CFTC proposes rule to assert jurisdiction over prediction markets

The Commodity Futures Trading Commission (CFTC) has proposed a rule to expand the definition of swaps to include event contracts, such as those based on sports, politics, cultural, and weather-related events. This action is the agency's latest effort to assert exclusive jurisdiction over prediction markets and counter regulatory challenges from state regulators.

The CFTC stated in its proposal that it has historically recognized many event contracts as falling under the Commodity Exchange Act's swap definition. This move occurs amidst an ongoing regulatory dispute where state regulators contend that sports event contracts are essentially sports bets, placing them under state jurisdiction.

However, the CFTC maintains that these event contracts are swaps and exclusively fall under its purview. Judicial opinions on the matter have been divided. The Ninth and Sixth Circuit Courts of Appeals have ruled against prediction markets, viewing sports contracts as sports bets. Conversely, the Third Circuit Court of Appeals ruled in favor of these platforms, affirming the CFTC's exclusive jurisdiction and classifying event contracts as swaps.

States have intensified their scrutiny of prediction markets, alleging that these platforms operate as illegal gambling sites. For instance, New York sued Polymarket for allegedly running an illegal gambling operation.

In parallel, the CFTC issued an interim final rule clarifying that casino-style gambling products, including sportsbooks and casino games, are not considered swaps and are excluded from the definition. CFTC Chair Mike Selig commented that these products are not derivatives.

Despite this, key stakeholders like the NFL have argued that prediction markets mimic sports bets, suggesting platforms like Polymarket and Kalshi are also gambling products. The NFL filed an amicus brief supporting New Jersey's petition to the Supreme Court, advocating for state regulation of these platforms. Robinhood has also petitioned the Supreme Court to grant the CFTC exclusive jurisdiction over prediction markets. Data from Polymarket indicates a 31% probability that the Supreme Court will hear a sports-event contract case by the end of the year.