FIA Wants Clearer Rules for Prediction Markets

Futures Industry Association President Walt Lukken urged the CFTC to establish a clearer and more durable regulatory framework for prediction markets. (See also, prior coverage.) 

In a column for FIA's MarketVoice, Mr. Lukken reiterated arguments made in FIA's comments on the CFTC's Advance Notice of Proposed Rulemaking. Mr. Lukken explained that prediction markets have moved into the mainstream as online platforms list contracts on elections, economic indicators, sporting events and other real-world outcomes, accelerated by technology and growing retail participation. He said the products represent a meaningful financial innovation that can improve information discovery and create new forms of risk transfer, but raised questions about market integrity, regulatory boundaries and customer protections. 

Mr. Lukken said market participants, exchanges and end users currently face significant uncertainty over which contracts regulators may permit, how the agency should apply the public-interest test under the Commodity Exchange Act, and what standards should govern the review process. He recommended the CFTC act quickly to avoid uneven expectations across markets and activity migrating outside regulated venues. He argued for regulators to extend the full clearing framework for leveraged derivatives to any leveraged event contracts, with FCMs functioning as the system's "shock absorbers" on risk management and customer protection.

Exchanges and clearinghouses, Mr. Lukken said, should demonstrate how event contracts comply with existing core principles (market integrity, financial safeguards, risk management and participant protections) and the CFTC should have a meaningful opportunity to evaluate whether specific event contracts meet the Commodity Exchange Act's requirements and whether the associated clearing arrangements appropriately manage the risks the products create.

On clearing, he said that regulators should consider whether separate and fully siloed default funds may make sense for certain leveraged event products, citing concentrated outcomes, sudden volatility spikes and heightened correlation risks. Segregating those risks, he wrote, could help protect the broader clearing ecosystem while preserving confidence in central clearing. He also said the products warrant proactive attention to market-conduct risks, including insider trading, manipulation, conflicts of interest and settlement-finality disputes. None of those concerns argue against innovation, he said, but rather for responsible innovation within regulated markets.