Don’t Mention It… The CFTC Places New Guardrails on Mention Markets

Prediction markets have steadily expanded the universe of event contracts in which market participants can take positions, the newest frontier being contracts on the conduct of named individuals. Staff of the Commodity Futures Trading Commission’s (CFTC) Division of Market Oversight (DMO) have signaled that this particular category of event contract, known as “Mention Markets,” will face a materially higher bar before it can be listed and traded on a designated contract market (DCM).[i]

What Is a Mention Market?

DMO staff use the term “Mention Markets” to describe event contracts that settle on whether a specific individual will say or “mention” certain words, attend or appear at an event, or otherwise interact with another person. Examples include contracts contingent on whether a named person uses a particular word or phrase during a speech, on an earnings call, or on social media, as well as attendance and interaction contracts that settle on conduct like shaking hands, being photographed together, or engaging with someone on social media.[ii]

Most event contracts listed today settle on independently generated, externally verifiable outcomes outside the control of any single person, such as economic data releases, election results, or the outcomes of regulated sporting events. Mention Market contracts differ because they generally settle on conduct that may be controlled or influenced by a named individual or coordinated group and may not be independently generated or externally verifiable. DMO staff also makes clear that its concerns are not limited to single individuals, noting that a small or select group acting together or in concert could create comparable risks.[iii]

Heightened Scrutiny for Manipulation

Under DCM Core Principle 3, each DCM has a statutory obligation to list only contracts that are not readily susceptible to manipulation. Appendix C to Part 38 of CFTC regulations recognizes that cash-settled contracts, which include event contracts, can create an incentive to manipulate the data from which the cash-settlement price is derived.[iv]

Because settlement may be controlled by a single individual, a small group of individuals, or people with control or influence over that individual, the advisory warns that “DMO staff may view Mention Markets as presumptively readily susceptible to manipulation and accordingly expect a heightened showing in support of any submission seeking to list such contracts.”[v]

DMO staff ground this presumption of susceptibility to manipulation in several features unique to Mention Markets. Those closest to the outcome often hold insider knowledge such as scripts, prepared remarks, guest lists, or unpublished content, which constitutes material nonpublic information. And the same insider access makes those individuals vulnerable to social engineering, inducements, or public pressure campaigns aimed at moving the outcome. DMO staff illustrates the point with a live-stream podcast host who can readily utter a catchphrase on demand, and whose audience can induce that outcome by submitting a question or purchasing an on-air acknowledgment.[vi]

The presumption is, of course, rebuttable. DMO staff identified four key factors: (i) whether the controlling individual is subject to independent legal, professional, contractual, fiduciary, confidentiality, or organizational obligations that meaningfully deter settlement-driven conduct; (ii) whether the contract can be manipulated through that individual by outside pressure; (iii) whether the settlement-determining words or actions are subject to transparent independent verification and contemporaneous public scrutiny, including whether they carry materiality in context; and (iv) the robustness of the DCM’s own prophylactic trading rules, surveillance, and controls. With regard to the last point, DMO staff also expect product certification filings to identify potential insiders and explain how a DCM’s trading and surveillance controls address these risks. The advisory also recognizes that legal, professional, contractual, fiduciary, confidentiality, or organizational duties imposed on the person controlling or influencing settlement may deter misconduct. Still, it makes clear that those outside constraints do not replace the DCM’s own controls and safeguards.[vii]

Awaiting the Final Rule

Although the advisory creates no new obligations, DCMs already must demonstrate that listed contracts comply with the Core Principles, including that contracts not be readily susceptible to manipulation. The advisory is arriving at a time where the industry awaits the CFTC’s final rule on prediction markets public interest determinations.[viii] Thus, it signals that DMO staff expect exchanges to satisfy the existing standard through complete, contract-specific Part 40 submissions and sufficiently robust controls/safeguards, and encourages exchanges to engage with DMO staff early in the product design process.