Wealthsimple wants wider retail access to event contracts; FAIR Canada says prove it first
Canadian securities regulators permit dealers to offer retail clients only a narrow set of prediction market contracts, tied to economic, financial-market and climate indicators, and do not authorize contracts linked to sports and entertainment events.
Wealthsimple wants that list opened up.
FAIR Canada said that the limits should stay unless broader retail access is shown to benefit investors and serve the public interest.
The investor advocacy group set out its position in Prediction Markets in Canada: Drawing the Regulatory Line, a response to the white paper Prediction Markets in Canada: A Principled Regulatory Framework, published by Wealthsimple and written by Blair Wiley and Catherine De Giusti.
That paper argues event contracts should be classified as derivatives based on their legal structure regardless of the underlying event, that they belong under securities regulation rather than gambling law, and that regulators should permit retail trading in a wider range of contracts.
Jean-Paul Bureaud, CEO of FAIR Canada, said in the organization's news release that an event contract "may be a derivative in legal form, but in substance it can still be a wager." He said allowing legal form alone to justify market access would erase "the line between investing and gambling."
He said retail investors bear the losses, but public confidence in capital markets "is ultimately what is at stake."
Legal classification is only the starting point, FAIR Canada writes in the response.
A product may meet the legal definition of a security or derivative and still be restricted, excluded or subject to another regulatory regime because of its substance, purpose or broader public-policy implications.
The Canadian Securities Administrators and the Canadian Investment Regulatory Organization set out the current rules in a notice dated April 2.
A narrow exception for certain event contracts should not become an open gateway to the retail distribution of virtually any future event contract that can be structured as a derivative.
Wealthsimple proposes safeguards that go beyond conventional derivatives controls and resemble protections used to address gambling-related harms, the response says, and their inclusion reinforces that some event contracts present risks securities regulation was not designed to address.
The ability to implement risk controls does not mean the product belongs in a regulatory regime built for a different purpose, according to the paper.
On the argument that Canadians will seek access whether or not the products are available domestically, FAIR Canada writes that investor demand is not the test, and that offshore activity involving unapproved products justifies enhanced enforcement, consumer warnings or other harm-reduction measures rather than regulatory approval.
Hedging rationales may apply to contracts tied to identifiable economic or financial risks, the paper says, but it is difficult to see how contracts tied to sports, entertainment, political outcomes or other non-economic events could serve the same purpose.
Even among the categories the CSA and CIRO already permit, FAIR Canada writes, there is no evidence that retail investors are using them to hedge risk.
The same test is applied to price discovery: whether the price produced helps with capital formation, asset valuation or risk management, not whether participants can generate a price for any uncertain outcome.
Many event contracts fall within the CSA's broad definition of a binary option, the paper states, referring to Multilateral Instrument 91-102, Prohibition of Binary Options, dated December 7, 2017.
The CSA described binary options as wagers based on yes-or-no propositions and framed the prohibition broadly to capture products with the same all-or-nothing structure regardless of how they were labelled or marketed.
The 30-day minimum maturity requirement reflects the CSA's recognition that product design can influence investor behaviour, FAIR Canada writes, because short-duration contracts heighten the significance of chance and short-term outcomes while facilitating frequent participation, rapid turnover and repeated exposure to immediate gains or losses.
Bureaud said those seeking broader distribution must first show clear investor benefits, effective protections and "a compelling public-interest case," according to the release.
He said claims about innovation and investor demand are not enough, and that regulators must hold the line until that case is made.
