The Commodity Futures Trading Commission (CFTC) has issued a warning to operators of prediction markets, known as designated contract markets (DCMs), regarding the increasing prevalence of broad self-certification of event contracts. In a staff advisory released on July 24, the CFTC expressed concern that licensees are sometimes grouping multiple potential variations of contracts under a single certification, which could obstruct the commission's ability to assess whether DCMs are providing all necessary information as mandated by current regulations.
This broad approach raises doubts about whether DCMs have thoroughly evaluated the settlement methodologies, data sources, and compliance with core principles for each variation of the contract they wish to list. The advisory, released by Duncan Hennes, the acting director of the CFTC's Division of Market Oversight, is non-binding and reflects the Division's views, not those of the commission as a whole.
Self-certification is a key feature of CFTC-regulated exchanges. This aspect has become controversial compared to state-regulated sportsbooks where any new wagers must receive prior approval. In contrast, prediction markets licensed by the CFTC function as self-regulatory entities, allowing them to certify contracts if they meet CFTC criteria.
Nevertheless, the Commodity Exchange Act requires DCMs to adhere to 23 core principles. One major principle states that exchanges can only list contracts that cannot be easily manipulated, an issue that has attracted significant media scrutiny recently. To maintain registration, CFTC-registered exchanges must comply with these principles.
The recent advisory highlights two prominent issues affecting prediction markets: rapid expansion and vague contract definitions. Over the past 18 months, the introduction of new contract types and various contract resolution controversies—such as the ousting of Venezuelan President Nicolás Maduro and the passing of Iranian leader Ayatollah Ali Khamenei—have made headlines and sparked litigation.
In his communication to CFTC licensees, Hennes noted that the existing provisions for bulk self-certification were established in 2011, when interest rate swaps made up 77% of the total notional value of over-the-counter swaps. He stated that certifying several contract types under one filing was manageable at that time due to the reliance on uniform pricing methods. However, the emergence of new contract types related to elections, politics, and pop culture now necessitates more tailored submissions.
For a broad template self-certification to hold validity, each contract within the filing must:
1. Focus on a valid commodity.
2. Utilise the same currency.
3. Employ identical pricing methodologies for calculating reference prices and payment obligations.
4. Follow the pricing source and methods of an already approved contract.
Hennes provided an example involving soccer match contracts, explaining that while DCMs might use a single game to represent an entire tournament for World Cup contracts (e.g., "Will Mexico beat South Africa at the 2026 World Cup?"), different rules for other tournaments, like the MLS Leagues Cup, would require different representations due to distinct tournament formats and potential outcomes.
The concerns surrounding self-certification are part of a broader array of regulatory issues facing prediction markets. In June, the CFTC introduced its first draft of rulemaking proposals aimed at defining important terms in the sector and clarifying discrepancies regarding acceptable contract types.
This upcoming rulemaking is extensive and aims to create a structured evaluation framework for determining whether certain contracts fall outside permissible activities or contradict public interest. The consequences of this rulemaking may also impact self-certification practices. For instance, last December, Kalshi self-certified contracts regarding college athletes transferring to various schools, employing broad templates like: "Will <player> enter/withdraw from the transfer portal in <time period>?" and "Will <player> transfer to <team> in <time period>?"
In summary, the CFTC's latest advisory seems to signal an attempt to constrain the rapid growth facilitated by self-certification, potentially at odds with Chairman Michael Selig's overall supportive stance on the matter. Under Selig’s leadership, the CFTC has taken legal action against nine states to assert its jurisdiction over event contracts as some states move to prohibit sports contracts or introduce their own legislation on prediction markets. Selig has consistently emphasized that sports events serve as genuine economic hedging opportunities that prediction markets can support.
