SEC Could Regulate Some Prediction Markets, But Not Sports

• CFTC, SEC already share some oversight responsibilities
• SEC Chair Atkins says prediction markets have potential overlap for the two agencies
• It’s unlikely the SEC would get involved with sports event contracts

Prediction market operators may soon have another federal regulator to answer to: The Securities and Exchange Commission (SEC).

At a Senate Banking Committee hearing Thursday, SEC Chairman Paul Atkins acknowledged the bulk of the regulatory responsibility for prediction markets falls to the Commodity Futures Trading Commission (CFTC), but there are parts of the industry that could be regulated by the SEC or by both agencies.

Prediction markets are exactly one thing where there’s overlapping jurisdiction potentially,” said Atkins at the hearing. “That is a huge issue we’re focused on.”

He added that the CFTC and SEC need to be “harmonized” in how they address the rapidly growing prediction markets industry.

Sports Unlikely Prediction Markets Frontier for SEC

Sports event contracts — the primary engines of prediction markets volume — are an unlikely frontier for SEC oversight. Those derivatives are certified through the CFTC and when yes/no exchange operators go through the self-certification process, that occurs through filings with the CFTC.

Perhaps cementing the notion that the SEC won’t be involved in overseeing sports event contracts is the fact that new CFTC Chair Michael Selig is pledging to rewrite rules governing sports derivatives — instruments some critics say are sports gambling under a different label.

“Chairman Selig directed CFTC staff to withdraw previously proposed rules and staff advisories that may have had a chilling effect or contributed to uncertainty about participation in prediction markets,” notes Alvarez & Marsal. “The CFTC plans to draft new rules that will provide clearer parameters for prediction markets and will develop a joint interpretation of Title VII definitions with the SEC to clarify swap product classifications and jurisdiction.”

Where SEC Could Have Prediction Markets Oversight

While the intersection of prediction markets and sports is what generates headlines, these exchanges offer contracts on much more than sports. Those offerings include derivatives on corporate events such earnings updates, mergers and acquisitions, and product announcements — all of which can affect stock prices and thus fall under the purview of the SEC.

Prediction markets also feature event contracts tied to movements on major equity indexes, such as the S&P 500, some individual stock prices, and goings on in the Treasury market. The SEC would likely be the regulator for those derivatives.

“A security is a security regardless how it is and some of the nuance with prediction markets and the products depends on wording,” said Atkins at the Senate hearing.

For institutional investors, risk managers, and policymakers, more regulatory clarity could be encouraging as it could pave the way for expanded usage of prediction markets by professional investors. Many on Wall Street would like to see that happen because there’s budding sentiment that if all prediction markets become is an alternative to sports betting, that would be disappointing.