The landscape of sports event contracts may soon be on its way to the U.S. Supreme Court as opinions diverge regarding jurisdiction and regulatory definitions within the industry. Recently, the Commodity Futures Trading Commission (CFTC) proposed new rules intended to broaden the definition of swaps, a move that could significantly impact this burgeoning billion-dollar market.
The CFTC released a notice of proposed rulemaking on October 9, just as fans were gearing up for a busy football weekend. Historically, the agency has classified most event contracts as falling under the Commodity Exchange Act (CEA). However, the new proposal expands this definition to include event contracts linked to sports, politics, cultural events, and even weather.
CFTC Chairman Michael Selig commented on the reasoning behind the proposal, stating, "Americans use event contracts to hedge risks, speculate and provide the public with information about the outcome of future events. These products are commodity derivatives squarely within the CFTC’s regulatory remit under the Commodity Exchange Act and are within the agency’s exclusive jurisdiction."
The term "swap" traditionally refers to transactions that rely on the occurrence of certain events, which in turn have financial or economic implications. The Dodd-Frank Act delineates clear "core prongs" for swaps under the CEA, distinguishing them from securities-based swaps that fall under SEC regulations.
Earlier this year, the CFTC gained a positive ruling from the U.S. Court of Appeals for the Third Circuit, which found that sports event contracts can indeed be categorized as swaps under the CEA. In the case of KalshiEX LLC vs. Flaherty, the court stated that the results of such contracts are connected to potential commercial or economic outcomes. The CFTC frequently cited this ruling, emphasizing its acknowledgment of various economic stakeholders, including sponsors and television networks, who are financially affected by the outcomes of sporting events.
For example, during the New York Knicks’ NBA playoff run, Madison Square Garden Sports saw its valuation nearly double, while the excitement around the playoffs was estimated to have contributed approximately $380 million to the New York City economy.
Contrasting with this, the Ninth Circuit issued a ruling in August stating that Kalshi's sports event contracts should not be classified as swaps, but rather as sports wagers. Judge Ryan Nelson of the Ninth Circuit said that event contracts should be regarded as bets rather than financial instruments intended for risk transfer.
Additionally, the Sixth Circuit found that even if event contracts were classified as swaps, they would not overrule existing sports gambling laws. Typically, a discrepancy among circuit courts raises the chance of the Supreme Court reviewing a case.
Another noteworthy aspect of the proposed rules is the exclusion of casino-style games from the swap definition, a point that has soothed concerns from pro-casino advocates who fear the surge of event contracts could blur the lines of legality in traditional games.
Analyst Jordan Bender mentioned on October 11 that Kalshi and Polymarket are unlikely to venture into casino-style offerings, categorizing them as a "base-case concern" for investors.
This ongoing jurisdictional debate surrounding derivatives marks perhaps the sports betting industry's most significant conflict since the repeal of PASPA. The American Gaming Association reported that these contracts have contributed to over $1 billion in missed state tax revenue. At a recent Global Gaming Expo, Mike Dreitzer, Chairman of the Nevada Gaming Control Board, questioned the legality of such contracts and accused prediction markets of misleading behaviors.
"All we as regulators ask for is a level playing field," Dreitzer stated.
The proposed rulemaking will soon be published in the Federal Register, allowing for public comments for a period of 30 days following the publication.
