The Commodity Futures Trading Commission is proposing to formally define event contracts, including those tied to sports, politics, culture and weather, as swaps, in a change the agency says would confirm its exclusive jurisdiction over contracts traded on prediction markets.
A “swap” is a derivative contract in which two parties exchange cash flows or financial payments based on underlying assets like interest rates, foreign exchange or commodities. Most swaps are regulated by the CFTC.
The agency is now proposing to clarify the definition to include event contracts used in prediction market trading.
People were interested in these podcasts
The agency said that a “wide array of market participants have looked to prediction markets to hedge various risks, including those related to sports, weather, and legislative outcomes.”
“Together, the Commission preliminarily concludes that this market practice provides compelling evidence that such event contracts are, in fact, commonly known to the trade as swaps,” it said in a Monday Federal Register notice.
States have taken actions and courts have issued rulings that “undermine the CFTC’s jurisdiction” over event contracts, the agency said.
Federal appeals courts are divided over whether sports event contracts are swaps.
The CFTC cited “widespread confusion and disuniformity” over the definition as the reason for the proposal. It said its authority to “further define” swaps gives it a separate legal basis.
Minnesota’s prediction market felony law was temporarily blocked by a federal judge in July, just days before it was set to take effect.
The legal battle over Minnesota’s first-in-the-nation legislation highlights a jurisdictional standoff between state anti-gambling laws and federal derivatives regulation.
The agency also excluded casino-style gambling products, including wagers placed on sportsbooks and casino games, from the definition of swap, codifying its “longstanding position” against their inclusion, the CFTC said in an interim final rule that took effect Monday.
In response to an earlier CFTC proposal, 40 states and the District of Columbia told the agency that sports event contracts are “indistinguishable from traditional sports betting,” according to the interim final rule.
The exclusion covers only products that are offered by state- or tribal-licensed operators and are not traded on a multilateral market, according to the rule. Exchange-traded contracts do not qualify.
The CFTC issued the interim final rule without a prior public comment period because it found “good cause” under federal administrative law, citing state efforts and court rulings, the agency said.
“The economic consequences of the shuttering of prediction markets on a State-by-State basis due to a lack of clear guidance are of a type and magnitude well in excess of prior cases recognizing good cause to skip notice-and-comment rulemaking due to ’possible fiscal harm,’” the agency said in the interim final rule.
Contact the author
Please read our comment policy before commenting.