CSA and CIRO let two dealers offer select us-traded event contracts under strict conditions
Canadian regulators have drawn a tight box around prediction markets, leaving dealers with only a narrow set of event contracts they can offer to Canadian clients.
According to a bulletin titled “Application of CIRO Requirements to Event Contracts,” the Canadian Investment Regulatory Organization (CIRO) has so far authorized only two Investment Dealer Members to facilitate trading in event contracts.
Trading by these dealers is subject to specific terms and conditions set by CIRO, in consultation with Canadian Securities Administrators (CSA) members, as well as CIRO’s existing options requirements.
CIRO says these dealers may trade a limited set of event contracts that are traded and cleared through certain US Commodity Futures Trading Commission regulated exchanges and clearing houses, provided they give written notification under Investment Dealer and Partially Consolidated Rule subsection 2246(2).
From a product perspective, CIRO’s Appendix A sharply restricts what Investment Dealer Members can offer.
CIRO limits event contracts to three categories: economic forecasts, environmental forecasts and financial indicators.
Economic contracts may track statistics such as sovereign debt, inflation, interest rates, labour markets and housing; environmental contracts may focus on climate indicators such as average global temperature; and financial contracts can include US 500 Forecast Contracts that settle on the Chicago Mercantile Exchange E‑Mini S&P 500 Futures daily settlement price.
Contracts based on financial benchmarks, such as US 500 Forecast Contracts that settle using the daily settlement price of the Chicago Mercantile Exchange E‑Mini S&P 500 Futures.
CIRO states that any Investment Dealer Member that wants to offer event contracts beyond this list must notify CIRO in writing and file a material change to business activities application.
CIRO also sets clear maturity and leverage constraints.
The bulletin specifies that Investment Dealer Members may only facilitate trading in permitted event contracts with a term to maturity of 30 days or longer.
CIRO adds that issuing a new threshold in respect of an event contract constitutes a new contract, and this new contract must also have a term to maturity of 30 days or longer.
CIRO further states that Investment Dealer Members will not allow clients to use leverage, including the use of margin accounts, for transacting in event contracts.
Certain themes are entirely prohibited.
CIRO emphasizes that Investment Dealer Members may not trade in event contracts based on the outcome of elections, political events, or other events of a political nature, including contracts predicting election results, political party leaders' nominations or referendum results.
CIRO also prohibits event contracts based on the outcome of unlawful activities under Canadian federal, provincial or territorial law and says Investment Dealer Members are expected to exercise due diligence to ensure any event contracts offered to clients do not fall into these categories.
At the regulatory framework level, the CSA stresses in a press release that prediction markets are platforms that facilitate trading of event contracts, which pay out based on the outcomes of future events.
The CSA states that anyone trading, or facilitating trading, in event contracts that are securities or derivatives must follow applicable requirements under securities or derivatives legislation, such as registration or recognition requirements.
The CSA notes that in some jurisdictions, Multilateral Instrument 91-102 Prohibition of Binary Options prohibits any person from advertising, offering, selling or otherwise trading a binary option with a term to maturity of less than 30 days with or to an individual.
The CSA warns that failure to comply with applicable requirements under Canadian securities and derivatives laws may lead to enforcement action.
Despite CIRO’s limited permissions, the CSA reports that, to date, no prediction market has been recognized as an exchange or registered as a dealer, or exempted from those requirements, in Canada.
The CSA and CIRO say they continue to monitor developments involving prediction markets and event contracts and intend to issue further guidance, and the CSA adds that they will consider whether other regulatory action is required, including changes to the CIRO terms and conditions.
Both bodies say any industry participant interested in trading, or facilitating trading, in event contracts with Canadian investors should contact their local CSA member and CIRO before doing so.
