Comment Text:
April 30, 2026
The Honorable Michael Selig
Chair
Commodity Futures Trading Commission
1155 21st Street, NW
Washington, DC 20581
Dear Chair Selig,
This letter is in response to the CFTC request for comments for Proposed Rule 91 FR 12516.
Introduction
Before addressing specific points requested by the CFTC, I will mention that I support the comment made by Rep. Dina Titus. Highly visible marketing campaigns confirm her assertion that, “These platforms now contend that sports event contracts are financial derivatives, effectively conflating sports betting with a form of investment.” It is this kind of reckless behavior which Cole Wogoman of the National Councils on Problem Gambling references when he writes that, “it is clear to NCPG that purchasing event contracts is functionally gambling.”
These concerns are especially important regarding the question in section II.C.19d:
“For example, do these market participants tend to be younger than those trading other financial instruments, and if so, how should this inform the Commission’s consideration?”
Anecdotal observations are that PMs do attract younger players, in part because of marketing strategies that target digital-native users. Marketing campaigns that characterize forecasting choices as ‘investments’ undermine financially responsible decisions and encourage patterns of behavior that have more in common with addiction than portfolio optimization. Most who trade ECs are not doing so to offset risk from other assets or derivatives positions, but rather to take a directional position on the outcome of near-term events.
Currently PMs do not operate to enable risk management via traditional hedging, instead mostly offering an alternative betting format to traditional sportsbook products. Large exchanges that can offer whatever products they choose simply do not offer binary options on most futures contracts because there is not enough customer interest. Binary options on Fed Fund Futures were offered nearly 20 years ago. They never gained traction in part because binary option Event Contracts do not allow customers to capture slippage away from the strike price at settlement, while traditional American options allow customers to capture extra granularity despite the same underlying price action.
Specific Responses
Regarding II.A.2 – Current markets with more established infrastructure and observability tools still do not deliver failproof audit trails. All the considerations raised in this section are virtually impossible to enforce if CFTC lacks real-time observability into trading activity. My paper, ‘A Modal Approach to Financial Epistemology’, is an attempt to improve audit trail observability through non-continuous (similar to pro-rata execution) trading.
Regarding II.B.8 - How should the public interests set out in CEA section 3 inform the Commission’s public interest determination under CEA section 5c(c)(5)(C)?
Regarding II.B.9, the ‘economic purpose’ test should be reinstated with a focus on risk management and minimizing price volatility for producers and manufacturers.
Regarding II.B.10, “What role do event contracts play in ‘managing and assuming price risks,
discovering prices, or disseminating pricing information’ as contemplated by CEA section 3(a)?”:
Due to the overwhelming use of ECs as a substitute for sportsbook-style betting, the use of ECs for risk management is small. This is largely due to the availability of options for most financial products. Exotic options, RFQ quotes, swaps, and repos have all existed for many years. Access to these products has traditionally been limited to customers with infrequent requests for highly specific insurance against certain scenarios.
A self-exclusion mandate as suggested in II.C.19e would essentially place the CFTC in charge of ensuring that anyone who requested such status could not participate on any PM. This seems like an excessive burden that would extend beyond the expertise and mandate of the CFTC mission.
Regarding II.B.12, “How do event contracts compare to, or substitute for, insurance contracts?”:
Event contracts typically are bilateral agreements on the outcome of events in the near-term. Most insurance contracts have multi-year terms that are priced efficiently using actuarial calculations. So, as Puts are insurance against the drop in price of an underlying contract and Calls are insurance against the rise in price of an underlying contract, Event Contracts are de facto insurance contracts related to the set of circumstances that cause the EC to pay.
Regarding the concerns described in II.E.30 and 32, there are already examples of government officials making profitable trades via abuse of non-public information.
Economic Theory and Potential Opportunities
Repeated assertions of pecuniary externalities such as generalized ‘price discovery’ from ECs ignore technical externalities such as scaled problem gambling and systemic risk from expanding bilateral clearing operations by smaller operators. Self-regulation of bilateral trading relationships has a documented history of creating systemic risk and was a feature of the crises caused by Long Term Capital Management and Lehman Brothers.
An additional Technical Externality that arises from the popularity of ECs on PMs is the Opportunity Cost of taking positions in ECs. Participation for most users is a churn of activity that results in transaction costs regardless of success, monetary losses over time, and negative behavioral consequences that are often found amongst day traders. This cumulative reality contradicts marketing that presents gambling as a carefree activity and is mostly an abuse of risk management technology.
Insofar as ECs are useful for price forecasting, more research must be done to quantify the potential value of ECs to facilitate consensus on intractable disagreements such as Colorado River Management. The decentralized nature of ECs, coupled with the ability to define highly specific outcome conditions on voting topics, could help groups find consensus when face-to-face negotiations fail.
Conclusion
The failure to regulate Credit Default Swaps was a historic oversight that should not be repeated with Event Contracts and Prediction Markets. Regulation mechanisms for existing electronic contracts and various swap products should be enhanced to include improved audit trail documentation. Commodity markets are auction processes, regardless of whether transactions happen in open-outcry pits, on trading screens managed by centralized clearinghouses, or via mobile applications with decentralized ledgers.
Historically, regulatory bodies such as the CFTC have had an ethical obligation to reduce systemic risk and minimize price volatility. The CEA has traditionally permitted states to decide whether commodities are permitted to trade, but recent court cases have seen that precedent thrown into question. The State of Nevada has seen contradictory court decisions on this topic and that is simply hard to understand. CFTC should revert to its longstanding position of deferring to states’ authority over whether a commodity may be traded within their jurisdiction. Arguments by PMs that geofencing of mobile applications is prohibitively expensive are specious; many sportsbook applications restrict participation based on geographical location and such arguments show a pattern of acting in bad faith.
Event Contracts are not new and have shown their value as financial instruments. It is not clear that ECs are sufficiently different from traditional options to exempt them from traditional oversight. It is clear from the popularity of platforms like Kalshi and Polymarket that gaming evokes powerful behavioral responses that can overwhelm retail customers. This is especially so when the target market for ECs is young, lacks practical experience with previous derivatives trading, and is required to use mobile devices for normal daily life. CFTC should continue to evaluate the public health consequences of Event Contracts and Prediction Markets at scale. New financial products must not create unnecessary technical externalities for public health and/or systemic risks to the overall financial system. Thank you for considering my comment.
Sincerely,
David J. Anderson
