Amid interest in event contracts based on sports and entertainment events or outcomes, the Canadian Securities Administrators (CSA) and the Canadian Investment Regulatory Organization (CIRO) have released a joint notice with new guidance on prediction markets.
Stan Magidson, the CSA’s chair and the Alberta Securities Commission’s chair and chief executive officer, explained that the notice aims to clarify the role and responsibility of Canadian securities regulators over certain kinds of event contracts.
Sports or entertainment outcomes
According to the guidance, the CSA believes that securities and derivatives laws should not cover the regulation of these forms of event contracts.
“It is important for investors and market participants to understand that event contracts based on sports- or entertainment-related activities or outcomes should not be regulated within securities and derivatives legislation,” Magidson specified.
Per the guidance, the CIRO finds it inappropriate to facilitate or approve its dealer members’ applications to trade these types of event contracts.
Under the current regulatory framework, two CIRO dealer members have thus far received authorization to facilitate the trading of a limited set of event contracts, with these members needing to meet the terms and conditions that CIRO set in consultation with the CSA.
The CSA and CIRO noted that this activity may, in the future, face additional restrictions or other changes.
The two regulators stressed that those trading in event contracts that are securities or derivatives and those facilitating such trading should comply with the relevant requirements under securities and derivatives law.
The CSA’s and CIRO’s news release noted that assessment remains pending for the regulatory status of event contracts not based on sports and entertainment events or outcomes.
FAIR Canada’s response
FAIR Canada – a national, independent, non-profit organization aimed at advancing individual investor interests – welcomed the clarity provided by the joint notice. However, the organization emphasized the risks of permitted prediction market contracts for retail investors.
FAIR Canada also expressed concerns that prediction market contracts might impact market integrity and make retail investors incur substantial losses and divert capital from productive investment.
“Before additional event contracts are approved, regulators should require clear evidence that they provide meaningful public interest benefits and that robust safeguards are in place to protect retail investors,” said JP Bureaud, FAIR Canada’s executive director, in a news release. “Innovation alone is not a sufficient basis for regulatory approval.”
According to FAIR Canada, regardless of client profits or losses, dealers facilitating trading in event contracts benefit from higher trading volumes, which incentivizes them to widen the array of available contracts and seek more participation, resulting in conflicts between dealer and client interests.
More news from Canadian Securities Administrators
Here are some other recent news stories from the CSA.
On July 15, the CSA announced the release of a staff notice detailing the findings of a recent targeted compliance examination sweep of organizations’ cybersecurity practices and updating the regulator’s guidance for organizations to improve their cybersecurity frameworks.
On June 22, the CSA and CIRO jointly announced a one-year delay in their implementation of final amendments to access fee and tick-size rules, which they had originally scheduled to take effect on Nov. 2.
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