Change of practice in regards to pool betting
2 December 2015
The Danish Gambling Authority releases a consolidated and updated version of our position on 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.
Newsletter 26 will replace the previous newsletters no. 19 as of 5 December 2014 and newsletter no. 23 as of 7 October 2015.
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.
Licence holders’ responsibility to ensure that there is a betting product
Products offered under the betting licence must not be able to be characterized 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.
Bets that can be provide within the scope of a betting licence
Based on a dialogue with Danish FSA, The Danish Gambling Authority announces that the following cannot be considered as a derivate:
Bets on the future value of financial instruments are not considered as derivates if it is offered as pool betting. 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.’ Fixed odds bets etc. is not permitted. It is not possible to offer bets where there are a proportionality between the movements in market prices and the winnings.
There are two possible ways to determine a pool bet on the future value of financial instruments: Either the relative movements in market prices for two or more financial instruments or the individual movements in market price for one financial instrument.
The license holder's provision of betting must not be subject to financial regulation. The license holder must take steps to ensure that bets supply remains within the gaming legislation.
The marketing of betting shall not be subject to financial regulation.
If the provision of betting is either fully or partly regulated within the financial regulation, all references to gambling, bets and the Danish Gambling Authority will have to be removed from the website.
The license holder may seek advice from the Danish FSA to make sure the provision of betting and marketing are not to be regulated with the financial regulation.
Supervision with this type of betting
The Danish Gambling Authority will supervise the offer of pool based betting on financial instruments based on the Danish gambling law and the act on online gambling. It is the license holders responsibility to make sure the pool betting provided are within the framework of the gambling law.
If the product change significantly from a gambling product to a financial product, the Danish gambling law will no longer be used to regulate the product and the compliance will pass from the Danish Gambling Authority to the Danish FSA.