NFL Calls Time-Out on ErisX’s NFL Binary Options

Thom Thompson

Thom Thompson

Editor

The National Football League asked the CFTC to delay any approval of ErisX’s proposed binary options contracts “pending a more comprehensive study” of whether the contracts would be used for hedging and whether users of the contract might be breaking federal laws by risking money on football spread betting across state lines. The NFL was reacting on the record to ErisX’s certification of three contracts that would settle to the results of NFL games. 

ErisX operates cryptocurrency spot and futures markets as well as a futures clearing organization. It lists deliverable futures contracts on bitcoin and Ether. In December last year, the exchange said it wanted to offer contracts on the winner of professional football games, the final point spread and the total number of points scored in weekly NFL games. 

In its comment letter filed last month, the NFL asked that the agency study, “Whether ErisX could and would confirm, in each instance, that every dollar used to purchase or sell NFL futures contracts was, in fact, a legitimate effort to mitigate commercial risk, and what criteria ErisX would use to do so.” 

ErisX certified that each of the three contracts complied with the federal “Core Principles” for futures markets in a December 14 submission. Ten days later the CFTC told the exchange to hold off on trading them for at least 90 days to give it time to consider whether it wants to regulate futures on sporting events or even if it has the authority from Congress to do so. 

In its press release the agency said that the Commission had determined that the proposed contracts “may involve, relate to, or reference . . . gaming, or an activity that is unlawful under any State or Federal law.” Gaming contracts on futures markets are prohibited under CFTC regulations.   

ErisX proposes that trading in the NFL contracts be limited to commercial entities hedging their risks and market makers that the exchange would designate. By excluding the general public, the contracts would not provide a way for people to gamble but rather for state-licensed sportsbooks to manage their risk.

In its comments, the NFL notes that ErisX’s designated market makers will not be hedgers and could be running very unbalanced positions. They ask whether such market makers “. . . should be engaging in such activities outside the purview of sports betting regulatory authorities.” 

A number of commenters support ErisX’s proposal, noting that since the CFTC wrote its regulations, sports betting has been legalized and is itself regulated in 25 states. They argue that the benefits for “commercial market participants seeking to hedge their cash market exposure” using futures contracts are in the public interest and should be allowed. 

The American Gaming Association, a nationwide gaming trade association, joined the NFL’s call for more study by the CFTC before it allows ErisX to list its contracts, saying the contracts “. . .  pose potentially complex legal and policy questions that should be fully explored by the CFTC before they are approved.” 

The National Basketball Association, though not directly implicated by ErisX’s football-based plan, nevertheless stepped up with a letter endorsing the NFL’s concerns, saying the issues raised by the league should be thoroughly studied by the CFTC before it acts. 

Tom Chippas, the CEO of ErisX, told John Lothian News, “We are confident in our ability to use our DCM and DCO licenses to partner with qualified third parties to bring novel contracts to the market. With respect to the RSBIX NFL futures contracts, we have reviewed the letters submitted as part of the comment period. Many of the letters expressed enthusiasm for this product, which would be the first of its kind.  It also highlighted some areas of concern, which we stand ready to help RSBIX address, specifically with the NFL and NBA.  We are optimistic we’ll be able to use our deep experience in traditional futures market contracts to address the outstanding questions, something we seek to do with any third-parties on our platform.”

The CFTC’s 90-day review closes in late March. The exchange can agree to an extension or force the issue at the agency, making them decide to approve or disapprove the contracts.     

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