A regulated futures exchange has withdrawn a proposal to list several futures contracts associated with National Football League games shortly before the U.S. Commodity Futures Trading Commission faced a deadline on whether to approve the controversial plan.
Eris Exchange LLC (ErisX), a derivatives clearing organization, unveiled the proposal in December ahead of the NFL playoffs, as a mechanism to assist legal sportsbooks in dealing with imbalances in sports betting volumes for major sports events. But the product has received pushback from the NFL in recent weeks on whether every dollar used to purchase or sell NFL contracts represented a legitimate effort to hedge commercial risk.
The CFTC began a 90-day review of three RSBIX NFL futures contracts self-certified by ErisX in late December, before the regulator faced a deadline this week to rule on the submission. Ahead of the deadline, ErisX withdrew its proposal on Monday morning, ErisX spokeswoman Jessica Darmoni told Sports Handle.
While ErisX plans to resubmit a proposal after consulting with other sports-related businesses that may benefit from the listings, the company does not have a timeline yet for completing the resubmission process, she added.
“We understand and appreciate the time the CFTC took to review the proposed contract listing. Our goal was and still is to collaborate with regulators and industry players. Sometimes that means taking a step back before progress can happen,” ErisX wrote in a statement posted on a company website.
The CFTC appeared on the verge of rejecting the proposal amid concerns that the NFL futures contract could promote gambling, the Wall Street Journal reported, citing a person familiar with the process.
Although the CFTC has the authority under federal law to restrict financial contracts associated with gaming, the law itself does not define gambling as it relates to the contracts, creating a gray area for the regulation of derivatives related to sports betting.
ErisX indicated that it worked with regulators for approximately a year while consulting with top law firms and economists before filing the self-certification documents for the RSBIX NFL futures contracts.
ErisX Exchange Drops Bid to Trade NFL Futures Contracts – TheStreet https://t.co/FxhTb9jmPq
— John Lothian (@JohnLothian) March 25, 2021
“As with most regulatory processes, even with a strong case it can be difficult to predict results and only by filing can the necessary process be undertaken to reach a definitive conclusion,” ErisX said in its statement.
The futures contracts
Under its proposal, ErisX outlined three types of fully collateralized, financially settled contracts for NFL games: moneyline contracts, point-spread contracts, and over/under contracts. Since major sportsbooks are constrained by the Wire Act in laying off bets across state lines, the proposal from ErisX appeared to provide an alternative for books in correcting betting imbalances.
Take last week’s upset in the NCAA tournament, for instance, when Oral Roberts became just the ninth 15-seed in tournament history to knock off a No. 2 seed. At DraftKings, just 12% of moneyline tickets had the Golden Eagles (+950) in their Round of 64 matchup against Ohio State. Facing a considerable liability on one side, the moneyline contracts would give the sportsbook an opportunity to take the other side to hedge their risk.
One creative element of the proposal summarized a method for stadium operators to use the contracts as a hedge for potential lost revenue from a playoff game. By purchasing a moneyline contract on the outcome of a game, the stadium operator could mitigate the risk of losing millions in lost revenue from ticket sales and food-and-beverage sales, if the team did not host a playoff game. The leagues did not vehemently oppose the idea during the CFTC comment period, but the NFL urged the CFTC to postpone its decision pending a more comprehensive study of the contracts.
@matt_levine The ErisX sports futures idea does bring up an interesting idea — there are businesses (sports bars near the stadium) that suffer when the home team is bad, or lose out on revenue when they fail to make the playoffs. Would be interesting to use over/unders to hedge
— RevDJEsq (@RevDJEsq) March 24, 2021
The decision from ErisX to pull the proposal was made during a hectic period in the global sports calendar. The Major League Baseball season is set to begin on April 1, two days before the Final Four. In a letter to the CFTC dated Dec. 14, 2020, ErisX wrote that commercial partner RSBIX reached out to the NFL, NBA, and MLB regarding the contracts. Though ErisX asserted in the letter than none of the three leagues expressed concern with the proposed contracts, the NFL in public comments to the CFTC said the exchange did not seek the league’s permission in making the representation.
The NFL reiterated during the comment period that it did not take an official position on the purported market benefits of hedging vehicles for licensed sportsbooks.
A spokesperson from the CFTC did not immediately respond on Thursday to a request for comment.