[Federal Register Volume 91, Number 113 (Friday, June 12, 2026)]
[Proposed Rules]
[Pages 35806-35871]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2026-11854]
[[Page 35805]]
Vol. 91
Friday,
No. 113
June 12, 2026
Part II
Commodity Futures Trading Commission
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17 CFR Part 40
Prediction Markets; Public Interest Determinations; Proposed Rule
Federal Register / Vol. 91 , No. 113 / Friday, June 12, 2026 /
Proposed Rules
[[Page 35806]]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 40
RIN 3038-AF65
Prediction Markets; Public Interest Determinations
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)
is proposing amendments to its rules concerning event contract
derivatives. The markets for these event contracts are commonly
referred to as ``prediction markets.'' In particular, the Commission is
proposing amendments to further specify the types of event contracts
that may be subject to a determination that they are contrary to the
public interest, such that they may not be listed for trading or
accepted for clearing on or through a CFTC-registered entity, as
provided in the Commodity Exchange Act (CEA). The proposed amendments
set out factors the Commission would apply in that determination and
conform the process by which the determination would be made to the
CEA. The Commission also is proposing amendments to the procedure for
the Commission's determination to enhance clarity and organization, as
well as a definition of the term ``gaming'' and a rule regarding when
event contracts ``involve'' an underlying activity.
DATES: Comments must be in writing and received by July 27, 2026.
ADDRESSES: You may submit comments, identified by ``Prediction Markets;
Public Interest Determinations'' and RIN 3038-AF65, by any of the
following methods:
Regulations.gov: Go to https://www.regulations.gov and
press the ``Search'' button, then proceed as follows:
1. Under Refine Documents Results--check the box to ``Only show
documents open for comment'';
2. Under Agency--select ``See More'' and check the box for
``Commodity Futures Trading Commission,'' then press the Apply button;
3. Identify this proposal in the list of CFTC documents open for
comment, press the ``Comment'' button to open the submission form, and
follow the instructions on the form.
Alternatively, if you are viewing this proposal on
www.federalregister.gov, click the ``Submit A Public Comment'' button
at the top of the page to open the comment form. Follow the
instructions on the form to submit your comment to Regulations.gov.
Mail: Send to Christopher Kirkpatrick, Secretary of the
Commission, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street NW, Washington, DC 20581.
Hand Delivery/Courier: Address to--CFTC Comment
Submission, Attn: Christopher Kirkpatrick, Secretary of the Commission,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street NW, Washington, DC 20581.
Please submit your comments using only one of these methods. To
avoid possible delays with mail or in-person deliveries, submissions
through Regulations.gov are encouraged.
All comments must be submitted in English, or if not, accompanied
by an English translation. Do not include in your comment text or
attachments any personal identifying information or business
information that you do not want published online. Comments (regardless
of submission method) will be published without review for, and without
removal of, any personal identifying information or information your
business may consider confidential.
If you wish to submit confidential information for the Commission's
consideration, please contact the CFTC personnel listed in this
document under FOR FURTHER INFORMATION CONTACT before making any
submission. Please also carefully review the Commission's procedures in
17 CFR 145.9 for requesting confidential treatment under the Freedom of
Information Act (FOIA) of information submitted to the Commission.
The CFTC reserves the right, but shall have no obligation, to
review, pre-screen, filter, or redact all or any part of your comment
submission. The CFTC also reserves the right, without further
notification, to refuse to publish or to remove from public view all or
any part of your submission to the extent it contains content
inappropriate for publication in a comment file, such as--without
limitation--obscene language, threats of violence, solicitations for
commercial sales or illegal activity, or obvious spam. If a submission
that is refused for or withdrawn from publication because of
inappropriate content also contains comments on the merits of this
proposal, such submission will be retained in the record for the matter
and will be considered as required under the Administrative Procedure
Act (APA) and other applicable laws, and may be accessible under the
FOIA.
Pursuant to the APA, 5 U.S.C. 553(b)(4), a plain language summary
of the proposed rule is available at regulations.gov.
FOR FURTHER INFORMATION CONTACT: Stephen Andrews, Deputy General
Counsel for Regulation, 771-210-7915, [email protected], or Mark
Fajfar, Senior Assistant General Counsel, Commodity Futures Trading
Commission, Three Lafayette Centre, 1151 21st Street NW, Washington, DC
20581.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
A. Prediction Markets
B. Statutory Authority
1. CFTC Jurisdiction Over Prediction Markets
2. CEA Section 5c(c)(5)(C)
3. Past Provisions for Contract Approval and History of the
Current Text of the Special Rule
C. Commission History With Prediction Markets
1. Staff Actions
2. 2008 Concept Release
3. 2010 Approval of Event Contracts on Box Office Receipts
4. 2011 Adoption of Sec. 40.11
5. 2012 Nadex Disapproval
6. 2021 ErisX Withdrawal
7. 2023 Kalshi Disapproval and Court Decision
8. 2024 Event Contract Proposal and 2026 Withdrawal
9. 2026 ANPRM
II. Proposed Amendments to Part 40
A. Overview of Proposed Changes to Part 40
B. Event Contracts Within the Scope of the Special Rule
C. Contracts That ``Involve'' an Enumerated Activity
D. Determining the Scope of Enumerated Activities
1. Activity That Is Unlawful Under Any Federal or State law
2. Terrorism, Assassination, and War
3. Gaming
4. Illustrative Examples of Event Contracts Not Within Scope
E. Adoption of Factors To Determine Whether Contrary To Public
Interest
1. Overview of Proposed Amendments
2. Public Interest Factors Applicable to All Enumerated
Activities
(a) Price Discovery and Information Aggregation Utility
(b) Potential Threats to Market Integrity
(c) Compliance and Self-Regulatory Challenges Arising From the
Prediction Market's Capacity To Administer the Contracts
3. Public Interest Factors Specific to the Enumerated Activities
(a) Activity That Is Unlawful Under Any Federal or State Law
(b) Terrorism, Assassination, and War
[[Page 35807]]
(c) Gaming
(i) Games of Random Chance Are Likely Contrary to the Public
Interest
(ii) Factors Indicating When Event Contracts Involving Sports
Activities Are Not Contrary to the Public Interest
(iii) Factors Indicating That the Commission Would Find Event
Contracts Involving Sports Activities To Be Contrary to the Public
Interest
F. The Commission's Authority To Identify Additional Activities
Similar to the Enumerated Activities
G. Process Under Sec. 40.11 and Technical Amendments
1. The Process for Commission Action Under Sec. 40.11
2. Information Required for Commission Action Under Sec. 40.11
3. Amendments to Sec. 40.11(c) and New Sec. 40.11(d)-(f)
4. Delegation of Authority to Director of Division of Market
Oversight
H. Implementation Timeline and Severability
III. Related Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
C. Consideration of Costs and Benefits
1. Introduction
2. Baseline
3. Proposed Amendments
(a) Proposed Sec. 40.11(a)(3): Event-Focused ``Involves''
Standard
(i) Benefits
(ii) Cost
(b) Proposed Amendment: Revised Definition of ``Gaming''
(i) Benefits
(ii) Cost
(c) Public Interest Factors Relating to Price Discovery and
Information Aggregation Utility
(i) Benefits
(ii) Cost
(d) Public Interest Factors Relating to Potential Threats to
Market Integrity
(i) Benefits
(ii) Cost
(e) Public Interest Factors Relating to Compliance and Self-
Regulatory Challenges
(i) Benefits
(ii) Cost
(f) Public Interest Factors Specific to Unlawful Activity
(i) Benefits
(ii) Cost
(g) Public Interest Factors Specific to Terrorism,
Assassination, and War
(i) Benefits
(ii) Cost
(h) Public Interest Factors Specific to Gaming
(i) Benefits
(ii) Cost
(i) Additional Activities Similar to the Enumerated Activities
(i) Benefits
(ii) Cost
(j) Procedural Amendments and Delegations
(i) Benefits
(ii) Cost
4. Section 15(a) Factors
(a) Protection of Market Participants and the Public
(b) Efficiency, Competitiveness and Financial Integrity
(c) Price Discovery
(d) Sound Risk Management Practices
(e) Other Public Interest Considerations
D. Antitrust Considerations
E. Executive Orders 12866, 13563, and 14192
F. Indian Tribal Consultation
I. Background
A. Prediction Markets
Prediction markets, on which ``event contract'' derivatives are
traded, are rapidly increasing in popularity with the American public
both as a financial asset class and as a source of reliable information
for news media, sports leagues, financial institutions, and everyday
Americans.\1\ Participants may buy or sell event contracts to manage
price risks around whether events stated in the contracts will occur.
The Commission preliminarily believes that event contracts also provide
economically useful or otherwise meaningful information and are a
source of responsible financial innovation.
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\1\ While the term ``event contract'' is not a defined term in
the CEA or the Commission regulations thereunder, the CFTC has used
this term to describe commodity derivative contracts, often with a
binary payoff structure, based on the outcome of an underlying
occurrence or event since at least 2008. See Concept Release on
Appropriate Regulatory Treatment of Event Contracts, 73 FR 25669
(May 7, 2008) (2008 Concept Release); see also CFTC, Contracts &
Products: Event Contracts, available at https://www.cftc.gov/IndustryOversight/ContractsProducts/index.htm.
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Parties have sought CFTC staff guidance concerning prediction
markets since the early 1990s, and the Commission first designated a
prediction market as a designated contract market (DCM) in 2004.\2\ The
Commission has recently observed a significant increase in the number
of event contracts listed for trading on prediction markets, as well as
in the diversity of events underlying such contracts. And, in 2025, the
total trading volume across CFTC-registered prediction markets exceeded
$25 billion. While growing, this is still a small share of the overall
futures market regulated by the Commission, which had a notional value
of around $31 trillion in 2025.\3\ As a result, the Commission and its
staff have taken affirmative steps to address this proliferation and
growth of prediction markets.
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\2\ See CFTC Press Release No. 4894-04, CFTC Designates
HedgeStreet as a Contract Market and as a Registered Clearing
Organization (Feb. 20, 2004) and the related DCM Order of
Designation for HedgeStreet, Inc. (Feb. 18, 2004), available at
https://www.cftc.gov/sites/default/files/opa/press04/opa4894-04.htm.
See also infra section I.C.1 (discussion of early staff actions).
\3\ See CFTC, FY 2025 Agency Financial Report 4 (2026),
available at https://www.cftc.gov/media/13096/2025AFR/download.
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The CEA identifies derivatives transactions as affecting a national
public interest by ``providing a means for managing and assuming price
risks, discovering prices, or disseminating pricing information,''
which requires a comprehensive federal regulatory scheme.\4\ The CEA
directs the CFTC to execute that regulatory scheme. Prediction markets
and event contracts are but one example of such derivatives
transactions.
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\4\ CEA sec. 3, 7 U.S.C. 5.
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The underlying price for an event contract is determined by market
participants' continuous buying and selling reaching an equilibrium
through a quote-based system.\5\ The market-established prices
therefore offer informational value as to the probability of the event
underlying the contract occurring,\6\ yielding forecasts (i.e., event
contract prices) that may rapidly incorporate new information and
``allocate probability mass in ways that may reflect the range of
plausible . . . outcomes better than traditional financial derivative
or survey-based forecasts.'' \7\ These findings conform with research
that highlights the informational value of retail trading behavior.\8\
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\5\ Karl E. Schneider and Rena S. Miller, Cong. Research Serv.,
IF13187, Prediction Markets: Policy Issues for Congress (2026),
available at https://www.congress.gov/crs-product/IF13187.
\6\ This market structure is inapposite to that of legalized
sports gambling, where the gaming company typically controls and
adjusts the gambling odds.
\7\ Anthony M. Diercks, Jared Dean Katz, and Jonathan H. Wright,
Kalshi and the Rise of Macro Markets, Finance and Economics
Discussion Series No. 2026-010, Washington: Board of Governors of
the Federal Reserve System, available at https://doi.org/10.17016/FEDS.2026.010.
\8\ Id. at 6 (``While early research often emphasized behavioral
biases, recent studies show that retail trading can enhance market
efficiency.''). See also Snowberg et al., Prediction Markets for
Economic Forecasting, National Bureau of Economic Research (2012),
available at https://www.nber.org/papers/w18222.
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In addition to their information aggregation, price discovery, and
price dissemination functions, prediction markets allow market
participants to hedge exposure to a wide array of events for which no
traditional financial instrument otherwise exists, ranging from events
concerning macroeconomics,\9\ politics, weather, and climate
conditions, to cultural trends and ``sporting events . . . that
generate billions of dollars in economic activity
[[Page 35808]]
and materially affect both regional and national markets.'' \10\
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\9\ See id.
\10\ Brief of CFTC as Amicus Curiae in Support of Appellant,
North American Derivatives Exchange, Inc. D/B/A Crypto.com v. State
of Nevada, No. 25-7187 (9th Cir. 2026), available at https://www.cftc.gov/media/13261/amicusbrief_02172026/download.
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As explained further in the next section, Congress vested the
Commission with ``exclusive jurisdiction'' over ``transactions
involving swaps'' and ``contracts of sale of a commodity for future
delivery,'' or futures contracts.\11\ The statutory definition of
commodity under the CEA is extremely broad and includes practically all
goods, articles, services, rights, and interests, except onions and
motion picture box-office receipts.\12\ The specific, enumerated
definitional exclusions from the broad statutory definition demonstrate
that when Congress sought to limit the Commission's exclusive
jurisdiction over commodity futures (other than security futures) and
swaps,\13\ it did so expressly, and not by inviting courts or states to
create implied carve-outs from the CEA.
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\11\ See CEA sec. 2a(1)(A), 7 U.S.C. 2(a)(1)(A) (expressly
extending the CFTC's ``exclusive jurisdiction'' to encompass
``transactions involving swaps or contracts of sale of a commodity
for future delivery . . . traded or executed on a contract market
designated pursuant to [CEA sec. 5, 7 U.S.C. 7] . . . .'').
\12\ See CEA sec. 1a(9), 7 U.S.C. 1a(9).
\13\ The CEA includes a savings clause providing that the CFTC's
jurisdiction does not apply to securities, other than security
futures. See, e.g., CEA sec. 2a(1)(A) and (H), 7 U.S.C. 2(a)(1)(A)
and (H). Thus, the CFTC's exclusive jurisdiction does not extend to
security-based swaps or other securities, and the CFTC shares
jurisdiction with the Securities and Exchange Commission (SEC) over
security futures.
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Under the plain language of the CEA, certain event contracts are
implicated by the ``swap'' definition.\14\ An event contract may also
be structured in other ways, including as a futures contract.\15\ A
prediction market that offers event contracts in the form of swaps or
futures contracts for trading by the general public must register with
the CFTC as a DCM and comply with the substantive and procedural
requirements that apply to the listing for trading of the event
contracts.\16\
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\14\ CEA sec. 1a(47)(A)(i), 7 U.S.C. 1a(47)(A)(i) defines the
term ``swap,'' in relevant part, to include ``any agreement,
contract, or transaction . . . that is a[n] . . . option of any kind
that is for the purchase or sale, or based on the value, of 1 or
more . . . quantitative measures, or other financial or economic
interests or property of any kind,'' and CEA sec. 1a(47)(A)(ii), 7
U.S.C. 1a(47)(A)(ii) defines swap to include ``any agreement,
contract, or transaction . . . that provides for any purchase, sale,
payment, or delivery . . . that is dependent on the occurrence,
nonoccurrence, or the extent of the occurrence of an event or
contingency associated with a potential financial, economic, or
commercial consequence.''
\15\ See CEA sec. 2a(1)(A), 7 U.S.C. 2(a)(1)(A) (CFTC exclusive
jurisdiction over commodity futures contracts).
\16\ See infra, notes 41 to 45 and accompanying text. With
respect to security futures, such offerings are also subject to
registration with and regulation by the SEC.
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B. Statutory Authority
1. CFTC Jurisdiction Over Prediction Markets
The CFTC is charged with administering and enforcing the CEA.
Congress created the CFTC in 1974 to establish a uniform national
system for regulating trading of futures contracts after concluding
that the existing patchwork of state-by-state regulation had critically
impaired the development and functioning of national commodities
markets.\17\ ``[T]ransactions subject to [the CEA] are entered into
regularly in interstate and international commerce and are affected
with a national public interest,'' including in ``liquid, fair and
financially secure trading facilities.'' \18\
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\17\ See H.R. Rep. No. 93-975, at 51 (1974); S. Rep. No. 93-
1131, at 36 (1974), reprinted in 1974 U.S.C.C.A.N. 5843, 5885. See
also KalshiEX, LLC v. Flaherty, 172 F.4th 220, 230 (3d Cir. 2026)
(``Congress created the CFTC and amended the Act to do away with the
patchwork of state regulations and bring futures trading on DCMs
under the exclusive jurisdiction of the CFTC.'').
\18\ CEA sec. 3, 7 U.S.C. 5.
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Congress vested the CFTC with ``exclusive jurisdiction'' to protect
that national interest by overseeing the regulation of futures
contracts and options on futures contracts on federally regulated
exchanges.\19\ An exchange on which futures contracts and options on
futures contracts are traded is formally known as a board of trade, and
such an exchange must be designated by the Commission as a contract
market, i.e., a DCM.\20\ Since its enactment in 1974, the CEA has
required that futures contracts and options on futures contracts be
transacted on or subject to the rules of a DCM; this is known as the
exchange trading requirement.\21\
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\19\ CEA sec. 2(a)(1)(A), 7 U.S.C. 2(a)(1)(A) (vesting the
Commission with ``exclusive jurisdiction,'' except as otherwise
expressly provided by Congress, over all ``accounts, agreements. .
., and transactions involving swaps or contracts of sale of a
commodity for future delivery''). The CEA ``preempts the application
of state law.'' Leist v. Simplot, 638 F.2d 283, 322 (2d Cir. 1980).
``Express preemption occurs when a federal statute explicitly states
that it overrides state or local law.'' Hoagland v. Town of Clear
Lake, 415 F.3d 693, 696 (7th Cir. 2005). The CFTC and the SEC share
jurisdiction over security futures and options on security futures.
Preemption was the primary goal of the ``exclusive jurisdiction''
provision. Indeed, potentially limiting language was stricken from
the statute ``to assure that Federal preemption is complete.'' 120
Cong. Rec. 30464 (1974) (Statement of Sen. Curtis).
\20\ See CEA sec. 5, 7 U.S.C. 7. The Board of Trade of the City
of Chicago (also called the Chicago Board of Trade, or CBOT), the
first cash grain market exchange in the U.S., was created in 1848 by
grain merchants and received its charter in 1859. See Philip McBride
Johnson et al., Derivatives Regulation sec. 6.03 (last updated Jan.
2026).
\21\ CEA sec. 4(a)(1), 7 U.S.C. 6(a)(1). This section of the CEA
also refers to transactions in futures contracts and options on a
derivatives transaction execution facility, but there are no such
facilities currently in operation.
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The CFTC's jurisdiction ``supersedes State as well as Federal
agencies'' because commodity derivatives markets require nationally
uniform rules governing the listing, trading, clearing, settlement,
surveillance, and enforcement of financial instruments traded in these
markets.\22\ Prompted by the evolution of national financial markets
and repeated conflicts with a patchwork of state laws, Congress granted
the CFTC exclusive jurisdiction in the CEA to regulate the commodity
derivatives markets through a comprehensive federal regulatory
framework that expressly preempts state laws that attempt to regulate
the operation of, or transactions on, CFTC-registered exchanges.\23\
State regulation of developing event contracts markets would impose
additional regulations on event contracts that, as discussed below in
section I.B.3., have long been traded uncontroversially on CFTC-
registered DCMs, like contracts on the weather or agricultural
production. Subjecting those markets to a patchwork of 50 state
regulations is precisely what Congress sought to avoid with the
CEA.\24\
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\22\ See S. Rep. No. 93-1131 (1974), reprinted in 1974
U.S.C.C.A.N. 5848. The Constitution's Supremacy Clause mandates that
``[t]his Constitution, and the Laws of the United States which shall
be made in Pursuance thereof . . . shall be the supreme Law of the
Land . . . any Thing in the Constitution or Laws of any State to the
Contrary notwithstanding.'' U.S. Const. art. VI, cl. 2.
\23\ See KalshiEX, 172 F.4th at 227 (the CEA ``grants the CFTC
exclusive regulatory authority over event contracts. . . .''). Where
Congress makes ``a single sovereign responsible for maintaining a
comprehensive and unified system'' of regulation, allowing states to
regulate the same field `` `detract[s] from the ``integrated scheme
of regulation'' created by Congress.' '' Arizona v. U.S., 567 U.S.
387, 401-02 (2012) (quoting Wisconsin Dept. of Indus. v. Gould Inc.,
475 U.S. 282, 288-89 (1986)).
\24\ Preemption of state law was necessary because, for decades,
states had attempted to apply state gambling laws to derivatives
trading. By the mid-nineteenth century, commodity exchanges in major
trading hubs like New York and Chicago had organized trading to
facilitate price discovery (information exchange), risk management
(hedging), and speculation. Congress recognized the need for
uniform, nationwide regulation of futures and options markets
because concurrent regulation by the states could lead to ``total
chaos.'' See Commodity Futures Trading Act of 1974: Hearings Before
the S. Comm. on Agriculture & Forestry on S. 2485, S. 2578, S. 2837,
H.R. 13113, 93d Cong., 2d Sess. 685 (1974) (statement of Sen.
Clark), available at https://catalog.hathitrust.org/Record/010373491.
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The 1990s saw the growth of a new type of derivative financial
product--swaps.\25\ The Futures Trading Practices Act of 1992,
authorized the CFTC to exempt certain off-exchange (i.e., over-the-
counter or OTC) swap transactions from the exchange trading
requirement.\26\ The swap market grew rapidly, and in 1999 a
Presidential Working Group Report concluded that ``under many
circumstances, the trading of financial derivatives by eligible swap
participants should be excluded from the CEA'' in order to avoid legal
uncertainty and unnecessary regulatory burdens.\27\ Spurred by the 1999
report, the Commodity Futures Modernization Act of 2000 (CFMA) exempted
or excluded swap transactions from the exchange trading
requirement.\28\
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\25\ In 1989, the Commission adopted a policy statement
describing when it would not take action against swaps as illegal
futures contracts. See Policy Statement Concerning Swap
Transactions, 54 FR 30694 (July 21, 1989).
\26\ Public Law 102-546, sec. 502(a)(2), 106 Stat. 3590, 3629
(1992), adding section 4(c) to the CEA, including CEA sec.
4(c)(5)(B), 7 U.S.C. 6(c)(5)(B).
\27\ Report of The President's Working Group on Financial
Markets, Over-the-Counter Derivatives Markets and the Commodity
Exchange Act (Nov. 1999) at 1 (footnote omitted), available at
https://home.treasury.gov/system/files/236/Over-the-Counter-Derivatives-Market-Commodity-Exchange-Act.pdf. In addition to
participating in this working group, the Commission also prepared a
framework for deregulation of DCMs and exclusions from the CEA for
OTC transactions. See Report of the Commodity Futures Trading
Commission Staff Task Force, A New Regulatory Framework (2000),
available at https://www.cftc.gov/sites/default/files/files/opa/oparegulatoryframework.pdf. See also Derivatives Regulation sec.
2.04[B].
\28\ Public Law 106-554, App. E, sec. 103, 114 Stat. 2763A-365,
2763A-377 (2000), adding CEA sec. 2(d), which at that time exempted
off-exchange swaps in an ``excluded commodity'' entered into by
``eligible contract participants.'' See 7 U.S.C. 2(d) (2000 Main
Ed.).
The CFMA also introduced definitions of the terms ``eligible
contract participant'' and ``excluded commodity.'' See CEA sec.
1a(18) and (19), 7 U.S.C. 1a(18) and (19), respectively. The
definition of ``excluded commodity'' is in effect unchanged today
and is discussed further below. The definition of ``eligible
contract participant'' has been subject to only technical
amendments.
The CFMA restructured CEA sec. 5, 7 U.S.C. 7, applying a
principles-based regulation philosophy to set out designation
criteria and core principles with which a DCM must comply, rather
than prescribing strict requirements. See CFMA sec. 110, 114 Stat.
at 2763A-384.
Last, the CFMA added CEA sec. 5c, 7 U.S.C. 7a-2, which
introduced a provision for DCMs to list a contract for trading by
providing to the Commission a certification that the contract
complies with the CEA (including Commission regulations thereunder).
See CFMA sec. 113, 114 Stat. at 2763A-399. CEA sec. 5c will be
discussed in detail below.
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In the wake of the 2008 financial crisis, Congress created a
framework within the CEA for the on-exchange execution, clearing and
reporting of vast portions of the previously OTC swap markets. The Wall
Street Transparency and Accountability Act of 2010 (Dodd-Frank Act)
expressly extended the CFTC's ``exclusive jurisdiction'' to encompass
``transactions involving swaps.'' \29\ Among other things, the Dodd-
Frank Act also:
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\29\ See Public Law 111-203, sec. 722(a)(1), 124 Stat. 1376,
1672 (2010), amending CEA sec. 2(a)(1)(A), 7 U.S.C. 2(a)(1)(A). This
CEA section expressly extends the CFTC's ``exclusive jurisdiction''
to encompass ``transactions involving swaps or contracts of sale of
a commodity for future delivery . . . traded or executed on a
contract market designated pursuant to [CEA sec. 5, 7 U.S.C. 7] . .
. .'' The CFTC shares jurisdiction over mixed swaps and security
futures with the SEC, and the SEC has sole jurisdiction over
security-based swaps. See CEA sec. 1a(44), 7 U.S.C. 1a(44) and secs.
3(a)(55) and 3(a)(68) of the Securities Exchange Act of 1934
(Exchange Act), 15 U.S.C. 78c(a)(55) and 78c(a)(68). See also
KalshiEX, 172 F.4th at 226 (``The Dodd-Frank Act of 2010 amended the
Act again, . . . expanding the CFTC's exclusive jurisdiction `with
respect to accounts, agreements . . . and transactions involving
swaps or contracts of sale of a commodity for future delivery . . .
traded or executed on a [DCM.]' 7 U.S.C. 2(a)(1)(A).'').
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added a new definition of the term ``swap'' to the CEA;
\30\
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\30\ CEA sec. 1a(47), 7 U.S.C. 1a(47).
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directed the CFTC and the SEC to jointly adopt a
rulemaking to further define the term ``swap'' (among other terms) in
consultation with the Federal Reserve; \31\
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\31\ Dodd-Frank Act sec. 712(d)(1), codified at 15 U.S.C.
8302(d)(1) (directing the CFTC and SEC to undertake joint rulemaking
on covered topics). See Further Definition of ``Swap,'' ``Security-
Based Swap,'' and ``Security-Based Swap Agreement''; Mixed Swaps;
Security-Based Swap Agreement Recordkeeping, 77 FR 48208 (Aug. 13,
2012).
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required retail swap transactions (i.e., transactions not
between eligible contract participants) to be entered into on a DCM;
\32\
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\32\ CEA sec. 2(e), 7 U.S.C. 2(e). The term ``eligible contract
participant'' is defined in CEA sec. 1a(18), 7 U.S.C. 1a(18), and
generally includes only institutional investors.
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created a new type of trading facility--a swap execution
facility (SEF)--where eligible contract participants can transact
swaps; \33\ and
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\33\ CEA sec. 5h, 7 U.S.C. 7b-3. A SEF may make any swap
available for trading to eligible contract participants.
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adopted CEA section 5c(c)(5)(C), a ``Special Rule for
review and approval of event contracts and swaps contracts,'' \34\
which is discussed in detail below.
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\34\ 7 U.S.C. 7a-2(c)(5)(C).
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In sum, under current law, futures contracts, options on futures
contracts and retail swaps must be transacted on DCMs, and the CFTC
oversees DCMs and SEFs and trading in these instruments. In this
document, the term ``prediction market'' refers to a CFTC-registered
DCM or SEF that offers event contracts in the form of swaps or futures
contracts for trading. Depending on their underlying events, other
event contracts may be security-based swaps or other instruments
subject to the jurisdiction of the SEC.\35\
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\35\ See 7 U.S.C. 1a(47)(B) (providing ``exclusions'' from the
definition of ``swap'' under the CEA, including for securities such
as security based-swaps, certain options, and debt securities); see
also, e.g., 15 U.S.C. 78c(a)(68)(A) (defining ``security-based
swap'' under the Exchange Act).
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CEA section 1a(47)(A)(ii) defines ``swap'' to include ``any
agreement, contract, or transaction . . . that provides for any
purchase, sale, payment, or delivery (other than a dividend on an
equity security) that is dependent on the occurrence, nonoccurrence, or
the extent of the occurrence of an event or contingency associated with
a potential financial, economic, or commercial consequence.'' \36\
Also, CEA section 1a(47)(A)(i) defines the term ``swap'' to include
``any agreement, contract, or transaction . . . that is a put, call,
cap, floor, collar, or similar option of any kind that is for the
purchase or sale, or based on the value, of 1 or more interest or other
rates, currencies, commodities, securities, instruments of
indebtedness, indices, quantitative measures, or other financial or
economic interests or property of any kind.'' \37\ Event contracts
traded as swaps under CEA section 1a(47)(A)(i) are sometimes referred
to as binary options, a type of swap which is an ``option whose payoff
is either a fixed amount or zero.'' \38\
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\36\ 7 U.S.C. 1a(47)(A)(ii).
\37\ 7 U.S.C. 1a(47)(A)(i).
\38\ See CFTC, Futures Glossary, available at https://www.cftc.gov/LearnAndProtect/AdvisoriesAndArticles/CFTCGlossary/index.htm#B.(last visited May 18, 2026).
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The definition of what constitutes a futures contract is not set
out in the CEA but rather has been developed in court decisions.\39\
Event contracts structured as futures contracts would have the key
characteristics of futures contracts such as standardization, futurity,
fungibility, and offset.\40\
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\39\ See CFTC v. Co Petro Marketing Group, Inc., 680 F.2d 573
(9th Cir. 1982), Transnor (Bermuda) Ltd. v. BP N. Am. Petroleum, 738
F. Supp. 1472 (S.D.N.Y. 1990), and Salomon Forex, Inc. v. Tauber, 8
F.3d 966 (4th Cir. 1993). See also In re Stovall, [1977-1980
Transfer Binder] Comm. Fut. L. Rep. (CCH) 20,941 (CFTC Dec. 6,
1979), available at https://www.cftc.gov/sites/default/files/idc/groups/public/@lrceacases/documents/ceacases/stovall-dec1979-decision-13.pdf.
\40\ Since futures contracts are specifically excluded from the
statutory definition of ``swap,'' these event contracts are not
swaps. CEA sec. 1a(47)(B), 7 U.S.C. 1a(47)(B), provides that ``[t]he
term `swap' does not include--(i) any contract of sale of a
commodity for future delivery (or option on such contract) . . . .''
---------------------------------------------------------------------------
Because of CEA section 2(e) and the exchange trading requirement,
respectively, a prediction market that offers event contracts for
trading by the general public in the form of swaps or futures contracts
must register with the
[[Page 35810]]
CFTC as a DCM.\41\ These prediction markets must comply with the
substantive and procedural requirements that apply, more generally, to
the listing for trading by a DCM of derivative contracts.\42\ Further,
a prediction market registered as a DCM or SEF is subject to statutory
requirements to only list or permit trading in derivative contracts
that are not readily susceptible to manipulation; \43\ to enforce
compliance with contract terms and conditions; \44\ and to monitor
trading on the exchange in order to prevent manipulation, price
distortion, and disruption of the settlement process through market
surveillance, compliance, and enforcement practices and procedures.\45\
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\41\ See CEA sec. 2(e), 7 U.S.C. 2(e) (requirement that persons
other than eligible contract participants transact swaps on a DCM)
and CEA sec. 4(a), 7 U.S.C. 6(a) (requirement to transact futures
contracts on a DCM). The term ``eligible contract participant'' is
defined in CEA sec. 1a(18), 7 U.S.C. 1a(18), and generally includes
only institutional investors. In addition to DCMs, a SEF may make
any swap, including an event contract that is a swap, available for
trading. See CEA sec. 5h, 7 U.S.C. 7b-3. However, swap trading on a
SEF is not available to the general public, but rather only to
eligible contract participants.
\42\ See generally CEA sec. 5, 7 U.S.C. 7. SEFs are subject to
similar requirements. See CEA sec. 5h, 7 U.S.C. 7b-3.
\43\ See Core Principle 3 for DCMs, CEA sec. 5(d)(3), 7 U.S.C.
7(d)(3), and Core Principle 3 for SEFs, CEA sec. 5h(f)(3), 7 U.S.C.
7b-3(f)(3).
\44\ See Core Principle 2 for DCMs, CEA sec. 5(d)(2), 7 U.S.C.
7(d)(2), and Core Principle 2 for SEFs, CEA sec. 5h(f)(2), 7 U.S.C.
7b-3(f)(2).
\45\ See Core Principle 4 for DCMs, CEA sec. 5(d)(4), 7 U.S.C.
7(d)(4), and Core Principle 4 for SEFs, CEA sec. 5h(f)(4), 7 U.S.C.
7b-3(f)(4).
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2. CEA Section 5c(c)(5)(C)
In 2000 the CFMA added CEA section 5c, which introduced a provision
for DCMs to list a contract for trading by providing to the Commission
a certification that the contract complies with the CEA and Commission
regulations.\46\ This document refers to event contracts which a
prediction market certifies to be in compliance with the CEA and
Commission regulations as ``self-certified event contracts'' and to
this process as ``self-certification.'' The Dodd-Frank Act revised CEA
section 5c(c) in 2010 to include a new paragraph (5)(C), under which
the Commission is authorized to prohibit CFTC-registered exchanges and
clearinghouses from listing for trading or making available for
clearing particular types of event contracts, if the Commission
determines that such contracts are contrary to the public interest.\47\
This document refers to CEA section 5c(c)(5)(C) as the Special Rule.
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\46\ See 7 U.S.C. 7a-2 (2000 Main Ed.). Before 2000, the CEA
required that a DCM obtain the Commission's prior approval before
listing a contract for trading. See infra, note 60. CEA section 5c,
as added by the CFMA, also includes a provision for a DCM to seek
prior approval of a contract; however, it is not mandatory. See 7
U.S.C. 7a-2(c)(4).
\47\ 7 U.S.C. 7a-2(c)(5)(C), amended by Dodd-Frank Act, Public
Law 111-203, sec. 745(b), 124 Stat. 1376, 1735 (2010).
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Specifically, clause (i) in the Special Rule provides that, ``[i]n
connection with the listing of agreements, contracts, transactions, or
swaps in excluded commodities \48\ that are based upon the occurrence,
extent of an occurrence, or contingency (other than a change in the
price, rate, value, or levels of a commodity described in [CEA] section
la(2)(i)),\49\ by a [DCM] or [SEF], the Commission may determine that
such agreements, contracts, or transactions are contrary to the public
interest if the agreements, contracts, or transactions involve--(I)
activity that is unlawful under any Federal or State law; (II)
terrorism; (III) assassination; (IV) war; (V) gaming; or (VI) other
similar activity determined by the Commission, by rule or regulation,
to be contrary to the public interest.'' \50\
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\48\ The term ``excluded commodity'' is defined in CEA section
1a(19), 7 U.S.C. 1a(19), as: ``(i) an interest rate, exchange rate,
currency, security, security index, credit risk or measure, debt or
equity instrument, index or measure of inflation, or other
macroeconomic index or measure; (ii) any other rate, differential,
index, or measure of economic or commercial risk return, or value
that is--(I) not based in substantial part on the value of a narrow
group of commodities not described in clause (i); or (II) based
solely on one or more commodities that have no cash market; (iii)
any economic or commercial index based on prices, rates, values, or
levels that are not within the control of any party to the relevant
contract, agreement, or transaction; or (iv) an occurrence, extent
of an occurrence, or contingency (other than a change in the price,
rate, value, or level of a commodity not described in clause (i))
that is--(I) beyond the control of the parties to the relevant
contract, agreement, or transaction; and (II) associated with a
financial, commercial, or economic consequence.''
\49\ There is no ``section 1a(2)(i)'' in the CEA. The Commission
believes that the reference in CEA section 5c(c)(5)(C)(i) to
``section 1a(2)(i)'' is a typographical or drafting error.
\50\ CEA sec. 5c(c)(5)(C)(i), 7 U.S.C. 7a-2(c)(5)(C)(i).
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Clause (ii) in the Special Rule provides that ``[n]o agreement,
contract or transaction \51\ determined by the Commission to be
contrary to the public interest under clause (i) may be listed or made
available for clearing or trading on or through a registered entity.''
\52\
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\51\ CEA sec. 5c(c)(5)(C)(i) applies in connection with the
listing of agreements, contracts, transactions, or swaps by a DCM or
SEF. 7 U.S.C. 7a-2(c)(5)(C)(i). The Commission notes that similar
phrases both later in CEA sec. 5c(c)(5)(C)(i) and in CEA sec.
5c(c)(5)(C)(ii) refer only to ``agreements, contracts, or
transactions . . . .'' The Commission interprets either phrase to
encompass derivative contracts listed for trading on or through DCMs
or SEFs, and for simplicity refers to ``agreements, contracts,
transactions or swaps'' as ``event contracts'' herein.
\52\ CEA sec. 5c(c)(5)(C)(ii); 7 U.S.C. 7a-2(c)(5)(C)(ii). The
term ``registered entity'' includes a DCM, a SEF, and a derivatives
clearing organization registered with the CFTC. See CEA sec. 1a(40);
7 U.S.C. 1a(40).
---------------------------------------------------------------------------
It is notable that the Special Rule applies in addition to the
other requirements applicable to event contracts traded on a prediction
market. That is, the Special Rule is not the only way in which a
prediction market could be prohibited from listing an event contract
and the Special Rule applies only if the event contract is certified to
be in compliance with all other requirements (because an event contract
can be listed only if it is certified to be in compliance).\53\ The
Commission therefore preliminarily believes that, in general, the
Special Rule should have only a limited application in cases where the
listing, trading, and clearing of event contracts that would be
otherwise in compliance with all applicable requirements should be
prohibited because the event contracts involve an activity enumerated
in clause (i) of the Special Rule and are contrary to the public
interest.
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\53\ In the self-certification process, the prediction market
bears the burden to assess and certify compliance of event contracts
with the CEA and Commission regulations. If the prediction market
certifies that the event contracts are in compliance, the prediction
market can list the event contracts for trading on the next business
day. See 17 CFR 40.2(a)(2). See also infra, note 58.
Apart from the Special Rule, the Commission has limited
authority to prohibit a prediction market from listing self-
certified event contracts. If Commission staff identify concerns
with a self-certified event contract submission (e.g., concerns that
a contract may be readily susceptible to manipulation), the
Commission could, pursuant to Sec. 40.2(c), stay the listing of the
event contracts during either the pendency of Commission proceedings
for filing a false certification or during the pendency of a
petition to alter or amend the event contract terms and conditions.
See 17 CFR 40.2(c). The Commission could also initiate an
enforcement action alleging that the prediction market failed to
comply with part 40 requirements or applicable core principles
(e.g., failure to comply with the prediction market's obligation to
list only contracts that are not readily susceptible to
manipulation).
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The Commission preliminarily interprets the Special Rule to require
the Commission to engage in a three-step inquiry before it may
determine an event contract is prohibited thereunder.\54\ First, the
Commission
[[Page 35811]]
must assess whether agreements, contracts, transactions, or swaps in an
excluded commodity are based upon an occurrence, extent of an
occurrence, or contingency and therefore qualify as ``event
contracts.'' \55\ Second, the Commission must determine whether the
event contracts ``involve'' an activity enumerated in paragraph (i) of
the Special Rule (each, an Enumerated Activity) or other similar
activity as determined by the Commission by rule or regulation (similar
activity). Third, if the Commission determines that the event contracts
involve such activity, the Commission may block a contract from being
listed if it undertakes a public interest analysis and determines the
event contract is affirmatively against the public interest. The
Commission interprets the Special Rule to provide that the event
contract may not be listed or made available for clearing or trading by
a prediction market if the Commission affirmatively finds that (i) the
contract is an event contract, (ii) the event contract involves an
Enumerated Activity or similar activity, and (iii) the event contract
is contrary to the public interest.
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\54\ Several commenters on the Commission's Advance Notice of
Proposed Rulemaking on Prediction Markets, see infra note 154, wrote
that the Special Rule requires a two-step inquiry. See, e.g., Letter
from CME Group, Inc. 9 (Apr. 30, 2026); Letter from Harry Crane,
Rutgers University, 2 (Apr. 30, 2026). Those commenters treated the
second and third steps below as the two steps required; the
Commission simply notes here that an additional initial step is to
determine if the agreements, contracts, transactions, or swaps are
event contracts. The letters are available on the Commission's
website. See infra note 155.
\55\ Event contracts in certain excluded commodities are not
subject to the Special Rule. See infra section II.B.
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The Commission also notes that the Special Rule does not provide
that event contracts involving Enumerated Activities are contrary to
the public interest per se. Rather, if event contracts involve an
Enumerated Activity, the Commission ``may'' determine that they are
contrary to the public interest and prohibited from trading.\56\
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\56\ CEA sec. 5c(c)(5)(C)(i); 7 U.S.C. 7a-2(c)(5)(C)(i). In the
two instances where the Commission applied the Special Rule, it made
an affirmative finding that the event contracts in question were
contrary to the public interest. See infra sections I.C.5 and I.C.7.
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In 2011, the Commission adopted final rules under part 40 of the
Commission's regulations, including new Regulation 40.11.\57\ The
Commission adopted Regulation 40.11 to implement the Special Rule as
part of broader changes to the Commission's part 40 regulations.\58\
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\57\ Provisions Common to Registered Entities, 76 FR 44776 (July
27, 2011).
\58\ Part 40 of the Commission's regulations, more generally,
implements the contract and rule submission requirements for
registered entities set forth in CEA section 5c(c). For example,
Sec. 40.2 sets forth the general process by which a DCM or SEF may
list a new derivative contract for trading by providing the
Commission a self-certification that the contract complies with the
CEA, including the CFTC's regulations thereunder. 17 CFR 40.2; see
also CEA sec. 5c(c)(1), 7 U.S.C. 7a-2(c)(1). The Commission must
receive the DCM's or SEF's self-certification at least one business
day before the contract's listing. 17 CFR 40.2(a)(2). Rule 40.3 sets
forth the general process by which a DCM or SEF may elect
voluntarily to seek prior Commission approval of a derivative
contract that the DCM or SEF seeks to list for trading. 17 CFR 40.3;
see also CEA sec. 5c(c)(4)-(5), 7 U.S.C. 7a-2(c)(4)-(5). Amendments
to an existing derivative contract also must be submitted to the
Commission either by way of self-certification or for prior
Commission approval. 17 CFR 40.5, 40.6.
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3. Past Provisions for Contract Approval and History of the Current
Text of the Special Rule
The Special Rule provides that the Commission may determine that
certain event contracts are ``contrary to the public interest.'' \59\
In understanding this provision, it is useful to review the prior
application of a public interest standard to a DCM's listing of a
contract for trading, and the legislative history of the Special Rule.
The Commission preliminarily believes that the following precedents and
legislative history indicate that the public interest standard to be
applied in the Special Rule is different from the public interest
standard previously applied prior to enactment of the CFMA in 2000.
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\59\ CEA sec. 5c(c)(5)(C)(i), 7 U.S.C. 7a-2(c)(5)(C)(i).
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As noted above, prior to the CFMA, CEA section 5(7) required that a
DCM demonstrate that each futures contract it listed ``will not be
contrary to the public interest.'' \60\ The legislative history of this
provision, from 1974 when the CEA was enacted, indicated that an
``economic purpose'' test was incorporated into the public interest
requirement.\61\ Based on this, prior to 2000 the Commission took the
position that every proposed futures contract must satisfy an economic
purpose test and, in addition, a broader public interest test.\62\
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\60\ 7 U.S.C. 7(7) (1994 Ed. and Supp. V). At that time, a DCM
was required to obtain from the Commission a designation as a
contract market for each futures contract that it listed for
trading. See Derivatives Regulation sec. 6.04[C.2.c.iii].
\61\ See id. The Derivatives Regulation authors explain that in
connection with the adoption of the CEA in 1974, the House of
Representatives proposed to explicitly require a DCM to demonstrate
that its contracts could be used by commercial businesses for price
discovery or to hedge the risk of price fluctuations, but the Senate
instead required a DCM to demonstrate ``that transactions for future
delivery in the commodity for which designation as a contract market
is sought will not be contrary to the public interest,'' which is
the provision that was added to the CEA. Id. (citing H.R. Rep. No.
975, 93d Cong., 2d Sess. 103 (Apr. 4, 1974) and S. Rep. No. 1131,
93d Cong., 2d Sess. 72 (Aug. 29, 1974)). However, the Conference
Committee report stated that the ``broader language of the Senate
provision would include the concept of the `economic purpose' test
provided in the House bill subject to the final test of the `public
interest.' '' H.R. Rep. No. 1383, 93d Cong., 2d Sess. 14 (Sept. 27,
1974).
\62\ The Commission adopted ``Guideline No. 1'' to assist DCMs
in preparing applications for product approval. See Guideline on
Economic and Public Interest Requirements for Contract Market
Designation, 40 FR 25849 (June 19, 1975). Guideline No. 1 stated
that DCMs should make an affirmative showing that a proposed futures
contract was ``reasonably expected to serve, on more than occasional
basis,'' as a price discovery or hedging tool for commercial users
of the underlying commodity. Subsequently, the Commission revised
Guideline No. 1, publishing it as appendix A to part 5 of the
Commission's regulations. See 47 FR 49832 (Nov. 3, 1982). As revised
in 1982, Guideline No. 1 was updated to address proposed innovations
in the trading of futures contracts, including futures contracts on
financial instruments and on various indexes and cash-settled
futures contracts. Guideline No. 1 was again revised in 1992. 57 FR
3518 (Jan. 30, 1992). The 1992 revisions, among other things,
eliminated the guideline that a DCM provide a further, separate
justification that the proposed contract would be quoted and
disseminated for price basing, or used as a means of hedging against
possible loss through price fluctuation on more than an occasional
basis, noting that ``the economic purpose of a contract is often
implicit, or encapsulated, in the exchange's demonstration that the
terms and conditions of the proposed contract meet the criteria of
the Guideline [No. 1].'' 57 FR at 3521-22, note 9. Finally,
Guideline No. 1 was further revised and streamlined in 1999. 64 FR
29217 (June 1, 1999). When former CEA section 5(7) was repealed by
the CFMA, Guideline No. 1 was withdrawn by the Commission.
---------------------------------------------------------------------------
Although the combined public interest/economic purpose test was
applied by the Commission from 1974 to 2000 and retained the support of
Congress through the various amendments to the CEA during that period,
it was not without criticism.\63\ In 1976, a Commission-established
Advisory Committee endorsed an approach where listing a contract for
trading would not require an affirmative conclusion that the contract
served an economic purpose.\64\ The Advisory Committee noted that
futures contract prices guide economic decisions, and therefore any
actively traded futures contract would provide economic benefits,
unless it is flawed.\65\ By
[[Page 35812]]
contrast, requiring an affirmative showing of economic purpose would be
difficult to apply and, given that futures contracts can undergo
revision, would ``hamper the industry's development and even its
current effectiveness by hampering innovation and adaptation to
change.'' \66\
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\63\ For example, prior to CFTC reauthorization in 1982, some
DCMs proposed a repeal or amendment of the public interest test. See
CFTC Reauthorization: Hearings before the Subcomm. on Conservation,
Credit, and Rural Development of the Comm. on Agriculture, House of
Representatives, 97th Cong., 2d Sess., on H.R. 5447, Feb. 23, 24,
and 25, 1982, at 269 (testimony of Lee Berendt, Comex, that contract
approval ``could be left to free market forces''), 309 (statement of
Clayton Yeutter, Chicago Mercantile Exchange, that ``the marketplace
should be allowed to decide whether a contract proposed by an
exchange is useful and beneficial so long as that contract is not in
violation of any provision of'' the CEA or regulations thereunder),
and 353 (statement of Alvin Donahoo, Minneapolis Grain Exchange,
that the contract approval process ``is very costly and time
consuming for the Exchange''), available at https://catalog.hathitrust.org/Record/002757479. But Congress did not make
the suggested changes to the CEA.
\64\ See Report of the CFTC Advisory Committee on the Economic
Role of Contract Markets 8 (1976), available at https://catalog.hathitrust.org/Record/000751730.
\65\ Id. (``The Committee endorses the Commission's demonstrated
approach to this evaluation of the public interest--that a futures
contract should only be denied designation if a finding is made that
the trading would be against the public interest. . . . [F]utures
markets ordinarily provide economic benefits through hedging and
price discovery. Futures prices guide production, storage, and
consumption decisions which help the economy function more smoothly.
. . . Thus, a futures contract which is likely to be actively traded
on an organized futures market can be expected to provide economic
benefits--unless it has a flaw.'').
\66\ The Advisory Committee concluded that ``[i]f a newly drawn
contract succeeds, it can produce substantial benefits for the
economy. Lack of success generally means simply that the contract is
not traded.'' Id.
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The public interest/economic purpose test did not prevent the
Commission from approving an increasing variety of futures contracts in
the 1980s and 1990s. These included futures contracts based on:
interest rates derived from the securitization of mortgages,\67\ rates
of return on Eurodollar deposits,\68\ equity indices,\69\ the consumer
price index,\70\ corporate bond indices,\71\ catastrophe insurance,\72\
barge freight rates,\73\ corn harvest yields in specific regions,\74\
and temperature indices.\75\
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\67\ See 1975 approval of GNMA CDR Mortgage Backed Certificate
futures contract, available at https://www.cftc.gov/IndustryOversight/IndustryFilings/TradingOrganizationProducts/255.
\68\ See 1981 approval of Eurodollar Time Deposit Rate futures
contract, available at https://www.cftc.gov/IndustryOversight/IndustryFilings/TradingOrganizationProducts/326.
\69\ See 1982 approval of Value Line Stock Index futures
contract, available at https://www.cftc.gov/IndustryOversight/IndustryFilings/TradingOrganizationProducts/455.
\70\ See 1985 approval of CPI-U futures contract, available at
https://www.cftc.gov/IndustryOversight/IndustryFilings/TradingOrganizationProducts/445.
\71\ See 1987 approval of Long Term Corporate Bond Index futures
contract, available at https://www.cftc.gov/IndustryOversight/IndustryFilings/TradingOrganizationProducts/231.
\72\ See 1992 approval of Catastrophe Insurance futures
contract, available at https://www.cftc.gov/IndustryOversight/IndustryFilings/TradingOrganizationProducts/223.
\73\ See 1992 approval of Barge Freight Rate Index futures
contract, available at https://www.cftc.gov/IndustryOversight/IndustryFilings/TradingOrganizationProducts/295.
\74\ See 1995 approval of North Dakota Spring Wheat Yield
Insurance futures contract, available at https://www.cftc.gov/IndustryOversight/IndustryFilings/TradingOrganizationProducts/737.
\75\ See 1999 approval of Atlanta Degree Days Index futures
contract, available at https://www.cftc.gov/IndustryOversight/IndustryFilings/TradingOrganizationProducts/1032.
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The Commission preliminarily believes that this history
demonstrates that the public interest/economic purpose test, despite
its longevity, was controversial and difficult to apply. And experience
showed that the public interest/economic purpose test was of limited
relevance to deciding whether a futures contract should be prohibited,
because no standard for finding that a futures contract does not serve
an economic purpose has ever been applied to prohibit any futures
contract.
As noted above, in 2000 the CFMA repealed CEA section 5(7) and
added CEA section 5c, which among other things introduced a provision
for DCMs to list a contract for trading by providing to the Commission
a certification that the contract complies with the CEA and Commission
regulations.\76\ Following the enactment of the CFMA, the Commission
was no longer required to find that a contract is not contrary to the
public interest before listing of the contract.
---------------------------------------------------------------------------
\76\ See 7 U.S.C. 7a-2 (2000 Main Ed.).
---------------------------------------------------------------------------
The Special Rule was added to the CEA by section 745(b) of the
Dodd-Frank Act, which amended the requirements for contract and rule
submission by adopting a new version of CEA section 5c(c).\77\ The only
discussion of the Special Rule in the legislative history of the Dodd-
Frank Act is a short colloquy on the Senate floor between the late
Senator Diane Feinstein and Senator Blanche Lincoln, then-Chair of the
Senate Committee on Agriculture, Nutrition, and Forestry.\78\ In this
colloquy, the two Senators appear to be talking about two different
types of derivatives contracts, and Senator Lincoln (the author of the
Special Rule) never expressly adopts Senator Feinstein's reasoning.
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\77\ 7 U.S.C. 7a-2(c), amended by Dodd-Frank Act section 745(b),
124 Stat. 1376, 1735 (2010). The new section 5c(c) was added
relatively late in the process of drafting the Dodd-Frank Act. It
first appears in the ``Dodd-Lincoln Substitute Amendment'' on April
29, 2010, where its text is the same as in the final law. See
Amendment No. 3739 to S.3217, Calendar No. 349, at 728, available at
https://www.congress.gov/111/bills/s3217/BILLS-111s3217as.pdf.
Notably, a new section 5c(c) does not appear in the April 15, 2010
Dodd draft of S.3217, available at https://www.congress.gov/111/bills/s3217/BILLS-111s3217pcs.pdf. The new section 5c(c) also is not
mentioned in S. Rep. No. 111-176, The Restoring American Financial
Stability Act of 2010 (April 30, 2010), available at https://www.congress.gov/committee-report/111th-congress/senate-report/176/1?outputFormat=pdf.
\78\ 156 Cong. Rec. S5906-07 (daily ed. July 15, 2010) (``Event
Contracts''), available at https://www.congress.gov/111/crec/2010/07/15/CREC-2010-07-15-senate.pdf (Feinstein-Lincoln Colloquy).
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Senator Feinstein describes a broad swath of speculative
derivatives, saying, ``[s]ince 2000, derivatives traders have bet
billions of dollars on derivatives contracts that served no commercial
purpose at all and often threaten the public interest,'' before
expressing that the Special Rule should authorize the CFTC to
``determine that a contract is a gaming contract if the predominant use
of the contract is speculative as opposed to a hedging or economic
use.'' \79\ The Commission preliminarily believes that Senator
Feinstein is suggesting that the activity of ``gaming'' in the Special
Rule would encompass ``billions of dollars'' of contracts--i.e., the
derivative contracts that she believes contributed to the 2008
crisis.\80\
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\79\ Id.
\80\ Given the precedents for approval of a wide variety of
futures contracts under the public interest/economic purpose test
described above, it is unlikely that this test would have led the
Commission to prohibit the contracts to which Senator Feinstein
refers.
---------------------------------------------------------------------------
Senator Lincoln, on the other hand, says the purpose of the Special
Rule is ``to prevent the creation of futures and swaps markets that
would allow citizens to profit from devastating events and also prevent
gambling through futures markets.'' \81\ That is, in contrast to
Senator Feinstein's reference to past contracts, Senator Lincoln looked
at types of event contracts that could potentially be developed in the
future.
---------------------------------------------------------------------------
\81\ Feinstein-Lincoln Colloquy.
---------------------------------------------------------------------------
The Commission preliminarily believes that the colloquy between
Senators Feinstein and Lincoln does not indicate an intent to revive
the public interest/economic purpose test that applied before the
CFMA.\82\ The ``billions of dollars on derivatives contracts that
served no commercial purpose at all and often threaten the public
interest'' to which Senator Feinstein refers would not be subject to
the Special Rule, and arguably would not be prohibited under the pre-
CFMA test. And Congress was aware of the history surrounding the
economic purpose test but chose not to incorporate it into the text of
the Special Rule. In any case, the Commission notes that a floor
colloquy is not a definitive source of Congressional intent.\83\ For
these reasons, and in addition to the generally limited value of
legislative history,\84\ the Commission preliminarily
[[Page 35813]]
believes that the colloquy is of limited usefulness to understanding
the purpose of the Special Rule. Thus, the Commission preliminarily
believes that the Special Rule contemplates a new type of public
interest test.\85\
---------------------------------------------------------------------------
\82\ That is, and for clarity, the Commission preliminarily
believes that the reasoning in a Commission order in 2012
prohibiting certain political event contracts was incorrect. See
section I.C.5.
\83\ See, e.g., NLRB v. SW Gen., Inc., 580 U.S. 288, 307 (2017)
(contradictory statements of two Senators are ``a good example of
why floor statements by individual legislators rank among the least
illuminating forms of legislative history''); Rhode Island v.
Narragansett Indian Tribe, 19 F.3d 685, 699 (1st Cir. 1994) (rule
that individual legislators' statements do not have controlling
effect ``applies fully to the special case of statements by those
members of Congress most intimately associated with a bill: its
floor manager and its sponsors'') (citing Weinberger v. Rossi, 456
U.S. 25, 35 n.15 (1982) (``The contemporaneous remarks of a sponsor
of legislation are certainly not controlling in analyzing
legislative history.'')).
\84\ See, e.g., Exxon Mobil Corp. v. Allapattah Services, Inc.,
545 U.S. 546, 568 (2005) (``Not all extrinsic materials are reliable
sources of insight into legislative understandings, however, and
legislative history in particular is vulnerable[.]''); Conroy v.
Aniskoff, 507 U.S. 511, 519 (1993) (Scalia, J., concurring) (``The
greatest defect of legislative history is its illegitimacy.'').
\85\ See Derivatives Regulation sec. 6.04[C.2.c.iv] (the Special
Rule is ``a different type of public interest standard'' as compared
to the pre-CFMA standard).
---------------------------------------------------------------------------
Senator Lincoln continued the colloquy by saying, ``[t]he
Commission needs the power to, and should, prevent derivatives
contracts that are contrary to the public interest because they exist
predominantly to enable gambling through supposed `event contracts.' It
would be quite easy to construct an `event contract' around sporting
events such as the Super Bowl, the Kentucky Derby, and Masters Golf
Tournament. These types of contracts would not serve any real
commercial purpose. Rather, they would be used solely for gambling.''
Senators Feinstein and Lincoln then conclude the colloquy by saying
that the Special Rule ``will also'' authorize the Commission to prevent
trading in event contracts relating to national security events such as
terrorism and war.\86\
---------------------------------------------------------------------------
\86\ Feinstein-Lincoln Colloquy.
---------------------------------------------------------------------------
The Commission preliminarily believes that the colloquy between
Senators Feinstein and Lincoln establishes that Congress was aware that
event contracts based on ``sporting events such as the Super Bowl, the
Kentucky Derby, and Masters Golf Tournament'' could potentially be
submitted under CEA section 5c(c), but Congress chose not to prohibit
event contracts involving those sorts of events. Instead, the Special
Rule confirms the CFTC's jurisdiction over event contracts and sets out
a process by which the CFTC ``may'' find such event contracts to be
contrary to the public interest. Notably, the statute does not
authorize the Commission to impose a per se prohibition on the listing
of such event contracts independent of a public interest determination.
The Commission has carefully considered the floor statement of
Senator Lincoln, expressing concern that event contracts on sporting
events might ``not serve any real commercial purpose'' and ``would be
used solely for gambling.'' \87\ The Commission preliminarily shares
the underlying concern that the Special Rule should prevent the use of
prediction markets as venues for event contracts that have neither
commercial utility nor informational value. This proposal's framework
operationalizes that concern through contract-specific application of
the public interest factors set forth in proposed Sec. 40.11(a)(5) and
(a)(6), rather than through a categorical prohibition based on the
identity of the underlying event. Former Senator Lincoln's own comment
in response to the Commission's Advance Notice of Proposed Rulemaking
on Prediction Markets supports the appropriateness of this
approach.\88\ Senator Lincoln explained that ``[s]ome contracts
genuinely should be prohibited--direct references to specific acts of
terrorism, named-individual assassinations, military operations,''
while ``[o]ther contracts that help users manage real economic exposure
should not be prohibited.'' \89\ Senator Lincoln specifically
identified ``the Super Bowl'' as an example of a sporting event with
``strong commercial value'' because of its ``major impacts on
advertising, apparel sales and the hospitality industry.'' \90\ The
framework proposed herein reflects these considerations.
---------------------------------------------------------------------------
\87\ Id.
\88\ Letter from Blanche Lincoln, Lincoln Policy Group (Apr. 30,
2026). The letter is available on the Commission's website. See
infra note 155.
\89\ Id.
\90\ Id.
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C. Commission History With Prediction Markets
1. Staff Actions
The Commission's Division of Market Oversight has issued staff no-
action positions which provide that, subject to specified terms, the
Division will not recommend to the Commission enforcement action with
respect to two small-scale, not-for-profit markets that offer trading
in political and economic indicator event contracts for educational and
research purposes.
The first no-action position, issued in 1992, involves the Iowa
Electronic Markets (IEM), an online electronic trading facility ``where
contract payoffs are based on real-world events such as political
outcomes, companies' earnings per share (EPS), and stock price returns.
The market is operated by University of Iowa Henry B. Tippie College of
Business faculty as an educational and research project.'' \91\ The
staff no-action position limits the number of traders who can access
the market at any one time and the maximum amount any single trader can
risk.\92\
---------------------------------------------------------------------------
\91\ See IEM home page, available at https://iem.uiowa.edu/iem/
(last visited May 18, 2026).
\92\ See CFTC Staff Letter No. 93-66 issued to the University of
Iowa (June 18, 1993), available at https://www.cftc.gov/sites/default/files/idc/groups/public/@lrlettergeneral/documents/letter/93-66.pdf. This no-action position superseded the operative terms of
a more limited no-action position issued in 1992.
The CFTC staff no-action position did not extend to EPS or stock
price returns. The University of Iowa did not request a no-action
position as to stock price returns, and the CFTC staff referred the
matter of EPS to the SEC staff. See CFTC Staff Letter No. 93-66 at
5. See also Letter from Erik Sirri, Director of Trading and Markets,
SEC (Sept. 3, 2008), available at https://www.cftc.gov/sites/default/files/idc/groups/public/@lrfederalregister/documents/frcomment/08-004c028.pdf.
_____________________________________-
The other no-action position, issued in 2014, involves an online
electronic market for political and economic indicator event contracts
called PredictIt.org, ``a project of Prediction Market Research
Consortium, a not-for-profit organization, for educational purposes.''
\93\ The staff no-action position limits the maximum amount any single
trader can risk, and states that the market ``is restricted to
political events, such as contracts related to the outcomes of
elections and other significant political questions not involving war,
terrorism, or assassination,'' and also economic indicator
contracts.\94\
---------------------------------------------------------------------------
\93\ See ``What is PredictIt?'' available at https://www.predictit.org/support/what-is-predictit (last visited May 18,
2026).
\94\ See CFTC Staff Letter No. 25-20 issued to Victoria
University of Wellington, New Zealand (Victoria University) and the
Prediction Market Research Consortium, Inc. (PMRC) (Jul. 14, 2025)
at 2, available at https://www.cftc.gov/csl/25-20/download. The 2025
letter amended CFTC Staff Letter 14-130 issued to Victoria
University (Oct. 29, 2014), available at https://www.cftc.gov/csl/14-130/download, to allow Victoria University to transfer operation
of the market to PMRC, a US-based not-for-profit corporation.
---------------------------------------------------------------------------
2. 2008 Concept Release
Prompted by the Commission's receipt of a substantial number of
requests for guidance related to application of the CEA to prediction
markets, in 2008 the Commission published a concept release (2008
Concept Release) requesting input from interested persons, and those
with expertise, on the appropriate regulatory treatment of prediction
markets.\95\ In the 2008 Concept Release, the Commission acknowledged
that event contracts may not have a direct price basing or hedging
purpose; rather, it described event contracts as ``information
aggregation vehicles.'' \96\ Specifically, the Commission stated that
``[i]n general, event contracts are neither dependent on, nor do they
necessarily relate to, market prices or broad-based measures of
economic or commercial activity.'' \97\ The Commission elaborated as
follows:
[[Page 35814]]
``Since 2005, the Commission's staff has received a substantial number
of requests for guidance on the propriety of offering and trading
financial agreements that may primarily function as information
aggregation vehicles. These event contracts generally take the form of
financial agreements linked to eventualities or measures that neither
derive from, nor correlate with, market prices or broad economic or
commercial measures.'' \98\
---------------------------------------------------------------------------
\95\ 2008 Concept Release, supra note 1, 73 FR at 25670, 25673.
\96\ Id. at 25670.
\97\ Id. at 25669.
\98\ Id. at 25670. More specifically, the 2008 Concept Release
noted that: (1) event contracts based on environmental measures
(such as the volatility of precipitation or temperature levels) or
environmental events (such as a specific type of storm within an
identifiable geographic region) will ``not predictably correlate to
commodity market prices or other measures of broad economic or
commercial activity;'' and (2) event contracts based on general
measures (such as the number of hours that U.S. residents spend in
traffic annually or the vote-share of a particular candidate) ``do
not quantify the rate, value, or level of any commercial or
environmental activity,'' and that contracts on general events (such
as whether a Constitutional amendment will be adopted) ``do not
reflect the occurrence of any commercial or environmental event.''
Id. at 25671.
---------------------------------------------------------------------------
Because event contracts differ from other derivatives in this
regard, the 2008 Concept Release sought comment on ``[w]hat public
interests are served by event contracts that are designed and will
principally be traded for information aggregation purposes and not for
commercial risk management or pricing purposes?'' \99\
---------------------------------------------------------------------------
\99\ Id. at 25673. The Commission received 31 comments in
response to the 2008 Concept Release but ultimately did not take
further action at that time. The comments are available at https://www.cftc.gov/LawRegulation/PublicComments/08-004.html.
---------------------------------------------------------------------------
3. 2010 Approval of Event Contracts on Box Office Receipts
In March 2010, prior to enactment of the Dodd-Frank Act, Media
Derivatives, Inc. (MDEX), a DCM, requested prior Commission approval
under CEA section 5c(c)(2) and Sec. 40.3 of Opening Weekend Motion
Picture Revenue futures and binary option contracts on the motion
picture ``Takers.'' \100\ In June 2010, the Commission approved the
contracts, finding that ``the contracts are based on commodities, are
not readily susceptible to manipulation and serve an economic hedging
purpose.'' \101\
---------------------------------------------------------------------------
\100\ See Statement of the Commission approving certain MDEX
contracts (June 14, 2010) (MDEX Statement) at 1, available at
https://www.cftc.gov/idc/groups/public/@otherif/documents/ifdocs/mdexcommissionstatement061410.pdf. MDEX later changed its name to
Trend Exchange, Inc.
Two weeks after approving the MDEX futures and binary option
contracts, the Commission also approved an application by the Cantor
Futures Exchange to list a futures contract on Domestic Box Office
Receipts of the motion picture ``The Expendables.'' The approval is
available at https://www.cftc.gov/IndustryOversight/IndustryFilings/TradingOrganizationProducts/19296.
\101\ MDEX Statement at 2. Regarding an economic hedging
purpose, the Commission noted that it had not found that a contract
is required to serve an economic hedging purpose in order to be
approved. Rather, the Commission staff undertook a review of the
contracts' economic hedging purpose due to concerns raised by the
public about the contracts. Id. at note 2.
---------------------------------------------------------------------------
In finding that box office receipts are a commodity, the Commission
reasoned that DCMs list for trading many contracts ``where the
underlying commodity is a non-price-based measure of an economic
activity, commercial activity or environmental event.'' \102\ Moreover,
where ``there is no cash market for the commodity, but the commodity
reflects some measure of economic activity or event that can be used
for a hedging purpose when incorporated into a futures or options
contract[,] . . . [t]he Commission has found that such commodity is a
right or interest'' within the CEA definition of the term
``commodity.'' \103\ The Commission also noted that while the ``term
`event' contract has no meaning under the [CEA]'' the ``statutory
definition of `commodity' does not suggest that an `event' cannot
underlie a futures or options contract.'' \104\
---------------------------------------------------------------------------
\102\ Id. at 3.
\103\ Id. The Commission cited as examples ``Company-Specific
Earnings Per Share; Eurozone Index of Consumer Prices; Consumer
Price Index; Nonfarm Payrolls; Retail Sales Data; Unemployment
Claims; Company-Specific Merger and Acquisitions; State-Specific and
National Crop Yields; Location-Specific Heating and Cooling Degree
Days; Location-Specific Snowfall; and Regional Wind Indices.'' Id.
\104\ Id.
---------------------------------------------------------------------------
In finding that the contracts are not readily susceptible to
manipulation, the Commission noted that the data on box office receipts
underlying the contracts would be collected by an independent third
party with an incentive to maintain accurate data.\105\ In order to
address fair and equitable trading and false reporting concerns, MDEX's
rules provided that entities and individuals that hold a large position
in contracts on a particular film's box office receipts and also
control the film's marketing budget, release date or opening screen
number must inform MDEX regarding such decisions.\106\ Also, movie
studios and distributors that trade contracts on their films' box
office receipts were required to adopt and enforce firewall procedures,
and their employees involved with compiling box office receipt data
were prohibited from trading.\107\
---------------------------------------------------------------------------
\105\ Id. at 5-7.
\106\ Id. at 7.
\107\ Id. at 8.
---------------------------------------------------------------------------
Noting that the earlier economic purpose test had been repealed by
the CFMA, the Commission did not apply an economic purpose test to the
contracts on movie box office receipts. However, ``in light of the
comments raised by the studios, the Commission evaluated MDEX's
proposed contracts to determine whether they would provide some
reasonable means for managing risks associated with box office
revenues'' and ``found that the contracts can perform hedging and price
discovery purposes'' because movie industry ``profit and losses have a
clear and direct relationship to box office revenues.'' \108\
---------------------------------------------------------------------------
\108\ Id. at 10.
---------------------------------------------------------------------------
Even before the Commission had approved the futures and binary
option contracts on box office receipts that MDEX had submitted, MDEX's
application had drawn the attention of Congress.\109\ The Dodd-Frank
Act, adopted one month after the Commission approved the contracts,
amended the CEA definition of the term ``commodity'' to explicitly
exclude ``motion picture box office receipts (or any index, measure,
value, or data related to such receipts).'' \110\ Congress thus
recognized that the CFTC correctly determined these to be a commodity
and that the economic purpose test was not required. Accordingly, the
MDEX box office receipts contracts were never traded.
---------------------------------------------------------------------------
\109\ See Hearing to Review Proposals to Establish Exchanges
Trading ``Movie Futures'': Hearing before the Subcomm. on Gen. Farm
Commodities and Risk Mgmt. of the H. Comm. on Agric., 111th Cong.,
2d Sess. (2010), available at https://www.govinfo.gov/content/pkg/CHRG-111hhrg56431/html/CHRG-111hhrg56431.htm.
\110\ CEA sec. 1a(9), 7 U.S.C. 1a(9). The Dodd-Frank Act also
amended 7 U.S.C. 13-1 to prohibit DCMs from listing futures
contracts based on motion picture box office receipts (or any index,
measure, value, or data related to such receipts).
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4. 2011 Adoption of Sec. 40.11
In 2011, the Commission adopted Sec. 40.11 to implement the
Special Rule as part of broader changes to the Commission's part 40
regulations.\111\
[[Page 35815]]
Rule 40.11(a)(l) provides that a registered entity shall not list for
trading or accept for clearing on or through the registered entity an
agreement, contract, transaction, or swap based upon ``an excluded
commodity, as defined in Section 1a(19)(iv) of the Act, that involves,
relates to, or references terrorism, assassination, war, gaming, or an
activity that is unlawful under any State or Federal law.'' \112\
---------------------------------------------------------------------------
\111\ Part 40 of the Commission's regulations, more generally,
implements the contract and rule submission requirements for
registered entities set forth in CEA sec. 5c(c). For example, Sec.
40.2 sets forth the general process by which a DCM or SEF may list a
new derivative contract for trading by providing the Commission with
a written certification--a ``self-certification''--that the contract
complies with the CEA, including the CFTC's regulations thereunder.
See also CEA sec. 5c(c)(1), 7 U.S.C. 7a-2(c)(1). The Commission must
receive the DCM's or SEF's self-certified submission at least one
business day before the contract's listing. 17 CFR 40.2(a)(2). Rule
40.3 sets forth the general process by which a DCM or SEF may elect
voluntarily to seek prior Commission approval of a derivative
contract that the DCM or SEF seeks to list for trading. See also CEA
sec. 5c(c)(4)-(5), 7 U.S.C. 7a-2(c)(4)-(5). Amendments to an
existing derivative contract also must be submitted to the
Commission either by way of self-certification or for prior
Commission approval. 17 CFR 40.5, 40.6.
\112\ 17 CFR 40.11(a)(1). Notably, the current text of Sec.
40.11(a)(1) does not explicitly refer to a finding that the contract
is contrary to the public interest.
The Special Rule applies with respect to agreements, contracts,
transactions, or swaps in excluded commodities that are based upon
the occurrence, extent of an occurrence, or contingency (other than
a change in the price, rate, value, or levels of a commodity
described in section 1a(2)(i)). There is no ``section 1a(2)(i)'' in
the CEA, and the Commission believes the reference to this provision
in the Special Rule is a typographical or drafting error. In
adopting Sec. 40.11(a)(1) and (2), as well as Sec. 40.11(c), the
Commission interpreted the Special rule to apply with respect to the
excluded commodities defined in CEA sec. 1a(19)(iv). See discussion
in section II.B., infra.
---------------------------------------------------------------------------
Rule 40.11(a)(2) provides that a registered entity shall not list
for trading or accept for clearing on or through the registered entity
an agreement, contract, transaction, or swap based upon an excluded
commodity, as defined in CEA section 1a(19)(iv), that involves, relates
to, or references an activity that is similar to an activity enumerated
in Sec. 40.11(a)(1), and that the Commission determines, by rule or
regulation, to be contrary to the public interest.\113\ To date, the
Commission has not made any such determinations regarding any similar
activity.
---------------------------------------------------------------------------
\113\ 17 CFR 40.11(a)(2).
---------------------------------------------------------------------------
Pursuant to Sec. 40.11(c), when a contract submitted to the
Commission by a registered entity may involve, relate to, or reference
an activity enumerated in Sec. 40.11(a)(1) or (2), the Commission is
authorized to commence a 90-day review of the contract.\114\ If the
Commission opts to undertake a public interest review, the Commission
must issue an order approving or disapproving the contract by the end
of the 90-day review period or, if applicable, at the conclusion of any
extended period agreed to or requested by the registered entity.\115\
Rule 40.11(c)(1) requires the Commission to request that the registered
entity suspend the listing or trading of the contract during the 90-day
review period.\116\ The Commission also must post on its website a
notification of the intent to carry out a 90-day review.\117\
---------------------------------------------------------------------------
\114\ 17 CFR 40.11(c). Rule 40.11(c) states that the 90-day
review period shall commence from the date the Commission notifies
the registered entity of a potential violation of Sec. 40.11(a).
\115\ 17 CFR 40.11(c)(2).
\116\ 17 CFR 40.11(c)(1).
\117\ Id.
---------------------------------------------------------------------------
The adopting release for Sec. 40.11 does not specifically discuss
the public interest standard in the Special Rule. It bases Sec. 40.11
on the Dodd-Frank Act's amendment of CEA section 5c to include the
Special Rule, stating that ``the Commission has determined to prohibit
contracts based upon the activities enumerated in Section 745 of the
Dodd-Frank Act and to consider individual product submissions on a
case-by-case basis under Sec. 40.2 or Sec. 40.3.'' \118\
---------------------------------------------------------------------------
\118\ Provisions Common to Registered Entities, 76 FR 44776,
44785 (July 27, 2011).
---------------------------------------------------------------------------
The Commission also did not define any of the Enumerated
Activities.\119\ The Commission acknowledged, in the adopting release,
a comment on the rule proposal that stated that the term ``gaming,'' in
particular, should be further defined in order to enhance clarity
regarding the scope of the prohibition set forth in Sec.
40.11(a)(1).\120\ The Commission expressed agreement with the interest
to further define ``gaming'' for purposes of the prohibition, and noted
that the 2008 Concept Release discussed the issue.\121\ The Commission
stated that it might issue a future event contracts rulemaking that,
among other things, addressed the appropriate treatment of event
contracts involving gaming.\122\
---------------------------------------------------------------------------
\119\ The Commission noted that a registered entity could
receive a definitive resolution of any questions concerning the
applicability of Sec. 40.11(a)(1) by submitting a particular
contract for Commission approval under Sec. 40.3: if the submitted
contract was approved by the Commission, the registered entity would
have assurance that the Commission had reviewed and did not object
to the submission based on the prohibitions in Sec. 40.11(a). Id.
at 44785-86. The Commission noted that, alternatively, a registered
entity could self-certify a contract under Sec. 40.2 and, if the
Commission determined during its review of the contract ``that the
submission may violate the prohibitions in Sec. 40.11(a)(1)-(2),
the Commission may request that the registered entity suspend the
trading or clearing of the contract pending the completion of a 90-
day . . . review.'' Id. at 44786. The Commission stated that, upon
completion of that review, the Commission would be required to issue
an order finding either that the contract violated, or did not
violate, the prohibitions in Sec. 40.11(a)(1)-(2). Id.
\120\ Id. at 44785.
\121\ Id.
\122\ Id.
---------------------------------------------------------------------------
The Commission has consistently applied Sec. 40.11 to operate a
discretionary review framework rather than a self-executing per se
prohibition, because the opposite interpretation would violate the
statute.\123\ As discussed in the next section and further below, when
the Commission applied the Special Rule and Sec. 40.11 to prohibit
certain event contracts, the Commission made an explicit, affirmative
finding that the specific event contracts were contrary to the public
interest; it did not simply apply a self-executing per se
prohibition.\124\
---------------------------------------------------------------------------
\123\ See supra text accompanying notes 55 to 56.
\124\ See infra sections I.C.5. and I.C.7.
---------------------------------------------------------------------------
The 2011 adopting release contemplated that registered entities
could receive a definitive resolution of any questions concerning the
applicability of Sec. 40.11(a)(1) by submitting a contract for
Commission approval under Sec. 40.3, and that, upon completion of a
Sec. 40.11(c) review, the Commission would be required to issue an
order finding either that the contract violated, or did not violate,
the prohibitions in Sec. 40.11(a)(1)-(2). The text of Sec. 40.11(c)
reflects the same understanding. It provides for review of contracts
that ``may involve'' an enumerated activity, which presupposes that
whether a particular contract involves such an activity is a question
the Commission resolves through review rather than a determination made
on the face of Sec. 40.11(a)(1). This understanding is necessary to
keep Sec. 40.11(a) within the bounds of the Commission's statutory
authority. The Special Rule provides that the Commission ``may
determine'' that an event contract involving an Enumerated Activity is
contrary to the public interest. That language confers discretion to
determine that a particular event contract is, or is not, contrary to
the public interest. Interpreting that ``may'' as a per se prohibition
would conflict with the requirements of the statute.
5. 2012 Nadex Disapproval
In 2012, the Commission commenced a 90-day review, under Sec.
40.11(c), of certain event contracts on election outcomes (the Nadex
Contracts) that had been self-certified by the North American
Derivatives Exchange (Nadex).\125\ On April 2, 2012, the Commission
issued an order (the Nadex Order) prohibiting the contracts from
[[Page 35816]]
being listed or made available for clearing or trading, finding that
the contracts involved the Enumerated Activity of gaming and were
contrary to the public interest.\126\
---------------------------------------------------------------------------
\125\ See CFTC Press Release No. 6163-12, CFTC Commences 90-day
Review of NADEX's Proposed Political Event Derivatives Contracts
(Jan. 5, 2012), available at https://www.cftc.gov/PressRoom/PressReleases/6163-12. Nadex self-certified cash-settled, binary
contracts on whether there would be a Democratic majority in the
U.S. House of Representatives (House); whether there would be a
Republican majority in the House; whether there would be a
Democratic majority in the U.S. Senate (Senate); and whether there
would be a Republican majority in the Senate. The contracts settled
based on whether the named party held the majority of seats in the
identified chamber of Congress on the expiration date. Nadex also
self-certified ten cash-settled, binary contracts on the upcoming
Presidential election. Each contract was based on one of the leading
candidates for President and paid according to whether that
candidate won the Presidency.
\126\ See Order Prohibiting the Listing or Trading of Political
Event Contracts (Apr. 2, 2012), available at https://www.cftc.gov/stellent/groups/public/@rulesandproducts/documents/ifdocs/nadexorder040212.pdf.
---------------------------------------------------------------------------
In the Nadex Order, the Commission interpreted the Special Rule.
First, the Commission stated that the legislative history of the
Special Rule ``indicates that the relevant question for the Commission
in determining whether a contract involves one of the activities
enumerated in [the Special Rule] is whether the contract, considered as
a whole, involves one of those activities.'' \127\ Second, the
Commission said that the legislative history indicated that Congress
intended ``to restore, for the purposes of that provision, the economic
purpose test that was used by the Commission to determine whether a
contract was contrary to the public interest'' prior to the CFMA.\128\
---------------------------------------------------------------------------
\127\ Nadex Order at 2.
\128\ Id. at 3.
---------------------------------------------------------------------------
The Commission also analyzed the Nadex Contracts. The Commission
reasoned that the terms ``gaming''--which it equated with the term
``gambling''--is linked to betting on elections which, in turn, is
analogous to taking a position in the Nadex Contracts, and that the
Nadex Contracts are premised on the outcome of a contest between
electoral candidates.\129\ The Commission also stated that the
unpredictability of the specific economic consequences of an election
mean that the Nadex Contracts cannot reasonably be expected to be used
for hedging and that the Nadex Contracts have no price basing
utility.\130\ Last, the Commission believed that the Nadex Contracts
could be used in a way that could potentially adversely affect the
integrity of elections.\131\ On these bases, the Commission found that
the Nadex Contracts involve gaming and are contrary to the public
interest, as contemplated by the Special Rule.\132\
---------------------------------------------------------------------------
\129\ Id.
\130\ Id.
\131\ Id. at 4.
\132\ Id.
---------------------------------------------------------------------------
6. 2021 ErisX Withdrawal
On December 15, 2020, the CFTC received a self-certification filed
by ErisX under Sec. 40.2 for the listing of event contracts based on
National Football League (NFL) games which would track the moneyline,
point spread, and total points sports bets offered by sports bookmakers
(NFL Contracts).\133\ ErisX proposed to limit trading in the NFL
Contracts to certain eligible contract participants with a commercial
connection to NFL games.\134\
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\133\ ErisX, CFTC Regulation 40.2(a) Certification (Dec. 14,
2020) (ErisX Certification), available at https://www.cftc.gov/sites/default/files/filings/ptc/20/12/ptc121520erisdcmdcm005.pdf.
The ErisX Certification described the NFL Contracts as event
contracts, and like many event contracts the NFL Contracts had a
binary payoff structure. Id. at 4-6.
\134\ Id. at 4.
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According to ErisX, the NFL Contracts would ``permit Licensed
Sportsbooks to manage commercial risk by hedging their exposure [to
imbalances in their books],'' and are ``tailored to address the unique
risks of Licensed Sportsbooks.'' \135\ ErisX also claimed that stadium
owners and vendors would be able ``to hedge the commercial risk
associated with lower game attendance or fewer home games resulting
from poor performance of the team that plays at the sports stadium or
arena.'' \136\
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\135\ Id. at 6.
\136\ Id.
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On December 23, 2020, the Commission informed ErisX that it had
determined that the NFL Contracts `` `may involve, relate to, or
reference an activity enumerated in [Rule] 40.11(a)' including but not
limited to `gaming, or an activity that is unlawful under any Federal
or State law' '' and it would begin a review under Sec. 40.11(c).\137\
On March 22, 2021, one day before the expiration of the 90-day review
period, ErisX withdrew its certification.\138\ One Commissioner later
said in a statement that the Commission staff had prepared a draft
order that would have prohibited the NFL Contracts because they
involved gaming and were contrary to the public interest.\139\
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\137\ Letter from Christopher Kirkpatrick, Secretary of the
Commission, to Chief Executive Officer, ErisX (Dec. 23, 2020),
available at https://www.cftc.gov/sites/default/files/filings/documents/2020/orgdcmerissignedletter201223.pdf. The CFTC requested
that ErisX suspend any listing and trading of the contracts during
the pendency of a 90-day review period beginning on that date.
The CFTC sought public comments on a number of questions related
to the certification and received 25 comment letters in response.
See Questions on the Eris Exchange, LLC (ErisX) RSBIX NFL Futures
Contracts for Public Comment (Dec. 23, 2020), available at https://www.cftc.gov/sites/default/files/filings/documents/2020/orgdcmerisquestionsre201223.pdf. Comments in response are available
at https://comments.cftc.gov/PublicComments/CommentList.aspx?id=5203.
\138\ See notation of withdrawal, available at https://www.cftc.gov/IndustryOversight/IndustryFilings/TradingOrganizationProducts/45226.
\139\ See Statement of Commissioner Brian D. Quintenz on ErisX
RSBIX NFL Contracts and Certain Event Contracts (Mar. 25, 2021),
available at https://www.cftc.gov/PressRoom/SpeechesTestimony/quintenzstatement032521. See also Statement of Commissioner Dan M.
Berkovitz Related to Review of ErisX Certification of NFL Futures
Contracts (Apr. 7, 2021), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/berkovitzstatement040721.
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7. 2023 Kalshi Disapproval and Court Decision
In June 2023, KalshiEX LLC (Kalshi) filed a certification of
congressional control political event contracts (the Kalshi Contracts)
under Sec. 40.2.\140\ The Commission determined that the Kalshi
Contracts may involve, relate to, or reference an Enumerated Activity,
requested that Kalshi suspend the listing and trading of the Kalshi
Contracts during the review period, and opened a public comment
period.\141\ On September 22, 2023, the Commission issued an order (the
Kalshi Order) prohibiting the Kalshi Contracts from being listed or
made available for trading or clearing, finding that the contracts
involved the Enumerated Activities of gaming and activity that is
unlawful under State law, and were contrary to the public
interest.\142\
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\140\ See Order In the Matter of the Certification by KalshiEX
LLC of Derivatives Contracts with Respect to Political Control of
the United States Senate and United States House of Representatives
(Sept. 22, 2023) available at https://www.cftc.gov/sites/default/files/filings/documents/2023/orgkexkalshiordersig230922.pdf (Kalshi
Order). The Congressional Control Contracts are cash-settled, binary
(yes/no) contracts based on the question: ``Will be controlled by for ?'' Id. at 2.
\141\ Id. at 1.
\142\ Id. at 23.
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Similar to the Nadex Order, the Kalshi Order interpreted the
Special Rule. The Commission found that the ``choice of the broader
term `involve' means that [the Special Rule] can capture both contracts
whose underlying activity is one of the Enumerated Activities, and
contracts with a different connection to one of the Enumerated
Activities,'' and that ``the question for the Commission in determining
whether a contract `involves' one of the [Enumerated Activities] . . .
is whether the contract, considered as a whole, involves one of those
activities.'' \143\
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\143\ Id. at 7 (emphasis in original).
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The Commission also found that ``gaming'' includes wagering on
elections, reasoning that (i) ``gaming'' means gambling; (ii) gambling
involves ``a person staking something of value upon the outcome of a
game, contest, or contingent event;'' and (iii) to wager on elections
is to ``stake something of value upon the outcome of contests of
others.'' \144\ Similarly, the Commission found that the Kalshi
Contracts involved activity that is unlawful under State law because
taking a position in the Kalshi Contracts would constitute wagering on
[[Page 35817]]
election results, which is contrary to many State laws.\145\
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\144\ Id. at 8-9.
\145\ Id. at 11-13.
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Regarding the public interest test under the Special Rule, the
Commission found that the legislative history of the Special Rule
indicates Congressional intent for the Commission to consider, among
other factors, a form of the economic purpose test that was applied
prior to the CFMA.\146\ The Commission also found that while control of
a chamber of Congress may have economic effects, it does not, in and of
itself, have sufficiently direct economic consequences such that the
Kalshi Contracts have hedging utility, and the hedging utility of the
Kalshi Contracts is also undermined by their binary payoff structure
and infrequent settlement every two years.\147\
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\146\ Id. at 13 (citing the Feinstein-Lincoln Colloquy and CEA
sec. 3, 7 U.S.C. 5).
\147\ Kalshi Order at 15-18. For similar reasons, the Commission
also found that the Kalshi Contracts do not serve a price-basing
function. Id. at 18-19.
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Last, the Commission found that the Kalshi Contracts ``could
potentially be used in ways that would have an adverse effect on the
integrity of elections, or the perception of integrity of elections,''
and ``conduct designed to artificially affect the electoral process
could also, intentionally or otherwise, manipulate the market in the
[Kalshi Contracts], or that [that market] . . . could be manipulated to
influence elections or electoral perceptions. In particular, . . . [the
Kalshi Contracts] could incentivize the spread of misinformation by
individuals or groups seeking to influence perceptions of a political
party or a party candidate's success.'' \148\
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\148\ Id. at 20-22. The Commission also noted that it was not
equipped or well-suited to investigate election-related activities.
Id. at 22-23.
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Following issuance of the Kalshi Order, Kalshi filed suit
challenging the Commission's decision as arbitrary, capricious, and
otherwise not in accordance with the law under the Administrative
Procedure Act (APA).\149\ In September 2024, the Honorable Jia M. Cobb
of the U.S. District Court for the District of Columbia (D.D.C.)
granted summary judgment to Kalshi and vacated the Kalshi Order, ruling
that the Kalshi Contracts ``d[id] not involve activity that is unlawful
under any Federal or State law, nor do they involve gaming.'' \150\ In
May 2025, the CFTC's motion to dismiss its appeal of the District
Court's decision was granted and the case was closed.\151\
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\149\ See KalshiEX LLC v. CFTC, No. 23-cv-3257, 2024 WL 4164694,
2024 U.S. Dist. LEXIS 163925, at *18 (D.D.C. Sept. 12, 2024), appeal
dismissed by KalshiEX LLC v. CFTC, No. 24-5205, 2025 U.S. App. LEXIS
11094 (D.C. Cir. May 7, 2025).
\150\ Id. at *39. The court did not consider whether the Kalshi
Contracts were contrary to the public interest. Id.
\151\ See KalshiEX LLC v. CFTC, No. 24-5205, 2025 U.S. App.
LEXIS 11094 (D.C. Cir. May 7, 2025).
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8. 2024 Event Contract Proposal and 2026 Withdrawal
In 2024, the Commission proposed rules to further specify the types
of event contracts that fall within the scope of CEA section
5c(c)(5)(C) and are contrary to the public interest.\152\ In 2026, the
Commission withdrew the proposed rules to reconsider them ``in light of
various forms of state regulatory actions and litigation concerning the
Commission's exclusive jurisdiction over event contract derivatives
listed on [DCMs] and the proper application of the swap and excluded
commodity definitions under the [CEA].'' \153\
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\152\ Event Contracts; Proposed Rule, 89 FR 48968 (June 10,
2024).
\153\ Event Contracts; Withdrawal of Proposed Regulatory Action,
91 FR 5386 (Feb. 6, 2026).
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9. 2026 ANPRM
To assist the Commission in considering issues, and potentially
adopting regulations, related to prediction markets the Commission
published an advance notice of proposed rulemaking (ANPRM) in the
Federal Register on March 16, 2026.\154\ The Commission explained that
the ANPRM was issued in light of the recent increase in the number of
applications for DCM registration, largely from entities that are
interested primarily, or exclusively, in operating prediction markets,
and to seek information about significant issues that have come to
light since the 2024 proposal. The comment period for the ANPRM closed
on April 30, 2026.
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\154\ See Prediction Markets; Advance Notice of Proposed
Rulemaking, 91 FR 12516 (Mar. 16, 2026).
---------------------------------------------------------------------------
In response to the ANPRM, the Commission received approximately
3,500 comments addressing issues relevant to prediction markets and
potential rulemakings from a wide range of commenters.\155\ Of these,
approximately 300 submissions provided detailed comments and
recommendations. The remaining submissions were either duplicative of
points made in other submissions or non-substantive. The comments came
from individuals, prediction markets and firms applying for designation
as a prediction market, firms using event contracts, trade
associations, public advocacy organizations, academics and researchers,
members of Congress, federal agencies, tribal governments, state
governments and others. Relevant commenter feedback is interwoven
throughout this proposed rule.
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\155\ Copies of all comments received by the CFTC on the ANPRM
are available on the CFTC's website, located at https://comments.cftc.gov/PublicComments/CommentList.aspx?id=7654.
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The comments expressed varying views on a wide variety of topics,
including the proper scope of the Special Rule, whether Sec. 40.11
properly effects the Special Rule, the scope of activities that are
encompassed in the Enumerated Activities, when an event contract should
be considered to ``involve'' an Enumerated Activity, the role that an
economic purpose test should play in the Special Rule, and the public
interest factors that the Commission should consider in applying the
Special Rule. The Commission has reviewed the comments received, and
the staff of the Commission has met with market participants and other
interested parties to discuss prediction markets.\156\
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\156\ Information about meetings that CFTC staff have had with
outside organizations regarding prediction markets is included in
the list of comments on the ANPRM at the link in the previous note.
The views expressed in the comments in response to the ANPRM and at
such meetings are collectively referred to as the views of
``commenters.''
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II. Proposed Amendments to Part 40
The statutory text of the Special Rule provides that ``[i]n
connection with the listing'' of certain event contracts, ``the
Commission may determine'' that the event contracts are contrary to the
public interest.\157\ The Commission preliminarily interprets this
provision to mean that the Commission's public interest determination
must follow the submission of one or more event contracts for listing.
The Commission also preliminarily believes that it would be helpful for
prediction markets and the general public to know which factors the
Commission will apply in determining whether particular event contracts
are subject to the Special Rule, and the factors it will apply in its
public interest determination. Therefore, the Commission is proposing
to amend part 40 to, among other things, lay out these factors and the
process by which the Commission may determine that specified event
contracts are contrary to the public interest (the Proposal).
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\157\ CEA sec. 5c(c)(5)(C)(i), 7 U.S.C. 7a-2(c)(5)(C)(i).
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As discussed below, the Commission preliminarily believes that the
Proposal's explanation of the factors the Commission would apply in its
public interest determinations would support efforts by prediction
markets to ensure compliance with the CEA and to make more informed
decisions about event contract design, thereby supporting responsible
innovation. By clearly identifying the factors the Commission
[[Page 35818]]
will apply in its public interest determination, the Proposal is also
expected to reduce the frequency of submissions that raise potential
public interest concerns, improving the efficiency of Commission and
staff resources by reducing the need to conduct individualized event
contract reviews.\158\ Greater clarity may also help prediction markets
avoid expending resources on event contracts that the Commission may
ultimately determine cannot be listed or cleared.
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\158\ Due to the high volume of event contract submissions and
the wide potential scope of the public interest review, the
Commission has attempted to propose factors that are clear and
direct, along with various illustrative examples. The Commission
preliminarily believes that prediction markets will be guided by the
factors, and by any early determinations that event contracts are
contrary to the public interest, in understanding the boundaries
around which event contracts may be listed for trading and thereby
limit the number of public interest reviews.
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The Commission acknowledges that, if the Special Rule is
interpreted to require the Commission's public interest determination
to follow the submission of event contracts for listing, and does not
require the prediction market to suspend trading of the event contracts
while the Commission conducts its review, it is likely that the
Commission would find that event contracts are contrary to the public
interest and cannot be traded or cleared after trading of the event
contracts has begun.\159\ The Commission preliminarily believes that
this is the inevitable result of the statutory structure, and
acknowledges that this means that some event contracts that are
contrary to the public interest may be traded during the period of time
required for the Commission's review. The Proposal, like existing Sec.
40.11(c)(1), includes a provision for the Commission to request that
the prediction market suspend listing or trading of event contracts
under review, and the Commission anticipates that some prediction
markets will abide by such requests, but there is no statutory
provision requiring the prediction market to do so.
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\159\ Thus, market participants who transacted in the event
contracts would have their positions closed out. Since the event
contracts are contrary to the public interest, the Commission
preliminarily believes this is the appropriate result.
---------------------------------------------------------------------------
The Commission believes that the Proposal is authorized by its
authority in the CEA, and, in particular, CEA sections 3, 5, 5c(c), 5h
and 8a(5).\160\ In describing the Proposal, the discussions in this
document of ``commercial utility,'' ``derivatives,'' ``gaming,''
``price discovery,'' and ``public interest'' are for purposes specific
to the CEA and the CFTC's jurisdiction, as described herein. Therefore,
the Proposal and the discussion herein have no bearing on any statutory
regime other than the CEA, including without limitation the treatment
of any contract, activity, receipt, or expense under the Internal
Revenue Code.
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\160\ 7 U.S.C. 5, 7, 7a-2(c), 7b-3 and 12a(5).
---------------------------------------------------------------------------
The Commission requests comment on all aspects of the Proposal.
A. Overview of Proposed Changes to Part 40
As noted above, the principal difference between the current Sec.
40.11 and the Proposal is that Sec. 40.11(a) would more clearly follow
the plain language of the Special Rule by stating that ``[t]he
Commission may determine'' that event contracts subject to the Special
Rule are contrary to the public interest.\161\ Correspondingly,
proposed Sec. 40.11(e)(1) provides for the Commission to issue an
order finding that certain event contracts are contrary to the public
interest prior to the end of the review period established in clause
(iv) of the Special Rule. The Commission preliminarily believes that
this change will remove uncertainty under the current text of Sec.
40.11(a) regarding whether a finding that event contracts are contrary
to the public interest is necessary to prohibit the trading and
clearing of the event contracts.\162\
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\161\ The Commission notes that the Nadex Order and the Kalshi
Order both included specific findings that the event contracts in
question were contrary to the public interest. See Nadex Order at 4,
Kalshi Order at 23.
\162\ Commenters on the ANPRM expressed varying views on what
the Special Rule requires in this regard and what the Commission's
regulations should require. Compare Letter from the Pechenga Band of
Indians 7 (Apr. 29, 2026) (CEA expressly bars listing of event
contracts that involve Enumerated Activities, current Sec. 40.11
implements this statutory mandate and should not be amended) and
Letter from eight U.S. Senators including Senator Jeffrey A. Merkley
2 (Apr. 30, 2026) (event contracts involving elections, war,
military actions, terrorism, and sports should be categorically
prohibited pursuant to the CFTC's existing authority) with Letter
from Susquehanna International Group, LLP 3 (Apr. 30, 2026)
(Commission should revise Sec. 40.11 to replace categorical ``shall
not'' with a provision for authority to prohibit event contracts
that are contrary to the public interest while avoiding blanket
prohibitions) and Letter from the Coalition for Prediction Markets 2
(Apr. 30, 2026) (to interpret Sec. 40.11(a) to categorically
prohibit event contracts involving Enumerated Activities is overly
prescriptive and beyond the authorization of the Special Rule, which
requires a specific public interest determination).
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As explained above, the Commission preliminarily interprets the
Special Rule to require that the Commission determine that event
contracts may involve an Enumerated Activity to begin the 90-day review
process. The Commission is therefore proposing to add Sec. 40.11(a)(4)
which sets out the factors that the Commission will apply in
determining whether event contracts involve an Enumerated Activity and
are therefore within the scope of the Special Rule.
The Commission preliminarily believes that two terms in the Special
Rule--``involve'' and ``gaming''--are particularly important.
Therefore, the Commission is proposing to adopt in Sec. 40.11(a)(3) a
statement of when event contracts ``involve'' an activity, and in Sec.
40.11(b) a definition of the term ``gaming.'' The 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 Proposal states that in determining whether event contracts
within the scope of the Special Rule are contrary to the public
interest, the Commission will apply the factors set out in proposed
Sec. Sec. 40.11(a)(5) and 40.11(a)(6). That is, these are the factors
that the Commission would apply prior to issuing an order under
proposed Sec. 40.11(e)(1) finding that certain event contracts are
contrary to the public interest. The Commission notes that it
preliminarily interprets the Special Rule to apply after the prediction
market certifies that the event contract complies with the CEA
(notably, the Core Principles in CEA sections 5 and 5h) and the
Commission's regulations thereunder. Proposed Sec. Sec. 40.11(a)(5)
and 40.11(a)(6) therefore include factors that may raise public
interest concerns particularly relevant to the types of event contracts
that are subject to the Special Rule.
The Commission preliminarily believes that its public interest
determination should be focused and understandable to prediction
markets in designing event contracts and to the general public. The
Commission also notes that the 90-day deadline for Commission action in
clause (iv) of the Special Rule does not allow for a wide-ranging
inquiry into the public good, but rather a focused inquiry subject to
set processes. And, as noted above, the Commission preliminarily
believes that the legislative history of the Special Rule does not
indicate Congressional intent for the Commission to apply the economic
purpose test that was applied prior to the CFMA. Therefore, the
[[Page 35819]]
Commission has included in proposed Sec. Sec. 40.11(a)(5) and
40.11(a)(6) factors that relate to specific public interest concerns
that would support a finding that event contracts within the scope of
the Special Rule are contrary to the public interest.
The Commission has observed a marked increase in the number of
event contracts that prediction markets have self-certified for listing
under Sec. 40.2. The Commission preliminarily believes that in some
circumstances (i) it would be impractical to review separately each
submission of similar event contracts; and (ii) if the Commission finds
that a number of similar event contracts are contrary to the public
interest, prediction markets and the general public would benefit from
the issuance of a single order (rather than multiple orders) covering
all such similar event contracts. Therefore, proposed Sec. 40.11(c)(4)
provides that the Commission may consolidate review of multiple event
contracts that involve the same underlying event or a substantially
similar set of underlying events, in which case the determination to
begin the review would include a description of the consolidated group.
Correspondingly, proposed Sec. 40.11(e)(1)(i) provides that the
Commission may issue an order finding that a group of event contracts
that are subject to review are contrary to the public interest. The
Commission preliminarily anticipates that issuing an order covering a
group of event contracts would reduce the number of future submissions,
as prediction markets would better understand which types of event
contracts the Commission is likely to find contrary to the public
interest.
The Commission is also proposing to amend Sec. 40.11 to establish
a procedural framework governing the Commission's exercise of its
discretionary authority under the Special Rule to determine that
agreements, contracts, transactions, or swaps involving an Enumerated
Activity are contrary to the public interest. Under the proposed
framework, the Commission may commence a review by making a written
determination that there is a basis to believe event contract(s) that
are self-certified or submitted for Commission approval both involve an
Enumerated Activity and may be contrary to the public interest under
the factors in proposed Sec. Sec. 40.11(a)(5) and 40.11(a)(6). A
written determination initiating the review identifying the event
contract(s), the Enumerated Activity(ies), the contract terms at issue,
and the factors warranting review must be provided to the prediction
market(s) making the submission(s). Issuance of the determination
commences the 90-day review.\163\ The review must commence within 10
days of the date of the event contract's listing.
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\163\ Under the proposed framework, within the 90 days, the
Director of the Division of Market Oversight shall provide to the
prediction market a written statement of concerns by day 15. By day
30, the prediction market may then submit a written response,
including proposed contract modifications and/or mitigating
safeguards. The Director of the Division of Market Oversight, with
the concurrence of the General Counsel, may submit a recommendation
to the Commission by day 60, provided simultaneously to the
prediction market. The prediction market may submit a response to
the recommendation by day 70. Under the proposed framework,
extensions are available only at the request of, or with the
agreement of, the prediction market.
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Under the proposed framework, by day 90, the Commission may issue
an order finding the contract contrary to the public interest. Such an
order must be supported by written findings that identify and analyze
the factors in proposed Sec. Sec. 40.11(a)(5) and 40.11(a)(6) on which
the Commission relied, weigh the relevant factors, and explain the
determination's consistency with prior Commission decisions or provide
a reasoned justification for any departure. Proposed Sec.
40.11(e)(1)(ii) includes a specific statement that if the Commission
does not issue an order at the end of a review period, the event
contracts subject to review may be, or continue to be, listed for
trading and accepted for clearing and the review shall be deemed
concluded. The Commission preliminarily believes that this provision
would allow for a more streamlined process by not requiring that the
Commission issue an order of approval and provide certainty in cases
where the Commission does not take any action at the end of the review
period.
This proposed framework reflects the Commission's preliminary view
that a determination under the Special Rule that event contracts are
contrary to the public interest has significant consequences, and that
the Commission's procedures should be calibrated accordingly. Such a
determination forecloses listing, trading, and clearing of the event
contracts, imposes sunk compliance costs on the submitting prediction
market, and eliminates the hedging, price-discovery, and information-
aggregation functions the event contracts might have served, along with
the reliance interests of market participants. In light of these
consequences, the proposed framework establishes procedural rights
designed to ensure that the prediction market's position is fully
presented and considered before the Commission acts. The Commission
also preliminarily believes that these procedures will also enhance the
quality of decision-making by ensuring that the record before the
Commission includes the prediction market's substantive response, if
any, to the Commission's reasoning.
In addition, the Commission is proposing to make certain amendments
to Sec. 40.11 to further align the language of the regulation with the
statutory text of the Special Rule, and to make certain technical
amendments to the regulation to enhance clarity and organization.
Proposed Sec. 40.11(a)(2) includes a reference to CEA section
1a(19)(i) because the Commission preliminarily believes this is the
correct cross reference to describe event contracts that are not
subject to the Special Rule. Proposed Sec. 40.11(a)(2) also uses the
word ``involve'' to reference the Enumerated Activities, to more
closely track the text of the Special Rule. Proposed Sec.
40.11(a)(2)(vi) reflects how the Commission preliminarily believes it
may determine that activities are similar to the Enumerated Activities.
For clarity, proposed Sec. 40.11(c)(3) specifically provides for the
Commission to notify the prediction market of the commencement of a 90-
day review. Throughout proposed Sec. 40.11, the text refers to
agreements, contracts, transactions, or swaps in the plural to match
the text of the Special Rule.
Finally, the Commission is proposing to add a provision to Sec.
40.7(a) that delegates to the Director of the Division of Market
Oversight, or the Director's designee, the authority to perform
ministerial and record-development functions under Sec. 40.11,
including service of notices, written determinations, and statements
and the development of staff recommendations.
The Commission requests comment on all aspects of its proposed
amendments to Sec. Sec. 40.7 and 40.11.
B. Event Contracts Within the Scope of the Special Rule
The text of the Special Rule states that it applies with respect to
``agreements, contracts, transactions, or swaps in excluded commodities
that are based upon the occurrence, extent of an occurrence, or
contingency (other than a change in the price, rate, value, or levels
of a commodity described in section 1a(2)(i) of [the CEA]).'' \164\ The
Commission preliminarily believes in understanding the scope of the
Special Rule, it is helpful to understand the
[[Page 35820]]
origin and scope of the term ``excluded commodity.''
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\164\ CEA sec. 5c(c)(5)(C)(i); 7 U.S.C. 7a-2(c)(5)(C)(i).
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The definition of ``excluded commodity'' was adopted in the CFMA as
part of provisions to permit off-exchange trading of swaps based on
financial commodities or commodities with an infinite supply.\165\ The
reasoning behind this change in the CFMA was that trading should not be
permitted in swaps based on agricultural commodities, certain metals
which had historically been subject to price manipulation, and physical
commodities for which the cash market is dependent on the futures
market for price discovery.\166\ But apart from these categories, swap
trading should be permitted for institutional investors within the
definition of ``eligible contract participant,'' which was also adopted
in the CFMA.
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\165\ While the CFMA does not have any official legislative
history, commentators generally agree that the excluded commodity
definition adopted in the CFMA was intended to implement a
recommendation in the Report of The President's Working Group on
Financial Markets, Over-the-Counter Derivatives Markets and the
Commodity Exchange Act, supra note 27 (PWG Report). See Derivatives
Regulation Sec. 2.02[7.C.ii].
\166\ See PWG Report at 16-17 (recommending that large financial
market participants be permitted to engage in bilateral swaps, so
long as the swap does not involve ``a non-financial commodity with a
finite supply'').
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The definition of ``excluded commodity'' in CEA section 1a(19) has
four clauses. Clause (i) includes rates, instruments, indices and
measures commonly understood to be financial commodities.\167\ Clause
(ii) includes any other index or measure of economic or commercial
risk, return, or value that is based on such financial commodities;
based on the value of a broad group of physical commodities; or based
on a commodity with no cash market.\168\ Clause (iii) includes any
index that qualifies as ``economic or commercial'' and is beyond the
control of any party to the relevant derivatives contract.\169\ Last,
clause (iv) includes any ``occurrence, extent of an occurrence, or
contingency'' of financial, commercial, or economic consequence that is
beyond the control of any party to the relevant derivatives contract
and is not based on a change in the price, rate, value, or level of a
``commodity not described in clause (i).'' \170\ The effect of the
cross-reference to clause (i) is that, for example, a change in crude
oil prices is not an occurrence which constitutes an excluded commodity
because crude oil is not described in clause (i); on the other hand,
clause (iv) means that a change in exchange rates is an occurrence
which constitutes an excluded commodity because exchange rates are
listed in clause (i).
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\167\ CEA sec. 1a(19)(i), 7 U.S.C. 1a(19)(i) (``an interest
rate, exchange rate, currency, security, security index, credit risk
or measure, debt or equity instrument, index or measure of
inflation, or other macroeconomic index or measure'').
\168\ CEA sec. 1a(19)(ii), 7 U.S.C. 1a(19)(ii) (``(ii) any other
rate, differential, index, or measure of economic or commercial
risk, return, or value that is--(I) not based in substantial part on
the value of a narrow group of commodities not described in clause
(i); or (II) based solely on one or more commodities that have no
cash market;'').
\169\ CEA sec. 1a(19)(iii), 7 U.S.C. 1a(19)(iii) (``any economic
or commercial index based on prices, rates, values, or levels that
are not within the control of any party to the relevant contract,
agreement, or transaction'').
\170\ CEA sec. 1a(19)(iv), 7 U.S.C. 1a(19)(iv) (``an occurrence,
extent of an occurrence, or contingency (other than a change in the
price, rate, value, or level of a commodity not described in clause
(i)) that is--(I) beyond the control of the parties to the relevant
contract, agreement, or transaction; and (II) associated with a
financial, commercial, or economic consequence.''). ``[C]lause (i)''
refers to CEA sec. 1a(19)(i).
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The Commission preliminarily believes that the increasing
generality of clauses (i) to (iv) of the excluded commodity definition
indicates a Congressional intent to include a very wide variety of
measures and occurrences in the definition. Clause (i) starts with
financial commodities, clause (ii) adds ``any other rate, differential,
index, or measure of economic or commercial risk, return, or value''
that is not based in substantial part on a ``narrow group'' of physical
(i.e., non-financial) commodities, clause (iii) adds any ``economic or
commercial index'' that is not under the control of a party to the
relevant derivatives contract, and clause (iv) brings in any event that
is beyond the control of any party to the relevant derivatives contract
and has financial, commercial or economic consequence (with the
exception for physical commodity price changes noted above). In
particular, the Commission notes that clauses (ii) and (iii) of the
definition are limited to ``economic or commercial'' measures or
indices, but clause (iv) uses the broader phrase ``financial,
commercial or economic consequence.'' Thus, the definition of excluded
commodity is clearly not limited to economic or commercial indices.
In adopting Sec. 40.11 in 2011, the Commission interpreted the
``excluded commodities'' falling within the scope of the Special Rule
to be those set forth in CEA section 1a(19)(iv), and accordingly
referenced CEA section 1a(19)(iv) in Sec. 40.11(a)(1)-(2) and Sec.
40.11(c).\171\ The Commission preliminarily does not see any reason to
limit the scope of the Special Rule in this way, as the statutory text
is not limited to only clause (iv) of CEA section 1a(19).
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\171\ While the adopting release did not discuss the basis for
this interpretation, it is likely that the Commission assumed that
Congress intended to incorporate the statutory language of the
``excluded commodity'' definition set forth in CEA sec. 1a(19)(iv),
since the Special Rule tracks the language of CEA sec. 1a(19)(iv) to
a large extent.
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Instead, proposed Sec. 40.11(a)(2) refers to all excluded
commodities based upon the occurrence, extent of an occurrence, or
contingency, with the exception of any change in the price, rate,
value, or levels of a commodity described in CEA section 1a(19)(i). The
Commission preliminarily believes that this exception gives effect to
the language in the Special Rule which excepts ``a change in the price,
rate, value, or levels of a commodity described in section 1a(2)(i) of
[the CEA]).'' \172\ There is no ``section 1a(2)(i)'' in the CEA, and
the Commission preliminarily believes the reference to this provision
in the Special Rule is a typographical or drafting error.\173\ Rather,
the Commission preliminarily believes that the reference to ``section
1a(2)(i)'' was intended by Congress to refer to the excluded
commodities described in CEA section 1a(19)(i), namely, an interest
rate, exchange rate, currency, security, security index, credit risk or
measure, debt or equity instrument, index or measure of inflation, or
other macroeconomic index or measure. This interpretation carves out
from the scope of the Special Rule event contracts based on a change in
the price, rate, value, or levels of these measures, indices, and
instruments.\174\
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\172\ CEA sec. 5c(c)(5)(C)(i); 7 U.S.C. 7a-2(c)(5)(C)(i).
\173\ CEA sec. 1a(2), 7 U.S.C. 1a(2), defines an ``appropriate
Federal banking agency,'' which is not relevant to the excluded
commodity definition.
\174\ The Commission understands that the phrasing in CEA sec.
1a(19)(iv), which removes from the excluded commodity definition any
``change in the price, rate, value, or level of a commodity not
described in clause (i)'' introduces some confusion. The point, as
noted above, is that changes in prices of commodities described in
clause (i) are excluded commodities, while changes in prices of
other commodities (e.g., physical commodities) are not excluded
commodities. Since physical commodity price changes are not excluded
commodities, they did not have to be excluded from the scope of the
Special Rule. On the other hand, because financial commodity price
changes are excluded commodities, it was necessary to exclude them
from the scope of the Special Rule. That is why it is appropriate
for the exception in the Special Rule to refer to changes to prices
that are described in the cross-referenced clause.
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The measures, indices, and instruments described in CEA section
1a(19)(i) served as underliers for a range of derivative contracts that
were broadly traded on CFTC-registered exchanges at the time of
enactment of the Special Rule.\175\ As such, the Commission believes
that it is unlikely that Congress
[[Page 35821]]
intended the heightened authority granted to the Commission in the
Special Rule to apply with respect to event contracts based on changes
in the price, rate, value or levels of these measures, indices, and
instruments.\176\
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\175\ See supra notes 67 to 71.
\176\ Consistent with the Commission's view that the reference
to ``section 1a(2)(i)'' in the Special Rule was intended by Congress
to refer to the excluded commodities described in CEA section
1a(19)(i), section 201(b) of the proposed CFTC Reauthorization Act
of 2019 included, as a technical correction to the CEA, the
replacement of the reference to ``section 1a(2)(i)'' with a
reference to ``section 1a(19)(i).'' CFTC Reauthorization Act of
2019, H.R. 6197, 116th Cong. (2d Sess. 2020).
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Last, the Commission notes two aspects of the Special Rule that
relate to its scope. First, the Special Rule encompasses ``agreements,
contracts, transactions, or swaps,'' meaning that it includes event
contracts that are listed as futures contracts, as well as event
contracts that are listed as swaps. Second, the Special Rule covers
such event contracts that are ``based upon the occurrence, extent of an
occurrence, or contingency.'' Since an event is the definitive
characteristic of a contract that is subject to the Special Rule, the
Commission preliminarily believes that in determining the scope of the
Special Rule, the focus should be on the event that underlies the event
contract, as will be discussed in the next section.
The Commission requests comment on all aspects of its preliminary
views on the scope of event contracts that are subject to the Special
Rule.
C. Contracts That ``Involve'' an Enumerated Activity
The Special Rule applies to agreements, contracts, or transactions
``that are based upon the occurrence, extent of an occurrence, or
contingency'' and that ``involve'' any of the Enumerated Activities.
The Commission preliminarily interprets the term ``involve'' in the
Special Rule to require that the settlement of the event contracts be
determined by an occurrence, the extent of an occurrence, or a
contingency in one of the Enumerated Activities.\177\ Therefore, the
Proposal includes the following text in proposed Sec. 40.11(a)(3):
``For purposes of paragraph (a)(2) of this section, agreements,
contracts, transactions, or swaps involve an activity if their
settlement is determined by an occurrence, extent of an occurrence, or
contingency in the activity.''
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\177\ For the avoidance of doubt, and as discussed in this
section, the Commission preliminarily believes that the Nadex Order
and Kalshi Order were incorrect in reasoning that event contracts
involve an Enumerated Activity when the event contracts viewed as a
whole relate to, or equate to, an Enumerated Activity.
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This interpretation follows from the three-step sequence set out in
the Special Rule that must occur before agreements, contracts,
transactions, or swaps are prohibited:
1. As discussed above, the agreements, contracts, transactions, or
swaps must be ``based upon the occurrence, extent of an occurrence, or
contingency;''
2. As discussed in this section, the agreements, contracts,
transactions, or swaps must ``involve'' any of the Enumerated
Activities; and
3. As discussed below, the Commission must determine that the
agreements, contracts, transactions, or swaps are contrary to the
public interest.
The role of the Enumerated Activities in this sequence is to filter
which event contracts are potentially subject to a public interest
determination. The Special Rule does not require the Commission to
determine whether the contract itself is or equates to an Enumerated
Activity. As noted earlier, it is the underlying activity that is the
subject of ``involve.''
The application of this test can be illustrated through several
examples. An event contract that settles on whether a specified
terrorist attack occurs at a specified location during a specified
period involves terrorism within the meaning of the Special Rule,
because the event contract's settlement is determined by an occurrence
within the terrorism activity. An event contract that settles on
whether a particular foreign head of state is killed during a specified
period involves assassination for the same reason. An event contract
that settles on whether Iran initiates armed conflict in the Strait of
Hormuz, or whether a specified non-state actor conducts an attack on
shipping in the Strait, would involve war or terrorism, because in
those event contracts the settlement-determining occurrence is within
the Enumerated Activity itself. By contrast, an event contract that
settles on whether a specified volume of crude oil transits the Strait
of Hormuz during a specified period does not involve war or terrorism,
even though the amount of oil flows through the Strait could change
based on military conditions, because the settlement-determining
occurrence is a measurement of commercial shipping activity rather than
an occurrence within a war or terrorism activity.
The Commission's proposed reading avoids surplusage. The Special
Rule's ``based upon'' and ``involve'' language describe complementary
aspects of a single event-focused concept: the event contract is based
upon an occurrence, and that occurrence must be in an Enumerated
Activity. An interpretation that treats ``involve'' as applying to the
event contract itself (as distinct from the underlying occurrence)
would render ``based upon'' superfluous.
The Commission's proposed interpretation is also consistent with
the reasoning of the District Court for the District of Columbia, which
held that the term ``involve'' in the Special Rule refers to ``the
event being offered and traded'' under an event contract, not the event
contract itself.\178\
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\178\ KalshiEX, 2024 U.S. Dist. LEXIS 163925, at *29.
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The Commission preliminarily believes that the Nadex Order erred in
this regard. Rather than examining whether the underlying event fell
within the Enumerated Activity, the Nadex Order interpreted the Special
Rule to apply when ``the contract, considered as a whole, involves one
of those [the enumerated] activities'' and therefore considered whether
the contract itself was gaming.\179\ The Nadex Order concluded that
trading in the contract constituted gaming, but it did not find that
the event on which the contract was based was an occurrence within a
gaming activity. In doing so, the Nadex Order reasoned that ``taking a
position in a Political Event Contract fits the plain meaning of a
person staking `something of value upon a contest of others,' '' which
is an element of what the Nadex Order considered to be gaming.\180\ But
that reasoning examines the nature of the trading--not the nature of
the underlying event. Therefore, the Commission preliminarily believes
that the Nadex Order misapplied the Special Rule, which, by its terms,
requires the Commission to determine whether the event contracts
involve an Enumerated Activity, not whether trading in the event
contracts is an Enumerated Activity.
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\179\ See Nadex Order at 2.
\180\ Id. at 3.
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The approach in the Nadex Order is contrary to the structure of the
Special Rule. Consider especially the Enumerated Activities of
terrorism, assassination and war. If the statute's ``involve''
requirement were satisfied only when trading in the event contracts is
or equates to terrorism, assassination or war, then the Special Rule
would never apply to contracts involving those activities, because
trading in event contracts does not constitute terrorism,
assassination, or war.\181\ As a corollary,
[[Page 35822]]
if one asserted that the Special Rule applied because the event
contract itself was ``gaming,'' then the terrorism, assassination and
war categories would be surplusage. The only coherent question--and the
only question the statute asks--is whether the occurrence, extent of an
occurrence, or contingency on which the contract is based is an
occurrence, extent of an occurrence, or contingency in terrorism,
assassination, or war activities.
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\181\ See KalshiEX, 2024 U.S. Dist. LEXIS 163925, at *30
(```[S]tandard principle[s] of statutory construction provide[ ]
that identical words and phrases within the same statute should
normally be given the same meaning' and effect''; citing Powerex
Corp. v. Reliant Energy Servs., Inc., 551 U.S. 224 (2007)).
---------------------------------------------------------------------------
The Nadex Order's approach also leads to illogical results. As
discussed below in relation to the definition of the term ``gaming,''
if the Special Rule's application were interpreted to depend on whether
trading in an event contract is or equates to gaming, the Special Rule
could potentially apply to any event contract because gaming could be
interpreted to include the staking of money on a contingency.\182\
Similarly, because some states prohibit the staking of money on a
contingency,\183\ trading in the event contract would appear to be
illegal under those laws--except that such state laws are preempted by
the CEA as applied to event contracts traded on CFTC-registered
entities.
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\182\ As discussed in connection with the proposed definition of
``gaming,'' the Commission preliminarily believes that gaming does
not include all activities that constitute the staking of money on a
contingency, but rather only such activities that are games--i.e.,
have a recreational or entertainment purpose. See infra notes 199 to
202 and accompanying text.
\183\ See, e.g., N.H. Rev. Stat. Ann. sec. 647:2(II)(d),
available at https://www.gencourt.state.nh.us/rsa/html/lxii/647/647-2.htm (last visited May 19, 2026) (banning gambling and defining it
as, ``to risk something of value upon a future contingent event not
under one's control or influence . . .'').
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Last, a wide-ranging inquiry into whether anything about event
contracts ``involves'' one of the Enumerated Activities (as opposed to
an inquiry focused on the event underlying the contract) would greatly
expand the inquiry under the Special Rule and be vulnerable to
arbitrary and inconsistent application.
The Commission preliminarily believes that the better approach is
to avoid an interpretation of the statute that is inconsistent with its
structure and would produce overbroad or illogical results.
Interpreting the Special Rule to apply when the event contracts'
settlement is determined by an occurrence, extent of an occurrence, or
contingency within an Enumerated Activity aligns with the structure of
the statute and properly limits scope for the Special Rule to the
circumstances Congress intended it to govern.
The Commission requests comment on all aspects of its preliminary
views on the scope of activities that event contracts ``involve.''
D. Determining the Scope of Enumerated Activities
The Commission preliminarily believes that it would be helpful for
prediction markets and the general public to know which factors the
Commission will apply in determining whether particular event contracts
are subject to the Special Rule. In other words, these factors would
describe the scope of activities that are encompassed within each of
the Enumerated Activities. The Commission is therefore proposing to add
Sec. 40.11(a)(4) which sets out the factors that the Commission will
apply in determining whether event contracts involve any Enumerated
Activity and are therefore within the scope of the Special Rule. The
Commission notes that event contracts involving more than one
Enumerated Activity would also be within the scope of the Special Rule.
In the case of the Enumerated Activity of ``gaming,'' the
Commission also preliminarily believes it would be useful to adopt a
rule to define the term ``gaming'' because it requires further
clarification.
The Commission notes that a prediction market would be able to
receive a definitive resolution of any questions concerning the
applicability of Sec. 40.11(a)(1) by submitting a contract for
Commission approval under Sec. 40.3. CFTC staff also may, at its
discretion and upon a request from a prediction market, review a draft
contract submission or proposal and provide guidance concerning the
contract's compliance with the CEA and CFTC regulations, including
Sec. 40.11(a)(1).\184\
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\184\ The Commission notes, however, that staff's guidance
concerning drafts and proposals is preliminary and non-binding. CFTC
staff formally reviews contracts only at such time as a compliant
submission is provided to the Commission pursuant to Sec. 40.2 or
Sec. 40.3.
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1. Activity That Is Unlawful Under any Federal or State Law
The Commission preliminarily does not believe that it is necessary
to adopt a rule to define ``activity that is unlawful under any Federal
or State law'' at this time. Instead, proposed Sec. 40.11(a)(4)(i)
provides that the Commission would consider the relevant laws and
whether the occurrence, extent of an occurrence, or contingency on
which an event contract is based occurs in an activity that is unlawful
under any Federal or State law. Additionally, proposed appendix F to
part 40 describes how the Commission would consider the relevant
factors in determining whether event contracts involve this Enumerated
Activity.
The proposed factors explain that in circumstances where there is a
question regarding whether an event contract submitted to the
Commission involves activity that is unlawful under any Federal or
State law, the Commission would survey the relevant law. Where an
activity is illegal under the laws of some States, but not others, the
Commission would consider whether the discrepancy relates to any of the
factors that would apply in determining if the event contract is
contrary to the public interest. For example, if an activity is illegal
under the laws of some States, and the relevant factors suggest that
event contracts involving that activity would be found to be contrary
to the public interest, then the Commission would be more likely to
find that the event contract involves unlawful activity and is within
the scope of the Special Rule.\185\
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\185\ The Commission acknowledges that many state codes include
laws prohibiting certain activity that, while not repealed, are
generally considered archaic and are not enforced. The Commission
believes that it is unlikely that a prediction market would seek to
list for trading or accept for clearing an event contract involving
such a law. To the extent that a prediction market does make a
submission to the Commission regarding a contract that may involve
such a law, the Commission believes that it may be appropriate to
commence a review of the contract pursuant to Sec. 40.11(c) to
evaluate whether, in light of the relevant facts and circumstances,
it is appropriate to recognize the contract as involving ``activity
that is unlawful under any . . . State law'' for purposes of Sec.
40.11(a)(1).
---------------------------------------------------------------------------
The Commission notes that the Kalshi Order evaluated whether the
subject event contracts involved an activity that is unlawful under
Federal or State law, and found that betting or wagering on elections
is prohibited by statute or common law in many states.\186\ For the
reasons discussed above, the Commission preliminarily believes that the
Kalshi Order's reasoning on this point was incorrect. The Kalshi Order
asked whether the act of trading the event contract equated to an
activity unlawful under State law. The Commission believes that the
relevant question under the Special Rule, however, is whether the
occurrence, extent of an occurrence, or contingency on which an event
contract is based occurs in an Enumerated Activity. Under that reading,
the event contracts at issue in the Kalshi Order would not involve
activity that is unlawful under Federal or State law, because the
occurrence, extent of an occurrence, or
[[Page 35823]]
contingency on which the subject event contracts were based (outcomes
of political elections) did not occur in an Enumerated Activity
(activity unlawful under State law).
---------------------------------------------------------------------------
\186\ Kalshi Order at 11-12.
---------------------------------------------------------------------------
The application of this interpretation can be illustrated through
several examples. An event contract that settles on whether an
individual will murder someone involves an activity that is unlawful
under State law, because the settlement-determining occurrence--the
murder--is itself within unlawful activity. Such an event contract
presents the precise concerns that animate the Special Rule's inclusion
of unlawful activity. By contrast, an event contract that settles on
whether Bernard Madoff is convicted of securities fraud by a specified
date does not involve activity that is unlawful within the meaning of
the Special Rule. The settlement-determining occurrence is the entry of
a judgment of conviction by the court, which is a lawful judicial act.
Although the underlying conduct alleged in the indictment--the
operation of a multi-decade Ponzi scheme that caused tens of billions
of dollars in investor loss--would, if proven, constitute unlawful
activity, the event contract's settlement is determined by the court's
judgment rather than by the underlying conduct itself. The same
analysis applies to an event contract settling on whether a defendant
in a specified federal securities-fraud prosecution is sentenced to a
term of imprisonment exceeding a specified threshold, or whether a
specified judgment of conviction is affirmed on appeal by a specified
court. Such event contracts may have meaningful commercial and
informational utility, including for participants seeking to hedge
price exposure to the resolution of large financial-fraud proceedings
that affect counterparty risk, claims against bankruptcy estates, and
the timing of recovery distributions to victims.
2. Terrorism, Assassination, and War
The Commission preliminarily does not believe that it is necessary
to adopt a rule to define ``terrorism,'' ``assassination,'' or ``war''
at this time. Instead, proposed Sec. 40.11(a)(4)(ii) provides that the
Commission would consider the extent to which the event contracts
involve violent or destructive activities occurring outside the United
States with an element of coercion or intimidation and some
relationship to political or social groups or ideologies, intentional
killing of an individual outside the United States, or belligerent
military activities and violent activities by organized groups,
respectively. Additionally, proposed appendix F to part 40 describes
how the Commission would consider these factors in determining whether
event contracts involve these Enumerated Activities.
Generally, the Commission preliminarily intends to interpret these
terms broadly and without making distinctions based on criteria under
international law, such as whether a war has been formally declared.
The Commission also notes that terrorism and assassination would be
unlawful under Federal or State law, and the Commission generally
interprets these Enumerated Activities to encompass events occurring
outside the United States, including against non-U.S. persons.\187\
---------------------------------------------------------------------------
\187\ For clarity, the Commission notes that event contracts
involving more than one Enumerated Activity would be subject to the
Special Rule.
---------------------------------------------------------------------------
The Commission notes that common definitions of terrorism include
the use of violence to coerce or intimidate in order to obtain demands
or with political aims.\188\ The proposed factors to define terrorism
would not require identification of a specific aim or demand, or
identification of a specific responsible group. Rather terrorism would
include all violent or destructive activities occurring outside the
United States with an element of coercion or intimidation and some
relationship to political or social groups or ideologies. The
Commission preliminarily believes that terrorism encompasses
cyberterrorism and other forms of attack that cause substantial
destruction or disruption through non-physical means, where the attack
is conducted with an element of coercion or intimidation and bears a
relationship to political or social group or ideologies. Since unlawful
activity inside the United States is an Enumerated Activity, it is
irrelevant whether a particular unlawful activity in the United States
constitutes domestic terrorism.
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\188\ See Oxford English Dictionary, ``terrorism'' (n.) (``The
unofficial or unauthorized use of violence and intimidation in the
pursuit of political aims; . . . (now usually) such practices used
by a clandestine or expatriate organization as a means of furthering
its aims.'') (last modified Sept. 2025), available at https://doi.org/10.1093/OED/7593421629; Merriam-Webster.com Dictionary,
``terrorism'' (n.) (``the systematic use of terror especially as a
means of coercion'') and ``terror'' (``violence or the threat of
violence used as a weapon of intimidation or coercion''), available
at https://www.merriam-webster.com/dictionary/terrorism (last
visited May 17, 2026).
---------------------------------------------------------------------------
Accordingly, an event contract that settles on whether the Islamic
State conducts an armed attack causing more than ten civilian deaths in
Baghdad during June 2026 involves terrorism within the meaning of the
Special Rule. The settlement-determining occurrence is the attack
itself, which is within the terrorism activity. An event contract that
settles on whether a coordinated cyberattack attributed by the United
States Cybersecurity and Infrastructure Security Agency to a state-
sponsored or politically motivated actor causes the operational
shutdown of electricity transmission in New York for more than twenty-
four hours sometime in 2026 involves terrorism. By contrast, an event
contract that settled on whether the Transportation Security
Administration implements enhanced screening procedures at certain
airports does not involve terrorism, because the settlement-determining
occurrence is a governmental administrative action, which is a lawful
exercise of agency authority, rather than any act of terrorism.
The factors to define assassination focus on whether the target of
the attack is a prominent person and whether there is some relationship
to a political or social motive.\189\ The Commission preliminarily
believes that any person who is the subject of an event contract should
be considered to be prominent, and that the relationship to a political
or social motive should be interpreted broadly. Therefore, the
Commission proposes that event contracts involving any intentional
killing of an individual outside the United States would involve
assassination.
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\189\ See Oxford English Dictionary, ``assassination'' (n.)
(``murder of a person (esp. a prominent public figure) in a planned
attack, typically with a political or ideological motive, sometimes
carried out by a hired or professional killer'') (last modified
Sept. 2025), available at https://doi.org/10.1093/OED/5671820672;
Merriam-Webster.com Dictionary, ``assassination'' (n.) (``murder by
sudden or secret attack often for political reasons''), available at
https://www.merriam-webster.com/dictionary/assassination (last
visited May 17, 2026).
---------------------------------------------------------------------------
Examples illustrate this definition. An event contract that settles
on whether Nicol[aacute]s Maduro dies as a result of an attack by an
organized political or military faction by December 31, 2026, involves
assassination. The settlement-determining event--his death--is an
occurrence within the assassination activity. By contrast, an event
contract that settles on whether Maduro will lose an election does not
involve assassination, war, or any other Enumerated Activity.
The Commission preliminarily intends that the factors to define war
would encompass all belligerent military activities and violent
activities by organized groups.\190\ That is, this Enumerated Activity
is not limited to declared wars and would include the
[[Page 35824]]
belligerent activities of both government and civil militias. It would
also include civil wars and civil unrest by organized groups. Because
the Special Rule is applied to particular event contracts, the
Commission preliminarily believes that it is not appropriate to apply a
temporal or quantitative threshold to determine if belligerent military
or violent activities constitute ``war.'' For example, if event
contracts were certified about a single belligerent military activity,
it would not be appropriate to examine whether that activity was
isolated or rather a part of a campaign over a certain time.\191\
Instead, the proposed factors explain that event contracts about a
single belligerent military or organized violent activity would involve
war.
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\190\ By referring to belligerent military activity, the
Commission does not intend to include any non-belligerent military
activities, such as routine deployments, training or disaster relief
assistance.
\191\ The Commission notes that some definitions of ``war''
refer to a series of actions over time. See, e.g., Oxford English
Dictionary, ``war'' (n.) (``Armed conflict . . . typically
characterized by a campaign or series of campaigns conducted over a
period of time'') (last modified Mar. 2026), available at https://doi.org/10.1093/OED/1011940408. However, at the time an event
contract is certified it may not be clear whether the underlying
event relates to a military campaign (e.g., it may be the first
event in a campaign).
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Several examples again illustrate this definition. An event
contract that settles on whether the Russian Federation conducts a
missile or drone strike against a target within the city limits of Kyiv
during the second quarter of 2026 involves war within the meaning of
the Special Rule, because the settlement-determining occurrence is
itself a military activity within the war activity. An event contract
that settles on whether the People's Republic of China conducts a naval
or amphibious military action against the territory of Taiwan likewise
involves war, regardless of whether such action is characterized as a
declared war or a more limited military operation, because the event
contract's settlement turns on the occurrence of a belligerent military
activity by an organized armed force.
By contrast, an event contract that settles on whether the front-
month Brent crude oil futures contract on the Intercontinental Exchange
closes above $120 per barrel on any trading day during the second
quarter of 2026 does not involve war within the meaning of the Special
Rule, even though oil prices are sensitive to military and geopolitical
conditions. The settlement-determining occurrence is the published
settlement price of an exchange-traded futures contract, which is a
measurement produced by a registered futures exchange.
The foregoing analysis addresses event contracts whose settlement-
determining occurrence falls within an Enumerated Activity on the face
of the event contract's terms. A separate question arises when an event
contract's settlement-determining occurrence is facially neutral--that
is, when the occurrence on which settlement turns can be reached
through multiple causal pathways, at least one of which falls within
terrorism, war, or assassination. In such cases, the Commission would
understand the event contract to involve the Enumerated Activity unless
the event contract's terms specify the qualifying settlement pathways
with sufficient detail to exclude the Enumerated-Activity pathway. An
event contract drafted at a level of generality that permits settlement
on the basis of an act of terrorism, war, or assassination would be
treated as involving that activity. This approach reflects the
Commission's preliminary view that the Special Rule's protective
purpose would be undermined if prediction markets could avoid its
application by drafting settlement conditions broadly enough to
encompass Enumerated-Activity pathways alongside non-Enumerated ones.
A few examples again illustrate the principle. An event contract
that settles on whether Maduro is out of office by a certain date,
without further specification of the qualifying mechanisms, involves
assassination within the meaning of the Special Rule because
assassination is among the pathways by which the settlement condition
can be satisfied. The same event contract, redrafted to settle only on
whether the named individual ceases to hold office ``by reason of
electoral defeat, resignation, constitutional removal, negotiated
departure, or natural death,'' would not involve assassination, because
the event contract's terms specify the qualifying pathways and exclude
the Enumerated Activity pathway. Similarly, an event contract that
settles on whether Iran's uranium enrichment facilities remain
functional as of a certain date would involve war, because an activity
of war is among the pathways by which the facility could cease to
remain standing; the same event contract, redrafted to settle only on
whether the facility is demolished pursuant to a government order, or
to negotiated terms of a diplomatic deal, would not.
3. Gaming
Neither the CEA nor the Commission's rules define the term
``gaming.'' In the preamble to the adoption of Sec. 40.11, the
Commission acknowledged that ``the term `gaming' requires further
clarification,'' and said that the Commission may issue a future
rulemaking concerning event contracts that involve ``gaming.'' \192\
---------------------------------------------------------------------------
\192\ See Provisions Common to Registered Entities, 76 FR 44776,
44785 (July 27, 2011).
---------------------------------------------------------------------------
The Commission preliminarily agrees with the District Court for the
District of Columbia that ``the word `gaming' in the statute carries
its ordinary, plain meaning and involves playing a game.'' \193\ ``
`When a term goes undefined in a statute, [courts] give the term its
ordinary meaning.' . . . To discern that meaning, courts often begin
with a survey of dictionaries. . . . Dictionaries define gaming' as
`the practice or activity of playing games for stakes' and `the
practice or activity of playing games.' . . . [There is] no reason to
stray from the ordinary definitions of `gaming,' which are `the
practice or activity of playing games' and `playing games for stakes.'
'' \194\
---------------------------------------------------------------------------
\193\ KalshiEX, 2024 U.S. Dist. LEXIS 163925, at *20.
\194\ Id. at *22 (citations omitted). See also, e.g., 25 CFR
part 502 (defining categories of ``gaming'' for purposes of the
Indian Gaming Regulatory Act in terms of various games such as
bingo, card games, casino games, sports games and lotteries).
---------------------------------------------------------------------------
The Commission acknowledges that it previously advanced a far
broader definition of ``gaming'' to the District Court for the District
of Columbia. Specifically, the Commission argued that ``gaming'' is
synonymous with ``gambling''--that is, `` `the practice or activity of
betting' without any limitation of what is being bet on.'' \195\ But in
that view, the District Court concluded, ``all event contracts would be
subject to review under the special rule because they all involve
purchasing (and thus risking money on) some contingent event with the
hope of receiving a payoff.'' \196\ And ``[g]iven that the CEA
authorizes the CFTC to review event contracts only if they involve
specific, enumerated activities, any definition of `gaming' that could
be read to subject all event contracts to the special rule just cannot
be right.'' \197\ The Commission's proposed definition does not repeat
its previous error and instead implements the more natural
interpretation described by the District Court.
---------------------------------------------------------------------------
\195\ KalshiEX, 2024 U.S. Dist. LEXIS 163925, at *8.
\196\ Id.
\197\ Id.
---------------------------------------------------------------------------
In interpreting ``gaming,'' the Commission preliminarily considers
it important to recognize what the Special Rule's other Enumerated
Activities describe. Terrorism, assassination, war, and unlawful
activity each describe activities that happen in the world: wars are
fought, assassinations are carried out, crimes are committed. The term
``gaming'' must play the same
[[Page 35825]]
grammatical and functional role in the statute. ``Gaming'' is the game
itself, the activity that occurs.
This matters for two reasons. First, this structural reading is
essential to giving effect to the Special Rule's operative text. As
discussed above in connection with the term ``involve,'' the Commission
interprets the Special Rule as asking whether event contracts'
settlements are determined by an occurrence in an Enumerated Activity.
That inquiry presupposes a distinction between the event contract and
the underlying activity to which it refers. Enumerated Activities must
therefore be activities in the world that event contracts can
reference.
A definition that characterizes ``gaming'' as a property of the
event contract itself (for example, ``the act of risking something of
value, especially money, for a chance to win a prize'') cannot
coherently be applied because it has no limiting principle. Under such
a definition, every event contract would involve ``gaming'' by
definition, because every event contract stakes value on a contingent
outcome. The ``involve'' inquiry would collapse into a tautology: the
event contract involves gaming because the event contract is gaming.
The Special Rule's requirement of a distinction between the event
contract and the underlying activity would be erased, contrary to the
canon against surplusage. Likewise, the other Enumerated Activities--
activity that is unlawful under any Federal or State law, terrorism,
assassination, war, and other similar activity determined by the
Commission to be contrary to the public interest--would be surplusage
if every event contract involved gaming by definition.
Some commenters on the ANPRM suggested that ``gaming'' should be
defined in terms of elements associated with gambling.\198\ The
Commission preliminarily believes, however, that a wagering- or
gambling-centered definition of gaming is overbroad.\199\ Ordinary
definitions of ``gambling'' include ``the act of risking something of
value, especially money, for a chance to win a prize.'' \200\ If this
definition of gaming built around wagering were implemented, some could
argue that the definition should apply to all event contracts and
render the Special Rule's ``gaming'' category limitless.\201\
Therefore, that definition of gaming is incompatible with the Special
Rule's structure.\202\ The Commission preliminarily believes the
coherent reading is the one the ordinary meaning of the word naturally
supplies: gaming is the game itself--the activity in which occurrences,
the extent of occurrences, or contingencies determine settlement.\203\
---------------------------------------------------------------------------
\198\ See, e.g., Letter from Kalshi, Inc. 20 (Apr. 30, 2026);
Letter from Amadeus Brandes 1-2 (Apr. 13, 2026); Letter from Better
Markets 7-8 (Apr. 30, 2026).
\199\ The Commission acknowledges that in some dictionaries, the
primary definition of the term ``gaming'' is playing games for
stakes, i.e., gambling. See Merriam-Webster.com Dictionary,
``gaming'' (n.) (``1. the practice or activity of playing games for
stakes, 2. the practice or activity of playing games (such as board
games, card games, or video games''), available at https://www.merriam-webster.com/dictionary/gaming (last visited May 17,
2026); Oxford English Dictionary, ``gaming'' (n.), (``1.a. The
action of engaging in games or entertainments; merrymaking; sport.
Now rare. 1.b. The action or practice of playing games, as cards,
dice, etc., for stakes. 1.c. The playing of war-games or role-
playing games. 1d. The playing of computer (video, etc.) games.'')
(last modified Mar. 2026), available at https://doi.org/10.1093/OED/1195200884. However, the Commission also notes that these
definitions include a variety of activities and do not directly
equate gaming with gambling. For example, if the dictionary
definitions were followed strictly, e-sports, in which individuals
play video games competitively on a professional basis, would be an
Enumerated Activity, but professional sports played athletically
would not--a distinction which does not have any apparent basis.
\200\ Black's Law Dictionary, ``gambling'' (12th ed. 2024).
\201\ This is the position of the District Court in the Kalshi
case. See supra note 197 and accompanying text.
\202\ The Nadex Order equated gaming with gambling, reasoning
that the terms ``are used interchangeably in common usage,
dictionary definitions and several state statutes.'' Nadex Order at
2; see also Kalshi Order at 8-9 (applying essentially the same
reasoning to equate gaming with gambling). The Commission
preliminarily believes that this interpretation was incorrect, for
reasons discussed here.
\203\ Also, the Commission preliminarily believes that
interpreting the term ``gaming'' to mean only wagering by
individuals on the outcome of games would be cumbersome to apply. It
would be difficult to define and validate individuals' actions in
order to base event contracts on the wagering activity.
---------------------------------------------------------------------------
Under this approach, the word ``gaming'' derives from ``game,''
which in turn is a word with many nuances and meanings.\204\ The
Commission preliminarily believes that the meaning of ``game'' relevant
to the Special Rule encompasses the activities that are games in common
parlance--sports games, athletic competitions and recreational games
including games of chance. Rather than simply listing examples of games
or describing this category using a multifactor approach, the
Commission proposes to adopt a specific definition of the term
``gaming'' in Sec. 40.11.
---------------------------------------------------------------------------
\204\ The Commission notes that the Merriam-Webster.com
Dictionary definition of the noun ``game'' has 20 categories and
subcategories of meaning. The Oxford English Dictionary definition
has 22 categories.
---------------------------------------------------------------------------
The Commission intends that this definition will capture
conceptually these types of games and preliminarily believes that a
rule defining the term ``gaming'' will be useful in the future because,
as new event contracts reference different activities, prediction
markets, market participants and Commission staff will need an easily
applied standard to determine if those activities constitute gaming.
The Commission's definition of the term ``gaming'' in the Proposal is
limited to the Special Rule context and does not purport to interpret
or displace any other federal or state statutory regime using the same
or a related term.
Proposed Sec. 40.11(b) sets out the following definition: ``Gaming
means 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 Commission derived this definition from dictionary definitions
of the term ``game'' to mean ``a physical or mental competition
conducted according to rules with the participants in direct opposition
to each other'' and ``activity engaged in for diversion or amusement,''
\205\ or ``an activity which provides amusement or fun'' and ``a
contest or competition, governed by rules of play, according to which
victory or success may be achieved through skill, strength, or good
luck.'' \206\
---------------------------------------------------------------------------
\205\ Merriam-Webster.com Dictionary, ``game'' (n.), available
at https://www.merriam-webster.com/dictionary/game (last visited May
17, 2026).
\206\ Oxford English Dictionary, ``game'' (n.), (last modified
Mar. 2026), available at https://doi.org/10.1093/OED/3374114774.
---------------------------------------------------------------------------
As noted above, the Commission aims to capture the activities that
are games in common parlance. To do so, the purposes for which
participants typically engage in the activity must be an element of the
definition.\207\ The Commission intends that the first clause of the
proposed definition--a typical purpose of ``recreation or to entertain
others''--will reflect the dictionary definitions' reference to
amusement and also capture professional sports, which are commonly
understood to be games. By looking to the typical purpose of the
activity, the proposed definition acknowledges that there may be
atypical circumstances where participants have different purposes for
engaging in an activity that is a game in common
[[Page 35826]]
parlance, but the activity should still be encompassed in ``gaming.''
---------------------------------------------------------------------------
\207\ The Commission notes that, as discussed further below, a
definition of ``gaming'' to encompass any competition with rules and
measurable outcomes depending on skill, without considering the
purpose of the activity, would be very broad and contrary to the
common understanding of games.
---------------------------------------------------------------------------
The Commission intends that the term ``recreation'' in the
definition would include many elements, such as when participants
engage in the activity for the simple pleasure of the activity, the
personal satisfaction of meeting a challenge, and the enjoyment of
competing against others. And to the extent professional participants
are not engaged in recreation, they are engaged in gaming to entertain
others.\208\ The proposed definition encompasses a mix of recreational
and entertainment purposes, as well as the variety of purposes subsumed
within ``recreation.'' \209\
---------------------------------------------------------------------------
\208\ The Commission understands that professional athletes are
paid or receive monetary compensation and are therefore motivated by
the opportunity to earn an income. Nonetheless, the Commission
preliminarily believes it is accurate, and in accordance with common
understanding, to say that the purpose of the participants in a
professional sporting activity is typically to entertain an audience
(and also to gain personal satisfaction through achievement). The
salary or compensation that the participants receive is a result of
fulfilling the entertainment purpose.
\209\ The Commission notes that a recreational or entertainment
purpose is not contrary to the activity having financial or economic
consequences. Recreation and entertainment are large parts of the
U.S. economy.
---------------------------------------------------------------------------
That ``gaming'' must be governed by rules simply conveys what the
Commission believes to be the commonsense understanding of a game and
conforms to the dictionary definitions cited above.
To be covered by the Special Rule, the Commission preliminarily
believes that the activity must have measurable occurrences or
outcomes. These occurrences in the game or outcomes at the end of a
game would be the potential bases for event contracts. And, in keeping
with the recreational or entertainment purpose of the activity, the
occurrences or outcomes must depend on luck, skill or athletic ability
during the activity. Thus, gaming includes all games of chance (e.g.,
roulette), games requiring skill (e.g., chess), and games of mixed
chance and skill (e.g., poker). The definition includes both skill and
athletic ability to be clear that gaming includes all sports, including
e-sports and sports where judges rank participants based on their skill
or athletic ability during the activity.
On the other hand, if the outcome of the activity depends on other
factors such as judges' evaluation of the participants' merit or
qualifications on a broader basis than a certain activity, it is not
gaming.\210\ The requirements that gaming have a recreational or
entertainment purpose, and that the occurrences or outcome of the
activity depend on the participants' luck, skill, or athletic ability
during the activity, distinguish gaming from other competitive
activities. This Proposal uses the term ``contest'' to refer to an
activity where participants compete for a prize, honor, award or
position based on their qualifications or merit displayed in general or
over an extended period. These contests are not gaming.
---------------------------------------------------------------------------
\210\ For example, a figure skating competition is gaming
because the skaters--the participants in the activity--are doing so
for recreation and to entertain others. Under the rules of the game,
judges rank the participants based on an evaluation of their skill
and athletic ability displayed in the competition. On the other
hand, an award of ``figure skater of the year'' based on a vote or
panel of judges is a contest, not gaming, if its purpose is to honor
the person who the judges assess to have displayed the best overall
figure skating ability over the past year.
The same distinction would apply whether the judges are
individual people or algorithms developed by the organizers of the
event. If the outcome is decided by algorithms based only on skill
and ability during the activity, it would be gaming. If the
algorithm considers other factors, it would not be gaming.
---------------------------------------------------------------------------
Political elections illustrate the distinction between gaming, as
defined in the Proposal, and contests.\211\ Elections typically serve
the purpose of selecting political leadership, not recreation or
entertainment. Their outcomes do not turn on the participants' luck,
skill, or athletic ability during the election itself, but rather on
voters' judgment regarding who should hold office, informed by
considerations beyond the discrete election period.\212\ Thus,
political elections are not gaming.
---------------------------------------------------------------------------
\211\ For clarity, and as discussed in this section, the
Commission preliminarily believes that the Nadex Order and the
Kalshi Order were incorrect to find that event contracts involving
political elections were event contracts that involve gaming.
\212\ It would be cynical, at best, to say that a person won a
political election because they got lucky or were more skillful at
convincing voters to vote for them.
---------------------------------------------------------------------------
The District Court for the District of Columbia reached the same
conclusion, reasoning that an event contract on whether a chamber of
Congress will be controlled by a specific party in a given term
involves ``elections, politics, Congress, and party control'' and does
not ``bear any relation to any game--played for stakes or otherwise.''
\213\
---------------------------------------------------------------------------
\213\ KalshiEX, 2024 U.S. Dist. LEXIS 163925, at *38-39.
---------------------------------------------------------------------------
Similarly, contests like the Nobel Prize and the Academy Awards are
not gaming. The outcome of these contests depends on electors' judgment
on who should receive an award based on a range of considerations
beyond the participants' luck, skill, or athletic ability displayed
during the contest. Because the award turns on evaluative judgments,
not on measurable occurrences dependent on the participants' skill or
athletic ability in the activity itself, it is a contest, not gaming.
Mere association with athletic performance does not change this
analysis. For example, the Cy Young Award, which is presented annually
by the Baseball Writers' Association of America to the two best
baseball pitchers, is not gaming.\214\ Although players are recognized
for their athletic performance during the season, the outcome is
ultimately determined by the judgment of a panel of voters, who assess
overall performance without being strictly limited to occurrences in
any game or games. On the other hand, an event contract on which
baseball pitcher will record the most strikeouts in a season is gaming.
Its outcome depends on a measurable outcome of the participants' skill
and athletic ability in games--i.e., who records the most strikeouts.
---------------------------------------------------------------------------
\214\ See Baseball Reference, Cy Young Award, available at
https://www.baseball-reference.com/bullpen/Cy_Young_Award (last
visited May 19, 2026).
---------------------------------------------------------------------------
The Commission also notes that under the proposed definition, if an
activity is not gaming as defined above, the mere fact that gambling
occurs in relation to that activity does not make it gaming. For
example, if gambling occurs on who will win the Nobel Prize, that
gambling does not change the fact that the Nobel Prize contest is not
gaming, and event contracts based on who will win the Nobel Prize would
not be subject to the Special Rule.\215\ In other words, the Commission
preliminarily believes that the definition of gaming in Sec. 40.11
should be limited to activities that are games.
---------------------------------------------------------------------------
\215\ The Commission notes that the contrary interpretation
would be illogical and difficult to apply. That is, if bets were
initially not offered on the Nobel Prize contest, then it would not
be gaming, but as soon as bets were offered, the activity would
``become'' gaming. The Commission believes that whether an activity
is gaming should depend on the activity itself, not on other things
occurring around or in connection with the activity.
---------------------------------------------------------------------------
The Commission's proposed definition focuses on the gaming activity
itself. Whether event contracts involve gaming turns on the ``involve''
analysis discussed above; an event contract involves gaming if its
settlement is determined by the occurrence, extent of an occurrence, or
contingency in a gaming activity. The outcome of a game is an
occurrence in a game. Accordingly, gaming includes events happening in
games but does not include events occurring in connection with or
around games. An event contract on whether a football player
[[Page 35827]]
will score a certain number of touchdowns in a game involves gaming:
settlement is determined by an occurrence in the football game. An
event contract on attendance at the football game does not involve
gaming: settlement is determined by ticket-purchasing decisions by
prospective attendees, not by an occurrence in the game itself.
Similarly, an event contract on whether a particular athlete will win a
gold medal at the Olympic Games involves gaming: settlement is
determined by a contingency in the Olympic athletic event itself. An
event contract on which city will host future Olympic Games does not
involve gaming: settlement is determined by the International Olympic
Committee's host-selection decision, which is a political and economic
decision rather than occurrence in any gaming activity. The ``involve''
analysis, together with the definition of gaming, distinguishes event
contracts that the Special Rule addresses from event contracts that it
does not.
The Commission requests comment on its proposed definition of
gaming. Commenters are invited to address whether the Commission should
provide its views regarding whether other activities constitute
``gaming.'' For example, should game shows, reality show competitions,
pageants and similar events be considered to be ``gaming''? The
Commission notes that game shows are typically subject to varying
standards intended to promote impartiality and fair competition. Other
competitions may allow departure from such standards to enhance their
entertainment value. Music and talent competitions often have
similarities to elections. How, if at all, should the Commission
consider these characteristics in the context of event contracts
involving these activities?
The Commission also invites comment on an alternative proposed
definition of gaming. The Commission sought to define gaming by
reference to activities that are colloquially known as games. The
Commission considered an alternative formulation grounded in the
structural features that distinguish games from other activities. Under
this alternative, ``gaming'' would mean ``an activity created by its
rules, in which (1) all participants whose conduct determines the
outcome operate within the activity itself, and (2) those participants,
in their capacity as participants, have purposes that are defined by
and internal to the activity itself.''
The Commission preliminarily believes that this alternative may
better capture the structural features of gaming and presents it for
comment. Each element of this formulation reflects a structural feature
that, in the Commission's preliminary view, identifies the activities
that ordinary speakers would recognize as games.
Activity created by its rules. The threshold element of the
formulation requires that the activity be one created by its rules--
that is, an activity that does not exist apart from the rules that
constitute it. This element captures a structural feature that
distinguishes games from other rule-governed conduct. Many activities
are governed by rules without being created by them. Driving, commerce,
professional practice, parenting, and warfare are all subject to
elaborate rule structures, but none of these activities exist because
of its rules. The rules constrain pre-existing activity that have
independent existence. Games are different. Football does not exist
independently of football's rules; the activity of playing football
came into being when its rules were developed and would cease to exist
if those rules were abandoned. The same is true of chess, of poker, of
baseball--of every activity that ordinary usage recognizes as a game.
All participants whose conduct determines the outcome operate
within the activity itself. The first numbered inquiry concerns the
structural locus of the participants whose conduct resolves the
activity. In a game, the participants who determine the outcome are
drawn from the same population as the participants whose conduct
generates the inputs the activity is resolving.
This element identifies what distinguishes a game from an
evaluative or selective process that may have rule-governed structure
but that depends on judgment external to the underlying activity. An
award conferred by a voting body, a prize awarded by a panel of judges,
a hiring decision made by a committee, an honor bestowed by an
institution--each of these may involve elaborate rules and rule-
governed deliberation, but each is structurally distinct from a game
because the participants who determine the outcome (the voters, judges,
committee members, institutional officers) operate outside the
underlying activity being evaluated, selected from, or recognized. The
conduct that generates the inputs (the candidate's performance, the
work being judged, the credentials being assessed) is produced by one
set of participants; the conduct that determines the outcome is
produced by a different set of participants who observe, assess, or
select from the inputs but who are not themselves engaged in the
underlying activity.
Purposes defined by and internal to the contest itself. The second
numbered inquiry concerns the teleological structure of participation--
the relationship between the participants' purposes and the activity in
which they participate. A participant's purpose is internal to the
contest when it is intelligible only within the rules that constitute
the contest and would not exist apart from those rules. A purpose is
external when it pre-exists the activity and would persist whether or
not the contest occurred.
In a game, the participants' purpose in their role as participants
are internal to the activity. A poker player's purpose in drawing to a
flush exists only because poker exists; the purpose has no content
outside the rules that define what a flush is, how cards may be drawn,
and what winning a poker hand means. A quarterback's purpose in
completing a pass exists only because football exists; the purpose has
no content outside the rules that define what completing a pass is,
what it accomplishes, and why it matters. These purposes are not
pursued through the game in service of ends that exist outside of it;
they are constituted by the game itself and have no existence apart
from it.
This element identifies what distinguishes a game from an activity
that may have rule-governed structure, but whose participants are
pursuing ends that exist independently of any contest. A candidate
seeking office pursues purposes (governing, advancing policy
preferences) that exist independently of any electoral contest and
would persist under any system of selecting officeholders. A trader
executing a transaction pursues purposes (profit, hedging, capital
allocation) that exist independently of any market structure and would
persist in any economic system that permitted the exchange of value. In
each case, the activity is a vehicle for ends that transcend it. The
contest, if there is one, is not the source of the participants'
purposes but a forum in which independently existing purposes are
pursued.
The ``in their capacity as participants'' qualifier. The qualifier
is essential to the second inquiry's operation. Most participants in
any serious activity have motivational structures that combine internal
purposes with external purposes. A professional athlete pursues
internal purposes (winning, performing, executing the play) and
external purposes (compensation, career advancement, public
recognition) simultaneously. The relevant inquiry is not whether
participants have any
[[Page 35828]]
external purposes--which would be true of virtually every activity in
which people engage seriously over time--but whether their purpose in
their role as participants in the activity is constituted by and
internal to the activity.
The Commission presents this alternative definition of ``gaming''
described above for comment.
4. Illustrative Examples of Event Contracts Not Within Scope
The Commission preliminarily believes that prediction markets and
market participants would benefit from the Commission providing
examples of the types of event contracts that, in the Commission's
view, fall outside of the scope of the Special Rule and, by extension,
Sec. 40.11.\216\ The Commission believes that, among other things,
this will assist prediction markets, as well as applicants for
registration, in making informed business decisions with respect to
product design, thereby supporting responsible innovation. The
Commission believes that this also will support the more efficient use
of CFTC staff resources in connection with the review of event contract
submissions.
---------------------------------------------------------------------------
\216\ For the avoidance of doubt, with respect to these types of
event contracts, a prediction market or clearinghouse still must
comply with the substantive and procedural requirements that apply,
more generally, to the listing for trading or acceptance for
clearing of derivative contracts, including, for DCMs and SEFs, the
statutory requirement to ensure that such contracts are not readily
susceptible to manipulation.
---------------------------------------------------------------------------
While the Commission cannot anticipate every contract design, the
Commission believes that event contracts based on the following would
generally fall outside of the scope of the Special Rule and Sec.
40.11: \217\
---------------------------------------------------------------------------
\217\ For the avoidance of doubt, these event contracts remain
subject to the statutory and regulatory requirements for listing and
trading of event contracts.
---------------------------------------------------------------------------
Rates, measures or levels of economic indicators,
including the CPI and other price indices; the U.S. trade deficit with
another country; measures related to GDP, jobless claims, or the
unemployment rate; and U.S. new home sales.\218\
---------------------------------------------------------------------------
\218\ The rates, measures, and levels in the first three items
of this list are outside the scope of the Special Rule and Sec.
40.11 for the reasons described in section II.B., supra.
---------------------------------------------------------------------------
Rates, measures or levels of financial indicators,
including the federal funds rate; total U.S. credit card debt; fixed-
rate mortgage averages (e.g., the 30-year fixed-rate mortgage interest
rate); and the values for broad-based stock indexes at particular
times.
Rates, measures or levels of foreign exchange rates or
currencies.
Results of political elections and outcomes or occurrences
of political activities, such as legislative votes, enactments of laws
or appointments of people to political offices.
Results or outcomes of honor and award contests, or
occurrences during those contests, such as who will win or be nominated
for a particular award, or when or if an award will be granted.
The Commission requests comment on all aspects of its proposed
approach to determine whether event contracts involve the Enumerated
Activities.
E. Adoption of Factors To Determine Whether Contrary to Public Interest
As discussed above, the Commission preliminarily interprets the
Special Rule to require the Commission to engage in a three-step
inquiry. In the third step of this inquiry, the Commission would have
to assess whether event contracts that involve an Enumerated Activity
are contrary to the public interest. Specifically, the Special Rule
provides that, ``[i]n connection with the listing'' of event contracts
by prediction markets, the Commission may determine that certain event
contracts are ``contrary to the public interest'' if the event
contracts involve one of the five Enumerated Activities or other
similar activity.\219\
---------------------------------------------------------------------------
\219\ CEA sec. 5c(c)(5)(C)(i), 7 U.S.C. 7a-2(c)(5)(C)(i).
---------------------------------------------------------------------------
The Special Rule does not define the term ``public interest.'' As
discussed above, prior to the enactment of the CFMA, the Commission
used an economic purpose test as part of determining the public
interest test when evaluating contracts, but that test was
controversial and difficult to administer, and the CEA provision for
that test was repealed. Currently, the public interests underlying the
CEA are described in CEA section 3, which provides the statutory
findings and purposes of the Act.\220\ Section 3(a) states that ``[t]he
transactions subject to [the CEA] . . . are affected with a national
public interest by providing a means for managing and assuming price
risks, discovering prices, or disseminating pricing information through
trading in liquid, fair and financially secure trading facilities.''
\221\
---------------------------------------------------------------------------
\220\ 7 U.S.C. 5.
\221\ 7 U.S.C. 5(a).
---------------------------------------------------------------------------
Further, CEA section 3(b) provides that to foster the public
interests described in subsection (a), the purposes of the CEA include
``to deter and prevent price manipulation or any other disruptions to
market integrity; to ensure the financial integrity of all transactions
subject to [the CEA] and the avoidance of systemic risk; to protect all
market participants from fraudulent or other abusive sales practices
and misuses of customer assets; and to promote responsible innovation
and fair competition among [DCMs], other markets and market
participants.'' \222\
---------------------------------------------------------------------------
\222\ 7 U.S.C. 5(b).
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While CEA section 3 guides the Commission's consideration of
whether a contract is contrary to the public interest, it is not the
Commission's exclusive consideration. Neither CEA section 3 nor the
Special Rule limits the Commission's ability to consider additional
public interest factors beyond CEA section 3 and traditional hedging or
price-discovery functions.
The Commission observes that by limiting the application of the
Special Rule to Enumerated Activities--activity that is unlawful under
any federal or state law, terrorism, assassination, war, and gaming--
Congress specified the areas that are of particular public interest
concern. Congress did not simply say that any event contract which is
contrary to the public interest considerations in CEA section 3 (e.g.,
hedging and price-basing utility) should be prohibited. Rather, the
Commission preliminarily believes that the Special Rule is an
instruction to apply a particular, focused public interest analysis to
specific types of event contracts. That is, the Commission should
consider how the public interest purposes of the CEA (and other public
interest factors) may be particularly implicated in the context of
event contracts involving Enumerated Activities. The discussion in this
section includes an explanation of when the Commission preliminarily
believes it should apply these public interest factors in a more
focused manner than the same factors would be applied to other event
contracts that do not involve Enumerated Activities and are not subject
to the Special Rule.
Further, the Commission preliminarily believes the public interest
factors should be articulated in a manner that is clear, focused, and
readily applied both by prediction markets in designing event contracts
and by Commission staff in reviewing submissions. The review should
focus on specific, potential harms, rather than a broad or
indeterminate inquiry into the ``public good.'' The relevant question
is whether particular event contracts that otherwise satisfy all
applicable requirements nonetheless raise public interest concerns.
[[Page 35829]]
1. Overview of Proposed Amendments
Proposed Sec. Sec. 40.11(a)(5) and 40.11(a)(6) set out the factors
that the Commission would apply in determining whether event contracts
subject to the Special Rule are contrary to the public interest.
Proposed Sec. 40.11(a)(5) sets out factors that apply to all event
contracts subject to the Special Rule, and Sec. 40.11(a)(6) sets out
factors specific to particular Enumerated Activities. Additionally,
proposed appendix F to part 40 describes how the Commission would apply
these factors.
The Commission notes that this determination is made after a
prediction market self-certifies that particular event contracts comply
with the requirements of the CEA, including the Core Principles; the
Special Rule is not the only way in which a prediction market could be
prohibited from listing an event contract. Therefore, the Commission
preliminarily believes that the public interest inquiry under the
Special Rule encompasses considerations in addition to compliance with
the Core Principles and other requirements under the CEA.
Given the range of the Enumerated Activities and potential breadth
of event contracts that could be listed, the Commission preliminarily
believes it is appropriate to consider a series of factors when
determining whether an event contract that involves an Enumerated
Activity is contrary to the public interest, instead of relying on a
single, static public interest test. The Special Rule contemplates a
review that considers the public interest, including the public
interests underlying the CEA, in a holistic manner to determine whether
the event contracts in question raise the potential for harms to the
public interest that outweigh any utility or public interest value of
the event contracts. The Commission preliminarily believes that
evaluating whether an event contract is contrary to the public interest
through multiple factors, rather than a single static test, is
beneficial because it allows the Commission to account for the
diversity and complexity of event contracts that could fall within the
Enumerated Activities.
A multifactor approach enables the Commission to weigh different
dimensions of potential harm or public benefit--including the event
contract's hedging or price-basing utility or potential to encourage
illicit behavior--while also accommodating novel event contract designs
and market developments and supporting innovation. This flexibility
would help ensure that the Commission's analysis remains consistent,
transparent, and adaptable across a wide range of event contracts,
rather than constrained by an overly rigid or underinclusive test. The
Commission notes that no single public interest factor discussed below
would be dispositive as the Commission would apply a range of public
interest considerations when determining whether an event contract is
contrary to the public interest. The Commission also notes that the
factors that inform a public interest determination, and the weight
given to each such factor, are likely to vary depending on the
particular characteristics of the event contract and Enumerated
Activity being evaluated.
2. Public Interest Factors Applicable to All Enumerated Activities
To provide a consistent and transparent framework for evaluating
event contracts subject to a public interest review under the Special
Rule, the Commission has developed a set of public interest factors
that it proposes to apply to all such event contracts. As discussed in
greater detail below, the proposed factors are:
whether the event contracts serve the public interest by
providing meaningful hedging or price basing utility consistent with
CEA section 3, yielding information that is economically, financially,
or commercially useful or otherwise meaningful, or promoting
responsible innovation and fair competition;
whether, in the context of the focused review required by
the Special Rule, the event contracts present a particular risk of
manipulation or market disruption, exhibit settlement integrity
deficits arising from the event contracts' particular characteristics,
or create particular risks of information leakage or exploitation of
material non-public information by insiders; and
whether trading or clearing of the event contracts would
challenge the prediction market's self-regulatory tools or compliance
infrastructure because of the event contracts' involvement of
Enumerated Activities.
The Commission preliminarily believes these factors would be
generally applicable to event contracts involving any of the Enumerated
Activities and would serve as the Commission's initial criteria for
assessing whether such event contracts are contrary to the public
interest. In addition to these general considerations, the Commission
would also apply more specific public interest factors tailored to the
specific Enumerated Activity which a given event contract involves, as
discussed further in section II.E.3 below. The Commission notes that no
single factor is dispositive as the Commission would weigh the various
factors on balance.
(a) Price Discovery and Information Aggregation Utility
As discussed above, the public interests underlying the CEA are
stated in CEA section 3 as ``findings'' that hedging and price
formation are the public purpose of CFTC-regulated markets and are in
the public interest. The Commission preliminarily believes that event
contracts subject to the Special Rule, like other event contracts, can
play a role in ``managing and assuming price risks, discovering prices,
or disseminating pricing information'' as contemplated by CEA section
3(a).\223\ Also, prediction markets ``function as information
aggregation vehicles'' because event contract prices reflect the market
participants' aggregate beliefs regarding whether the events will
occur.\224\ Another purpose of the CEA is to promote responsible
innovation and fair competition.\225\
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\223\ 7 U.S.C. 5(a).
\224\ ANPRM, 91 FR at 12517.
\225\ CEA sec. 3(b), 7 U.S.C. 5(b).
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The Commission preliminarily believes that these public interests
underlying the CEA, relevant to all derivatives under the CFTC's
jurisdiction, should be included in the Commission's review under the
Special Rule. Therefore, when reviewing event contracts involving an
Enumerated Activity, the Commission would consider whether the event
contracts can facilitate these functions.
Meaningful hedging or price basing utility. The Commission notes
that the test specifically focused on whether a derivative contract
serves an economic purpose was removed from the CEA by the CFMA in
2000, and as explained above, the Commission preliminarily does not
believe that the Dodd-Frank Act reinstated the economic purpose test in
the Special Rule.\226\ Therefore, the Commission preliminarily believes
it is not necessary to demonstrate that event contracts have a
reasonable potential for a hedging or pricing function to avoid a
finding that the event contracts are contrary to the public interest.
Still, event contracts' reasonable potential for a hedging or pricing
function would be a significant factor against a finding that they are
contrary to the public interest. As part
[[Page 35830]]
of this inquiry, the Commission would consider whether the event
contracts can meaningfully facilitate risk transfer and price
discovery.
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\226\ Some commenters on the ANPRM argued that the economic
purpose test should be reinstated and applied to event contracts.
See, e.g., Letter from Jeromee Johnson 3 (Apr. 2, 2026) (CEA should
not apply to purely speculative contracts which cannot serve any
hedging purpose).
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Use of information in economic decisions. The Commission
preliminarily believes that price discovery and the connection between
prices and economic decisions become more complex as information is
used in economic decision-making in ever more sophisticated ways. In
1976, a CFTC Advisory Committee wrote:
``Futures prices guide production, storage, and consumption
decisions which help the economy function more smoothly. . . . Thus,
a futures contract which is likely to be actively traded on an
organized futures market can be expected to provide economic
benefits--unless it has a flaw.'' \227\
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\227\ See Report of the CFTC Advisory Committee on the Economic
Role of Contract Markets, supra note 64.
Now, a half-century later, derivatives markets serve this same
purpose in more complex ways. Economic modeling uses inputs from a
multitude of sources to guide decision-making on a variety of topics
that are not necessarily directly tied to a specific commodity market.
For example, prices in the corn futures market, which represent a
collective assessment of future price trends, can be one input (along
with others such as interest rate futures as an indicator of future
interest rates) to guide a farm equipment manufacturer in planning its
production of corn harvesters. At the next level of removal from the
corn market, an investor could use the prices of corn futures, interest
rate futures and certain securities in deciding whether to invest in
farm equipment manufacturers. This is a simple example. But it
illustrates how the prices in a derivatives market should not be viewed
in isolation but rather as one thread in a fabric of information. The
corn futures market is about more than just corn.
The Commission preliminarily believes the same is true of
prediction markets. Whether event contracts have a potential price
discovery function depends not just on whether the price of a
particular event contract can be used, alone, to make economic
decisions. Instead, the event contracts' role in price discovery can
arise from how the prices of a variety of event contracts can be
factored into decision-making processes.\228\ Event contracts can serve
as a collective assessment of not only the likelihood of events, but
also the level of the market's or the public's attention to various
issues and their assessment of the importance of that issue.
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\228\ Commenters on the ANPRM noted this use of event contracts.
See, e.g., Letter from Daniel Cavero 1 (Apr. 27, 2026) (event
contracts aggregate knowledge into a single probability that is
directly usable in operational decision-making, even when they are
not used as traditional hedging instruments); Letter from FanLabel
Music Markets, LLC 3 (Apr. 23, 2026) (the market-implied
probabilities implied in prediction market prices are themselves an
information good).
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The collective assessment reflected in event contract pricing has
economic value, which, in turn, would be a factor in the Commission's
assessment of event contracts' price discovery functionality. For
example, event contracts that involve sporting events can be used for
price discovery in a variety of ways. Sports teams are economic
enterprises and sports stadiums are regional economic anchors that
generate economic activity and materially affect both regional and
national markets.\229\ For these reasons, it is economically useful to
know not only how a sports team is likely to perform in upcoming games,
but also how the public believes that the sports team will perform in
upcoming games.\230\ Thus, the price discovery utility of an event
contract on whether a team will win a game this weekend arises not
simply from whether the information about that particular game can be
directly tied to a specific economic decision. Rather, the price
discovery usefulness of all event contracts about a team may arise from
other analyses, such as how their pricing and trading volume change
over time, how trading in event contracts about one team compares to
trading in event contracts about other teams, and so forth. Anyone
interested in that team as an economic enterprise can use information
derived from those event contracts as one factor in economic decision-
making on a variety of topics. Just as the corn futures market is about
more than just corn, a prediction market about one sporting event is
about more than just that sporting event.
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\229\ See, e.g., Ryan Grandeau, Securing the Best Odds: Why
Congress Should Regulate Sports Gambling Based on Securities-Style
Mandatory Disclosure, 41 Cardozo L. Rev. 1229, 1247 (2020); Los
Angeles Mem'l Coliseum Comm'n v. NFL, 726 F.2d 1381, 1397 (9th
Cir.1984) (discussing claim that a professional sporting team's
presence generates local business activity); and Pennsylvania v.
Nat'l Collegiate Athletic Ass'n, 948 F.Supp. 2d 416, 433 (M.D. Pa.
2013) (summarizing the Commonwealth's allegations that sanctions
would cause a loss of football-related hospitality revenue for
surrounding businesses).
\230\ This information could be useful, for example, to hotels
adjusting their pricing models, restaurants making staffing
decisions to accommodate increased demand, vendors increasing supply
orders, and cities allocating resources to accommodate projected
crowds.
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The Commission preliminarily believes that three fundamental points
are especially pertinent here. First, the price discovery function of
event contracts is not limited to how the market participants buying
and selling event contracts use the prices as guides to how likely
events are to occur. Rather, so long as there is a sufficient volume of
event contracts about an underlying event or issue, they can serve as
price discovery tools by indicating what the market or the general
public thinks about the underlying events or issues (i.e., market
sentiment). Second, the usefulness of event contracts for price
discovery, as compared to other tools such as surveys to measure market
sentiment, arises from the fact that market participants are spending
money, even in nominal amounts, to support their beliefs. Thus, event
contracts may be a more accurate indicator than surveys of how strongly
those beliefs are held. Third, whether event contracts can be used
directly for hedging is of limited importance in the public interest
determination; rather, the question is whether the information derived
from event contract pricing can be used to guide hedging
decisions.\231\
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\231\ For example, even if a real estate firm does not use event
contracts involving a sports team to hedge its investment in
property near the team's stadium, it could nonetheless use the event
contract prices as a factor in its decisions about how to use other
financial instruments to hedge its property investment.
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In short, to take just one example, the price discovery value of
event contracts on how many points a basketball player will score in a
game depends on more than whether the event contracts can be used to
hedge the purchase price of a ticket to the game. In some
circumstances, the prices of those contracts could also, along with
other information including the prices of many other event contracts,
be factored into models used for commercial forecasting or audience-
demand analysis, which are economic questions.
For these reasons, the Commission preliminarily believes it would
be more likely to find that the event contracts involving an Enumerated
Activity are contrary to the public interest where the event contracts
lack the potential to inform any economic, commercial or financial
decisions. This includes event contracts that settle based on purely
random events, such as the spin of a roulette wheel or the outcome of a
random-number generator.\232\ As
[[Page 35831]]
discussed further in section II.E.3(c)(i), market participants buying
and selling such event contracts cannot, by definition, have any
insight into whether the events will occur. Therefore, the prices of
the event contracts cannot be used to understand market sentiment about
any potential economic, financial or commercial consequence.
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\232\ It is important to distinguish random events from
unpredictable events. The outcome of a game of skill may be
unpredictable at times, but it is not random because the outcome
depends on the players' actions in the game, which are under the
players' control. A game of pure chance, such as roulette, is
structured to be random and outside any individual's control. As
noted above, many games and other activities mix skill and chance,
and are therefore not ``purely random.'' See supra section II.D.3.
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Information aggregation. The Commission acknowledged in the 2008
Concept Release that ``innovative event markets have the capacity to
facilitate the discovery of information, and thereby provide potential
benefits to the public.'' \233\ For many years, event contract markets
have been used for educational insights, research, and accurate
forecasting of events, among other uses.\234\ Many prediction markets
have become reliable and accurate information sources, in part, by
harnessing the wisdom of crowds--market participants who are
incentivized to avoid financial loss when taking a position in a
particular contract. There are also many documented cases where
prediction markets outperform traditional polling sources or other
forecasting methods.\235\ In that context, and as discussed in the
previous section, information gleaned from prediction markets can help
guide economic decision-making.
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\233\ 2008 Concept Release, supra note 1, 73 FR at 25672.
\234\ See CFTC Staff Letter No. 93-66 issued to the University
of Iowa (June 18, 1993), available at https://www.cftc.gov/sites/default/files/idc/groups/public/@lrlettergeneral/documents/letter/93-66.pdf; see also IEM Research Page, available at https://iemweb.biz.uiowa.edu/about-iem/research/ (last visited May 29,
2026).
\235\ See Joyce E. Berg et al., Prediction Market Accuracy in
the Long Run, 24 Int'l J. Forecasting 285 (2008), available at
https://www.sciencedirect.com/science/article/pii/S0169207008000320.
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The Commission preliminarily believes that event contracts are more
likely to be contrary to the public interest when any meaningful
information about whether the underlying event will occur is
unavailable to the broader market. This includes events that are
entirely random or where insight into the underlying event is highly
concentrated--in a single individual, for example, or only individuals
legally prohibited from transacting--and relevant information is
necessarily concealed from the public. In such cases, the Commission
would consider whether buyers and sellers have any basis to form a
meaningful view on the underlying event, and whether the resulting
prices can reasonably be expected to reflect informed market sentiment.
This factor could also apply where the only market participants with
insight into the underlying event would be legally prohibited from
transacting in the event contract. Thus, this factor is closely related
to the previous factor about whether the event contract can be used for
price discovery, and the factor below regarding inside information.
For example, event contracts settling on where a military attack
will occur or on the officiating calls made by referees in a specific
game may present this concern. The individuals with genuine insight
into such event--military personnel or referees--are typically subject
to fiduciary duties or confidentiality obligations that would prevent
them from lawfully transacting in the event contract. In some
instances, other market participants would lack any comparable basis
for forming an informed view on the event, with the result that
resulting prices would not reflect aggregated informed sentiment about
the underlying event.
The Commission also preliminarily believes that in determining
whether event contracts can convey meaningful information, event
contracts should generally be considered in the aggregate. As described
in the previous section, the prices and volumes of event contracts over
time can indicate public sentiment, especially when event contracts on
related topics are compared with each other. So, if a small group of
event contracts do not appear to convey any meaningful information, the
Commission would still consider whether the event contracts convey
meaningful information when combined with or compared to other event
contracts.
Therefore, when reviewing event contracts involving an Enumerated
Activity, the Commission proposes to consider whether the event
contracts have any utility as information aggregation vehicles--meaning
whether the event contracts provide any meaningful information that is
useful to making economic, financial or commercial decisions. The
Commission would consider the absence of any information aggregation
utility as a factor in favor of finding the event contracts to be
contrary to the public interest.
Innovation and fair competition. Another ``purpose'' of the CEA is
to ``promote responsible innovation and fair competition among [DCMs],
other markets and market participants.'' \236\ Responsible innovation
and fair competition are critical to the healthy functioning of the
derivatives markets, particularly given the substantial increase in the
trading of event contracts and the growing demand for these products by
market participants seeking information regarding, or to hedge exposure
to, variables for which no traditional financial instrument exists.
This expansion underscores a clear market need and sustained demand for
prediction markets as a means of managing novel and otherwise
unaddressed risks. The public therefore has an interest in ensuring
that these markets retain the space to innovate and develop responsibly
so they can continue to meet the evolving needs of market participants
while maintaining appropriate regulatory safeguards.
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\236\ CEA sec. 3(b), 7 U.S.C. 5(b).
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The Commission observes that market participants have demonstrated
demand for event contracts addressing categories of risk for which
traditional financial instruments either do not exist or provide only
imperfect hedges with substantial basis risk. For example, event
contracts referencing the timing or content of legislative, regulatory,
and policy actions, such as whether a certain bill will become law, or
whether a specified tariff or trade measure will be in force at a given
time, likewise address exposure that businesses face but cannot
meaningfully hedge through equity, rates, or commodity markets.
Indications that event contracts support responsible innovation and
fair competition would accordingly weigh against a finding that the
event contracts are contrary to the public interest.
In assessing this factor, the Commission proposes to also consider
the competitive implications of restricting access to event contracts.
Particularly where demand for the event contract is strong, a
determination barring its listing on a CFTC-registered prediction
market is unlikely to eliminate the activity; rather, it may divert
trading to offshore or otherwise less transparent and less supervised
markets. Such migration would diminish the Commission's oversight of
these markets, deprive the public of the transparency and market
integrity safeguards afforded by the CEA, and undermine the public
benefits associated with responsible innovation occurring within the
U.S.
Accordingly, the likelihood that prohibiting an event contract
would push trading activity into less transparent and less regulated
foreign markets is a factor that weighs against finding that the event
contract is contrary to the public interest.
[[Page 35832]]
(b) Potential Threats to Market Integrity
Susceptibility to manipulation or market disruption. Another
``purpose'' of the CEA is to ``deter and prevent price manipulation or
any other disruptions to market integrity.'' \237\ As a general matter
applicable to all swaps and futures contracts traded on their
platforms, DCMs and SEFs have a statutory obligation to ensure that the
contracts they list for trading are not readily susceptible to
manipulation.\238\ But in its public interest analysis of event
contracts subject to the Special Rule, the Commission preliminarily
believes that, as discussed above, it should also consider how the
public interest purposes of the CEA are particularly implicated. The
Commission therefore proposes to distinguish its evaluation of whether
a particular risk of manipulative activity may raise public interest
concerns for purposes of the Special Rule, from the review that all
DCMs and SEFs must undertake to evaluate whether a contract complies
with this statutory obligation. Thus, the use of the factors outlined
below in determining whether event contracts are contrary to the public
interest is beyond and separate from a DCM's or SEF's analysis of a
contract's compliance with the CEA and applicable regulations.
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\237\ Id.
\238\ See Core Principle 3 for DCMs, CEA sec. 5(d), 7 U.S.C.
7(d)(3), and Core Principle 3 for SEFs, CEA sec. 5h(f)(3), 7 U.S.C.
7b-3(f)(3).
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In the same way, the Commission also proposes to apply a particular
analysis of whether event contracts involving Enumerated Activities can
be settled based on objective, publicly verifiable criteria within a
reasonable timeframe in determining whether the event contracts are
contrary to the public interest, and whether such event contracts raise
a particular potential for improperly obtained non-public information
to be exploited by insiders.\239\ To the extent particular concerns
arise with respect to event contracts subject to the Special Rule, such
factors would weigh in favor of finding the event contracts to be
contrary to the public interest.
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\239\ See infra note 241 and accompanying text.
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The factors outlined below address risks that inhere in the event
contracts themselves--their terms, their underlying subject matter, and
the criteria on which settlement turns--and that may be present
regardless of the prediction market's compliance capabilities. In
contrast, the factors in section II.E.2(c) below will address whether
the event contracts raise any public interest concerns in light of the
prediction market's compliance capabilities.
Settlement integrity. Prediction markets are statutorily required
to ``establish, monitor, and enforce compliance with . . . the terms
and conditions of'' contracts traded on the prediction market.\240\ The
Commission preliminarily believes that in the context of its public
interest analysis under the Special Rule, it is particularly important
that the criteria on which event contracts involving Enumerated
Activities settle are clear, objective, and publicly verifiable, and
that the contracts identify the triggering events and the means by
which it is determined whether those events have occurred transparently
and in a manner that clearly identifies the triggering events and how
it is determined whether or not those events have occurred. It is also
important that the settlement mechanism and the data upon which it
relies are suitable to the event contracts under review. The Commission
acknowledges that a variety of data sources may be appropriate for the
settlement of event contracts and does not intend to overly restrict
prediction markets' flexibility to determine which sources should be
used in settlement.
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\240\ See CEA sec. 5(d)(2)(A)(ii), 7 U.S.C. 7(d)(2)(A)(ii)
(DCMs); see also CEA sec. 5h(f)(2), 7 U.S.C. 7b-3(f)(2) (SEFs).
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Vulnerability to settlement integrity deficits--e.g., a lack of
clarity about exactly how event contracts involving Enumerated
Activities will be resolved--undermines market function and is
indicative of event contracts that are likely to be contrary to the
public interest. Therefore, when reviewing event contracts involving an
Enumerated Activity, the Commission proposes to consider whether the
criteria for settlement of the event contracts are clear, objective,
and publicly verifiable. Event contracts whose conditions or resolution
criteria are ambiguous, overly complex, or potentially misleading to
market participants raise settlement integrity concerns under this
factor.
Information leakage and misuse of confidential information.
Commission Rule 180.1 makes it unlawful for any person to employ any
device, scheme, or artifice to defraud or attempt to defraud any person
or manipulate the price of any futures contract listed on a DCM or any
swap, including the misappropriation of confidential information in
breach of a pre-existing duty of trust or confidence to the
source.\241\
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\241\ See 17 CFR 180.1 and 180.2. See CFTC Press Release No.
9185-26, CFTC Enforcement Division Issues Prediction Markets
Advisory (Feb. 25, 2026), available at https://www.cftc.gov/PressRoom/PressReleases/9158-26 (reiterating the Commission's full
authority to police illegal trading practices occurring on any DCM,
including those related to prediction markets).
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The Commission preliminarily believes that certain event contracts
involving Enumerated Activities may create unique incentives for
information leakage or misuse of material nonpublic information--for
example, by encouraging individuals with privileged access to disclose
or act upon such information, by incentivizing the unlawful acquisition
of additional sensitive information, or by enabling third parties to
pressure, solicit, or bribe such individuals to obtain it. These
incentives may present significant public interest concerns for event
contracts involving Enumerated Activities, particularly where the
information is highly sensitive and closely guarded, and meaningful
insight into the underlying event is concentrated among a small number
of individuals.
The Commission preliminarily believes that these concerns are
especially acute for contracts involving national-security matters,
where relevant information is tightly held, highly sensitive, and
subject to strict confidentiality obligations.\242\ In such settings,
an event contract may create improper incentives to leak or misuse
sensitive information, or to attempt to obtain such information
illicitly. For example, event contracts settling on the occurrence,
timing, or specifics of intelligence activities could create financial
incentives for individuals with security clearances or other access to
classified information to disclose or trade upon such information in
violation of their obligations, and could similarly incentivize foreign
intelligence services or other third parties to target cleared
personnel for the purpose of extracting tradeable information.
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\242\ That is, beyond the broad prohibition noted above, see
id., the Commission preliminarily believes that these concerns are
of special importance when it reviews event contracts involving an
Enumerated Activity.
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Where the structural features of an event contract--the sensitivity
of the underlying information, the concentration of insight among a
small number of individuals, or the nature of the activity to which the
contract refers--give rise to identifiable concerns regarding the
leakage, misuse, unlawful acquisition, or third-party exploitation of
privileged information, and where a
[[Page 35833]]
prediction market has not implemented adequate safeguards, those
concerns would weigh in favor of finding the event contracts contrary
to the public interest.\243\
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\243\ See also infra the discussion of event contracts involving
war in section II.E.3(b).
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(c) Compliance and Self-Regulatory Challenges Arising From the
Prediction Market's Capacity to Administer the Contracts
Prediction markets have self-regulatory obligations to ensure
proper surveillance and oversight of trading in all of the event
contracts that they list, accounting for the particular characteristics
and attributes of each event contract.\244\ In the context of the
Special Rule and the analysis of whether event contracts involving
Enumerated Activities are contrary to the public interest, the
Commission proposes to consider whether the event contracts would be
difficult to administer or challenge the prediction market's compliance
obligations. This factor addresses a question distinct from the
contract-design concerns identified in the prior section: whether the
prediction market, given its existing compliance, surveillance, and
dispute-resolution infrastructure, can discharge its statutory self-
regulatory obligations with respect to the event contracts. These types
of challenges would weigh in favor of a finding that such event
contracts are contrary to the public interest. Conversely, the
Commission preliminarily believes that the existence of guardrails
reasonably designed to address the specific risks the event contracts
present is a factor weighing against a finding that the contract is
contrary to the public interest.
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\244\ See, generally, CEA sec. 5(d), 7 U.S.C. 7(d) (DCMs), and
CEA sec. 5h(f), 7 U.S.C. 7b-3(f) (SEFs).
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Among the considerations relevant to this factor, the Commission
would consider whether the prediction market's dispute resolution
processes are suitable to resolving potential disputes about the
resolution of the event contracts. The Commission would consider the
absence of settlement criteria and dispute resolution procedures that
are suitable for event contracts involving Enumerated Activities as a
factor in favor of finding the event contracts to be contrary to the
public interest.
The Commission would also consider whether a prediction market has
adopted effective guardrails against the spread or misuse of non-public
information, such as prohibiting certain categories of traders likely
to have access to inside information from trading in certain event
contracts, and maintaining a robust surveillance and customer
identification policy. Such mitigating measures would weigh against a
finding that the event contracts are contrary to the public interest.
The Commission preliminarily believes that public interest concerns
are likely to arise when uncertainties about the circumstances
influencing the underlying events mean that the prediction market's
surveillance program may not be able to detect whether or not insiders
would have an information advantage.
The Commission invites comment on all aspects of the proposed
public interest factors applicable to all Enumerated Activities. Are
there any additional general factors that should be considered in the
Commission's public interest determinations?
3. Public Interest Factors Specific to the Enumerated Activities
The Commission proposes to evaluate all event contracts subject to
review under the Special Rule under the public interest factors set out
in the previous section, and also to apply additional factors
applicable to event contracts involving each type of Enumerated
Activity, as discussed in this section. The following factors specific
to each type of Enumerated Activity supplement the general factors in
the previous section. Thus, for event contracts involving each type of
Enumerated Activity, the Commission proposes to apply both the general
factors above and the relevant specific factors below in determining
whether the event contracts are contrary to the public interest.
(a) Activity That Is Unlawful Under Any Federal or State Law
In determining whether event contracts involving activity that is
unlawful under any federal or state law are contrary to the public
interest, the Commission proposes to consider the following factors, in
addition to the general factors in section II.E.2.
First, the Commission preliminarily believes that there may be a
distinction between event contracts involving an overall rate of
unlawful activity, and event contracts involving more specific unlawful
actions. For example, event contracts based on crime rates in a general
area over extended periods may have price basing or information utility
in matters such as insurance or other economic planning.
In contrast, the Commission preliminarily believes that event
contracts based on more specific unlawful activity raise concerns under
the general public interest factors described above. To the extent that
trading in such event contracts would yield meaningful information
about specific criminal actions, that information should be shared
confidentially with the appropriate authorities--it would be contrary
to the public interest for such information to be revealed in a public
market because it could compromise law enforcement efforts. Trading in
such event contracts could also incentivize criminal behavior,\245\
and, if the event contracts are based on potential actions of
individuals or small groups, would be subject to manipulation and
insider trading concerns.
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\245\ Also, public attention to such event contracts could lead
to ``copycats,'' i.e., individuals engaging in the criminal behavior
because of the publicity about it.
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Public interest considerations particular to federal and state law
are described below.
Activity that is unlawful under any federal law. The Commission
exercises the authorities granted to it by Congress under the CEA to
help ensure that U.S. derivatives markets operate with integrity. The
Commission preliminarily believes that it is likely contrary to the
public interest to permit trading, in the financial markets that the
Commission is mandated by Congress to oversee, in event contracts that
involve activity that Congress has determined to be illegal under
federal law.\246\
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\246\ The Commission notes that, as discussed supra in section
II.C., the issue here is whether the activity on which the event
contracts are based is unlawful under federal law. If trading in the
event contracts was unlawful under federal law or facilitated
unlawful activity (e.g., if trading in the event contracts
facilitated money laundering), then the event contracts could not be
certified to be in compliance with the CEA. See CEA sec. 5c(c)(1), 7
U.S.C. 7a-2(c)(1).
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The Commission recognizes, however, that not all references to
unlawful activity present public policy concerns. In particular, event
contracts that involve aggregate crime rates in a geographic area over
extended periods generally do not create incentives to engage in
specific unlawful acts. Instead, they reflect broad, statistical
measures used for economic, demographic, or public-policy analysis.
Because these event contracts do not encourage or reward criminal
conduct--and instead reference generalized, population-level data--the
Commission preliminarily believes they do not raise the same public
policy concerns.
Accordingly, under the Commission's proposed factors, it would be
highly likely that event contracts involving activity that is unlawful
under federal law would be found contrary to the
[[Page 35834]]
public interest, except where the event contracts reference generalized
crime rates over time in a manner that does not incentivize specific
criminal conduct.
Activity that is unlawful under any state law. The Commission
preliminarily believes that event contracts that involve activity that
is illegal under state law likely raise public interest concerns.
Legislative bodies generally bar or prohibit activity that they
recognize as causing, or posing, public harm. Judges and judicial
bodies, applying statutes and developing common law, also establish the
illegality of activity that is recognized as causing, or posing, public
harm. The Commission thus preliminarily believes that event contracts
that involve activity that is unlawful under state law would likely
undermine important state interests, expressed in state statutes and
common law, in protecting the public good.
The Commission notes that there are variations across state law in
the specific activities that are recognized as unlawful. In assessing
whether event contracts are contrary to the public interest, the
Commission preliminarily believes it would need to account for
variations in state laws and in how states define the underlying
activity; consider any relevant judicial precedent that may bear on the
Commission's analysis; review a survey of state statutes to understand
the extent to which jurisdictions have determined the activity to be
unlawful; and consider whether the underlying activity is generally
considered as causing, or posing, public harm. The Commission proposes
that it would then weigh these considerations--together with the
broader public-interest factors discussed above--to understand the
extent to which the underlying activity is recognized as unlawful. This
inquiry would address the character of the underlying activity for
purposes of the Special Rule and does not alter the Commission's
exclusive jurisdiction.
For these reasons, under the Commission's proposed factors, it
would be likely that event contracts that involve activity that is
unlawful under state law would be found to be contrary to the public
interest, unless the event contracts involve crime rates in a general
area over extended periods as described above. As noted above, the
relevant issue is whether the activity on which the event contracts are
based is unlawful under state law.
(b) Terrorism, Assassination, and War
As discussed above, in addition to the general factors in section
II.E.2, the Commission proposes to consider also the more specific
factors below in determining whether event contracts involving
terrorism, assassination, or war are contrary to the public interest.
National security. The Commission preliminarily believes that event
contracts involving terrorism, assassination, or war can present
significant national security risks and therefore raise public interest
concerns. The Commission is concerned, first, that the prices of such
event contracts would not necessarily align with the actual likelihood
of the underlying terrorism, assassination, or war events because the
trading public is shielded as a matter of public policy from relevant
information about the event. For this reason, trading in such event
contracts could, at the least, present a distraction to law enforcement
and military authorities and, at worst, be manipulated by wrong-doers
to divert attention from planned harmful events.\247\ For example,
event contracts based on whether an attack on a particular location
will occur would provide an opportunity to individuals planning such an
attack to buy the ``no'' contract and thereby create misleading market
signals, potentially diverting attention and resources at a critical
time.
---------------------------------------------------------------------------
\247\ The Commission notes that this concern could become
increasingly problematic as the volume of trading in such event
contracts increases.
---------------------------------------------------------------------------
As discussed above, these event contracts also present especially
significant information leakage and misappropriation concerns because
individuals with access to sensitive national security information
could potentially be incentivized to exploit that information through
trading that would be in violation of their duty of
confidentiality.\248\
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\248\ Although the case does not involve event contracts traded
on a CFTC-registered prediction market, a recent instance where a
U.S. service member allegedly used confidential information
regarding a U.S. military operation to trade in event contracts on
an unregistered platform is an example of the potential for such
insider trading. See CFTC Press Release No. 9217-26, CFTC Charges
U.S. Service Member with Insider Trading in Nicol[aacute]s Maduro-
Related Event Contracts (Apr. 23, 2026), available at https://www.cftc.gov/PressRoom/PressReleases/9217-26.
---------------------------------------------------------------------------
More generally, the Commission preliminarily believes that event
contracts involving terrorism, assassination or war are particularly
vulnerable to settlement ambiguity. The inherent uncertainty and
limited access to reliable information during such events--often
described as the ``fog of war''--can undermine clarity regarding
whether relevant events have taken place. Additionally, as noted above,
the prices of these event contracts may not accurately reflect actual
probabilities because the individuals with direct knowledge or insight
are typically insiders subject to legal restrictions that prohibit them
from trading these event contracts. To promote public safety, the
Commission believes it is preferable for other individuals with
pertinent information to share that information with the authorities,
rather than to use it for trading purposes.
Violence, profiting from harm to human life, or potential to
facilitate illicit behavior. The Commission preliminarily believes that
event contracts involving terrorism, assassination, or war could
potentially result in or incentivize violence or harm to human life or
other illicit behavior and therefore raise public interest concerns.
First, as noted above, these types of event contracts have very little
informational value, but individuals who do have any special knowledge
regarding these types of activities or events have a public duty to
report this information to the proper authorities to prevent any
violence, harm, or illicit behavior. For example, if a private
terrorist expert were to uncover communications regarding a plot to
assassinate a public figure, the Commission believes that expert should
alert authorities rather than trade event contracts regarding that
assassination. It is contrary to the public interest to profit from the
potential assassination of a human being.
Moreover, the Commission preliminarily believes that event
contracts involving terrorism, assassination, or war could potentially
encourage such activity, because there is a potential for individuals
to act in order to receive payout under the event contracts, resulting
in significant risk of harm to human life and property. The Commission
preliminarily believes that this encouragement and incentivization of
violence, human harm, or illicit behavior is not in the public interest
and proposes to carefully analyze these types of contracts to ensure
that the incentives structured into the contract for a monetary payout
do not encourage any direct violence, harm to human life, or illicit
behavior. Based on the foregoing public interest analysis, all event
contracts involving terrorism, assassination, and war are highly likely
to be against the public interest.
(c) Gaming
In determining whether event contracts involving gaming are
contrary to the public interest, the Commission proposes to consider
the following factors in addition to the general factors in section
II.E.2.
[[Page 35835]]
(i) Games of Random Chance Are Likely Contrary to the Public Interest
The Commission preliminarily believes that event contracts
involving games whose outcome depends on random chance--e.g., pure
luck--are likely to be contrary to the public interest. As discussed
above, prediction markets function as information aggregation vehicles,
meaning their usefulness depends in part on whether market participants
can bring insight, expectations, or informed views as to whether the
event underlying the contract will occur. 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. Trading in such event contracts therefore provides
no meaningful information that could support decision making or market
understanding.
On the other hand, the outcome of some games that depend on a high
degree of luck, like poker, can also be significantly affected by the
participants' skill, particularly when the game is repeated over many
rounds, as in organized tournaments. The Commission preliminarily
believes that when a game with some element of random chance also
depends to a significant extent on the participants' skill, and the
settlement of an event contract involving the game is determined by an
occurrence, extent of an occurrence or contingency in an organized
tournament, then that event contract would less likely be viewed as
involving a game that depends entirely on random chance.
Thus, the Commission preliminarily believes that event contracts
involving games whose outcome depends on random chance--by definition,
devoid of informational content--would not advance any of the purposes
of the CEA. For these reasons, under the Commission's proposed factors,
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.
(ii) Factors Indicating When Event Contracts Involving Sports
Activities Are Not Contrary to the Public Interest
The Commission observes that prediction markets have successfully
listed for trading a wide variety of event contracts based on sports
activities. The Commission preliminarily finds that certain
characteristics of event contracts involving sports activities would
reduce the basis for finding that the event contracts are contrary to
the public interest. For example, the extent to which event contracts
settle based on the overall outcome of a sporting event--including
final scores, point differentials, win-loss results, tournament
advancement, individual or team statistical performance or season long
performance metrics--would be factors against a finding that the event
contracts are 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. Additionally, in terms of the Commission's focused
analysis of event contracts involving Enumerated Activities described
above,\249\ the Commission preliminarily believes that these event
contracts are unlikely to raise the particular manipulation, settlement
ambiguity and information leakage issues that could raise public
interest concerns.
---------------------------------------------------------------------------
\249\ See supra introduction to section II.E.
---------------------------------------------------------------------------
The structural features underlying the Commission's preliminary
view are that, for these event contracts, manipulation risk is bounded
by the distribution of determinative capacity among participants and
events in the underlying activity, and any residual manipulation risk
produces observable patterns that the prediction market can detect
through surveillance.\250\ An event contract involving the aggregate
outcome of a single game typically depends on the cumulative
contributions of many participants over the course of the game; no
individual participant has determinative capacity to affect settlement
through their own conduct, and any participant's attempt to do so
produces performance patterns inconsistent with prior play and
inconsistent with game context.\251\ An event contract involving
aggregate statistical performance of an individual over the course of a
game presents a similar analysis. No single act has determinative
capacity to affect settlement, and a participant's attempt to do so
produces performance patterns that are detectable.
---------------------------------------------------------------------------
\250\ That is, the event contracts would generally not be
reasonably susceptible to manipulation, and moreover any residual
manipulation risk would not raise public interest concerns.
\251\ For example, the Commission preliminarily believes that in
games such as tennis or golf, an individual player's attempt to skew
occurrences during the game would typically be detectable in the
context of the game and the player's prior performance.
---------------------------------------------------------------------------
Among other considerations, the Commission notes that the
settlement outcomes of these types of event contracts would typically
depend on the aggregate performance over an extended period of play.
The breadth of potential outcomes, and the variety of factors
influencing the outcomes, should provide more opportunities for the
event contracts to advance price discovery or provide meaningful
information. Generally, a finding that sports-related event contracts
fall within the above categories would weigh heavily against finding
that the contract is contrary to the public interest.
Objective and verifiable settlement data. As part of its review of
particular public interest concerns in event contracts involving
Enumerated Activities, the Commission preliminarily believes that
objective settlement data reduces the risk that settlement values can
be manipulated through the exercise of subjective judgment by
individuals positioned to influence the settlement determination. The
Commission also preliminarily believes that objective settlement data
permits surveillance of trading activity for patterns inconsistent with
the publicly available data, which is a tool by which prediction
markets detect attempted manipulation. The fact that event contracts
involving sports settle by reference to publicly reported, league-
verified, or otherwise objectively determinable data would be a factor
weighing against a finding that the applicable event contracts are
contrary to the public interest.\252\
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\252\ As noted above, see supra section II.E.2(b), the
settlement mechanism and the data upon which it relies should be
suitable to the event contracts under review. The Commission
acknowledges that a variety of data sources may be appropriate for
the settlement of event contracts and does not intend to overly
restrict prediction markets' flexibility to determine which sources
should be used in settlement.
---------------------------------------------------------------------------
Established sport-level integrity infrastructure. The Commission
preliminarily believes the public interest considerations relevant to
event contracts involving sports are materially affected by whether the
underlying game operates within a framework that addresses integrity
concerns at the level of the sport. A prediction market listing event
contracts involving a sport with a developed integrity framework can
leverage that framework in ways unavailable for sports without
comparable infrastructure. The fact that the sport underlying an event
contract is subject to an established integrity framework, including a
recognized governing body, an integrity unit or comparable monitoring
function, published rules of competition, and disciplinary procedures
applicable to participants, officials, and other personnel would be a
factor weighing against a finding that the applicable
[[Page 35836]]
event contract is contrary to the public interest.
Information sharing and coordination with relevant sports leagues
and governing bodies. As noted above, event contracts involving sports
may implicate the involvement of a recognized governing body, integrity
unit or comparable monitoring function for that sport, including but
not limited to professional sports leagues and their integrity units,
as well as the National Collegiate Athletic Association. The Commission
preliminarily believes that communication between prediction markets
and such relevant governing bodies or authorities prior to listing
sports event contracts would support compliance and surveillance
programs for sports events contracts.\253\ 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. Such engagement and information sharing
efforts could entail a practice or agreement with the relevant sports
governing body that the prediction market will:
---------------------------------------------------------------------------
\253\ The Commission notes that any communication by prediction
markets with third parties must comply with any applicable
regulatory or confidentiality requirements. Also, beyond the
relevance of interactions with sports governing bodies to the public
interest determination under the Special Rule, these interactions
may also be relevant to a prediction market's compliance obligations
in general.
---------------------------------------------------------------------------
Report suspicious trading activity or trading activity by
prohibited traders to the relevant sports governing body;
Cooperate with sports governing bodies to provide certain
data in connection with sports integrity investigations;
Consult with sports governing bodies on proposed event
contracts; and
Consult, as appropriate, with relevant governing bodies
regarding integrity-related restrictions applicable to marketing,
participant protections, and event contract design in the relevant
sport.
To the extent a prediction market coordinated with or entered into
information sharing arrangements with the relevant sports leagues or
governing bodies and/or designs event contracts in accordance with
league integrity standards, where applicable, those facts would weigh
against a finding that the applicable event contracts are contrary to
the public interest.
For these reasons, the Commission preliminarily believes that event
contracts based on the aggregate outcomes of professional or collegiate
sports events, based on objective and verifiable settlement criteria,
listed by prediction markets that maintain appropriate surveillance,
trading prohibitions, and coordination with relevant sports governing
bodies, are, depending on the full record and the Commission's
evaluation of all relevant factors, unlikely to be found to be contrary
to the public interest. This preliminary belief also rests on relevant
prior experience with how similar event contract types have operated,
although no prior listing or experience is dispositive. Prediction
markets have listed sports event contracts of the types described--
final scores, point differentials, win-loss results, tournament
advancement, individual and team statistical performance, and season-
long performance metrics--in volumes sufficient to permit meaningful
evaluation of their operating characteristics. The Commission has
considered surveillance data, integrity referrals, identified instances
of attempted manipulation, and the prediction markets' responses to
those instances. The Commission preliminarily believes that the record
supports the conclusion that event contracts involving aggregate
outcomes can be operated consistent with the public interest when
prediction markets maintain the structural protections outlined in
Sec. 40.11(a)(6)(iii)(A). The Commission has also considered the
potential uses of price information generated by these event contracts
in commercial decision-making, including by sports broadcasters,
sponsors, advertisers, fantasy sports operators, sports analytics
firms, and other commercial participants in sports-adjacent industries,
although generalized use of price information by adjacent industries is
not, standing alone, sufficient to resolve the public interest inquiry.
Nothing in the Proposal, including the Commission's preliminary
belief that such event contracts are unlikely to be contrary to the
public interest, is intended to create a safe harbor that any
particular contract satisfies the public interest standard, nor does it
replace the multi-factor analysis required under Sec. Sec. 40.11(a)(5)
and 40.11(a)(6). Rather, it reflects the Commission's considered
preliminary view of how the factor analysis generally resolves for such
event contracts. Event contracts remain subject to factor-by-factor
weighing.
(iii) Factors Indicating That the Commission Would Find Event Contracts
Involving Sports Activities To Be Contrary to the Public Interest
The Commission preliminarily finds that certain types of event
contracts involving sports activities are likely to be found to be
contrary to the public interest.
Player injury contracts. The Commission preliminarily believes that
event contracts that explicitly settle solely by reference to the
duration, severity, occurrence, or medical diagnosis of an injury
sustained by a specific athlete raise serious public interest
concerns.\254\ First, such event contracts create perverse financial
incentives that could encourage or facilitate physical harm to
athletes. Second, the settlement of such event contracts would likely
depend on medical diagnoses, which raises public interest concerns
about the confidentiality of medical information and the potential for
such sensitive information to be leaked or exploited by insiders.
Third, settlement conditions based on a physicians' diagnoses or injury
reports do not provide a sufficiently objective, verifiable, and
manipulation-resistant basis for contract settlement. Therefore, under
the Commission's proposed factors, it would be likely that event
contracts that explicitly settle solely by reference to the severity,
occurrence, or medical diagnosis of an injury sustained by a specific
player would be found to be contrary to the public interest.
---------------------------------------------------------------------------
\254\ Comments on the ANPRM from the associations representing
major league sports players said that event contracts based on
player injuries should be prohibited, including because they involve
personal medical information. See Letter from the National Football
League Players Ass'n, the Major League Baseball Players Ass'n, the
National Basketball Players Ass'n, the National Hockey League
Players' Ass'n, and the Major League Soccer Players Ass'n 2-3 (Apr.
30, 2026).
---------------------------------------------------------------------------
Officiating outcome contracts. The Commission preliminarily
believes that event contracts that settle solely by reference to
judgment calls, discretionary decisions, or rulings of referees,
umpires, or other game officials, including without limitation,
penalties assessed, fouls called or not called, reviews initiated,
video replay decisions, player ejections, or disciplinary rulings made
during live games raise public interest concerns. Unlike final score
outcome contracts, event contracts based on officiating decisions
resolve on the basis of a small number of discrete human decisions made
by identifiable individuals under significant pressure and with limited
[[Page 35837]]
accountability in real time.\255\ The Commission preliminarily finds
that the risk of inappropriate contact between market participants and
officiating personnel and the risk of selective officiating raises
public interest concerns because that risk threatens the integrity of
the game, which is, in turn, a matter of public interest.\256\ In
addition, market participants could not form meaningful forecasts about
officiating outcomes described above because for these calls officials
must make quick, discrete judgments, and so the prices of such event
contracts would not provide meaningful information.\257\ For these
reasons, under the Commission's proposed factors, it would be likely
that event contracts that explicitly settle solely by reference to
officiating outcomes as described above would be found to be contrary
to the public interest.\258\
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\255\ For example, event contracts based on officiating
decisions could incentivize game participants to commit more fouls,
thereby threatening the integrity of the game.
\256\ The Commission notes an instance of selective officiating
and other inappropriate conduct that is an example of the public
interest concerns regarding officials' conduct. See U.S. v. Donaghy,
570 F.Supp.2d 411 (E.D.N.Y. 2008) (NBA official cooperated in
investigation and pled guilty in case where official used inside
information in a betting scheme).
\257\ That is, market participants' opinions on such matters are
irrelevant and expression of those opinions through event contract
trading would call into question the integrity of the game involved.
\258\ For the avoidance of doubt, event contracts that settle
based on the overall outcome of sports events, including final
scores, point differentials, or statistics compiled over the course
of play, are not included in this category, even if such outcomes
may have been affected in part by officiating decisions. This factor
relates solely to event contracts in which the settlement events are
officiating decisions, rather than derivative outcomes of play.
---------------------------------------------------------------------------
Discrete-action contracts involving specific participants. The
Commission preliminarily believes that event contracts that settle
solely by reference to a discrete action, event, or occurrence in
sporting events, including, without limitation, event contracts
settling on the type of a specific play called for or executed by a
specific player or team, the type or outcome of a specific pitch thrown
by a specific pitcher, the outcome of a specific shot taken by a
specific player, or whether a specific player or team commits a
specific foul or penalty, present public interest concerns.
Specifically, event contracts based on discrete actions do not
provide meaningful information because market participants can have
little actual insight into specific in-game acts of identifiable
participants. Also, in the context of the Commission's focused review
of event contracts involving Enumerated Activities, the Commission
preliminarily views such event contracts as raising public interest
concerns relating to manipulation and information leakage because a
single player or team coaching staff member can determine the
settlement outcome of the event contracts. Last, the risk that
athletes' in-game decisions would be influenced by such event contracts
is contrary to the integrity of the game. For these reasons, under the
Commission's proposed factors, it would be likely that event contracts
meeting the criteria of a discrete-action contract as described above
would be found to be contrary to the public interest.
Physical altercation contracts. The Commission preliminarily
believes that event contracts that settle solely by reference to
physical altercations, fights, or conduct between players or
participants in the game that are subject to penalty, ejection, or
disciplinary action raise public interest concerns.\259\ Such event
contracts could create a direct financial incentive for both athletes
and market participants to encourage, facilitate, or provoke such
conduct. Even if the probability that any athlete or market participant
acts on such an incentive is low, the effect of a market in physical
altercation contracts on the culture of athletic competition is
inconsistent with the public interest. Also, the Commission
preliminarily believes that such event contracts are unlikely to
provide meaningful information, as market participants would generally
not have insight into when altercations would occur and, to the extent
they do have such insight, it is contrary to the public interest for
market participants to express those views on regulated markets. For
these reasons, under the Commission's proposed factors, it would be
likely that event contracts involving game-related altercations, as
described above, would be found to be contrary to the public interest.
---------------------------------------------------------------------------
\259\ The Commission preliminarily believes that event contracts
based on the overall outcomes, and not the specific actions of a
particular fighter, of combat sports, including Mixed Martial Arts,
Brazilian Jujitsu, Muay Thai, Boxing, Wrestling, and other sports in
which physical contact or combat is an integral and sanctioned
element of the game, are not included in this category. For these
sports, the occurrence of physical combat or contact during the game
is a core and lawful element of the sporting event on which the
contract is based, not an extraneous act of misconduct.
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Pre-collegiate sports events. The Commission preliminarily believes
that event contracts that settle solely by reference to games, sporting
events, or outcomes in which participants are below the collegiate
level raise public interest concerns.\260\ There are several factors
that differentiate pre-collegiate sports from sports at the collegiate
and professional levels. Since pre-collegiate sports have less
extensive governing bodies and typically lack a rigorous integrity
infrastructure, prediction markets would be less able to interface with
the governing body. Also, the relevant data flows (to the extent formal
data are collected at all) are decentralized and less reliable than for
collegiate and professional sports. Similarly, broad and numerous
groups of individuals would potentially have inside information about
pre-collegiate sports and would be subject to little or no contractual
limitations on information usage. In the context of its focused review
of event contracts involving Enumerated Activities, the Commission
preliminarily believes that these differences from professional and
collegiate sports raise particular concerns about manipulation,
settlement integrity and information leakage.
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\260\ The Commission preliminarily does not view this category
to include any professional league, international competition
sanctioned by recognized governing bodies, or other games that may
include athletes of various ages but are not organized primarily at
the pre-collegiate or youth level.
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The Commission also notes that, to the extent event contracts based
on pre-collegiate sports events would yield economically useful
information, this use of the event contracts could raise public
interest concerns relating to marketing and other commercial use of
information related to minors. There may also be public interest
concerns related to the disclosure of minors' personal identifying
information. For these reasons, under the Commission's proposed
factors, it would be likely that event contracts involving pre-
collegiate sports events would be found to be contrary to the public
interest.
The Commission requests comment on all aspects of its proposed
factors to determine whether event contracts that involve particular
Enumerated Activities are contrary to the public interest.
F. The Commission's Authority To Identify Additional Activities Similar
to the Enumerated Activities
Clause (VI) in paragraph (i) of the Special Rule provides that the
Commission may determine that event contracts are contrary to the
public interest if the event contracts involve ``other similar activity
determined by the Commission, by rule or regulation,
[[Page 35838]]
to be contrary to the public interest.'' \261\ The Commission notes
that this phrasing appears to call for the Commission to make two
separate determinations that the event contracts are contrary to the
public interest, but preliminarily does not believe that is the intent
of the provision.
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\261\ CEA sec. 5c(c)(5)(C)(i)(VI), 7 U.S.C. 7a-
2(c)(5)(C)(i)(VI).
---------------------------------------------------------------------------
Instead, the Commission preliminarily believes that the Special
Rule calls for, first, a determination that the other activity is
similar to one or more of the Enumerated Activities, made by rule or
regulation, and second, a determination that event contracts involving
that activity are contrary to the public interest. The second
determination would be made in the same way as for other event
contracts that involve Enumerated Activities.
The Commission also preliminarily believes that the phrase
``contrary to the public interest'' at the end of clause (VI) means
that the similarity to the Enumerated Activities should be in a way
that makes event contracts based on the similar activity also subject
to a public interest prohibition. That is, this phrase emphasizes that
the similarity must be in some public interest-related aspect.
Clause (VI) is implemented in proposed Sec. 40.11(a)(2)(vi), which
provides that Sec. 40.11 applies to event contracts that involve
``Other activity that the Commission determines, by rule or regulation,
to be similar to one or more activities enumerated in paragraphs
(a)(2)(i) through (v) of this section.'' Proposed Sec. 40.11(a)(2)(vi)
would thus authorize the Commission to identify, by rule or regulation,
additional, similar activities to the Enumerated Activities. And if
event contracts involved those similar activities, then the event
contracts would be subject to a determination that the event contracts
are contrary to the public interest. While the Commission is not
proposing to adopt, at this time, a rule or regulation determining that
any activity is similar to any Enumerated Activity, the Commission
reiterates that it retains the authority under the Special Rule and
proposed Sec. 40.11(a)(2)(vi) to do so.
The Commission requests comment on all aspects of its proposed
approach to event contracts that involve activities that are similar to
the Enumerated Activities.
G. Process Under Sec. 40.11 and Technical Amendments
The Commission acknowledges that under the structure of the Special
Rule, event contracts could be found to be contrary to the public
interest after trading of the event contracts has begun. Since this
statutory structure could require that prediction markets close out
market participants' positions in event contracts that are found to be
contrary to the public interest, the Commission recognizes that this
could disadvantage market participants and prediction markets. This
section discusses these issues and how the Commission has attempted, in
the Proposal, to streamline Sec. 40.11 so that any necessary
Commission action can be taken as efficiently as possible. This section
also discusses technical amendments in Sec. 40.11 and the delegation
of authority in Sec. 40.7.
1. The Process for Commission Action Under Sec. 40.11
The Special Rule provides that the Commission must make a final
public interest determination ``not later than 90 days from the
commencement of its review unless the party seeking to offer the
[relevant event contract] agrees to an extension of this time
limitation.'' \262\ CEA section 5c(c)(1) provides that a DCM may list a
contract for trading by providing a written certification that the
contract complies with the CEA (including Commission regulations
thereunder).\263\ Rule 40.2(a)(2) provides that the Commission must
receive a self-certified contract submission by the open of business on
the business day preceding the product's listing.\264\ The Special Rule
(i.e., CEA section 5c(c)(5)(C)) does not include any requirement that
the DCM suspend the listing of event contracts that are under review by
the Commission.\265\
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\262\ CEA sec. 5c(c)(5)(C)(iv), 7 U.S.C. 7a-2(c)(5)(C)(iv).
\263\ 7 U.S.C. 7a-2(c)(1).
\264\ 17 CFR 40.2(a)(2).
\265\ Cf. CEA sec. 5c(c)(3), 7 U.S.C. 7a-2(c)(3), providing for
a stay of the certification of a new rule or rule amendment while
under review by the Commission.
---------------------------------------------------------------------------
The Commission preliminarily believes it is clear from this
statutory timeline that Congress contemplated that self-certified event
contracts that are subject to the Special Rule and that are listed and
actively trading could be found to be contrary to the public interest
and prohibited, in which case the event contracts would have to be
delisted under clause (ii) of the Special Rule. The Commission notes
that the Special Rule applies ``[i]n connection with the listing of''
event contracts but does not impose a specific time limit on when the
Commission may commence a public interest review of event
contracts.\266\ Also, as explained above, the Commission preliminarily
believes that the Special Rule does not authorize the Commission to
determine that event contracts are contrary to the public interest
unless the Commission has the relevant event contracts before it.
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\266\ CEA sec. 5c(c)(5)(C)(i), 7 U.S.C. 7a-2(c)(5)(C)(i).
---------------------------------------------------------------------------
For these reasons, the Commission preliminarily anticipates that
its determinations that event contracts are contrary to the public
interest might entail the delisting of at least some event contracts
that are actively trading. The Commission understands that this
delisting could result in an administrative burden for the prediction
market but anticipates that it would be manageable for the prediction
market to cancel the event contracts and return the purchase price and
fees paid by market participants for the event contracts. Market
participants would lose any hedge and unrealized gains provided by the
event contracts, but the Commission preliminarily believes that event
contracts found to be contrary to the public interest would have lesser
hedging utility. In any case, contracts that are determined to be
contrary to the public interest should not be listed for trading or
cleared, as is stated in the Special Rule.
The Commission also acknowledges that unless the prediction market
agrees to suspend trading of the event contracts while they are under
review, it is possible that event contracts that are later found to be
contrary to the public interest would be traded for the time permitted
for the Commission's review under the proposed process. To mitigate
this, the Commission has attempted to propose factors that should
assist prediction markets in avoiding the self-certification of event
contracts that would likely be found to be contrary to the public
interest. The Commission encourages prediction markets to engage with
Commission staff to discuss event contracts that may involve Enumerated
Activities and potentially raise concerns under the factors in proposed
Sec. Sec. 40.11(a)(5) and 40.11(a)(6). Such discussions prior to self-
certification could mitigate adverse consequences from trading of event
contracts that are later prohibited under the Special Rule.
Last, the Commission preliminarily believes that proposed Sec.
40.11(c)(5), which provides for the Commission to request that the
prediction market suspend trading of the event contracts under review,
could also mitigate such adverse consequences. In determining whether
to abide by the request and suspend trading, the prediction market
[[Page 35839]]
could consider any of its relevant statutory, regulatory or self-
regulatory obligations (e.g., its obligations to ensure market
integrity and prevent market disruption) and circumstances such as the
volume of transactions in the event contracts. Thus, relevant
obligations and market factors would influence the prediction market's
choice whether trading should occur in event contracts that may
potentially be found contrary to the public interest.
The Commission requests comment on its preliminary interpretation
of the process under Sec. 40.11 and any steps that could mitigate any
market disruption from a determination that event contracts are
contrary to the public interest.
Recalling that clause (i) of the Special Rule states that ``[i]n
connection with the listing of'' event contracts, ``the Commission may
determine that such [event contracts] are contrary to the public
interest'' if they involve an Enumerated Activity,\267\ commenters are
invited to address a different possible reading of this provision. It
could be interpreted to mean that the Commission's public interest
determination may be made prior to listing, so long as the
determination relates to a type of event contract that involves an
Enumerated Activity and could potentially be listed.
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\267\ Id.
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The Commission is not proposing to adopt this reading.\268\ Under
such an interpretation, however, the Commission could issue
determinations that categories of event contracts involving certain
Enumerated Activities (as described in the determinations) are contrary
to the public interest and may not be listed or made available for
clearing or trading, even before any such event contracts are self-
certified. In this approach, all of the Proposal would remain the same,
including the factors that the Commission would apply to determine if
event contracts involve an Enumerated Activity and if such event
contracts are contrary to the public interest. The difference would be
the addition of a provision to proposed Sec. 40.11 to the effect that
the Commission may issue an order finding that event contracts
involving an Enumerated Activity described in the order are contrary to
the public interest, based on the factors in proposed Sec. Sec.
40.11(a)(5) and 40.11(a)(6), without requiring that the event contracts
be self-certified by a prediction market or that the Commission
undertake a 90-day review of the event contracts under proposed Sec.
40.11(c).
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\268\ See supra, introduction to section II., for a description
of the Commission's proposed interpretation of the Special Rule.
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As another alternative, the Commission requests comment on whether
it should use its exemptive authority under CEA section 4(c) to provide
that defined classes of event contracts may be listed and traded
without individualized review under Sec. 40.11,\269\ and whether such
relief would meaningfully reduce the burden of individualized review.
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\269\ CEA sec. 4(c), 7 U.S.C. 6(c).
---------------------------------------------------------------------------
The Commission requests comment on whether either of these
alternative approaches should be added to the proposed approach.
2. Information Required for Commission Action Under Sec. 40.11
The Commission notes that application of the proposed factors to
determine whether event contracts involve an Enumerated Activity and
whether such event contracts are contrary to the public interest would
require that prediction markets provide appropriate information about
the event contracts they certify for trading. This information would
have to be sufficient for Commission staff reviewing the event
contracts to recommend Commission action under Sec. 40.11 when
appropriate.
The Commission notes that Sec. 40.2(a)(3)(v) requires the
prediction market to submit with its self-certification of a contract
``[a] concise explanation and analysis that is complete with respect to
the product's terms and conditions, the underlying commodity, and the
product's compliance with applicable provisions of the [CEA],'' along
with sufficient documentation.\270\ The Commission believes that, where
an event contract potentially involves an Enumerated Activity, this
rule requires that the prediction market concisely explain and analyze
whether the event contract does in fact involve an Enumerated Activity
and, if it does, why the event contract is not contrary to the public
interest, as these are applicable provisions of the CEA.
---------------------------------------------------------------------------
\270\ 17 CFR 40.2(a)(3)(v).
---------------------------------------------------------------------------
The Commission preliminarily anticipates that prediction markets
would address the proposed factors for the Commission's determinations
in the prediction markets' part 40 submissions of event contracts that
potentially involve an Enumerated Activity. The Commission notes that
overly broad or generalized contract specifications may impact a
prediction market's ability to provide a complete explanation and
analysis of whether the event contract's potential permutations may
involve an Enumerated Activity and, if so, are contrary to the public
interest--as well as the CFTC's ability to effectively evaluate such
explanation and analysis.\271\ The Commission preliminarily believes
that for event contracts that potentially involve an Enumerated
Activity, a mere general statement of the type of event contracts to be
listed would be insufficient for the Commission's review under Sec.
40.11 and would not comply with the Sec. 40.2(a)(3)(v) requirement
that the prediction market explain why the event contracts comply with
the CEA. Therefore, the Commission preliminarily anticipates that in
such instances, the staff would request that the prediction market
provide additional information, sufficient for the Commission's review
under Sec. 40.11, demonstrating that the event contracts meet the
requirements of the CEA, as required by Sec. 40.2(b).\272\
---------------------------------------------------------------------------
\271\ See CFTC Staff Letter 26-08 (Mar. 12, 2026), at 4-5,
available at https://www.cftc.gov/csl/26-08/download. The statutory
and regulatory requirements discussed in this letter apply to all
event contracts self-certified by prediction markets, not just event
contracts subject to the Special Rule.
\272\ 17 CFR 40.2(b).
---------------------------------------------------------------------------
3. Amendments to Sec. 40.11(c) and New Sec. 40.11(d)-(f)
A determination under the Special Rule that an event contract is
contrary to the public interest carries substantial consequences. The
event contract cannot be listed for trading or accepted for clearing.
The prediction market loses the ability to offer a product it has
developed, on which it has expended compliance costs, and around which
market participants may have organized hedging or trading strategies.
Counterparties lose access to the event contract. The information-
aggregation and price-discovery functions the event contract might have
served are foreclosed. And the certification right Congress provided to
prediction markets under section 5c(c)(1) is overridden as to that
event contract.
Accordingly, the Commission proposes a framework designed to ensure
that prohibition determinations rest on a record sufficient to support
them and on the considered judgment of the Commission as a body. The
framework reflects the Commission's preliminary view that
determinations of this consequence should be made carefully, on a
developed record, with the prediction market having had a meaningful
opportunity to respond to the agency's reasoning, and only when the
Commission has reached a
[[Page 35840]]
considered conclusion that the public interest requires prohibition.
The 90-day timeline the Special Rule imposes is a hard backstop on
the determination process. The proposed framework's procedural steps
are designed to fit within 90 days because the statute requires it.
Where additional time is needed to develop the record adequately, the
statute provides for extensions only with the prediction market's
agreement,\273\ and the framework preserves that mechanism by
permitting extensions only with the agreement of, or upon the request
of, the prediction market.
---------------------------------------------------------------------------
\273\ CEA sec. 5c(c)(5)(c)(iv), 7 U.S.C. 7a-2(c)(5)(c)(iv).
---------------------------------------------------------------------------
The Commission acknowledges that the framework proposed herein
departs in several respects from the procedures established in the
existing Sec. 40.11(c). The existing rule provides a 90-day review
process triggered by Commission determination based on review of
submissions and contemplates suspension of listing or trading during
the pendency of review at the Commission's request. The framework
proposed by the Commission refines the initiation procedure, clarifies
the suspension provision, and adds procedural protections for the
prediction market that is the subject of review. The reasons supporting
the new framework are stated in the discussion of each provision below.
The Commission's proposed Sec. 40.11 establishes a structured 90-
day review process with defined procedural rights for the prediction
market, defined record-development obligations on the Commission and
its staff, and defined limits on the Commission's authority to act on a
thin record or without considered Commission-level engagement.
Initiation of Review. Proposed Sec. 40.11(c)(1) provides that the
Commission may commence a review under this section only by a written
determination of the Commission that there is a basis to believe that
an event contract submitted under Sec. 40.2 or Sec. 40.3 both
involves an Enumerated Activity and may be contrary to the public
interest under the factors set forth in Sec. Sec. 40.11(a)(5) and
40.11(a)(6). Such a review must commence within 10 days after the event
contract's listing. This provision implements the statute's ``may
determine . . . if'' structure. The statute does not require the
Commission to review every submission involving an Enumerated Activity;
it authorizes the Commission to act when warranted. This proposed
basis-determination ensures that the Commission's discretion to
initiate review is exercised through a Commission-level commitment,
rather than through informal staff-level processes that the Commission
must subsequently ratify, under time pressure. Notice to the prediction
market of the Commission's written determination initiating review
would be the action that triggers the 90-day clock and engages the
procedural and substantive consequences that follow; the Commission
preliminarily believes that the triggering action should reflect the
Commission's considered judgment from the start.
The proposed provision refines the initiation procedure under the
existing Sec. 40.11(c)(1), which permits the Commission to determine,
based on review of submissions, that event contracts may involve an
enumerated activity and are subject to review, without specifying a
basis standard or a written-determination requirement. The Commission
preliminarily believes that initiation of review should rest on a
written determination of the Commission satisfying a defined standard.
The written determination requirement and the basis standard ensure
that the procedural and substantive consequences of review are engaged
only when the Commission has determined those consequences are
warranted, and they create a record at the start against which any
subsequent determination can be measured.
The proposed notice-content requirements in Sec. 40.11(c)(2)
ensure that the prediction market knows what is being reviewed, which
Enumerated Activity is implicated, which terms of the event contract
are at issue, and which factors in proposed Sec. Sec. 40.11(a)(5) and
40.11(a)(6) the Commission has identified as warranting review. Without
this information, the Commission preliminarily believes the prediction
market cannot meaningfully respond. The Commission also preliminarily
believes the requirements are also beneficial for record development--
the Commission should articulate its theory at the start of the review
and be constrained, going forward, to develop the record consistent
with the theory it has stated.\274\
---------------------------------------------------------------------------
\274\ Cf. SEC v. Chenery Corp., 318 U.S. 80, 87 (1943).
---------------------------------------------------------------------------
Consolidation. As noted above, due to the increase in the number of
event contracts that DCMs have self-certified for listing under Sec.
40.2, the Commission preliminarily believes that in some circumstances
DCMs and the general public would benefit from the issuance of a single
order (rather than multiple orders) finding that a group of similar
event contracts are contrary to the public interest. Throughout
proposed Sec. 40.11, the text refers to agreements, contracts,
transactions, or swaps in the plural to match the text of the Special
Rule.\275\ The plural form used in the Special Rule implies that more
than one contract can be covered by a public interest finding.
---------------------------------------------------------------------------
\275\ CEA sec. 5c(c)(5)(C)(i), 7 U.S.C. 7a-2(c)(5)(C)(i).
---------------------------------------------------------------------------
Therefore, proposed Sec. 40.11(c)(4) provides that the Commission
may consolidate review of multiple submissions pending under Sec. 40.2
or Sec. 40.3 that share common characteristics, in which case the
determination to begin the review would include a description of the
group of submissions. The rule also makes clear that a determination to
begin a 90-day review can cover event contracts submitted by multiple
prediction markets. The Commission preliminarily intends that this
provision would apply to groups of event contracts that are similar in
substance because they involve the same underlying event or a
substantially similar set of underlying events. Distinctions between
the event contracts in matters such as the particular settlement
mechanism would be less important. The purpose would be to group
together event contracts that raise substantially the same potential
public interest concerns so that the event contracts could be reviewed
together and, if found to be contrary to the public interest, be
covered by a single order by the Commission.
Correspondingly, proposed Sec. 40.11(e)(1)(i) provides that the
Commission may issue an order finding that a group of event contracts
that are subject to a 90-day review are contrary to the public
interest. The Commission preliminarily believes that its action with
respect to a group of event contracts would promote predictability for
prediction markets and market participants. It would also obviate the
need for multiple determinations with respect to similar contracts and
streamline the process for Commission action under Sec. 40.11. The
Commission realizes that to serve this purpose, an order covering a
group of event contracts would have to describe the group and the
reasons why the event contracts in the group are contrary to the public
interest in a manner that would be useful to prediction markets and
market participants in understanding what types of event contracts
would be subject to the same finding.
[[Page 35841]]
The Commission has carefully considered whether the proposed rule
should authorize categorical determinations--that is, determinations
applying prospectively to a defined class of agreements, contracts,
transactions, or swaps not yet certified or submitted to the
Commission. The Commission preliminarily believes that such categorical
determinations are not permissible under the structure of CEA section
5c. This preliminary belief flows from the text of the Special Rule,
the structure of section 5c, and the APA.
The Special Rule authorizes the Commission to ``determine that such
agreements, contracts, or transactions are contrary to the public
interest if the agreements, contracts, or transactions involve'' any of
the enumerated activities.\276\ The text refers to specific
``agreements, contracts, transactions, or swaps''--the same agreements,
contracts, transactions, or swaps that registered entities certify or
submit to the Commission under CEA section 5c(c) and the Commission's
part 40 regulations. The Special Rule's placement within the same
statutory section as the certification and approval framework suggests
that it operates as a backstop: when a prediction market certifies an
agreement, contract, transaction, or swap involving an enumerated
activity, the Commission may determine whether that particular
instrument is contrary to the public interest. The text does not
authorize the Commission to issue prospective declarations applying to
agreements, contracts, transactions, or swaps that have not been
certified or submitted and that may not yet exist.
---------------------------------------------------------------------------
\276\ Id.
---------------------------------------------------------------------------
The Commission preliminarily believes that categorical
determinations would function as rulemaking without APA compliance. The
APA distinguishes between ``rule making'' which is ``the agency process
for formulating, amending, or repealing a rule,'' and ``adjudication,''
which is ``the agency process for the formulation of an order.'' \277\
A ``rule'' is defined as ``the whole or a part of an agency statement
of general or particular applicability and future effect designed to
implement, interpret, or prescribe law or policy.'' \278\ An ``order''
is ``the whole or a part of a final disposition, whether affirmative,
negative, injunctive, or declaratory in form, of an agency in a manner
other than rule making but including licensing.'' \279\
---------------------------------------------------------------------------
\277\ 5 U.S.C. 551(5), (7).
\278\ 5 U.S.C. 551(4).
\279\ 5 U.S.C. 551(6).
---------------------------------------------------------------------------
The Commission preliminarily believes that a categorical
determination applying prospectively to a class of agreements,
contracts, transactions, or swaps not before the Commission would have
general applicability and future effect--the defining features of a
rule rather than an order. The Supreme Court has long recognized that
an agency cannot achieve through adjudication what the APA requires it
to achieve through notice-and-comment rulemaking.\280\ A categorical
determination--purporting to apply prospectively to a class of future
certifications without those certifications having been the subject of
the determinative proceeding--would have precisely the general
applicability and future effect that distinguish a rule from an order.
The Commission preliminarily believes that issuing such a determination
through an adjudicative posture rather than through notice-and-comment
rulemaking would invert the APA's allocation of agency authority.
---------------------------------------------------------------------------
\280\ See, e.g., Chrysler Corp. v. Brown, 441 U.S. 281, 301-03
(1979) (agency action having ``the force and effect of law'' must be
promulgated through procedures consistent with the APA).
---------------------------------------------------------------------------
The Commission acknowledges that the volume of event contracts
certified under Sec. Sec. 40.2 and 40.3 may make individualized review
burdensome, particularly during periods of high submission activity.
The Commission preliminarily believes, however, that this burden
follows from the structure Congress established.
The absence of categorical determinations does not leave market
participants without guidance. Although the Commission's determinations
would apply only to the event contracts before it, the Commission's
reasoning in prior determinations would inform its analysis of
substantially similar event contracts. Consistent with ordinary
principles of reasoned decision-making, the Commission would treat like
event contracts alike and would explain any departure from its prior
analysis. Prediction markets could thus look to the Commission's
published determinations to anticipate how the public interest factors
are likely to apply to comparable event contracts. This predictability
arises from the consistency of the Commission's reasoning rather than
from any binding categorical effect. The Commission preliminarily
expects that prediction markets, as self-regulatory organizations, will
incorporate the Commission's public interest findings into their
construction and listing of event contracts, reducing the number of
event contracts that the Commission will need to review.
As noted above, the Commission requests comment on alternatives to
the proposed approach in this regard.\281\
---------------------------------------------------------------------------
\281\ See supra, text accompanying notes 268 to 269.
---------------------------------------------------------------------------
Statement of concerns and prediction market response. Proposed
Sec. 40.11(d)(1) requires the Director of the Division of Market
Oversight, within fifteen days after the prediction market is provided
the written determination of initiation, to provide the prediction
market a written statement identifying the factual basis, legal theory,
specific contract terms, and factors in proposed Sec. Sec.
40.11(a)(4), 40.11(a)(5), and 40.11(a)(6) supporting the Commission's
review. Proposed Sec. 40.11(d)(2) provides the prediction market 30
days from the written determination of initiation to submit a written
response, which may include supporting data, expert submissions,
economic analysis, and any proposed modifications to the event
contract.
The Commission preliminarily believes that these provisions advance
two principles. The first is that meaningful opportunity to respond
requires advance notice of the Commission's theory. The fifteen-day
statement of concerns prevents the prediction market from responding to
a moving target. It also forecloses the Commission from refining its
theory after seeing the response, which is a form of post hoc
rationalization the Commission disfavors and which administrative law
bars.\282\
---------------------------------------------------------------------------
\282\ See Motor Vehicle Manufacturers Ass'n v. State Farm Mutual
Automobile Insurance Co., 463 U.S. 29, 50 (1983).
---------------------------------------------------------------------------
The second principle is that determinations of this consequence are
substantively better when the Commission has the prediction market's
response and proposed modifications before it. The Commission
preliminarily believes that a determination process that operates as a
binary yes-or-no on the event contract as submitted is suboptimal. The
prediction market may be able to address the Commission's concerns
through targeted modifications, and the Commission may be able to reach
a result that protects the public interest without imposing the
determinate costs of prohibition. The express provision for proposed
modifications during the response period creates space for that
possibility on the record, before the Commission commits to a
determination.
The existing Sec. 40.11(c) does not provide defined procedural
rights of this kind to the prediction market that is the
[[Page 35842]]
subject of review. The Commission preliminarily believes that defined
procedural rights are warranted given the consequences of a Sec. 40.11
determination and given the contribution that meaningful registered-
entity participation makes to the quality of the Commission's record
and reasoning.
Staff recommendation and prediction market response to
recommendation. Proposed Sec. 40.11(d)(3) provides that the Director
of the Division of Market Oversight, with the concurrence of the
General Counsel, may submit a written recommendation to the Commission
not later than 60 days after the written determination of initiation.
The recommendation would address the prediction market's response and
any proposed modifications and would be required to be provided to the
prediction market simultaneously with submission to the Commission.
Proposed Sec. 40.11(d)(4) allows the prediction market until day 70 to
submit a written response to the recommendation, limited in scope to
the recommendation.
The Commission preliminarily believes that these provisions reflect
the principle that a party adverse to consequential agency action
should have the opportunity to identify errors in the Commission's
reasoning before the agency acts. A staff recommendation provided to
the Commission without the prediction market's response operates as a
one-sided submission. The Commission preliminarily believes that the
prediction market may have factual or analytical responses to the
recommendation that the Commission would benefit from considering
before voting. The Commission preliminarily believes that the day-70
response right ensures that the Commission has those responses before
it.
The scope of the day-70 response would be limited to the
recommendation itself. It would not be an opportunity to relitigate the
response submitted by day 30. The Commission preliminarily believes the
response should be limited to address what the staff recommendation
said, what it relied on, what it omitted, and how it characterized the
prediction market's prior submission.
The existing Sec. 40.11(c) does not provide for any of these
procedures. The Commission preliminarily believes that the response
opportunity is warranted given the consequence of the determination and
the contribution responsive submissions make to the quality of the
Commission's deliberation.
Extensions. Proposed Sec. 40.11(d)(5) provides that the 90-day
review period may be extended only with the agreement of, or upon the
request of, the prediction market. This proposed provision implements
the statute.\283\ The statute does not authorize unilateral Commission
extension.
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\283\ CEA sec. 5c(c)(5)(C)(iv), 7 U.S.C. 7a-2(c)(5)(C)(iv).
---------------------------------------------------------------------------
Determination and review deemed concluded. Proposed Sec.
40.11(e)(1) provides that, not less than 90 days after the written
determination of initiation, or at the conclusion of any registered-
entity-agreed extension, the Commission may issue an order finding that
the event contract (or contracts if a consolidated group is under
review) is contrary to the public interest. If the Commission does not
issue such an order, the event contract may be, or continue to be,
listed for trading and accepted for clearing, and the review is deemed
concluded.
Proposed Sec. 40.11(e)(1)(ii) includes a specific statement that
if the Commission does not issue an order before the end of the 90-day
review period, or any agreed extension thereof, or if 100 days have
passed since the date of the contracts' listing, the event contracts
subject to review (or never subjected to review) may be, or continue to
be, listed for trading and accepted for clearing and the review shall
be deemed concluded. The Commission preliminarily believes that this
provision would allow for a more streamlined process by not requiring
that the Commission issue an order of approval and provide certainty in
cases where the Commission does not take any action at the end of the
review period. Thus, whether through an order or through non-action,
the agency will have taken final agency action.
For clarity, proposed Sec. 40.11(c)(3) specifically provides for
the Commission to notify the prediction market of the commencement of a
90-day review.
The existing Sec. 40.11 does not articulate the consequences of
inaction at the 90-day point in the terms the new proposed rule uses.
The Commission preliminarily believes this feature is warranted. The
Commission preliminarily believes that the deemed-concluded default is
supported by the statutory text and benefits prediction markets, market
participants, and the Commission by providing certainty about the
status of contracts at the conclusion of the review period.
Required findings. Proposed Sec. 40.11(e)(2) provides that an
order finding an event contract contrary to the public interest must
include written findings addressing each factor in proposed Sec. Sec.
40.11(a)(4), 40.11(a)(5), and 40.11(a)(6) on which the Commission
relied, weighing the factors favoring listing against those disfavoring
listing, and explaining the consistency of the determination with prior
Commission determinations involving comparable agreements, contracts,
transactions, or swaps, or providing a reasoned explanation for any
departure.
These requirements would codify obligations that already apply to
the Commission as a matter of administrative law. The duty of reasoned
decision-making, including the duty to consider relevant factors and to
weigh evidence in the record, is a State Farm obligation.\284\ The duty
to acknowledge departures from prior agency positions and to provide a
reasoned explanation for them is a Fox obligation.\285\ The Commission
preliminarily believes that codifying these obligations in the Proposal
does not impose substantive standards beyond what administrative law
requires, but it makes those obligations explicit on the face of the
regulation and ensures that any reviewing court will have a clear
regulatory benchmark against which to assess Commission action.
---------------------------------------------------------------------------
\284\ State Farm, 463 U.S. at 43.
\285\ FCC v. Fox Television Stations, Inc., 556 U.S. 502, 515
(2009).
---------------------------------------------------------------------------
Limits on delegation. Proposed Sec. 40.11(f) provides that the
Commission shall not delegate the determination to initiate review, the
submission of a recommendation to the Commission (except as provided in
proposed Sec. 40.11(d)(3)), or the issuance of a determination. The
Commission preliminarily believes that delegation of these functions is
incompatible with the structure of the proposed framework.
4. Delegation of Authority to Director of Division of Market Oversight
The Commission is proposing to add a provision to Sec. 40.7(a)
that delegates to the Director of the Division of Market Oversight, or
the Director's designee, the authority to perform ministerial and
record-development functions under Sec. 40.11, including service of
notices, written determinations, and statements and the development of
staff recommendations. The proposed provision states expressly that the
Commission does not delegate the functions reserved to the Commission
under Sec. 40.11(f).
The proposed new provision would be subject to the existing
limitation in Sec. 40.7(d) that the Commission may at
[[Page 35843]]
any time exercise the delegated authority. Also, current Sec. 40.7(c)
provides that the Director of the Division of Market Oversight may
submit to the Commission for its consideration any matter that has been
delegated pursuant to Sec. 40.7, which would include the new
provision.
The Commission requests comment on all aspects of its preliminary
views on the process for Commission action under Sec. 40.11 and the
proposed amendments to streamline the rule.
H. Implementation Timeline and Severability
The Commission proposes that the amendments to part 40, including
the adoption of the proposed factors for determining whether event
contracts involve Enumerated Activities and, if so, are contrary to the
public interest, would go into effect 60 days following publication of
a final rule in the Federal Register. At this time, Commission staff
would begin to review certified event contracts as described in section
II.G. above. The Commission preliminarily believes that the public
interest is served by preventing the listing and trading of event
contracts that are contrary to the public interest as soon as
practicable.
The Commission intends that if any provision of the Proposal were
to be held to be invalid or unenforceable facially, or as applied to
any person, plaintiff, or circumstance, the provision shall be
severable from the remainder of the Proposal, and shall not affect the
remainder thereof, and the invalidation of any specific application of
a provision shall not affect the application of the provision to other
persons or circumstances.
III. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) requires agencies to consider
whether the rules they issue will have a significant economic impact on
a substantial number of small entities and, if so, provide a regulatory
flexibility analysis with respect to such impact.\286\ The Commission
has previously established certain definitions of ``small entities'' to
be used by the Commission in evaluating the impact of its regulations
on small entities in accordance with the RFA.\287\ The amendments to
part 40 set forth herein impact DCMs and SEFs. The Commission has
previously determined that DCMs are not small entities for purposes of
the RFA.\288\ As the Commission explained in its Small Entity Policy
Statement, DCMs play a vital role in the national economy and are
required to operate as self-regulatory organizations, subject to
Commission oversight, with statutory duties to enforce the rules
adopted by their own governing bodies. Accordingly, the Commission
designates a DCM only when it meets the stringent requirements set
forth in section 5 of the Act, 7 U.S.C. 7, including expenditure of
sufficient resources to establish and maintain adequate self-regulatory
programs. Moreover, the Commission considered the resource and capital
requirements for operation of a DCM. Membership on the designated
exchanges is expensive and includes the nation's largest brokerage
houses. Moreover, the Commission considered the high volume of
transactions on Commission-designated DCMs and the large number of
employees. Based on these factors, the Commission has concluded DCMs do
not constitute small entities for purposes of the RFA.
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\286\ 5 U.S.C. 601 et seq.
\287\ Policy Statement and Establishment of ``Small Entities''
for purposes of the Regulatory Flexibility Act, 47 FR 18618 (Apr.
30, 1982).
\288\ Id. at 18618, 18619.
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Likewise, The Commission has also previously determined that SEFs
\289\ are not small entities for purposes of the RFA. The Commission
has determined that SEFs should not be considered ``small entities''
for essentially the same reasons that DCMs have previously been
determined not to be small entities.\290\ In making this determination,
the Commission has considered the resource and capital requirements for
registration as a SEF. SEFs play a central role in the national
regulatory scheme overseeing the trading of swaps and are subject to
Commission oversight with statutory duties to enforce the regulations
adopted by their own governing bodies. Accordingly, the Commission will
register an entity as a SEF only after it has met specific criteria to
establish it has the capability and sufficient resources to establish
and maintain an adequate self-regulatory program. In addition, once
registered, SEFs are required to comply with the requirements set forth
part 37 of the Commission's rules. For this reason, the Commission has
previously determined that SEFs do not constitute small entities for
purposes of the RFA.
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\289\ Core Principles and Other Requirements for Swap Execution
Facilities, 78 FR 33476, 33548 (June 4, 2013).
\290\ Id.
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Accordingly, the Chairman, on behalf of the Commission, pursuant to
5 U.S.C. 605(b), hereby certifies that the proposed amended rules will
not have a significant economic impact on a substantial number of small
entities. The Commission invites the public to comment on this
determination.
B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA) \291\ imposes certain
requirements on Federal agencies, including the Commission, in
connection with their conducting or sponsoring any collection of
information, as defined by the PRA. Under the PRA, an agency may not
conduct or sponsor, and a person is not required to respond to, a
collection of information unless it displays a currently valid control
number from the Office of Management and Budget (OMB).\292\ The PRA is
intended, in part, to minimize the paperwork burden created for
individuals, businesses, and other persons as a result of the
collection of information by Federal agencies, and to ensure the
greatest possible benefit and utility of information created,
collected, maintained, used, shared, and disseminated by or for the
Federal government.\293\ The PRA applies to all information, regardless
of form or format, whenever the Federal government is obtaining,
causing to be obtained, or soliciting information, and includes
required disclosure to third parties or the public, of facts or
opinions, when the information collection calls for answers to
identical questions posed to, or identical reporting or recordkeeping
requirements imposed on, ten or more persons.\294\
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\291\ 44 U.S.C. 3501 et seq.
\292\ 44 U.S.C. 3507(a)(3); 5 CFR 1320.5(a)(3).
\293\ 44 U.S.C. 3501.
\294\ 44 U.S.C. 3502(3).
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The Commission is proposing amendments to regulations containing a
collection of information for which the Commission has previously
received a control number from OMB. The title for this collection is:
OMB control number 3038-0093, Part 40, Provisions Common to Registered
Entities.\295\ The Proposal does not, however, contain any new
collections of information or modify any existing information
collection requirements subject to the PRA. Instead, as described in
this preamble, the proposed amendments specify types of event contracts
that may fall within the scope of section 5c(c)(5)(C) of the CEA. They
also include provisions allowing the Commission to determine that
certain categories of event contracts are contrary to the public
interest and therefore may not be listed for trading
[[Page 35844]]
or accepted for clearing on or through a CFTC-registered entity and set
out factors the Commission would apply in making this public interest
determination. Further, the Commission is proposing a definition of the
term ``gaming,'' a rule defining when an event contract ``involves'' an
Enumerated Activity, and related procedural amendments. These proposed
amendments do not include information collection requirements and will
not alter the information collection obligations of Commission
registrants subject to part 40.
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\295\ For the previously approved estimates, see ICR Reference
No: 202408-3038-001, available at https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=202408-3038-001.
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Accordingly, the CFTC has not prepared a PRA submission to OMB with
respect to the proposed amendments.
C. Consideration of Costs and Benefits
1. Introduction
Section 15(a) of the CEA requires the Commission to consider the
costs and benefits of its actions before promulgating a regulation
under the CEA or issuing certain orders.\296\ Consistent with this
statutory obligation, the Commission preliminarily considers the
potential costs and benefits associated with the proposed amendments to
Sec. 40.11. As required by CEA section 15(a), the Commission evaluates
these potential costs and benefits in light of the five broad areas of
market and public concern identified in the statute: (i) protection of
market participants and the public; (ii) efficiency, competitiveness,
and financial integrity of the derivatives markets; (iii) price
discovery; (iv) sound risk-management practices; and (v) other public-
interest considerations.\297\
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\296\ See 7 U.S.C. 19(a). See also, Investment Co. Inst. v.
Commodity Futures Trading Comm'n, 720 F.3d 370 (D.C. Cir. 2013);
Sec. Indus. & Fin. Mkts. Ass'n v. U.S. Commodity Futures Trading
Comm'n, 67 F. Supp. 3d 373 (D.D.C. 2014) (stating, ``Section 19(a)
does not require the CFTC to promulgate only rules that have low or
no costs; rather, the agency is simply required to show that they
`considered' and `evaluated' the costs of the rule . . . Nor does
Section 19(a) require the CFTC to conduct a `rigorous, quantitative
economic analysis to consider hypothetical costs that may never
arise or to ``measure the immeasurable'' benefits of ``preventing
future financial crises . . . the CFTC need not even gather
additional market data or conduct empirical studies to support its
analysis, so long as it reasonably addresses the uncertainty
stemming from any data limitations'').
\297\ The Commission's requirements under CEA sec. 15(a) differ
from those set out in Title II of the Unfunded Mandates Reform Act
(UMRA) of 1995 (2 U.S.C. 1532-1538), which covers Cabinet
departments and independent agencies, but not independent regulatory
agencies. According to Congressional Research Service, ``UMRA
requires that before promulgating a rule containing a mandate that
may result in the expenditure of $100 million or more in any one
year . . . covered agencies are to prepare a written statement
containing (among other things) a qualitative and quantitative
assessment of the anticipated costs and benefits . . . as well as
the effect of the Federal mandate on health, safety, and the natural
environment. The written statement is also generally required to
include estimates of future compliance costs, and any
disproportionate budgetary effects on particular regions,
governments, or segments of the private sector, and estimates of
effects on the national economy, including effects on job creation,
productivity, full employment, and international competitiveness.''
See Curtis W. Copeland, Cong. Research Serv., R41974, Cost-Benefit
and Other Analysis Requirements in the Rulemaking Process (2011),
available at https://www.congress.gov/crs-product/R41974.
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Since 2023, prediction-market activity has evolved against a
backdrop of significant legal and regulatory developments. The
Commission has observed continued growth in both the number and
diversity of event contracts listed for trading, as well as heightened
interest from entities seeking registration for the purpose of offering
such contracts as DCMs.\298\ A 2024 lawsuit challenged the Commission's
prior interpretations of the Special Rule, including the Commission's
treatment of political-control contracts and the scope of the term
``involve'' under the Special Rule.\299\ The Commission's history with
event contracts has also included academic-purpose political and
economic indicator markets,\300\ a 2008 Commission concept release
seeking comment on the appropriate regulatory treatment of event
contracts,\301\ several resource-intensive 90-day reviews of political
and sports-related contracts,\302\ and the significant expansion of
novel event contracts in recent years.\303\ Collectively, these
developments highlight that the current regulatory framework may
benefit from additional clarity, greater predictability, and a more
focused articulation of the factors that guide the Commission's
evaluation of whether an event contract is within the scope of the
Special Rule and, if so, whether the event contract is contrary to the
public interest.
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\298\ In the past year, the Commission has reviewed 28
applications involving DCMs and SEFs. The Commission approved 7
DCMs, while 18 DCM applications and 3 SEF applications are still
under review. Currently, there are 25 DCMs and 20 SEFs that operate
within the Commission's regulatory framework. See https://www.cftc.gov/IndustryOversight/IndustryFilings/TradingOrganizations.
In one of the largest prediction markets, the daily average number
of event contracts listed for trading increased from approximately
1,600 in April 2025 to 162,000 in April 2026.
\299\ See supra section I.C.7.
\300\ The Commission has long evaluated small-scale prediction
markets operated for academic purposes. For example, the Commission
issued no-action relief to the University of Iowa in 1992 and to
Victoria University of Wellington in 2014, permitting limited
political and economic-indicator trading for research purposes. See
supra section I.C.1.
\301\ The 2008 Concept Release sought public comment on the
appropriate regulatory treatment of event contract markets, prompted
by numerous questions about how the CEA applied to such products.
The release sought responses to 24 enumerated questions and
reflected early recognition of the increasing diversity of event-
based derivatives. See supra section I.C.2.
\302\ Since the adoption of Sec. 40.11 in 2011, the Commission
has conducted three 90-day reviews under Sec. 40.11(c) reflecting
recurring interpretive challenges under the Special Rule. See supra
sections I.C.5., I.C.6., and I.C.7.
\303\ Since 2021, the number and diversity of event contracts
listed for trading have increased dramatically--from roughly five
per year historically to more than 220 in 2021, with over 8,000
contracts trading in May 2026. New event contract underliers vary
from international events and natural disasters in specific U.S.
cities to public-health metrics, the occurrence of exoplanet
discoveries, video-game release dates, Academy Awards, public-health
metrics (COVID-19 cases and restrictions), confirmation of federal
officials, Supreme Court case outcomes, NFL television ratings, and
NASA moon-landing milestones.
---------------------------------------------------------------------------
The proposed amendments seek to provide this clarity while aligning
the Commission's administration of Sec. 40.11 with recent judicial
interpretations and the statutory structure of the Special Rule. In
particular, the Commission is considering amendments that would: (i)
clarify what it means for an event contract to ``involve'' an
enumerated activity under the Special Rule, including by expressly
focusing the analysis on whether an event contract's settlement is
determined by an occurrence, extent of an occurrence, or contingency in
such an activity; (ii) provide a definition of ``gaming'' consistent
with the ordinary meaning of the term and recent judicial guidance by
distinguishing ``gaming'' from other contests or competitive
activities; (iii) articulate a focused and understandable set of
public-interest factors, as described in proposed Sec. Sec.
40.11(a)(5) and 40.11(a)(6), that the Commission would apply in
determining whether an event contract subject to the Special Rule is
contrary to the public interest; and (iv) clarify the procedures for
initiating and conducting a 90-day review while preserving the
requirement that any final determination be based on the statutory
public-interest standard. Because prediction markets operate as self-
regulatory organizations under the CEA, the implementation of more
explicit Sec. 40.11 standards and a factor-based framework enhance
certainty at the time of contract listings, minimize interpretive
discrepancies, and mitigate late-stage disruptions. The Commission
preliminarily believes these improvements are likely to generate
tangible administrative efficiencies for prediction markets and market
participants, including shorter review cycles, fewer scope-related
disputes,
[[Page 35845]]
and reduced risk of post-listing reversals.
These amendments are intended to make the rules more transparent,
encourage responsible innovation, and reduce uncertainty for registered
entities and market participants. They also aim to ensure that any
event contracts traded on prediction markets comply with the CEA and
serve the public interest.
Under the Special Rule, the Commission interprets the public
interest as tied to specific, identifiable concerns rooted in the CEA's
purposes. These include whether a contract provides meaningful price-
discovery or informational utility; whether it poses risks of
manipulation, information leaks, or unclear settlement; and whether the
contract can be administered effectively within a prediction market's
compliance framework. The Proposal also considers the economic,
financial, and commercial significance of prediction market pricing as
an input into economic decision-making--including how aggregated market
sentiment may inform commercial planning, resource allocation, and
assessments of economic conditions. Conversely, if an event contract
does not provide meaningful informational value, encourages illicit
conduct, raises national-security concerns, or creates particular risks
of manipulation or information leakage, these factors strongly support
a finding that the contract is contrary to the public interest.
The Commission recognizes that market participants and prediction
markets may experience costs under the proposed amendments. These
include those associated with contract design, compliance planning,
market integrity, informational value, and submission practices, and
potentially second order impacts on the market structure and the
availability of new risk management tools. The Commission preliminarily
believes that the proposed factors-based framework, while imposing some
additional upfront analysis and documentation costs, will reduce
longer-term uncertainty, improve the predictability of Commission
determinations, and decrease the likelihood of late-stage disruptions
such as delisting following an adverse finding.
The discussion that follows identifies the baseline against which
potential costs and benefits are evaluated, describes the anticipated
effects associated with the amendments under consideration, and
explains how the Commission interprets and applies the CEA section
15(a) factors in this context. Because the Commission's analysis is
preliminary, and because the amendments under consideration may be
revised in response to public comments, the Commission invites
commenters to provide both qualitative and quantitative data regarding
the costs and benefits associated with these potential amendments, as
well as any information that may assist the Commission in refining its
evaluation in final rulemaking.
In the discussion that follows, the Commission has endeavored to
quantify costs and benefits, where possible and appropriate. In many
places, however, the Commission either lacks the necessary data to
reasonably quantify all of the costs and benefits, quantification is
impossible, or quantification would not enhance the consideration of
costs and benefits. Therefore, the Commission discusses the costs and
benefits in qualitative terms. Moreover, the Commission recognizes that
each market participant structures their business differently, so the
costs and benefits will not be applied uniformly across the market.
Lastly, the costs and benefits set out in the discussion below may be
mitigated by current market practices; however, the Commission's
discussion takes an expansive approach, as not all affected market
participants may have already realized or mitigated these costs and
benefits.
2. Baseline
For purposes of evaluating the potential costs and benefits of the
amendments under consideration, the Commission identifies the current
legal framework and current market conditions as its baseline. This
baseline includes: (i) the Special Rule--meaning CEA section
5c(c)(5)(C), (ii) the text of Sec. 40.11 as adopted in 2011, which
governs the submission process and how the Commission applies the
Special Rule; and (iii) the current state of the law applying that
text, including the 2024 decision of the U.S. District Court for the
District of Columbia in KalshiEX,\304\ the resulting vacatur of the
Commission's 2023 disapproval order, and the Commission's withdrawal of
the 2024 proposed rulemaking.
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\304\ KalshiEX, 2024 U.S. Dist. LEXIS 163925.
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The baseline also reflects current market practices and conditions,
especially the rapid growth and expansion of some prediction markets.
These practices and conditions provide insight and frame both the
expected benefits (e.g., price discovery, information aggregation,
hedging) and the risks borne by market participants (e.g., manipulation
susceptibility, exposure to information leakage).
Under the current framework for CFTC-regulated transactions,
prediction markets self-certify contracts (Sec. 40.2), including event
contracts, and list them for trading or clearing on the business day
following submission. These submissions are subject to the general
requirements of the CEA and the Commission's regulations, including
Core Principles applicable to prediction markets. Such event contracts
are also subject to the Special Rule, which applies after the
prediction market has certified the contract's compliance with all
other applicable requirements. The Special Rule directs the Commission
to evaluate whether the event contracts ``involve'' an enumerated
activity and, if so, whether the contracts are contrary to the public
interest. As reflected in the Commission's history with prediction
markets, the application of the Special Rule has produced significant
interpretive and procedural challenges.\305\
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\305\ These include the adoption of Sec. 40.11 in 2011 and the
subsequent 90-day reviews and determinations involving political
event contracts and sports-related contracts; the 2023 disapproval
of congressional control contracts; and a 2024 decision of the U.S.
District Court for the District of Columbia vacating that
disapproval. See supra section I.C.
---------------------------------------------------------------------------
The 2024 KalshiEX decision exposed significant unresolved questions
about the application of the Special Rule.\306\ The court rejected the
Commission's interpretation of ``involve'' and the scope of ``gaming''
in the Special Rule and vacated the Commission's 2023 disapproval of
congressional control event contracts.\307\ The decision resolved the
particular event contracts before the court but left open broader
questions about how the Special Rule applies, including how to identify
when an event contract ``involves'' an enumerated activity, what falls
within ``gaming,'' and how the unlawful-activity prong interacts with
conduct regulated under non-federal law. The Commission's subsequent
withdrawal of the 2024 proposed rulemaking left these questions
unaddressed.
---------------------------------------------------------------------------
\306\ KalshiEX, 2024 U.S. Dist. LEXIS 163925.
\307\ Id. at *39.
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In parallel, the Commission has observed a substantial expansion in
the number and diversity of event contract submissions and trading
activity, especially since October 2025, reaching $25 billion in March
2026, including new underlying events related to entertainment, public
health, natural phenomena, scientific discoveries, and political
events.\308\ Even though some of
[[Page 35846]]
these markets are still relatively new, event contracts are already
being used for price discovery, information aggregation, and hedging
across macroeconomics, politics, weather, and sports. The market for
event contracts is proving to be a vibrant and competitive space. In
response to strong demand from retail and institutional market
participants, multiple venues have registered as DCMs.
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\308\ The $25 billion in event contracts is approximately 0.08%
of the $31 trillion total notional value in futures contracts
regulated by the Commission. See Commodity Futures Trading
Commission, FY 2025 Agency Financial Report 4, available at https://www.cftc.gov/media/13096/2025AFR/download.
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DCMs registered with the CFTC (and other platforms outside the U.S.
where event contracts are listed and traded) have increasingly applied
their self-regulatory obligations to address trading on material non-
public information. In February 2026, for example, Kalshi closed two
cases alleging trading on material non-public information against its
own members, and the CFTC's Division of Enforcement issued an advisory
publicizing them.\309\ These developments reflect both heightened DCM
and Commission scrutiny of insider trading, manipulation, and
surveillance sufficiency in prediction markets, elements that bear on
baseline risk and compliance burdens for exchanges and market
participants.
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\309\ CFTC Press Release No. 9185-26, CFTC Enforcement Division
Issues Prediction Markets Advisory (Feb. 25, 2026), available at
https://www.cftc.gov/PressRoom/PressReleases/9185-26.
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The withdrawal of the 2024 proposal and the issuance of the 2026
ANPRM have further informed the Commission. The 2026 ANPRM requested
comments on the scope and operation of the Special Rule, including the
meaning of ``involve,'' the appropriate treatment of the Enumerated
Activities, and the factors relevant to a public-interest
determination. The Commission received approximately 3,500 public
comments.
Collectively, these developments reflect a regulatory environment
where the meaning and application of Sec. 40.11 remains uncertain for
both courts and market participants. At the same time, the scope of the
Commission's authority under the Special Rule has been the subject of
judicial scrutiny, leaving exchanges and market participants without
clear guidance on how their event contract submissions will be
evaluated.
3. Proposed Amendments
Key elements of the Proposal include: (1) providing a definition of
the circumstances in which an event contract ``involves'' an enumerated
activity, consistent with the understanding that ``involve'' refers to
the underlying event and not to trading activity or incidental
relationships; (2) providing a definition of ``gaming'' that aligns
with the meaning of the term as playing a game for recreational or
entertainment purposes and distinguishing games from contests such as
elections and awards; (3) setting out a structured set of factors to
guide Commission evaluations when determining whether a contract is
contrary to the public interest, which intends to ensure that the
Special Rule remains narrow and does not duplicate the Core Principles
or introduce an open-ended ``public good'' standard; (4) allowing the
Commission to review a self-certified contract, or a group of similar
contracts, by placing such contract(s) into a 90-day review period to
evaluate whether listing would be contrary to the public interest under
the Special Rule using the Proposal's factor framework; (5) clarifying
that at the end of the 90-day review period (i) if the Commission
issues an order finding a contract contrary to the public interest, the
contract may not be listed or may not continue to trade; or (ii) if no
order is issued, self-certification remains operative under Sec. 40.2
and the contract may be listed or continue to trade; and (6) delegating
authority to the Director of the Division of Market Oversight to
perform ministerial actions in the 90-day review.
The Proposal reflects the Commission's recent experience with event
contract market submissions, the procedural challenges observed in
prior 40.11(c) reviews, the interpretive issues raised in recent
litigation, observations of DCMs' responses to violations of their
standards in certain event contracts, and the feedback received in
response to the 2026 ANPRM. As described in section I.C., the
Commission's prior efforts demonstrate that flexibility and clarity are
required for a regulatory framework that ensures a fulsome analysis of
event contracts, leading to responsible market innovation. The Proposal
aims to clarify the Commission's authority under the Special Rule by
providing exchanges and market participants with clear standards and
predictable procedures, concentrating on the public-interest inquiry
relating to the specific characteristics of the underlying event and
contract design. The Commission also believes that the Proposal
reestablishes the relationship between the Commission and prediction
markets, acting in their role as self-regulatory organizations (SROs),
where the Commission is providing SROs with a clear framework in
applying the Special Rule, resulting in market and administrative
efficiencies.
The proposed amendments are intended to support prediction markets
as they provide price discovery, function as an information aggregation
tool, and enable hedging for events that lack traditional financial-
hedging instruments. Overall, these amendments may result in increased
regulatory scrutiny. This scrutiny may raise compliance burdens for
prediction markets listing diverse set of event contracts, potentially
increasing their costs. Furthermore, prediction markets may face
additional costs as they may need to modify internal reviews to align
with new definitions and factors. The Commission preliminarily believes
that to some extent these costs are attenuated by the Proposal as they
provide clearer boundaries for lawful versus prohibited products
resulting in potential declines in litigation risk and regulatory
uncertainty. Finally, to the extent that proposed amendments result in
enhanced consistency across prediction markets, there may be benefits
as consistency leads to a better functioning marketplace.
While the Proposal is likely to result in both costs and benefits,
the Commission preliminarily believes that the costs will be largely
mitigated by current market practices, and the benefit of enhanced
regulatory certainty will more than offset the costs.
(a) Proposed Sec. 40.11(a)(3): Event-Focused ``Involves'' Standard
Proposed Sec. 40.11(a)(3) identifies event contracts that
``involve'' an activity if their settlement is determined by an
occurrence, the extent of an occurrence, or a contingency in that
activity. This formulation focuses analysis on the underlying event the
contract references, not on features of trading behavior, venue
mechanics, or incidental relationships among market participants. This
event-focused formulation is part of the Proposal's broader effort to
increase clarity and align Sec. 40.11 to the statutory structure of
the Special Rule. The objective of the proposed amendment is to reduce
ambiguity around the scope of the Special Rule by focusing the inquiry
on the event that the event contract references. Focusing on what
happens in the world (e.g., whether a specified game is played and a
given outcome occurs) rather than on how trading happens (e.g., who
participates, market-maker strategies, cross-listing) is intended to
produce more consistent determinations and streamline review under
Sec. 40.11, thereby advancing the Proposal's goals of clarity,
[[Page 35847]]
predictability, and consistency in public-interest analysis.
Under the existing Sec. 40.2(a)(3)(v), prediction markets are
required to submit a concise explanation and analysis on whether the
event contract does in fact involve an Enumerated Activity and, if it
does, why the event contract is not contrary to the public interest.
Currently, many event contracts are certified using a template
submission, which is then used for listing many specific event
contracts. These templates often provide only a general description of
type of event contracts that will be listed. The Commission
preliminarily believes that for event contracts that potentially
involve an Enumerated Activity, this general description would be
insufficient for the Commission's review under Sec. 40.11 and would
not comply with the Sec. 40.2(a)(3)(v) requirement that the prediction
market explain why the event contracts comply with the CEA. Therefore,
the Commission preliminarily anticipates that in such instances, the
staff would request that the DCM supplement the template with
additional information, sufficient for the Commission's review under
Sec. 40.11, demonstrating that the event contracts meet the
requirements of the CEA and regulations thereunder, as required by
Sec. 40.2(b).
(i) Benefits
By shifting the focus to the triggering event of the event
contract, the Commission preliminarily believes that the Proposal will
provide prediction markets with clearer standards and a more
transparent review process. This added clarity will make it easier and
more efficient for prediction markets to bring event contracts to
market, producing administrative benefits for both the public and the
exchanges. The Commission also preliminarily believes that clearer
criteria and greater transparency will help prediction markets better
anticipate how their submissions will be evaluated, which may, in turn,
support a timelier listing of certain event contracts. As a result,
market participants may benefit from a broader range of contract
offerings, enabling more targeted exposures and improved hedging
opportunities. Clarity will also enable prediction markets to more
efficiently execute their responsibilities as SROs.
(ii) Cost
The Commission preliminarily believes there may be documentation
and workflow costs resulting from specific analysis of each underlying
event of an event contract. However, the Commission believes that these
costs will be incremental, short-term, and modest, as many prediction
markets list similar types of events that can be slightly modified for
each event contract. The Commission further believes that these costs
are also mitigated by the clarity gained resulting from fewer
interpretive disputes, shorter review cycles, and lower likelihood of
post-listing challenges once settlement conditions are objectively
specified.
(b) Proposed Amendment: Revised Definition of ``Gaming''
The proposed rulemaking defines ``gaming'' as activity typically
engaged in for recreation or to entertain others, governed by rules,
with measurable occurrences or outcomes dependent on participants'
luck, skill, or athletic ability during the activity. The Proposal also
clarifies that elections and awards are contests, not gaming. The
Commission is now providing clarity and objective criteria to the
market regarding the Commission's approach in reviewing these types of
event contracts under the Special Rule, aligning the definition with
the U.S. District Court for the District of Columbia decision vacating
the Commission's previous definition.
Currently listed event contracts already reflect elements of this
shift away from the Commission's prior view. These event contracts
include underlying events focused on aggregate performance in sports
events (final scores, point differentials, season long statistics,
tournament advancement).
Relative to the baseline, where the Commission did not define
gaming, the proposed definition is expected to reduce interpretive
variance and correct past misapplications that read ``gaming'' too
broadly. By centering classification on the character of the underlying
activity and the event contract's settlement link to that activity, the
amendment narrows gaming to games and provides prediction markets with
clearer design criteria.
The Commission preliminarily believes the resulting economic
effects of the proposed approach are operational and compliance-
focused, as prediction markets may incur front-loaded documentation and
taxonomy costs to restate product families and certification narratives
in activity-based terms, update internal review workflows to reflect
game vs. contest distinctions, and evidence settlement triggers with
independent, reliable sources. Based on Commission estimates, these
initial compliance activities are expected to require between 40 and
100 staff hours per entity, resulting in a one-time cost of
approximately $6,400 to $16,000 per prediction market, assuming an
average fully loaded hourly rate of $160 for compliance and legal
professionals. Costs for updating internal review workflows and
training staff on new distinctions (such as game vs. contest) are
expected to be included within this range, as most entities can
leverage existing compliance infrastructure. The cost of evidencing
settlement triggers with independent, reliable sources may vary
depending on the complexity of the product, but for most prediction
markets, this is expected to be a modest incremental cost, typically
involving additional documentation and, where necessary, procurement of
third-party data or verification services. For highly novel or complex
products, costs may be higher, but the Commission does not expect these
to be significant for the majority of entities. These are expected to
be modest and are attenuated by greater determinacy at listing and
review, fewer scope disputes, and reduced risk of post-listing
reversals. The Proposal's process clarifications elsewhere--
particularly that, at the end of a 90-day review, if no order issues
the contract may be listed or continue to trade--also may limit
uncertainty costs while factor-based analysis proceeds.
(i) Benefits
In providing a definition of the term ``gaming,'' the Commission
believes that it is providing clarity, as prediction markets will know
what underlying activities meet the definition of gaming. With this
clarity, prediction markets will ensure that those event contracts that
meet this definition follow the proper procedures when taking an event
contract to market. Prediction markets gain predictable criteria for
designing and certifying event contracts, which reduces signal-to-noise
at the threshold and streamlines staff review to focus on objective,
verifiable settlement conditions in the underlying activity. These
effects align with the Proposal's goals of clarity, predictability, and
consistency and with the statutory alignment objective under the
Special Rule.
In addition, acting in their capacity as SROs, prediction markets
will benefit from the Commission's definition of gaming, as it provides
clarity in executing the Special Rule. This clarity may result in
greater efficiency in executing their responsibilities as SROs.
The Proposal also identifies process benefits that lessen
uncertainty while factual determinations proceed. Where event contracts
or groups of event contracts are placed into a 90-day review, the
Proposal clarifies that if the
[[Page 35848]]
Commission does not issue an order by the end of the review period,
listing may proceed or continue and the review is deemed concluded.
This process mitigates delay costs for exchanges and market
participants while protecting market integrity, as exchanges will now
have a clear definition of gaming, which allows them to follow the
correct process when bringing an event contract to market, and market
participants will have confidence that the event contract will not be
cancelled after entering into a transaction.
Finally, by correcting past misapplications associated with the
Nadex Order and Kalshi Order--where ``gaming'' was read expansively--
the proposed definition decreases the likelihood of post-listing
disruption, improves regulatory certainty, and supports responsible
innovation in prediction markets.
(ii) Cost
The possible costs incurred by prediction markets include
incremental, front-loaded compliance and operational costs to implement
the ``gaming'' definition. The Commission believes that prediction
markets may have to redocument product designs to map settlement
conditions to the proposed definition. In addition, legal and
surveillance teams must update Sec. 40.2 certification workflows with
a concise explanation and analysis addressing classification and any
public-interest considerations tied to the design. The Commission
believes that these changes may include training, taxonomy changes in
product governance, and limited vendor work for outcome verification.
For borderline categories, such as certain hybrid events,
prediction markets may need to invest additional effort in
classification to ensure the event contract meets the activity-based
criteria and aligns with the factor framework. If the Commission
decides to review groups of event contracts, prediction markets could
experience temporary timing costs pending determinations. Due to this
uncertainty, there may be costs. First, data availability and quality
can affect the pace at which clarity benefits are realized,
particularly for gaming events reliant on non-standard adjudicators or
specialized sources. The proposed definition is likely to mitigate this
effect by requiring exchanges to substantiate settlement conditions
with independent, reliable providers. Second, since involvement of
activity that is unlawful under state law is a basis for application of
the Special Rule, if an event contract references contests subject to
state prohibitions, prediction markets may face additional advisory
time and documentation costs during reviews. To the extent that the
activity-based gaming definition enhances clarity by keeping
classification focused on games and settlement linkage, the costs will
be limited.
Lastly, the Commission's proposed definition of ``gaming'' may be
over or under inclusive. If the Commission is over-inclusive in its
definition, certain contracts that should not have been covered under
the definition, and therefore, the Special Rule, may be reviewed and
ultimately delayed or never listed. Alternatively, the proposed
definition may be too narrow. If this is the case, certain contracts
that should be covered under Sec. 40.11 may be listed without
Commission review.
(c) Public Interest Factors Relating to Price Discovery and Information
Aggregation Utility
The Proposal sets out a multi-factor public interest analysis in
two separate categories: factors applicable to all event contracts and
factors specific to each enumerated activity. This section and sections
III.C.3(d) and III.C.3(e) below discuss the factors applicable to all
event contracts.
The Commission's policy objective is to clarify scope and increase
determinacy in Special Rule reviews, focusing the public interest
inquiry through clear, multi-factor criteria while preserving room for
responsible innovation by registered entities. By making explicit how
the Commission will assess (i) whether event contracts involve an
Enumerated Activity and (ii) whether they are contrary to the public
interest, the framework aims to reduce interpretive variance and limit
ad hoc determinations, ultimately promoting transparent design
discipline and predictable outcomes for prediction markets and the
public.
Regarding price discovery and information aggregation utility, the
Commission is seeking in the Proposal to screen out contracts that, by
design, would likely produce uninformative or misleading signals. Under
proposed Sec. 40.11(a)(5), the factor involving price discovery and
information aggregation utility directs the Commission's analysis to
whether a contract's settlement conditions, data environment, and use
case plausibly support information aggregation and decision-relevant
pricing. The extent to which event contracts exhibit predictable
informational value, including the ability to inform hedging decisions
or model-based economic choices, would weigh against a finding that the
event contracts are contrary to the public interest. In applying this
factor, the Commission does not reinstate the pre-CFMA ``economic-
purpose'' test; rather, event contracts exhibiting predictable
informational value--whether by facilitating hedging decisions or by
serving as inputs to model-based economic choices--would be less likely
to be found contrary to the public interest.
As proposed, the Commission would consider whether the contract's
design (i) permits market participants to contribute and aggregate
dispersed information about the underlying occurrence, (ii) produces
trading prices that can be used, either directly or as inputs to
economic models, for forecasting and decision-making, and (iii) does
not depend on inherently non-informational mechanisms (e.g., outcomes
determined purely by chance). This framing reflects the Commission's
understanding that prediction markets may serve as information
aggregation vehicles, and that useful signals can arise even where
traditional cash-market price basing is indirect; conversely, events
determined solely by luck (e.g., pure chance games) lack meaningful
information aggregation and presumptively weigh in favor of a contrary-
to-the-public-interest finding.
The price discovery and information aggregation utility factor
operates as a quality filter that distinguishes contracts whose prices
include credible beliefs about future states of the world from
contracts whose prices are uninformative. A contract passing this
screen will typically: (a) specify objective, verifiable settlement
criteria tied to occurrences about which non-insider participants can
form rational expectations; (b) leverage publicly accessible data or
transparent adjudication so that prices can be compared to eventual
outcomes; and (c) exhibit breadth of outcome space (e.g., aggregate
sports statistics over a game or season rather than a single controlled
action) that dilutes any single actor's unilateral control over
settlement. These design attributes enhance the information content of
prices and thereby serve the CEA's price-discovery purpose.
The price discovery and information aggregation utility factor
explicitly recognizes that event-contract prices may be input variables
to broader economic models, not solely direct hedges. For example,
aggregated prices on sports outcomes can inform downstream decisions by
sponsors, broadcasters, advertisers, or local businesses, even absent a
one-for-one hedge; in such settings, market-implied
[[Page 35849]]
probabilities may be used with other data (e.g., foot traffic,
inventory, staffing) to optimize economic choices. By favoring
contracts that meaningfully inform decisions, the factor favors event
contracts that advance price discovery in the sense contemplated by CEA
section 3.
(i) Benefits
By directing listings toward event contracts with demonstrable
information value, the Commission believes that this factor reduces the
likelihood of listing event contracts that do not provide informative
data to the market, which may result in more accurate information in
the market. The Commission believes that this more accurate information
and its resulting price series given through event contracts provides
the market with a better guide in economic decisions, consistent with
CEA section 3(a), resulting in a more efficient market and economy.
Furthermore, the Commission believes that to the extent that prediction
markets adopt objective settlement feeds and, as relevant, real-time
dissemination, markets can absorb data more accurately and form prices
that reflect aggregated beliefs, improving transparency in the
marketplace and supporting public price discovery across prediction
markets and related sectors.
The Commission believes that there are potentially indirect
benefits as well. For example, to the extent that the utilization of
this factor encourages event contract designers to build around
objective data and wider outcome spaces, and to pair event contracts
with integrity coordination (e.g., with governing bodies), it will
likely contribute to the development of clear informational-utility
benchmarks. Those clear benchmarks will, in turn, reduce the likelihood
of subsequent re-work and late disapprovals, resulting in more
efficiencies in the process of creating and taking an event contract to
market. The Commission also believes that this self-reinforced design
discipline by the prediction markets is likely to result in responsible
innovation, which will potentially improve signal quality, yielding
efficiency gains for market participants and commercial users who
incorporate event contract prices into resource allocation or risk-
management models (e.g., staffing, sponsorship hedging strategies,
advertising placement). Lastly, in providing clarity to the prediction
market, acting as an SRO, the Commission preliminarily believes that
this will result in greater efficiencies in carrying out its role, as
there will be less uncertainty in overseeing the market.
(ii) Cost
The Commission preliminarily believes that the direct cost
associated with this factor stems from increased documentation in the
self-certification process. The Proposal would require prediction
markets to provide detailed narratives--such as data sources,
adjudication pathways, and anticipated informational use--to
demonstrate compliance with the price-discovery and information-
aggregation benchmarks. This would likely increase initial compliance
obligations for event contract submissions.\310\ Data procurement and
integrity arrangements further contribute to operational costs. To
maintain objective settlement and ensure verifiable data, registrants
may incur vendor fees, governance expenses, or additional integrity
coordination overhead, such as suspicious-activity reporting channels
and restrictions for certain trader categories. These requirements add
to standard surveillance responsibilities and costs to be implemented.
---------------------------------------------------------------------------
\310\ In the past year, approximately 14% of the self-certified
event contracts required additional review by Commission staff to
ensure consistency with core principles and self-certification
requirements. For these contracts, registrants may incur further
costs associated with responding to staff inquiries, providing
supplemental documentation, or revising submissions. The Commission
estimates that such follow-up activities may require an additional
5-15 staff hours per contract, or $800-$2,400 per contract,
depending on the complexity of the issues raised.
---------------------------------------------------------------------------
The Commission also believes that there are potential indirect
costs. For example, time-to-market considerations are particularly
relevant for event contracts approaching the threshold of non-
informational designs, such as single-action or pure-chance event
constructs. To the extent that redesigning to increase outcome
diversity or introducing objective data elements results in delayed
product launches, there will be not only administrative costs, but also
opportunity costs to the prediction market and to the market in
general, as the event contract is not available for trading.
Nevertheless, these delays are attenuated by long-term advantages
resulting from the Proposal, including more reliable signals and a
reduction in subsequent regulatory actions.
Some commenters on the ANPRM asserted that prediction markets built
around agricultural events could alter participation patterns and
trading behavior on traditional agricultural derivatives exchanges,
potentially shifting liquidity and affecting the cost and reliability
of hedge execution for producers, merchants, processors, and allied
participants.\311\ The commenters also noted that if rules enable
agricultural event contracts without early, systematic engagement, the
result could be event contract designs misaligned with real hedging
needs, leading to basis risks, weaker convergence, or less useful risk-
transfer for producers, all of which translate into additional costs
across supply chains.
---------------------------------------------------------------------------
\311\ See, e.g., Letter from National Cattlemen's Beef
Association (Apr. 30, 2026); Letter from the Commodity Markets
Council on behalf of multiple agricultural trade organizations (Apr.
30, 2026).
---------------------------------------------------------------------------
(d) Public Interest Factors Relating to Potential Threats to Market
Integrity
The market integrity factor addresses three principal risk domains:
(i) susceptibility to manipulation or market disruption; (ii) presence
of settlement-integrity deficits (e.g., subjective or non-verifiable
adjudication, unclear resolution criteria, or contested data pipelines)
that undermine orderly market function; and (iii) risks of information
leakage or exploitation of material non-public information by insiders
or identifiable persons capable of influencing outcomes. Elevation of
any of these risks would weigh in favor of a determination that an
event contract is contrary to the public interest.
The first prong of this factor is intended to function as a
manipulation susceptibility test. Specifically, the Commission would
assess whether settlement outcomes are unduly controllable by a narrow
set of actors (e.g., single-decision officiating, first-action triggers
for a named participant) or whether event contract terms invite
selective influence inconsistent with orderly markets. Designs that
diffuse control across aggregate outcomes and rely on data not subject
to discretionary intervention weigh against manipulation concerns. This
test augments Core Principle 3 expectations and settlement practices
referenced in exchange compliance materials.
The second prong of this factor is intended to function as a
settlement-integrity test. Specifically, the Commission would evaluate
whether the event contracts settle on clear, objective, and publicly
verifiable criteria, supported by resilient data feeds, transparent
calculation procedures, and defined dispute-resolution protocols.
Settlement frameworks that minimize subjectivity and establish
auditability of inputs and triggers weigh against a contrary-to-public-
interest finding. This approach is designed to be consistent with
guidance concerning third-party cash-settlement
[[Page 35850]]
series and data reliability reflected in exchange compliance materials.
The third prong of this factor is intended to function as a tool to
control information leakage. Because misuse of insider information
degrades market integrity and public confidence, the Commission would
consider whether registrants implement prohibited-trader policies,
eligibility screens, and surveillance protocols capable of identifying
and deterring misappropriation of confidential information or other
illegal trading practices. The Commission believes that trader-
identifying information and prompt public dissemination of transaction
data facilitate monitoring and enforcement, as discussed in event
contract reporting materials.
As this factor is designed to ensure that certain event contracts
are not listed because they lack certain design controls and
assurances, leading to a lack of market confidence, the Commission
preliminarily believes that this proposed factor is likely to deter and
prevent manipulation, price distortion, settlement ambiguity, and
exploitation of material non-public information in event contract
markets, thereby preserving the integrity, fairness, and financial
soundness of Commission-regulated trading facilities. In furtherance of
the findings and purposes of the CEA, the market integrity factor
directs the Commission's analysis to whether a contract's design, data
environment, and surveillance posture create heightened risks of market
disruption or insider misuse that outweigh any informational or
innovative benefits.
(i) Benefits
The Commission believes that one of the direct benefits of
implementing this factor is the potential reduction in the
susceptibility of event contracts to manipulation and disruption.
Specifically, by prioritizing aggregate-outcome designs and objective,
non-discretionary settlement criteria (e.g., verified statistics rather
than single officiating calls), this factor curtails channels through
which identifiable persons could exert selective influence over
settlement triggers. The Commission believes that event contract types
that diffuse control across many participants and that settle on
publicly verifiable data materially reduce the likelihood of price
distortion or disruptive tactics, thereby preserving market integrity.
The Commission, however, recognizes that there could still be room for
residual manipulation through indirect channels limiting the
effectiveness of this factor. Even with aggregate outcomes, actors may
attempt indirect influence (e.g., strategic behavior affecting
statistics without overt rule violations). The Commission preliminarily
believes that while risk controls and surveillance programs mitigate
the possibility of manipulation, the factor is not likely to screen for
all evolving tactics, which may reduce the overall benefit derived from
this factor.
The Commission believes that a second potential benefit is enhanced
settlement integrity. Specifically, by requiring clear, objective, and
publicly verifiable settlement feeds, paired with documented
calculation procedures and dispute resolution protocols, the Commission
believes that the proposed factor provides auditability and
predictability at resolution. Exchange compliance frameworks that
evaluate third-party cash-settlement series and the reliability of
input data--including safeguards against unauthorized release--further
reinforce settlement integrity. The Commission, however, believes that
the benefits may be attenuated due to the potential heterogeneity of
the implementation of these practices across prediction markets.
Specifically, differences in prediction markets' technology
infrastructure, staffing, and compliance maturity may lead to uneven
application of integrity controls. Furthermore, the potential benefits
resulting from enhanced settlement integrity may be limited due to
cross-regime coordination frictions. The Commission recognizes that
since the integrity coordination relies on third-party governing
bodies, differences in data standards and legal constraints may limit
the speed and completeness of information sharing. The Commission,
therefore, preliminarily believes that the factor, as a review
criterion, cannot substitute for the operational capabilities required
to sustain robust surveillance and rapid incident response once trading
begins. While the factor may encourage responsible arrangements, it
cannot compel uniform practices across non-Commission entities.
The Commission also preliminarily believes that a third potential
benefit exists, as there may be an increase in the detection and
deterrence of the misuse of insider information. Specifically, by
embedding trader-identifying information collection and real-time
public dissemination of transaction data into operational practices,
the utilization of the proposed factor is likely to improve
surveillance which will then support the identification of
misappropriation of confidential information and other illegal
practices. Reporting provisions (e.g., dissemination as soon as
technologically practicable) could formalize transparency expectations
that bolster market monitoring and enforcement. The Commission,
however, preliminarily believes that there are limitations to the
effectiveness of controls that aim to limit access to, and deter the
misuse of, insider information. Specifically, eligibility screens and
surveillance are likely to reduce risk but cannot perfectly eliminate
trading by people with privileged access (e.g., team staff, medical
personnel, broadcast insiders). The Commission believes that the
factor's effectiveness in detecting and deterring misuse of non-public
information will depend on prediction market enforcement and on the
timeliness and accuracy of trader-identifying information and alerts.
Despite best practices residual leakage risk may still exist.
The Commission preliminarily believes that the proposed factor is
also likely to result in indirect benefits. One of the potential
indirect benefits of implementing this factor is discipline and
predictability it may bring to event contract design. Clear integrity
benchmarks encourage registrants to internalize risk-mitigating
attributes (objective feeds, redundancy, prohibited-trader lists,
integrity coordination) at the design stage. This reduces ad hoc
interventions and late prohibitions, fosters predictable Commission
determinations, and supports competitive neutrality across prediction
markets. Another potential indirect benefit that the Commission
preliminarily believes may be realized is the improvements in the
price-signal quality. When settlement standards and insider-risk
controls are robust, information content of prices is less likely to be
degraded by selective influence or data uncertainty, thereby improving
public price discovery and the reliability of market-implied
probabilities used in downstream decisions. Finally, the utilization of
the proposed factor may likely lead to operational resilience, which is
an indirect benefit. Specifically, risk-control practices (e.g.,
trading halts, order-entry limits, layered surveillance) documented in
exchange materials strengthen resilience to emergent disturbances, may
help contain the aberrant behavior in an expedient manner. As discussed
above, in providing clarity, the Commission preliminarily believes that
this will result in greater administrative efficiencies to prediction
markets in
[[Page 35851]]
carrying out their role as SROs, as there will be less uncertainty in
overseeing the process of bringing an event contract through the
Special Rule to market.
(ii) Cost
The Commission believes that possible direct costs may result from
procurement of settlement-related data and the implementation of
governance protocols. Specifically, to meet integrity expectations,
registrants may incur costs to secure third-party verified feeds,
implement redundant data sources, and formalize calculation/
adjudication protocols and dispute processes. The Commission believes
that these investments are incremental to ordinary listing preparations
and are necessary to demonstrate objective and verifiable settlement
and will be spread over many event contracts that involve similar
underlying events. Another source of direct costs that the Commission
believes prediction markets are likely to incur are costs from the
surveillance and compliance practices implemented in response to the
Proposal. Specifically, the Commission preliminarily believes that to
the extent that prediction markets implement prohibited-trader
policies, eligibility screens, and enhanced monitoring, including
trader-identifying information workflows, in response to the Proposal,
they are likely to incur technology, staffing, and policy costs.
Finally, the Commission believes that prediction markets are likely to
incur costs relating to the necessary documentation for certifications.
Specifically, the Proposal would require prediction markets to submit
granular narratives in Sec. 40.2 certifications detailing settlement
data provenance, adjudication pathways, redundancy, surveillance
programs, and risk controls, which is likely to increase the pre-
listing documentation burden.
The Commission preliminarily believes that the implementation of
the proposed factor is also likely to result in indirect costs. For
example, indirect costs may arise from the additional time it may take
to market and re-design event contracts. Specifically, in cases where
the event contracts rely on subjective judgement or narrowly
controllable outcomes, prediction markets will need to re-design to
expand outcomes and eliminate discretion which may result in delays in
event contract listings. Similarly, the need to establish feed
redundancy, integrity coordination, and dissemination workflows may
extend development timelines, resulting in additional indirect costs.
Furthermore, even objective settlement feeds may experience latency,
outages, or revisions, and some sports contexts inevitably involve
judgment elements (e.g., review processes) that can reintroduce
subjectivity. While redundancy mitigates risk, the proposed factor is
not likely to fully eliminate feed-level vulnerabilities.
The Commission preliminarily believes that prediction markets may
also incur additional indirect costs due to their ongoing operational
commitments. Specifically, in response to the Proposal prediction
markets may establish continuous insider-risk surveillance which would
result in additional and sustained demand for operational capacity.
Since these indirect costs are fixed costs, small or new prediction
markets are likely to face a larger burden to maintain these
capabilities over time. Finally, the Commission believes that
prediction markets may face additional indirect costs resulting from
coordination. Specifically, prediction markets' efforts in establishing
and maintaining information-sharing arrangements with governing bodies
(e.g., league integrity units) in an attempt to promote market
integrity and confidence is likely to result in legal and
administrative burdens (e.g., MOUs, data-sharing protocols), especially
in cases where multiple sports or governing authorities are involved.
(e) Public Interest Factors Relating to Compliance and Self-Regulatory
Challenges
Under the Proposal, the Commission considers whether a prediction
market, in its capacity as a self-regulatory organization, can
meaningfully administer the event contracts at issue. This factor
focuses on the prediction market's ability to discharge its obligations
under CEA sections 5(d) and 5h(f), including market surveillance,
position monitoring, customer-identification programs, dispute-
resolution processes, and data-integrity controls. Unlike the preceding
factors, which evaluate how the characteristics of the event contract
itself bear on public-interest concerns, this factor examines whether
the prediction market possesses the operational infrastructure
necessary to supervise trading, detect and deter misconduct, and ensure
accurate, timely, and verifiable settlement. The Commission
preliminarily believes that to the extent that the prediction market
lacks the surveillance, compliance, or dispute-resolution capabilities
necessary to oversee trading in event contracts involving Enumerated
Activities, this would weigh in favor of finding the event contracts
contrary to the public interest.
This aspect of the Proposal considers several dimensions of
administrability: (i) whether the prediction market maintains
surveillance systems capable of detecting abnormal trading patterns,
insider-information risks, coordinated activity, and other behavior
inconsistent with orderly markets; (ii) whether the prediction market's
customer identification and account monitoring systems are sufficient
to identify traders, link trading activity to individuals or entities,
and distinguish insiders or persons with privileged access to
information about the underlying event; (iii) whether the prediction
market's dispute-resolution processes, including documentation
standards, process timelines, and escalation procedures, are adequate
to resolve settlement or trading disputes for event contracts involving
Enumerated Activities; (iv) whether the prediction market has access to
reliable settlement feeds, its processes for validating the integrity
of those data, and the mechanisms it uses to identify incomplete,
inconsistent, or contested information.
The Commission preliminarily believes that evolving market dynamics
may affect whether a prediction market can effectively perform its
self-regulatory responsibilities. For example, advancements in
artificial intelligence tools, such as model-driven trading agents
capable of generating rapid, correlated trading patterns, may strain
conventional surveillance models, increasing the need for predictive
analytics and real-time anomaly detection. Furthermore, competitive
pressures from offshore or foreign platforms, which may operate without
comparable surveillance obligations, may also create incentives for
domestic prediction markets to list higher-risk products despite
lacking the operational capacity to supervise them effectively. Under
this factor, the Commission would evaluate whether these dynamic
conditions meaningfully limit the prediction market's ability to
fulfill its self-regulatory responsibilities.
(i) Benefits
The Commission preliminarily believes that this factor would
enhance market integrity and public confidence by ensuring that
prediction markets list only those event contracts that they can
effectively supervise. By requiring prediction markets to demonstrate
robust surveillance systems, comprehensive customer-identification
controls, effective dispute-resolution procedures, and reliable
settlement-data pipelines, the factor strengthens
[[Page 35852]]
protections against insider misuse, manipulation, information leakage,
and operational failures. This, in turn, supports orderly markets and
reduces the likelihood of disruptive post-listing events such as
settlement disputes or large-scale position close-outs.
The Commission preliminarily believes indirect benefits may also
arise as prediction markets invest in upgraded surveillance
technologies, expand their customer-identification and account-
monitoring systems, and improve their ability to ingest and validate
settlement feeds. These improvements may enhance operational
resilience, reduce systemic vulnerabilities exposed by AI-driven
trading dynamics, and allow prediction markets to respond more
effectively to emerging risks. By basing listing decisions in
administrability, this factor may deter product offerings driven by
regulatory arbitrage or competitive pressures from offshore markets and
instead favor those that the prediction market can monitor responsibly.
The Commission preliminarily believes that, over time, this is likely
to result in a more stable and reliably supervised market structure,
improving participant trust and supporting responsible innovation among
registered entities.
(ii) Cost
The Commission preliminarily believes that prediction markets may
incur direct costs in upgrading their surveillance, compliance, and
data-integrity infrastructure to meet the expectations outlined under
this factor. These costs may include additional staffing for compliance
and surveillance functions, investment in analytical and pattern-
recognition technologies, enhancements to customer-identification and
verification systems, and procurement of reliable third-party
settlement feeds. Prediction markets may also incur costs associated
with strengthening dispute-resolution frameworks, documenting control
processes, and maintaining operational redundancies necessary to ensure
accurate and timely settlement.
The Commission preliminarily believes that there may also be
indirect costs. For example, prediction markets that cannot feasibly
supervise certain event contracts may forego listing them, reducing
potential revenues and limiting the breadth of products available to
market participants. In addition, competitive pressure from offshore or
pseudonymous markets may exacerbate these indirect costs, especially by
listing higher-risk products without comparable self-regulatory
obligations. Furthermore, innovations in the marketplace, including
growth in artificial intelligence driven trading, may entail continuous
surveillance upgrades, raising ongoing operational expenditures. The
Commission notes that smaller or newer prediction markets may face
disproportionate burdens in scaling these capabilities, potentially
affecting their competitiveness. Nonetheless, the Commission
preliminarily believes that these costs are mitigated by the benefits
of improved oversight, reduced manipulation and insider-risk exposure,
and increased market stability.
(f) Public Interest Factors Specific to Unlawful Activity
The Commission is proposing specific factors to prevent listing of
event contracts that reference specific criminal acts or otherwise
involve activity unlawful under federal or state law, due to attendant
manipulation risk, public-harm incentives, and comity concerns. The
Commission also proposes to distinguish such event contracts from those
that reference broad measures such as crime-rate indices, where
different informational and integrity considerations may apply. In
determining whether event contracts fit under the ``unlawful event''
category, the Commission is proposing to consider the following three
factors: (i) whether the event contracts reference specific criminal
acts (heightened manipulation and perverse incentive risk to create
harm); (ii) whether the event contracts reference activity that is
unlawful under federal law (strong presumption against listing); or
(iii) whether the event contracts reference activity that is unlawful
under state law, with weight calibrated to the breadth and consistency
of state prohibitions and public harm considerations.
(i) Benefits
The Commission preliminarily believes that to the extent that the
public interest factor discourages the listing of event contracts that
could incentivize criminal conduct or exploit crime-adjacent
information asymmetries, strengthening protection of market
participants and the public, there will be benefits. The Commission
preliminarily believes that by preventing incentives of criminal
activity through these types of event contracts, the Proposal would
lower the possibility of increasing illegal behavior, as the incentive
through these contracts may be removed. Additionally, the Commission
anticipates that applying clear illegality weighting will lead to more
predictable outcomes disincentivizing the listing of these event
contracts, thereby minimizing resource-intensive scope disputes during
the listing process. There could be, however, limitations to this
benefit due to the heterogeneity in state-laws resulting in residual
interpretive uncertainty.
(ii) Cost
The Commission believes that the cost of implementation of this
factor may require the exchanges to document legality, public-harm
considerations, and integrity controls within a Sec. 40.2 submission,
which may increase the costs in a prediction market's pre-listing
process. In addition, the Commission believes that prediction markets
may face indirect costs as event contract designs based on broader-
measures (e.g., indices) may require legal surveys across jurisdictions
and calibrations to avoid implied references to specific criminal acts,
marginally extending timelines.
(g) Public Interest Factors Specific to Terrorism, Assassination, and
War
The Commission believes that event contracts that involve
terrorism, assassination, or war present national-security harms,
extraordinary information leakage risks, and perverse incentive effects
that overwhelm any potential informational utility. Consequently, these
event contracts would be very likely to be contrary to the public
interest. In determining whether event contracts fit under this
category, the Commission is proposing three factors that emphasize: (i)
national-security externalities; (ii) insider-information constraints
and misuse risk (including classified or sensitive sources); (iii)
settlement uncertainty in contested or incomplete information
environments; and (iv) perverse incentive effects that could facilitate
or reward violence.
(i) Benefits
With these public interest factors specifically tailored to apply
to this category, the Commission believes that the Proposal would
prevent these event contracts from being listed because they could,
among other things, distract authorities, enable exploitation of
sensitive information, or incentivize violence. The Commission also
believes that the specialized set of factors is likely to enhance
clarity at the time of the listing, reduces interpretive variance, and
results in prediction markets avoiding event contracts involving these
prohibited activities. To the extent that the factors prevent these
event contracts from being listed,
[[Page 35853]]
encourage innovation on non-sensitive event categories, and reduce the
risk of post-listing disruption, there will be benefits. In addition,
as with illegal activity discussed above, the Commission believes that
by preventing the incentivization of these activities through these
types of event contracts, the Proposal may lower the possibility of
these types of activities. Moreover, the Commission preliminarily
believes that proposing specific factors for event contracts on
terrorism, assassination, or war may result in greater administrative
efficiencies, as there will be less uncertainty for SROs overseeing the
market with regard to these types of contracts.
(ii) Cost
The Commission believes that by providing clarity regarding event
contracts that fall under this category, the Proposal is likely to
foreclose potential revenue and possible informational value from event
contracts tied to geopolitical violence categories. The Commission
preliminarily believes that potential foregone revenue and value from
these event contracts are outweighed by public-interest harms.
Furthermore, there are likely to be additional costs as event contracts
proximate to ``war'' (e.g., sanction triggers, mobilization thresholds)
may require careful scoping and documentation under the factors in the
Proposal. There are potentially additional costs as dynamic
geopolitical events can blur boundaries--even categorical prohibitions
require ongoing interpretive guidance to prevent a chilling impact on
lawful macro-risk contracts.
(h) Public Interest Factors Specific to Gaming
The Proposal defines gaming functionally and distinguishes games
from contests such as elections and awards. Within gaming, the
Commission aims to permit contracts settled on aggregate sports
outcomes with objective data and integrity infrastructure, while
prohibiting pure-chance games and high-risk sports-adjacent designs
(e.g., injury, officiating-only, discrete actions, altercations, pre-
collegiate events). The activity specific factors that group event
contracts into three categories: (i) event contracts involving pure
chance games, with outcomes determined entirely by randomness that lack
informational utility and create gambling-adjacent risks; (ii) event
contracts involving aggregate sports outcomes, which include final
scores, point differentials, win-loss results, advancement, statistics,
and season-long metrics, where settlement relies on objective,
verifiable, league-certified data and robust integrity coordination;
(iii) event contracts involving player injury, officiating-only
decisions, discrete actions, altercations, and pre-collegiate sports.
Furthermore, for event contracts in this category, the general factors
that apply to all event contracts are also highly relevant as they
weigh settlement-integrity, insider-risk, and information-sharing
arrangements to preserve information quality and limit manipulation.
The Commission preliminarily believes that event contracts
involving pure games of chance are likely to be contrary to the public
interest due to the absence of informational utility. In contrast,
contracts based on broad sports outcomes, such as final scores,
statistics, and season records, are generally considered not to be
contrary to the public interest, if settlement relies on objective,
verifiable data and robust integrity measures. The Commission
preliminarily believes that contracts referencing player injuries,
officiating decisions, limited-controlled outcomes, altercations, or
pre-collegiate sports are likely contrary to the public interest as
these types of event contracts present significant risks of
manipulation, offer opportunities for insider access, and may create
perverse incentives for harmful behavior. As a result, the Commission
would likely find event contracts in these areas to be contrary to the
public interest and thereby protect market integrity.
(i) Benefits
The Commission preliminarily believes that the Proposal provides
market participants with clarity and predictability by offering a
transparent taxonomy that permits aggregate sports outcomes with
objective data, while screening out designs prone to manipulation or
harm incentives. Furthermore, the Commission believes that the proposed
factors focusing on specific circumstances relating to sports contracts
provide benefits to the market through enhanced market integrity by
prohibiting injury, officiating-only, limited-control outcomes, and
altercation contracts, and protecting minors in pre-collegiate
contexts. Furthermore, the Commission believes that the Proposal is
likely to result in responsible innovation by encouraging prediction
markets to embed integrity coordination (e.g., information sharing,
suspicious-activity reporting) and objective settlement feeds,
improving market signal quality.
In addition, the Commission preliminarily believes that this factor
may also improve process efficiency by reducing scope disputes and
late-stage interventions--supporting category-level determinations
where appropriate. The Commission, however, also preliminarily believes
that as the result of residual judgment, the proposed application will
have limited effectiveness in some settings (e.g., replay decisions),
as the integrity controls and objective feeds may mitigate but cannot
eliminate residual subjectivity. Similarly, there could be limitations
in the effective implementation of the factors due to the persistence
of insider risk where even though eligibility screens and surveillance
reduce the risk, these mitigants cannot fully eliminate trading by
people with privileged access. Finally, the Commission believes that
there could be limitations on applying the factors effectively due to
coordination variability across prediction markets and sports leagues
because the integrity arrangements could depend on third-party
practices and uneven cooperation or data standards may affect
effectiveness of their collaboration. In defining gaming functionally,
and distinguishing games from contests, the Commission preliminarily
believes that it is increasing regulatory certainty over these event
contracts, which is likely to result in more administrative
efficiencies for SROs and lessen the likelihood of litigation, as the
Commission is limiting the probability that problematic event contracts
may be listed.
(ii) Cost
The Commission preliminarily believes that this factor is likely to
result in costs, as registrants may incur vendor costs for league-
certified data, feed redundancy, protocol decisions, and eligibility
controls to address insider risk. The registrations may incur
additional costs relating to the changes in the certification process
as the Proposal requires more granular Sec. 40.2 narratives mapping
event contracts to the gaming taxonomy and its sub-factors. In
addition, the Commission preliminarily believes that as a result of
this factor, some sports-related event contracts may not be listed,
which may result in lost revenue to the prediction market and the
unavailability of trading to market participants. The Commission also
preliminarily believes that there are likely to be indirect costs
associated with the redesign of event contracts and the time it takes
to market these event contracts as redesign may be required
[[Page 35854]]
(e.g., shift from first-action to aggregate metrics). The Commission
preliminarily believes that there may also be further indirect costs
associated with potential coordination challenges, such as the legal
and administrative burdens introduced when establishing information-
sharing agreements with governing bodies.
(i) Additional Activities Similar to the Enumerated Activities
The Proposal seeks to clarify its authority under the Special Rule
to identify additional activities that are similar to the Enumerated
Activities (i.e., unlawful activity, terrorism, assassination, war, and
gaming) and to determine whether event contracts involving such similar
activities are contrary to the public interest. The Proposal describes
the general approach that the Commission would take in a comparative
assessment of risk channels and public-interest concerns between the
candidate activity and the enumerated categories, using the general
factors (i.e., price discovery, information aggregation, market
integrity, compliance) as the analytic baseline and considering whether
the activity may be identified as ``similar'' for Special Rule purposes
if risk profiles and public-interest harms are materially similar.
(i) Benefits
The Commission preliminarily believes that this approach provides
clarity and flexibility. The authority to identify similar activities
indicates that the Special Rule is not limited to a closed list,
enabling flexible, timely responses to novel event contract designs
that pose comparable public-interest risks. Determining ``similarity''
is, however, inherently context-dependent and may require nuanced
judgments about risk comparators and public-interest harms. While the
factors in proposed Sec. Sec. 40.11(a)(5) and 40.11(a)(6) enhance
determinacy, some borderline cases will remain fact-intensive. While
there likely will be limitations due to definitions around the boundary
cases, there likely will also be benefits, to the extent that the
proposed approach promotes consistency and market integrity in line
with statutory purposes.
Furthermore, the Commission believes that the Proposal approaches
harm mitigation proactively, as the proposed mechanism allows the
Commission to preemptively address emerging activities whose incentive
effects, insider-risk profiles, or settlement uncertainties would
otherwise replicate concerns in Enumerated Activities, thereby
protecting market participants and the public. The Commission
preliminarily believes that there are likely to be indirect benefits
due to potential increases in process efficiency and competitive
neutrality across prediction markets, as they internalize the risk-
profile comparators, which in turn leads to improved ex-ante event
contract design and reduced scope disputes. The Commission, however,
recognizes that there may be limitations to this benefit as innovation
may outpace codified examples, which may result in the Commission's
updating guidance through orders and interpretations, as event contract
architecture evolves. The Commission also believes that there are also
potential indirect benefits as the Proposal encourages listing activity
away from similar-risk categories with poor settlement integrity or
insider-leakage risks, which in turn increases the potential benefit
from listed event contracts, leading to possible greater price
discovery and information aggregation. Moreover, the Commission
preliminarily believes that in proposing specific factors for other
similar activities, it may result in greater administrative
efficiencies when an SRO reviews event contracts and oversees its
market in regard to these similar contracts.
(ii) Cost
As a result of this section of the Proposal, the Commission
preliminarily believes that prediction markets may incur incremental
costs to analyze whether proposed event contracts could be deemed
similar to enumerated activities, including detailed Sec. 40.2
narratives mapping risk channels, settlement data provenance, and
integrity controls to address comparability concerns. Furthermore, in
cases of similarity concerns, prediction markets may need to redesign
settlement features (e.g., objective feeds, redundancy, dispute
procedures), tighten eligibility policies, or embed coordination with
independent adjudicators or integrity bodies, entailing vendor, legal,
and surveillance costs. In addition, products close to similar-activity
boundaries may face longer development timelines as prediction markets
assess and address comparability to Enumerated Activities, potentially
slowing rollout of borderline designs, resulting in costs. Finally, the
Commission preliminarily believes that until precedents accumulate,
registrants may experience interpretive uncertainty regarding certain
hybrid or emerging activities that may be deemed similar, increasing
advisory and scoping costs for first movers.
(j) Procedural Amendments and Delegations
Under proposed Sec. 40.11, the Commission may initiate a 90-day
review when a self-certified event contract appears to involve an
Enumerated Activity and may be contrary to the public interest. The
review would proceed within the 90-day statutory window with defined
milestones (initiation; written statement of concerns; prediction
market response; staff recommendation; Commission order), with
extensions only at the prediction market's request or agreement. The
Commission may also conduct reviews of groups of substantially similar
submissions to foster consistency and reduce duplicative effort.
At the end of the review, the Commission may either: (i) issue an
order finding the event contract (or a group of event contracts)
contrary to the public interest, in which case it may not be listed or
must be delisted; or (ii) allow the contract to continue trading if no
such order is issued, potentially with modifications proposed by the
prediction market that resolve the Commission's concerns. Because the
CEA permits self-certified contracts to trade on the business day
following self-certification, event contracts are likely to trade
during the review period. The Proposal allows the Commission to request
suspension of trading of the event contracts under review, but
prediction markets are not required to abide by such requests.
(i) Benefits
The Commission preliminarily believes that the 90-day framework
with defined steps provides predictable timing and clear expectations
for prediction markets, reducing uncertainty costs at listing and
improving efficiency in Commission operations. The Proposal may also
provide indirect benefits as grouped reviews could reduce duplicative
effort and streamline recurring determinations, encouraging design
discipline and fewer borderline submissions. Nonetheless, novel or
hybrid event contract designs requiring fact intensive approach may
remain and as a result benefits will be limited as the effectiveness of
the process relies on accumulating precedents and clear orders to
reduce residual uncertainty. The Commission preliminarily believes that
there are additional potential indirect benefits if prediction markets
are able to discern from any Commission orders finding event contracts
to be contrary to the public
[[Page 35855]]
interest ways to design event contracts that would not be subject to an
adverse Commission order. The Commission, however, notes that
differences in capabilities among prediction markets could lead to
uneven preparedness for the milestones in the proposed process.
(ii) Cost
The Commission preliminarily believes that the Proposal is likely
to result in certification and documentation costs if prediction
markets choose to engage in the Commission's review process and submit
responses to the Commission. Preparing such responses would require
pre-listing effort and associated advisory time. Potential operational
processes (e.g., tracking Commission milestones, preparing responses)
may require additional vendor costs (e.g., to strengthen data feeds),
as the registrants develop protocols consistent with the proposed
process. The Commission preliminarily believes that event contracts
near scope boundaries may require redesign or additional documentation,
potentially lengthening development timelines resulting in indirect
costs. Furthermore, while fixed costs faced by prediction markets
decline as precedents accumulate, they may continue to incur
transitional costs to standardize templates to the revised processes
resulting in indirect costs.
4. Section 15(a) Factors
The Commission has evaluated the costs and benefits of the Proposal
in light of the following five broad areas of market and public concern
identified in CEA section 15(a): protection of market participants and
the public; efficiency, competitiveness, and financial integrity of the
markets; price discovery; sound risk management practices; and other
public interest considerations.
(a) Protection of Market Participants and the Public
Section 15(a) requires the Commission to ensure its regulations
protect market participants and the public. For event contracts, this
includes discouraging harmful incentives or illicit conduct, ensuring
clear settlement and market safeguards, deterring misuse of material
non-public information and manipulation, and mitigating risks for all
participant types including retail traders. The framework in part 40
(including appendix F) aims to effect these protections, when
necessary, through the Commission's review of event contracts that may
be contrary to the public interest. The accompanying analysis notes
that while the process may require prediction markets to provide more
documentation, the factor-based approach reduces uncertainty,
encourages responsible innovation, and lowers disruption risks like
late-stage delistings--ultimately protecting market participants and
the public.
In the Proposal, the Commission aims to ensure event contracts are
settled using clear, verifiable data and streamlined dispute-resolution
processes to protect market participants. The Proposal's focus on real-
time, objective information helps build trust, reduces confusion and
disputes, and enhances oversight for all investors. Furthermore, the
framework excludes designs with outcomes easily controlled by a few
participants, instead favoring those with distributed influence to
limit disruptive tactics and support orderly markets. Furthermore, the
Proposal would prioritize event contracts that prediction markets could
supervise efficiently within existing structures, reducing participant
risk and promoting self-regulatory effectiveness. Finally, the proposed
framework aims to protect retail users by excluding pure games of
chance from CFTC derivatives markets and requiring clear settlement,
objective procedures, and dispute resolution for allowed contracts.
These measures help ensure retail participants avoid contracts lacking
informational value or with random outcomes.
The Proposal recognizes that contracts referencing specific
unlawful acts pose acute manipulation and perverse-incentive risks, can
undermine public-safety objectives, and may compromise law-enforcement
efforts if trading reveals sensitive information. Accordingly, the
Proposal weighs heavily against listing such event contracts while
recognizing a limited role for broader-measure references (e.g., area
crime-rate indices) where informational utility and integrity controls
can be demonstrated without incentivizing specific harmful conduct.
The Proposal recognizes that contracts tied to terrorism,
assassination, or war present extreme information leakage risks,
settlement uncertainty (e.g., the ``fog of war''), and incentive
effects incompatible with the protective aims of the CEA. Therefore,
the framework treats these products as highly likely to be contrary to
the public interest, noting that prices could distract or be
manipulated to misdirect authorities and that persons with sensitive
information should report to authorities rather than trade. Foreclosing
listings of this type would best protect market participants and the
public.
Finally, the Proposal defines ``gaming'' by its ordinary meaning.
It also would find event contracts involving games of pure chance
likely to be contrary to the public interest, while channeling
permissible sports event contracts toward aggregate outcomes (final
scores, tournament advancement, season metrics) settled on objective,
league-verified data within established integrity frameworks. Within
sports, the framework discourages or disallows designs that directly
increase participant harm or selective influence--such as player-
injury, officiating-only, first-action, altercation, and pre-collegiate
contracts--because these structures heighten perverse incentives,
subjectivity, and insider risk in ways incompatible with participant
protection and the integrity of the game.
The framework advances protection when contract pricing conveys
decision-relevant information rather than low-content or misleading
signals. Designs that meet this quality filter anchor settlement to
objective, verifiable criteria, use transparent adjudication and
reliable data, and diffuse control across broad outcome spaces, thereby
reducing measurement error and elevating the informational utility of
prices.
Protection also derives from a predictable process. The proposed
90-day framework, written statement of concerns, prediction market
response (which could include proposed modifications), staff
recommendation, and Commission final action promotes fairness,
transparency, due process, and certainty. It ensures prediction markets
can address concerns on the record, limits rationalization of outcomes
ex-post, and provides clear defaults (e.g., if no order issues, listing
may proceed or continue), reducing disruption risks for market
participants.
It is the Commission's preliminary view that the proposed factor-
based framework protects market participants and the public by
excluding event contracts involving activities with inherent harm risks
(terrorism, assassination, war; pure-chance games; specified unlawful
acts), steering permissible event contracts toward aggregate outcomes
settled on objective data with integrity coordination, demanding
administrability and surveillance feasibility, and providing procedural
safeguards that reduce uncertainty and disruption. The Commission
recognizes that despite the residual risks, such as innovation risks,
coordination problems with third-parties, and potential migration of
demand offshore, the Proposal's clear protective factors, process
rights, and category guidance are designed to limit these externalities
while supporting
[[Page 35856]]
responsible innovation consistent with market integrity and public
welfare.
(b) Efficiency, Competitiveness and Financial Integrity
By clarifying what it means for a contract to involve an Enumerated
Activity (i.e., its settlement is determined by an occurrence, extent
of an occurrence, or contingency in that activity), defining gaming
using its ordinary meaning, and aligning the rule text with the statute
(including the cross-reference to CEA section1a(19)(i)), the Proposal
is designed to reduce interpretive variance, streamline Commission
review, and provide predictable procedures. The factor-based framework
and the codified, time-bounded review process anchors determinations in
objective settlement linkages and enumerated decision criteria,
improving the contract listing and review process and lowering late-
stage uncertainty costs while preserving Commission control over
consequential determinations. These proposed changes aim to support a
marketplace experiencing rapid growth and facing ongoing interpretive
challenges.
From an efficiency standpoint, the Commission preliminarily
believes that the framework established in the Proposal will likely
reduce threshold disputes and shorten review cycles relative to ad hoc
sequencing, and, importantly, create space for targeted event contract
modifications that resolve integrity concerns without foreclosing
listing. In addition, it should allow for a more efficient SRO, when
carrying out their responsibilities. At the same time, the Proposal
introduces some fixed costs (more granular Sec. 40.2 narratives,
objective settlement feeds and redundancy, dispute-resolution
protocols) that can increase the time it takes to list contracts,
especially for smaller exchanges. Additionally, the Commission
preliminarily believes that dependence on third-party data vendors may
introduce potential latency or outage risks. There may also be
efficiency challenges resulting from heterogeneity in the effectiveness
of and uneven implementation of the surveillance programs. Moreover,
because trading may still occur during the Commission's review, unless
the prediction market voluntarily suspends the trading, adverse
determinations may still result in late-stage delistings and position
close-outs. The Commission preliminarily believes that the efficiency
gains from clarity and predictable timing will dominate these frictions
over the medium term but recognizes transitional costs and operational
heterogeneity across prediction markets.
The Commission believes the presence and implementation of
transparent factors and explicitly defined review milestones should
lower discovery costs particularly for event contract designs that
pursue compliant innovation and support a process that is applied
uniformly across all prediction markets, promoting product competition
that focuses on informational utility, enhancing the integrity of the
infrastructure, and data quality rather than regulatory arbitrage.
Furthermore, the Commission believes that the ability to group reviews
reduces duplication of effort, supporting new entrants with predictable
compliance expectations.
The Commission, however, recognizes this is a growing marketplace
with multiple new and potential entrants competing for traders,
liquidity, and market share. Such competition can create incentives to
differentiate by offering broader event contract selections, including
designs that test the boundary of acceptability under the Proposal.
While competition typically promotes efficiency, competition on listing
standards can have countervailing effects, including liquidity
fragmentation across prediction markets with uneven standards, rising
transaction costs, and reduced overall market efficiency. The
Commission preliminarily believes that uniform enforcement of the
Proposal across platforms would alleviate these concerns, but on the
other hand scale economies in integrity tooling could advantage
incumbents, narrow precedents may chill borderline experimentation, and
unequal access to league-verified data or integrity arrangements could
create de facto asymmetries. The Proposal acknowledges migration risks
for prohibited or borderline event contract designs to offshore venues,
with attendant liquidity fragmentation; however, clarity around
aggregate-outcome designs and objective settlement standards is
intended to sustain viable compliant alternatives, while competitive
pressure from least-compliant venues remains a relevant constraint.
The factors in proposed Sec. Sec. 40.11(a)(5) and 40.11(a)(6)
elevate settlement clarity and market-integrity safeguards by favoring
aggregate-outcome designs that diffuse control across broader outcome
spaces and settle on objective, publicly verifiable data, and
disfavoring constructs that are inherently susceptible to manipulation
or insider misuse (e.g., discrete-action triggers for named
competitors, officiating-only or injury-diagnosis settlement). Paired
with surveillance practices--eligibility screens, trader
identification, and prompt public dissemination--the framework
strengthens auditability and enforcement against misappropriation of
confidential information and other illegal practices. Coordination with
relevant governing bodies and resilient data pipelines further enhance
resolution confidence and incident response capacity.
Residual vulnerabilities persist, as event contracts based on
aggregate outcomes can face indirect influence or strategic behavior,
subjective elements in some adjudication contexts, and lower resolution
confidence because of feed latency, outages, or revisions. Requiring
Commission action to prohibit event contracts that are contrary to the
public interest anchors consequential prohibitions in a developed
record and reasoned decision-making, but realization of integrity gains
remains contingent on sustained investment by prediction markets and
practical cooperation with external data and integrity providers.
(c) Price Discovery
In prediction markets that settle on objective, verifiable events,
dispersed signals are translated into market-implied probabilities
through continuous trading, and prices become informative when
participants can form rational expectations about clearly specified
outcomes and control over those outcomes is diffuse rather than
concentrated. The Proposal would reinforce this mechanism by focusing
any public interest determination on the underlying event that
determines settlement, which in turn ensures that price paths credibly
aggregate beliefs rather than idiosyncratic discretion.
The Proposal directs event contract listings to focus on
comprehensive aggregate sports outcomes rather than designs with
limited or conflated content. This approach reduces extraneous noise
and enhances the informational value of pricing. Additionally, it
explicitly excludes event contracts involving games of pure chance
which lack meaningful informational content and do not facilitate
public price discovery.
Price discovery should be enhanced when settlement standards are
objectively verifiable, data feeds remain robust and transparent, and
prediction markets actively prevent the misuse of material non-public
information by implementing eligibility screens and surveillance
mechanisms. These policy measures mitigate measurement error and reduce
adverse selection. Consequently, market-implied probabilities more
accurately reflect
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realized outcomes resulting in more efficient price discovery process.
The Commission acknowledges that market microstructure and
information dissemination practices significantly influence price
discovery. Accordingly, the Proposal is designed to facilitate the
delivery of timely and objective data streams, alongside well-
documented calculation procedures. These measures enhance the
auditability and comparability of price series both across various
events and over time, thereby strengthening the reliability of these
information signals for economic decision-making. In contrast, limited
liquidity, wide bid-ask spreads, and delayed or subjective inputs
reduce the informativeness of price signals.
The Commission believes that its approach to event contract design
focusing on aggregate outcomes and objective data could improve
prediction market reliability and limit manipulation. The Proposal
would encourage prediction markets to show informational value in their
Sec. 40.2 submissions, promoting event contracts that help non-
insiders form rational expectations. While listing event contracts may
require more documentation and external vendor support, these
challenges are outweighed by enhancements in information quality and
comparability across event contracts, which could ultimately strengthen
the price discovery process.
The Commission preliminarily believes that as precedents are
established and prediction markets coordinate actively with governing
bodies, the quality and reliability of data pipelines are likely to
improve. This collaborative framework is anticipated to reduce price
discrepancies, thereby promoting stability between market prices and
actual outcomes. The adoption of clearer standards further limits
competition based on permissive listing practices, enhancing
credibility and acceptance of market-implied probabilities across
business models.
The Commission preliminarily believes that effective price
discovery relies on robust metrics such as forecast accuracy,
timeliness, microstructure health, settlement reliability, and
integrity safeguards. By focusing on event-driven settlements,
objective aggregate outcomes, and strict process standards, the
Proposal would advance the informational quality and trustworthiness of
price formation process. Collectively, these enhancements align with
the CEA's mandate to promote efficient and reliable price discovery
within the marketplace.
(d) Sound Risk Management Practices
The Commission views ``sound risk management practices'' as the
operational controls that prediction markets use to ensure event
contract trading, clearing, and settlement are conducted securely and
transparently. Prediction markets have grown rapidly with fully
collateralized designs that limit immediate clearing risk, but ongoing
expansion underscores the need for clear contract settlement, anti-
manipulation measures, and insider-risk controls.
Objective and auditable settlement terms reduce risk, prevent
disputes, and protect operational systems. As a result of the standards
and procedures in the Proposal, the Commission anticipates that
prediction markets are likely to use eligibility screens, prohibited-
trader lists, and real-time surveillance, and promptly share
transaction data, to deter manipulation and maintain orderly markets.
The Proposal also would promote cooperation with governing bodies,
improving detection of and response to abnormalities in sports-related
event contracts.
The Proposal should encourage transparent data pipelines, system
redundancy, and well-defined dispute-resolution mechanisms to ensure
settlement accuracy. The standardization of integrity tools contributes
to greater outcome stability; however, certain residual risks persist,
such as offshore migration and challenges with data feeds. To mitigate
these risks, the Proposal encourages enhanced coordination among
stakeholders.
The Commission believes that ongoing monitoring and comprehensive
reporting on surveillance, settlement integrity, market resilience, and
governance actions are essential for registrants to fulfill regulatory
requirements under CEA section 15(a). The Commission believes that
these practices underpin robust risk management, strengthen the
security and transparency of event contract trading, clearing, and
settlement, and support the Commission's broader objectives of
maintaining orderly and trustworthy markets.
(e) Other Public Interest Considerations
The Commission preliminarily considers several additional public
interest dimensions implicated by event contract markets. These include
the protection of retail participants, the integrity of public
processes, informational externalities from technology and data
quality, migration to offshore or unregulated venues, distributional
impacts, and design features that may influence real-world outcomes.
The Commission preliminarily believes that as a result of the
clarifying nature of the Proposal, it is possible that more event
contracts may be listed. With this possible increase in the number of
event contracts, a related public interest issue should be considered.
Some prediction market trading characteristics (such as outcomes
occurring at unpredictable intervals, perception of skill-based
decision making, near miss experiences, and potential for loss chasing
behavior) are generally associated with addictive potential.
Furthermore, low minimum position sizes, continuous market
availability, and notification systems that facilitate frequent
engagement could further contribute to this potential. These factors
can lead to financial harm as users accumulate losses through high
frequency trading, allocate disproportionate resources to trading
activity, and have trouble disengaging voluntarily. Protective
measures, such as position limits, cooling off periods, notification
restrictions, or self-exclusion mechanisms might preserve legitimate
market functions while mitigating harm to retail traders.
In addition, event contracts can concentrate losses among retail
segments with lower financial literacy or higher susceptibility to
salience and longshot bias. The systematic overpricing of very low-
probability outcomes and underpricing of near-certain ones can draw
traders into positions with negative expected values. Because such
miscalibration can impair price discovery and produce distributional
harms, prediction markets could monitor calibration and cohort outcomes
and document when remediation, such as product redesign or targeted
education, reduces these adverse consequences.
The Commission also believes that the public interest is served
when event contracts do not create incentives to profit from
devastating events or undermine confidence in sensitive processes. The
Proposal's activity-specific factors reflect that contracts involving
terrorism, assassination, or war are very likely to be contrary to the
public interest. Insider-risk controls, transparent data pipelines, and
eligibility screens for participants with access to confidential
information can mitigate the risk of misuse that could erode trust in
public institutions.
However, excessive prohibitions of event contracts could shift
demand to unregulated or offshore platforms,
[[Page 35858]]
fragment liquidity, and reduce access to consumer protections. To
mitigate these externalities, the Commission preliminarily favors
maintaining viable, compliant event contracts with high informational
utility and settlement integrity, pursuing cross-market visibility and
enforcement where appropriate, and communicating determinations and
precedents clearly so that listing decisions are predictable. The
Commission preliminarily believes that monitoring of migration signals,
such as traffic to offshore venues for prohibited or borderline
designs, could be advisable when appropriate.
The Commission preliminarily believes the public interest could be
better served when prediction markets evidence data provenance, publish
clear calculation procedures, maintain feed redundancy, and document
controls for automated quoting and news ingestion that limit spurious
price moves. Surveillance could incorporate model-audit trails and
anomaly detection tuned to event-contract microstructure. Where AI-
generated content may influence outcomes (e.g., synthetic polling or
deep-fakes), prediction markets could consider mitigants, such as
verified data sources and latency buffers for contested inputs, so
settlement remains anchored to objective, verifiable facts.
Because of these public-interest considerations, the Commission
invites comment on which metrics and processes could be implemented to
monitor these concerns. For example, would any of the following steps
allow for better monitoring of the potential costs and benefits arising
from the Proposal: (i) retail-outcomes dashboards (education
completion, complaint rates, cohort loss distributions); (ii) integrity
and influence indicators (insider-risk detections, event-adjacent
incident referrals, influence-risk assessments for narrow outcomes);
(iii) migration monitoring (cross-venue traffic or listings on offshore
platforms for prohibited/borderline products); and (iv) technology
quality measures (feed uptime, revision history, model auditability,
anomaly alerts). Could these indicators provide an auditable basis for
demonstrating that ``other public interest'' concerns are being
identified early and mitigated effectively?
The Commission preliminarily believes the Proposal would likely
support the broader public interest by (1) preserving confidence in
sensitive public processes, (2) countering manipulation and insider
misuse through objective settlement and surveillance, and (3) guiding
innovation toward designs with demonstrable informational and societal
value. The Commission preliminarily believes that these measures,
together with the implementation practices described above, are likely
to reduce externalities and enhance the welfare of market participants
and the public.
D. Antitrust Considerations
Section 15(b) of the CEA requires the Commission to ``take into
consideration the public interest to be protected by the antitrust laws
and endeavor to take the least anticompetitive means of achieving'' the
purposes of the CEA, in issuing any order or adopting any Commission
rule or regulation (including any exemption under section 4(c) or
4c(b)), or in requiring or approving any bylaw, rule, or regulation of
a contract market established pursuant to section 17 of the CEA.\312\
---------------------------------------------------------------------------
\312\ 7 U.S.C. 19(b).
---------------------------------------------------------------------------
The Commission believes that the public interest to be protected by
the antitrust laws is generally to protect competition. The Commission
requests comment on whether the Proposal implicates any other specific
public interest to be protected by the antitrust laws.
The Commission has considered the Proposal to determine whether it
is anticompetitive and has preliminarily identified no anticompetitive
effects. The Commission requests comment on whether the Proposal is
anticompetitive and, if it is, what the anticompetitive effects are.
Because the Commission has preliminarily determined that the
Proposal is not anticompetitive and has no anticompetitive effects, the
Commission has not identified any less anticompetitive means of
achieving the purposes of the CEA. The Commission requests comment on
whether there are less anticompetitive means of achieving the relevant
purposes of the CEA that would otherwise be served by adopting the
Proposal.
E. Executive Orders 12866, 13563, and 14192
Executive Orders (E.O.) 12866 and 13563 direct agencies to assess
all costs and benefits of available regulatory alternatives and, if
regulation is necessary, to select those regulatory approaches that
maximize net benefits (including potential economic, environmental,
public health and safety, and other advantages and distributive
impacts). Section 3(f) of E.O. 12866 defines a ``significant regulatory
action'' as any regulatory action that is likely to result in a rule
that may: (1) have an annual effect on the economy of $100 million or
more or adversely affect in a material way the economy, a sector of the
economy, productivity, competition, jobs, the environment, public
health or safety, or State, local, or tribal governments or
communities; (2) create a serious inconsistency or otherwise interfere
with an action taken or planned by another agency; (3) materially alter
the budgetary impact of entitlements, grants, user fees, or loan
programs or the rights and obligations of recipients thereof; or (4)
raise novel legal or policy issues arising out of legal mandates, or
the President's priorities.
The Office of Management and Budget has determined that this action
is an economically significant regulatory action as defined in section
3(f)(1) of E.O. 12866, and therefore it was subject to E.O. 12866
review.
This Proposal, if finalized as proposed, is not expected to be an
Executive Order 14192 regulatory action, because it imposes no more
than de minimis net costs.
F. Indian Tribal Consultation
Executive Order 13175 requires subject agencies to adhere, to the
extent permitted by law, to certain criteria when formulating actions
that have tribal implications.\313\ The CFTC is not subject to E.O.
13175, but non-subject agencies such as the CFTC are ``encouraged to
comply with [its] provisions[.]'' \314\ Under E.O. 13175, a subject
agency identifies whether an action has tribal implications by
assessing whether the action has a substantial direct effect on one or
more Indian tribes, the federal tribal relationship, or the
distribution of power between tribes and the federal government.\315\
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\313\ E.O. 13175 sec. 3, 65 FR 67249 (Nov. 9, 2000). Commenters
on the ANPRM suggested that the Commission should consider E.O.
13175 in any rulemaking about prediction markets. See, e.g., Letter
from the Tohono O'odham Nation 15 (Apr. 30, 2026).
\314\ E.O. 13175 at secs. 1(c), 8.
\315\ Id. at secs. 1(a), 3.
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The Commission understands that the Indian Gaming Regulatory Act
(IGRA) establishes a comprehensive federal framework for the regulation
of gaming on Indian lands, that the National Indian Gaming Commission
administers that framework, and that Tribal-State compacts under
section 11(d) of the IGRA govern the conduct of Class III gaming.\316\
The Commission recognizes the importance of gaming revenue to tribal
governments and the federal interest, reflected in the declaration of
[[Page 35859]]
policy in section 2 of the IGRA, in tribal gaming as a means of
promoting tribal economic development and self-sufficiency.\317\
However, the Proposal involves event contracts traded as swaps or
futures contracts, which are subject to the Commission's exclusive
jurisdiction.
---------------------------------------------------------------------------
\316\ The IGRA is codified at 25 U.S.C. 2701 et seq. Section
11(d) of the IGRA is codified at 25 U.S.C. 2710(d).
\317\ 25 U.S.C. 2701.
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The Commission agrees that ``[t]he United States has a unique legal
relationship with Indian tribal governments as set forth in the
Constitution of the United States, treaties, statutes, Executive
Orders, and court decisions.'' \318\ For this reason, Commission staff
has met with Indian tribal governments concerning prediction markets
and the Commission invites Indian tribal governments and other
concerned parties to provide comments on all aspects of the Proposal
that may relate to the relationship between the federal and Indian
tribal governments or that may affect tribal governmental, economic, or
regulatory interests.
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\318\ E.O. 13175 at sec. 2(a).
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List of Subjects in 17 CFR Part 40
Commodity futures, Reporting and recordkeeping requirements.
For the reasons stated in the preamble, the Commodity Futures
Trading Commission hereby proposes to amend 17 CFR part 40 as follows:
PART 40--PROVISIONS COMMON TO REGISTERED ENTITIES
0
1. The authority citation for part 40 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 5, 6, 7, 8 and 12, as amended by
Titles VII and VIII of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, Public Pub. L. 111-203, 124 Stat. 1376
(2010).
0
2. Amend Sec. 40.7 by adding paragraph (a)(6) to read as follows:
Sec. 40.7 Delegations.
(a) * * *
(6) The Commission hereby delegates to the Director of the Division
of Market Oversight, to be exercised by the Director or by such
employees of the Commission as the Director may designate, the
authority to perform ministerial and record-development functions under
Sec. 40.11, including service of notices, written determinations, and
statements and the development of staff recommendations. The Commission
does not delegate the functions reserved to the Commission under Sec.
40.11(f).
0
3. Revise Sec. 40.11 to read as follows:
Sec. 40.11 Event contracts based upon certain excluded commodities.
(a) Event contracts subject to a public interest determination--(1)
Determination. The Commission may determine, in accordance with the
procedures set forth in this section, that agreements, contracts,
transactions, or swaps described in paragraph (a)(2) of this section
are contrary to the public interest. Agreements, contracts,
transactions, or swaps subject to such a determination shall not be
listed for trading or accepted for clearing on or through a registered
entity.
(2) Enumerated activities. This section shall apply to agreements,
contracts, transactions, or swaps in excluded commodities based upon
the occurrence, extent of an occurrence, or contingency (other than a
change in the price, rate, value, or levels of a commodity described in
section 1a(19)(i) of the Act) that involve:
(i) Activity that is unlawful under any Federal or State law;
(ii) Terrorism;
(iii) Assassination;
(iv) War;
(v) Gaming; or
(vi) Other activity that the Commission determines, by rule or
regulation, to be similar to one or more activities enumerated in
paragraphs (a)(2)(i) through (v) of this section.
(3) Involve. For purposes of paragraph (a)(2) of this section,
agreements, contracts, transactions, or swaps involve an activity if
their settlement is determined by an occurrence, extent of an
occurrence, or contingency in the activity.
(4) Factors for involvement of enumerated activity. In determining
whether agreements, contracts, transactions, or swaps involve an
activity enumerated in paragraph (a)(2) of this section, the Commission
shall consider the following factors:
(i) Involvement of activity that is unlawful under any Federal or
State law. In determining whether agreements, contracts, transactions,
or swaps involve activity that is unlawful under any Federal or State
law, the Commission shall consider the relevant laws and whether the
occurrence, extent of an occurrence, or contingency on which an event
contract is based occurs in an activity that is unlawful under any
Federal or State law. The discussion in paragraph (b) of appendix F to
this part describes how the Commission shall consider these factors.
(ii) Involvement of terrorism, assassination, or war. In
determining whether agreements, contracts, transactions, or swaps
involve terrorism, the Commission shall consider the extent to which
they involve violent or destructive activities occurring outside the
United States with an element of coercion or intimidation and some
relationship to political or social groups or ideologies. In
determining whether agreements, contracts, transactions, or swaps
involve assassination, the Commission shall consider the extent to
which they involve any intentional killing of an individual outside the
United States. In determining whether agreements, contracts,
transactions, or swaps involve war, the Commission shall consider the
extent to which they involve belligerent military activities and
violent activities by organized groups. The discussion in paragraph (c)
of appendix F to this part describes how the Commission shall consider
these factors.
(iii) Involvement of gaming. In determining whether agreements,
contracts, transactions, or swaps involve gaming, the Commission shall
consider the definition of ``gaming'' in paragraph (b)(1) of this
section. The discussion in paragraph (d) of appendix F to this part
describes how the Commission shall interpret this definition.
(5) Public interest factors applicable to all agreements,
contracts, transactions, or swaps subject to this section. In
determining whether agreements, contracts, transactions, or swaps
described in paragraph (a)(2) of this section are contrary to the
public interest, the Commission shall consider all of the factors in
this paragraph (a)(5) as well as the factors in paragraph (a)(6) of
this section applicable to the activity that such agreements,
contracts, transactions, or swaps involve.
(i) The Commission shall consider whether such agreements,
contracts, transactions, or swaps serve the public interest by
providing meaningful hedging or price-basing utility consistent with
section 3 of the Act, yielding economically useful or otherwise
meaningful information, or promoting responsible innovation and fair
competition.
(ii) The Commission shall consider whether the agreements,
contracts, transactions, or swaps present a particular risk of
manipulation or market disruption, exhibit settlement integrity
deficits arising from their particular characteristics, or create
particular risks of information leakage or exploitation of material
non-public information by insiders.
(iii) The Commission shall consider whether trading or clearing of
the agreements, contracts, transactions, or swaps would challenge the
registered entity's self-regulatory tools or compliance infrastructure.
[[Page 35860]]
(iv) The discussion in paragraph (f) of appendix F to this part
describes how the Commission shall consider the factors in this
paragraph (a)(5).
(6) Public interest factors relevant to specific activities. In
determining whether agreements, contracts, transactions, or swaps
described in paragraph (a)(2) of this section are contrary to the
public interest, the Commission shall consider the factors in this
paragraph (a)(6) relevant to the activity that such agreements,
contracts, transactions, or swaps involve, as well as the factors in
paragraph (a)(5) of this section.
(i) Activity that is unlawful under any Federal or State law. (A)
Regarding such agreements, contracts, transactions, or swaps that
involve activity that is unlawful under any Federal law, the Commission
shall consider the extent to which they involve activity that Congress
has determined to be illegal under federal law.
(B) Regarding such agreements, contracts, transactions, or swaps
that involve activity that is unlawful under any State law, the
Commission shall consider the extent to which they involve activity
that is unlawful under State law, taking into account variations in
State laws, relevant judicial precedents, and whether the underlying
activity is generally considered as causing or posing public harm.
(C) The extent to which any such agreements, contracts,
transactions, or swaps (involving activity that is unlawful under any
Federal or State law) involve aggregate crime rates in a geographic
area over extended periods shall weigh against a finding that such
agreements, contracts, transactions, or swaps are contrary to the
public interest.
(D) The discussion in paragraph (g)(1) of appendix F to this part
describes how the Commission shall consider the factors in this
paragraph (a)(6)(i).
(ii) Terrorism, assassination, or war. Regarding such agreements,
contracts, transactions, or swaps that involve terrorism,
assassination, or war, the Commission shall consider the factors in
this paragraph (a)(6)(ii). The extent to which each such factor is
relevant would weigh in favor of finding that such agreements,
contracts, transactions, or swaps are contrary to the public interest.
(A) National security. Whether such agreements, contracts,
transactions, or swaps present a material risk to national security,
including by providing a vehicle for individuals planning a terrorist
attack, assassination, or act of war to create misleading market
signals or otherwise divert law enforcement or military resources.
(B) Inside information. Whether persons with insight into the
probability of the underlying event are likely to be insiders subject
to a duty of confidentiality with respect to that information, and such
duty cannot be adequately addressed through surveillance and trading
prohibitions of the registered entity.
(C) Facilitation. Whether such agreements, contracts, transactions,
or swaps create a financial incentive for any person to commit,
facilitate, or encourage the underlying terrorist act, assassination,
or act of war.
(D) Lack of meaningful information. Whether trading in such
agreements, contracts, transactions, or swaps is unlikely to yield
meaningful information, taking into account that persons with material
insight into the underlying event are typically subject to a duty to
report that information to authorities rather than to trade upon it.
(E) Reference to appendix. The discussion in paragraph (g)(2) of
appendix F to this part describes how the Commission shall consider the
factors in this paragraph (a)(6)(ii).
(iii) Gaming. Regarding such agreements, contracts, transactions,
or swaps that involve gaming, the Commission shall consider the factors
in this paragraph (a)(6)(iii).
(A) Positive public interest factors. The extent to which a factor
in this paragraph (a)(6)(iii)(A) is relevant would weigh against a
finding that such agreements, contracts, transactions, or swaps are
contrary to the public interest.
(1) Aggregate outcome. Whether settlement of such agreements,
contracts, transactions, or swaps is based on the aggregate outcome of
one or more professional or collegiate games, including final scores,
point differentials, win-loss results, tournament advancement,
individual or team statistical performance, or season-long performance
metrics.
(2) Individual statistical performance. Whether settlement of such
agreements, contracts, transactions, or swaps is based on aggregate
statistical performance of an individual over the course of a game.
(3) Objectively determinable settlement data. Whether settlement of
such agreements, contracts, transactions, or swaps is based on
reference to publicly reported, league-verified, or otherwise
objectively determinable settlement data, as opposed to data dependent
upon inherently subjective determinations.
(4) Integrity framework. Whether the underlying game is subject to
an established integrity framework, including a recognized governing
body, an integrity unit or comparable monitoring function, published
rules of competition, and disciplinary procedures applicable to
participants, officials, and other personnel.
(5) Information sharing. Whether the registered entity has
established formal information-sharing or coordination arrangements
with the league, governing body, or integrity monitoring organization
relevant to the underlying game, including, with respect to collegiate
games, the National Collegiate Athletic Association.
(6) Surveillance. Whether the registered entity maintains
appropriate surveillance and trading prohibitions, and coordination
with relevant governing bodies, with respect to such agreements,
contracts, transactions, or swaps.
(B) Negative public interest factors. The extent to which a factor
in this paragraph (a)(6)(iii)(B) is relevant would weigh in favor of a
finding that such agreements, contracts, transactions, or swaps are
contrary to the public interest.
(1) Random chance. Whether such agreements, contracts,
transactions, or swaps involve a game that depends entirely on random
chance.
(2) Player injury. Whether such agreements, contracts,
transactions, or swaps settle solely by reference to the duration,
severity, occurrence, or medical diagnosis of one or more injuries
sustained by one or more participants in the game.
(3) Officiating outcome. Whether such agreements, contracts,
transactions, or swaps settle solely by reference to one or more
judgment calls, discretionary decisions, or rulings of referees,
umpires, or other game officials, including without limitation
penalties assessed, fouls called or not called, reviews initiated,
video replay decisions, player ejections, or disciplinary rulings made
during live games.
(4) Discrete actions. Whether such agreements, contracts,
transactions, or swaps settle solely by reference to a discrete action,
event, or occurrence in a game.
(5) Physical altercations. Whether such agreements, contracts,
transactions, or swaps settle solely by reference to one or more
physical altercations, fights, or conduct between players or
participants in the game that are subject to penalty ejection or
disciplinary action.
[[Page 35861]]
(6) Pre-collegiate games. Whether such agreements, contracts,
transactions, or swaps settle solely by reference to one or more games
or outcomes in which participants are below the collegiate level.
(C) Reference to appendix. The discussion in paragraph (g)(3) of
appendix F to this part describes how the Commission shall consider the
factors in this paragraph (a)(6)(iii).
(b) Gaming. (1) For purposes of this section, ``gaming'' means 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.
(2) [Reserved]
(c) Initiation of review. (1) The Commission may commence a review
under this section only by a written determination of the Commission
that there is a basis to believe that an agreement, contract,
transaction, or swap submitted by a registered entity under Sec. 40.2
or Sec. 40.3 both involves an activity enumerated in paragraph (a)(2)
of this section, considering the factors in paragraph (a)(4) of this
section, and may be contrary to the public interest under the factors
set forth in paragraphs (a)(5) and (a)(6) of this section. Such review
must commence no later than 10 days after the date of the listing of an
agreement, contract, transaction, or swap under review.
(2) The Commission's written determination initiating review shall
identify:
(i) The specific submission or submissions under Sec. 40.2 or
Sec. 40.3 that are under review;
(ii) The enumerated activity under paragraph (a)(2) of this section
that is implicated;
(iii) The specific terms of the agreements, contracts,
transactions, or swaps at issue; and
(iv) The factors in paragraphs (a)(4), (a)(5), and (a)(6) of this
section that the Commission has determined warrant review.
(3) The Commission shall provide the written determination to the
registered entity making a submission referred to in paragraph (c)(1)
of this section and post it on the Commission's website. The 90-day
review period commences on the date the written determination is
provided to the registered entity.
(4) The Commission may consolidate review of multiple submissions
under Sec. 40.2 or Sec. 40.3 that involve the same underlying event
or a substantially similar set of underlying events. In such case, the
written determination referred to in paragraph (c)(2) of this section
shall identify a description of the consolidated group. The
consolidated group of submissions may include submissions by more than
one registered entity, in which case the written determination referred
to in paragraph (c)(2) of this section shall be provided to each such
registered entity and references in this section to the registered
entity shall include all such registered entities.
(5) The Commission may request that the registered entity suspend
the listing or trading of the agreements, contracts, transactions, or
swaps subject to a 90-day review during the pendency of the review
period.
(d) Pre-decisional process--(1) Statement of concerns. Not later
than 15 days after the date the registered entity is provided the
written determination under paragraph (c)(3) of this section, the
Director of the Division of Market Oversight shall provide the
registered entity a written statement identifying the factual basis,
legal theory, specific contract terms, and factors in paragraphs
(a)(4), (a)(5), and (a)(6) of this section supporting the Commission's
review.
(2) Registered entity response. Not later than 30 days after the
date the registered entity is provided the written determination under
paragraph (c)(3) of this section, the registered entity may submit a
written response, including supporting data, expert submissions,
economic analysis, and any proposed modifications to the agreements,
contracts, transactions, or swaps.
(3) Recommendation. Not later than 60 days after the date the
registered entity is provided the written determination under paragraph
(c)(3) of this section, the Director of the Division of Market
Oversight, with the concurrence of the General Counsel, may submit to
the Commission a written recommendation regarding the Commission's
determination. The recommendation shall address the registered entity's
response and any proposed modifications and shall be provided
simultaneously to the registered entity.
(4) Response to recommendation. Not later than 70 days after the
date the registered entity is provided the written determination under
paragraph (c)(3) of this section, the registered entity may submit to
the Commission a written response to the recommendation under paragraph
(d)(3) of this section. The response shall be limited in scope to the
recommendation.
(5) Extensions. The 90-day review period may be extended only with
the agreement of, or upon the request of, the registered entity.
(e) Determination. (1) Not later than 90 days after the date the
registered entity is provided the written determination under paragraph
(c)(3) of this section, or at the conclusion of any extension under
paragraph (d)(5) of this section:
(i) The Commission may issue an order finding that the agreement,
contract, transaction, or swap, or consolidated group of agreements,
contracts, transactions, or swaps, under review is contrary to the
public interest and such review shall be deemed concluded; or
(ii) If the Commission does not issue an order under paragraph
(e)(1)(i) of this section, or if 100 days have passed since the date of
the listing of the agreements, contracts, transactions, or swaps under
review (and any extension under paragraph (d)(5) of this section has
concluded), the agreements, contracts, transactions, or swaps, or
consolidated group of agreements, contracts, transactions, or swaps,
that are subject to such review may be, or continue to be, listed for
trading and accepted for clearing on or through a registered entity and
such review shall be deemed concluded.
(2) An order under paragraph (e)(1)(i) of this section shall
include written findings:
(i) Addressing each factor in paragraphs (a)(4), (a)(5), and (a)(6)
of this section on which the Commission relied;
(ii) Weighing the factors favoring listing against those
disfavoring listing; and
(iii) Explaining the consistency of the order with prior Commission
determinations involving comparable agreements, contracts,
transactions, or swaps, or providing a reasoned explanation for any
departure.
(f) Limits on delegation. Notwithstanding any other provision of
this part, the Commission shall not delegate any of the following:
(1) The determination to initiate a review under paragraph (c)(1)
of this section;
(2) The submission of a recommendation to the Commission under
paragraph (d)(3) of this section, except to the extent provided in that
paragraph; or
(3) The issuance of a determination under paragraph (e) of this
section.
0
4. Add appendix F to part 40 to read as follows:
[[Page 35862]]
Appendix F to Part 40--Factors To Determine Whether Event Contracts
Involve Enumerated Activities and, if so, Are Contrary to the Public
Interest
(a) Definitions. In this appendix the following terms have the
meanings set forth in this paragraph (a).
``Enumerated Activity'' means an activity enumerated in clauses
(I) to (VI) of section 5c(c)(5)(C)(i) of the Act.
``Event contract'' means an agreement, contract, transaction, or
swap that is subject to the Special Rule.
``Prediction market'' means a designated contract market or swap
execution facility that offers for trading event contracts in the
form of swaps or contracts of sale of a commodity for future
delivery.
``Special Rule'' means section 5c(c)(5)(C) of the Act.
(b) Factors to Determine Whether Event Contracts Involve
Activity That is Unlawful Under Any Federal or State Law. In
determining whether agreements, contracts, transactions, or swaps
involve activity that is unlawful under any Federal or State law,
the Commission shall consider the factors in Sec. 40.11(a)(4)(i) as
set forth in this paragraph (b).
(1) Survey of relevant law. Where there is a question regarding
whether an event contract submitted to the Commission involves
activity that is unlawful under any Federal or State law, the
Commission would survey the relevant law.
(2) State laws--(i) Discrepancies. Where an activity is illegal
under the laws of some States, but not others, the Commission would
consider whether the discrepancy relates to any of the factors that
would apply in determining if the event contract is contrary to the
public interest. For example, if an activity is illegal under the
laws of some States, and the relevant factors suggest that event
contracts involving that activity would be found to be contrary to
the public interest, then the Commission would be more likely to
find that the event contract involves unlawful activity and is
within the scope of the Special Rule.
(ii) Archaic laws. The Commission acknowledges that many state
codes include laws prohibiting certain activity that, while not
repealed, are generally considered archaic and are not enforced. The
Commission believes that it is unlikely that a prediction market
would seek to list for trading or accept for clearing an event
contract involving such a law. To the extent that a prediction
market does make a submission to the Commission regarding a contract
that may involve such a law, the Commission believes that it may be
appropriate to commence a review of the contract pursuant to Sec.
40.11(c) to evaluate whether, in light of the relevant facts and
circumstances, it is appropriate to recognize the contract as
involving ``activity that is unlawful under any . . . State law''
for purposes of Sec. 40.11(a)(1).
(3) Staff review. The Commission notes further that a prediction
market may receive a definitive resolution of any questions
concerning the applicability of Sec. 40.11(a)(1) by submitting a
contract for Commission approval under Sec. 40.3. CFTC staff also
may, at its discretion and upon a request from a prediction market,
review a draft contract submission or proposal and provide guidance
concerning the contract's compliance with the Act and CFTC
regulations, including Sec. 40.11(a)(1). The Commission notes,
however, that staff's guidance concerning drafts and proposals is
preliminary and non-binding. CFTC staff formally reviews contracts
only at such time as a compliant submission is provided to the
Commission pursuant to Sec. 40.2 or Sec. 40.3.
(4) Examples. (i) An event contract that settles on whether an
individual will murder someone involves an activity that is unlawful
under State law, because the settlement-determining occurrence--the
murder--is itself within unlawful activity.
(ii) By contrast, an event contract that settles on whether an
individual is convicted of securities fraud by a specified date does
not involve activity that is unlawful under State or Federal law
within the meaning of the Special Rule. The settlement-determining
occurrence is the entry of a judgment of conviction by the court,
which is a lawful judicial act. Although the underlying conduct
alleged in the indictment would, if proven, constitute unlawful
activity, the event contract's settlement is determined by the
court's judgment rather than by the underlying conduct itself. The
same analysis applies to an event contract settling on whether a
defendant in a specified Federal securities-fraud prosecution is
sentenced to a term of imprisonment exceeding a specified threshold,
or whether a specified judgment of conviction is affirmed on appeal
by a specified court.
(c) Factors to Determine Whether Event Contracts Involve
Terrorism, Assassination, or War. In determining whether agreements,
contracts, transactions, or swaps involve terrorism, assassination,
or war, the Commission will consider the factors in Sec.
40.11(a)(4)(ii) as set forth in this paragraph (c).
(1) In general. Generally, the Commission intends to interpret
the terms ``terrorism,'' ``assassination,'' and ``war'' broadly and
without making distinctions based on criteria under international
law, such as whether a war has been formally declared. The
Commission also notes that terrorism and assassination would be
unlawful under Federal or State law, and the Commission generally
interprets these Enumerated Activities to encompass events occurring
outside the United States, including against non-U.S. persons. For
clarity, the Commission notes that event contracts involving more
than one Enumerated Activity would be subject to the Special Rule.
(2) Terrorism. (i) Terrorism includes all violent or destructive
activities occurring outside the United States with an element of
coercion or intimidation and some relationship to political or
social groups or ideologies. To find that an activity constitutes
terrorism would not require identification of a specific aim or
demand, or identification of a specific responsible group. Terrorism
encompasses cyberterrorism and other forms of attack that cause
substantial destruction or disruption through non-physical means,
where the attack is conducted with an element of coercion or
intimidation and bears a relationship to political or social group
or ideologies. Since unlawful activity inside the United States is
an Enumerated Activity, it is irrelevant whether a particular
unlawful activity in the United States constitutes domestic
terrorism.
(ii) Examples. (A) An event contract that settles on whether a
certain organization outside the U.S. conducts an armed attack
causing more than ten civilian deaths in a certain location during a
certain month involves terrorism within the meaning of the Special
Rule. The settlement-determining occurrence is the attack itself,
which is within the terrorism activity.
(B) An event contract that settles on whether a coordinated
cyberattack attributed by the United States Cybersecurity and
Infrastructure Security Agency to a state-sponsored or politically
motivated actor causes the operational shutdown of electricity
transmission in a certain location for more than twenty-four hours
in a certain time period involves terrorism.
(C) By contrast, an event contract that settled on whether the
Transportation Security Administration implements enhanced screening
procedures at certain airports does not involve terrorism, because
the settlement-determining occurrence is a governmental
administrative action, which is a lawful exercise of agency
authority, rather than any act of terrorism.
(3) Assassination. (i) An act constitutes assassination when the
target is a prominent individual and the attack is connected to a
political or social motive. The Commission believes that any person
who is the subject of an event contract is prominent, and that the
relationship to a political or social motive should be interpreted
broadly. Therefore, any intentional killing of an individual outside
the United States would be an assassination.
(ii) Examples. (A) An event contract that settles on whether a
foreign leader dies as a result of an attack by an organized
political or military faction by a certain date involves
assassination. The settlement-determining occurrence is itself
within the assassination activity.
(B) By contrast, an event contract that settles on whether the
leader will lose an election does not involve assassination, war, or
any other Enumerated Activity.
(4) War. (i) The Commission intends that the factors to define
war would encompass all belligerent military activities and violent
activities by organized groups. By referring to belligerent military
activity, the Commission does not intend to include any non-
belligerent military activities, such as routine deployments,
training or disaster relief assistance. That is, this Enumerated
Activity is not limited to declared wars and would include the
belligerent activities of both government and civil militias. It
would also include civil wars and civil unrest by organized groups.
(ii) Because the Special Rule is applied to particular event
contracts, the Commission believes that it is not appropriate to
apply a temporal or quantitative threshold to determine if
belligerent military or violent activities constitute ``war.'' For
example, if
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event contracts were certified about a single belligerent military
activity, it would not be appropriate to examine whether that
activity was isolated or rather a part of a campaign over a certain
time. Instead, the proposed factors explain that event contracts
about a single belligerent military or organized violent activity
would involve war.
(iii) Examples. (A) A contract that settles on whether a foreign
government conducts a missile or drone strike against a target
within a certain city during a certain fiscal quarter involves war
within the meaning of the Special Rule, because the settlement-
determining occurrence is itself a military activity within the war
activity.
(B) A contract that settles on whether a foreign government
conducts a naval or amphibious military action against another
government likewise involves war, regardless of whether such action
is characterized as a declared war or a more limited military
operation, because the event contract's settlement turns on the
occurrence of a belligerent military activity by an organized armed
force.
(C) By contrast, an event contract that settles on whether the
front-month Brent crude oil futures contract closes above $120 per
barrel on any trading day during a certain fiscal quarter does not
involve war within the meaning of the Special Rule, even though oil
prices are sensitive to military and geopolitical conditions. The
settlement-determining occurrence is the published settlement price
of an exchange-traded futures contract, which is a measurement
produced by a registered futures exchange.
(5) Multiple causal pathways. (i) The foregoing analysis
addresses event contracts whose settlement-determining occurrence
falls within an Enumerated Activity on the face of the event
contract's terms. A separate question arises when an event
contract's settlement-determining occurrence is facially neutral--
that is, when the occurrence on which settlement turns can be
reached through multiple causal pathways, at least one of which
falls within terrorism, war, or assassination. In such cases, the
Commission would understand the event contract to involve the
Enumerated Activity unless the event contract's terms specify the
qualifying settlement pathways with sufficient detail to exclude the
Enumerated-Activity pathway. An event contract drafted at a level of
generality that permits settlement on the basis of an act of
terrorism, war, or assassination is treated as involving that
activity. This approach reflects the Commission's view that the
Special Rule's protective purpose would be undermined if registered
entities could avoid its application by drafting settlement
conditions broadly enough to encompass Enumerated-Activity pathways
alongside non-enumerated ones.
(ii) Examples. (A) An event contract that settles on whether a
foreign leader is out of office by a certain date, without further
specification of the qualifying mechanisms, involves assassination
within the meaning of the Special Rule because assassination is
among the pathways by which the settlement condition can be
satisfied
(B) The same event contract, redrafted to settle only on whether
the named individual ceases to hold office ``by reason of electoral
defeat, resignation, constitutional removal, negotiated departure,
or natural death,'' would not involve assassination, because the
event contract's terms specify the qualifying pathways and exclude
the Enumerated-Activity pathway.
(C) Similarly, an event contract that settles on whether a
specified facility of a certain foreign nation remain functional as
of a certain date would involve war, because an activity of war is
among the pathways by which the facility could cease to remain
functional; the same event contract, redrafted to settle only on
whether the facility is demolished pursuant to a government order,
or to negotiated terms of a diplomatic deal, would not.
(d) Factors to Determine Whether Event Contracts Involve Gaming.
In determining whether agreements, contracts, transactions, or swaps
involve gaming, the Commission will consider the definition of
``gaming'' in Sec. 40.11(b)(1) as set forth in this paragraph (d).
(1) Ordinary meaning. The Commission believes that the word
``gaming'' in the statute carries its ordinary, plain meaning and
involves playing a game. Dictionaries define ``gaming'' as ``the
practice or activity of playing games for stakes'' and ``the
practice or activity of playing games.'' The Commission's
interpretation of the term ``gaming'' in this appendix F is limited
to the Special Rule context and does not purport to interpret or
displace any other federal or state statutory regime using the same
or a related term.
(2) Interpretive principles. (i) In interpreting ``gaming,'' the
Commission considers it important to recognize what the Special
Rule's other Enumerated Activities describe. Terrorism,
assassination, war, and unlawful activity each describe activities
that happen in the world: wars are fought, assassinations are
carried out, crimes are committed. The term ``gaming'' must play the
same grammatical and functional role in the statute. ``Gaming'' is
the game itself, the activity that occurs.
(ii) This matters for two reasons. First, this structural
reading is essential to giving effect to the Special Rule's
operative text. As discussed above in connection with the term
``involve,'' the Commission interprets the Special Rule as asking
whether event contracts' settlements are determined by the
occurrence of an Enumerated Activity. That inquiry presupposes a
distinction between the event contract and the underlying activity
to which it refers. Enumerated Activities must therefore be
activities in the world that event contracts can reference.
(iii) A definition that characterizes ``gaming'' as a property
of the event contract itself (for example, ``the act of risking
something of value, especially money, for a chance to win a prize'')
cannot coherently be applied because it has no limiting principle.
Under such a definition, every event contract would involve
``gaming'' by definition, because every event contract stakes value
on a contingent outcome.
(iv) For similar reasons, a wagering- or gambling-centered
definition of gaming is overbroad. Ordinary definitions of
``gambling'' include ``the act of risking something of value,
especially money, for a chance to win a prize.'' A definition of
gaming built around wagering would apply to all event contracts and
render the Special Rule's ``gaming'' category limitless. The
Commission believes the coherent reading is the one the ordinary
meaning of the word naturally supplies: gaming is the game itself--
the activity in which occurrences, the extent of occurrences, or
contingencies determine settlement.
(v) Under this approach, the word ``gaming'' derives from
``game,'' which in turn is a word with many nuances and meanings.
The Commission believes that the meaning of ``game'' relevant to the
Special Rule encompasses the activities that are games in common
parlance--sports games, athletic competitions, and recreational
games including games of chance.
(vi) The Commission derived the definition of gaming in Sec.
40.11(b) from dictionary definitions of the term ``game'' to mean
``a physical or mental competition conducted according to rules with
the participants in direct opposition to each other'' and ``activity
engaged in for diversion or amusement,'' or ``an activity which
provides amusement or fun'' and ``a contest or competition, governed
by rules of play, according to which victory or success may be
achieved through skill, strength, or good luck.''
(vii) As noted above, the Commission aims to capture the
activities that are games in common parlance. To do so, the purposes
for which participants typically engage in the activity must be an
element of the definition. The Commission notes that, as discussed
further below, a definition of ``gaming'' to encompass any
competition with rules and measurable outcomes depending on skill,
without considering the purpose of the activity, would be very broad
and contrary to the common understanding of games.
(3) Clauses of the definition. (i)(A) The Commission intends
that the first clause of the regulatory definition--a typical
purpose of ``recreation or to entertain others''--will reflect the
dictionary definitions' reference to amusement and also capture
professional sports, which are commonly understood to be games. By
looking to the typical purpose of the activity, the regulatory
definition acknowledges that there may be atypical circumstances
where participants have different purposes for engaging in an
activity that is a game in common parlance, but the activity should
still be encompassed in ``gaming.'' The Commission intends that the
term ``recreation'' in the definition would include many elements,
such as when participants engage in the activity for the simple
pleasure of the activity, the personal satisfaction of meeting a
challenge, and the enjoyment of competing against others. The
proposed definition encompasses a mix of recreational and
entertainment purposes, as well as the variety of purposes subsumed
within ``recreation.'' The Commission notes that a recreational or
entertainment purpose is not contrary to the activity having
financial or economic consequences. Recreation and entertainment are
large parts of the U.S. economy.
(B) To the extent professional participants are not engaged in
recreation, they are
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engaged in gaming to entertain others. The Commission understands
that professional athletes are paid or receive monetary compensation
and are therefore motivated by the opportunity to earn an income.
Nonetheless, the Commission believes it is accurate, and in
accordance with common understanding, to say that the purpose of the
participants in a professional sporting activity is typically to
entertain an audience (and also to gain personal satisfaction
through achievement). The salary or compensation that the
participants receive is a result of fulfilling the entertainment
purpose.
(ii) That ``gaming'' must be governed by rules simply conveys
what the Commission believes to be the commonsense understanding of
a game and conforms to the dictionary definitions.
(iii) To be covered by the Special Rule, the Commission believes
that the activity must have measurable occurrences or outcomes.
These occurrences in the game or outcomes at the end of a game would
be the potential bases for event contracts. And, in keeping with the
recreational or entertainment purpose of the activity, the
occurrences or outcomes must depend on luck, skill, or athletic
ability during the activity. Thus, gaming includes all games of
chance (e.g., roulette), games requiring skill (e.g., chess), and
games of mixed chance and skill (e.g., poker). The definition
includes both skill and athletic ability to be clear that gaming
includes all sports, including e-sports and sports where judges rank
participants based on their skill or athletic ability during the
activity.
(iv) Examples. (A) If the outcome of the activity depends on
other factors such as judges' evaluation of the participants' merit
or qualifications on a broader basis than a certain activity, it is
not gaming. For example, a figure skating competition is gaming
because the skaters--the participants in the activity--are doing so
for recreation and to entertain others. Under the rules of the game,
judges rank the participants based on their skill and athletic
ability displayed in the competition.
(B) On the other hand, an award of ``figure skater of the year''
based on a vote or panel of judges is a contest, not gaming, if its
purpose is to honor the person who the judges assess to have
displayed the best overall figure skating ability over the past
year. The requirements that gaming have a recreational or
entertainment purpose, and that the occurrences or outcome of the
activity depend on the participants' luck, skill, or athletic
ability during the activity, distinguish gaming from other
competitive activities. The same distinction would apply whether the
judges are individual people or algorithms developed by the
organizers of the event. If the outcome is decided by algorithms
based only on skill and ability during the activity, it would be
gaming. If the algorithm considers other factors, it would not be
gaming.
(4) Contests. In this paragraph (d), the term ``contest'' refers
to an activity where participants compete for a prize, honor, award
or position based on their qualifications or merit displayed in
general or over an extended period. These contests are not gaming.
(i) Political elections illustrate the distinction between
gaming and contests. Elections typically serve the purpose of
selecting political leadership, not recreation or entertainment.
Their outcomes do not turn on the participants' luck, skill, or
athletic ability during the election itself, but rather on voters'
judgment regarding who should hold office, informed by
considerations beyond the discrete election period. Thus, political
elections are not gaming.
(ii) Similarly, contests like the Nobel Prize and the Academy
Awards are not gaming. The outcome of these contests depends on
electors' judgment on who should receive an award based on a range
of considerations beyond the participants' luck, skill, or athletic
ability displayed during the contest. Because the award turns on
evaluative judgments, not on measurable occurrences dependent on the
participants' skill or athletic ability in the activity itself, it
is a contest, not gaming.
(iii) Mere association with athletic performance does not change
this analysis. For example, the Cy Young Award, which is presented
annually by the Baseball Writers' Association of America to the two
best baseball pitchers, is not gaming. Although players are
recognized for their athletic performance during the season, the
outcome is ultimately determined by the judgment of a panel of
voters, who assess overall performance without being strictly
limited to occurrences in any game or games. On the other hand, an
event contract on which baseball pitcher will record the most
strikeouts in a season is gaming. Its outcome depends on a
measurable outcome of the participants' skill and athletic ability
in games--i.e., who records the most strikeouts.
(5) Other gambling. The Commission also notes that if an
activity is not gaming as defined above, the mere fact that gambling
occurs in relation to that activity does not make it gaming. For
example, if gambling occurs on who will win the Nobel Prize, that
gambling does not change the fact that the Nobel Prize contest is
not gaming, and event contracts based on who will win the Nobel
Prize would not be subject to the Special Rule. In other words, the
Commission believes that the definition of gaming in Sec. 40.11
should be limited to events that are games.
(6) Events happening in games. (i) Whether an event contract
involves gaming depends on whether its settlement is determined by
the occurrence, extent of an occurrence, or contingency in a gaming
activity. The outcome of a game is an occurrence in a game.
Accordingly, gaming includes events happening in games but does not
include events occurring in connection with or around games.
(ii) Examples. (A) An event contract on whether a football
player will score a certain number of touchdowns in a game involves
gaming: settlement is determined by an occurrence in the football
game.
(B) An event contract on attendance at the football game does
not involve gaming: settlement is determined by ticket-purchasing
decisions by prospective attendees, not by an occurrence in the game
itself.
(C) Similarly, an event contract on whether a particular athlete
will win a gold medal at the Olympic Games involves gaming:
settlement is determined by a contingency in the Olympic athletic
event itself.
(D) An event contract on which city will host future Olympic
Games does not involve gaming: settlement is determined by the
International Olympic Committee's host-selection decision, which is
a political and economic decision rather than occurrence in any
gaming activity.
(e) Illustrative examples of event contracts not within scope.
While the Commission cannot anticipate every contract design, the
Commission believes that event contracts based on the following
would generally fall outside of the scope of the Special Rule and
Sec. 40.11. For the avoidance of doubt, these event contracts
remain subject to the statutory and regulatory requirements for
listing and trading of event contracts.
Rates, measures or levels of economic indicators,
including the CPI and other price indices; the U.S. trade deficit
with another country; measures related to GDP, jobless claims, or
the unemployment rate; and U.S. new home sales.
Rates, measures or levels of financial indicators,
including the federal funds rate; total U.S. credit card debt;
fixed-rate mortgage averages (e.g., the 30-year fixed-rate mortgage
interest rate); and the values for broad-based stock indexes at
particular times.
Rates, measures or levels of foreign exchange rates or
currencies.
Results of political elections and outcomes or
occurrences of political activities, such as legislative votes,
enactments of laws or appointments of people to political offices.
Results or outcomes of honor and award contests, or
occurrences during those contests, such as who will win or be
nominated for a particular award, or when or if an award will be
granted.
(f) Public interest factors applicable to all agreements,
contracts, transactions, or swaps subject to Sec. 40.11. In
determining whether agreements, contracts, transactions, or swaps
described in Sec. 40.11(a)(2) are contrary to the public interest,
the Commission will consider all of the factors in Sec. 40.11(a)(5)
as set forth in this paragraph (f). The Commission will also
consider the factors in Sec. 40.11(a)(6) applicable to the activity
that such agreements, contracts, transactions, or swaps involve, as
set forth in paragraph (g) of this appendix.
(1) Overview. (i) The Special Rule does not define the term
``public interest.'' While section 3 of the Act guides the
Commission's consideration of whether a contract is contrary to the
public interest, it is not the Commission's exclusive consideration.
The Commission observes that by limiting the application of the
Special Rule to Enumerated Activities--activity that is unlawful
under any federal or state law, terrorism, assassination, war, and
gaming--Congress specified the areas that are of particular public
interest concern. The Commission believes that the Special Rule is
an instruction to apply a particular, focused
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public interest analysis to specific types of event contracts. That
is, the Commission should consider how the public interest purposes
of the Act (and other public interest factors) may be particularly
implicated in the context of event contracts involving Enumerated
Activities. The discussion in this section includes an explanation
of when the Commission believes it should apply these public
interest factors in a more focused manner than the same factors
would be applied to other event contracts that do not involve
Enumerated Activities and are not subject to the Special Rule.
(ii) Further, the Commission believes the public interest review
should focus on specific, potential harms, rather than a broad or
indeterminate inquiry into the ``public good.'' The relevant
question is whether particular event contracts that otherwise
satisfy all applicable requirements nonetheless raise public
interest concerns.
(iii) The Commission believes that the public interest inquiry
under the Special Rule encompasses considerations in addition to
compliance with the Core Principles and other requirements under the
Act.
(iv) Multi-factor approach. (A) Given the range of the
Enumerated Activities and potential breadth of event contracts that
could be listed, the Commission believes it is appropriate to
consider a series of factors when determining whether an event
contract that involves an Enumerated Activity is contrary to the
public interest, instead of relying on a single, static public
interest test. The Special Rule contemplates a review that considers
the public interest, including the public interests underlying the
Act, in a holistic manner to determine whether the event contracts
in question raise the potential for harms to the public interest
that outweigh any utility or public interest value of the event
contracts. The Commission believes that evaluating whether an event
contract is contrary to the public interest through multiple
factors, rather than a single static test, is beneficial because it
allows the Commission to account for the diversity and complexity of
event contracts that could fall within the Enumerated Activities.
(B) A multifactor approach enables the Commission to weigh
different dimensions of potential harm or public benefit--including
the event contract's hedging or price-basing utility or potential to
encourage illicit behavior--while also accommodating novel event
contract designs and market developments and supporting innovation.
This flexibility helps to ensure that the Commission's analysis
remains consistent, transparent, and adaptable across a wide range
of event contracts, rather than constrained by an overly rigid or
underinclusive test. The Commission notes that no single public
interest factor discussed below would be dispositive as the
Commission will apply a range of public interest considerations when
determining whether an event contract is contrary to the public
interest. The Commission also notes that the factors that inform a
public interest determination, and the weight given to each such
factor, are likely to vary depending on the particular
characteristics of the event contract and Enumerated Activity being
evaluated.
(v) To provide a consistent and transparent framework for
evaluating event contracts subject to a public interest review under
the Special Rule, the Commission will apply the factors in this
section to all such event contracts. In addition to these general
considerations, the Commission will also apply more specific public
interest factors tailored to the specific Enumerated Activity which
a given event contract involves, as discussed in paragraph (g) of
this appendix. The Commission notes that no single factor is
dispositive as the Commission would weigh the various factors on
balance.
(2) Price discovery and information aggregation utility--(i)
Overview. (A) The factors in this section consider whether the event
contracts serve the public interest by providing meaningful hedging
or price basing utility consistent with section 3 of the Act,
yielding information that is economically, financially, or
commercially useful or otherwise meaningful, or promoting
responsible innovation and fair competition. As discussed above, the
public interests underlying the Act are stated in section 3 as
findings that hedging and price formation are the public purpose of
CFTC-regulated markets and are in the public interest.
(B) The Commission believes that event contracts subject to the
Special Rule, like other event contracts, can play a role in
``managing and assuming price risks, discovering prices, or
disseminating pricing information'' as contemplated by section 3(a)
of the Act.
(C) Also, prediction markets function as information aggregation
vehicles because event contract prices reflect the market
participants' aggregate beliefs regarding whether the events will
occur.
(D) Another purpose stated in section 3(b) of the Act is to
promote responsible innovation and fair competition.
(E) The Commission believes that these public interests
underlying the Act, relevant to all derivatives under the CFTC's
jurisdiction, should be included in the Commission's review under
the Special Rule. Therefore, when reviewing event contracts
involving an Enumerated Activity, the Commission will consider
whether the event contracts can facilitate these functions.
(F) The Commission believes it is not necessary to demonstrate
that event contracts have a reasonable potential for a hedging or
pricing function to avoid a finding that the event contracts are
contrary to the public interest. Still, event contracts' reasonable
potential for a hedging or pricing function would be a significant
factor against a finding that they are contrary to the public
interest. As part of this inquiry, the Commission will consider
whether the event contracts can meaningfully facilitate risk
transfer and price discovery.
(ii) Use of information in economic decisions. (A) The
Commission believes that price discovery and the connection between
prices and economic decisions become more complex as information is
used in economic decision-making in ever more sophisticated ways.
Economic modeling uses inputs from a multitude of sources to guide
decision-making on a variety of topics that are not necessarily
directly tied to a specific commodity market. Whether event
contracts have a potential price discovery function depends not just
on whether the price of a particular event contract can be used,
alone, to make economic decisions. Instead, the event contracts'
role in price discovery can arise from how the prices of a variety
of event contracts can be factored into decision-making processes.
Event contracts can serve as a collective assessment of not only the
likelihood of events, but also the level of the market's or the
public's attention to various issues and their assessment of the
importance of that issue.
(B) The collective assessment reflected in event contract
pricing has economic value, which, in turn, would be a factor in the
Commission's assessment of event contracts' price discovery
functionality. For example, event contracts that involve sporting
events can be used for price discovery in a variety of ways. Sports
teams are economic enterprises and sports stadiums are regional
economic anchors that generate economic activity and materially
affect both regional and national markets. For these reasons, it is
economically useful to know not only how a sports team is likely to
perform in upcoming games, but also how the public believes that the
sports team will perform in upcoming games. This information could
be useful, for example, to hotels adjusting their pricing models,
restaurants making staffing decisions to accommodate increased
demand, vendors increasing supply orders, and cities allocating
resources to accommodate projected crowds.
(C) Thus, the price discovery utility of an event contract on
whether a team will win a game arises not simply from whether the
information about that particular game can be directly tied to a
specific economic decision. Rather, the price discovery usefulness
of all event contracts about a team may arise from other analyses,
such as how their pricing and trading volume change over time, how
trading in event contracts about one team compares to trading in
event contracts about other teams, and so forth.
(D) The Commission believes that three fundamental points are
especially pertinent here.
(1) The price discovery function of event contracts is not
limited to how the market participants buying and selling event
contracts use the prices as guides to how likely events are to
occur. Rather, so long as there is a sufficient volume of event
contracts about an underlying event or issue, they can serve as
price discovery tools by indicating what the market or the general
public thinks about the underlying events or issues (i.e., market
sentiment).
(2) The usefulness of event contracts for price discovery, as
compared to other tools such as surveys to measure market sentiment,
arises from the fact that market participants are spending money,
even in nominal amounts, to support their beliefs. Thus, event
contracts may be a more accurate indicator than surveys of how
strongly those beliefs are held.
(3) Whether event contracts can be used directly for hedging is
of limited importance in the public interest determination; rather,
the question is whether the information
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derived from event contract pricing can be used to guide hedging
decisions. For example, even if a real estate firm does not use
event contracts involving a sports team to hedge its investment in
property near the team's stadium, it could nonetheless use the event
contract prices as a factor in its decisions about how to use other
financial instruments to hedge its property investment.
(E) Example. The price discovery value of event contracts on how
many points a basketball player will score in a game depends on more
than whether the event contracts can be used to hedge the purchase
price of a ticket to the game. In some circumstances, the prices of
those contracts could also, along with other information including
the prices of many other event contracts, be factored into models
used for commercial forecasting or audience-demand analysis, which
are economic questions.
(F) For these reasons, the Commission will be more likely to
find that the event contracts involving an Enumerated Activity are
contrary to the public interest where the event contracts lack the
potential to inform any economic, commercial or financial decisions.
This includes event contracts that settle based on purely random
events, such as the spin of a roulette wheel or the outcome of a
random-number generator. Market participants buying and selling such
event contracts cannot, by definition, have any insight into whether
the events will occur. Therefore, the prices of the event contracts
cannot be used to understand market sentiment about any potential
economic, financial or commercial consequence. However, it is
important to distinguish random events from unpredictable events.
The outcome of a game of skill may be unpredictable at times, but it
is not random because the outcome depends on the players' actions in
the game, which are under the players' control. A game of pure
chance, such as roulette, is structured to be random and outside any
individual's control. Many games and other activities mix skill and
chance and are therefore not ``purely random.''
(iii) Information aggregation. (A) The Commission believes that
innovative event markets have the capacity to facilitate the
discovery of information and thereby provide potential benefits to
the public. For many years, event contract markets have been used
for educational insights, research, and accurate forecasting of
events, among other uses. Many prediction markets have become
reliable and accurate information sources, in part, by harnessing
the wisdom of crowds--market participants who are incentivized to
avoid financial loss when taking a position in a particular
contract. There are also many documented cases where prediction
markets outperform traditional polling sources or other forecasting
methods. In that context, information gleaned from prediction
markets can help guide economic decision-making.
(B) The Commission believes that event contracts are more likely
to be contrary to the public interest when any meaningful
information about whether the underlying event will occur is
unavailable to the broader market. This includes events that are
entirely random or where insight into the underlying event is highly
concentrated--in a single individual, for example, or only
individuals legally prohibited from transacting--and relevant
information is necessarily concealed from the public. In such cases,
the Commission will consider whether buyers and sellers have any
basis to form a meaningful view on the underlying event, and whether
the resulting prices can reasonably be expected to reflect informed
market sentiment. This factor could also apply where the only market
participants with insight into the underlying event would be legally
prohibited from transacting in the event contract. Thus, this factor
is closely related to the previous factor about whether the event
contract can be used for price discovery, and the factor below
regarding inside information.
(C) Examples. Event contracts settling on where a military
attack will occur or on the officiating calls made by referees in a
specific game may present this concern. The individuals with genuine
insight into such event--military personnel or referees--are
typically subject to fiduciary duties or confidentiality obligations
that would prevent them from lawfully transacting in the event
contract. In some instances, other market participants would lack
any comparable basis for forming an informed view on the event, with
the result that resulting prices would not reflect aggregated
informed sentiment about the underlying event.
(D) The Commission also believes that in determining whether
event contracts can convey meaningful information, event contracts
should generally be considered in the aggregate. As described in the
previous section, the prices and volumes of event contracts over
time can indicate public sentiment, especially when event contracts
on related topics are compared with each other. So, if a small group
of event contracts do not appear to convey any meaningful
information, the Commission will still consider whether the event
contracts convey meaningful information when combined with or
compared to other event contracts.
(E) Therefore, when reviewing event contracts involving an
Enumerated Activity, the Commission will consider whether the event
contracts have any utility as information aggregation vehicles--
meaning whether the event contracts provide any meaningful
information that is useful to making economic, financial or
commercial decisions. The Commission will consider the absence of
any information aggregation utility as a factor in favor of finding
the event contracts to be contrary to the public interest.
(iv) Innovation and fair competition. (A) Another purpose stated
in section 3(b) of the Act is to promote responsible innovation and
fair competition among designated contract markets, other markets
and market participants. Responsible innovation and fair competition
are critical to the healthy functioning of the derivatives markets,
particularly given the substantial increase in the trading of event
contracts and the growing demand for these products by market
participants seeking information regarding, or to hedge exposure to,
variables for which no traditional financial instrument exists. This
expansion underscores a clear market need and sustained demand for
prediction markets as a means of managing novel and otherwise
unaddressed risks. The public therefore has an interest in ensuring
that these markets retain the space to innovate and develop
responsibly so they can continue to meet the evolving needs of
market participants while maintaining appropriate regulatory
safeguards.
(B) The Commission observes that market participants have
demonstrated demand for event contracts addressing categories of
risk for which traditional financial instruments either do not exist
or provide only imperfect hedges with substantial basis risk. For
example, event contracts referencing the timing or content of
legislative, regulatory, and policy actions, such as whether a
certain bill will become law, or whether a specified tariff or trade
measure will be in force at a given time, likewise address exposure
that businesses face but cannot meaningfully hedge through equity,
rates, or commodity markets. Indications that event contracts
support responsible innovation and fair competition would
accordingly weigh against a finding that the event contracts are
contrary to the public interest.
(C) In assessing this factor, the Commission will also consider
the competitive implications of restricting access to event
contracts. Particularly where demand for the event contract is
strong, a determination barring its listing on a CFTC-registered
prediction market is unlikely to eliminate the activity; rather, it
may divert trading to offshore or otherwise less transparent and
less supervised markets. Such migration would diminish the
Commission's oversight of these markets, deprive the public of the
transparency and market integrity safeguards afforded by the Act,
and undermine the public benefits associated with responsible
innovation occurring within the U.S.
(D) Accordingly, the likelihood that prohibiting an event
contract would push trading activity into less transparent and less
regulated foreign markets is a factor that weighs against finding
that the event contract is contrary to the public interest.
(3) Potential threats to market integrity. Another purpose
stated in section 3(b) of the Act is to deter and prevent price
manipulation or any other disruptions to market integrity. The
factors in this section consider whether, in the context of the
focused review required by the Special Rule, the event contracts
present a particular risk of manipulation or market disruption,
exhibit settlement integrity deficits arising from the event
contracts' particular characteristics, or create particular risks of
information leakage or exploitation of material non-public
information by insiders.
(i) Overview. (A) As a general matter applicable to all swaps
and futures contracts traded on their platforms, designated contract
markets and swap execution facilities have a statutory obligation to
ensure that the contracts they list for trading are not readily
susceptible to manipulation. But in its public interest analysis of
event contracts subject to the Special Rule, the Commission believes
that, as discussed above, it should also consider how the public
interest purposes of the Act are particularly implicated. The
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Commission therefore distinguishes its evaluation of whether a
particular risk of manipulative activity may raise public interest
concerns for purposes of the Special Rule, from the review that all
designated contract markets and swap execution facilities must
undertake to evaluate whether a contract complies with this
statutory obligation. Thus, the use of the factors outlined below in
determining whether event contracts are contrary to the public
interest is beyond and separate from a designated contract market's
or swap execution facility's analysis of a contract's compliance
with the Act and applicable regulations.
(B) In the same way, the Commission will also apply a particular
analysis of whether event contracts involving Enumerated Activities
can be settled based on objective, publicly verifiable criteria
within a reasonable timeframe in determining whether the event
contracts are contrary to the public interest, and whether such
event contracts raise a particular potential for improperly obtained
non-public information to be exploited by insiders. To the extent
particular concerns arise with respect to event contracts subject to
the Special Rule, such factors will weigh in favor of finding the
event contracts to be contrary to the public interest.
(C) The factors outlined below address risks that inhere in the
event contracts themselves--their terms, their underlying subject
matter, and the criteria on which settlement turns--and that may be
present regardless of the prediction market's compliance
capabilities.
(ii) Settlement integrity. (A) Registered entities are
statutorily required by sections 5(d)(2)(A)(ii) (designated contract
markets) and 5h(f)(2)(A)(i) (swap execution facilities) of the Act
to establish, monitor, and enforce compliance with the terms and
conditions of contracts traded on the registered entity. The
Commission believes that in the context of its public interest
analysis under the Special Rule, it is particularly important that
the criteria on which event contracts involving Enumerated
Activities settle are clear, objective, and publicly verifiable, and
that the contracts identify the triggering events and the means by
which it is determined whether those events have occurred
transparently and in a manner that clearly identifies the triggering
events and how it is determined whether or not those events have
occurred. It is also important that the settlement mechanism and the
data upon which it relies are suitable to the event contracts under
review. The Commission acknowledges that a variety of data sources
may be appropriate for the settlement of event contracts and does
not intend to overly restrict prediction markets' flexibility to
determine which sources should be used in settlement.
(B) Vulnerability to settlement integrity deficits--e.g., a lack
of clarity about exactly how event contracts involving Enumerated
Activities will be resolved--undermines market function and is
indicative of event contracts that are likely to be contrary to the
public interest. Therefore, when reviewing event contracts involving
an Enumerated Activity, the Commission will consider whether the
criteria for settlement of the event contracts are clear, objective,
and publicly verifiable. Event contracts whose conditions or
resolution criteria are ambiguous, overly complex, or potentially
misleading to market participants raise settlement integrity
concerns under this factor.
(iii) Information leakage and misuse of confidential
information. (A) Commission Rule 180.1 (Sec. 180.1 of this chapter)
makes it unlawful for any person to employ any device, scheme, or
artifice to defraud or attempt to defraud any person or manipulate
the price of any futures contract listed on a registered entity or
any swap, including the misappropriation of confidential information
in breach of a pre-existing duty of trust or confidence to the
source.
(B) The Commission believes that certain event contracts
involving Enumerated Activities may create unique incentives for
information leakage or misuse of material nonpublic information--for
example, by encouraging individuals with privileged access to
disclose or act upon such information, by incentivizing the unlawful
acquisition of additional sensitive information, or by enabling
third parties to pressure, solicit, or bribe such individuals to
obtain it. These incentives may present significant public interest
concerns for event contracts involving Enumerated Activities,
particularly where the information is highly sensitive and closely
guarded, and meaningful insight into the underlying event is
concentrated among a small number of individuals.
(C) The Commission believes that these concerns are especially
acute for contracts involving national-security matters, where
relevant information is tightly held, highly sensitive, and subject
to strict confidentiality obligations. In such settings, an event
contract may create improper incentives to leak or misuse sensitive
information, or to attempt to obtain such information illicitly.
(D) Example. Event contracts settling on the occurrence, timing,
or specifics of intelligence activities could create financial
incentives for individuals with security clearances or other access
to classified information to disclose or trade upon such information
in violation of their obligations and could similarly incentivize
foreign intelligence services or other third parties to target
cleared personnel for the purpose of extracting tradeable
information.
(E) Where the structural features of an event contract--the
sensitivity of the underlying information, the concentration of
insight among a small number of individuals, or the nature of the
activity to which the contract refers--give rise to identifiable
concerns regarding the leakage, misuse, unlawful acquisition, or
third-party exploitation of privileged information, and where a
prediction market has not implemented adequate safeguards, those
concerns will weigh in favor of finding the event contracts contrary
to the public interest.
(4) Compliance and self-regulatory challenges arising from the
prediction market's capacity to administer the contracts. (i) The
factors in this section consider whether trading or clearing of the
event contracts would challenge the prediction market's self-
regulatory tools or compliance infrastructure because of the event
contracts' involvement of Enumerated Activities.
(ii) Prediction markets have self-regulatory obligations to
ensure proper surveillance and oversight of trading in all of the
event contracts that they list, accounting for the particular
characteristics and attributes of each event contract. In the
context of the Special Rule and the analysis of whether event
contracts involving Enumerated Activities are contrary to the public
interest, the Commission will consider whether the event contracts
would be difficult to administer or challenge the prediction
market's compliance obligations. This factor addresses a question
distinct from the contract-design concerns identified in the prior
section: whether the prediction market, given its existing
compliance, surveillance, and dispute-resolution infrastructure, can
discharge its statutory self-regulatory obligations with respect to
the event contracts. These types of challenges weigh in favor of a
finding that such event contracts are contrary to the public
interest. Conversely, the Commission believes that the existence of
guardrails reasonably designed to address the specific risks the
event contracts present is a factor weighing against a finding that
the contract is contrary to the public interest.
(iii) Among the considerations relevant to this factor, the
Commission will consider whether the prediction market's dispute
resolution processes are suitable to resolving potential disputes
about the resolution of the event contracts. The Commission will
consider the absence of settlement criteria and dispute resolution
procedures that are suitable for event contracts involving
Enumerated Activities as a factor in favor of finding the event
contracts to be contrary to the public interest.
(iv) The Commission will also consider whether a prediction
market has adopted effective guardrails against the spread or misuse
of non-public information, such as prohibiting certain categories of
traders likely to have access to inside information from trading in
certain event contracts and maintaining a robust surveillance and
customer identification policy. Such mitigating measures will weigh
against a finding that the event contracts are contrary to the
public interest.
(v) The Commission believes that public interest concerns are
likely to arise when uncertainties about the circumstances
influencing the underlying events mean that the prediction market's
surveillance program may not be able to detect whether or not
insiders would have an information advantage.
(g) Public interest factors specific to the enumerated
activities. The Commission will evaluate all event contracts subject
to review under the Special Rule under the public interest factors
set out in Sec. 40.11(a)(5), as discussed in paragraph (f) of this
appendix. The Commission will also consider the factors in Sec.
40.11(a)(6) applicable to the activity that such agreements,
contracts,
[[Page 35868]]
transactions, or swaps involve, as discussed in this paragraph (g).
The following factors specific to each type of Enumerated Activity
supplement the general factors in paragraph (f) of this appendix.
(1) Activity that is unlawful under any federal or state law--
(i) Overview. (A) First, the Commission believes that there is a
distinction between event contracts involving an overall rate of
unlawful activity, and event contracts involving more specific
unlawful actions. For example, event contracts based on crime rates
in a general area over extended periods may have price basing or
information utility in matters such as insurance or other economic
planning.
(B) In contrast, the Commission believes that event contracts
based on more specific unlawful activity raise concerns under the
general public interest factors described above. To the extent that
trading in such event contracts would yield meaningful information
about specific criminal actions, that information should be shared
confidentially with the appropriate authorities--it would be
contrary to the public interest for such information to be revealed
in a public market because it could compromise law enforcement
efforts. Trading in such event contracts could also incentivize
criminal behavior, and, if the event contracts are based on
potential actions of individuals or small groups, would be subject
to manipulation and insider trading concerns. Also, public attention
to such event contracts could lead to ``copycats,'' i.e.,
individuals engaging in the criminal behavior because of the
publicity about it. Public interest considerations particular to
federal and state law are described below.
(ii) Activity that is unlawful under any federal law. (A) The
Commission exercises the authorities granted to it by Congress under
the Act to help ensure that U.S. derivatives markets operate with
integrity. The Commission believes that it is likely contrary to the
public interest to permit trading, in the financial markets that the
Commission is mandated by Congress to oversee, in event contracts
that involve activity that Congress has determined to be illegal
under federal law. The Commission notes that the issue here is
whether the activity on which the event contracts are based is
unlawful under federal law. If trading in the event contracts was
unlawful under federal law or facilitated unlawful activity (e.g.,
if trading in the event contracts facilitated money laundering),
then the event contracts could not be certified to be in compliance
with the Act.
(B) The Commission recognizes, however, that not all references
to unlawful activity present public policy concerns. In particular,
event contracts that involve aggregate crime rates in a geographic
area over extended periods generally do not create incentives to
engage in specific unlawful acts. Instead, they reflect broad,
statistical measures used for economic, demographic, or public-
policy analysis. Because these event contracts do not encourage or
reward criminal conduct--and instead reference generalized,
population-level data--the Commission believes they do not raise the
same public policy concerns.
(C) Accordingly, it is highly likely that event contracts
involving activity that is unlawful under federal law will be found
contrary to the public interest, except where the event contracts
reference generalized crime rates over time in a manner that does
not incentivize specific criminal conduct.
(iii) Activity that is unlawful under any state law. (A) The
Commission believes that event contracts that involve activity that
is illegal under state law likely raise public interest concerns.
Legislative bodies generally bar or prohibit activity that they
recognize as causing, or posing, public harm. Judges and judicial
bodies, applying statutes and developing common law, also establish
the illegality of activity that is recognized as causing, or posing,
public harm. The Commission thus believes that event contracts that
involve activity that is unlawful under state law would likely
undermine important state interests, expressed in state statutes and
common law, in protecting the public good.
(B) The Commission notes that there are variations across state
law in the specific activities that are recognized as unlawful. In
assessing whether event contracts are contrary to the public
interest, the Commission will account for variations in state laws
and in how states define the underlying activity; consider any
relevant judicial precedent that may bear on the Commission's
analysis; review a survey of state statutes to understand the extent
to which jurisdictions have determined the activity to be unlawful;
and consider whether the underlying activity is generally considered
as causing, or posing, public harm. The Commission will then weigh
these considerations--together with the broader public-interest
factors discussed above--to understand the extent to which the
underlying activity is recognized as unlawful.
(C) For these reasons, it is likely that event contracts that
involve activity that is unlawful under state law will be found to
be contrary to the public interest, unless the event contracts
involve crime rates in a general area over extended periods as
described above. As noted above, the relevant issue is whether the
activity on which the event contracts are based is unlawful under
state law.
(2) Terrorism, assassination, and war--(i) National security.
The Commission believes that event contracts involving terrorism,
assassination, or war can present significant national security
risks and therefore raise public interest concerns. The Commission
is concerned, first, that the prices of such event contracts would
not necessarily align with the actual likelihood of the underlying
terrorism, assassination or war events because the trading public is
shielded as a matter of public policy from relevant information
about the event. For this reason, trading in such event contracts
could, at the least, present a distraction to law enforcement and
military authorities and, at worst, be manipulated by wrong-doers to
divert attention from planned harmful events. The Commission notes
that this concern could become increasingly problematic as the
volume of trading in such event contracts increases.
(ii) Example. Event contracts based on whether an attack on a
particular location will occur would provide an opportunity to
individuals planning such an attack to buy the ``no'' contract and
thereby create misleading market signals, potentially diverting
attention and resources at a critical time.
(iii) Information leakage. As discussed above, these event
contracts also present especially significant information leakage
and misappropriation concerns because individuals with access to
sensitive national security information could potentially be
incentivized to exploit that information through trading that would
be in violation of their duty of confidentiality.
(iv) No meaningful information. More generally, the Commission
believes that event contracts involving terrorism, assassination or
war are particularly vulnerable to settlement ambiguity. The
inherent uncertainty and limited access to reliable information
during such events--often described as the ``fog of war''--can
undermine clarity regarding whether relevant events have taken
place. Additionally, as noted above, the prices of these event
contracts may not accurately reflect actual probabilities because
the individuals with direct knowledge or insight are typically
insiders subject to legal restrictions that prohibit them from
trading these event contracts. To promote public safety, the
Commission believes it is preferable for other individuals with
pertinent information to share that information with the
authorities, rather than to use it for trading purposes.
(v) Violence, profiting from harm to human life, or potential to
facilitate illicit behavior. The Commission believes that event
contracts involving terrorism, assassination, or war could
potentially result in or incentivize violence or harm to human life
or other illicit behavior and therefore raise public interest
concerns. First, as noted above, these types of event contracts have
very little informational value, but individuals who do have any
special knowledge regarding these types of activities or events have
a public duty to report this information to the proper authorities
to prevent any violence, harm, or illicit behavior. For example, if
a private terrorist expert were to uncover communications regarding
a plot to assassinate a public figure, the Commission believes that
expert should alert authorities rather than trading event contracts
regarding that assassination. It is contrary to the public interest
to profit from the potential assassination of a human being.
(vi) Incentivization of violence. Moreover, the Commission
believes that event contracts involving terrorism, assassination, or
war could potentially encourage such activity, because there is a
potential for individuals to act in order to receive payout under
the event contracts, resulting in significant risk of harm to human
life and property. The Commission believes that this encouragement
and incentivization of violence, human harm, or illicit behavior is
not in the public interest and will carefully analyze these types of
contracts to ensure that the incentives structured into the contract
for a monetary payout do not encourage any direct violence,
[[Page 35869]]
harm to human life, or illicit behavior. Based on the foregoing
public interest analysis, all event contracts involving terrorism,
assassination, and war are highly likely to be against the public
interest.
(3) Gaming--(i) Games of random chance are likely contrary to
the public interest. (A) The Commission believes that event
contracts involving games that depend on random chance--e.g., pure
luck--are likely to be contrary to the public interest. As discussed
above, prediction markets function as information aggregation
vehicles, meaning their usefulness depends in part on whether market
participants can bring insight, expectations, or informed views as
to whether the event underlying the contract will occur. 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. Trading in such event
contracts therefore provides no meaningful information that could
support decision making or market understanding.
(B) On the other hand, the outcome of some games that depend on
a high degree of luck, like poker, can also be significantly
affected by the participants' skill, particularly when the game is
repeated over many rounds, as in organized tournaments. The
Commission believes that when a game with some element of random
chance also depends to a significant extent on the participants'
skill, and the settlement of an event contract involving the game is
determined by an occurrence, extent of an occurrence or contingency
in an organized tournament, then that event contract would not be
viewed as involving a game that depends entirely on random chance.
(C) Thus, the Commission believes that event contracts involving
games that depend on random chance--by definition, devoid of
informational content--would not advance any of the purposes of the
Act. For these reasons, it is highly likely that event contracts
involving games that depend entirely on random chance would be found
to be contrary to the public interest.
(ii) Factors indicating when event contracts involving sports
events are not contrary to the public interest--(A) Overview. (1)
The Commission finds that certain characteristics of event contracts
involving sports events would reduce the basis for finding that the
event contracts are contrary to the public interest. For example,
the extent to which event contracts settle based on the overall
outcome of a sporting event--including final scores, point
differentials, win-loss results, tournament advancement, individual
or team statistical performance or season long performance metrics--
are factors against a finding that the event contracts are contrary
to the public interest. The Commission believes that these
categories of sports event contract markets may serve price
discovery functions and provide meaningful information.
Additionally, in terms of the Commission's focused analysis of event
contracts involving Enumerated Activities described above, the
Commission believes that these event contracts are unlikely to raise
the particular manipulation, settlement ambiguity and information
leakage issues that could raise public interest concerns.
(2) The structural features underlying the Commission's view is
that, for these event contracts, manipulation risk is bounded by the
distribution of determinative capacity among participants and events
in the underlying activity, and any residual manipulation risk
produces observable patterns that the prediction market can detect
through surveillance. That is, the event contracts would generally
not be reasonably susceptible to manipulation, and moreover any
residual manipulation risk would not raise public interest concerns.
An event contract involving the aggregate outcome of a single game
typically depends on the cumulative contributions of many
participants over the course of the game; no individual participant
has determinative capacity to affect settlement through their own
conduct, and any participant's attempt to do so produces performance
patterns inconsistent with prior play and inconsistent with game
context. An event contract involving aggregate statistical
performance of an individual over the course of a game presents a
similar analysis. No single act has determinative capacity to affect
settlement, and a participant's attempt to do so produces
performance patterns that are detectable. For example, the
Commission believes that in games such as tennis or golf, an
individual player's attempt to skew occurrences during the game
would typically be detectable in the context of the game and the
player's prior performance.
(3) Among other considerations, the Commission notes that the
settlement outcomes of these types of event contracts would
typically depend on the aggregate performance over an extended
period of play. The breadth of potential outcomes, and the variety
of factors influencing the outcomes, should provide more
opportunities for the event contracts to advance price discovery or
provide meaningful information. Generally, a finding that sports-
related event contracts fall within the above categories will weigh
heavily against finding that the contract is contrary to the public
interest.
(B) Objective and verifiable settlement data. As part of its
review of particular public interest concerns in event contracts
involving Enumerated Activities, the Commission believes that
objective settlement data reduces the risk that settlement values
can be manipulated through the exercise of subjective judgment by
individuals positioned to influence the settlement determination.
The Commission also believes that objective settlement data permits
surveillance of trading activity for patterns inconsistent with the
publicly available data, which is a tool by which prediction markets
detect attempted manipulation. The fact that event contracts
involving sports settle by reference to publicly reported, league-
verified, or otherwise objectively determinable data would be a
factor weighing against a finding that the applicable event
contracts are contrary to the public interest. The settlement
mechanism and the data upon which it relies should be suitable for
the event contracts under review. The Commission acknowledges that a
variety of data sources may be appropriate for the settlement of
event contracts and does not intend to overly restrict prediction
markets' flexibility to determine which sources should be used in
settlement.
(C) Established sport-level integrity infrastructure. The
Commission believes the public interest considerations relevant to
event contracts involving sports are materially affected by whether
the underlying game operates within a framework that addresses
integrity concerns at the level of the sport. A prediction market
listing event contracts involving a sport with a developed integrity
framework can leverage that framework in ways unavailable for sports
without comparable infrastructure. The fact that the sport
underlying an event contract is subject to an established integrity
framework, including a recognized governing body, an integrity unit
or comparable monitoring function, published rules of competition,
and disciplinary procedures applicable to participants, officials,
and other personnel is a factor weighing against a finding that the
applicable event contract is contrary to the public interest.
(D) Information sharing and coordination with relevant sports
leagues and governing bodies. (1) As noted above, event contracts
involving sports may implicate the involvement of a recognized
governing body, integrity unit or comparable monitoring function for
that sport, including but not limited to professional sports leagues
and their integrity units, as well as the National Collegiate
Athletic Association. The Commission believes that communication
between registered entities and such relevant governing bodies or
authorities prior to listing sports event contracts would support
compliance and surveillance programs for sports events contracts.
The Commission notes that any communication by registered entities
with third parties must comply with any applicable regulatory or
confidentiality requirements.
(2) The Commission also 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. Such engagement and information sharing efforts could entail
a practice or agreement with the relevant sports governing body that
the prediction market will:
Report suspicious trading activity or trading activity
by prohibited traders to the relevant sports governing body;
Cooperate with sports governing bodies to provide
certain data in connection with sports integrity investigations;
Consult with sports governing bodies on proposed event
contracts; and
Consult, as appropriate, with relevant governing bodies
regarding integrity-related restrictions applicable to marketing,
participant protections, and event contract design in the relevant
sport.
(3) To the extent a prediction market coordinated with or
entered into information sharing arrangements with the relevant
sports leagues or governing bodies and/or designs event contracts in
accordance with league
[[Page 35870]]
integrity standards, where applicable, those facts will weigh
against a finding that the applicable event contracts are contrary
to the public interest.
(E) For these reasons, the Commission believes that event
contracts based on the aggregate outcomes of professional or
collegiate sports events, based on objective and verifiable
settlement criteria, listed by prediction markets that maintain
appropriate surveillance, trading prohibitions, and coordination
with relevant sports governing bodies, are, depending on the full
record and the Commission's evaluation of all relevant factors,
unlikely to be found to be contrary to the public interest. This
belief also rests on relevant prior experience with how similar
event contract types have operated, although no prior listing or
experience is dispositive. Prediction markets have listed sports
event contracts of the types described--final scores, point
differentials, win-loss results, tournament advancement, individual
and team statistical performance, and season-long performance
metrics--in volumes sufficient to permit meaningful evaluation of
their operating characteristics. The Commission has considered
surveillance data, integrity referrals, identified instances of
attempted manipulation, and the prediction markets' responses to
those instances. The Commission has also considered the potential
uses of price information generated by these event contracts in
commercial decision-making, including by sports broadcasters,
sponsors, advertisers, fantasy sports operators, sports analytics
firms, and other commercial participants in sports-adjacent
industries, although generalized use of price information by
adjacent industries is not, standing alone, sufficient to resolve
the public interest inquiry.
(F) Nothing in this appendix F, including the Commission's
belief that such event contracts are unlikely to be contrary to the
public interest is intended to create a safe harbor that any
particular contract satisfies the public interest standard, nor does
it replace the multi-factor analysis required under Sec.
40.11(a)(5) and (a)(6). Rather, it reflects the Commission's
considered view of how the factor analysis generally resolves for
such event contracts. Event contracts remain subject to factor-by-
factor weighing.
(iii) Factors indicating that the Commission would find event
contracts involving sports events to be contrary to the public
interest. The Commission finds that certain types of event contracts
involving sports events are likely to be found to be contrary to the
public interest.
(A) Player injury contracts. The Commission believes that event
contracts that explicitly settle solely by reference to the
duration, severity, occurrence, or medical diagnosis of an injury
sustained by a specific athlete raise serious public interest
concerns. First, such event contracts create perverse financial
incentives that could encourage or facilitate physical harm to
athletes. Second, the settlement of such event contracts would
likely depend on medical diagnoses, which raises public interest
concerns about the confidentiality of medical information and the
potential for such sensitive information to be leaked or exploited
by insiders. Third, settlement conditions based on a physicians'
diagnoses or injury reports do not provide a sufficiently objective,
verifiable, and manipulation-resistant basis for contract
settlement. Therefore, it is likely that event contracts that
explicitly settle solely by reference to the severity, occurrence,
or medical diagnosis of an injury sustained by a specific player
will be found to be contrary to the public interest.
(B) Officiating outcome contracts. The Commission believes that
event contracts that settle solely by reference to judgment calls,
discretionary decisions, or rulings of referees, umpires, or other
game officials, including without limitation, penalties assessed,
fouls called or not called, reviews initiated, video replay
decisions, player ejections, or disciplinary rulings made during
live games raise public interest concerns. Unlike final score
outcome contracts, event contracts based on officiating decisions
resolve on the basis of a small number of discrete human decisions
made by identifiable individuals under significant pressure and with
limited accountability in real time. For example, event contracts
based on officiating decisions could incentivize game participants
to commit more fouls, thereby threatening the integrity of the game.
The Commission finds that the risk of inappropriate contact between
market participants and officiating personnel and the risk of
selective officiating raises public interest concerns because that
risk threatens the integrity of the game, which is, in turn, a
matter of public interest. In addition, market participants could
not form meaningful forecasts about officiating outcomes described
above because for these calls officials must make quick, discrete
judgments, and so the prices of such event contracts would not
provide meaningful information. That is, market participants'
opinions on such matters are irrelevant and expression of those
opinions through event contract trading would call into question the
integrity of the game involved.
(C) For these reasons, it is likely that event contracts that
explicitly settle solely by reference to officiating outcomes as
described above will be found to be contrary to the public interest.
For the avoidance of doubt, event contracts that settle based on the
overall outcome of sports events, including final scores, point
differentials, or statistics compiled over the course of play, are
not included in this category, even if such outcomes may have been
affected in part by officiating decisions. This factor relates
solely to event contracts in which the settlement events are
officiating decisions, rather than derivative outcomes of play.
(D) Discrete-action contracts involving specific participants.
The Commission believes that event contracts that settle solely by
reference to a discrete action, event, or occurrence in sporting
events, including, without limitation, event contracts settling on
the type of a specific play called for or executed by a specific
player or team, the type or outcome of a specific pitch thrown by a
specific pitcher, the outcome of a specific shot taken by a specific
player, or whether a specific player or team commits a specific foul
or penalty, present public interest concerns.
(E) Specifically, event contracts based on discrete actions do
not provide meaningful information because market participants can
have little actual insight into specific in-game acts of
identifiable participants. Also, in the context of the Commission's
focused review of event contracts involving Enumerated Activities,
the Commission views such event contracts as raising public interest
concerns relating to manipulation and information leakage because a
single player or team coaching staff member can determine the
settlement outcome of the event contracts. Last, the risk that
athletes' in-game decisions would be influenced by such event
contracts is contrary to the integrity of the game. For these
reasons, it is likely that event contracts meeting the criteria of a
discrete-action contract as described above will be found to be
contrary to the public interest.
(F) Physical altercation contracts. The Commission believes that
event contracts that settle solely by reference to physical
altercations, fights, or conduct between players or participants in
the game that are subject to penalty, ejection, or disciplinary
action raise public interest concerns. Such event contracts could
create a direct financial incentive for both athletes and market
participants to encourage, facilitate, or provoke such conduct. Even
if the probability that any athlete or market participant acts on
such an incentive is low, the effect of a market in physical
altercation contracts on the culture of athletic competition is
inconsistent with the public interest. Also, the Commission believes
that such event contracts are unlikely to provide meaningful
information, as market participants would generally not have insight
into when altercations would occur and, to the extent they do have
such insight, it is contrary to the public interest for market
participants to express those views on regulated markets. For these
reasons, it is likely that event contracts involving game-related
altercations, as described above, will be found to be contrary to
the public interest. The Commission believes that event contracts
based on the overall outcomes, and not the specific actions of a
particular fighter, of combat sports, including Mixed Martial Arts,
Brazilian Jujitsu, Muay Thai, Boxing, Wrestling, and other sports in
which physical contact or combat is an integral and sanctioned
element of game, are not included in this category. For these
sports, the occurrence of physical combat or contact during the game
is a core and lawful element of the sporting event on which the
contract is based, not an extraneous act of misconduct.
(G) Pre-collegiate sports events. (1) The Commission believes
that event contracts that settle solely by reference to games,
sporting events or outcomes in which participants are below the
collegiate level raise public interest concerns. The Commission does
not view this category to include any professional league,
international competition sanctioned by recognized governing bodies,
or other games that may include athletes of various ages but are not
organized primarily at the pre-collegiate or youth level.
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(2) There are several factors that differentiate pre-collegiate
sports from sports at the collegiate and professional levels. Since
pre-collegiate sports have less extensive governing bodies and
typically lack a rigorous integrity infrastructure, prediction
markets would be less able to interface with the governing body.
Also, the relevant data flows (to the extent formal data are
collected at all) are decentralized and less reliable than for
collegiate and professional sports. Similarly, broad and numerous
groups of individuals would potentially have inside information
about pre-collegiate sports and would be subject to little or no
contractual limitations on information usage. In the context of its
focused review of event contracts involving Enumerated Activities,
the Commission believes that these differences from professional and
collegiate sports raise particular concerns about manipulation,
settlement integrity and information leakage.
(3) The Commission also notes that, to the extent event
contracts based on pre-collegiate sports events would yield
economically useful information, this use of the event contracts
could raise public interest concerns relating to marketing and other
commercial use of information related to minors. There may also be
public interest concerns related to the disclosure of minors'
personal identifying information. For these reasons, it is likely
that event contracts involving pre-collegiate sports events will be
found to be contrary to the public interest.
Issued in Washington, DC, on June 10, 2026, by the Commission.
Christopher Kirkpatrick,
Secretary of the Commission.
Note: The following appendix will not appear in the Code of
Federal Regulations.
Appendix to Prediction Markets; Public Interest Determinations--
Commission Voting Summary
On this matter, Chairman Selig voted in the affirmative. No
Commissioner voted in the negative.
[FR Doc. 2026-11854 Filed 6-11-26; 8:45 am]
BILLING CODE 6351-01-P