CIRO and the CSA are wrangling to control markets that straddle the lines between derivatives and gambling, says lawyer
Prediction markets invite a core, fundamental question for regulators: what are they? On one hand, platforms like Polymarket and Kalshi that allow individuals to place bets on the outcomes of events, from sports to elections to celebrity deaths, look a lot like gambling. Users, after all, are placing bets. However, the case has been made that these are not bets in a traditional sense, but are instead “event contracts,” and therefore can be categorized as derivatives and regulated by the Canadian Securities Administrators (CSA) and the Canadian Investment Regulatory Organization (CIRO).
To Gregory Hogan, partner in the Capital Markets Group at Cassels, the decision by the CSA and CIRO to regulate some prediction market event contracts opens up a host of further regulatory questions and issues. Some of those issues directly impact advisors who may be asked by clients to make recommendations on platforms where knowing your product is especially challenging. He believes there is still a lot that needs to be reasoned out before these regulatory questions can be settled.
“The problem, I think that we have with securities regulators is that they’re willing often to take jurisdiction a little more aggressively than in other jurisdictions. They will find a way, I think, often to define something as a security, something as a derivative, something that they can put their arms around and regulate,” Hogan says. “Some of these are going to be derivatives and there will be regulation around these. And some of them… may just be pure betting. And that’s, I think the question that they are grappling with is where do they draw the line.”
Where CIRO has drawn the line already
So far, Hogan notes, CIRO rules have been quite strict around what they are willing to regulate. They have so far allowed two registered dealers to trade a limited set of event contracts that are already 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).
Those contracts are limited to economic contracts that may track statistics like sovereign debt, inflation, interest rates, labour markets and housing. They also include environmental contracts which may focus on climate indicators 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. Any contracts beyond that list of events will require specific approval from CIRO.
Hogan says that the know your product (KYP) rules are likely playing a role in this highly limited list. He notes that KYP regulations require advisors to make recommendations based on suitability for a client’s long-term financial objectives. He argues that no form of accreditation could give an advisor a special ability to more deeply know an event contract over the outcome of the US-Israeli war with Iran, for example. He believes that CIRO may have to allow more diversity of event contracts, but that they’ll have to reconcile this wider availability with the fact that nobody has a special ability to know these products.
Should prediction market exchanges, not contracts, be regulated?
Hogan accepts that while some of these regulatory questions are unanswered, and regulatory frameworks may not be ideally suited to prediction markets, the CSA and CIRO are currently what Canada has. As it stands, prediction markets like Polymarket and Kalshi are easily available. While they’re not legally available in Canada, a user with a VPN can access the platforms. He notes that the question for these regulators may be over how they regulate exchanges, rather than individual contracts. The trouble there is that a regulated exchange needs to be fair and not subject to manipulation. Moreover, the way users operate on the platforms may be more important than their technical definition.
“People are going to prediction markets and making their bets. They’re not working on hedging their portfolio or doing something that, they are using them the same way that you’re going down and trying to bet on the Knicks and Spurs. Right. And we’re not regulating that stuff,” Hogan says. “I think if it’s clearly a derivative then I don’t think they have a choice, they probably have to put their arms around it. But if it’s a betting platform maybe they will rewrite some of these rules around derivatives to make sure that they don’t have to regulate some of these things that are pure bets.”
There is risk for the regulators and dealers, too, that could come with potentially legitimizing a platform that is primarily used for betting. While good and bad advice can be highly subjective, most would agree that recommending what is essentially a bet does not fall under the umbrella of good financial advice, Hogan notes.
What should advisors tell clients?
In the face of all this ongoing regulatory wrangling and uncertainty, Hogan’s advice to advisors is to not advise on these platforms at all.
“When [a client] comes into the office and starts talking about these things, I don’t know if an advisor should take a position on it. If you’re not qualified to advise on this and I would suggest most are not. I would say that nobody’s really qualified to advise on this. There’s at least some skill sometimes in poker,” Hogan says. “But some of these things are just thinking that this is where something going to go and you’re subject to someone on the other side who may be able to manipulate that. what is your skill to do this?
“I would suggest an advisor should say: ‘I don’t want to tell you what you should do.’”
