ErisX and RSBIX Introduce Sporting Event Based Futures Contracts
ErisX is pleased to announce that today we filed a product self-certification to introduce fully-collateralized, financially settled sporting event-based futures contracts in collaboration with RSBIX. This is ErisX’s first strategic collaboration to provide listing and clearing services enabled by our recent DCO order amendment permitting us to clear derivatives on any commodity.
The sporting event based futures contracts were designed to specifically meet the hedging needs of commercial market participants. Trading will be accessible only to eligible contract participants such as state-licensed sportsbooks, vendors and stadium owners with a demonstrated need to hedge financial exposure associated with their commercial business, as well as designated market makers. Contracts will be based on moneyline, point spread, and over/under for each game, including games in the pre-season, regular season, playoffs and championships. Based on the timing of our self-certification, we are looking to launch contracts for the remainder of the current NFL season, and then move into the full upcoming NBA season.
Managing Risk
Licensed sportsbooks face commercial exposure based upon imbalances in their books. These imbalances often arise when, for example, licensed sportsbooks, which are legally allowed to do business in their licensed state, receive wagers that disproportionately favor a local team. There are currently 26 states that have legalized licensed sportsbook operators that today can only service customers within the state where they are licensed. Two or more sportsbook operators, operating in different states, may have offsetting books but today lack a means to offset their separate pools of interest directly with each other.
When a licensed sportsbook faces an imbalance it creates an unhedged risk where the sportsbook may make/lose money depending on the outcome of the game. The sportsbook does not want to be in this position — it wants a perfectly balanced book where it makes its fees for the provision of wager taking services with no relation to the outcome of the game. An imbalance that can’t be hedged results in three options for the sportsbook: (1) prohibit additional wagers once an imbalance in its books reaches a certain threshold, putting an artificial structural constraint on its commercial operations; (2) offer customers a line that is inconsistent with its off-shore competitors, and thus, drive consumers to illegal off-shore operations; or (3) offer customers a line that is consistent with its off-shore competitors, but face significant financial exposure to the outcome of a sporting event because the supply/demand imbalance within the geographic region for the licensed sportsbook favors a particular outcome.
ErisX’s RSBIX suite of products will permit licensed sportsbooks to manage their commercial risk by creating a means to aggregate offsetting, independent state-specific books via commonly accessible futures contracts that trade nationally.
These contracts also provide stadium owners and vendors the opportunity to hedge the commercial risk associated with fluctuations in game attendance or fewer home games resulting from a team’s performance at the stadium. For example, a stadium owner would lose potential additional revenue if the team was not eligible to host one or more playoff games, or if fewer fans show up to watch games. Both of these scenarios depend (in whole or in part) upon a team’s win-loss record. A stadium owner could buy or sell a moneyline contract, the outcome of which determines whether a team will host a playoff game. The contract would serve as a hedge against the lost potential revenue.
The suite of RSBIX designed sporting event based contracts at ErisX include the following types:
Moneyline Contracts
Moneyline contracts settle based on the outright winner of a game, and each game will have a single moneyline contract. The buyer of the contract (long position) would take the position that the away team will win the game, and the seller of a contract (short position) will take the position that the home team will win the game.
For example, let’s say Eris Exchange lists the following contract : NFL Week 1 New York Jets at Buffalo Bills. Member A (market maker) bought a contract and Member B (licensed sportsbook) sold a contract at the price of $40. Under this example, Member A would post to the Exchange $400 as the buyer while Member B would post $600 to the Exchange as the seller. If the Buffalo Bills win, then contract settlement would result in Member B receiving $1000, it’s initial $600 posted and the $400 posted by Member A. If the game results in a tie, each Member’s collateral is returned.
Point Spread Contracts
Point spread contracts settle based upon the winner of a game after taking into account the away team’s points as adjusted by the point spread. The buyer of a contract (long position) would take the position that the away team’s adjusted points will be higher than the home team’s actual points. The seller of the contract (short position) would take the position that the away team’s adjusted points will be lower than the home team’s actual points.
For example, let’s say the Eris Exchange lists the following contract : NFL Week 1 New York Jets at Buffalo Bills Point Spread +3.0. Member A (licensed sportsbook) bought a contract and Member B (a licensed sportsbook or market maker) sold a contract at a price of $50. Member A would post $500 as the buyer while Member B would post $500 as the seller. If the final score was New York Jets 13 points and Buffalo Bills 14 points, then New York’s final adjusted score of 16 points (13 points plus 3 points, point spread) would be greater than Buffalo’s actual number of 14 points. The contract settlement would result in Member A receiving $1000 (its initial $500 and the $500 posted by Member B). If the two scores after point spread are equal and thus resulting in a tie, each Member’s collateral is returned.
Over/Under Contracts
Over/under contracts settle based upon the total points scored by each team in a game, and whether the point totals were over or under a predetermined point threshold (“the over/under value.”) The buyer of the contract (long position) will take the position that the total points scored by both teams in an game will exceed the over/under value, and the seller of a contract (short position) would take the position that the total points scored by both teams in an game will be lesser than the over/under value.
For example, let’s say Eris Exchange lists the following contract: NFL Week 1 New York Jets at Buffalo Bills O/U 35. Assume Member A (market maker) bought a contract and Member B (licensed sportsbook) sold a contract at the price of $50. Member A would post $500 as the buyer while Member B would post $500 as the seller. The final score of the game was New York Jets 13 points and Buffalo Bills 14 points, which equates to 27 total points. 27 points is less than the over/under value of 35. Contract settlement would result in Member B receiving $1000, its initial $500 and the $500 posted from Member B because the total points were under 35. If the final total points were equal to the over/under value of the contract, each Member’s collateral is returned.
Regulation
The RSBIX designed suite of sporting event based contracts (pending regulatory approval) will be listed on Eris Exchange, our Designated Contract Market (DCM), and cleared at Eris Clearing, our Derivatives Clearing Organization (DCO). ErisX is a regulated futures exchange based in the United States and under the jurisdiction of the Commodity Futures Trading Commission. For more information about how we work to prevent market manipulation and fraud as well as keep Member funds safe, we invite you to read about the roles and responsibilities of a DCM and DCO.
ErisX’s integrated exchange and clearing technology platform, licenses and operations enable us to offer services to third-parties, such as RSBIX, that have innovative commercial ideas that require regulated market infrastructure. By working with ErisX, businesses can reduce their time to market and up front costs, and trust that they are working with a professional team and world-class infrastructure. For more information about our third party clearing services, please email info@erisx.com.
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