CFTC proposes two rules to claim exclusive jurisdiction over prediction markets
One rule would take effect almost immediately after publication.
Key Takeaways
- The CFTC has submitted two rules to the White House Office of Management and Budget in a bid to clarify federal oversight of prediction markets.
- One rule would amend the definition of a swap to explicitly exclude casino-style gambling, using an interim final rule that could take effect soon after publication in the Federal Register. The second rule would classify event contracts as swaps.
- CFTC Chairman Michael Selig outlined a three-part regulatory roadmap at the first Innovation Advisory Committee meeting, which included representatives from CME Group, Robinhood, Nasdaq, Polymarket and Kalshi.
U.S. – The Commodity Futures Trading Commissionn (CFTC) has submitted two rules to the White House Office of Management and Budget (OMB) in an attempt to clarify federal oversight of prediction markets and contracts linked to real-world events. The measures could become important to the ongoing legal disputes over whether sports-related event contracts should be treated as financial derivatives or gambling products.
One proposal would amend the definition of a swap to explicitly exclude casino-style gambling. The measure is an interim final rule that could take effect soon after publication in the Federal Register. This is a less common regulatory instrument that generally requires agencies to explain why it is necessary.
The second proposal would establish that event contracts qualify as swaps, a classification that could directly affect products offered by prediction market companies such as Kalshi and Polymarket. The implementation of this rule would follow the traditional process, including a period for public comments.
The CFTC’s proposals seek to draw a clearer regulatory line between event contracts, which allow users to take positions on the outcome of real-world events, including sports and other occurrences, and state-regulated gambling products. Sports event contracts have been the focus of legal disputes between prediction market operators, state authorities and federal regulators. The extent to which the proposed rules could affect those cases remains unclear.
In the first meeting of the Innovation Advisory Committee, which reunited 30 representatives from financial and technology companies, including CME Group, Robinhood, Nasdaq, Polymarket and Kalshi, CFTC Chairman Michael Selig outlined a three-part regulatory roadmap covering prohibited event contracts, reporting requirements for fully collateralised contracts and rules governing how designated contract markets list contracts and protect consumers.
Selig also reiterated the CFTC’s position that it has exclusive jurisdiction over prediction markets, putting the agency at odds with states that argue that some contracts constitute gambling. Earlier this year, a coalition of 44 state attorneys general opposed a separate CFTC proposal concerning sports-related event contracts, arguing that the Commodity Exchange Act does not clearly authorise the agency to regulate products that have traditionally fallen under state gambling laws.
Frequently asked questions (FAQs)
- What are the CFTC’s new prediction market rules? One would amend the definition of a swap to exclude casino-style gambling. The other would classify event contracts as swaps, following the standard rulemaking process with public comment.
- Why is the CFTC using an interim final rule for one of these proposals? The CFTC has not yet provided justification.
- How could these rules affect Kalshi and Polymarket? The rule classifying event contracts as swaps would directly affect products offered by prediction market companies like Kalshi and Polymarket, though the exact impact on pending legal disputes remains unclear.
