What do Proposed CFTC Rules Mean for Sports Event Contracts, Casino-Style Contracts?

• The CFTC this week proposed two new rules for its event contracts to the Office of Information and Regulatory Affairs 
• One will officially define event contracts as swaps
• Another will exclude casino-style gambling products

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The Commodity Futures Trading Commission submitted two new rules for its event contracts to the Office of Information and Regulatory Affairs, both of which may have a significant impact on popular prediction market contracts.

Both of the rules were submitted to the federal department this week. One seeks to expand the definition of a “swap” to include event contracts and the second seeks to expand the definition of a “swap” to exclude casino-style gambling products.

The full language for both of these rules has yet to be published.

Banning Casino-Style Games?

The proposed Commodity Futures Trading Commission (CFTC) rule to exclude casino-style gambling products will likely put an end to any plans prediction market operators had to potentially offer event contracts based on casino games such as roulette, slot machines, or card games.

If approved by the Office of Information and Regulatory Affairs, the rule will go into effect immediately. According to Bloomberg, the rule would go into effect as soon as it’s published in the Federal Register, without the need to accept public comments on the measure.

While no casino-type games are offered yet by prediction markets, it’s easy to see how they potentially could be offered. Event contracts could be offered on the next spin of a roulette wheel, for instance, with traders taking up positions on what number or color space the roulette ball could land.

The CFTC seems to be taking the steps to prohibit these types of event contracts before market makers can begin offering them to traders.

Event Contracts as Swaps

The second rule, which if approved will have to go through a review process before going into effect, seeks to officially expand the definition of a “swap” to include event contracts. The basis of what defines a swap, and if sports event contracts are classified as swaps, is the central question of several lawsuits throughout the country between prediction market operators and state gaming regulators.

While the newly proposed rule does not specifically mention sports event contracts, it’s likely to include the product in its definition of a swap.

A split currently exists at the circuit court level regarding swaps and sports event contracts. The U.S. Court of Appeals for the Sixth Circuit most recently ruled Kalshi did not show that its sports event contracts satisfied the statutory definition of a swap, noting that the Commodity Exchange Act “neither expressly nor impliedly preempts Ohio’s or Tennessee’s gambling laws.”

The U.S. Court of Appeals for the Ninth Circuit agreed with the Sixth Circuit’s evaluation of the definition. The Ninth Circuit ruling enabled Nevada to enforce its state gambling laws against Kalshi’s sports event contracts and disagreed with Kalshi’s overly broad reading of the CEA and ruled that its sports event contracts are likely sports bets.

“Because we disagree with Kalshi’s overly broad reading of the CEA, and because CFTC regulations currently prohibit offering contracts related to gaming on prediction markets, we affirm the district court’s order dissolving the injunction as to sports event contracts. We remand for the district court to consider Kalshi’s election contracts,” Judge Ryan D. Nelson wrote in his decision.

The Sixth and Ninth Circuit decisions differed sharply from a U.S. Third Circuit ‌Court ⁠of Appeals ruling this past April, in which the court ruled New Jersey could not regulate Kalshi’s sports event contract offerings, as they reached the CEA’s definition of a swap.

Kalshi awaits one more Court of Appeals decision in the Fourth Circuit, in which the court is evaluating Kalshi’s appeal of a lower district court’s denial of a preliminary injunction in Maryland.

Even if the rule is approved and event contracts are included in the definition of a swap, it’s unlikely that courts will have to abide by the definition and will still interpret the definition for itself. However, this could be the CFTC better positioning itself for a potential U.S. Supreme Court evaluation of sports event contracts and who regulates the markets.