Posted on: January 3, 2021, 01:57h.
Last updated on: January 3, 2021, 05:03h.
Eris Exchange, LLC (ErisX), the operator of a digital currency exchange and clearinghouse, is asking the Commodity Futures Trading Commission (CFTC) to permit futures contracts tied to NFL games on its bourse.
The Chicago-based company sent a letter to the CFTC last month seeking approval to list “fully collateralized and financially settled contracts” derived from NFL moneyline, over/under, and point spread futures. In financial parlance, derivatives are instruments, such as futures or options contracts, where the value is set by an underlying asset.
In the letter to the CFTC, which regulates derivatives trading in the US, ErisX indicates the target audiences for its proposed contracts are sportsbooks, stadium owners, and vendors. The pitch to sportsbook operators is that derivatives can hedge risk and potentially diversify revenue streams.
Contrary to popular belief, licensed sportsbooks do not seek to make money based on the outcome of sporting events; rather they seek to maximize their revenue from the collection of fees,” according to the Eris Exchange letter.
The company notes the traditional model for gaming operators is to pay winning sports wagers with proceeds from losing bets with revenue being generated via fees, or the vig. For example, the extra $10 a gambler lays in a -110 bet to win $100 is considered revenue.
ErisX’s idea of bring Wall Street-style futures to a specific industry isn’t unique. The practice has been used for decades in other output-intensive businesses. For example, airlines are major players in the oil futures markets, as they often look to lock in low crude prices or hedge against spiking costs. Likewise, large food companies account for substantial activity in the agricultural commodities markets as they look to hedge exposure in grain markets, among others.
Another pitch from ErisX is that its derivatives concept could be appealing to gaming companies with significant regional portfolios. While Las Vegas and New Jersey are known for being havens for “sharps” — successful, professional sports bettors that lay large sums with no bias for their favorite teams — sportsbooks in smaller markets can draw outsized action on one side of a game involving nearby teams.
In a hypothetical example, a sportsbook in Colorado could be subject to lopsided action on a Denver Broncos game. With no way to hedge that vulnerability, the operator is left to shift odds or to hope bettors are wrong.
“Although adjusting the odds provides one tool for a licensed sportsbook to balance its books, there are limitations to the effectiveness of using odds to balance books,” said Eris Exchange in its letter to the CFTC.
ErisX views its futures proposal as a practical risk management tool for the evolving sports betting industry.
Don’t Try This At Home
Futures contracts are available on an array of assets, including bitcoin, gold, oil and US Treasuries, and investors of all stripes — professional and retail — can participate in those markets. However, if the ErisX derivatives are approved, the contracts won’t be available to ordinary investors, nor will they be available to hedge funds that operate in the sports betting universe.
The CFTC commenced a 90-day review of the ErisX plan on Dec. 23 and a 30-day public comment period on the matter opened on Dec. 28.
The exchange operator isn’t likely to list any contracts prior to the Super Bowl on Feb. 7. Regulatory documents don’t mention possibilities of similar derivatives being offered on college football or other sports.