The Commodity Futures Trading Commission (CFTC) has issued a warning to operators of prediction markets, also known as designated contract markets (DCMs), regarding the broad self-certification of event contracts. This advisory, dated July 24, highlights concerns that some licensees are consolidating various potential contract variations into one single certification, which could impede the CFTC’s ability to evaluate compliance with existing regulations.
The CFTC's advisory notes that these broad template certifications raise questions about whether DCMs have sufficiently assessed the compliance of their proposed contracts with the fundamental principles mandated by current regulations. It emphasizes that operators need to fully evaluate the settlement methodologies and data sources for all contract variations before listing them.
This advisory comes from the CFTC’s Division of Market Oversight, headed by acting director Duncan Hennes. It is important to note that this notice is not binding and reflects only the views of the Division of Market Oversight, not the entire commission.
Self-certification is an integral part of CFTC-regulated exchanges and is a notable difference from state-regulated sportsbooks. Unlike state sports betting protocols that require prior approval for new wager types, CFTC-licensed prediction markets can self-certify their contracts as long as they adhere to specific requirements set by the CFTC.
Under the Commodity Exchange Act, DCMs are required to follow a set of 23 core principles. One crucial principle, Core Principle 3, mandates that exchanges can only list contracts that are not easily manipulated. This principle has gained significant attention due to recent media focus on the integrity of prediction markets.
The recent advisory identifies two key challenges associated with prediction markets: rapid growth and ambiguous contract terms. Over the past 18 months, the introduction of new contract types and controversies surrounding contract resolutions, such as political events involving Venezuelan President Nicolas Maduro and Iranian leader Ayatollah Ali Khamenei, have drawn considerable scrutiny.
Hennes stated that the current provisions for bulk self-certification were established in 2011 when interest rate swaps dominated the market. He pointed out that certifying multiple contract types in a single filing was feasible back then due to their reliance on similar pricing sources and methodologies. Today, however, the emergence of diverse contract types encompassing elections, politics, and sports demands more individualized submissions.
To validate a broad template self-certification, specific criteria must be met for all contracts included in the filing. Each contract must: focus on a legitimate commodity; use the same currency; and apply identical pricing sources, formulas, procedures, and methodologies for calculating reference prices and payment responsibilities.
An example provided by Hennes discussed the certification of soccer match contracts. He explained that when certifying for World Cup matches, DCMs could potentially use one match as a representative sample; for instance, “Will Mexico beat South Africa at the 2026 World Cup?” However, different criteria must be considered for other tournaments like the MLS Leagues Cup, which has distinct rules and formats.
The discussion surrounding self-certification is part of broader regulatory challenges facing prediction markets. Earlier in June, the CFTC released preliminary proposals for rulemaking aimed at clarifying definitions and addressing inconsistencies regarding permissible contract types in prediction markets.
This rulemaking could influence the self-certification process. For example, last December, Kalshi self-certified contracts regarding college athletes transferring schools using broad templates such as “Will <player> enter/withdraw from the transfer portal in <time period>?”
The recent advisory from the CFTC appears to be an attempt to rein in the rapid expansion facilitated by self-certification, contrasting with the supportive stance of Chairman Michael Selig’s administration. Under Selig’s leadership, the CFTC has initiated lawsuits against nine states to assert its regulatory authority over event contracts, as various states have sought to ban sports contracts or enact state-level prediction market regulations. Selig has consistently maintained that sports events provide legitimate economic hedging opportunities that prediction markets can help facilitate.
