The Commodity Futures Trading Commission (CFTC) has issued a warning to operators of prediction markets, also known as designated contract markets (DCMs), regarding the increasingly broad self-certification of event contracts. The advisory, released on July 24, indicates that DCM licensees are sometimes merging multiple potential variations into a single self-certification.
The CFTC expressed concern that these "broad template certifications" could hinder its ability to ensure that DCMs provide the necessary information and analysis required by current regulations. The advisory also raised doubts about whether DCMs have sufficiently assessed the settlement methods, data sources, and compliance with core principles for all variations of the contracts they intend to list.
This staff advisory comes from the CFTC’s Division of Market Oversight, led by acting director Duncan Hennes. Importantly, it is not a binding directive and expresses the views of the Division rather than the Commission as a whole.
Self-certification is a key feature of exchanges regulated by the CFTC, distinguishing them from state-regulated sportsbooks, which need prior approval for any new wagers or bet types. CFTC-licensed prediction markets operate as self-regulatory bodies, able to certify their own contracts as long as they comply with CFTC requirements.
Despite this flexibility, the Commodity Exchange Act mandates that DCMs adhere to 23 core principles. For example, Core Principle 3 requires that exchanges only list contracts that are not prone to manipulation, a topic that has recently received considerable attention.
The advisory highlighted two ongoing issues in the realm of prediction markets: rapid expansion and ambiguous contract definitions. Recent events, including significant political events and contract disputes, have led to a surge in new contract types and surrounding controversies.
Hennes pointed out that the language permitting bulk self-certification dates back to 2011, a period when interest rate swaps dominated the market. He noted that certifying multiple contract types in a single filing was manageable at that time, as they relied on similar pricing sources and methodologies. However, the rise of new contract types linked to elections, politics, and cultural phenomena necessitates more tailored submissions today.
To ensure a broad template self-certification is legitimate, each contract in the submission must meet four specific criteria: they must all revolve around a verifiable commodity, use the same currency, feature identical pricing methodologies, and reference an established, approved contract.
For instance, when certifying contracts for soccer matches at the World Cup, a DCM might choose one game as a representative of the tournament. However, for contracts related to a different tournament like the MLS Leagues Cup, a different representative must be selected due to differing rules and formats.
The issues surrounding self-certification are part of a wider discussion on regulatory frameworks for prediction markets. In June, the CFTC released a draft proposal aimed at clarifying essential terms within this sector and addressing discrepancies in contract listings.
This proposal seeks to provide a structured framework for evaluating contracts that may fall outside permissible activities and assess whether they contradict public interest. This ongoing rulemaking could affect self-certification practices in the future, particularly as seen in Kalshi's self-certification of contracts concerning college athletes transferring schools using broad template language.
The advisory appears to be an effort from the CFTC to control the rapid growth facilitated by self-certification, which contrasts with the broader support exhibited by the Commission under Chairman Michael Selig’s leadership. Under Selig, the CFTC has actively pursued regulatory jurisdiction over event contracts, suing nine states in response to attempts to ban sports contracts or implement prediction market legislation. He has reiterated that sports events represent valid economic hedging opportunities that prediction markets can support.
Jess Marquez has been covering the global gaming industry since 2022. He is originally from Reno, Nevada.
