On Wednesday, the CFTC’s Division of Market Oversight issued a reminder to prediction market DCMs that they must fully comply with the federal agency’s regulations when submitting self-certification notices concerning incentive program rules. In an official press release, the CFTC pinpointed Regulation 40.6(a), which enables prediction markets to self-certify, pending a ten-business-day agency review process, new rules, trading programs, and fee schedules.
“This advisory addresses concerns regarding an increasing number of incentive‑program rule filings submitted under CFTC Regulation 40.6(a)—particularly those relating to event contract products—that contain procedural or substantive deficiencies,” the CFTC said on Wednesday. “Such deficiencies can impede staff’s ability to evaluate whether DCMs have provided adequate notice of program terms and have sufficiently assessed compliance with core principles and other Commission requirements.”
CFTC Regulation 40.6(a) is designed to allow registered DCMs to bypass much of the bureaucratic red tape associated with launching prediction market event contracts through a self-certification process for new rules, fees, or trader incentive programs. This way, prediction markets can remain flexible and adapt to updated consumer trends without having to seek the CFTC’s direct approval.
Until now, many of the self-certification filings that have been submitted by registered DCMs have become effective automatically once the agency concludes its mandatory ten-business-day review process. However, the CFTC is now reminding prediction markets that they must adhere to the full extent of Regulation 40.6(a), which mandates registered DCMs to:
“This guidance outlines staff expectations regarding both procedural and substantive content for submissions made under CFTC Regulations 40.5 and 40.6, including initial program submissions, amendments, or changes to such programs, and submission procedures,” reads the CFTC statement published on Wednesday.
The CFTC statement appears to hint that registered DCMs may be cutting corners when filing self-certification submissions for incentive programs. By rule, each filing must satisfy the Core Principles established within the Commodity Exchange Act. If DCMs are failing to provide the CFTC with a full-scope analysis of how incentive programs are preventing manipulative market activity or artificial trading volume, the relevant submissions could be rejected as incomplete.
The “deficiencies” that the CFTC is referring to could also point to a failure by some DCMs to disclose exact details of incentive programs, such as entry prerequisites, ongoing eligibility obligations, program end dates, compensation schedules, or minimum performance benchmarks to maintain a recipient’s status.
Finally, DCMs should not “bundle” diverse programs under a single “template” that fails to adequately analyze the risks of individual listings contained within a broad self-certification submission. In the long run, bypassing the necessary digital paperwork needed to ensure that each listing adheres to the Core Principles could result in future crackdowns by the CFTC due to the additional regulatory burden such “deficient” self-certification submissions place on the agency.
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