Comment Text:
Marc Nagel
680 N Lake Shore Dr.
Suite 419
Chicago, IL 60611
[email protected]
312-218-8999
January 8, 2021
Mr. Christopher Kirkpatrick
Secretary of the Commission
Commodity Futures Trading Commission
Three Lafayette Centre
1155 21st Street, NW
Washington, DC 20581
Re: Commodity Futures Trading Commission Rule 40.11
Review of Proposed RSBIX NFL Futures Contracts
Dear Mr. Kirkpatrick:
I am taking this opportunity to submit this letter in response to the Commodity
Futures Trading Commission’s (“CFTC”) request for public comment on the RSBIX NFL futures contracts that the Eris Exchange self-certified on December 15, 2020.
I support the Commission’s decision to solicit public comment on these innovative futures contracts. I have long been a proponent of new and innovative ways to manage financial risk and am grateful for this opportunity to express my opinion. The futures markets function as a means for businesses to hedge their financial risks, and I believe that the RSBIX contracts may fill that role for some market participants.
I am providing the responses below to the 6 specific questions the Commission raised in its solicitation of public comment.
Question 1: Do any of these contracts involve, relate to, or reference gaming as described in Commission regulation 40.11(a)(1)?
As set forth in the RSBIX Self-Certification, the RSBIX NFL futures contracts do not
involve, relate to, or reference gaming as set forth in CFTC Rule 40.11(a)(1). The restrictions on participation in these contracts renders them as hedge vehicles rather than speculative and as such they serve an important function in managing risk. These contracts allow pricing to be geographically consistent much like the way grain futures contracts make local prices become geographically consistent.
(Please see Question 3 for a discussion of participation)
Question 2: Do any of these contracts involve, relate to, or reference “an activity that is unlawful under any State or Federal law” as described in Commission regulation 40.11(a)(1)?
The RSBIX NFL futures contracts do not involve, relate to, or reference an activity that is unlawful under any State or Federal law as described in Commission regulation 40.11(a)(1). The Murphy decision voided the existing Federal legislation in this area, and 25 jurisdictions have thus far legalized sports betting. The legislation in the
other states has no impact on the legality of sports betting in those states that have made sports betting legal.
Question 3: ErisX has proposed to restrict participation in the futures contracts. If such contracts are determined to involve, relate to, or reference gaming or an activity that is unlawful under any State or Federal law, are ErisX’s proposed participation restrictions relevant to the Commission’s determination of whether one or more of the contracts serve an economic purpose and thus may impact the Commission’s determination on whether such contracts are contrary to the public interest? If so, how should such restrictions impact the Commission’s determination of whether one or more of the contracts serve an economic interest and thus may impact the Commission’s determination on whether such contracts are contrary to the public interest?
ErisX has proposed 2 categories of participants, Licensed Sportsbooks and Stadium Owners and their Vendors. It is clear to me that Licensed Sportsbooks have a very legitimate need to hedge their exposure to holding a lopsided book. For this reason I believe that it is appropriate to allow Licensed Sportsbooks the opportunity to utilize the RSBIX contracts. If there were a concern about the speculative use of these contracts, the Commission could implement regulations much like speculative position limits and hedge exemptions as they currently exist for other futures contracts.
As to Stadium Owners and their Vendors, the necessity to hedge and even the correlation of the RSBIX contracts to the economic activity of these participants is tenuous at best. Success or lack thereof on the playing field isn’t necessarily reflected in financial success. As a lifelong Chicagoan, I offer the Bears as proof that it doesn’t take a winner to fill the stands. Likewise a very successful team may play to an empty stadium in this pandemic era.
To be an effective hedge vehicle, a futures contract must bear a reasonable correlation to the activity being hedged. I fail to see how hedging the result of any single game could be correlated to an economic result at a stadium. Presuming for a moment that such correlation existed, Stadium Owners and their Vendors would by necessity be
limited to only utilizing the RSBIX contracts involving their home team and then only taking positions that were biased against the success of their home team. There may be a better correlation to a full season’s result but that is not what ErisX is proposing.
My conclusion is therefore, that participation should be limited to Licensed Sportsbooks and other legitimate hedging participants as may be identified.
Question 4: In determining whether any of these contracts falls under the prohibition pursuant to Commission regulation 40.11(a)(1) as an activity that is unlawful under any State or Federal law, to what extent should the Commission be influenced by whether all states’ laws permit gaming (including sports gaming), and/or by the prohibition of interstate betting under Federal law?
If participation in the RSBIX is limited to Licensed Sportsbooks (other legitimate hedging participants), this should not be an issue. Laws across a myriad of issues differ from state to state, but one state’s laws cannot impact the laws of another state and must in fact be respected. If participants are appropriately licensed in the state in which they operate that should settle the issue.
Question 5: Could the trading of these contracts that involve sports gaming create incentives to influence the outcome of a sporting event or other outcomes related to sporting events? What mechanisms would be available to the Commission or to the DCM to surveil for, and guard against, manipulation of these contracts through manipulation of sporting events or other outcomes related to sporting events?
It is unlikely that the RSBIX contracts could influence the result of a sporting event or be manipulated as long as participation is limited to Licensed Sportsbooks (and other legitimate hedging participants) and their activities are limited to bona fide hedging.
Question 6: What factors should the Commission consider in determining whether these contracts are “contrary to the public interest”?
As long as there is no Federal legislation restricting sports betting and sports betting is legal in 25 jurisdictions, I don’t think the Commission is in a position to make a judgement contrary to Congress and the State legislatures.
Conclusion
Thank you for the opportunity to express my opinion on this matter. I am hopeful that you will find my comments helpful in reaching your decision.
Sincerely,
Marc Nagel
