FAIR Canada welcomes the August 27 joint notice from the CSA and CIRO on prediction markets. Prediction market contracts allow investors to bet on the outcome of future events. While they may be presented as financial innovation and a new way to manage risk, FAIR Canada is concerned that many are gambling products dressed up as financial instruments.
The joint notice expresses the view that event contracts based on sports and entertainment events or outcomes should not be regulated as securities or derivatives, and that securities dealers should not seek approval to offer such contracts.
However, this hardly settles the matter. Many types of prediction market contracts function more like bets than investments and should be subject to stronger consumer protections and regulatory oversight. In this regard, FAIR Canada supports the CSA and CIRO’s review of other types of event contracts, including whether further restrictions or other changes are needed to previously approved event contracts.
That analysis should not turn on whether a contract meets the technical definition of a derivative. Regulators must consider what these products are designed to do, how they are used, and whether they are, in substance, closer to investing or gambling. Innovation in financial markets is important. But so is ensuring that products offered through investment platforms are consistent with the public interest and the objectives of securities regulation.
Our concerns are heightened since these event contracts are being offered through order-execution-only platforms where investors do not receive advice. As a result, retail investors may be encouraged to trade complex, speculative products that do not match their financial circumstances, objectives, or risk tolerance. As regulators continue their review, FAIR Canada urges them to keep investor protection, market integrity, and the public interest at the centre of any future decisions about prediction markets.
Read our press release to learn more.