Odds appear to improve for sports-based financial derivatives

CFTC member sees room to speculate on football results

CFTC member Berkovitz said futures contracts on sports would allow one to speculate on the outcome of a football game just like one can speculate on the price of soybeans.  (Tom Williams/CQ Roll Call)
CFTC member Berkovitz said futures contracts on sports would allow one to speculate on the outcome of a football game just like one can speculate on the price of soybeans. (Tom Williams/CQ Roll Call)
Posted April 27, 2021 at 7:00am

The agency known for regulating agricultural commodities and oil futures is considering financial products that imitate sports betting, which could be used throughout the United States instead of the current state-by-state approach to gambling.

Commodity Futures Trading Commission member Dan Berkovitz is one of the commissioners leading the effort, saying the derivatives contracts would be similar to ones the agency regulates that allow people to lock in prices on agricultural products.

State laws vary widely, and federal law keeps much activity from crossing state lines. Allowing financial derivatives would ease banks’ discomfort with accepting gambling-related funds, he said.

CFTC futures contracts are not subject to state gambling laws, or to federal internet gambling restrictions, Berkovitz told CQ Roll Call in an interview.

“Market participants could speculate on the outcome of a football game just like they could speculate on the price of soybeans,” he said. He envisions what the agency calls an event contract, which pays off if conditions are met and provides nothing if they don’t.

A Chicago company, Eris Exchange LLC, proposed last year to offer something similar on NFL games, only to withdraw it after the staff at the CFTC raised objections.

Berkovitz found fault with the ErisX plan but offered conditions that would win his approval. One is that the futures contracts would be available to any member of the public, not just those who would gain when a team wins and suffer if it doesn’t. ErisX had proposed to restrict the contracts to parties with a direct economic business interest in NFL games, including stadium owners and betting organizations seeking to hedge risk.

A successful applicant should demonstrate that there is a legitimate hedging interest, he said, but the participants themselves do not have to demonstrate if they are hedging or why they are buying sports futures, Berkovitz added.

While sports futures might not seem much like the pork bellies normally associated with the CFTC, they might play an important role in hedging risk and establishing prices, two core CFTC responsibilities, according to Berkovitz.

Federal restrictions on betting across state lines can create an imbalance because many wagers are for the home team. The futures would help bookmakers hedge that disparity, Berkovitz said, much in the same way oil producers are able to hedge against one-way price movements. CFTC futures would allow bets based on the input of the market, instead of the odds assigned by the bookmakers, which work to their advantage.

Sports gambling has taken off since a 2018 Supreme Court decision in Murphy v. NCAA allowed it to expand beyond Nevada. It is now conducted in 20 states and the District of Columbia, to varying degrees. Another five states have laws allowing it.

“That Supreme Court case opened the gates to legalized sports betting,” Berkovitz said. The expansion of gambling is creating risk, and he believes CFTC betting futures can reduce that.

State laws prevail

Gambling companies currently must comply with numerous state laws. Betting is underway in Washington, for example, but not allowed on college teams based within the district. Virginia has a similar policy. In some cases, gambling companies have to ensure the eligibility of their customers, and some require users to have “plug-ins” on their computer software to verify their location.

A 2006 federal law on internet gambling, however, doesn’t restrict transactions conducted under the federal commodity laws.

The ideas that Berkovitz and others are considering are drawing plenty of opposition.

One opponent is professor John Kindt of the University of Illinois’ Gies School of Business. “The CFTC should have put a stake” into the NFL proposal, “thereby, sending a message to the financial community that such proposals are outrageous and will not be seriously considered,” he said in an email.

Kindt has urged policymakers to oppose gambling for years and has said as much before Congress and state lawmakers.

“For Wall Street, these types of futures contracts predicated on sports gambling are a bullet to the head,” he said. “The U.S. macro-economy needs stability of expectations to grow, but if these types of futures proposals are ever approved, they will become financial instruments that will catalyze speculative bubbles — destabilizing Wall Street and financial systems.”

After reviewing remarks Berkovitz posted on the CFTC’s webpage, Tom W. Bell of Chapman University’s Dale E. Fowler School of Law questioned whether the agency has jurisdiction. An entrepreneur willing to fight the agency might prevail on the jurisdictional issue, Bell said.

Other academics are intrigued by the idea.

Professor James Angel, who teaches finance at Georgetown University, anticipated that the ErisX proposal would lower costs by narrowing the “spread” between bets, meaning the difference between the payout for winning a bet and the cost of losing it, a disparity that benefits bookmakers, he said in an interview.

As for whether proposals like these will move forward, Angel noted that baby boomers are now the nation’s policymakers, and they have shown they are tolerant of gambling, he said.

At the CFTC, Berkovitz said the agency would make sure retail investors, ordinary folks investing their paychecks, would receive adequate protection from fraud or market manipulation. The NFL futures would be what’s known as binary options, where the investor either gets a payment or gets nothing. Binaries are permitted, although the CFTC has taken enforcement action against many that have not played by the rules.

Susquehanna International Group LLP, a large Wall Street market maker, supports the idea of sports futures. Market makers provide buy and sell prices of securities to make sure investors can trade if they need to, including for futures products. A regulated U.S. futures market would provide more tax revenue and better regulation, it told the CFTC in a letter on the issue. Currently, the U.S. market is less than 10 percent of the offshore gambling activity, it added, and CFTC futures might bring more of it back.

Another commissioner, Brian Quintenz, has signaled support, not just for sports futures but also for wider prediction markets. 

“How valuable would it have been to restaurants across California and New York during the pandemic lockdowns to have had an event contract in place for hedging that asked in March 2020 whether indoor dining would be allowed within one year?” he asked in a public statement last month.