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Event-Based Futures Would Help Licensed Sportsbooks, Stadium Owners Hedge Economic Risk

Back on Dec. 23, the Commodity Futures Trading Commission (CFTC) announced that it had begun its review of three RSBIX NFL futures contracts, self-certified by Eris Exchange (ErisX). The CFTC—which has since opened up a 30-day public comment period—now has 90 days to make its determination on the submissions. Should RSBIX gain authorization to clear futures on NFL games, licensed sports betting operators would finally be able to offset the economic risk associated with an unbalanced book (by buying up exposure to the other side) and leverage their existing volume to take on additional wagers. “Right now, there isn’t a great formal mechanism to do that,” noted Eilers & Krejcik Gaming principal Chris Grove. (Note: Eilers & Krejcik is an advisor to RSBIX.)

Our Take: To be clear, the fully collateralized, financially settled sporting event-based futures contracts RSBIX intends to list are not wagers themselves. Like traditional derivatives, listings on the ErisX platform would simply be a means of transferring economic risk for those engaged in the underlying business of sports wagering (i.e., they’re not a replacement for sports betting)—which explains why trading will only be available to eligible commercial participants and not retail investors. For those unaware, a futures contract is an agreement to buy exposure to a commodity at a specified point down the line.

The legalized domestic sports gaming industry operates on a state-by-state basis. That’s problematic for sportsbook operators with bettors disproportionately wagering on the home team and the Wire Act preventing them from moving money across state lines. As a result, lopsided books find themselves with unhedged economic exposure and their profits and losses tied to the outcome of a game. The fact that the U.S. remains a nascent market only exacerbates the challenge. “A couple of high-volume bettors can really do a number on the risk profile of a given sportsbook,” Grove said.

As it stands, licensed operators that reach their risk tolerance limitations either stop taking wagers (which directly limits the handle) or begin offering bettors lines inconsistent with their offshore competitors (which indirectly limits the handle by pushing bets elsewhere). In other words, without a way to offset exposure, domestic books are unable to operate at peak efficiency. Operators can choose to continue taking bets on a heavily directional book. But as we saw with Super Bowl LIII, that can lead to significant operational losses.

Should the CFTC approve RSBIX’s submissions and a federally approved derivatives marketplace were to exist, operators would finally have a means of moving economic risk off their books or taking on some offsetting risk to flatten their exposure. Remember, in an ideal world a sportsbook has even money on both sides—eliminating the need for one particular party to win—and is making its money on the fees associated with booking the bets (also known as the vigorish). Grove suspected many sportsbook operators will “jump at the opportunity” to make their handle bigger in a more balanced way.

Vendors and stadium owners seeking to eliminate the financial risk associated with fluctuations in home game attendance and/or the number of home games on the schedule should also benefit from having access to sports events futures. ErisX CEO Thomas Chippas said he could see them saying, “Look, the team is going into the playoffs, but unlikely to get home field games all the way through. Maybe [it would be wise] to hedge the potential economic loss [associated with no being able to host home field playoff games] by getting exposure to the other side. It’s good practice, and there haven’t been the tools to do it.”

Chippas also expects to see market makers on the platform “as you have in any futures market; folks buying and selling all day long to provide liquidity on both sides of the trade.”

As Grove said, “There are certainly some people who envision a stratum of sports event hedging that will be conducted far more like commodities or derivatives trading [in the future].”

The financially settled futures contracts that RSBIX seeks approval on are based on the point spread, money line and over/under totals of individual NFL games. The company is starting with football and hopes to receive approval from the CFTC before the end of the 2020 NFL season. But it fully intends on listing futures contracts on other sporting events, including the ’20-’21 NBA season.

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