CFTC Proposes New Rules for Prediction Market Products

The Commodity Futures Trading Commission (CFTC) is proposing two new rules that could significantly impact the ongoing legal battle surrounding prediction markets and the extent of federal oversight of sports event-related contracts. The CFTC sent both measures to the White House Office of Management and Budget (OMB) for review earlier this week as it aims to improve its control over the burgeoning sector. New Rules Could Improve the CFTC’s Framework The CFTC’s first proposal is an interim final rule that would come into effect shortly after publication in the Federal Register, although the regulator would normally also gather public feedback. The proposal aims to change the definition of a swap to exclude casino-style gambling. Using an interim final rule is uncommon, and agencies usually have to justify this approach. The second proposed rule follows the standard procedure and would go through the standard public comment process. This measure would definitively classify event contracts as swaps. Such contracts are primarily used by prediction market operators like Kalshi and Polymarket, allowing customers to trade positions based on the outcome of specific real-world events. These two new rules could improve the agency’s regulatory framework and clarify what belongs in the swaps market and what does not. Such a distinction is especially relevant for sports contracts where the boundary between a financial derivative and a wager has led to several court cases. It is not clear whether the proposed rules will affect these disputes. Sports Prediction Markets Remain a Sore Topic Most prediction markets are currently treated as swaps under the Commodity Exchange Act. Swaps are a type of financial derivative traditionally used by financial institutions, companies managing commercial risks, and professional traders, and allow parties to exchange cash flows or financial instruments based on a specific event. Prediction markets have brought this structure to a much broader audience. Retail customers can now trade on the outcomes of elections, interest-rate decisions, political developments, entertainment events, and even sports games. Sports contracts have attracted significant scrutiny because they appear very similar to traditional sportsbook wagers. They have led to several legal disputes between prediction market operators and state gambling authorities, and the courts have issued conflicting rulings. The CFTC has generally backed prediction operators and challenged state efforts to regulate their offerings. The agency has even taken legal action against some states, arguing that only it can police the sector. With these two new proposals, the CFTC could be preparing to weigh in on a potential Supreme Court case over who has the final say on sports prediction markets in the US.