CFTC Issues No-Action Letters on Event Contract Reporting
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The US commodities regulator, the Commodity Futures Trading Commission (CFTC), issued a significant round of No-Action Letters yesterday, December 11. The letters were issued to four major operators in the derivatives and prediction market space – Polymarket, Gemini, PredictIt, and LedgerX/MIAX.
According to the regulator’s statement, it has “taken a no-action position regarding swap data reporting and recordkeeping regulations in response to requests from multiple registered entities.”
The letters provide a targeted regulatory relief from certain swap-related recordkeeping and data reporting requirements. This signals that the CFTC is taking a more flexible and supportive approach to bringing innovative crypto-related products under the regulated federal framework.
The action also acts as a big boost, especially for the burgeoning prediction market sector, as it offers much-needed regulatory clarity to operators like Polymarket and Gemini, especially now, when the competition in the space is starting to intensify.
Commentin further in its announcement, the CFTC said: “The divisions will not recommend the CFTC initiate an enforcement action against certain registered entities or their participants for failure to comply with certain swap-related recordkeeping requirements and for failure to report to swap data repositories data associated with binary option transactions executed on or subject to the rules of the registered entities, subject to the terms of the no-action letters.”
It added that the no-action letters apply only in narrow circumstances, and are comparable to no-action letters issued for other similarly situated designated contract markets and derivatives clearing organizations.
A Step In The Right Direction For Regulation
No-Action Letters act as formal statements from the regulator that staff will not recommend enforcement action against companies for non-compliance with a specific rule or rules.
In this case, the relief involves certain swap-related recordkeeping requirements and the failure to report data to SDRs, which is a standard, but often complex requirement for derivatives trading platforms.
More importantly, the move shows that the regulator has recognized that the nature of fully-collateralized crypto derivatives and prediction contracts differs from traditional credit swaps and interest rates, which is a big step in the right direction.
But, as the regulator noted, the relief is strictly conditional, and it requires the recipients to ensure that their contracts are fully collateralized at all times. This means that participants must post the entire required margin upfront.
Lastly, the clearing must be conducted internally using their designated platform, and businesses may not rely on external clearing members. All data tied to the contracts must be published publicly on the firm’s platform after execution, to ensure transparency.
But, the action will let the mentioned platforms operate their event contracts and derivatives markets within a regulated environment, while avoiding compliance with some older data reporting rules which might not apply, which is still a positive development.
