Futures contracts on the outcome of NFL games could soon be a reality. Here’s how the Wall Street-style derivatives wagers work.

  • ErisX, a digital currency derivatives exchange and clearinghouse, has proposed new futures contracts tied to the outcome of NFL games.
  • While retail customers and hedge funds would not be able to trade the product, it would allow sportsbooks and stadium vendors and owners to hedge risks tied to how teams perform.
  • Products would involve contracts tied to the money line, points spread and over/under outcomes of given football games.
  • Before ErisX can launch the new futures, the products must go through 90 days of review by the CFTC and a public comment period.
  • Visit Business Insider’s homepage for more stories.

In the vast US futures markets, traders can exchange derivatives on everything from cattle to crude oil, the S&P 500 Index, Treasury rates and bitcoin.

The breadth of products is a reflection of the variety of American businesses, and futures are how these businesses, from a soybean farmer in Iowa to a hedge fund in New York City, hedge their exposure to future risks or speculate on the price of a given commodity or other benchmark.

To date, however, traders have never had access to futures on the outcome of sports games, the results of which affect sportsbooks and stadium vendors and owners alike. One derivatives exchange, looking to build off the momentum that has seen legal sports gambling surge in the U.S. since a 2018 US Supreme Court decision overturned a federal ban on such wagering outside of Nevada, wants to change that.

Read more:TD Ameritrade is exploring ways to tap into the red-hot world of sports gambling

On Dec. 14, ErisX, a digital currency exchange and clearinghouse that began offering spot and futures trading in cryptocurrencies last year, sent what’s called a self-certification letter to the Commodity Futures Trading Commission.

The letter from Chicago-based ErisX notified the agency, which regulates US futures and options trading, of the exchange’s intent to establish futures contracts on their exchange for NFL games, in partnership with regulated sportsbook index exchange company RSBIX.

By ErisX’s logic, futures markets are a natural extension of risk management to the sports betting industry. 

“The gaming industry has not had the ability to access the innovation of derivatives,” ErisX CEO Thomas Chippas told Insider. “What can we do here that would create a risk transfer mechanism, which is what futures really ultimately represent, and apply that to this industry?” 

Chippas said RSBIX has developed an order management system and front-end analytics software that sportsbooks will be able to use to manage their hedges, as well as the technology to route orders to the ErisX exchange.

“They’re experts on the sports wagering side and what happens there operationally, legally and otherwise. We’re experts in derivatives and running a market clearing house,” Chippas said.

Read more:One of FanDuel’s early investors breaks down how to capitalize on the booming US sports betting industry amid a ‘tremendous decade’ of growth

The NFL futures contracts would be available to sportsbooks and other market players looking to hedge risks 

Per ErisX’s letter, the contracts will not be available to retail customers (for example, anyone who simply wants to bet on a given NFL game) or hedge funds that place bets on sports, but rather only to eligible participants like licensed sportsbooks, arena vendors and owners, and market makers.

The distinction is key, given a restriction in CFTC regulations that forbids event-based contracts that reference gaming.

“These aren’t wagers, these aren’t a substitute for you going on DraftKings or FanDuel or walking into a sports book somewhere and betting on the Pats or betting on the Bills,” Chippas said in reference to the CFTC rule.

In a separate letter to the CFTC released on Tuesday, Chippas described the contracts as passing the “economic purpose test” that determines whether businesses have a demonstrated hedging need for a derivative.

The rationale for the vendors and stadium owners is straightforward: Their income varies given how their home team performs and whether they participate in the NFL playoffs – win and they fill more seats and cater to more fans, lose and they miss out on potential customers. These contracts could ideally serve as a hedge against potential future losses.

See more: How the sports-betting industry is responding to the coronavirus pandemic that has halted most major sporting events

Sportsbooks that have trouble matching off wagers could use the futures contracts to grow

As for the sportsbooks, ErisX’s hope is that bookmakers – particularly smaller ones that have a concentrated betting base and might have difficulty matching off wagers evenly – will see the need for mitigating their exposure and smoothing their revenues. 

Since the Supreme Court decision, 18 states from New Jersey to Oregon have legalized gambling in one form or another and have gone live with betting, according to the American Gaming Association. But sportsbooks are confined by law to only taking bets in the state in which they operate. According to Chippas, the geographic restriction limits the size of betting markets, and bookmakers will occasionally have a hard time matching off one bet against another.

Bookmakers typically tend to want an even distribution of wagers on either side of a betting line, since being overly concentrated on one outcome means they face a greater loss if that event fails to occur – or they have to adjust their odds to compensate and lose potential customers.

“If you look at some of the public commentary from some of these firms, some of them that are on the large end of the scale seem to be very comfortable with the idea of being axed one way or the other,” Chippas said. For a trader, being “axed” means having a directional interest in a given outcome.

“I think if you’re a smaller book, you can use this to take on wagers that you may maybe would have either priced yourself out of or were not seeing. And now you can be more competitive and you can grow that handle while having the benefit of hedging,” Chippas continued. Handle refers to the total pool of money bet at a sportsbook over a given period of time.

Three new futures contracts: money lines, spreads, and over/under

ErisX has proposed three new futures contracts to the CFTC, all of which will be fully collateralized.

One would involve the money line on a given game, an outcome based simply off who wins and who loses. A second would be tied to the points spread, which takes into account the winner of the game after the final score has been adjusted for the betting spread. And a third contract would relate to the over/under odds of a given game and whether the total points scored in the game are above or below that threshold.

“There might be a different interpretation by the risk managers about how to manage, say a moneyline contract versus say a point spread contract or an over under contract, all three of which we intend to list,” Chippas said.

The CFTC began reviewing ErisX’s proposal last week, on Dec. 23, and has 90 days to make a determination of whether the exchange can list the futures; the agency specifically flagged the gaming section of their regulations when requesting ErisX not list the futures during that time. A 30-day public comment period also began on Dec. 28.

The CFTC did not immediately respond to a request for comment from Insider.

While Chippas said “the math doesn’t work out very well” to list the contracts ahead of the end of the NFL season on Feb. 7, given the 90-day review period, he’s confident that ErisX and RSBIX will “get a fair shake” from the CFTC.

“I think we’ve had good dialogue with the regulator. We knew what was going to happen. They want the input, having spoken to staff, having spoken to commissioners, I would say everyone’s brought an open mind to this,” he said.

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