The Commodity Futures Trading Commission moved its jurisdiction fight with the states over prediction markets from the courtroom into the rulebook on Oct. 9. The agency proposed adding event contracts to its regulatory definition of a swap, and in a companion interim final rule carved casino-style gambling out of that same definition.
The proposal would insert a new paragraph into the agency’s swap definition at 17 CFR 1.3 covering event contracts “including those based on sports, politics, cultural, and weather-related events,” according to the CFTC.
“Americans use event contracts to hedge risks, speculate, and provide the public with information about the outcome of future events,” CFTC Chairman Michael S. Selig said in the agency’s announcement of the proposal. The products “are commodity derivatives squarely within the CFTC’s regulatory remit under the Commodity Exchange Act and are within the agency’s exclusive jurisdiction,” he added.
Comments on the proposed rule are due 30 days after it is published in the Federal Register.
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Answering the States
Under the interim final rule, bets placed on sportsbooks and casino games fall outside the swap definition, a position the CFTC says it has long held. “Casino-style gambling products are not derivatives,” Selig said in a statement on the rule. The rule takes effect once it appears in the Federal Register, with a 30-day comment period after that.
The rule text presents the carve-out as a reply to opponents. It cites a comment letter from 40 states and the District of Columbia calling sports event contracts “indistinguishable from traditional sports betting,” and New Jersey’s argument to the Supreme Court that the commodities law gives the CFTC no “unprecedented authority to become the sole regulator of sports gambling in this country.” It also points to the American Gaming Association’s position that treating exchange-traded sports bets as swaps would push every sports bet onto federally regulated markets.
The CFTC calls that line of reasoning an “erroneous premise” and says the new rule “implements the Third Circuit’s suggested approach.”
A Split in the Courts
That approach traces to an April ruling in which a divided Third Circuit panel found that sports event contracts listed by Kalshi fit the statutory swap definition. The Ninth Circuit in August and the Sixth Circuit in September reached the opposite result, with the Sixth Circuit warning that treating sports contracts as swaps would push every sports wager, even a bet between friends, onto federal markets.
In September, New Jersey asked the Supreme Court to take up the question. Minnesota passed a criminal ban on prediction markets that a federal judge has since blocked. Arizona has filed criminal charges against an exchange, and state courts in Michigan, Washington and Nevada have ordered sports contracts geofenced, according to the proposal. The CFTC has also clashed with Michigan over Kalshi trades a state court ordered canceled.
“We need to wait until the Supreme Court ruling because it could supersede that rulemaking,” Arche Capital co-founder Vanessa Grellet told American Banker after the CFTC sent the rules for White House review.
Related Listen: Why the Kalshi-Nevada Ruling Could Land at the Supreme Court
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