Betting on the future value of financial instruments
5 December 2014
Based on a specific case, the Danish Gambling Authority has chosen to examine the content of ’betting on the future value of financial assets’ in section 2 (3) of the Danish Gambling Act with special regards to the financial regulation.
The Danish Gambling Authority is publishing this interpretative aid to support the understanding of the Danish Gambling Act in regards to pool betting based on the relative development in the prices of financial instruments. The Danish Financial Services Authority (FSA) have reviewed this interpretative aid before release.
The Gambling Act and betting on financial instruments
The Gambling Act section 2 (3) states that betting on the future value of financial assets is not covered by the Act and therefore this type of betting cannot be offered with a betting licence after the Gambling Act’s section 11.
The intent behind the provision is to ensure that financial instruments such as spread betting, contracts of difference (CFD) and similar products do not fall within the scope of the Gambling Act. These instruments are best handled by the financial regulation. This means that if a product falls within the definition of a financial instrument, then the product fails to fall within the scope of the Danish Gambling Act. E.g., binary options are considered a financial instrument and they are therefore not covered by the Danish Gambling Act. See among others SAU 714 2013-2014 from the Fiscal Affairs Committee.
Bets on the future value of financial instruments will not always be considered a financial instrument and therefore it is possible to offer betting on financial instruments within a certain legal latitude. Because of this The Danish Gambling Authority has accepted that ‘virtual stock trading games’ is a type of game that can be offered under a betting licence.
In these virtual stock trading games, customers play with play money on fictional financial markets. The player who has performed the best during a given period wins a prize. At no point do the customers trade real financial instruments on a real financial market. Equivalently other betting products on the future value of financial instruments can be offered as long as it itself is not a financial instrument.
Betting products can be derivatives
When providing bets, where development in market prices of financial instruments is the key factor in settling a bet, risks can arise that the bets have the characteristics of derivatives, which is a financial instrument.
The definition of derivatives is not clear-cut and it relies on an open definition, which makes it difficult to define the framework for establishing when a betting product is a bet or a derivative. Whether or not a bet can be characterised as a derivative must be determined on a case by case basis.
On a general level, a derivate is a financial instrument, where the value depends on an underlying asset. Derivatives can be structured in such a way, that the underlying asset can consist of basically any financial asset. For example stocks, raw material or currency. It can also be an index, e.g. stock index, or another measure. For example, a rate of interest. The price or the value of derivatives is calculated on the basis of the underlying asset and the anticipated future value hereof.
Furthermore, derivatives are characterised as being an agreement on the exchange of services, hereunder money/value between the parties if the value is also dependent on the underlying asset.
If you have any questions regarding the interpretation of derivatives, please contact the Danish FSA.
Tilladelsesindehavers ansvar, at der er tale om et væddemålsprodukt
Products offered under the betting licence must not be able to be characterised as derivatives, since in that case it can fall under the scope of the financial regulation and thereby fall under the Danish FSA’s area. It is the licence holder’s responsibility to ensure, that betting products offered are not derivatives.
Licence holders’ responsibility to ensure that there is a betting product
The following criteria must as a minimum be complied with in order for bets not to be considered financial instruments.
To ensure that betting products are not characterised as a financial service or derivatives, the following sections should be complied with:
A – Only pool betting with equal stake for every game option
A bet on the future value of financial instruments will only fall within the scope of the Danish Gambling Act section 11, if it is offered as a pool bet. Fixed odds bets etc. is not permitted. Pool betting is defined in section 5 (1)(6) as ‘Bets where all or parts of the winnings depend on the size of the total pool of stakes or the winnings are shared between the winners.’
The stake for participating in pool betting must not be differentiated between the game options. The player’s stake must have the same value and significance in the game. For example it must not be more costly to bet on stock A than stock B. However, the players can still choose the size of the stake. In general, there must not be differentiated rules or other conditions between the game options. The management of stake, result and winnings must therefore be the same for all the game options in the pool betting.
The pool bet must only be determined by the relative development in market value between several financial instruments. It is not possible to offer betting, where the development in marked value and the player’s winnings are proportional. The winnings must therefore reflect the deposited amount of money, the number of winning players and the size of the stake from the individual player.
B – Which financial assets can used for betting products?
Betting should be limited to financial instruments that are trading on regulated markets. To reduce the risk of market abuse it is only allowed to bet on the indices of the most traded financial instruments. Betting products based on financial instruments that are rarely traded or which can easily be affected should not be offered.
C – The marketing and presentation of these types of games
When offering betting products based on financial instruments, they must be presented and marketed as a gambling product in all respects.
The marketing and the visual presentation of the game must not give rise to doubt that it is a gambling product and not a financial asset. The offered gambling product, the marketing, and the website where the betting is made available, must not contain offering of financial services or any reference to financial services. Therefore, the licence holder must not give financial counselling financial recommendations, compose financial analyses or other financial overview tools such as statistics, graph and charts. The licence holder must not refer to other parties who provide financial services or analysis.
The licence holder must have an ordinary offer of betting before offering of betting on financial assets can take place. A betting offer solely based on betting products regarding the future value of financial assets is not allowed since this can confuse the consumers as to what nature the offered product is.
Securities traders cannot obtain a betting licence because securities traders only can offer activities as stated in appendix 4 to the Danish Financial Business Act as per section 9 (1) in said act.
Supervision with this type of betting
The Danish Gambling Authority will supervise the offer of these types of betting products and there will be an ongoing evaluation of the risks associated, among others market abuse.
It should be emphasised, that the precautionary measures which already applies to match-fixing will also be applicable to market abuse, specifically the requirements in the Danish Gambling Authority’s certification programme.
The Danish Gambling Authority and the Danish FSA will evaluate whether or not certain bets on the relative development in market value on financial products should be regulated in the gambling or financial legislation.
Difference between the Danish and English version of the newsletter
Please note that any difference and differentiated interpretation arising from the two versions of the newsletter (Danish/English), it is the Danish version that applies.