CFTC and Division of Market Oversight Issue Two Releases on Prediction Markets and Event Contracts

Prediction markets remain front-and-center at the Commodity Futures Trading Commission (CFTC or Commission). So far in March the CFTC has issued an advance notice of proposed rulemaking and staff of its Division of Market Oversight have issued an advisory, both providing first looks at how the current administration intends to regulate event contracts and prediction markets. They represent both a stark departure from the previous administration’s policies and a focus on issues that have emerged over the last 15 months as the popularity of these markets has exploded.

Key Takeaways

• According to the advance notice of proposed rulemaking (ANPRM)[1], the number of registration applications for designated contract markets (DCMs)—types of regulated exchange that event contracts and other derivatives trade on—has more than doubled over the past year, largely from entities that are interested primarily or exclusively in operating prediction markets.
• The ANPRM covers matters as diverse as listing standards, position limits, abusive trade practices, trading on margin, the hedging purposes served by event contracts, and the definitions of “gaming,” “war,” “terrorism,” and “assassination.” The Commission clearly intends to look comprehensively at how to regulate these markets.
• There is no indication that a broad overhaul is coming. Perhaps reflecting Chairman Michael Selig’s commitment to the “minimum effective dose” of regulation, the ANPRM focuses on how existing law applies to these markets and what factors the Commission should consider in carrying out its oversight.
• The Advisory[2] shows the Commission and its staff are focused on issues of market integrity, including contract design and risks of manipulation and insider trading.
• Both documents suggest that the Commission intends to leverage DCMs’ self-regulatory obligations to achieve the CFTC’s goals.
• The Advisory also reinforces the Commission’s stated intent to continue exercising jurisdiction over sports event contracts traded on registered exchanges as litigation between CFTC-regulated entities and state regulators on this topic roils state and federal courts across the country.

THE ANPRM: 40 QUESTIONS

The ANPRM explains that interest in offering event contracts has increased dramatically in recent years, from an average of five listings per year between 2006 and 2020 to roughly 1,600 in 2025. Against that backdrop, the Commission appears poised for a deep dive into the current state of regulation.

The ANPRM consists almost entirely of questions, keeping the CFTC’s specific intentions close to the vest, however, the Commission is demonstrably looking at prediction markets and event contracts from all angles.

Notable areas of inquiry include:

• Compliance with core principles related to contract terms and conditions, dispute resolution, contracts that may be readily susceptible to manipulation, position limits or accountability, financial integrity of contracts, and system safeguards
• Whether there are any considerations specific to blockchain-based markets
• Whether and how margin trading should be permitted in these markets, which currently are offered only on a fully collateralized basis
• Whether trading by institutional traders differs from retail trading
• The scope of the Commission’s authority under the special rule to review event contracts involving unlawful activity, war, terrorism, assassination, or gaming
• What public interest factors should be considered in reviewing those contracts, including whether the Commission should apply any elements of an “economic purpose” test as part of its public interest determination[3]

THE ADVISORY: DCMS MUST POLICE THEIR MARKETS AND EXPLAIN THEIR PRODUCTS

Unlike the ANPRM, the Advisory affirmatively expresses staff’s views on certain aspects of how DCMs should be complying with current law and regulations, particularly their obligation to protect market integrity. In that regard, the Advisory singles out sports event contracts for discussion.

As with the ANPRM, the Advisory contains a discussion of core principles that the Division of Market Oversight (DMO) is focused on with respect to prediction markets and event contracts. It reminds the exchanges that they must conduct real-time monitoring to identify disorderly trading and any market or system anomalies and, if it identifies such issues, conduct appropriate inquiries and take disciplinary action if warranted.

In a similar vein, the Advisory emphasizes that prohibitions under the Commodity Exchange Act (CEA) and CFTC regulations of manipulative and deceptive devices, including insider trading, apply in this context.

Notably, DMO encouraged exchanges to consider whether certain types of sports event contracts may be more readily susceptible to manipulation than others:

For example, in the context of sports-related event contracts, such contracts could involve those that resolve or settle based on injuries to individual sports participants, unsportsmanlike conduct, or physical altercations between sports participants, as well as contracts that resolve or settle based on the action of a single individual or a small group of individuals, such as officiating actions occurring during a sporting event.

The Advisory emphasizes that in self-certifying a contract for listing a DCM must include an “explanation and analysis that is complete” with respect to the contract’s compliance with the law. DMO also noted pointedly that overly broad or generalized contract specifications can negatively impact that explanation and analysis.

Finally, recognizing special issues of sports integrity that may exist with respect to sports event contracts, DMO recommends that DCMs consider:

• Engaging in pre–self-certification communications with such relevant sports governing bodies, leagues, or other authorities when developing terms and conditions and compliance and market oversight programs for sports-related events contracts;
• Including, as part of the self-certified product submission, an explanation of whether the contract is consistent with the relevant league’s or governing body’s integrity standards, as applicable;
• Establishing information-sharing and data arrangements with the relevant sports integrity monitoring organization; and
• Relying on official data provided by the relevant league or governing body, as applicable, as the settlement source.

LOOKING AHEAD

The public has until April 30 to comment on the ANPRM. The Commission will likely use what it learns to issue a notice of proposed rulemaking, which would trigger a new comment period and ultimately lead to new rules and regulations for prediction markets. But, given the content of the ANPRM, the public should not expect dramatic changes from the Commission’s current stance. 

Meanwhile, DCMs have a new set of considerations in how they present new contracts to the Commission. DMO’s emphasis on the completeness of these submissions suggests that it expects a greater degree, and specific kinds, of information so that it can discharge its own duties to ensure products are compliant with the CEA and CFTC regulations.

Finally, DMO’s references to the prohibitions against manipulative and deceptive devices such as insider trading indicate that, despite what is unlikely to be heavy-handed market regulation, the Commission will act where there is wrongdoing.

Separately, we note that in prior remarks at the CFTC and US Securities and Exchange Commission’s roundtable on regulatory harmonization efforts between the agencies in January, CFTC Chairman Selig indicated that a joint interpretation on the definitions of “swap” and “security-based swap” as applied to event contracts would be forthcoming.[4] No substantive discussion of considerations relating to such distinction was included in either the ANPRM or Advisory. The joint interpretation is something market participants should continue to look out for.