Designated Contract Market (DCM)
Definition
A Designated Contract Market (DCM) is a licensed exchange category under the CFTC. Kalshi operates as a DCM for event contracts.
What is a DCM?
A DCM is the highest level of exchange registration with the CFTC:
- Formal designation: CFTC-approved status
- Comprehensive regulation: Full oversight
- Broad authority: Can list various derivatives
- Institutional grade: Highest compliance standards
DCM Requirements
Core Principles
CFTC requires DCMs to follow 23 Core Principles:
- Compliance with rules
- Monitoring of trading
- Ability to obtain information
- Emergency authority
- Conflicts of interest
- Position limits/accountability
- Financial integrity
- Financial resources
- System safeguards
- Trade information ... and 13 more
Key Obligations
- Market surveillance: Detect manipulation
- Financial safeguards: Protect customer funds
- Fair access: Non-discriminatory
- Rule enforcement: Consistent application
- Transparency: Public disclosure
- Record-keeping: Comprehensive audit trails
Kalshi as a DCM
Approval Process
Kalshi's path to DCM status:
- 2020: Filed application with CFTC
- Months of review: Detailed examination
- Public comment: Industry feedback
- September 2021: Designation granted
- November 2021: Launched trading
What It Means
- First and only DCM for event contracts
- Can list approved markets
- Must maintain compliance
- Subject to CFTC supervision
DCM vs Other Registrations
DCM (Designated Contract Market)
- Full exchange status
- Broad product authority
- Highest regulatory tier
- Institutional access
SEF (Swap Execution Facility)
- Swaps trading
- Different products
- Also CFTC-regulated
Foreign Boards of Trade
- Offshore exchanges
- Limited US access
- Different standards
Benefits of DCM Status
For the Exchange
- Credibility: Highest regulatory standard
- Flexibility: List new products (with approval)
- Institutional access: Banks, funds can participate
- Legal certainty: Clear regulatory framework
For Traders
- Protection: Segregated funds
- Transparency: Fair market rules
- Recourse: Dispute resolution
- Security: Audited systems
Market Listing Process
How DCMs List Markets
- Self-certification: Submit to CFTC
- Or pre-approval: Request explicit approval
- CFTC review: 10-day minimum
- Potential stay: CFTC can block
- Launch: If approved
Criteria for Approval
Markets must:
- Serve hedging or price discovery
- Not be contrary to public interest
- Have clear resolution criteria
- Meet economic purpose test
Compliance Obligations
Ongoing Requirements
- Quarterly reports: Financial and operational
- Trade data: T+1 reporting
- Large trader reports: Position monitoring
- Rule amendments: CFTC notification
- Audits: Regular examinations
Costs
- Significant compliance expenses
- Technology infrastructure
- Legal and regulatory staff
- Ongoing CFTC fees
DCM Governance
Required Committees
- Disciplinary: Rule violations
- Arbitration: Dispute resolution
- Market regulation: Oversight
- Public board seats: Independence
Conflicts of Interest
- Strict separation of commercial/regulatory
- Independent compliance function
- Oversight of affiliated entities
Comparison: DCM vs Unregulated
| Aspect | DCM (Kalshi) | Unregulated (Global platforms) | |--------|--------------|--------------------------------| | US Legal | ✓ Yes | ⚠ Unclear | | Fund Protection | ✓ Segregated | Varies | | Oversight | ✓ CFTC | None/Self | | US Institutional | ✓ Access | ✗ Limited | | Costs | Higher (compliance) | Lower | | Market Types | Approved only | Broader | | US Residents | ✓ Allowed | Some restrictions |
Future of DCMs in Prediction Markets
Potential Growth
- More DCMs for event contracts likely
- Established exchanges may apply
- Hybrid models possible
- International coordination
Challenges
- High barrier to entry
- Approval process lengthy
- Compliance costs significant
- Limited to approved products