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The legal sports-betting industry has cited both concerns and potential opportunities in letters submitted to a federal regulator over a proposed rule that would prohibit regulated exchanges from listing certain contracts not in the public interest.
Under new proposed regulations published earlier in June, an activity that may be deemed a forbidden contract by the Commodity Futures Trading Commission (CFTC) is those related to “gaming”, which the CFTC defines as “the outcome of a contest of others”, such as sporting events.
The proposal would also ban trading on the potential outcome of political elections and awards ceremonies such as the Academy Awards.
In a comment letter, the American Gaming Association (AGA) urged the CFTC to clarify that the proposed regulation does not conflict with state-regulated sports betting or other legal forms of gaming.
“Out of an abundance of caution, the AGA, therefore, requests that the commission clarify its intent to ensure the proposal does not set up a conflict between federal regulations and state law, i.e., expressly acknowledge continuation of existing regulated business models,” wrote Chris Cylke, senior vice president government affairs at the AGA.
Cylke also asked the commission to clarify it will not pursue Commodity Exchange Act (CEA) and CFTC rule violations where a company is authorized under state law to enter into or offer such contracts. The CEA, which was passed in 1936 and has been amended several times since then, regulates the trading of commodity futures in the United States.
“In addition to the prior clarification, the AGA urges the commission to revise the proposal to clearly allow licensed gaming entities to use event contracts on sports contests to hedge against legitimate commercial risk,” Cylke wrote in a three-page letter.
“As the commission notes, gaming is a rapidly evolving field, and institutions in the space should have access to a safe, regulated market to hedge commercial risk. This can be achieved in a way that safeguards the public interest while working in concert with state and tribal regulatory regimes to support the stability and growth of the regulated sports-betting market.”
Cylke stressed that a regulated market where operators can hedge exposure to legitimate business risks would serve an important commercial purpose.
“The commission should evaluate options for narrowing the proposal to permit such trading,” he added. “And finally, 38 states and Washington, D.C. have decided that some form of regulated gaming is in their public interest; the commission should not undermine those conclusions.”
The CFTC is charged with regulating the U.S. derivatives markets. The new rule proposed is an effort by the agency to clarify the boundaries between gambling and financial markets.
The Sports Betting Alliance (SBA), an industry group that represents BetMGM, DraftKings, FanDuel and Fanatics, said the operators “respectfully object” to the commission’s proposed determination that any contracts that involve gaming are categorically contrary to the public interest.
“We respectfully urge the CFTC to refrain from approving this rule in its current form due to its unconditional nature and its potential harm to a multibillion-dollar industry and the tens of millions of consumers that currently enjoy legal regulated betting on sporting events,” SBA president Jeremy Kudon wrote in a two-page letter.
Kudon echoed the AGA in asking the CFTC to clarify whether the proposed rule conflicts with state-regulated gaming and to confirm that “gaming itself is not contrary to the public interest, as demonstrated by the widespread adoption of the activity across the country”.
Kudon also asked the CFTC to “allow for an institutional futures market [to be] accessible to licensed sports-betting operators”, which can be a legitimate way for sports-betting operators to buy and sell event contracts that would allow them to reduce risk.
“Currently, the proposed rule overlooks the compelling economic purpose that an institutional futures market could serve in allowing operators to hedge commercial risks,” Kudon wrote.
“Labeling any contracts involving gaming as categorically contrary to the public interest will limit the industry's hedging ability, a move that we believe has not been sufficiently considered by the CFTC. We object to the proposed rule to the extent it forecloses an institutional futures market for this purpose.”
Among the four major U.S. professional sports leagues, the National Football League (NFL) was the only one to submit a letter by the CFTC’s August 8 comment deadline on its proposed rule.
Jonathan Nabavi, the NFL’s vice president of public policy and government affairs, told the agency that the league supports its plan to prohibit sports-related event contract trading.
“The NFL is concerned that if sports-related gaming contracts were to be permitted, such contracts may not be used in a legitimate effort to mitigate commercial risk,” Nabavi wrote in a two-page letter. “These contracts would mimic sports betting but seemingly without the robust regulatory features that accompany regulated and legalized sports betting, and which help to mitigate threats to the integrity of our contests.”
Nabavi noted that event contract wagering would fall outside the purview of sports-betting regulatory authorities and the safeguards they impose on the industry.
The CFTC voted 3-2 in May to move forward with the proposed rule that would prohibit trades on sports-betting contracts, as well as wagering on elections and awards ceremonies. The agency believes that these event contracts are contrary to the public interest and may not be listed on CFTC-regulated markets.
The proposal requires a second vote by the commission, with the purpose to finalize the rule by early 2025.
