The Commodity Futures Trading Commission (CFTC) announced an interim rule on Friday aimed at distinguishing sports event contracts from traditional sports wagers. This move comes in light of recent court rulings that have questioned the similarities between the two categories.
The interim final rule specifies that bets made through state or tribal-licensed sportsbooks and casinos are not classified as swaps under the Commodity Exchange Act, which means they fall outside the CFTC's regulatory jurisdiction.
CFTC Chairman Michael Selig stated in a release, "Casino-style gambling products are not derivatives. Just as the CFTC has done with respect to other products historically regulated by the states, the Commission today provides clarity regarding the limits of its regulatory remit by codifying the exclusion of casino-style gambling products from the 'swap' definition."
This rule will take effect immediately upon publication in the Federal Register, with comments from the public due within 30 days thereafter.
Additionally, in a separate notice, Selig called for comments on proposed rulemaking to further refine the definition of swaps. He emphasized that event contracts are considered commodity derivatives that fall within the CFTC's authority under the Commodity Exchange Act. These rules aim to encompass event contracts related to "sports, politics, cultural, and weather-related events."
As these developments unfold, the U.S. Supreme Court is deliberating on New Jersey's petition in the case of Flaherty v. KalshiEX. This petition has recently received backing from gaming regulators, 39 states, the District of Columbia, and the National Football League.
The interim rule seems to directly address recent rulings by the Sixth and Ninth Circuit courts that favored states in disputes with prediction markets. These courts concluded that there was no legal distinction between sports event contracts and wagers from sportsbooks. Consequently, they argued, if one were deemed a swap, then the other must be too, effectively bringing all sports betting under federal regulation.
The CFTC referred to the rationale behind those court decisions as “erroneous,” stating that it resulted in the courts imposing limits on the swap definition that are not present in the legislation.
In April, the Third Circuit supported Kalshi in New Jersey, indicating that regulators had the authority to “further define” swaps in cases where unconventional scenarios, such as bingo or ping-pong matches, developed. The new rule reflects this approach advocated by the Third Circuit.
The CFTC has identified five key differences between event contracts and sportsbook wagers, many of which echo arguments made in various court cases involving prediction markets:
1. Event contracts trade on a central order book with market-determined prices, while sportsbooks set their own odds.
2. Event contracts are cleared through a clearinghouse.
3. The Commodity Exchange Act specifically addresses "gaming" event contracts within its provisions.
4. Since the 1990s, exchanges have listed event contracts under federal oversight.
5. In the derivatives industry, these types of contracts are categorized as swaps.
The agency acknowledged that while a person might attain similar economic exposure through both products, that similarity does not make them equivalent, drawing a comparison between insurance and credit default swaps. The rule also clarifies that it does not alter any existing legal rights because the CFTC already considers sportsbooks as outside its scope. Thus, it aims to reduce "interpretive uncertainty" related to these products.
