The staff of the U.S. Commodity Futures Trading Commission (the “CFTC”) published a Notice of Proposed Rulemaking – Data Reporting Requirements for Certain Event Contracts (the “NPRM”) in which it proposes, among other points, an alternative reporting framework for certain fully collateralized event contracts that would exempt such contracts from certain swap data reporting requirements and shift them into the reporting regime generally applicable to futures and options.
Background
Earlier this year, the staff of the CFTC, through its Division of Market Oversight (“DMO”), issued a prediction markets advisory (the “Advisory”)1 highlighting key considerations for designated contract markets (“DCMs”) in connection with the listing and trading of event contracts and emphasizing that DCMs remain subject to their existing self-regulatory and core-principle obligations under the Commodity Exchange Act (the “CEA”) and CFTC regulations.
The Advisory was followed by an advance notice of proposed rulemaking (the “ANPRM”) in which the CFTC sought public comment on a broad range of questions relating to prediction markets, including the manner in which event contract transaction and pricing data should be reported to the Commission.2 Separately, since 2017, the staff of the CFTC’s DMO and Division of Clearing and Risk have issued 16 no-action letters (the “Staff No-Action Letters”) permitting DCMs and derivatives clearing organizations (“DCOs”) to report certain fully collateralized event contracts under the futures and options reporting regime rather than the swap data reporting regime contemplated by Parts 43 and 45 of the CFTC’s regulations.3 The CFTC has now followed with the NPRM.
Comments must be received in writing within 30 days after publication of the NPRM in the Federal Register.
The NPRM
The NPRM is more narrowly tailored to one aspect of the broader inquiry raised in the ANPRM. As described in the CFTC’s corresponding press release, the proposed rules would amend Parts 15, 16, and 17 of the CFTC’s regulations to codify and supersede the framework reflected in the Staff No-Action Letters, while making certain modifications.4 Among other items, the NPRM defines a new category of “Covered Event Contracts” — generally swaps under CEA Section 1a(47)(A)(i) or (ii) that are listed on a DCM, cleared through a DCO, trade as fully collateralized positions, and have either a binary or variable payout structure — that would be excluded from certain swap data reporting and recordkeeping requirements (including those under §§ 38.8, 38.10, 38.951 (to the extent it requires Part 45 compliance), 39.20(b)(2), Part 43, and Part 45). The Covered Event Contracts would instead be reported under Parts 16, 17, and 18 in a manner generally consistent with futures and options, since they generally trade as standardized, exchange‑listed products that can be readily offset and not like bespoke over‑the‑counter swaps. The proposed scope would extend to variable-payout contracts, which is broader than most of the existing Staff No-Action Letters.
The NPRM would also recalibrate the large trader reporting framework for Covered Event Contracts. Among other items, it would substantially raise the applicable reporting and volume thresholds to exclude the vast majority of retail traders while still capturing the most significant participants in Covered Event Contract markets. The thresholds would increase to 125,000 contracts (or the notional equivalent of $125,000) for both special account position reporting under Part 17 and reportable trading volume under § 15.04. Proposed §§ 17.00(j) and 17.01(f) would also address mixed-intermediation markets by shifting the obligation to submit Part 17 reports in respect of clearing members trading in their own name from the trader to the DCM itself.
The NPRM further addresses public dissemination of transaction data, requiring DCMs to publish certain trade information (execution timestamp, contract ticker symbol, trade quantity, and price) “as soon as technologically practicable.” That standard is generally consistent with that applicable to swap transaction and pricing data and represents a tightening of the “promptly” standard reflected in the Staff No-Action Letters. DCMs would also be required to make such information publicly available and to maintain such information on the DCM’s website for at least one year and report to the CFTC the occurrence or non-occurrence of the underlying event upon which a Covered Event Contract is settled. The latter “settlement event” reporting requirement contains no direct analog in the traditional futures and options reporting regime.
In addition, DCMs listing Covered Event Contracts would be required to collect from all customers certain trader-identifying information and maintain such information throughout the life of the contract and for at least five years following its final termination. Such information includes each customer’s name, physical address, email address, phone number, occupation, employer, and the names of any guarantors or persons holding a financial interest of 10 percent or more in the account or trader. The CFTC notes that that information is particularly important for detecting insider trading, preventing wash trading, and conducting cross-market surveillance as multiple DCMs list economically similar contracts.
The NPRM establishes a two-tier compliance timeline: general compliance 60 days after publication of a final rule, with the large trader reporting components becoming effective on the later of (i) six months after publication and (ii) July 26, 2027, to align with the implementation timeline for the CFTC’s 2024 Large Trader Reporting rulemaking. Upon the applicable compliance date, the staff is expected to withdraw the Staff No-Action Letters, meaning that DCMs and DCOs currently relying on those letters would need to come into compliance with the final rule directly. The CFTC has also requested public comment on a number of discrete elements of the Proposal, including the calibration of the proposed thresholds and whether the framework should be extended in the future to event contracts that are not fully collateralized.
These developments do not displace the broader obligations DCMs and DCOs already face under the CEA and existing CFTC guidance, including all other applicable obligations under Parts 38 and 39 of the CFTC’s regulations and the listing, surveillance, settlement-integrity and compliance expectations described in the Advisory.5
Conclusion
Prediction market regulations are rapidly evolving. The NPRM provides a clearer view of how the CFTC is viewing the reporting obligations applicable to fully collateralized event contracts and reflects an effort to rationalize the patchwork of staff no-action relief that has developed alongside the event contract market. How the CFTC ultimately calibrates reporting thresholds, public dissemination requirements, trader-identification obligations, and the allocation of reporting responsibilities between DCMs and market participants will play a significant role in shaping the operational and compliance landscape for DCMs, DCOs, intermediaries, and traders active in these markets. To the extent an investment adviser has exposure to event contracts, it should carefully consider its due diligence, risk disclosure and monitoring processes to adequately account for the evolving treatment of these instruments.
We will continue to monitor comments as they are submitted and further developments as these proposed rules evolve. If you have any questions regarding prediction markets or event contracts, or would like assistance in assessing how these developments may affect your business, please contact an attorney in the Investment Management Group at Seward & Kissel LLP.
