CFTC proposes broader swap definition covering sports event contracts as circuit courts split on prediction markets

The US Commodity Futures Trading Commission published a notice of proposed rulemaking on 9 October that would expand the definition of swaps. Under the proposal, swaps expressly include event contracts based on sports, politics, cultural and weather-related events. The rules were released ahead of a busy football weekend and add a new element to the dispute over who regulates prediction markets.

CFTC Chairman Michael Selig said Americans use event contracts to hedge risks, speculate and inform the public about the outcome of future events. He described the products as commodity derivatives within the agency's remit under the Commodity Exchange Act and its exclusive jurisdiction.

The courts have not spoken with one voice. In April the US Court of Appeals for the Third Circuit ruled in KalshiEX LLC vs Flaherty that sports event contracts could be classified as swaps, because their outcomes are tied to possible commercial or economic consequences. The CFTC cited that decision repeatedly in its proposal, including the court's recognition of stakeholders such as sponsors, advertisers, broadcasters, franchises and communities. The commission pointed to Madison Square Garden Sports' valuation nearly doubling during the New York Knicks' championship run, and to about $380 million generated for the New York City economy.

The Ninth Circuit took the opposite view in August, finding that Kalshi's sports event contracts do not qualify as swaps. Judge Ryan Nelson, writing for the majority, indicated that courts should treat such contracts as sports wagers rather than risk-transfer financial instruments. Separately, the Sixth Circuit held that even if event contracts were swaps, they would not preempt state sports gambling laws. A split among appellate courts historically raises the likelihood of Supreme Court review.

The proposal also excludes casino-style games from the definition of a swap. That may ease concerns among casino-industry advocates who had worried that games such as blackjack could be repackaged as event contracts. In an 11 October note, Citizens analyst Jordan Bender wrote that Kalshi and Polymarket are unlikely to offer casino-style games and that this is not a base-case concern for investors.

The American Gaming Association says the contracts are responsible for more than $1 billion in lost state tax revenue. At the AGA's Global Gaming Expo, Nevada Gaming Control Board Chairman Mike Dreitzer questioned their legality and accused prediction markets of deceptive conduct, saying regulators only ask for a level playing field. The CFTC will publish the proposal in the Federal Register, after which the public will have 30 days to comment.