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The Commodity Futures Trading Commission has sent two rulemaking proposals to the White House that could affect federal oversight of prediction markets and sports event contracts. The CFTC filed the measures with the White House Office of Information and Regulatory Affairs on Sept. 28.
One filing, “Further Definition of ‘Swap’ to Include Event Contracts,” is a proposed rule that would define event contracts as swaps. The other, “Further Definition of ‘Swap’ to Exclude Casino-Style Gambling Products,” which the CFTC submitted as an interim final rule, would exclude “casino-style” gambling products from the swap definition. The text of the proposed rules was not released publicly.
Drawing the line between sports event contracts and casino-style gambling
How the CFTC draws the line between event contracts and “casino-style” gambling could help determine whether prediction markets are governed by federal derivatives rules or state gambling laws. Swaps fall under the CFTC’s jurisdiction, so defining event contracts as swaps could bring them within the federal derivatives framework. Excluding “casino-style” gambling products could establish a boundary between federally regulated event contracts and state-regulated gambling.
Prediction markets company Kalshi arguies that its sports event contracts are federally regulated derivatives, while several states maintain that those contracts constitute gambling and are subject to state gaming laws.
On the federal court level, judges have not agreed on a single answer. In September, the U.S. Court of Appeals for the Sixth Circuit ruled that Kalshi had not shown its sports contracts were swaps and allowed Ohio and Tennessee gambling laws to remain in effect. The Ninth Circuit also sided with Nevada in August, while the Third Circuit earlier ruled in Kalshi’s favor in its dispute with New Jersey.
Over the past year, CFTC chairman Michael Selig has made it clear that he believes the agency should have sole jurisdiction over prediction market platforms and its sports event contract products.
Two paths for the proposed rules
The two CFTC filings would follow different regulatory paths. The proposed rule defining event contracts as swaps would go through the normal public comment process before it could take effect. The interim final rule excluding casino-style gambling products could generally take effect when it is published. The agency can solicit comments after the interim rule becomes effective and move replace or change the rule as after reviewing comments.
In the meantime, with the CFTC’s effort to clarify its regulatory authority, legal battle over federal versus state control over sports event contracts continues to play out in court.
