The Commodity Futures Trading Commission (CFTC) has alerted operators of prediction markets, or designated contract markets (DCMs), regarding the increasing broadness of self-certifications for event contracts. In an advisory released on July 24, the CFTC expressed concern that these expansive certifications allow licensees to combine various contract variations into a single declaration, potentially undermining the commission's ability to assess whether adequate information and analysis have been provided as required by existing regulations.
The CFTC highlighted that this wide-ranging approach raises questions about whether DCMs have sufficiently evaluated their contracts’ settlement methodologies, data sources, and compliance with core principles before listing them.
Issued by the CFTC’s Division of Market Oversight, led by acting director Duncan Hennes, the advisory is not binding and represents the views of the Division and not of the overall commission.
Self-certification is a key feature of CFTC-regulated markets, distinguishing them from state-regulated sportsbooks, which must seek prior approval for new bet types. In contrast, DCMs, functioning as self-regulatory entities, can certify contracts autonomously as long as they meet CFTC requirements. However, the Commodity Exchange Act requires DCMs to follow 23 distinct core principles, one of which (Core Principle 3) prohibits listing contracts that are easily manipulated. This principle has gained attention due to recent media coverage surrounding market integrity.
Last week’s advisory addressed two longstanding issues in prediction markets: rapid growth and ambiguous contract terms. The past 18 months have seen a surge in new contract types and related controversies, including notable political events like the removal of Venezuelan President Nicolas Maduro and the death of Iranian leader Ayatollah Ali Khamenei, which have resulted in lawsuits and considerable media focus.
Hennes noted that the framework for bulk self-certification, implemented in 2011, originated when interest rate swaps constituted a significant majority of the notional value of over-the-counter swaps. He pointed out that certifying multiple contract types in one submission was feasible back then due to shared pricing sources and methodologies. However, today’s market, filled with contracts related to elections, sports, and pop culture, necessitates more tailored submissions.
To validate a broad template self-certification, all contracts included in the submission must align with certain criteria: they must relate to a valid commodity, utilize the same currency, and apply an identical pricing source and calculation methodologies for reference prices and payment obligations, akin to an already approved contract.
Hennes illustrated this point using examples from soccer match contracts. For certifying a general template for World Cup matches, he suggested that one game could represent the entire tournament (e.g., “Will Mexico beat South Africa at the 2026 World Cup?”). Conversely, if certifying contracts for the MLS Leagues Cup, the DCM would need a different representative due to distinct rules governing that tournament.
Concerns about self-certification are among several regulatory challenges facing prediction markets. In June, the CFTC presented its first draft proposal aimed at defining essential terms in the sector and clarifying inconsistencies regarding the types of contracts eligible for listing.
This rulemaking proposal seeks to create a structured framework for assessing whether specific contracts engage in excluded activities or are contrary to public interest. The outcomes of this proposal may impact self-certification processes. For instance, in December, the firm Kalshi self-certified broad templates for contracts related to college athletes transferring schools, including queries like “Will <player> enter/withdraw from the transfer portal in <time period>?” and “Will <player> transfer to <team> in <time period>?”
Ultimately, last week's advisory signals the CFTC’s intent to moderate the rapid proliferation of self-certification, a position somewhat at odds with the robust endorsement for self-regulation expressed by current CFTC Chairman Michael Selig. Under Selig's leadership, the CFTC has undertaken legal action against nine states to affirm its regulatory authority over event contracts, as several states have attempted to prohibit sports contracts or enact prediction market legislation at the state level. Selig has consistently maintained that sports events present legitimate economic hedging opportunities that prediction markets can facilitate.
