CFTC Moves to Define Event Contracts as Swaps, Exclude Casino Gambling

While the Commodity Futures Trading Commission (CFTC) may not be the easiest government agency in which to predict future outcomes or rulemaking, they do occasionally give us a sense of what they’re thinking. Case in point: this week, the CFTC submitted two separate proposals to the White House’s Office of Information and Regulatory Affairs (OIRA).

This is a procedural step taken before the agency formally issues new regulations, but in this case, the titles alone give us something to ponder.

Reading the Tea Leaves: Event Contracts vs. Casino Gambling

The two proposals are rather dryly titled:

• "Further Definitions of Swap to Include Event Contracts"

• "Further Definition of Swap to Exclude Casino-Style Gambling Products"

Since we don’t yet have the actual text of the proposed interim final rules, we are left reading the tea leaves. The titles suggest the CFTC envisions "swaps" to include event contracts, which could cover an enormous range of outcomes - from Fed rate changes and hurricane tracks to the total score in a Yankees/Red Sox game or which party will control Congress.

However, while opening up event contracts to an enormous possible range of decisions, the agency seems prepared to draw a hard line at casino-style gambling. So, wagering on earnings reports and Emmy winners is allowed, but betting on whether the player hand will win the next round of baccarat apparently is not. Expect this to be a very fine line for the CFTC to draw - and an even harder one to explain. Unsurprisingly, the planning around explicitly allowing sports event contracts to be legally traded has drawn the most interest so far.

The Kalshi Connection and the Sixth Circuit Ruling

We’d like to make a quick Kalshi wager that the timing of these filings was no coincidence. Just three days prior, the Sixth Circuit Court of Appeals handed Kalshi a significant loss in its ongoing fight with state regulators.

The Court explicitly found that Kalshi had failed to demonstrate its sports event contracts qualified as swaps under the Commodity Exchange Act (CEA). Furthermore, it rejected the argument that federal law prevented states - specifically Ohio and Tennessee - from enforcing their own laws against the US prediction market apps.

Sending a proposed rule to the White House less than 72 hours after this appellate Kalshi review was bound to raise eyebrows. It adds another layer to an increasingly complicated legal battle that will almost certainly require the Supreme Court to clear up.

A Deepening Circuit Split

The legal landscape surrounding prediction markets is currently fractured across the country:

• Third Circuit (New Jersey): Previously sided with Kalshi. New Jersey has already asked the Supreme Court to review this decision.

• Ninth Circuit: Ruled that sports event contracts are likely not swaps under the CEA.

• Sixth Circuit (Ohio & Tennessee): Ruled against Kalshi, finding sports contracts are not swaps and states can enforce local gambling laws.

• Fourth Circuit (Maryland): Another related case remains pending.

While the CFTC’s rulemaking will certainly matter, it doesn’t magically change the law. Congress wrote the CEA, and the federal courts will ultimately have the final say. The CFTC can offer its two cents on what a swap is, but as the Sixth Circuit noted, even if these sports contracts did qualify as swaps, states like Ohio and Tennessee would still be allowed to enforce their gambling laws.

What Happens Next?

For now, both proposed rules must make their way through the OIRA review process. Once the actual language is released, we should get answers to several crucial questions:

1. Will the CFTC explicitly include sports event contracts in its definition of swaps?

2. How exactly does the agency plan to define "casino-style gambling products"?

3. Most importantly, what legal reasoning will they use to separate one from the other?

These answers won’t just matter to Kalshi and prediction market operators; they will be closely watched by state gaming regulators, legislators, and congressional delegations. The battle over who defines a swap is becoming a hot topic not just on Capitol Hill, but also over at One First Street, where it is increasingly likely the nine Supreme Court justices will have the final say.