U.S. CFTC seeks event contract definitions that may defy states' gambling claims

The U.S. regulator of derivatives and the prediction markets has submitted another two rules for review at the White House's Office of Management and Budget. One would wed event contracts to the regulatory definition of swaps and another would insist they're not connected to gambling — pointed positions as the agency battles with states over the nature of these products.

The Commodity Futures Trading Commission has fully embraced a role as the federal regulator of prediction markets and the event contracts they trade in, generally binary yes-or-no bets on the outcome of measurable situations, such as sporting events and elections. To that end, the CFTC has embarked on a campaign to regulate prediction markets such as Kalshi and defend against legal pushback from states insisting they have the power to oversee certain contracts as gambling.

The most recent federal court decision explicitly ruled that Kalshi's sports-tied contracts are not swaps and are subject to state gambling regulations, though an earlier federal ruling had come to a different conclusion.

The latest CFTC moves would counter that view by more clearly defining swaps, which are agency-regulated financial instruments in which two parties agree to an exchange. The CFTC is seeking to propose a new rule that would extend the regulatory definition of swaps to include event contracts, traded on popular platforms including Kalshi, Polymarket, Crypto.com and Robinhood. It's also pursuing an "interim final rule" that would remove "casino-style gambling products" from what can make up a swap.

Both were received by the OMB this week, where a review is generally a final step on the path to submitting rules for public comment. In the case of an interim final rule, that would be an immediately effective move that would remain open for input and revision.

If event contracts are swaps, and such swaps are not gambling products, this could undermine the states' position in a wide array of lawsuits against prediction markets companies — routinely Kalshi — that are being accused of operating illegal gambling platforms in their states.

The CFTC has actively engaged in these lawsuits, regularly suing the states as it defends what Chairman Mike Selig has argued is the agency's sole jurisdiction over prediction markets. The matter has drawn some conflicting rulings in federal appellate courts, suggesting the likelihood that the U.S. Supreme Court could eventually be tapped to decide the matter.