The Commodity Futures Trading Commission (CFTC) has issued a cautionary note to operators of prediction markets, highlighting that event contracts linked to an individual's statements or actions are particularly vulnerable to manipulation.
On Tuesday, the CFTC's Division of Market Oversight released an advisory concerning “mention market” contracts. These contracts are settled based on whether a person uses specific phrases, attends an event, or interacts with another individual.
The regulator pointed out that such contracts are more prone to manipulation since their outcomes rely on the specific actions of an individual, which may not be independently verified or generated externally.
The advisory outlines specific conditions under which mention market contracts can be listed according to the Commodity Exchange Act and CFTC regulations. It also lists various factors that designated contract markets (DCMs) should take into account when designing and submitting these contracts under Regulations 40.2 or 40.3.
The CFTC reminded DCMs that they must adhere to Core Principle 3, which stipulates that only contracts that are not easily manipulated should be listed. Additionally, it emphasized that exchanges submitting mention market contracts under Part 40 must provide a thorough, contract-specific analysis to demonstrate compliance with the necessary requirements.
In recent months, mention markets have attracted heightened scrutiny. Kalshi, one of the few US-regulated platforms offering such contracts, had previously suspended sports-related mention markets during a CFTC review, as reported by CNBC.
Elisabeth Diana, a spokesperson for Kalshi, stated, “We’ve addressed this guidance based on a prior discussion with the CFTC.”
Kalshi’s competitor, Polymarket, provides mention markets through its international exchange, which operates without CFTC regulation.
This contract type has come under fire following reports that Gabriel Perez, a long-time teleprompter operator for former President Donald Trump, traded on Kalshi contracts related to whether Trump would make specific statements. In August, the CFTC ordered Perez to pay $172,539 for insider trading involving mention market event contracts.
According to the new advisory, the CFTC has outlined four factors that exchanges should evaluate when considering mention markets: the external obligations of the individual involved in the contract; any external pressures that might affect that person's speech or behavior; whether the words or actions used for settlement can be independently verified; and whether adequate oversight measures are in place to identify manipulation.
The CFTC also encouraged exchanges to engage with its Division of Market Oversight during the early stages of developing mention market contracts to explore ways to reduce manipulation risks.