What do proposed CFTC prediction market rules say about sports and gaming?

Michael Selig’s Commodity Futures Trading Commission (CFTC) officially published its proposed prediction markets rules on Wednesday after months of review and thousands of public comments.

The 267-page document outlines how the federal regulator intends to approach event contract trading across the U.S. and reiterates the agency’s stance that prediction markets broadly fall under its purview as ‘swaps’ under the Commodity Exchange Act (CEA).

“The CFTC will protect the integrity of our regulated markets without standing in the way of responsible innovation,” said Selig in a CFTC press release. “This proposal gives the Commission a durable, transparent framework to identify the contracts Congress directed us to scrutinize while letting legitimate markets move forward.”

The proposed rules, which are subject to a final period of review before they could be formally implemented, cover a lot of ground.

Unsurprisingly, sports are a major focus of the public interest determinations. Sports event contracts are consistently central to the discussion around prediction markets, as well as a core theme of the various federal and court battles between states and companies such as Kalshi and Polymarket.

So, what do the proposed CFTC prediction market rules say about sports and gaming? Here are some things we learned.

CFTC suggests new definition of ‘gaming’ contracts

Recognizing that the issue of gaming contracts is central to the Special Rule, the CFTC proposes to adopt new definitions of “gaming” and “involve”.

• The CFTC proposal states that event contracts “involve an activity if their settlement is determined by an occurrence, extent of an occurrence, or contingency in the activity.
• The proposal defines gaming as “any activity that: (i) one or more participants typically engage in for purposes of recreation or to entertain others; (ii) is governed by rules; and (iii) includes measurable occurrences or outcomes that depend on the participants’ luck, skill, or athletic ability during the activity.”

The rules also define the word “involving” in the CFTC’s Rule 40.11, which relates to a ban on “contracts involving gaming”. Henceforth, that would stipulate that the underlying event being traded on must be gaming, rather than the act of trading the contract itself.

Sports contracts are generally fine, says CFTC

Addressing the issue of sports event contracts head-on, the CFTC stated that such markets should generally be allowed as they do not run contrary to the public interest.

“The Commission preliminarily believes that these categories of sports event contract markets may serve price discovery functions and provide meaningful information,” adds the document.

The CFTC added that such event contracts “are unlikely to raise the particular manipulation, settlement ambiguity and information leakage issues that could raise public interest concerns” as no individual participant has a materially significant ability to affect outcomes such as the winner of games or points totals.

But ‘micro’ markets and player props pose problems

However, the commission did note that it preliminarily found that certain types of event contracts involving sports activities are likely to be found to be contrary to the public interest, primarily because they pose an enhanced risk of manipulation.

The CFTC document specifically mentions several categories, several of which equate to the type of ‘micro’ betting markets or player prop bets that have been flagged as concerns in the world of state-regulated sports betting:

• Player injury contracts — The CFTC opined that such event contracts create “perverse financial incentives” that could encourage or facilitate physical harm to athletes, and that as the settlement of the contracts depends on medical diagnoses, there are public interest concerns about the confidentiality and potential leakage of medical information.
• Officiating outcome contracts — The proposed rules note that, unlike final score outcome contracts, event contracts based on officiating decisions such as penalty calls would be based on “discrete human decisions” and risk threatening the integrity of the game.
• Singular action, event, or occurrence contracts — The CFTC stated that contracts on things like the outcome of a specific pitch thrown by an MLB pitcher or the outcome of a specific shot taken by a specific player present public interest concerns due to their susceptibility to manipulation or the use of insider information. “A single player or team coaching staff member can determine the settlement outcome of the event contracts,” wrote the CFTC.

The CFTC also cited contracts on fights or physical altercations in games as well as markets on pre-collegiate level sports (e.g. high-school sports) would run counter to the public interest.

Operators should work with leagues on sporting integrity

While the CFTC notes that basic sports event contracts such as the winning team, tournament winners, or final scores would not generally pose integrity concerns, the proposed prediction markets rules also advocate for prediction market companies to work with relevant governing bodies, major leagues, and other sports authorities prior to listing sports event contracts in order to support compliance and surveillance.

“The Commission also preliminarily believes that establishing formal information sharing agreements between prediction markets, the Commission, and the relevant sports integrity monitoring organization may aid prediction markets in monitoring sports event contracts for manipulation, insider trading and other compliance issues,” adds the document.

It suggests that such engagement efforts could include a formal agreement with a sports league that includes consultation on the markets listed, reporting suspicious trading activity or trading activity, and providing data for the purposes of monitoring. These kinds of efforts seem to already be underway; Kalshi has a deal with Integrity Compliance 360, and both the NHL and MLB have formal partnerships with the CFTC and at least one major prediction market platform.

CFTC suggests prohibiting casino-style contracts

Meanwhile, some industry stakeholders and observers have suggested that the next expansion of prediction markets into gaming, beyond sports betting, could be contracts that allow users to trade on casino-style outcomes such as the next spin of a roulette wheel or a slot machine. That concern was notably aired publicly by PENN Entertainment CEO Jay Snowden last year.

However, the proposed CFTC rules seem to suggest that markets on “games of random chance” would not be permissible.

“When an outcome is dictated solely by luck and cannot be meaningfully predicted, participants have no insight to contribute, leaving their forecasts without any informational value,” adds the document. “Trading in such event contracts therefore provides no meaningful information that could support decision-making or market understanding.”

While it notes that some casino-style games such as poker are affected by skill as well as luck, the CFTC writes that event contracts involving games whose outcome depends on random chance “would not advance any of the purposes of the CEA”.

“It would be highly likely that event contracts involving games that depend entirely on random chance would be found to be contrary to the public interest.”

Proposed prediction market rules face final review

The CFTC’s new proposed rules on prediction markets will now go up for a 90-day review period. That process could include feedback from prediction market operators and market-makers.

In the meantime, the CFTC continues to sue states in court in broad support of its registrants’ rights to offer event contracts on sports and more, despite state officials’ and gaming regulators’ argument that doing so violates state and tribal gaming rights.