The Commodity Futures Trading Commission (CFTC) has issued a warning to prediction market operators, also known as designated contract markets (DCMs), regarding the broad self-certification of event contracts. In an advisory dated July 24, the CFTC expressed concern that operators are combining various potential contract variations into single certifications, which could hinder the commission's ability to properly assess whether DCMs have provided all necessary information and analysis according to existing regulations.
This practice raises doubts about whether DCMs have adequately evaluated critical factors such as settlements, data sources, and compliance with fundamental principles for all contract permutations they aim to introduce.
The advisory comes from the CFTC's Division of Market Oversight, under the guidance of acting director Duncan Hennes. While it offers insight into the CFTC's concerns, it is not binding and presents the views of the Division rather than the entire commission.
Self-certification has long been a feature of CFTC-regulated exchanges, but it has sparked considerable debate in comparison to state-regulated sportsbooks. Unlike state sports betting systems, which require prior approval for new wager types, CFTC-licensed prediction markets can self-certify their contracts, provided they meet CFTC standards.
However, the Commodity Exchange Act mandates that DCMs comply with 23 specific core principles. Notably, Core Principle 3 states that exchanges must list contracts only if they cannot be easily manipulated, a topic that has received increased media scrutiny recently. Compliance with these core principles is vital for maintaining a DCM's registration.
The recent notice focuses on two longstanding issues in prediction markets: rapid expansion and ambiguous contract terms. Over the past 18 months, the proliferation of new contract types and various controversies—such as the political upheaval involving Venezuelan President Nicolás Maduro and the demise of Iranian leader Ayatollah Ali Khamenei—have generated significant media attention and legal challenges.
Hennes reminded CFTC licensees that the provision allowing bulk self-certification was introduced in 2011, during a period when interest rate swaps made up 77% of the total outstanding notional value of over-the-counter swaps. With such markets, certifying multiple contract types under one submission was feasible due to the use of similar pricing sources and methodologies. However, today's complex contract types surrounding elections, sports, and popular culture necessitate more tailored submissions.
To validate broad template self-certification, each contract in the application must meet specific criteria: it must pertain to a valid commodity, use the same currency, and apply identical pricing sources, formulas, and methodologies for calculating reference prices and payment obligations as existing approved contracts.
For example, when certifying a broad template for World Cup soccer match contracts, a DCM could use one game as a representative of the tournament, such as asking, “Will Mexico beat South Africa at the 2026 World Cup?” In contrast, listing contracts for the MLS Leagues Cup would require a different representative due to distinct rules and structures.
These ongoing debates around self-certification highlight the regulatory challenges facing prediction markets. In June, the CFTC revealed an initial draft of a rulemaking proposal designed to clarify definitions within the sector and address the various discrepancies concerning contract listings.
This proposal offers a broad approach to sports-related contracts while aiming to create a structured framework for determining whether specific contracts fall under excluded activities or conflict with public interests.
The outcomes of this rulemaking may impact self-certification practices. For instance, in December, the platform Kalshi certified contracts about college athletics transfers using broad templates, such as asking, "Will <player> enter/withdraw from the transfer portal in <time period>?" and "Will <player> transfer to <team> in <time period>?".
Overall, the advisory issued last week signifies a CFTC effort to control the swift expansion facilitated by self-certification, contrasting with the generally favorable stance the commission has taken under Chairman Michael Selig's leadership.
Selig has taken legal action against nine states to establish the CFTC's authority over event contracts as many states have sought to outlaw sports contracts or enact state-level prediction market regulations. He maintains that prediction markets represent valid economic hedging opportunities related to sports events.
