ANALYSIS: Cboe head flags issues with event contract regulation

Speaking at the FIA Expo event in Chicago on Tuesday, Craig Donohue welcomed moves by regional market regulators to harmonise frameworks and encourage innovation, but flagged potential issues with the way some contracts have been fast-tracked under current rules. The comments echo statements made by Donohue and other heads of traditional exchanges at a joint CFTC and Securities and Exchange Commission (SEC) roundtable event in September. The heart of the issue is the ability of regulated venues to “self-certify” contracts and list them in 24 hours, rather than waiting for a full review process.

“We are living in an environment right now where there is just an awful lot that is happening, and I’m not so sure that it’s happening in quite the right way,” Donohue (pictured) said. “It was interesting on the panel right before this, one of the folks was referring to these event prediction contracts as binary options – well they are binary options even though they are called swaps and most of them are traded through self-certification on a designated contract market (DCM).

“The interesting thing about that is Kalshi, for example, is trading a binary option product based on the S&P 500 index value. Well, that’s clearly a binary option on a security that is actually not even supposed to be traded on a DCM or regulated by the CFTC, it is subject to the exclusive authority of the SEC.”

Donohue, who took over as chief executive of Cboe in May, said that while the prediction market is growing it is still some way off the Chicago exchange’s own vast S&P 500 index options volume these are still issues that will have to be resolved.

“The contrast is huge, but the point is that these are likely securities products that probably should not be offered for trading on a DCM and there are implications for that,” he added. “That is something that has to be sorted out either by the regulators or it is going to be sorted out by customers - through recission rights or States’ Attorneys General where you are offering unregistered securities.

“That’s one example, but that’s kind of the world we are living in so there is a duality to it – there is a lot that is good that is happening. I definitely believe in innovation and competition, I like the fact that there are lots of people doing interesting things but as you know the reckoning always comes.”

Donohue at the end of last month cited prediction and crypto markets as two key strategic priorities for the firm as he presented third quarter results. Cboe’s planned offering will focus on financial and economic events. CME Group announced this month it plans to list sports contracts as part of a platform launch in December stemming from a partnership with FanDuel, as well as events in traditional asset classes.

Cboe last month announced that it will exit its Australian and Canadian cash equities platforms as it completed a multi-year review of businesses. Speaking at the FIA event, Donohue said the review would allow the firm to focus on growth areas.

“Our core capabilities are product innovation, we are a very customer-focussed organisation, we are very good at not just product but also technology innovation as well,” he said. “I want to make sure that we are focussed on where growth is, so some of what we are doing is just recalibrating a little bit because our most constrained resource is human capital.

“Most of what we do is not hugely capital intensive - so it’s really where are people focussed, do they have the ability to really execute and be excellent in what they are trying to do or are they too fragmented and distributed across too many things.”