CFTC Draws a Federal-State Line for Prediction Markets

The Commodity Futures Trading Commission (CFTC) has released two measures to delineate which prediction-market contracts fall under federal derivatives rules and which remain under state gambling jurisdictions. The agency argues that event contracts are subject to its exclusive authority under the Commodity Exchange Act, a stance that has ignited a jurisdictional dispute.

One proposal expands the definition of a swap to include contracts linked to cultural events, weather, politics, and sports. The CFTC contends that these products are typically classified as swaps in trading markets and that the rule would clarify their status under federal law. The other measure is an interim final rule that excludes casino-style gambling, such as sportsbook wagers and casino games, from the swap definition.

This rule takes effect upon publication in the Federal Register. Both measures are open to 30-day comment periods, and the filings were submitted to the White House Office of Information and Regulatory Affairs on September 28 before their publication on October 9. The distinction between federally regulated event contracts and state gambling products is significant, as it could bolster the federal agency's position against states arguing that prediction markets fall under their jurisdiction.

However, this move alone does not settle the issue of whether federal oversight precludes states from applying their gambling laws to contracts traded on exchanges. This unresolved matter is currently being addressed in court. The CFTC's action occurs amid a split between the Third and Ninth Circuit Courts of Appeals over the classification of event contracts as federally regulated swaps, a disagreement that has led to legal challenges for firms like Kalshi and Polymarket.

New Jersey has sought Supreme Court review of a case involving Kalshi, and gaming regulators from 39 states and the District of Columbia have joined the NFL in urging the justices to hear the dispute. The Supreme Court's consideration of the case adds another layer to the regulatory debate, as the CFTC seeks to establish its interpretation through regulation while the broader authority question remains undecided in litigation.

The NFL supports New Jersey's request for Supreme Court review, arguing that states are better equipped to regulate sports-related contracts under the present circumstances. State and league officials are concerned that the lack of a Supreme Court decision could enable operators to exploit the discrepancy between federal and state rules, potentially endangering consumers and the integrity of sports events.