Vertical Integration and Customer Protection in the Prediction Market

The full text of the comment letter De Silva Law Offices filed with the Commodity Futures Trading Commission on July 8, 2026 (RIN 3038-ZA24) appears below, reproduced in full with its footnotes. It is also available in the Commission’s public rulemaking record.

July 8, 2026

Christopher Kirkpatrick

Secretary of the Commission

Commodity Futures Trading Commission

Three Lafayette Centre

1155 21st Street NW

Washington, DC 20581

Re: Request for Information: Identifying Regulations To Facilitate Innovation and Competition to Financial Products and Services for Fintech Firms; RIN 3038-ZA24; 91 Fed. Reg. 36774 (June 18, 2026)

Dear Mr. Kirkpatrick:

De Silva Law Offices, LLC submits these comments on the Commission’s Request for Information concerning regulations that may impede innovation and competition for fintech firms (the “RFI”), issued under Executive Order 14405.[1] The firm writes as counsel to the market participants the Order is meant to reach. Its comments address a structural change now underway in the event contract markets, and what that change means for how the Commission’s rules should apply.

I. Statement of Interest

De Silva Law Offices is a Chicago financial regulatory and litigation firm, founded in 2002. Its practice centers on CFTC and NFA compliance, derivatives and futures regulation, event contracts and prediction markets, fund formation, and enforcement defense. Its Managing Attorney spent more than two decades in the industry, beginning on the floor of the Chicago futures exchanges as a floor trader and floor broker, and the firm’s clients include designated contract markets, introducing brokers, futures commission merchants, commodity pool operators, commodity trading advisors, proprietary trading firms, and numerous event contract and fintech platforms this RFI concerns.

The firm has engaged with the Commission on these markets before, most recently in its comment on the prediction markets advance notice of proposed rulemaking.[2] The comments below draw on that work, and on a longer view of how the futures markets have actually protected customers. They respond principally to Questions 1, 3, and 4, and they touch on Questions 2 and 5 where those bear on the same problem.

II. Summary of Comments

The event contract markets are consolidating. Functions the futures industry has long kept in separate hands, running the exchange, clearing the trades, carrying the customer, and trading for the house, are being drawn into single corporate families, and the industry is asking the Commission to bless that consolidation.

The firm makes three connected points. First, the Commission’s registration and designation framework, and the Core Principles at its center, were built on the assumption that these functions sit in separate entities, and much of the customer protection the framework delivers comes from that separation rather than from any single rule. Second, vertical integration removes the separation while leaving the rules formally in place, which strains the obligations that matter most to customers, segregation, surveillance, best execution, the handling of orders, and the marketing of the venue, at the very moment those obligations carry the most weight. Third, the right response is a rule that says how these obligations attach to an integrated entity, not another decade of answering the question one no-action letter at a time. The firm does not ask the Commission to forbid integration. It asks the Commission to set the terms before the walls come down, rather than after.

III. The Framework Presupposes a Separation of Functions That Integration Is Erasing (Questions 1 and 3)

Begin with how the futures markets were historically built. The design of separate silos for separate functions has been a critical safeguard of the futures markets. Its lack has also historically led to problems.

Clearing, brokerage, proprietary trading, and customer account segregation have been the distinguishing hallmarks of relatively crisis-free and well-functioning derivatives markets. A designated contract market lists the contracts and runs the order book. A derivatives clearing organization stands in the middle of each trade as central counterparty and guarantees that it settles. A futures commission merchant carries the customer, holds the customer’s money, and collects margin. Where a firm trades for its own account, that proprietary activity sits in a separate book. For most of the history of these markets, those four functions have lived in four different places, and usually in four different companies.

That separation was neither accidental nor redundant. It did regulatory work.[3] Customer money was protected in part because a different entity held it than the one running the market or the house account, and because the law required that money to be segregated and kept apart from the firm’s own funds.[4] Surveillance had a measure of independence because the exchange watching for manipulation was not the same firm whose customers and proprietary desk it was watching. The prohibition on trading ahead of customers meant something concrete because the broker holding a customer’s order and the account on the other side of the market were not the same hand. None of these protections lived only in a rule in the Code of Federal Regulations. Each rested on a structural fact: the functions were in different hands, those hands had to deal with one another at arm’s length, and dealing at arm’s length left a trail.

That structure has a long record, and for customers a remarkably good one. Through the market break of 1987, the financial crisis of 2008, and a steady stream of individual firm failures, the separated model protected segregated customer funds with striking reliability. Customers of a failed futures commission merchant have generally been made whole, because their money was segregated, held elsewhere, and identifiable as theirs. That reliability is one of the quieter achievements of American financial regulation, and it is worth pausing on before dismantling the structure that produced it.

The rare exception proves the rule. The signature customer-protection disaster in modern futures history, MF Global, happened precisely because the firm breached the separation the framework depends on. MF Global drew on segregated customer funds to support its own proprietary positions in European sovereign debt, and when those positions turned, roughly 1.6 billion dollars of customer money was missing.[5] The lesson is not that segregation failed. It is that the wall between customer funds and house risk is the thing that protects customers, and that customers are harmed when the entity holding their money is also the entity running the proprietary book. The catastrophe came from collapsing the separation, not from keeping it.

FTX is the more recent illustration, and it points the same way; the firm has written about it before.[6] The distinction that mattered in that collapse was structural. LedgerX, the CFTC-registered derivatives entity within the FTX group, operated under the Commission’s customer-protection and segregation rules, remained solvent, and its customers did not lose their funds. The offshore business, which folded exchange, clearing, brokerage, and an affiliated proprietary trading firm into one undifferentiated enterprise, had none of the checks that separation supplies, and its customers were not so fortunate. MF Global shows the damage done by breaching the separation; FTX shows the damage done by never building it. A sitting Commissioner observed at the time that the Commission’s existing rules did not even reach the questions the non-intermediated model raised, and urged a rule to close the gap.[7] This letter urges the same, for the same reason, in a market now moving decisively toward that structure.

The event contract markets are now collapsing that separation by design rather than by misconduct. A single corporate family increasingly holds several of these functions at once. One operator holds the full set, exchange, clearinghouse, and brokerage, offers the same contracts on its own platform, and supplies the infrastructure behind several others.[8] Others operate as both the venue and the clearinghouse for their own products, with brokerage the only piece not yet in house.[9] And the direction is not hidden. In its own comment on the prediction markets rulemaking, one prospective operator asked the Commission to take a permissive approach to vertical integration and to permit common ownership of a designated contract market, a clearing organization, an intermediary, and an affiliated market maker.[10] That is the entire chain, the venue, the clearinghouse, the broker, and a house trading desk, under one roof.

When that happens, the rules do not disappear. Segregation is still required. Surveillance is still required. The prohibition on trading ahead of customers is still on the books, and at least one exchange’s own rulebook carries a conventional version of it.[11] What disappears is the structural assurance behind those rules. Segregation enforced by separate ownership becomes segregation enforced by an internal firewall. Independent surveillance becomes self-surveillance, with the entity watching for manipulation now watching flow it intermediates and, where there is an affiliated market maker, trades against. The line between the customer’s order and the house account, once a line between two companies, becomes a line inside one. Each of these is a weaker guarantee than the one it replaces, and none is what the Core Principles were written to assume.

It is worth being precise about the conflict, because the conflict itself is old. A firm that profits from its customers’ order flow, that internalizes that flow or trades around it, has been a familiar feature of securities and futures markets for a very long time, and the apparatus that manages it, best execution, order-handling rules, the front-running prohibitions, segregation, grew up around exactly that conflict. The conflict was tolerated because it was fenced. What integration changes is not the existence of the conflict but the removal of the fences, the arm’s-length separations, and the records those separations generated, that made the conflict visible and manageable in the first place.

Visibility is the heart of it. In the separated model, the seams between firms produced evidence. A customer order passing from an introducing broker to a futures commission merchant to a clearinghouse left a trail across separate entities, each with its own books, because separate entities had to transact with one another to move it. Collapse the entities and those inter-firm records become internal ledgers a single firm controls.

A fully collateralized, self-cleared, application-based system run by one corporate family is efficient, but it is also opaque in a way the older plumbing was not. Conduct the separated model would have exposed at the seams, trading ahead of a customer, internalizing flow on terms adverse to the customer in a manner analogous to payment for order flow, a surveillance gap around an affiliate, is far harder for a regulator or a customer to see when there are no seams. The firm raises this as a matter of structure, not as an accusation. It does not suggest that any particular platform engages in such conduct. The point is narrower and more durable: integration removes the visibility that would let anyone know, and that alone is a reason for the Commission to act by rule.

This is also where the firm’s earlier work on insider trading in these markets connects.[12] The Commission is leaning heavily on the self-regulatory model to police manipulation and insider trading in event contracts, that is, on the exchanges’ surveillance of their own markets. Vertical integration concentrates that surveillance function inside the very entity whose flow and whose affiliate are being surveilled. Self-policing is a weaker check than independent policing, and it is weakest exactly where the stakes run highest.

None of this argues that the Commission should forbid vertical integration. Efficiency and capital formation are real, and integration may serve both. It argues that the Core Principles and conduct rules were written for a separated world, that they presuppose protections integration removes, and that the Commission should say, by rule, how segregation, surveillance independence, best execution, order handling, and the transparency needed to verify each of them apply to an integrated entity, before it approves more such entities rather than after.

IV. Answer the Question by Rule, Not by Serial No-Action Letters (Questions 1 and 4)

Question 4 asks whether the Commission’s registration, designation, and authorization categories capture what these firms actually do, and invites commenters to identify the authority to fill any gap. Question 1 asks which processes are not fit for purpose. The integration described above answers both, and the Commission’s own recent practice points to the remedy.

Platforms listing fully collateralized event contracts have operated under staff no-action letters since 2017, and the Commission has issued a succession of them, with more expected as further applicants seek designation.[13] A recurring need for individualized relief is itself a symptom. When the same novel structure keeps appearing and each entrant negotiates its own terms, the categories are no longer doing the defining work that registration exists to do. The Commission has essentially said so: in proposing to codify the event contract reporting requirements, it acknowledged that handling these questions one no-action letter at a time is an inefficient answer to a recurring problem better settled by rulemaking, and the Chairman has said the agency will stop regulating through a patchwork of no-action letters.[14]

The integration problem is a reason to act on that principle now. A no-action letter binds only the firm that received it and turns on the facts it recites; it creates nothing the next applicant can rely on, and it leaves the operating terms of a market in staff correspondence rather than in the Code of Federal Regulations.[15] For questions as consequential as how customer protection and surveillance survive vertical integration, that is the wrong instrument. The Commission has a recent illustration of the cost. In CFTC Letter No. 26-09, staff granted no-action relief to a non-intermediated technology provider and, rather than resolve the questions its structure raised, attached conditions written for that one firm, among them a requirement that it run its communications and marketing as though it were a registered introducing broker.[16] Staff thus reached conduct the Commission’s rules do not otherwise reach, but did so privately, for a single beneficiary, on facts no other platform can invoke. The conflict and marketing questions integration raises will recur in every application. They should be answered once, in a rule.

The authority is already in hand. The Commission’s power to designate contract markets, to prescribe registration, and to grant exemptions under section 4(c) of the Act is more than enough to define how the Core Principles and conduct obligations apply to integrated entities and to codify the recurring positions into rules that bind everyone.[17] This is the same logic behind the National Futures Association’s call for a purpose-built framework for retail direct clearing rather than an effort to force new structures into old categories, and behind the firm’s own comment on the prediction markets advance notice.[18]

None of this cuts against where the Commission has said it wants to go. The Securities and Exchange Commission, facing an analogous question about how a registration regime built for intermediaries applies to platforms that reach users directly, answered it with general guidance rather than case-by-case adjudication, on terms open to anyone similarly situated.[19] And in March the two agencies signed a Memorandum of Understanding and stood up a Joint Harmonization Initiative for the express purpose of cutting conflicting requirements and closing regulatory gaps in the areas they share.[20] A framework in which one agency meets a shared structural question with a public rule while the other meets it firm by firm is the inconsistency that Initiative exists to resolve. The Commission should resolve it here, and on the side of a rule.

V. Communications, Antifraud, and the Marketing of an Integrated Venue (Question 2)

One conduct area deserves separate emphasis, because it is where the integration problem is already visible to the public: how these platforms market themselves.

The rules governing how registered intermediaries solicit retail customers, the National Futures Association’s promotional-material rule chief among them, are among the most demanding in the derivatives markets.[21] They bind registrants, and they exist because solicitation is where retail customers are most exposed. Two features of the current market strain them. The first is the one this letter has described. When the venue, the broker, and a house trading desk share ownership, marketing is no longer a broker promoting access to an independent exchange; it is an integrated firm promoting trading in its own book, to the retail customer it faces and profits from. That is a concentrated conflict the arm’s-length model never had to price, and the promotional rules were not written with it in mind.

The second is the channel. These platforms increasingly reach retail through paid social-media promoters who hold no registration, and recent reporting has documented promotional campaigns for prediction market platforms built on fabricated trades and undisclosed payment.[22] The most exacting marketing standard in the derivatives markets binds registrants; the unregistered promoter reaching retail on a platform’s behalf can fall outside it entirely, while performing the very solicitation the standard was written to govern. That burdens the registrants who remain fully answerable for promotional material produced for them, and it leaves a gap wherever direct-to-retail, promoter-driven marketing occurs. The Commission should say, by rule, how promotional responsibility attaches in these markets, so that the obligation follows the solicitation rather than the label, and so that an integrated venue’s marketing of its own book carries obligations commensurate with the conflict.

VI. Technology Providers That Perform No Regulated Function (Question 5)

One narrower item, responsive to Question 5, runs in the opposite direction and deserves a brief word. A fintech firm that supplies only technological infrastructure to a registrant can be left uncertain whether that alone pulls it into a category such as introducing broker or commodity trading advisor, though it performs none of the regulated function those categories describe.[23] The Commission should clarify, by interpretation or exemption, when a technology provider that does not solicit customers, hold their funds, or exercise trading discretion is acting in a registrable capacity and when it is not. The firm has pressed the parallel point on the securities side in its petition to the Securities and Exchange Commission for a finder’s exemption.[24] Clarity here lowers a barrier to entry without lowering any protection.

VII. Conclusion

The event contract markets are consolidating functions that the futures industry has long, and successfully, kept apart. That separation was not bureaucratic clutter. It was the structure through which these markets protected customers for the better part of a century, and its rare failures came from breaching it, not from maintaining it. The Commission’s Core Principles and conduct rules presuppose that structure. As vertical integration erases it, those rules need to be restated for the market that is arriving, in a rule that specifies how segregation, surveillance independence, best execution, order handling, marketing, and the transparency needed to verify them all apply to an integrated entity. Resolving each of these questions firm by firm through no-action letters is the approach the Commission has rightly begun to abandon, and it is the wrong way to answer questions this consequential. The firm urges the Commission to set the terms by rule, and to do so before it approves further integration rather than after.

The firm would welcome the chance to provide further information or to answer any questions the Commission or its staff may have.

Respectfully submitted,

R Tamara de Silva

Managing Attorney

De Silva Law Offices, LLC

View the comment as filed on Regulations.gov.