The future of the sports event contracts industry faces uncertainty as varying opinions on jurisdiction emerge, possibly leading to a case reaching the U.S. Supreme Court. Meanwhile, stakeholders are closely monitoring recent developments, including divergent circuit decisions that provide a framework for understanding what constitutes a swap in this context. Amid this legal landscape, the U.S. Commodity Futures Trading Commission (CFTC) has proposed new regulations that expand the definition of swaps, creating additional layers to an already complex debate.
On October 9, just before the busy football weekend, the CFTC published a notice of proposed rulemaking aimed at clarifying the classification of event contracts under the Commodity Exchange Act (CEA). While the CFTC has typically viewed most event contracts as subject to the CEA, the agency's new proposal seeks to broaden this definition, explicitly incorporating event contracts related to sports, politics, culture, and more.
"Americans use event contracts to hedge risks, speculate, and provide the public with information about the outcome of future events," CFTC Chairman Michael Selig stated. He asserted that these products fall within the agency's exclusive jurisdiction as commodity derivatives under the CEA.
Historically, swaps have been transactions reliant on events that have financial or economic ramifications. The Dodd-Frank Act established core categories for swaps under the CEA, distinguishing them from securities-based swaps managed by the SEC.
The CFTC recently cited a favorable ruling from the U.S. Court of Appeals for the Third Circuit, which concluded in KalshiEX LLC vs. Flaherty that sports event contracts qualify as swaps governed by the CEA. The majority opinion noted that the outcomes of these contracts relate to possible economic consequences, highlighting a wide array of stakeholders, such as sponsors and television networks, whose financial interests are tied to sports outcomes. For instance, the valuation of Madison Square Garden Sports nearly doubled during the New York Knicks’ playoff run, which generated approximately $380 million for New York City’s economy.
In contrast, an August ruling from the Ninth Circuit found that Kalshi's sports event contracts do not meet the criteria for swaps. Ninth Circuit Judge Ryan Nelson emphasized that such contracts should be seen as sports wagers rather than financial instruments for risk transfer.
Furthermore, the Sixth Circuit determined that even if classified as swaps, event contracts do not take precedence over existing sports gambling laws. A circuit split among appellate courts often increases the likelihood that the Supreme Court will hear a case, and this situation appears no different.
An important aspect of the proposed rules is the provision excluding casino-style games from the swap classification, which is likely to reassure advocates worried about the potential for these games to evolve into event contracts. Recently, analysts indicated that it is improbable for Kalshi and Polymarket to introduce casino games, alleviating concerns for investors.
The legal debates surrounding derivatives jurisdiction represent a significant challenge for the sports betting industry, likened to disputes stemming from the Professional and Amateur Sports Protection Act (PASPA). According to the American Gaming Association, event contracts could account for more than $1 billion in lost tax revenue at the state level. At the recent Global Gaming Expo, Nevada Gaming Control Board Chairman Mike Dreitzer raised concerns regarding the legality of these contracts, labeling prediction markets as potentially misleading.
"All we as regulators ask for is a level playing field," Dreitzer affirmed.
The CFTC plans to publish the proposed rulemaking in the Federal Register, after which the public will have 30 days to submit comments.
