Leadership1 publisher3 min readPublished
FCA turns to international regulators as Polymarket takes bets on HSBC and Lloyds failing
Polymarket has taken $77,507 in positions on whether the world's biggest banks, HSBC and Lloyds among them, fail by year-end. For British lenders the exposure is how fast that price could travel on social media during a period of stress.
The Board Room · Leadership desk
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What happened
- Residents of the UK, US, Canada and the EU are barred from Polymarket's offshore platform, which leaves bettors in roughly 150 other countries free to trade the contracts.
- ESMA's twice-yearly risk report last month warned that a growing number of incidents shows prediction markets are rife with insider trading.
- Bobby Dean, a Liberal Democrat MP on the Treasury committee, said Polymarket has a poor reputation for stopping insider trading and bad actors on its platform.
- Polymarket said it sees no problem with the bets and argued it is opening markets once restricted to elite traders and institutions to everyone else.
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Why it matters
- exposure HSBC and Lloyds now have a public, tradable probability of their own failure, a figure anyone can circulate during a bad week for bank shares.
- constraint A UK-only response has little to act on, since the company is US-based and already shuts out British residents; any pressure on the bank contracts depends on US regulators.
- contradiction Polymarket calls the contracts a window onto public information and ESMA calls them anonymous wagers that invite insider trading; whichever view supervisors take decides whether the bank markets are tolerated.
- decision At current volumes the bank contracts are something for treasury and communications teams to monitor this quarter; escalating makes sense only if volumes grow roughly tenfold.
The sum is small. Across every bank listed, from JP Morgan to BNP Paribas [2], the positions add up to $77,507 [1]. ESMA says newly created wallets reportedly made $1.2m shortly before the US-Israel strike on Iran became public in February [18]. That one episode is about 15 times the whole bank book [1]. Bobby Dean, who wants UK authorities to intervene [7], accepted the scale. "We should not turn a blind eye to the risks because they are relatively small today, we've all seen how quickly things can move in this sector," he said [11].
A bank board's exposure here is to sentiment. Silicon Valley Bank and Credit Suisse both collapsed in 2023 after sell-offs and runs that speculation on X and WhatsApp sped up [6]. A contract on a named bank's failure hands that kind of speculation a price to quote. Dean described how it could escalate. "If the bank-related activity grows on the platform and then a particular market was to escalate rapidly, it could even trigger bank runs," he said [9].
Polymarket's defence is that it discloses nothing new. "The information in these markets is already public. Banks, hedge funds and credit professionals have had access to credit default swap markets for years," Neal Kumar, the company's chief legal officer, said [13]. Kumar's comparison is about who gets to see the price. ESMA's objection is about who places the bet. The regulator wrote that platforms such as Polymarket "operate with limited identity verification and where the platform itself may not know who is behind a given wager" [15]. Accounts on the offshore platform are crypto wallets that anyone can trace but few can tie to a person [16].
Reach is the FCA's harder problem. The FCA has discussed prediction markets with regulators abroad, it told the Guardian, as part of its work to protect "market integrity" [4]. Polymarket is headquartered in the US, and users from restricted countries who get in through VPNs are breaching its own terms [17]. A British rule aimed at British users would land on people the company already excludes. Dean wants the matter taken to Washington. "I would urge our regulators to get in contact with their counterparts in the US to raise concerns," he said [10]. The Guardian's report describes talks and a published warning. It does not describe a rule, a fine or a request to remove the bank markets.
This quarter and next pull in different directions. At today's size, I'd expect bank treasury and communications teams to treat the contracts as one more input to the preparation for social media-fuelled runs the industry has already been asked to make [5]. The harder decision comes later. If the FCA's talks turn into a request that US authorities act on bank-failure contracts, British supervisors will be asking a US company to change markets that, under its own rules, UK residents are not allowed to trade [3].
What to watch
- Whether the FCA's talks with international regulators produce a joint statement or a formal approach to US authorities about bank-failure contracts.
- Volume on the HSBC and Lloyds contracts around bank results or a market sell-off, the escalation Dean described.
- Whether ESMA's next risk report moves from warnings to proposed measures on DLT-based prediction markets.