As questions swirl about Canadian investment dealers entering into prediction markets, the Canadian Investment Regulatory Organization (CIRO) has published a bulletin to clarify its requirements for dealers who facilitate trading in the space.
The bulletin notes that so far only two CIRO investment dealer members have been authorized by the regulator to facilitate trading in a limited set of event contracts, which are already offered in the U.S.. As previously reported, those dealers are Interactive Brokers Canada Inc. and Wealthsimple Inc.
As the bulletin highlights, trading of events and options contracts by dealers is subject to certain terms and conditions imposed by CIRO, in consultation with the Canadian Securities Administrators (CSA).
Those terms and conditions stipulate that dealers can only offer event contracts tied to economic indicators, financial markets and climate trends. They can’t offer event contracts based on election outcomes, political events or other events of a political nature.
For example, they can offer contracts based on economic statistics related to the amount of sovereign debt or inflation rates in Canada, climate indicators related to the average global temperature, or financial indicators such as US 500 Forecast Contracts that settle based on the daily settlement price of the Chicago Mercantile Exchange E-Mini S&P 500 Futures.
They can’t, however, offer event event contracts that predict “election results, political party leaders’ nominations or referendum results or otherwise offer event contracts based on the outcome of unlawful activities under Canadian federal, provincial or territorial law,” the bulletin stresses. Such event contracts are currently offered in the U.S., but they’ve drawn intense scrutiny from lawmakers due to concerns about potential insider trading.
Also, dealers are limited to offering contracts with a term to maturity of 30 days or longer.
“For greater certainty, issuing a new threshold in respect of an event contract constitutes a new contract, this new contract must also have a term to maturity of 30 days or longer,” CIRO notes.
Further, dealers are prohibited from allowing clients to use leverage, including the use of margin accounts, for transacting in event contracts.
Dealers seeking to trade or facilitate trading in these products must provide written notification to the regulator, in line with the Investment Dealer and Partially Consolidated Rule subsection 2246(2).
As things evolve, regulators may introduce additional rules related to the prediction markets.
“CIRO and the CSA continue to monitor developments with prediction markets and event contracts and intend to issue further guidance which could result in the imposition of further restrictions,” the bulletin says.