Proposed Rule2026-11854
Prediction Markets; Public Interest Determinations
Primary source
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Published
June 12, 2026
Issuing agencies
Commodity Futures Trading Commission
Abstract
The Commodity Futures Trading Commission (Commission or CFTC) is proposing amendments to its rules concerning event contract derivatives. The markets for these event contracts are commonly referred to as "prediction markets." In particular, the Commission is proposing amendments to further specify the types of event contracts that may be subject to a determination that they are contrary to the public interest, such that they may not be listed for trading or accepted for clearing on or through a CFTC-registered entity, as provided in the Commodity Exchange Act (CEA). The proposed amendments set out factors the Commission would apply in that determination and conform the process by which the determination would be made to the CEA. The Commission also is proposing amendments to the procedure for the Commission's determination to enhance clarity and organization, as well as a definition of the term "gaming" and a rule regarding when event contracts "involve" an underlying activity.
Full Text
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[Federal Register Volume 91, Number 113 (Friday, June 12, 2026)]
[Proposed Rules]
[Pages 35806-35871]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2026-11854]
[[Page 35805]]
Vol. 91
Friday,
No. 113
June 12, 2026
Part II
Commodity Futures Trading Commission
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17 CFR Part 40
Prediction Markets; Public Interest Determinations; Proposed Rule
Federal Register / Vol. 91 , No. 113 / Friday, June 12, 2026 /
Proposed Rules
[[Page 35806]]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 40
RIN 3038-AF65
Prediction Markets; Public Interest Determinations
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)
is proposing amendments to its rules concerning event contract
derivatives. The markets for these event contracts are commonly
referred to as ``prediction markets.'' In particular, the Commission is
proposing amendments to further specify the types of event contracts
that may be subject to a determination that they are contrary to the
public interest, such that they may not be listed for trading or
accepted for clearing on or through a CFTC-registered entity, as
provided in the Commodity Exchange Act (CEA). The proposed amendments
set out factors the Commission would apply in that determination and
conform the process by which the determination would be made to the
CEA. The Commission also is proposing amendments to the procedure for
the Commission's determination to enhance clarity and organization, as
well as a definition of the term ``gaming'' and a rule regarding when
event contracts ``involve'' an underlying activity.
DATES: Comments must be in writing and received by July 27, 2026.
ADDRESSES: You may submit comments, identified by ``Prediction Markets;
Public Interest Determinations'' and RIN 3038-AF65, by any of the
following methods:
<bullet> <a href="http://Regulations.gov">Regulations.gov</a>: Go to <a href="https://www.regulations.gov">https://www.regulations.gov</a> and
press the ``Search'' button, then proceed as follows:
1. Under Refine Documents Results--check the box to ``Only show
documents open for comment'';
2. Under Agency--select ``See More'' and check the box for
``Commodity Futures Trading Commission,'' then press the Apply button;
3. Identify this proposal in the list of CFTC documents open for
comment, press the ``Comment'' button to open the submission form, and
follow the instructions on the form.
Alternatively, if you are viewing this proposal on
<a href="http://www.federalregister.gov">www.federalregister.gov</a>, click the ``Submit A Public Comment'' button
at the top of the page to open the comment form. Follow the
instructions on the form to submit your comment to <a href="http://Regulations.gov">Regulations.gov</a>.
<bullet> Mail: Send to Christopher Kirkpatrick, Secretary of the
Commission, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street NW, Washington, DC 20581.
<bullet> Hand Delivery/Courier: Address to--CFTC Comment
Submission, Attn: Christopher Kirkpatrick, Secretary of the Commission,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street NW, Washington, DC 20581.
Please submit your comments using only one of these methods. To
avoid possible delays with mail or in-person deliveries, submissions
through <a href="http://Regulations.gov">Regulations.gov</a> are encouraged.
All comments must be submitted in English, or if not, accompanied
by an English translation. Do not include in your comment text or
attachments any personal identifying information or business
information that you do not want published online. Comments (regardless
of submission method) will be published without review for, and without
removal of, any personal identifying information or information your
business may consider confidential.
If you wish to submit confidential information for the Commission's
consideration, please contact the CFTC personnel listed in this
document under FOR FURTHER INFORMATION CONTACT before making any
submission. Please also carefully review the Commission's procedures in
17 CFR 145.9 for requesting confidential treatment under the Freedom of
Information Act (FOIA) of information submitted to the Commission.
The CFTC reserves the right, but shall have no obligation, to
review, pre-screen, filter, or redact all or any part of your comment
submission. The CFTC also reserves the right, without further
notification, to refuse to publish or to remove from public view all or
any part of your submission to the extent it contains content
inappropriate for publication in a comment file, such as--without
limitation--obscene language, threats of violence, solicitations for
commercial sales or illegal activity, or obvious spam. If a submission
that is refused for or withdrawn from publication because of
inappropriate content also contains comments on the merits of this
proposal, such submission will be retained in the record for the matter
and will be considered as required under the Administrative Procedure
Act (APA) and other applicable laws, and may be accessible under the
FOIA.
Pursuant to the APA, 5 U.S.C. 553(b)(4), a plain language summary
of the proposed rule is available at regulations.gov.
FOR FURTHER INFORMATION CONTACT: Stephen Andrews, Deputy General
Counsel for Regulation, 771-210-7915, <a href="/cdn-cgi/l/email-protection#b5c7c0d9d0d8d4dedcdbd2f5d6d3c1d69bd2dac3"><span class="__cf_email__" data-cfemail="f98b8c959c94989290979eb99a9f8d9ad79e968f">[email protected]</span></a>, or Mark
Fajfar, Senior Assistant General Counsel, Commodity Futures Trading
Commission, Three Lafayette Centre, 1151 21st Street NW, Washington, DC
20581.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
A. Prediction Markets
B. Statutory Authority
1. CFTC Jurisdiction Over Prediction Markets
2. CEA Section 5c(c)(5)(C)
3. Past Provisions for Contract Approval and History of the
Current Text of the Special Rule
C. Commission History With Prediction Markets
1. Staff Actions
2. 2008 Concept Release
3. 2010 Approval of Event Contracts on Box Office Receipts
4. 2011 Adoption of Sec. 40.11
5. 2012 Nadex Disapproval
6. 2021 ErisX Withdrawal
7. 2023 Kalshi Disapproval and Court Decision
8. 2024 Event Contract Proposal and 2026 Withdrawal
9. 2026 ANPRM
II. Proposed Amendments to Part 40
A. Overview of Proposed Changes to Part 40
B. Event Contracts Within the Scope of the Special Rule
C. Contracts That ``Involve'' an Enumerated Activity
D. Determining the Scope of Enumerated Activities
1. Activity That Is Unlawful Under Any Federal or State law
2. Terrorism, Assassination, and War
3. Gaming
4. Illustrative Examples of Event Contracts Not Within Scope
E. Adoption of Factors To Determine Whether Contrary To Public
Interest
1. Overview of Proposed Amendments
2. Public Interest Factors Applicable to All Enumerated
Activities
(a) Price Discovery and Information Aggregation Utility
(b) Potential Threats to Market Integrity
(c) Compliance and Self-Regulatory Challenges Arising From the
Prediction Market's Capacity To Administer the Contracts
3. Public Interest Factors Specific to the Enumerated Activities
(a) Activity That Is Unlawful Under Any Federal or State Law
(b) Terrorism, Assassination, and War
[[Page 35807]]
(c) Gaming
(i) Games of Random Chance Are Likely Contrary to the Public
Interest
(ii) Factors Indicating When Event Contracts Involving Sports
Activities Are Not Contrary to the Public Interest
(iii) Factors Indicating That the Commission Would Find Event
Contracts Involving Sports Activities To Be Contrary to the Public
Interest
F. The Commission's Authority To Identify Additional Activities
Similar to the Enumerated Activities
G. Process Under Sec. 40.11 and Technical Amendments
1. The Process for Commission Action Under Sec. 40.11
2. Information Required for Commission Action Under Sec. 40.11
3. Amendments to Sec. 40.11(c) and New Sec. 40.11(d)-(f)
4. Delegation of Authority to Director of Division of Market
Oversight
H. Implementation Timeline and Severability
III. Related Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
C. Consideration of Costs and Benefits
1. Introduction
2. Baseline
3. Proposed Amendments
(a) Proposed Sec. 40.11(a)(3): Event-Focused ``Involves''
Standard
(i) Benefits
(ii) Cost
(b) Proposed Amendment: Revised Definition of ``Gaming''
(i) Benefits
(ii) Cost
(c) Public Interest Factors Relating to Price Discovery and
Information Aggregation Utility
(i) Benefits
(ii) Cost
(d) Public Interest Factors Relating to Potential Threats to
Market Integrity
(i) Benefits
(ii) Cost
(e) Public Interest Factors Relating to Compliance and Self-
Regulatory Challenges
(i) Benefits
(ii) Cost
(f) Public Interest Factors Specific to Unlawful Activity
(i) Benefits
(ii) Cost
(g) Public Interest Factors Specific to Terrorism,
Assassination, and War
(i) Benefits
(ii) Cost
(h) Public Interest Factors Specific to Gaming
(i) Benefits
(ii) Cost
(i) Additional Activities Similar to the Enumerated Activities
(i) Benefits
(ii) Cost
(j) Procedural Amendments and Delegations
(i) Benefits
(ii) Cost
4. Section 15(a) Factors
(a) Protection of Market Participants and the Public
(b) Efficiency, Competitiveness and Financial Integrity
(c) Price Discovery
(d) Sound Risk Management Practices
(e) Other Public Interest Considerations
D. Antitrust Considerations
E. Executive Orders 12866, 13563, and 14192
F. Indian Tribal Consultation
I. Background
A. Prediction Markets
Prediction markets, on which ``event contract'' derivatives are
traded, are rapidly increasing in popularity with the American public
both as a financial asset class and as a source of reliable information
for news media, sports leagues, financial institutions, and everyday
Americans.\1\ Participants may buy or sell event contracts to manage
price risks around whether events stated in the contracts will occur.
The Commission preliminarily believes that event contracts also provide
economically useful or otherwise meaningful information and are a
source of responsible financial innovation.
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\1\ While the term ``event contract'' is not a defined term in
the CEA or the Commission regulations thereunder, the CFTC has used
this term to describe commodity derivative contracts, often with a
binary payoff structure, based on the outcome of an underlying
occurrence or event since at least 2008. See Concept Release on
Appropriate Regulatory Treatment of Event Contracts, 73 FR 25669
(May 7, 2008) (2008 Concept Release); see also CFTC, Contracts &
Products: Event Contracts, available at <a href="https://www.cftc.gov/IndustryOversight/ContractsProducts/index.htm">https://www.cftc.gov/IndustryOversight/ContractsProducts/index.htm</a>.
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Parties have sought CFTC staff guidance concerning prediction
markets since the early 1990s, and the Commission first designated a
prediction market as a designated contract market (DCM) in 2004.\2\ The
Commission has recently observed a significant increase in the number
of event contracts listed for trading on prediction markets, as well as
in the diversity of events underlying such contracts. And, in 2025, the
total trading volume across CFTC-registered prediction markets exceeded
$25 billion. While growing, this is still a small share of the overall
futures market regulated by the Commission, which had a notional value
of around $31 trillion in 2025.\3\ As a result, the Commission and its
staff have taken affirmative steps to address this proliferation and
growth of prediction markets.
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\2\ See CFTC Press Release No. 4894-04, CFTC Designates
HedgeStreet as a Contract Market and as a Registered Clearing
Organization (Feb. 20, 2004) and the related DCM Order of
Designation for HedgeStreet, Inc. (Feb. 18, 2004), available at
<a href="https://www.cftc.gov/sites/default/files/opa/press04/opa4894-04.htm">https://www.cftc.gov/sites/default/files/opa/press04/opa4894-04.htm</a>.
See also infra section I.C.1 (discussion of early staff actions).
\3\ See CFTC, FY 2025 Agency Financial Report 4 (2026),
available at <a href="https://www.cftc.gov/media/13096/2025AFR/download">https://www.cftc.gov/media/13096/2025AFR/download</a>.
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The CEA identifies derivatives transactions as affecting a national
public interest by ``providing a means for managing and assuming price
risks, discovering prices, or disseminating pricing information,''
which requires a comprehensive federal regulatory scheme.\4\ The CEA
directs the CFTC to execute that regulatory scheme. Prediction markets
and event contracts are but one example of such derivatives
transactions.
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\4\ CEA sec. 3, 7 U.S.C. 5.
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The underlying price for an event contract is determined by market
participants' continuous buying and selling reaching an equilibrium
through a quote-based system.\5\ The market-established prices
therefore offer informational value as to the probability of the event
underlying the contract occurring,\6\ yielding forecasts (i.e., event
contract prices) that may rapidly incorporate new information and
``allocate probability mass in ways that may reflect the range of
plausible . . . outcomes better than traditional financial derivative
or survey-based forecasts.'' \7\ These findings conform with research
that highlights the informational value of retail trading behavior.\8\
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\5\ Karl E. Schneider and Rena S. Miller, Cong. Research Serv.,
IF13187, Prediction Markets: Policy Issues for Congress (2026),
available at <a href="https://www.congress.gov/crs-product/IF13187">https://www.congress.gov/crs-product/IF13187</a>.
\6\ This market structure is inapposite to that of legalized
sports gambling, where the gaming company typically controls and
adjusts the gambling odds.
\7\ Anthony M. Diercks, Jared Dean Katz, and Jonathan H. Wright,
Kalshi and the Rise of Macro Markets, Finance and Economics
Discussion Series No. 2026-010, Washington: Board of Governors of
the Federal Reserve System, available at <a href="https://doi.org/10.17016/FEDS.2026.010">https://doi.org/10.17016/FEDS.2026.010</a>.
\8\ Id. at 6 (``While early research often emphasized behavioral
biases, recent studies show that retail trading can enhance market
efficiency.''). See also Snowberg et al., Prediction Markets for
Economic Forecasting, National Bureau of Economic Research (2012),
available at <a href="https://www.nber.org/papers/w18222">https://www.nber.org/papers/w18222</a>.
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In addition to their information aggregation, price discovery, and
price dissemination functions, prediction markets allow market
participants to hedge exposure to a wide array of events for which no
traditional financial instrument otherwise exists, ranging from events
concerning macroeconomics,\9\ politics, weather, and climate
conditions, to cultural trends and ``sporting events . . . that
generate billions of dollars in economic activity
[[Page 35808]]
and materially affect both regional and national markets.'' \10\
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\9\ See id.
\10\ Brief of CFTC as Amicus Curiae in Support of Appellant,
North American Derivatives Exchange, Inc. D/B/A <a href="http://Crypto.com">Crypto.com</a> v. State
of Nevada, No. 25-7187 (9th Cir. 2026), available at <a href="https://www.cftc.gov/media/13261/amicusbrief_02172026/download">https://www.cftc.gov/media/13261/amicusbrief_02172026/download</a>.
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As explained further in the next section, Congress vested the
Commission with ``exclusive jurisdiction'' over ``transactions
involving swaps'' and ``contracts of sale of a commodity for future
delivery,'' or futures contracts.\11\ The statutory definition of
commodity under the CEA is extremely broad and includes practically all
goods, articles, services, rights, and interests, except onions and
motion picture box-office receipts.\12\ The specific, enumerated
definitional exclusions from the broad statutory definition demonstrate
that when Congress sought to limit the Commission's exclusive
jurisdiction over commodity futures (other than security futures) and
swaps,\13\ it did so expressly, and not by inviting courts or states to
create implied carve-outs from the CEA.
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\11\ See CEA sec. 2a(1)(A), 7 U.S.C. 2(a)(1)(A) (expressly
extending the CFTC's ``exclusive jurisdiction'' to encompass
``transactions involving swaps or contracts of sale of a commodity
for future delivery . . . traded or executed on a contract market
designated pursuant to [CEA sec. 5, 7 U.S.C. 7] . . . .'').
\12\ See CEA sec. 1a(9), 7 U.S.C. 1a(9).
\13\ The CEA includes a savings clause providing that the CFTC's
jurisdiction does not apply to securities, other than security
futures. See, e.g., CEA sec. 2a(1)(A) and (H), 7 U.S.C. 2(a)(1)(A)
and (H). Thus, the CFTC's exclusive jurisdiction does not extend to
security-based swaps or other securities, and the CFTC shares
jurisdiction with the Securities and Exchange Commission (SEC) over
security futures.
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Under the plain language of the CEA, certain event contracts are
implicated by the ``swap'' definition.\14\ An event contract may also
be structured in other ways, including as a futures contract.\15\ A
prediction market that offers event contracts in the form of swaps or
futures contracts for trading by the general public must register with
the CFTC as a DCM and comply with the substantive and procedural
requirements that apply to the listing for trading of the event
contracts.\16\
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\14\ CEA sec. 1a(47)(A)(i), 7 U.S.C. 1a(47)(A)(i) defines the
term ``swap,'' in relevant part, to include ``any agreement,
contract, or transaction . . . that is a[n] . . . option of any kind
that is for the purchase or sale, or based on the value, of 1 or
more . . . quantitative measures, or other financial or economic
interests or property of any kind,'' and CEA sec. 1a(47)(A)(ii), 7
U.S.C. 1a(47)(A)(ii) defines swap to include ``any agreement,
contract, or transaction . . . that provides for any purchase, sale,
payment, or delivery . . . that is dependent on the occurrence,
nonoccurrence, or the extent of the occurrence of an event or
contingency associated with a potential financial, economic, or
commercial consequence.''
\15\ See CEA sec. 2a(1)(A), 7 U.S.C. 2(a)(1)(A) (CFTC exclusive
jurisdiction over commodity futures contracts).
\16\ See infra, notes 41 to 45 and accompanying text. With
respect to security futures, such offerings are also subject to
registration with and regulation by the SEC.
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B. Statutory Authority
1. CFTC Jurisdiction Over Prediction Markets
The CFTC is charged with administering and enforcing the CEA.
Congress created the CFTC in 1974 to establish a uniform national
system for regulating trading of futures contracts after concluding
that the existing patchwork of state-by-state regulation had critically
impaired the development and functioning of national commodities
markets.\17\ ``[T]ransactions subject to [the CEA] are entered into
regularly in interstate and international commerce and are affected
with a national public interest,'' including in ``liquid, fair and
financially secure trading facilities.'' \18\
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\17\ See H.R. Rep. No. 93-975, at 51 (1974); S. Rep. No. 93-
1131, at 36 (1974), reprinted in 1974 U.S.C.C.A.N. 5843, 5885. See
also KalshiEX, LLC v. Flaherty, 172 F.4th 220, 230 (3d Cir. 2026)
(``Congress created the CFTC and amended the Act to do away with the
patchwork of state regulations and bring futures trading on DCMs
under the exclusive jurisdiction of the CFTC.'').
\18\ CEA sec. 3, 7 U.S.C. 5.
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Congress vested the CFTC with ``exclusive jurisdiction'' to protect
that national interest by overseeing the regulation of futures
contracts and options on futures contracts on federally regulated
exchanges.\19\ An exchange on which futures contracts and options on
futures contracts are traded is formally known as a board of trade, and
such an exchange must be designated by the Commission as a contract
market, i.e., a DCM.\20\ Since its enactment in 1974, the CEA has
required that futures contracts and options on futures contracts be
transacted on or subject to the rules of a DCM; this is known as the
exchange trading requirement.\21\
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\19\ CEA sec. 2(a)(1)(A), 7 U.S.C. 2(a)(1)(A) (vesting the
Commission with ``exclusive jurisdiction,'' except as otherwise
expressly provided by Congress, over all ``accounts, agreements. .
., and transactions involving swaps or contracts of sale of a
commodity for future delivery''). The CEA ``preempts the application
of state law.'' Leist v. Simplot, 638 F.2d 283, 322 (2d Cir. 1980).
``Express preemption occurs when a federal statute explicitly states
that it overrides state or local law.'' Hoagland v. Town of Clear
Lake, 415 F.3d 693, 696 (7th Cir. 2005). The CFTC and the SEC share
jurisdiction over security futures and options on security futures.
Preemption was the primary goal of the ``exclusive jurisdiction''
provision. Indeed, potentially limiting language was stricken from
the statute ``to assure that Federal preemption is complete.'' 120
Cong. Rec. 30464 (1974) (Statement of Sen. Curtis).
\20\ See CEA sec. 5, 7 U.S.C. 7. The Board of Trade of the City
of Chicago (also called the Chicago Board of Trade, or CBOT), the
first cash grain market exchange in the U.S., was created in 1848 by
grain merchants and received its charter in 1859. See Philip McBride
Johnson et al., Derivatives Regulation sec. 6.03 (last updated Jan.
2026).
\21\ CEA sec. 4(a)(1), 7 U.S.C. 6(a)(1). This section of the CEA
also refers to transactions in futures contracts and options on a
derivatives transaction execution facility, but there are no such
facilities currently in operation.
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The CFTC's jurisdiction ``supersedes State as well as Federal
agencies'' because commodity derivatives markets require nationally
uniform rules governing the listing, trading, clearing, settlement,
surveillance, and enforcement of financial instruments traded in these
markets.\22\ Prompted by the evolution of national financial markets
and repeated conflicts with a patchwork of state laws, Congress granted
the CFTC exclusive jurisdiction in the CEA to regulate the commodity
derivatives markets through a comprehensive federal regulatory
framework that expressly preempts state laws that attempt to regulate
the operation of, or transactions on, CFTC-registered exchanges.\23\
State regulation of developing event contracts markets would impose
additional regulations on event contracts that, as discussed below in
section I.B.3., have long been traded uncontroversially on CFTC-
registered DCMs, like contracts on the weather or agricultural
production. Subjecting those markets to a patchwork of 50 state
regulations is precisely what Congress sought to avoid with the
CEA.\24\
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\22\ See S. Rep. No. 93-1131 (1974), reprinted in 1974
U.S.C.C.A.N. 5848. The Constitution's Supremacy Clause mandates that
``[t]his Constitution, and the Laws of the United States which shall
be made in Pursuance thereof . . . shall be the supreme Law of the
Land . . . any Thing in the Constitution or Laws of any State to the
Contrary notwithstanding.'' U.S. Const. art. VI, cl. 2.
\23\ See KalshiEX, 172 F.4th at 227 (the CEA ``grants the CFTC
exclusive regulatory authority over event contracts. . . .''). Where
Congress makes ``a single sovereign responsible for maintaining a
comprehensive and unified system'' of regulation, allowing states to
regulate the same field `` `detract[s] from the ``integrated scheme
of regulation'' created by Congress.' '' Arizona v. U.S., 567 U.S.
387, 401-02 (2012) (quoting Wisconsin Dept. of Indus. v. Gould Inc.,
475 U.S. 282, 288-89 (1986)).
\24\ Preemption of state law was necessary because, for decades,
states had attempted to apply state gambling laws to derivatives
trading. By the mid-nineteenth century, commodity exchanges in major
trading hubs like New York and Chicago had organized trading to
facilitate price discovery (information exchange), risk management
(hedging), and speculation. Congress recognized the need for
uniform, nationwide regulation of futures and options markets
because concurrent regulation by the states could lead to ``total
chaos.'' See Commodity Futures Trading Act of 1974: Hearings Before
the S. Comm. on Agriculture & Forestry on S. 2485, S. 2578, S. 2837,
H.R. 13113, 93d Cong., 2d Sess. 685 (1974) (statement of Sen.
Clark), available at <a href="https://catalog.hathitrust.org/Record/010373491">https://catalog.hathitrust.org/Record/010373491</a>.
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[[Page 35809]]
The 1990s saw the growth of a new type of derivative financial
product--swaps.\25\ The Futures Trading Practices Act of 1992,
authorized the CFTC to exempt certain off-exchange (i.e., over-the-
counter or OTC) swap transactions from the exchange trading
requirement.\26\ The swap market grew rapidly, and in 1999 a
Presidential Working Group Report concluded that ``under many
circumstances, the trading of financial derivatives by eligible swap
participants should be excluded from the CEA'' in order to avoid legal
uncertainty and unnecessary regulatory burdens.\27\ Spurred by the 1999
report, the Commodity Futures Modernization Act of 2000 (CFMA) exempted
or excluded swap transactions from the exchange trading
requirement.\28\
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\25\ In 1989, the Commission adopted a policy statement
describing when it would not take action against swaps as illegal
futures contracts. See Policy Statement Concerning Swap
Transactions, 54 FR 30694 (July 21, 1989).
\26\ Public Law 102-546, sec. 502(a)(2), 106 Stat. 3590, 3629
(1992), adding section 4(c) to the CEA, including CEA sec.
4(c)(5)(B), 7 U.S.C. 6(c)(5)(B).
\27\ Report of The President's Working Group on Financial
Markets, Over-the-Counter Derivatives Markets and the Commodity
Exchange Act (Nov. 1999) at 1 (footnote omitted), available at
<a href="https://home.treasury.gov/system/files/236/Over-the-Counter-Derivatives-Market-Commodity-Exchange-Act.pdf">https://home.treasury.gov/system/files/236/Over-the-Counter-Derivatives-Market-Commodity-Exchange-Act.pdf</a>. In addition to
participating in this working group, the Commission also prepared a
framework for deregulation of DCMs and exclusions from the CEA for
OTC transactions. See Report of the Commodity Futures Trading
Commission Staff Task Force, A New Regulatory Framework (2000),
available at <a href="https://www.cftc.gov/sites/default/files/files/opa/oparegulatoryframework.pdf">https://www.cftc.gov/sites/default/files/files/opa/oparegulatoryframework.pdf</a>. See also Derivatives Regulation sec.
2.04[B].
\28\ Public Law 106-554, App. E, sec. 103, 114 Stat. 2763A-365,
2763A-377 (2000), adding CEA sec. 2(d), which at that time exempted
off-exchange swaps in an ``excluded commodity'' entered into by
``eligible contract participants.'' See 7 U.S.C. 2(d) (2000 Main
Ed.).
The CFMA also introduced definitions of the terms ``eligible
contract participant'' and ``excluded commodity.'' See CEA sec.
1a(18) and (19), 7 U.S.C. 1a(18) and (19), respectively. The
definition of ``excluded commodity'' is in effect unchanged today
and is discussed further below. The definition of ``eligible
contract participant'' has been subject to only technical
amendments.
The CFMA restructured CEA sec. 5, 7 U.S.C. 7, applying a
principles-based regulation philosophy to set out designation
criteria and core principles with which a DCM must comply, rather
than prescribing strict requirements. See CFMA sec. 110, 114 Stat.
at 2763A-384.
Last, the CFMA added CEA sec. 5c, 7 U.S.C. 7a-2, which
introduced a provision for DCMs to list a contract for trading by
providing to the Commission a certification that the contract
complies with the CEA (including Commission regulations thereunder).
See CFMA sec. 113, 114 Stat. at 2763A-399. CEA sec. 5c will be
discussed in detail below.
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In the wake of the 2008 financial crisis, Congress created a
framework within the CEA for the on-exchange execution, clearing and
reporting of vast portions of the previously OTC swap markets. The Wall
Street Transparency and Accountability Act of 2010 (Dodd-Frank Act)
expressly extended the CFTC's ``exclusive jurisdiction'' to encompass
``transactions involving swaps.'' \29\ Among other things, the Dodd-
Frank Act also:
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\29\ See Public Law 111-203, sec. 722(a)(1), 124 Stat. 1376,
1672 (2010), amending CEA sec. 2(a)(1)(A), 7 U.S.C. 2(a)(1)(A). This
CEA section expressly extends the CFTC's ``exclusive jurisdiction''
to encompass ``transactions involving swaps or contracts of sale of
a commodity for future delivery . . . traded or executed on a
contract market designated pursuant to [CEA sec. 5, 7 U.S.C. 7] . .
. .'' The CFTC shares jurisdiction over mixed swaps and security
futures with the SEC, and the SEC has sole jurisdiction over
security-based swaps. See CEA sec. 1a(44), 7 U.S.C. 1a(44) and secs.
3(a)(55) and 3(a)(68) of the Securities Exchange Act of 1934
(Exchange Act), 15 U.S.C. 78c(a)(55) and 78c(a)(68). See also
KalshiEX, 172 F.4th at 226 (``The Dodd-Frank Act of 2010 amended the
Act again, . . . expanding the CFTC's exclusive jurisdiction `with
respect to accounts, agreements . . . and transactions involving
swaps or contracts of sale of a commodity for future delivery . . .
traded or executed on a [DCM.]' 7 U.S.C. 2(a)(1)(A).'').
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<bullet> added a new definition of the term ``swap'' to the CEA;
\30\
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\30\ CEA sec. 1a(47), 7 U.S.C. 1a(47).
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<bullet> directed the CFTC and the SEC to jointly adopt a
rulemaking to further define the term ``swap'' (among other terms) in
consultation with the Federal Reserve; \31\
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\31\ Dodd-Frank Act sec. 712(d)(1), codified at 15 U.S.C.
8302(d)(1) (directing the CFTC and SEC to undertake joint rulemaking
on covered topics). See Further Definition of ``Swap,'' ``Security-
Based Swap,'' and ``Security-Based Swap Agreement''; Mixed Swaps;
Security-Based Swap Agreement Recordkeeping, 77 FR 48208 (Aug. 13,
2012).
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<bullet> required retail swap transactions (i.e., transactions not
between eligible contract participants) to be entered into on a DCM;
\32\
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\32\ CEA sec. 2(e), 7 U.S.C. 2(e). The term ``eligible contract
participant'' is defined in CEA sec. 1a(18), 7 U.S.C. 1a(18), and
generally includes only institutional investors.
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<bullet> created a new type of trading facility--a swap execution
facility (SEF)--where eligible contract participants can transact
swaps; \33\ and
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\33\ CEA sec. 5h, 7 U.S.C. 7b-3. A SEF may make any swap
available for trading to eligible contract participants.
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<bullet> adopted CEA section 5c(c)(5)(C), a ``Special Rule for
review and approval of event contracts and swaps contracts,'' \34\
which is discussed in detail below.
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\34\ 7 U.S.C. 7a-2(c)(5)(C).
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In sum, under current law, futures contracts, options on futures
contracts and retail swaps must be transacted on DCMs, and the CFTC
oversees DCMs and SEFs and trading in these instruments. In this
document, the term ``prediction market'' refers to a CFTC-registered
DCM or SEF that offers event contracts in the form of swaps or futures
contracts for trading. Depending on their underlying events, other
event contracts may be security-based swaps or other instruments
subject to the jurisdiction of the SEC.\35\
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\35\ See 7 U.S.C. 1a(47)(B) (providing ``exclusions'' from the
definition of ``swap'' under the CEA, including for securities such
as security based-swaps, certain options, and debt securities); see
also, e.g., 15 U.S.C. 78c(a)(68)(A) (defining ``security-based
swap'' under the Exchange Act).
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CEA section 1a(47)(A)(ii) defines ``swap'' to include ``any
agreement, contract, or transaction . . . that provides for any
purchase, sale, payment, or delivery (other than a dividend on an
equity security) that is dependent on the occurrence, nonoccurrence, or
the extent of the occurrence of an event or contingency associated with
a potential financial, economic, or commercial consequence.'' \36\
Also, CEA section 1a(47)(A)(i) defines the term ``swap'' to include
``any agreement, contract, or transaction . . . that is a put, call,
cap, floor, collar, or similar option of any kind that is for the
purchase or sale, or based on the value, of 1 or more interest or other
rates, currencies, commodities, securities, instruments of
indebtedness, indices, quantitative measures, or other financial or
economic interests or property of any kind.'' \37\ Event contracts
traded as swaps under CEA section 1a(47)(A)(i) are sometimes referred
to as binary options, a type of swap which is an ``option whose payoff
is either a fixed amount or zero.'' \38\
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\36\ 7 U.S.C. 1a(47)(A)(ii).
\37\ 7 U.S.C. 1a(47)(A)(i).
\38\ See CFTC, Futures Glossary, available at <a href="https://www.cftc.gov/LearnAndProtect/AdvisoriesAndArticles/CFTCGlossary/index.htm#B">https://www.cftc.gov/LearnAndProtect/AdvisoriesAndArticles/CFTCGlossary/index.htm#B</a>.(last visited May 18, 2026).
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The definition of what constitutes a futures contract is not set
out in the CEA but rather has been developed in court decisions.\39\
Event contracts structured as futures contracts would have the key
characteristics of futures contracts such as standardization, futurity,
fungibility, and offset.\40\
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\39\ See CFTC v. Co Petro Marketing Group, Inc., 680 F.2d 573
(9th Cir. 1982), Transnor (Bermuda) Ltd. v. BP N. Am. Petroleum, 738
F. Supp. 1472 (S.D.N.Y. 1990), and Salomon Forex, Inc. v. Tauber, 8
F.3d 966 (4th Cir. 1993). See also In re Stovall, [1977-1980
Transfer Binder] Comm. Fut. L. Rep. (CCH) 20,941 (CFTC Dec. 6,
1979), available at <a href="https://www.cftc.gov/sites/default/files/idc/groups/public/@lrceacases/documents/ceacases/stovall-dec1979-decision-13.pdf">https://www.cftc.gov/sites/default/files/idc/groups/public/@lrceacases/documents/ceacases/stovall-dec1979-decision-13.pdf</a>.
\40\ Since futures contracts are specifically excluded from the
statutory definition of ``swap,'' these event contracts are not
swaps. CEA sec. 1a(47)(B), 7 U.S.C. 1a(47)(B), provides that ``[t]he
term `swap' does not include--(i) any contract of sale of a
commodity for future delivery (or option on such contract) . . . .''
---------------------------------------------------------------------------
Because of CEA section 2(e) and the exchange trading requirement,
respectively, a prediction market that offers event contracts for
trading by the general public in the form of swaps or futures contracts
must register with the
[[Page 35810]]
CFTC as a DCM.\41\ These prediction markets must comply with the
substantive and procedural requirements that apply, more generally, to
the listing for trading by a DCM of derivative contracts.\42\ Further,
a prediction market registered as a DCM or SEF is subject to statutory
requirements to only list or permit trading in derivative contracts
that are not readily susceptible to manipulation; \43\ to enforce
compliance with contract terms and conditions; \44\ and to monitor
trading on the exchange in order to prevent manipulation, price
distortion, and disruption of the settlement process through market
surveillance, compliance, and enforcement practices and procedures.\45\
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\41\ See CEA sec. 2(e), 7 U.S.C. 2(e) (requirement that persons
other than eligible contract participants transact swaps on a DCM)
and CEA sec. 4(a), 7 U.S.C. 6(a) (requirement to transact futures
contracts on a DCM). The term ``eligible contract participant'' is
defined in CEA sec. 1a(18), 7 U.S.C. 1a(18), and generally includes
only institutional investors. In addition to DCMs, a SEF may make
any swap, including an event contract that is a swap, available for
trading. See CEA sec. 5h, 7 U.S.C. 7b-3. However, swap trading on a
SEF is not available to the general public, but rather only to
eligible contract participants.
\42\ See generally CEA sec. 5, 7 U.S.C. 7. SEFs are subject to
similar requirements. See CEA sec. 5h, 7 U.S.C. 7b-3.
\43\ See Core Principle 3 for DCMs, CEA sec. 5(d)(3), 7 U.S.C.
7(d)(3), and Core Principle 3 for SEFs, CEA sec. 5h(f)(3), 7 U.S.C.
7b-3(f)(3).
\44\ See Core Principle 2 for DCMs, CEA sec. 5(d)(2), 7 U.S.C.
7(d)(2), and Core Principle 2 for SEFs, CEA sec. 5h(f)(2), 7 U.S.C.
7b-3(f)(2).
\45\ See Core Principle 4 for DCMs, CEA sec. 5(d)(4), 7 U.S.C.
7(d)(4), and Core Principle 4 for SEFs, CEA sec. 5h(f)(4), 7 U.S.C.
7b-3(f)(4).
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2. CEA Section 5c(c)(5)(C)
In 2000 the CFMA added CEA section 5c, which introduced a provision
for DCMs to list a contract for trading by providing to the Commission
a certification that the contract complies with the CEA and Commission
regulations.\46\ This document refers to event contracts which a
prediction market certifies to be in compliance with the CEA and
Commission regulations as ``self-certified event contracts'' and to
this process as ``self-certification.'' The Dodd-Frank Act revised CEA
section 5c(c) in 2010 to include a new paragraph (5)(C), under which
the Commission is authorized to prohibit CFTC-registered exchanges and
clearinghouses from listing for trading or making available for
clearing particular types of event contracts, if the Commission
determines that such contracts are contrary to the public interest.\47\
This document refers to CEA section 5c(c)(5)(C) as the Special Rule.
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\46\ See 7 U.S.C. 7a-2 (2000 Main Ed.). Before 2000, the CEA
required that a DCM obtain the Commission's prior approval before
listing a contract for trading. See infra, note 60. CEA section 5c,
as added by the CFMA, also includes a provision for a DCM to seek
prior approval of a contract; however, it is not mandatory. See 7
U.S.C. 7a-2(c)(4).
\47\ 7 U.S.C. 7a-2(c)(5)(C), amended by Dodd-Frank Act, Public
Law 111-203, sec. 745(b), 124 Stat. 1376, 1735 (2010).
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Specifically, clause (i) in the Special Rule provides that, ``[i]n
connection with the listing of agreements, contracts, transactions, or
swaps in excluded commodities \48\ that are based upon the occurrence,
extent of an occurrence, or contingency (other than a change in the
price, rate, value, or levels of a commodity described in [CEA] section
la(2)(i)),\49\ by a [DCM] or [SEF], the Commission may determine that
such agreements, contracts, or transactions are contrary to the public
interest if the agreements, contracts, or transactions involve--(I)
activity that is unlawful under any Federal or State law; (II)
terrorism; (III) assassination; (IV) war; (V) gaming; or (VI) other
similar activity determined by the Commission, by rule or regulation,
to be contrary to the public interest.'' \50\
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\48\ The term ``excluded commodity'' is defined in CEA section
1a(19), 7 U.S.C. 1a(19), as: ``(i) an interest rate, exchange rate,
currency, security, security index, credit risk or measure, debt or
equity instrument, index or measure of inflation, or other
macroeconomic index or measure; (ii) any other rate, differential,
index, or measure of economic or commercial risk return, or value
that is--(I) not based in substantial part on the value of a narrow
group of commodities not described in clause (i); or (II) based
solely on one or more commodities that have no cash market; (iii)
any economic or commercial index based on prices, rates, values, or
levels that are not within the control of any party to the relevant
contract, agreement, or transaction; or (iv) an occurrence, extent
of an occurrence, or contingency (other than a change in the price,
rate, value, or level of a commodity not described in clause (i))
that is--(I) beyond the control of the parties to the relevant
contract, agreement, or transaction; and (II) associated with a
financial, commercial, or economic consequence.''
\49\ There is no ``section 1a(2)(i)'' in the CEA. The Commission
believes that the reference in CEA section 5c(c)(5)(C)(i) to
``section 1a(2)(i)'' is a typographical or drafting error.
\50\ CEA sec. 5c(c)(5)(C)(i), 7 U.S.C. 7a-2(c)(5)(C)(i).
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Clause (ii) in the Special Rule provides that ``[n]o agreement,
contract or transaction \51\ determined by the Commission to be
contrary to the public interest under clause (i) may be listed or made
available for clearing or trading on or through a registered entity.''
\52\
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\51\ CEA sec. 5c(c)(5)(C)(i) applies in connection with the
listing of agreements, contracts, transactions, or swaps by a DCM or
SEF. 7 U.S.C. 7a-2(c)(5)(C)(i). The Commission notes that similar
phrases both later in CEA sec. 5c(c)(5)(C)(i) and in CEA sec.
5c(c)(5)(C)(ii) refer only to ``agreements, contracts, or
transactions . . . .'' The Commission interprets either phrase to
encompass derivative contracts listed for trading on or through DCMs
or SEFs, and for simplicity refers to ``agreements, contracts,
transactions or swaps'' as ``event contracts'' herein.
\52\ CEA sec. 5c(c)(5)(C)(ii); 7 U.S.C. 7a-2(c)(5)(C)(ii). The
term ``registered entity'' includes a DCM, a SEF, and a derivatives
clearing organization registered with the CFTC. See CEA sec. 1a(40);
7 U.S.C. 1a(40).
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It is notable that the Special Rule applies in addition to the
other requirements applicable to event contracts traded on a prediction
market. That is, the Special Rule is not the only way in which a
prediction market could be prohibited from listing an event contract
and the Special Rule applies only if the event contract is certified to
be in compliance with all other requirements (because an event contract
can be listed only if it is certified to be in compliance).\53\ The
Commission therefore preliminarily believes that, in general, the
Special Rule should have only a limited application in cases where the
listing, trading, and clearing of event contracts that would be
otherwise in compliance with all applicable requirements should be
prohibited because the event contracts involve an activity enumerated
in clause (i) of the Special Rule and are contrary to the public
interest.
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\53\ In the self-certification process, the prediction market
bears the burden to assess and certify compliance of event contracts
with the CEA and Commission regulations. If the prediction market
certifies that the event contracts are in compliance, the prediction
market can list the event contracts for trading on the next business
day. See 17 CFR 40.2(a)(2). See also infra, note 58.
Apart from the Special Rule, the Commission has limited
authority to prohibit a prediction market from listing self-
certified event contracts. If Commission staff identify concerns
with a self-certified event contract submission (e.g., concerns that
a contract may be readily susceptible to manipulation), the
Commission could, pursuant to Sec. 40.2(c), stay the listing of the
event contracts during either the pendency of Commission proceedings
for filing a false certification or during the pendency of a
petition to alter or amend the event contract terms and conditions.
See 17 CFR 40.2(c). The Commission could also initiate an
enforcement action alleging that the prediction market failed to
comply with part 40 requirements or applicable core principles
(e.g., failure to comply with the prediction market's obligation to
list only contracts that are not readily susceptible to
manipulation).
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The Commission preliminarily interprets the Special Rule to require
the Commission to engage in a three-step inquiry before it may
determine an event contract is prohibited thereunder.\54\ First, the
Commission
[[Page 35811]]
must assess whether agreements, contracts, transactions, or swaps in an
excluded commodity are based upon an occurrence, extent of an
occurrence, or contingency and therefore qualify as ``event
contracts.'' \55\ Second, the Commission must determine whether the
event contracts ``involve'' an activity enumerated in paragraph (i) of
the Special Rule (each, an Enumerated Activity) or other similar
activity as determined by the Commission by rule or regulation (similar
activity). Third, if the Commission determines that the event contracts
involve such activity, the Commission may block a contract from being
listed if it undertakes a public interest analysis and determines the
event contract is affirmatively against the public interest. The
Commission interprets the Special Rule to provide that the event
contract may not be listed or made available for clearing or trading by
a prediction market if the Commission affirmatively finds that (i) the
contract is an event contract, (ii) the event contract involves an
Enumerated Activity or similar activity, and (iii) the event contract
is contrary to the public interest.
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\54\ Several commenters on the Commission's Advance Notice of
Proposed Rulemaking on Prediction Markets, see infra note 154, wrote
that the Special Rule requires a two-step inquiry. See, e.g., Letter
from CME Group, Inc. 9 (Apr. 30, 2026); Letter from Harry Crane,
Rutgers University, 2 (Apr. 30, 2026). Those commenters treated the
second and third steps below as the two steps required; the
Commission simply notes here that an additional initial step is to
determine if the agreements, contracts, transactions, or swaps are
event contracts. The letters are available on the Commission's
website. See infra note 155.
\55\ Event contracts in certain excluded commodities are not
subject to the Special Rule. See infra section II.B.
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The Commission also notes that the Special Rule does not provide
that event contracts involving Enumerated Activities are contrary to
the public interest per se. Rather, if event contracts involve an
Enumerated Activity, the Commission ``may'' determine that they are
contrary to the public interest and prohibited from trading.\56\
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\56\ CEA sec. 5c(c)(5)(C)(i); 7 U.S.C. 7a-2(c)(5)(C)(i). In the
two instances where the Commission applied the Special Rule, it made
an affirmative finding that the event contracts in question were
contrary to the public interest. See infra sections I.C.5 and I.C.7.
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In 2011, the Commission adopted final rules under part 40 of the
Commission's regulations, including new Regulation 40.11.\57\ The
Commission adopted Regulation 40.11 to implement the Special Rule as
part of broader changes to the Commission's part 40 regulations.\58\
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\57\ Provisions Common to Registered Entities, 76 FR 44776 (July
27, 2011).
\58\ Part 40 of the Commission's regulations, more generally,
implements the contract and rule submission requirements for
registered entities set forth in CEA section 5c(c). For example,
Sec. 40.2 sets forth the general process by which a DCM or SEF may
list a new derivative contract for trading by providing the
Commission a self-certification that the contract complies with the
CEA, including the CFTC's regulations thereunder. 17 CFR 40.2; see
also CEA sec. 5c(c)(1), 7 U.S.C. 7a-2(c)(1). The Commission must
receive the DCM's or SEF's self-certification at least one business
day before the contract's listing. 17 CFR 40.2(a)(2). Rule 40.3 sets
forth the general process by which a DCM or SEF may elect
voluntarily to seek prior Commission approval of a derivative
contract that the DCM or SEF seeks to list for trading. 17 CFR 40.3;
see also CEA sec. 5c(c)(4)-(5), 7 U.S.C. 7a-2(c)(4)-(5). Amendments
to an existing derivative contract also must be submitted to the
Commission either by way of self-certification or for prior
Commission approval. 17 CFR 40.5, 40.6.
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3. Past Provisions for Contract Approval and History of the Current
Text of the Special Rule
The Special Rule provides that the Commission may determine that
certain event contracts are ``contrary to the public interest.'' \59\
In understanding this provision, it is useful to review the prior
application of a public interest standard to a DCM's listing of a
contract for trading, and the legislative history of the Special Rule.
The Commission preliminarily believes that the following precedents and
legislative history indicate that the public interest standard to be
applied in the Special Rule is different from the public interest
standard previously applied prior to enactment of the CFMA in 2000.
---------------------------------------------------------------------------
\59\ CEA sec. 5c(c)(5)(C)(i), 7 U.S.C. 7a-2(c)(5)(C)(i).
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As noted above, prior to the CFMA, CEA section 5(7) required that a
DCM demonstrate that each futures contract it listed ``will not be
contrary to the public interest.'' \60\ The legislative history of this
provision, from 1974 when the CEA was enacted, indicated that an
``economic purpose'' test was incorporated into the public interest
requirement.\61\ Based on this, prior to 2000 the Commission took the
position that every proposed futures contract must satisfy an economic
purpose test and, in addition, a broader public interest test.\62\
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\60\ 7 U.S.C. 7(7) (1994 Ed. and Supp. V). At that time, a DCM
was required to obtain from the Commission a designation as a
contract market for each futures contract that it listed for
trading. See Derivatives Regulation sec. 6.04[C.2.c.iii].
\61\ See id. The Derivatives Regulation authors explain that in
connection with the adoption of the CEA in 1974, the House of
Representatives proposed to explicitly require a DCM to demonstrate
that its contracts could be used by commercial businesses for price
discovery or to hedge the risk of price fluctuations, but the Senate
instead required a DCM to demonstrate ``that transactions for future
delivery in the commodity for which designation as a contract market
is sought will not be contrary to the public interest,'' which is
the provision that was added to the CEA. Id. (citing H.R. Rep. No.
975, 93d Cong., 2d Sess. 103 (Apr. 4, 1974) and S. Rep. No. 1131,
93d Cong., 2d Sess. 72 (Aug. 29, 1974)). However, the Conference
Committee report stated that the ``broader language of the Senate
provision would include the concept of the `economic purpose' test
provided in the House bill subject to the final test of the `public
interest.' '' H.R. Rep. No. 1383, 93d Cong., 2d Sess. 14 (Sept. 27,
1974).
\62\ The Commission adopted ``Guideline No. 1'' to assist DCMs
in preparing applications for product approval. See Guideline on
Economic and Public Interest Requirements for Contract Market
Designation, 40 FR 25849 (June 19, 1975). Guideline No. 1 stated
that DCMs should make an affirmative showing that a proposed futures
contract was ``reasonably expected to serve, on more than occasional
basis,'' as a price discovery or hedging tool for commercial users
of the underlying commodity. Subsequently, the Commission revised
Guideline No. 1, publishing it as appendix A to part 5 of the
Commission's regulations. See 47 FR 49832 (Nov. 3, 1982). As revised
in 1982, Guideline No. 1 was updated to address proposed innovations
in the trading of futures contracts, including futures contracts on
financial instruments and on various indexes and cash-settled
futures contracts. Guideline No. 1 was again revised in 1992. 57 FR
3518 (Jan. 30, 1992). The 1992 revisions, among other things,
eliminated the guideline that a DCM provide a further, separate
justification that the proposed contract would be quoted and
disseminated for price basing, or used as a means of hedging against
possible loss through price fluctuation on more than an occasional
basis, noting that ``the economic purpose of a contract is often
implicit, or encapsulated, in the exchange's demonstration that the
terms and conditions of the proposed contract meet the criteria of
the Guideline [No. 1].'' 57 FR at 3521-22, note 9. Finally,
Guideline No. 1 was further revised and streamlined in 1999. 64 FR
29217 (June 1, 1999). When former CEA section 5(7) was repealed by
the CFMA, Guideline No. 1 was withdrawn by the Commission.
---------------------------------------------------------------------------
Although the combined public interest/economic purpose test was
applied by the Commission from 1974 to 2000 and retained the support of
Congress through the various amendments to the CEA during that period,
it was not without criticism.\63\ In 1976, a Commission-established
Advisory Committee endorsed an approach where listing a contract for
trading would not require an affirmative conclusion that the contract
served an economic purpose.\64\ The Advisory Committee noted that
futures contract prices guide economic decisions, and therefore any
actively traded futures contract would provide economic benefits,
unless it is flawed.\65\ By
[[Page 35812]]
contrast, requiring an affirmative showing of economic purpose would be
difficult to apply and, given that futures contracts can undergo
revision, would ``hamper the industry's development and even its
current effectiveness by hampering innovation and adaptation to
change.'' \66\
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\63\ For example, prior to CFTC reauthorization in 1982, some
DCMs proposed a repeal or amendment of the public interest test. See
CFTC Reauthorization: Hearings before the Subcomm. on Conservation,
Credit, and Rural Development of the Comm. on Agriculture, House of
Representatives, 97th Cong., 2d Sess., on H.R. 5447, Feb. 23, 24,
and 25, 1982, at 269 (testimony of Lee Berendt, Comex, that contract
approval ``could be left to free market forces''), 309 (statement of
Clayton Yeutter, Chicago Mercantile Exchange, that ``the marketplace
should be allowed to decide whether a contract proposed by an
exchange is useful and beneficial so long as that contract is not in
violation of any provision of'' the CEA or regulations thereunder),
and 353 (statement of Alvin Donahoo, Minneapolis Grain Exchange,
that the contract approval process ``is very costly and time
consuming for the Exchange''), available at <a href="https://catalog.hathitrust.org/Record/002757479">https://catalog.hathitrust.org/Record/002757479</a>. But Congress did not make
the suggested changes to the CEA.
\64\ See Report of the CFTC Advisory Committee on the Economic
Role of Contract Markets 8 (1976), available at <a href="https://catalog.hathitrust.org/Record/000751730">https://catalog.hathitrust.org/Record/000751730</a>.
\65\ Id. (``The Committee endorses the Commission's demonstrated
approach to this evaluation of the public interest--that a futures
contract should only be denied designation if a finding is made that
the trading would be against the public interest. . . . [F]utures
markets ordinarily provide economic benefits through hedging and
price discovery. Futures prices guide production, storage, and
consumption decisions which help the economy function more smoothly.
. . . Thus, a futures contract which is likely to be actively traded
on an organized futures market can be expected to provide economic
benefits--unless it has a flaw.'').
\66\ The Advisory Committee concluded that ``[i]f a newly drawn
contract succeeds, it can produce substantial benefits for the
economy. Lack of success generally means simply that the contract is
not traded.'' Id.
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The public interest/economic purpose test did not prevent the
Commission from approving an increasing variety of futures contracts in
the 1980s and 1990s. These included futures contracts based on:
interest rates derived from the securitization of mortgages,\67\ rates
of return on Eurodollar deposits,\68\ equity indices,\69\ the consumer
price index,\70\ corporate bond indices,\71\ catastrophe insurance,\72\
barge freight rates,\73\ corn harvest yields in specific regions,\74\
and temperature indices.\75\
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\67\ See 1975 approval of GNMA CDR Mortgage Backed Certificate
futures contract, available at <a href="https://www.cftc.gov/IndustryOversight/IndustryFilings/TradingOrganizationProducts/255">https://www.cftc.gov/IndustryOversight/IndustryFilings/TradingOrganizationProducts/255</a>.
\68\ See 1981 approval of Eurodollar Time Deposit Rate futures
contract, available at <a href="https://www.cftc.gov/IndustryOversight/IndustryFilings/TradingOrganizationProducts/326">https://www.cftc.gov/IndustryOversight/IndustryFilings/TradingOrganizationProducts/326</a>.
\69\ See 1982 approval of Value Line Stock Index futures
contract, available at <a href="https://www.cftc.gov/IndustryOversight/IndustryFilings/TradingOrganizationProducts/455">https://www.cftc.gov/IndustryOversight/IndustryFilings/TradingOrganizationProducts/455</a>.
\70\ See 1985 approval of CPI-U futures contract, available at
<a href="https://www.cftc.gov/IndustryOversight/IndustryFilings/TradingOrganizationProducts/445">https://www.cftc.gov/IndustryOversight/IndustryFilings/TradingOrganizationProducts/445</a>.
\71\ See 1987 approval of Long Term Corporate Bond Index futures
contract, available at <a href="https://www.cftc.gov/IndustryOversight/IndustryFilings/TradingOrganizationProducts/231">https://www.cftc.gov/IndustryOversight/IndustryFilings/TradingOrganizationProducts/231</a>.
\72\ See 1992 approval of Catastrophe Insurance futures
contract, available at <a href="https://www.cftc.gov/IndustryOversight/IndustryFilings/TradingOrganizationProducts/223">https://www.cftc.gov/IndustryOversight/IndustryFilings/TradingOrganizationProducts/223</a>.
\73\ See 1992 approval of Barge Freight Rate Index futures
contract, available at <a href="https://www.cftc.gov/IndustryOversight/IndustryFilings/TradingOrganizationProducts/295">https://www.cftc.gov/IndustryOversight/IndustryFilings/TradingOrganizationProducts/295</a>.
\74\ See 1995 approval of North Dakota Spring Wheat Yield
Insurance futures contract, available at <a href="https://www.cftc.gov/IndustryOversight/IndustryFilings/TradingOrganizationProducts/737">https://www.cftc.gov/IndustryOversight/IndustryFilings/TradingOrganizationProducts/737</a>.
\75\ See 1999 approval of Atlanta Degree Days Index futures
contract, available at <a href="https://www.cftc.gov/IndustryOversight/IndustryFilings/TradingOrganizationProducts/1032">https://www.cftc.gov/IndustryOversight/IndustryFilings/TradingOrganizationProducts/1032</a>.
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The Commission preliminarily believes that this history
demonstrates that the public interest/economic purpose test, despite
its longevity, was controversial and difficult to apply. And experience
showed that the public interest/economic purpose test was of limited
relevance to deciding whether a futures contract should be prohibited,
because no standard for finding that a futures contract does not serve
an economic purpose has ever been applied to prohibit any futures
contract.
As noted above, in 2000 the CFMA repealed CEA section 5(7) and
added CEA section 5c, which among other things introduced a provision
for DCMs to list a contract for trading by providing to the Commission
a certification that the contract complies with the CEA and Commission
regulations.\76\ Following the enactment of the CFMA, the Commission
was no longer required to find that a contract is not contrary to the
public interest before listing of the contract.
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\76\ See 7 U.S.C. 7a-2 (2000 Main Ed.).
---------------------------------------------------------------------------
The Special Rule was added to the CEA by section 745(b) of the
Dodd-Frank Act, which amended the requirements for contract and rule
submission by adopting a new version of CEA section 5c(c).\77\ The only
discussion of the Special Rule in the legislative history of the Dodd-
Frank Act is a short colloquy on the Senate floor between the late
Senator Diane Feinstein and Senator Blanche Lincoln, then-Chair of the
Senate Committee on Agriculture, Nutrition, and Forestry.\78\ In this
colloquy, the two Senators appear to be talking about two different
types of derivatives contracts, and Senator Lincoln (the author of the
Special Rule) never expressly adopts Senator Feinstein's reasoning.
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\77\ 7 U.S.C. 7a-2(c), amended by Dodd-Frank Act section 745(b),
124 Stat. 1376, 1735 (2010). The new section 5c(c) was added
relatively late in the process of drafting the Dodd-Frank Act. It
first appears in the ``Dodd-Lincoln Substitute Amendment'' on April
29, 2010, where its text is the same as in the final law. See
Amendment No. 3739 to S.3217, Calendar No. 349, at 728, available at
<a href="https://www.congress.gov/111/bills/s3217/BILLS-111s3217as.pdf">https://www.congress.gov/111/bills/s3217/BILLS-111s3217as.pdf</a>.
Notably, a new section 5c(c) does not appear in the April 15, 2010
Dodd draft of S.3217, available at <a href="https://www.congress.gov/111/bills/s3217/BILLS-111s3217pcs.pdf">https://www.congress.gov/111/bills/s3217/BILLS-111s3217pcs.pdf</a>. The new section 5c(c) also is not
mentioned in S. Rep. No. 111-176, The Restoring American Financial
Stability Act of 2010 (April 30, 2010), available at <a href="https://www.congress.gov/committee-report/111th-congress/senate-report/176/1?outputFormat=pdf">https://www.congress.gov/committee-report/111th-congress/senate-report/176/1?outputFormat=pdf</a>.
\78\ 156 Cong. Rec. S5906-07 (daily ed. July 15, 2010) (``Event
Contracts''), available at <a href="https://www.congress.gov/111/crec/2010/07/15/CREC-2010-07-15-senate.pdf">https://www.congress.gov/111/crec/2010/07/15/CREC-2010-07-15-senate.pdf</a> (Feinstein-Lincoln Colloquy).
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Senator Feinstein describes a broad swath of speculative
derivatives, saying, ``[s]ince 2000, derivatives traders have bet
billions of dollars on derivatives contracts that served no commercial
purpose at all and often threaten the public interest,'' before
expressing that the Special Rule should authorize the CFTC to
``determine that a contract is a gaming contract if the predominant use
of the contract is speculative as opposed to a hedging or economic
use.'' \79\ The Commission preliminarily believes that Senator
Feinstein is suggesting that the activity of ``gaming'' in the Special
Rule would encompass ``billions of dollars'' of contracts--i.e., the
derivative contracts that she believes contributed to the 2008
crisis.\80\
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\79\ Id.
\80\ Given the precedents for approval of a wide variety of
futures contracts under the public interest/economic purpose test
described above, it is unlikely that this test would have led the
Commission to prohibit the contracts to which Senator Feinstein
refers.
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Senator Lincoln, on the other hand, says the purpose of the Special
Rule is ``to prevent the creation of futures and swaps markets that
would allow citizens to profit from devastating events and also prevent
gambling through futures markets.'' \81\ That is, in contrast to
Senator Feinstein's reference to past contracts, Senator Lincoln looked
at types of event contracts that could potentially be developed in the
future.
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\81\ Feinstein-Lincoln Colloquy.
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The Commission preliminarily believes that the colloquy between
Senators Feinstein and Lincoln does not indicate an intent to revive
the public interest/economic purpose test that applied before the
CFMA.\82\ The ``billions of dollars on derivatives contracts that
served no commercial purpose at all and often threaten the public
interest'' to which Senator Feinstein refers would not be subject to
the Special Rule, and arguably would not be prohibited under the pre-
CFMA test. And Congress was aware of the history surrounding the
economic purpose test but chose not to incorporate it into the text of
the Special Rule. In any case, the Commission notes that a floor
colloquy is not a definitive source of Congressional intent.\83\ For
these reasons, and in addition to the generally limited value of
legislative history,\84\ the Commission preliminarily
[[Page 35813]]
believes that the colloquy is of limited usefulness to understanding
the purpose of the Special Rule. Thus, the Commission preliminarily
believes that the Special Rule contemplates a new type of public
interest test.\85\
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\82\ That is, and for clarity, the Commission preliminarily
believes that the reasoning in a Commission order in 2012
prohibiting certain political event contracts was incorrect. See
section I.C.5.
\83\ See, e.g., NLRB v. SW Gen., Inc., 580 U.S. 288, 307 (2017)
(contradictory statements of two Senators are ``a good example of
why floor statements by individual legislators rank among the least
illuminating forms of legislative history''); Rhode Island v.
Narragansett Indian Tribe, 19 F.3d 685, 699 (1st Cir. 1994) (rule
that individual legislators' statements do not have controlling
effect ``applies fully to the special case of statements by those
members of Congress most intimately associated with a bill: its
floor manager and its sponsors'') (citing Weinberger v. Rossi, 456
U.S. 25, 35 n.15 (1982) (``The contemporaneous remarks of a sponsor
of legislation are certainly not controlling in analyzing
legislative history.'')).
\84\ See, e.g., Exxon Mobil Corp. v. Allapattah Services, Inc.,
545 U.S. 546, 568 (2005) (``Not all extrinsic materials are reliable
sources of insight into legislative understandings, however, and
legislative history in particular is vulnerable[.]''); Conroy v.
Aniskoff, 507 U.S. 511, 519 (1993) (Scalia, J., concurring) (``The
greatest defect of legislative history is its illegitimacy.'').
\85\ See Derivatives Regulation sec. 6.04[C.2.c.iv] (the Special
Rule is ``a different type of public interest standard'' as compared
to the pre-CFMA standard).
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Senator Lincoln continued the colloquy by saying, ``[t]he
Commission needs the power to, and should, prevent derivatives
contracts that are contrary to the public interest because they exist
predominantly to enable gambling through supposed `event contracts.' It
would be quite easy to construct an `event contract' around sporting
events such as the Super Bowl, the Kentucky Derby, and Masters Golf
Tournament. These types of contracts would not serve any real
commercial purpose. Rather, they would be used solely for gambling.''
Senators Feinstein and Lincoln then conclude the colloquy by saying
that the Special Rule ``will also'' authorize the Commission to prevent
trading in event contracts relating to national security events such as
terrorism and war.\86\
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\86\ Feinstein-Lincoln Colloquy.
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The Commission preliminarily believes that the colloquy between
Senators Feinstein and Lincoln establishes that Congress was aware that
event contracts based on ``sporting events such as the Super Bowl, the
Kentucky Derby, and Masters Golf Tournament'' could potentially be
submitted under CEA section 5c(c), but Congress chose not to prohibit
event contracts involving those sorts of events. Instead, the Special
Rule confirms the CFTC's jurisdiction over event contracts and sets out
a process by which the CFTC ``may'' find such event contracts to be
contrary to the public interest. Notably, the statute does not
authorize the Commission to impose a per se prohibition on the listing
of such event contracts independent of a public interest determination.
The Commission has carefully considered the floor statement of
Senator Lincoln, expressing concern that event contracts on sporting
events might ``not serve any real commercial purpose'' and ``would be
used solely for gambling.'' \87\ The Commission preliminarily shares
the underlying concern that the Special Rule should prevent the use of
prediction markets as venues for event contracts that have neither
commercial utility nor informational value. This proposal's framework
operationalizes that concern through contract-specific application of
the public interest factors set forth in proposed Sec. 40.11(a)(5) and
(a)(6), rather than through a categorical prohibition based on the
identity of the underlying event. Former Senator Lincoln's own comment
in response to the Commission's Advance Notice of Proposed Rulemaking
on Prediction Markets supports the appropriateness of this
approach.\88\ Senator Lincoln explained that ``[s]ome contracts
genuinely should be prohibited--direct references to specific acts of
terrorism, named-individual assassinations, military operations,''
while ``[o]ther contracts that help users manage real economic exposure
should not be prohibited.'' \89\ Senator Lincoln specifically
identified ``the Super Bowl'' as an example of a sporting event with
``strong commercial value'' because of its ``major impacts on
advertising, apparel sales and the hospitality industry.'' \90\ The
framework proposed herein reflects these considerations.
---------------------------------------------------------------------------
\87\ Id.
\88\ Letter from Blanche Lincoln, Lincoln Policy Group (Apr. 30,
2026). The letter is available on the Commission's website. See
infra note 155.
\89\ Id.
\90\ Id.
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C. Commission History With Prediction Markets
1. Staff Actions
The Commission's Division of Market Oversight has issued staff no-
action positions which provide that, subject to specified terms, the
Division will not recommend to the Commission enforcement action with
respect to two small-scale, not-for-profit markets that offer trading
in political and economic indicator event contracts for educational and
research purposes.
The first no-action position, issued in 1992, involves the Iowa
Electronic Markets (IEM), an online electronic trading facility ``where
contract payoffs are based on real-world events such as political
outcomes, companies' earnings per share (EPS), and stock price returns.
The market is operated by University of Iowa Henry B. Tippie College of
Business faculty as an educational and research project.'' \91\ The
staff no-action position limits the number of traders who can access
the market at any one time and the maximum amount any single trader can
risk.\92\
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\91\ See IEM home page, available at <a href="https://iem.uiowa.edu/iem/">https://iem.uiowa.edu/iem/</a>
(last visited May 18, 2026).
\92\ See CFTC Staff Letter No. 93-66 issued to the University of
Iowa (June 18, 1993), available at <a href="https://www.cftc.gov/sites/default/files/idc/groups/public/@lrlettergeneral/documents/letter/93-66.pdf">https://www.cftc.gov/sites/default/files/idc/groups/public/@lrlettergeneral/documents/letter/93-66.pdf</a>. This no-action position superseded the operative terms of
a more limited no-action position issued in 1992.
The CFTC staff no-action position did not extend to EPS or stock
price returns. The University of Iowa did not request a no-action
position as to stock price returns, and the CFTC staff referred the
matter of EPS to the SEC staff. See CFTC Staff Letter No. 93-66 at
5. See also Letter from Erik Sirri, Director of Trading and Markets,
SEC (Sept. 3, 2008), available at <a href="https://www.cftc.gov/sites/default/files/idc/groups/public/@lrfederalregister/documents/frcomment/08-004c028.pdf">https://www.cftc.gov/sites/default/files/idc/groups/public/@lrfederalregister/documents/frcomment/08-004c028.pdf</a>.
_____________________________________-
The other no-action position, issued in 2014, involves an online
electronic market for political and economic indicator event contracts
called <a href="http://PredictIt.org">PredictIt.org</a>, ``a project of Prediction Market Research
Consortium, a not-for-profit organization, for educational purposes.''
\93\ The staff no-action position limits the maximum amount any single
trader can risk, and states that the market ``is restricted to
political events, such as contracts related to the outcomes of
elections and other significant political questions not involving war,
terrorism, or assassination,'' and also economic indicator
contracts.\94\
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\93\ See ``What is PredictIt?'' available at <a href="https://www.predictit.org/support/what-is-predictit">https://www.predictit.org/support/what-is-predictit</a> (last visited May 18,
2026).
\94\ See CFTC Staff Letter No. 25-20 issued to Victoria
University of Wellington, New Zealand (Victoria University) and the
Prediction Market Research Consortium, Inc. (PMRC) (Jul. 14, 2025)
at 2, available at <a href="https://www.cftc.gov/csl/25-20/download">https://www.cftc.gov/csl/25-20/download</a>. The 2025
letter amended CFTC Staff Letter 14-130 issued to Victoria
University (Oct. 29, 2014), available at <a href="https://www.cftc.gov/csl/14-130/download">https://www.cftc.gov/csl/14-130/download</a>, to allow Victoria University to transfer operation
of the market to PMRC, a US-based not-for-profit corporation.
---------------------------------------------------------------------------
2. 2008 Concept Release
Prompted by the Commission's receipt of a substantial number of
requests for guidance related to application of the CEA to prediction
markets, in 2008 the Commission published a concept release (2008
Concept Release) requesting input from interested persons, and those
with expertise, on the appropriate regulatory treatment of prediction
markets.\95\ In the 2008 Concept Release, the Commission acknowledged
that event contracts may not have a direct price basing or hedging
purpose; rather, it described event contracts as ``information
aggregation vehicles.'' \96\ Specifically, the Commission stated that
``[i]n general, event contracts are neither dependent on, nor do they
necessarily relate to, market prices or broad-based measures of
economic or commercial activity.'' \97\ The Commission elaborated as
follows:
[[Page 35814]]
``Since 2005, the Commission's staff has received a substantial number
of requests for guidance on the propriety of offering and trading
financial agreements that may primarily function as information
aggregation vehicles. These event contracts generally take the form of
financial agreements linked to eventualities or measures that neither
derive from, nor correlate with, market prices or broad economic or
commercial measures.'' \98\
---------------------------------------------------------------------------
\95\ 2008 Concept Release, supra note 1, 73 FR at 25670, 25673.
\96\ Id. at 25670.
\97\ Id. at 25669.
\98\ Id. at 25670. More specifically, the 2008 Concept Release
noted that: (1) event contracts based on environmental measures
(such as the volatility of precipitation or temperature levels) or
environmental events (such as a specific type of storm within an
identifiable geographic region) will ``not predictably correlate to
commodity market prices or other measures of broad economic or
commercial activity;'' and (2) event contracts based on general
measures (such as the number of hours that U.S. residents spend in
traffic annually or the vote-share of a particular candidate) ``do
not quantify the rate, value, or level of any commercial or
environmental activity,'' and that contracts on general events (such
as whether a Constitutional amendment will be adopted) ``do not
reflect the occurrence of any commercial or environmental event.''
Id. at 25671.
---------------------------------------------------------------------------
Because event contracts differ from other derivatives in this
regard, the 2008 Concept Release sought comment on ``[w]hat public
interests are served by event contracts that are designed and will
principally be traded for information aggregation purposes and not for
commercial risk management or pricing purposes?'' \99\
---------------------------------------------------------------------------
\99\ Id. at 25673. The Commission received 31 comments in
response to the 2008 Concept Release but ultimately did not take
further action at that time. The comments are available at <a href="https://www.cftc.gov/LawRegulation/PublicComments/08-004.html">https://www.cftc.gov/LawRegulation/PublicComments/08-004.html</a>.
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3. 2010 Approval of Event Contracts on Box Office Receipts
In March 2010, prior to enactment of the Dodd-Frank Act, Media
Derivatives, Inc. (MDEX), a DCM, requested prior Commission approval
under CEA section 5c(c)(2) and Sec. 40.3 of Opening Weekend Motion
Picture Revenue futures and binary option contracts on the motion
picture ``Takers.'' \100\ In June 2010, the Commission approved the
contracts, finding that ``the contracts are based on commodities, are
not readily susceptible to manipulation and serve an economic hedging
purpose.'' \101\
---------------------------------------------------------------------------
\100\ See Statement of the Commission approving certain MDEX
contracts (June 14, 2010) (MDEX Statement) at 1, available at
<a href="https://www.cftc.gov/idc/groups/public/@otherif/documents/ifdocs/mdexcommissionstatement061410.pdf">https://www.cftc.gov/idc/groups/public/@otherif/documents/ifdocs/mdexcommissionstatement061410.pdf</a>. MDEX later changed its name to
Trend Exchange, Inc.
Two weeks after approving the MDEX futures and binary option
contracts, the Commission also approved an application by the Cantor
Futures Exchange to list a futures contract on Domestic Box Office
Receipts of the motion picture ``The Expendables.'' The approval is
available at <a href="https://www.cftc.gov/IndustryOversight/IndustryFilings/TradingOrganizationProducts/19296">https://www.cftc.gov/IndustryOversight/IndustryFilings/TradingOrganizationProducts/19296</a>.
\101\ MDEX Statement at 2. Regarding an economic hedging
purpose, the Commission noted that it had not found that a contract
is required to serve an economic hedging purpose in order to be
approved. Rather, the Commission staff undertook a review of the
contracts' economic hedging purpose due to concerns raised by the
public about the contracts. Id. at note 2.
---------------------------------------------------------------------------
In finding that box office receipts are a commodity, the Commission
reasoned that DCMs list for trading many contracts ``where the
underlying commodity is a non-price-based measure of an economic
activity, commercial activity or environmental event.'' \102\ Moreover,
where ``there is no cash market for the commodity, but the commodity
reflects some measure of economic activity or event that can be used
for a hedging purpose when incorporated into a futures or options
contract[,] . . . [t]he Commission has found that such commodity is a
right or interest'' within the CEA definition of the term
``commodity.'' \103\ The Commission also noted that while the ``term
`event' contract has no meaning under the [CEA]'' the ``statutory
definition of `commodity' does not suggest that an `event' cannot
underlie a futures or options contract.'' \104\
---------------------------------------------------------------------------
\102\ Id. at 3.
\103\ Id. The Commission cited as examples ``Company-Specific
Earnings Per Share; Eurozone Index of Consumer Prices; Consumer
Price Index; Nonfarm Payrolls; Retail Sales Data; Unemployment
Claims; Company-Specific Merger and Acquisitions; State-Specific and
National Crop Yields; Location-Specific Heating and Cooling Degree
Days; Location-Specific Snowfall; and Regional Wind Indices.'' Id.
\104\ Id.
---------------------------------------------------------------------------
In finding that the contracts are not readily susceptible to
manipulation, the Commission noted that the data on box office receipts
underlying the contracts would be collected by an independent third
party with an incentive to maintain accurate data.\105\ In order to
address fair and equitable trading and false reporting concerns, MDEX's
rules provided that entities and individuals that hold a large position
in contracts on a particular film's box office receipts and also
control the film's marketing budget, release date or opening screen
number must inform MDEX regarding such decisions.\106\ Also, movie
studios and distributors that trade contracts on their films' box
office receipts were required to adopt and enforce firewall procedures,
and their employees involved with compiling box office receipt data
were prohibited from trading.\107\
---------------------------------------------------------------------------
\105\ Id. at 5-7.
\106\ Id. at 7.
\107\ Id. at 8.
---------------------------------------------------------------------------
Noting that the earlier economic purpose test had been repealed by
the CFMA, the Commission did not apply an economic purpose test to the
contracts on movie box office receipts. However, ``in light of the
comments raised by the studios, the Commission evaluated MDEX's
proposed contracts to determine whether they would provide some
reasonable means for managing risks associated with box office
revenues'' and ``found that the contracts can perform hedging and price
discovery purposes'' because movie industry ``profit and losses have a
clear and direct relationship to box office revenues.'' \108\
---------------------------------------------------------------------------
\108\ Id. at 10.
---------------------------------------------------------------------------
Even before the Commission had approved the futures and binary
option contracts on box office receipts that MDEX had submitted, MDEX's
application had drawn the attention of Congress.\109\ The Dodd-Frank
Act, adopted one month after the Commission approved the contracts,
amended the CEA definition of the term ``commodity'' to explicitly
exclude ``motion picture box office receipts (or any index, measure,
value, or data related to such receipts).'' \110\ Congress thus
recognized that the CFTC correctly determined these to be a commodity
and that the economic purpose test was not required. Accordingly, the
MDEX box office receipts contracts were never traded.
---------------------------------------------------------------------------
\109\ See Hearing to Review Proposals to Establish Exchanges
Trading ``Movie Futures'': Hearing before the Subcomm. on Gen. Farm
Commodities and Risk Mgmt. of the H. Comm. on Agric., 111th Cong.,
2d Sess. (2010), available at <a href="https://www.govinfo.gov/content/pkg/CHRG-111hhrg56431/html/CHRG-111hhrg56431.htm">https://www.govinfo.gov/content/pkg/CHRG-111hhrg56431/html/CHRG-111hhrg56431.htm</a>.
\110\ CEA sec. 1a(9), 7 U.S.C. 1a(9). The Dodd-Frank Act also
amended 7 U.S.C. 13-1 to prohibit DCMs from listing futures
contracts based on motion picture box office receipts (or any index,
measure, value, or data related to such receipts).
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4. 2011 Adoption of Sec. 40.11
In 2011, the Commission adopted Sec. 40.11 to implement the
Special Rule as part of broader changes to the Commission's part 40
regulations.\111\
[[Page 35815]]
Rule 40.11(a)(l) provides that a registered entity shall not list for
trading or accept for clearing on or through the registered entity an
agreement, contract, transaction, or swap based upon ``an excluded
commodity, as defined in Section 1a(19)(iv) of the Act, that involves,
relates to, or references terrorism, assassination, war, gaming, or an
activity that is unlawful under any State or Federal law.'' \112\
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\111\ Part 40 of the Commission's regulations, more generally,
implements the contract and rule submission requirements for
registered entities set forth in CEA sec. 5c(c). For example, Sec.
40.2 sets forth the general process by which a DCM or SEF may list a
new derivative contract for trading by providing the Commission with
a written certification--a ``self-certification''--that the contract
complies with the CEA, including the CFTC's regulations thereunder.
See also CEA sec. 5c(c)(1), 7 U.S.C. 7a-2(c)(1). The Commission must
receive the DCM's or SEF's self-certified submission at least one
business day before the contract's listing. 17 CFR 40.2(a)(2). Rule
40.3 sets forth the general process by which a DCM or SEF may elect
voluntarily to seek prior Commission approval of a derivative
contract that the DCM or SEF seeks to list for trading. See also CEA
sec. 5c(c)(4)-(5), 7 U.S.C. 7a-2(c)(4)-(5). Amendments to an
existing derivative contract also must be submitted to the
Commission either by way of self-certification or for prior
Commission approval. 17 CFR 40.5, 40.6.
\112\ 17 CFR 40.11(a)(1). Notably, the current text of Sec.
40.11(a)(1) does not explicitly refer to a finding that the contract
is contrary to the public interest.
The Special Rule applies with respect to agreements, contracts,
transactions, or swaps in excluded commodities that are based upon
the occurrence, extent of an occurrence, or contingency (other than
a change in the price, rate, value, or levels of a commodity
described in section 1a(2)(i)). There is no ``section 1a(2)(i)'' in
the CEA, and the Commission believes the reference to this provision
in the Special Rule is a typographical or drafting error. In
adopting Sec. 40.11(a)(1) and (2), as well as Sec. 40.11(c), the
Commission interpreted the Special rule to apply with respect to the
excluded commodities defined in CEA sec. 1a(19)(iv). See discussion
in section II.B., infra.
---------------------------------------------------------------------------
Rule 40.11(a)(2) provides that a registered entity shall not list
for trading or accept for clearing on or through the registered entity
an agreement, contract, transaction, or swap based upon an excluded
commodity, as defined in CEA section 1a(19)(iv), that involves, relates
to, or references an activity that is similar to an activity enumerated
in Sec. 40.11(a)(1), and that the Commission determines, by rule or
regulation, to be contrary to the public interest.\113\ To date, the
Commission has not made any such determinations regarding any similar
activity.
---------------------------------------------------------------------------
\113\ 17 CFR 40.11(a)(2).
---------------------------------------------------------------------------
Pursuant to Sec. 40.11(c), when a contract submitted to the
Commission by a registered entity may involve, relate to, or reference
an activity enumerated in Sec. 40.11(a)(1) or (2), the Commission is
authorized to commence a 90-day review of the contract.\114\ If the
Commission opts to undertake a public interest review, the Commission
must issue an order approving or disapproving the contract by the end
of the 90-day review period or, if applicable, at the conclusion of any
extended period agreed to or requested by the registered entity.\115\
Rule 40.11(c)(1) requires the Commission to request that the registered
entity suspend the listing or trading of the contract during the 90-day
review period.\116\ The Commission also must post on its website a
notification of the intent to carry out a 90-day review.\117\
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\114\ 17 CFR 40.11(c). Rule 40.11(c) states that the 90-day
review period shall commence from the date the Commission notifies
the registered entity of a potential violation of Sec. 40.11(a).
\115\ 17 CFR 40.11(c)(2).
\116\ 17 CFR 40.11(c)(1).
\117\ Id.
---------------------------------------------------------------------------
The adopting release for Sec. 40.11 does not specifically discuss
the public interest standard in the Special Rule. It bases Sec. 40.11
on the Dodd-Frank Act's amendment of CEA section 5c to include the
Special Rule, stating that ``the Commission has determined to prohibit
contracts based upon the activities enumerated in Section 745 of the
Dodd-Frank Act and to consider individual product submissions on a
case-by-case basis under Sec. 40.2 or Sec. 40.3.'' \118\
---------------------------------------------------------------------------
\118\ Provisions Common to Registered Entities, 76 FR 44776,
44785 (July 27, 2011).
---------------------------------------------------------------------------
The Commission also did not define any of the Enumerated
Activities.\119\ The Commission acknowledged, in the adopting release,
a comment on the rule proposal that stated that the term ``gaming,'' in
particular, should be further defined in order to enhance clarity
regarding the scope of the prohibition set forth in Sec.
40.11(a)(1).\120\ The Commission expressed agreement with the interest
to further define ``gaming'' for purposes of the prohibition, and noted
that the 2008 Concept Release discussed the issue.\121\ The Commission
stated that it might issue a future event contracts rulemaking that,
among other things, addressed the appropriate treatment of event
contracts involving gaming.\122\
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\119\ The Commission noted that a registered entity could
receive a definitive resolution of any questions concerning the
applicability of Sec. 40.11(a)(1) by submitting a particular
contract for Commission approval under Sec. 40.3: if the submitted
contract was approved by the Commission, the registered entity would
have assurance that the Commission had reviewed and did not object
to the submission based on the prohibitions in Sec. 40.11(a). Id.
at 44785-86. The Commission noted that, alternatively, a registered
entity could self-certify a contract under Sec. 40.2 and, if the
Commission determined during its review of the contract ``that the
submission may violate the prohibitions in Sec. 40.11(a)(1)-(2),
the Commission may request that the registered entity suspend the
trading or clearing of the contract pending the completion of a 90-
day . . . review.'' Id. at 44786. The Commission stated that, upon
completion of that review, the Commission would be required to issue
an order finding either that the contract violated, or did not
violate, the prohibitions in Sec. 40.11(a)(1)-(2). Id.
\120\ Id. at 44785.
\121\ Id.
\122\ Id.
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The Commission has consistently applied Sec. 40.11 to operate a
discretionary review framework rather than a self-executing per se
prohibition, because the opposite interpretation would violate the
statute.\123\ As discussed in the next section and further below, when
the Commission applied the Special Rule and Sec. 40.11 to prohibit
certain event contracts, the Commission made an explicit, affirmative
finding that the specific event contracts were contrary to the public
interest; it did not simply apply a self-executing per se
prohibition.\124\
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\123\ See supra text accompanying notes 55 to 56.
\124\ See infra sections I.C.5. and I.C.7.
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The 2011 adopting release contemplated that registered entities
could receive a definitive resolution of any questions concerning the
applicability of Sec. 40.11(a)(1) by submitting a contract for
Commission approval under Sec. 40.3, and that, upon completion of a
Sec. 40.11(c) review, the Commission would be required to issue an
order finding either that the contract violated, or did not violate,
the prohibitions in Sec. 40.11(a)(1)-(2). The text of Sec. 40.11(c)
reflects the same understanding. It provides for review of contracts
that ``may involve'' an enumerated activity, which presupposes that
whether a particular contract involves such an activity is a question
the Commission resolves through review rather than a determination made
on the face of Sec. 40.11(a)(1). This understanding is necessary to
keep Sec. 40.11(a) within the bounds of the Commission's statutory
authority. The Special Rule provides that the Commission ``may
determine'' that an event contract involving an Enumerated Activity is
contrary to the public interest. That language confers discretion to
determine that a particular event contract is, or is not, contrary to
the public interest. Interpreting that ``may'' as a per se prohibition
would conflict with the requirements of the statute.
5. 2012 Nadex Disapproval
In 2012, the Commission commenced a 90-day review, under Sec.
40.11(c), of certain event contracts on election outcomes (the Nadex
Contracts) that had been self-certified by the North American
Derivatives Exchange (Nadex).\125\ On April 2, 2012, the Commission
issued an order (the Nadex Order) prohibiting the contracts from
[[Page 35816]]
being listed or made available for clearing or trading, finding that
the contracts involved the Enumerated Activity of gaming and were
contrary to the public interest.\126\
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\125\ See CFTC Press Release No. 6163-12, CFTC Commences 90-day
Review of NADEX's Proposed Political Event Derivatives Contracts
(Jan. 5, 2012), available at <a href="https://www.cftc.gov/PressRoom/PressReleases/6163-12">https://www.cftc.gov/PressRoom/PressReleases/6163-12</a>. Nadex self-certified cash-settled, binary
contracts on whether there would be a Democratic majority in the
U.S. House of Representatives (House); whether there would be a
Republican majority in the House; whether there would be a
Democratic majority in the U.S. Senate (Senate); and whether there
would be a Republican majority in the Senate. The contracts settled
based on whether the named party held the majority of seats in the
identified chamber of Congress on the expiration date. Nadex also
self-certified ten cash-settled, binary contracts on the upcoming
Presidential election. Each contract was based on one of the leading
candidates for President and paid according to whether that
candidate won the Presidency.
\126\ See Order Prohibiting the Listing or Trading of Political
Event Contracts (Apr. 2, 2012), available at <a href="https://www.cftc.gov/stellent/groups/public/@rulesandproducts/documents/ifdocs/nadexorder040212.pdf">https://www.cftc.gov/stellent/groups/public/@rulesandproducts/documents/ifdocs/nadexorder040212.pdf</a>.
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In the Nadex Order, the Commission interpreted the Special Rule.
First, the Commission stated that the legislative history of the
Special Rule ``indicates that the relevant question for the Commission
in determining whether a contract involves one of the activities
enumerated in [the Special Rule] is whether the contract, considered as
a whole, involves one of those activities.'' \127\ Second, the
Commission said that the legislative history indicated that Congress
intended ``to restore, for the purposes of that provision, the economic
purpose test that was used by the Commission to determine whether a
contract was contrary to the public interest'' prior to the CFMA.\128\
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\127\ Nadex Order at 2.
\128\ Id. at 3.
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The Commission also analyzed the Nadex Contracts. The Commission
reasoned that the terms ``gaming''--which it equated with the term
``gambling''--is linked to betting on elections which, in turn, is
analogous to taking a position in the Nadex Contracts, and that the
Nadex Contracts are premised on the outcome of a contest between
electoral candidates.\129\ The Commission also stated that the
unpredictability of the specific economic consequences of an election
mean that the Nadex Contracts cannot reasonably be expected to be used
for hedging and that the Nadex Contracts have no price basing
utility.\130\ Last, the Commission believed that the Nadex Contracts
could be used in a way that could potentially adversely affect the
integrity of elections.\131\ On these bases, the Commission found that
the Nadex Contracts involve gaming and are contrary to the public
interest, as contemplated by the Special Rule.\132\
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\129\ Id.
\130\ Id.
\131\ Id. at 4.
\132\ Id.
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6. 2021 ErisX Withdrawal
On December 15, 2020, the CFTC received a self-certification filed
by ErisX under Sec. 40.2 for the listing of event contracts based on
National Football League (NFL) games which would track the moneyline,
point spread, and total points sports bets offered by sports bookmakers
(NFL Contracts).\133\ ErisX proposed to limit trading in the NFL
Contracts to certain eligible contract participants with a commercial
connection to NFL games.\134\
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\133\ ErisX, CFTC Regulation 40.2(a) Certification (Dec. 14,
2020) (ErisX Certification), available at <a href="https://www.cftc.gov/sites/default/files/filings/ptc/20/12/ptc121520erisdcmdcm005.pdf">https://www.cftc.gov/sites/default/files/filings/ptc/20/12/ptc121520erisdcmdcm005.pdf</a>.
The ErisX Certification described the NFL Contracts as event
contracts, and like many event contracts the NFL Contracts had a
binary payoff structure. Id. at 4-6.
\134\ Id. at 4.
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According to ErisX, the NFL Contracts would ``permit Licensed
Sportsbooks to manage commercial risk by hedging their exposure [to
imbalances in their books],'' and are ``tailored to address the unique
risks of Licensed Sportsbooks.'' \135\ ErisX also claimed that stadium
owners and vendors would be able ``to hedge the commercial risk
associated with lower game attendance or fewer home games resulting
from poor performance of the team that plays at the sports stadium or
arena.'' \136\
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\135\ Id. at 6.
\136\ Id.
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On December 23, 2020, the Commission informed ErisX that it had
determined that the NFL Contracts `` `may involve, relate to, or
reference an activity enumerated in [Rule] 40.11(a)' including but not
limited to `gaming, or an activity that is unlawful under any Federal
or State law' '' and it would begin a review under Sec. 40.11(c).\137\
On March 22, 2021, one day before the expiration of the 90-day review
period, ErisX withdrew its certification.\138\ One Commissioner later
said in a statement that the Commission staff had prepared a draft
order that would have prohibited the NFL Contracts because they
involved gaming and were contrary to the public interest.\139\
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\137\ Letter from Christopher Kirkpatrick, Secretary of the
Commission, to Chief Executive Officer, ErisX (Dec. 23, 2020),
available at <a href="https://www.cftc.gov/sites/default/files/filings/documents/2020/orgdcmerissignedletter201223.pdf">https://www.cftc.gov/sites/default/files/filings/documents/2020/orgdcmerissignedletter201223.pdf</a>. The CFTC requested
that ErisX suspend any listing and trading of the contracts during
the pendency of a 90-day review period beginning on that date.
The CFTC sought public comments on a number of questions related
to the certification and received 25 comment letters in response.
See Questions on the Eris Exchange, LLC (ErisX) RSBIX NFL Futures
Contracts for Public Comment (Dec. 23, 2020), available at <a href="https://www.cftc.gov/sites/default/files/filings/documents/2020/orgdcmerisquestionsre201223.pdf">https://www.cftc.gov/sites/default/files/filings/documents/2020/orgdcmerisquestionsre201223.pdf</a>. Comments in response are available
at <a href="https://comments.cftc.gov/PublicComments/CommentList.aspx?id=5203">https://comments.cftc.gov/PublicComments/CommentList.aspx?id=5203</a>.
\138\ See notation of withdrawal, available at <a href="https://www.cftc.gov/IndustryOversight/IndustryFilings/TradingOrganizationProducts/45226">https://www.cftc.gov/IndustryOversight/IndustryFilings/TradingOrganizationProducts/45226</a>.
\139\ See Statement of Commissioner Brian D. Quintenz on ErisX
RSBIX NFL Contracts and Certain Event Contracts (Mar. 25, 2021),
available at <a href="https://www.cftc.gov/PressRoom/SpeechesTestimony/quintenzstatement032521">https://www.cftc.gov/PressRoom/SpeechesTestimony/quintenzstatement032521</a>. See also Statement of Commissioner Dan M.
Berkovitz Related to Review of ErisX Certification of NFL Futures
Contracts (Apr. 7, 2021), available at <a href="https://www.cftc.gov/PressRoom/SpeechesTestimony/berkovitzstatement040721">https://www.cftc.gov/PressRoom/SpeechesTestimony/berkovitzstatement040721</a>.
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7. 2023 Kalshi Disapproval and Court Decision
In June 2023, KalshiEX LLC (Kalshi) filed a certification of
congressional control political event contracts (the Kalshi Contracts)
under Sec. 40.2.\140\ The Commission determined that the Kalshi
Contracts may involve, relate to, or reference an Enumerated Activity,
requested that Kalshi suspend the listing and trading of the Kalshi
Contracts during the review period, and opened a public comment
period.\141\ On September 22, 2023, the Commission issued an order (the
Kalshi Order) prohibiting the Kalshi Contracts from being listed or
made available for trading or clearing, finding that the contracts
involved the Enumerated Activities of gaming and activity that is
unlawful under State law, and were contrary to the public
interest.\142\
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\140\ See Order In the Matter of the Certification by KalshiEX
LLC of Derivatives Contracts with Respect to Political Control of
the United States Senate and United States House of Representatives
(Sept. 22, 2023) available at <a href="https://www.cftc.gov/sites/default/files/filings/documents/2023/orgkexkalshiordersig230922.pdf">https://www.cftc.gov/sites/default/files/filings/documents/2023/orgkexkalshiordersig230922.pdf</a> (Kalshi
Order). The Congressional Control Contracts are cash-settled, binary
(yes/no) contracts based on the question: ``Will <chamber of
Congress> be controlled by <party> for <term>?'' Id. at 2.
\141\ Id. at 1.
\142\ Id. at 23.
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Similar to the Nadex Order, the Kalshi Order interpreted the
Special Rule. The Commission found that the ``choice of the broader
term `involve' means that [the Special Rule] can capture both contracts
whose underlying activity is one of the Enumerated Activities, and
contracts with a different connection to one of the Enumerated
Activities,'' and that ``the question for the Commission in determining
whether a contract `involves' one of the [Enumerated Activities] . . .
is whether the contract, considered as a whole, involves one of those
activities.'' \143\
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\143\ Id. at 7 (emphasis in original).
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The Commission also found that ``gaming'' includes wagering on
elections, reasoning that (i) ``gaming'' means gambling; (ii) gambling
involves ``a person staking something of value upon the outcome of a
game, contest, or contingent event;'' and (iii) to wager on elections
is to ``stake something of value upon the outcome of contests of
others.'' \144\ Similarly, the Commission found that the Kalshi
Contracts involved activity that is unlawful under State law because
taking a position in the Kalshi Contracts would constitute wagering on
[[Page 35817]]
election results, which is contrary to many State laws.\145\
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\144\ Id. at 8-9.
\145\ Id. at 11-13.
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Regarding the public interest test under the Special Rule, the
Commission found that the legislative history of the Special Rule
indicates Congressional intent for the Commission to consider, among
other factors, a form of the economic purpose test that was applied
prior to the CFMA.\146\ The Commission also found that while control of
a chamber of Congress may have economic effects, it does not, in and of
itself, have sufficiently direct economic consequences such that the
Kalshi Contracts have hedging utility, and the hedging utility of the
Kalshi Contracts is also undermined by their binary payoff structure
and infrequent settlement every two years.\147\
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\146\ Id. at 13 (citing the Feinstein-Lincoln Colloquy and CEA
sec. 3, 7 U.S.C. 5).
\147\ Kalshi Order at 15-18. For similar reasons, the Commission
also found that the Kalshi Contracts do not serve a price-basing
function. Id. at 18-19.
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Last, the Commission found that the Kalshi Contracts ``could
potentially be used in ways that would have an adverse effect on the
integrity of elections, or the perception of integrity of elections,''
and ``conduct designed to artificially affect the electoral process
could also, intentionally or otherwise, manipulate the market in the
[Kalshi Contracts], or that [that market] . . . could be manipulated to
influence elections or electoral perceptions. In particular, . . . [the
Kalshi Contracts] could incentivize the spread of misinformation by
individuals or groups seeking to influence perceptions of a political
party or a party candidate's success.'' \148\
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\148\ Id. at 20-22. The Commission also noted that it was not
equipped or well-suited to investigate election-related activities.
Id. at 22-23.
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Following issuance of the Kalshi Order, Kalshi filed suit
challenging the Commission's decision as arbitrary, capricious, and
otherwise not in accordance with the law under the Administrative
Procedure Act (APA).\149\ In September 2024, the Honorable Jia M. Cobb
of the U.S. District Court for the District of Columbia (D.D.C.)
granted summary judgment to Kalshi and vacated the Kalshi Order, ruling
that the Kalshi Contracts ``d[id] not involve activity that is unlawful
under any Federal or State law, nor do they involve gaming.'' \150\ In
May 2025, the CFTC's motion to dismiss its appeal of the District
Court's decision was granted and the case was closed.\151\
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\149\ See KalshiEX LLC v. CFTC, No. 23-cv-3257, 2024 WL 4164694,
2024 U.S. Dist. LEXIS 163925, at *18 (D.D.C. Sept. 12, 2024), appeal
dismissed by KalshiEX LLC v. CFTC, No. 24-5205, 2025 U.S. App. LEXIS
11094 (D.C. Cir. May 7, 2025).
\150\ Id. at *39. The court did not consider whether the Kalshi
Contracts were contrary to the public interest. Id.
\151\ See KalshiEX LLC v. CFTC, No. 24-5205, 2025 U.S. App.
LEXIS 11094 (D.C. Cir. May 7, 2025).
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8. 2024 Event Contract Proposal and 2026 Withdrawal
In 2024, the Commission proposed rules to further specify the types
of event contracts that fall within the scope of CEA section
5c(c)(5)(C) and are contrary to the public interest.\152\ In 2026, the
Commission withdrew the proposed rules to reconsider them ``in light of
various forms of state regulatory actions and litigation concerning the
Commission's exclusive jurisdiction over event contract derivatives
listed on [DCMs] and the proper application of the swap and excluded
commodity definitions under the [CEA].'' \153\
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\152\ Event Contracts; Proposed Rule, 89 FR 48968 (June 10,
2024).
\153\ Event Contracts; Withdrawal of Proposed Regulatory Action,
91 FR 5386 (Feb. 6, 2026).
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9. 2026 ANPRM
To assist the Commission in considering issues, and potentially
adopting regulations, related to prediction markets the Commission
published an advance notice of proposed rulemaking (ANPRM) in the
Federal Register on March 16, 2026.\154\ The Commission explained that
the ANPRM was issued in light of the recent increase in the number of
applications for DCM registration, largely from entities that are
interested primarily, or exclusively, in operating prediction markets,
and to seek information about significant issues that have come to
light since the 2024 proposal. The comment period for the ANPRM closed
on April 30, 2026.
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\154\ See Prediction Markets; Advance Notice of Proposed
Rulemaking, 91 FR 12516 (Mar. 16, 2026).
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In response to the ANPRM, the Commission received approximately
3,500 comments addressing issues relevant to prediction markets and
potential rulemakings from a wide range of commenters.\155\ Of these,
approximately 300 submissions provided detailed comments and
recommendations. The remaining submissions were either duplicative of
points made in other submissions or non-substantive. The comments came
from individuals, prediction markets and firms applying for designation
as a prediction market, firms using event contracts, trade
associations, public advocacy organizations, academics and researchers,
members of Congress, federal agencies, tribal governments, state
governments and others. Relevant commenter feedback is interwoven
throughout this proposed rule.
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\155\ Copies of all comments received by the CFTC on the ANPRM
are available on the CFTC's website, located at <a href="https://comments.cftc.gov/PublicComments/CommentList.aspx?id=7654">https://comments.cftc.gov/PublicComments/CommentList.aspx?id=7654</a>.
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The comments expressed varying views on a wide variety of topics,
including the proper scope of the Special Rule, whether Sec. 40.11
properly effects the Special Rule, the scope of activities that are
encompassed in the Enumerated Activities, when an event contract should
be considered to ``involve'' an Enumerated Activity, the role that an
economic purpose test should play in the Special Rule, and the public
interest factors that the Commission should consider in applying the
Special Rule. The Commission has reviewed the comments received, and
the staff of the Commission has met with market participants and other
interested parties to discuss prediction markets.\156\
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\156\ Information about meetings that CFTC staff have had with
outside organizations regarding prediction markets is included in
the list of comments on the ANPRM at the link in the previous note.
The views expressed in the comments in response to the ANPRM and at
such meetings are collectively referred to as the views of
``commenters.''
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II. Proposed Amendments to Part 40
The statutory text of the Special Rule provides that ``[i]n
connection with the listing'' of certain event contracts, ``the
Commission may determine'' that the event contracts are contrary to the
public interest.\157\ The Commission preliminarily interprets this
provision to mean that the Commission's public interest determination
must follow the submission of one or more event contracts for listing.
The Commission also preliminarily believes that it would be helpful for
prediction markets and the general public to know which factors the
Commission will apply in determining whether particular event contracts
are subject to the Special Rule, and the factors it will apply in its
public interest determination. Therefore, the Commission is proposing
to amend part 40 to, among other things, lay out these factors and the
process by which the Commission may determine that specified event
contracts are contrary to the public interest (the Proposal).
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\157\ CEA sec. 5c(c)(5)(C)(i), 7 U.S.C. 7a-2(c)(5)(C)(i).
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As discussed below, the Commission preliminarily believes that the
Proposal's explanation of the factors the Commission would apply in its
public interest determinations would support efforts by prediction
markets to ensure compliance with the CEA and to make more informed
decisions about event contract design, thereby supporting responsible
innovation. By clearly identifying the factors the Commission
[[Page 35818]]
will apply in its public interest determination, the Proposal is also
expected to reduce the frequency of submissions that raise potential
public interest concerns, improving the efficiency of Commission and
staff resources by reducing the need to conduct individualized event
contract reviews.\158\ Greater clarity may also help prediction markets
avoid expending resources on event contracts that the Commission may
ultimately determine cannot be listed or cleared.
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\158\ Due to the high volume of event contract submissions and
the wide potential scope of the public interest review, the
Commission has attempted to propose factors that are clear and
direct, along with various illustrative examples. The Commission
preliminarily believes that prediction markets will be guided by the
factors, and by any early determinations that event contracts are
contrary to the public interest, in understanding the boundaries
around which event contracts may be listed for trading and thereby
limit the number of public interest reviews.
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The Commission acknowledges that, if the Special Rule is
interpreted to require the Commission's public interest determination
to follow the submission of event contracts for listing, and does not
require the prediction market to suspend trading of the event contracts
while the Commission conducts its review, it is likely that the
Commission would find that event contracts are contrary to the public
interest and cannot be traded or cleared after trading of the event
contracts has begun.\159\ The Commission preliminarily believes that
this is the inevitable result of the statutory structure, and
acknowledges that this means that some event contracts that are
contrary to the public interest may be traded during the period of time
required for the Commission's review. The Proposal, like existing Sec.
40.11(c)(1), includes a provision for the Commission to request that
the prediction market suspend listing or trading of event contracts
under review, and the Commission anticipates that some prediction
markets will abide by such requests, but there is no statutory
provision requiring the prediction market to do so.
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\159\ Thus, market participants who transacted in the event
contracts would have their positions closed out. Since the event
contracts are contrary to the public interest, the Commission
preliminarily believes this is the appropriate result.
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The Commission believes that the Proposal is authorized by its
authority in the CEA, and, in particular, CEA sections 3, 5, 5c(c), 5h
and 8a(5).\160\ In describing the Proposal, the discussions in this
document of ``commercial utility,'' ``derivatives,'' ``gaming,''
``price discovery,'' and ``public interest'' are for purposes specific
to the CEA and the CFTC's jurisdiction, as described herein. Therefore,
the Proposal and the discussion herein have no bearing on any statutory
regime other than the CEA, including without limitation the treatment
of any contract, activity, receipt, or expense under the Internal
Revenue Code.
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\160\ 7 U.S.C. 5, 7, 7a-2(c), 7b-3 and 12a(5).
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The Commission requests comment on all aspects of the Proposal.
A. Overview of Proposed Changes to Part 40
As noted above, the principal difference between the current Sec.
40.11 and the Proposal is that Sec. 40.11(a) would more clearly follow
the plain language of the Special Rule by stating that ``[t]he
Commission may determine'' that event contracts subject to the Special
Rule are contrary to the public interest.\161\ Correspondingly,
proposed Sec. 40.11(e)(1) provides for the Commission to issue an
order finding that certain event contracts are contrary to the public
interest prior to the end of the review period established in clause
(iv) of the Special Rule. The Commission preliminarily believes that
this change will remove uncertainty under the current text of Sec.
40.11(a) regarding whether a finding that event contracts are contrary
to the public interest is necessary to prohibit the trading and
clearing of the event contracts.\162\
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\161\ The Commission notes that the Nadex Order and the Kalshi
Order both included specific findings that the event contracts in
question were contrary to the public interest. See Nadex Order at 4,
Kalshi Order at 23.
\162\ Commenters on the ANPRM expressed varying views on what
the Special Rule requires in this regard and what the Commission's
regulations should require. Compare Letter from the Pechenga Band of
Indians 7 (Apr. 29, 2026) (CEA expressly bars listing of event
contracts that involve Enumerated Activities, current Sec. 40.11
implements this statutory mandate and should not be amended) and
Letter from eight U.S. Senators including Senator Jeffrey A. Merkley
2 (Apr. 30, 2026) (event contracts involving elections, war,
military actions, terrorism, and sports should be categorically
prohibited pursuant to the CFTC's existing authority) with Letter
from Susquehanna International Group, LLP 3 (Apr. 30, 2026)
(Commission should revise Sec. 40.11 to replace categorical ``shall
not'' with a provision for authority to prohibit event contracts
that are contrary to the public interest while avoiding blanket
prohibitions) and Letter from the Coalition for Prediction Markets 2
(Apr. 30, 2026) (to interpret Sec. 40.11(a) to categorically
prohibit event contracts involving Enumerated Activities is overly
prescriptive and beyond the authorization of the Special Rule, which
requires a specific public interest determination).
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As explained above, the Commission preliminarily interprets the
Special Rule to require that the Commission determine that event
contracts may involve an Enumerated Activity to begin the 90-day review
process. The Commission is therefore proposing to add Sec. 40.11(a)(4)
which sets out the factors that the Commission will apply in
determining whether event contracts involve an Enumerated Activity and
are therefore within the scope of the Special Rule.
The Commission preliminarily believes that two terms in the Special
Rule--``involve'' and ``gaming''--are particularly important.
Therefore, the Commission is proposing to adopt in Sec. 40.11(a)(3) a
statement of when event contracts ``involve'' an activity, and in Sec.
40.11(b) a definition of the term ``gaming.'' The Proposal states that
event contracts ``involve an activity if their settlement is determined
by an occurrence, extent of an occurrence, or contingency in the
activity.'' The Proposal defines gaming as ``any activity that: (i) one
or more participants typically engage in for purposes of recreation or
to entertain others; (ii) is governed by rules; and (iii) includes
measurable occurrences or outcomes that depend on the participants'
luck, skill, or athletic ability during the activity.''
The Proposal states that in determining whether event contracts
within the scope of the Special Rule are contrary to the public
interest, the Commission will apply the factors set out in proposed
Sec. Sec. 40.11(a)(5) and 40.11(a)(6). That is, these are the factors
that the Commission would apply prior to issuing an order under
proposed Sec. 40.11(e)(1) finding that certain event contracts are
contrary to the public interest. The Commission notes that it
preliminarily interprets the Special Rule to apply after the prediction
market certifies that the event contract complies with the CEA
(notably, the Core Principles in CEA sections 5 and 5h) and the
Commission's regulations thereunder. Proposed Sec. Sec. 40.11(a)(5)
and 40.11(a)(6) therefore include factors that may raise public
interest concerns particularly relevant to the types of event contracts
that are subject to the Special Rule.
The Commission preliminarily believes that its public interest
determination should be focused and understandable to prediction
markets in designing event contracts and to the general public. The
Commission also notes that the 90-day deadline for Commission action in
clause (iv) of the Special Rule does not allow for a wide-ranging
inquiry into the public good, but rather a focused inquiry subject to
set processes. And, as noted above, the Commission preliminarily
believes that the legislative history of the Special Rule does not
indicate Congressional intent for the Commission to apply the economic
purpose test that was applied prior to the CFMA. Therefore, the
[[Page 35819]]
Commission has included in proposed Sec. Sec. 40.11(a)(5) and
40.11(a)(6) factors that relate to specific public interest concerns
that would support a finding that event contracts within the scope of
the Special Rule are contrary to the public interest.
The Commission has observed a marked increase in the number of
event contracts that prediction markets have self-certified for listing
under Sec. 40.2. The Commission preliminarily believes that in some
circumstances (i) it would be impractical to review separately each
submission of similar event contracts; and (ii) if the Commission finds
that a number of similar event contracts are contrary to the public
interest, prediction markets and the general public would benefit from
the issuance of a single order (rather than multiple orders) covering
all such similar event contracts. Therefore, proposed Sec. 40.11(c)(4)
provides that the Commission may consolidate review of multiple event
contracts that involve the same underlying event or a substantially
similar set of underlying events, in which case the determination to
begin the review would include a description of the consolidated group.
Correspondingly, proposed Sec. 40.11(e)(1)(i) provides that the
Commission may issue an order finding that a group of event contracts
that are subject to review are contrary to the public interest. The
Commission preliminarily anticipates that issuing an order covering a
group of event contracts would reduce the number of future submissions,
as prediction markets would better understand which types of event
contracts the Commission is likely to find contrary to the public
interest.
The Commission is also proposing to amend Sec. 40.11 to establish
a procedural framework governing the Commission's exercise of its
discretionary authority under the Special Rule to determine that
agreements, contracts, transactions, or swaps involving an Enumerated
Activity are contrary to the public interest. Under the proposed
framework, the Commission may commence a review by making a written
determination that there is a basis to believe event contract(s) that
are self-certified or submitted for Commission approval both involve an
Enumerated Activity and may be contrary to the public interest under
the factors in proposed Sec. Sec. 40.11(a)(5) and 40.11(a)(6). A
written determination initiating the review identifying the event
contract(s), the Enumerated Activity(ies), the contract terms at issue,
and the factors warranting review must be provided to the prediction
market(s) making the submission(s). Issuance of the determination
commences the 90-day review.\163\ The review must commence within 10
days of the date of the event contract's listing.
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\163\ Under the proposed framework, within the 90 days, the
Director of the Division of Market Oversight shall provide to the
prediction market a written statement of concerns by day 15. By day
30, the prediction market may then submit a written response,
including proposed contract modifications and/or mitigating
safeguards. The Director of the Division of Market Oversight, with
the concurrence of the General Counsel, may submit a recommendation
to the Commission by day 60, provided simultaneously to the
prediction market. The prediction market may submit a response to
the recommendation by day 70. Under the proposed framework,
extensions are available only at the request of, or with the
agreement of, the prediction market.
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Under the proposed framework, by day 90, the Commission may issue
an order finding the contract contrary to the public interest. Such an
order must be supported by written findings that identify and analyze
the factors in proposed Sec. Sec. 40.11(a)(5) and 40.11(a)(6) on which
the Commission relied, weigh the relevant factors, and explain the
determination's consistency with prior Commission decisions or provide
a reasoned justification for any departure. Proposed Sec.
40.11(e)(1)(ii) includes a specific statement that if the Commission
does not issue an order at the end of a review period, the event
contracts subject to review may be, or continue to be, listed for
trading and accepted for clearing and the review shall be deemed
concluded. The Commission preliminarily believes that this provision
would allow for a more streamlined process by not requiring that the
Commission issue an order of approval and provide certainty in cases
where the Commission does not take any action at the end of the review
period.
This proposed framework reflects the Commission's preliminary view
that a determination under the Special Rule that event contracts are
contrary to the public interest has significant consequences, and that
the Commission's procedures should be calibrated accordingly. Such a
determination forecloses listing, trading, and clearing of the event
contracts, imposes sunk compliance costs on the submitting prediction
market, and eliminates the hedging, price-discovery, and information-
aggregation functions the event contracts might have served, along with
the reliance interests of market participants. In light of these
consequences, the proposed framework establishes procedural rights
designed to ensure that the prediction market's position is fully
presented and considered before the Commission acts. The Commission
also preliminarily believes that these procedures will also enhance the
quality of decision-making by ensuring that the record before the
Commission includes the prediction market's substantive response, if
any, to the Commission's reasoning.
In addition, the Commission is proposing to make certain amendments
to Sec. 40.11 to further align the language of the regulation with the
statutory text of the Special Rule, and to make certain technical
amendments to the regulation to enhance clarity and organization.
Proposed Sec. 40.11(a)(2) includes a reference to CEA section
1a(19)(i) because the Commission preliminarily believes this is the
correct cross reference to describe event contracts that are not
subject to the Special Rule. Proposed Sec. 40.11(a)(2) also uses the
word ``involve'' to reference the Enumerated Activities, to more
closely track the text of the Special Rule. Proposed Sec.
40.11(a)(2)(vi) reflects how the Commission preliminarily believes it
may determine that activities are similar to the Enumerated Activities.
For clarity, proposed Sec. 40.11(c)(3) specifically provides for the
Commission to notify the prediction market of the commencement of a 90-
day review. Throughout proposed Sec. 40.11, the text refers to
agreements, contracts, transactions, or swaps in the plural to match
the text of the Special Rule.
Finally, the Commission is proposing to add a provision to Sec.
40.7(a) that delegates to the Director of the Division of Market
Oversight, or the Director's designee, the authority to perform
ministerial and record-development functions under Sec. 40.11,
including service of notices, written determinations, and statements
and the development of staff recommendations.
The Commission requests comment on all aspects of its proposed
amendments to Sec. Sec. 40.7 and 40.11.
B. Event Contracts Within the Scope of the Special Rule
The text of the Special Rule states that it applies with respect to
``agreements, contracts, transactions, or swaps in excluded commodities
that are based upon the occurrence, extent of an occurrence, or
contingency (other than a change in the price, rate, value, or levels
of a commodity described in section 1a(2)(i) of [the CEA]).'' \164\ The
Commission preliminarily believes in understanding the scope of the
Special Rule, it is helpful to understand the
[[Page 35820]]
origin and scope of the term ``excluded commodity.''
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\164\ CEA sec. 5c(c)(5)(C)(i); 7 U.S.C. 7a-2(c)(5)(C)(i).
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The definition of ``excluded commodity'' was adopted in the CFMA as
part of provisions to permit off-exchange trading of swaps based on
financial commodities or commodities with an infinite supply.\165\ The
reasoning behind this change in the CFMA was that trading should not be
permitted in swaps based on agricultural commodities, certain metals
which had historically been subject to price manipulation, and physical
commodities for which the cash market is dependent on the futures
market for price discovery.\166\ But apart from these categories, swap
trading should be permitted for institutional investors within the
definition of ``eligible contract participant,'' which was also adopted
in the CFMA.
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\165\ While the CFMA does not have any official legislative
history, commentators generally agree that the excluded commodity
definition adopted in the CFMA was intended to implement a
recommendation in the Report of The President's Working Group on
Financial Markets, Over-the-Counter Derivatives Markets and the
Commodity Exchange Act, supra note 27 (PWG Report). See Derivatives
Regulation Sec. 2.02[7.C.ii].
\166\ See PWG Report at 16-17 (recommending that large financial
market participants be permitted to engage in bilateral swaps, so
long as the swap does not involve ``a non-financial commodity with a
finite supply'').
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The definition of ``excluded commodity'' in CEA section 1a(19) has
four clauses. Clause (i) includes rates, instruments, indices and
measures commonly understood to be financial commodities.\167\ Clause
(ii) includes any other index or measure of economic or commercial
risk, return, or value that is based on such financial commodities;
based on the value of a broad group of physical commodities; or based
on a commodity with no cash market.\168\ Clause (iii) includes any
index that qualifies as ``economic or commercial'' and is beyond the
control of any party to the relevant derivatives contract.\169\ Last,
clause (iv) includes any ``occurrence, extent of an occurrence, or
contingency'' of financial, commercial, or economic consequence that is
beyond the control of any party to the relevant derivatives contract
and is not based on a change in the price, rate, value, or level of a
``commodity not described in clause (i).'' \170\ The effect of the
cross-reference to clause (i) is that, for example, a change in crude
oil prices is not an occurrence which constitutes an excluded commodity
because crude oil is not described in clause (i); on the other hand,
clause (iv) means that a change in exchange rates is an occurrence
which constitutes an excluded commodity because exchange rates are
listed in clause (i).
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\167\ CEA sec. 1a(19)(i), 7 U.S.C. 1a(19)(i) (``an interest
rate, exchange rate, currency, security, security index, credit risk
or measure, debt or equity instrument, index or measure of
inflation, or other macroeconomic index or measure'').
\168\ CEA sec. 1a(19)(ii), 7 U.S.C. 1a(19)(ii) (``(ii) any other
rate, differential, index, or measure of economic or commercial
risk, return, or value that is--(I) not based in substantial part on
the value of a narrow group of commodities not described in clause
(i); or (II) based solely on one or more commodities that have no
cash market;'').
\169\ CEA sec. 1a(19)(iii), 7 U.S.C. 1a(19)(iii) (``any economic
or commercial index based on prices, rates, values, or levels that
are not within the control of any party to the relevant contract,
agreement, or transaction'').
\170\ CEA sec. 1a(19)(iv), 7 U.S.C. 1a(19)(iv) (``an occurrence,
extent of an occurrence, or contingency (other than a change in the
price, rate, value, or level of a commodity not described in clause
(i)) that is--(I) beyond the control of the parties to the relevant
contract, agreement, or transaction; and (II) associated with a
financial, commercial, or economic consequence.''). ``[C]lause (i)''
refers to CEA sec. 1a(19)(i).
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The Commission preliminarily believes that the increasing
generality of clauses (i) to (iv) of the excluded commodity definition
indicates a Congressional intent to include a very wide variety of
measures and occurrences in the definition. Clause (i) starts with
financial commodities, clause (ii) adds ``any other rate, differential,
index, or measure of economic or commercial risk, return, or value''
that is not based in substantial part on a ``narrow group'' of physical
(i.e., non-financial) commodities, clause (iii) adds any ``economic or
commercial index'' that is not under the control of a party to the
relevant derivatives contract, and clause (iv) brings in any event that
is beyond the control of any party to the relevant derivatives contract
and has financial, commercial or economic consequence (with the
exception for physical commodity price changes noted above). In
particular, the Commission notes that clauses (ii) and (iii) of the
definition are limited to ``economic or commercial'' measures or
indices, but clause (iv) uses the broader phrase ``financial,
commercial or economic consequence.'' Thus, the definition of excluded
commodity is clearly not limited to economic or commercial indices.
In adopting Sec. 40.11 in 2011, the Commission interpreted the
``excluded commodities'' falling within the scope of the Special Rule
to be those set forth in CEA section 1a(19)(iv), and accordingly
referenced CEA section 1a(19)(iv) in Sec. 40.11(a)(1)-(2) and Sec.
40.11(c).\171\ The Commission preliminarily does not see any reason to
limit the scope of the Special Rule in this way, as the statutory text
is not limited to only clause (iv) of CEA section 1a(19).
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\171\ While the adopting release did not discuss the basis for
this interpretation, it is likely that the Commission assumed that
Congress intended to incorporate the statutory language of the
``excluded commodity'' definition set forth in CEA sec. 1a(19)(iv),
since the Special Rule tracks the language of CEA sec. 1a(19)(iv) to
a large extent.
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Instead, proposed Sec. 40.11(a)(2) refers to all excluded
commodities based upon the occurrence, extent of an occurrence, or
contingency, with the exception of any change in the price, rate,
value, or levels of a commodity described in CEA section 1a(19)(i). The
Commission preliminarily believes that this exception gives effect to
the language in the Special Rule which excepts ``a change in the price,
rate, value, or levels of a commodity described in section 1a(2)(i) of
[the CEA]).'' \172\ There is no ``section 1a(2)(i)'' in the CEA, and
the Commission preliminarily believes the reference to this provision
in the Special Rule is a typographical or drafting error.\173\ Rather,
the Commission preliminarily believes that the reference to ``section
1a(2)(i)'' was intended by Congress to refer to the excluded
commodities described in CEA section 1a(19)(i), namely, an interest
rate, exchange rate, currency, security, security index, credit risk or
measure, debt or equity instrument, index or measure of inflation, or
other macroeconomic index or measure. This interpretation carves out
from the scope of the Special Rule event contracts based on a change in
the price, rate, value, or levels of these measures, indices, and
instruments.\174\
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\172\ CEA sec. 5c(c)(5)(C)(i); 7 U.S.C. 7a-2(c)(5)(C)(i).
\173\ CEA sec. 1a(2), 7 U.S.C. 1a(2), defines an ``appropriate
Federal banking agency,'' which is not relevant to the excluded
commodity definition.
\174\ The Commission understands that the phrasing in CEA sec.
1a(19)(iv), which removes from the excluded commodity definition any
``change in the price, rate, value, or level of a commodity not
described in clause (i)'' introduces some confusion. The point, as
noted above, is that changes in prices of commodities described in
clause (i) are excluded commodities, while changes in prices of
other commodities (e.g., physical commodities) are not excluded
commodities. Since physical commodity price changes are not excluded
commodities, they did not have to be excluded from the scope of the
Special Rule. On the other hand, because financial commodity price
changes are excluded commodities, it was necessary to exclude them
from the scope of the Special Rule. That is why it is appropriate
for the exception in the Special Rule to refer to changes to prices
that are described in the cross-referenced clause.
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The measures, indices, and instruments described in CEA section
1a(19)(i) served as underliers for a range of derivative contracts that
were broadly traded on CFTC-registered exchanges at the time of
enactment of the Special Rule.\175\ As such, the Commission believes
that it is unlikely that Congress
[[Page 35821]]
intended the heightened authority granted to the Commission in the
Special Rule to apply with respect to event contracts based on changes
in the price, rate, value or levels of these measures, indices, and
instruments.\176\
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\175\ See supra notes 67 to 71.
\176\ Consistent with the Commission's view that the reference
to ``section 1a(2)(i)'' in the Special Rule was intended by Congress
to refer to the excluded commodities described in CEA section
1a(19)(i), section 201(b) of the proposed CFTC Reauthorization Act
of 2019 included, as a technical correction to the CEA, the
replacement of the reference to ``section 1a(2)(i)'' with a
reference to ``section 1a(19)(i).'' CFTC Reauthorization Act of
2019, H.R. 6197, 116th Cong. (2d Sess. 2020).
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Last, the Commission notes two aspects of the Special Rule that
relate to its scope. First, the Special Rule encompasses ``agreements,
contracts, transactions, or swaps,'' meaning that it includes event
contracts that are listed as futures contracts, as well as event
contracts that are listed as swaps. Second, the Special Rule covers
such event contracts that are ``based upon the occurrence, extent of an
occurrence, or contingency.'' Since an event is the definitive
characteristic of a contract that is subject to the Special Rule, the
Commission preliminarily believes that in determining the scope of the
Special Rule, the focus should be on the event that underlies the event
contract, as will be discussed in the next section.
The Commission requests comment on all aspects of its preliminary
views on the scope of event contracts that are subject to the Special
Rule.
C. Contracts That ``Involve'' an Enumerated Activity
The Special Rule applies to agreements, contracts, or transactions
``that are based upon the occurrence, extent of an occurrence, or
contingency'' and that ``involve'' any of the Enumerated Activities.
The Commission preliminarily interprets the term ``involve'' in the
Special Rule to require that the settlement of the event contracts be
determined by an occurrence, the extent of an occurrence, or a
contingency in one of the Enumerated Activities.\177\ Therefore, the
Proposal includes the following text in proposed Sec. 40.11(a)(3):
``For purposes of paragraph (a)(2) of this section, agreements,
contracts, transactions, or swaps involve an activity if their
settlement is determined by an occurrence, extent of an occurrence, or
contingency in the activity.''
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\177\ For the avoidance of doubt, and as discussed in this
section, the Commission preliminarily believes that the Nadex Order
and Kalshi Order were incorrect in reasoning that event contracts
involve an Enumerated Activity when the event contracts viewed as a
whole relate to, or equate to, an Enumerated Activity.
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This interpretation follows from the three-step sequence set out in
the Special Rule that must occur before agreements, contracts,
transactions, or swaps are prohibited:
1. As discussed above, the agreements, contracts, transactions, or
swaps must be ``based upon the occurrence, extent of an occurrence, or
contingency;''
2. As discussed in this section, the agreements, contracts,
transactions, or swaps must ``involve'' any of the Enumerated
Activities; and
3. As discussed below, the Commission must determine that the
agreements, contracts, transactions, or swaps are contrary to the
public interest.
The role of the Enumerated Activities in this sequence is to filter
which event contracts are potentially subject to a public interest
determination. The Special Rule does not require the Commission to
determine whether the contract itself is or equates to an Enumerated
Activity. As noted earlier, it is the underlying activity that is the
subject of ``involve.''
The application of this test can be illustrated through several
examples. An event contract that settles on whether a specified
terrorist attack occurs at a specified location during a specified
period involves terrorism within the meaning of the Special Rule,
because the event contract's settlement is determined by an occurrence
within the terrorism activity. An event contract that settles on
whether a particular foreign head of state is killed during a specified
period involves assassination for the same reason. An event contract
that settles on whether Iran initiates armed conflict in the Strait of
Hormuz, or whether a specified non-state actor conducts an attack on
shipping in the Strait, would involve war or terrorism, because in
those event contracts the settlement-determining occurrence is within
the Enumerated Activity itself. By contrast, an event contract that
settles on whether a specified volume of crude oil transits the Strait
of Hormuz during a specified period does not involve war or terrorism,
even though the amount of oil flows through the Strait could change
based on military conditions, because the settlement-determining
occurrence is a measurement of commercial shipping activity rather than
an occurrence within a war or terrorism activity.
The Commission's proposed reading avoids surplusage. The Special
Rule's ``based upon'' and ``involve'' language describe complementary
aspects of a single event-focused concept: the event contract is based
upon an occurrence, and that occurrence must be in an Enumerated
Activity. An interpretation that treats ``involve'' as applying to the
event contract itself (as distinct from the underlying occurrence)
would render ``based upon'' superfluous.
The Commission's proposed interpretation is also consistent with
the reasoning of the District Court for the District of Columbia, which
held that the term ``involve'' in the Special Rule refers to ``the
event being offered and traded'' under an event contract, not the event
contract itself.\178\
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\178\ KalshiEX, 2024 U.S. Dist. LEXIS 163925, at *29.
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The Commission preliminarily believes that the Nadex Order erred in
this regard. Rather than examining whether the underlying event fell
within the Enumerated Activity, the Nadex Order interpreted the Special
Rule to apply when ``the contract, considered as a whole, involves one
of those [the enumerated] activities'' and therefore considered whether
the contract itself was gaming.\179\ The Nadex Order concluded that
trading in the contract constituted gaming, but it did not find that
the event on which the contract was based was an occurrence within a
gaming activity. In doing so, the Nadex Order reasoned that ``taking a
position in a Political Event Contract fits the plain meaning of a
person staking `something of value upon a contest of others,' '' which
is an element of what the Nadex Order considered to be gaming.\180\ But
that reasoning examines the nature of the trading--not the nature of
the underlying event. Therefore, the Commission preliminarily believes
that the Nadex Order misapplied the Special Rule, which, by its terms,
requires the Commission to determine whether the event contracts
involve an Enumerated Activity, not whether trading in the event
contracts is an Enumerated Activity.
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\179\ See Nadex Order at 2.
\180\ Id. at 3.
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The approach in the Nadex Order is contrary to the structure of the
Special Rule. Consider especially the Enumerated Activities of
terrorism, assassination and war. If the statute's ``involve''
requirement were satisfied only when trading in the event contracts is
or equates to terrorism, assassination or war, then the Special Rule
would never apply to contracts involving those activities, because
trading in event contracts does not constitute terrorism,
assassination, or war.\181\ As a corollary,
[[Page 35822]]
if one asserted that the Special Rule applied because the event
contract itself was ``gaming,'' then the terrorism, assassination and
war categories would be surplusage. The only coherent question--and the
only question the statute asks--is whether the occurrence, extent of an
occurrence, or contingency on which the contract is based is an
occurrence, extent of an occurrence, or contingency in terrorism,
assassination, or war activities.
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\181\ See KalshiEX, 2024 U.S. Dist. LEXIS 163925, at *30
(```[S]tandard principle[s] of statutory construction provide[ ]
that identical words and phrases within the same statute should
normally be given the same meaning' and effect''; citing Powerex
Corp. v. Reliant Energy Servs., Inc., 551 U.S. 224 (2007)).
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The Nadex Order's approach also leads to illogical results. As
discussed below in relation to the definition of the term ``gaming,''
if the Special Rule's application were interpreted to depend on whether
trading in an event contract is or equates to gaming, the Special Rule
could potentially apply to any event contract because gaming could be
interpreted to include the staking of money on a contingency.\182\
Similarly, because some states prohibit the staking of money on a
contingency,\183\ trading in the event contract would appear to be
illegal under those laws--except that such state laws are preempted by
the CEA as applied to event contracts traded on CFTC-registered
entities.
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\182\ As discussed in connection with the proposed definition of
``gaming,'' the Commission preliminarily believes that gaming does
not include all activities that constitute the staking of money on a
contingency, but rather only such activities that are games--i.e.,
have a recreational or entertainment purpose. See infra notes 199 to
202 and accompanying text.
\183\ See, e.g., N.H. Rev. Stat. Ann. sec. 647:2(II)(d),
available at <a href="https://www.gencourt.state.nh.us/rsa/html/lxii/647/647-2.htm">https://www.gencourt.state.nh.us/rsa/html/lxii/647/647-2.htm</a> (last visited May 19, 2026) (banning gambling and defining it
as, ``to risk something of value upon a future contingent event not
under one's control or influence . . .'').
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Last, a wide-ranging inquiry into whether anything about event
contracts ``involves'' one of the Enumerated Activities (as opposed to
an inquiry focused on the event underlying the contract) would greatly
expand the inquiry under the Special Rule and be vulnerable to
arbitrary and inconsistent application.
The Commission preliminarily believes that the better approach is
to avoid an interpretation of the statute that is inconsistent with its
structure and would produce overbroad or illogical results.
Interpreting the Special Rule to apply when the event contracts'
settlement is determined by an occurrence, extent of an occurrence, or
contingency within an Enumerated Activity aligns with the structure of
the statute and properly limits scope for the Special Rule to the
circumstances Congress intended it to govern.
The Commission requests comment on all aspects of its preliminary
views on the scope of activities that event contracts ``involve.''
D. Determining the Scope of Enumerated Activities
The Commission preliminarily believes that it would be helpful for
prediction markets and the general public to know which factors the
Commission will apply in determining whether particular event contracts
are subject to the Special Rule. In other words, these factors would
describe the scope of activities that are encompassed within each of
the Enumerated Activities. The Commission is therefore proposing to add
Sec. 40.11(a)(4) which sets out the factors that the Commission will
apply in determining whether event contracts involve any Enumerated
Activity and are therefore within the scope of the Special Rule. The
Commission notes that event contracts involving more than one
Enumerated Activity would also be within the scope of the Special Rule.
In the case of the Enumerated Activity of ``gaming,'' the
Commission also preliminarily believes it would be useful to adopt a
rule to define the term ``gaming'' because it requires further
clarification.
The Commission notes that a prediction market would be able to
receive a definitive resolution of any questions concerning the
applicability of Sec. 40.11(a)(1) by submitting a contract for
Commission approval under Sec. 40.3. CFTC staff also may, at its
discretion and upon a request from a prediction market, review a draft
contract submission or proposal and provide guidance concerning the
contract's compliance with the CEA and CFTC regulations, including
Sec. 40.11(a)(1).\184\
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\184\ The Commission notes, however, that staff's guidance
concerning drafts and proposals is preliminary and non-binding. CFTC
staff formally reviews contracts only at such time as a compliant
submission is provided to the Commission pursuant to Sec. 40.2 or
Sec. 40.3.
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1. Activity That Is Unlawful Under any Federal or State Law
The Commission preliminarily does not believe that it is necessary
to adopt a rule to define ``activity that is unlawful under any Federal
or State law'' at this time. Instead, proposed Sec. 40.11(a)(4)(i)
provides that the Commission would consider the relevant laws and
whether the occurrence, extent of an occurrence, or contingency on
which an event contract is based occurs in an activity that is unlawful
under any Federal or State law. Additionally, proposed appendix F to
part 40 describes how the Commission would consider the relevant
factors in determining whether event contracts involve this Enumerated
Activity.
The proposed factors explain that in circumstances where there is a
question regarding whether an event contract submitted to the
Commission involves activity that is unlawful under any Federal or
State law, the Commission would survey the relevant law. Where an
activity is illegal under the laws of some States, but not others, the
Commission would consider whether the discrepancy relates to any of the
factors that would apply in determining if the event contract is
contrary to the public interest. For example, if an activity is illegal
under the laws of some States, and the relevant factors suggest that
event contracts involving that activity would be found to be contrary
to the public interest, then the Commission would be more likely to
find that the event contract involves unlawful activity and is within
the scope of the Special Rule.\185\
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\185\ The Commission acknowledges that many state codes include
laws prohibiting certain activity that, while not repealed, are
generally considered archaic and are not enforced. The Commission
believes that it is unlikely that a prediction market would seek to
list for trading or accept for clearing an event contract involving
such a law. To the extent that a prediction market does make a
submission to the Commission regarding a contract that may involve
such a law, the Commission believes that it may be appropriate to
commence a review of the contract pursuant to Sec. 40.11(c) to
evaluate whether, in light of the relevant facts and circumstances,
it is appropriate to recognize the contract as involving ``activity
that is unlawful under any . . . State law'' for purposes of Sec.
40.11(a)(1).
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The Commission notes that the Kalshi Order evaluated whether the
subject event contracts involved an activity that is unlawful under
Federal or State law, and found that betting or wagering on elections
is prohibited by statute or common law in many states.\186\ For the
reasons discussed above, the Commission preliminarily believes that the
Kalshi Order's reasoning on this point was incorrect. The Kalshi Order
asked whether the act of trading the event contract equated to an
activity unlawful under State law. The Commission believes that the
relevant question under the Special Rule, however, is whether the
occurrence, extent of an occurrence, or contingency on which an event
contract is based occurs in an Enumerated Activity. Under that reading,
the event contracts at issue in the Kalshi Order would not involve
activity that is unlawful under Federal or State law, because the
occurrence, extent of an occurrence, or
[[Page 35823]]
contingency on which the subject event contracts were based (outcomes
of political elections) did not occur in an Enumerated Activity
(activity unlawful under State law).
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\186\ Kalshi Order at 11-12.
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The application of this interpretation can be illustrated through
several examples. An event contract that settles on whether an
individual will murder someone involves an activity that is unlawful
under State law, because the settlement-determining occurrence--the
murder--is itself within unlawful activity. Such an event contract
presents the precise concerns that animate the Special Rule's inclusion
of unlawful activity. By contrast, an event contract that settles on
whether Bernard Madoff is convicted of securities fraud by a specified
date does not involve activity that is unlawful within the meaning of
the Special Rule. The settlement-determining occurrence is the entry of
a judgment of conviction by the court, which is a lawful judicial act.
Although the underlying conduct alleged in the indictment--the
operation of a multi-decade Ponzi scheme that caused tens of billions
of dollars in investor loss--would, if proven, constitute unlawful
activity, the event contract's settlement is determined by the court's
judgment rather than by the underlying conduct itself. The same
analysis applies to an event contract settling on whether a defendant
in a specified federal securities-fraud prosecution is sentenced to a
term of imprisonment exceeding a specified threshold, or whether a
specified judgment of conviction is affirmed on appeal by a specified
court. Such event contracts may have meaningful commercial and
informational utility, including for participants seeking to hedge
price exposure to the resolution of large financial-fraud proceedings
that affect counterparty risk, claims against bankruptcy estates, and
the timing of recovery distributions to victims.
2. Terrorism, Assassination, and War
The Commission preliminarily does not believe that it is necessary
to adopt a rule to define ``terrorism,'' ``assassination,'' or ``war''
at this time. Instead, proposed Sec. 40.11(a)(4)(ii) provides that the
Commission would consider the extent to which the event contracts
involve violent or destructive activities occurring outside the United
States with an element of coercion or intimidation and some
relationship to political or social groups or ideologies, intentional
killing of an individual outside the United States, or belligerent
military activities and violent activities by organized groups,
respectively. Additionally, proposed appendix F to part 40 describes
how the Commission would consider these factors in determining whether
event contracts involve these Enumerated Activities.
Generally, the Commission preliminarily intends to interpret these
terms broadly and without making distinctions based on criteria under
international law, such as whether a war has been formally declared.
The Commission also notes that terrorism and assassination would be
unlawful under Federal or State law, and the Commission generally
interprets these Enumerated Activities to encompass events occurring
outside the United States, including against non-U.S. persons.\187\
---------------------------------------------------------------------------
\187\ For clarity, the Commission notes that event contracts
involving more than one Enumerated Activity would be subject to the
Special Rule.
---------------------------------------------------------------------------
The Commission notes that common definitions of terrorism include
the use of violence to coerce or intimidate in order to obtain demands
or with political aims.\188\ The proposed factors to define terrorism
would not require identification of a specific aim or demand, or
identification of a specific responsible group. Rather terrorism would
include all violent or destructive activities occurring outside the
United States with an element of coercion or intimidation and some
relationship to political or social groups or ideologies. The
Commission preliminarily believes that terrorism encompasses
cyberterrorism and other forms of attack that cause substantial
destruction or disruption through non-physical means, where the attack
is conducted with an element of coercion or intimidation and bears a
relationship to political or social group or ideologies. Since unlawful
activity inside the United States is an Enumerated Activity, it is
irrelevant whether a particular unlawful activity in the United States
constitutes domestic terrorism.
---------------------------------------------------------------------------
\188\ See Oxford English Dictionary, ``terrorism'' (n.) (``The
unofficial or unauthorized use of violence and intimidation in the
pursuit of political aims; . . . (now usually) such practices used
by a clandestine or expatriate organization as a means of furthering
its aims.'') (last modified Sept. 2025), available at <a href="https://doi.org/10.1093/OED/7593421629">https://doi.org/10.1093/OED/7593421629</a>; <a href="http://Merriam-Webster.com">Merriam-Webster.com</a> Dictionary,
``terrorism'' (n.) (``the systematic use of terror especially as a
means of coercion'') and ``terror'' (``violence or the threat of
violence used as a weapon of intimidation or coercion''), available
at <a href="https://www.merriam-webster.com/dictionary/terrorism">https://www.merriam-webster.com/dictionary/terrorism</a> (last
visited May 17, 2026).
---------------------------------------------------------------------------
Accordingly, an event contract that settles on whether the Islamic
State conducts an armed attack causing more than ten civilian deaths in
Baghdad during June 2026 involves terrorism within the meaning of the
Special Rule. The settlement-determining occurrence is the attack
itself, which is within the terrorism activity. An event contract that
settles on whether a coordinated cyberattack attributed by the United
States Cybersecurity and Infrastructure Security Agency to a state-
sponsored or politically motivated actor causes the operational
shutdown of electricity transmission in New York for more than twenty-
four hours sometime in 2026 involves terrorism. By contrast, an event
contract that settled on whether the Transportation Security
Administration implements enhanced screening procedures at certain
airports does not involve terrorism, because the settlement-determining
occurrence is a governmental administrative action, which is a lawful
exercise of agency authority, rather than any act of terrorism.
The factors to define assassination focus on whether the target of
the attack is a prominent person and whether there is some relationship
to a political or social motive.\189\ The Commission preliminarily
believes that any person who is the subject of an event contract should
be considered to be prominent, and that the relationship to a political
or social motive should be interpreted broadly. Therefore, the
Commission proposes that event contracts involving any intentional
killing of an individual outside the United States would involve
assassination.
---------------------------------------------------------------------------
\189\ See Oxford English Dictionary, ``assassination'' (n.)
(``murder of a person (esp. a prominent public figure) in a planned
attack, typically with a political or ideological motive, sometimes
carried out by a hired or professional killer'') (last modified
Sept. 2025), available at <a href="https://doi.org/10.1093/OED/5671820672">https://doi.org/10.1093/OED/5671820672</a>;
<a href="http://Merriam-Webster.com">Merriam-Webster.com</a> Dictionary, ``assassination'' (n.) (``murder by
sudden or secret attack often for political reasons''), available at
<a href="https://www.merriam-webster.com/dictionary/assassination">https://www.merriam-webster.com/dictionary/assassination</a> (last
visited May 17, 2026).
---------------------------------------------------------------------------
Examples illustrate this definition. An event contract that settles
on whether Nicol[aacute]s Maduro dies as a result of an attack by an
organized political or military faction by December 31, 2026, involves
assassination. The settlement-determining event--his death--is an
occurrence within the assassination activity. By contrast, an event
contract that settles on whether Maduro will lose an election does not
involve assassination, war, or any other Enumerated Activity.
The Commission preliminarily intends that the factors to define war
would encompass all belligerent military activities and violent
activities by organized groups.\190\ That is, this Enumerated Activity
is not limited to declared wars and would include the
[[Page 35824]]
belligerent activities of both government and civil militias. It would
also include civil wars and civil unrest by organized groups. Because
the Special Rule is applied to particular event contracts, the
Commission preliminarily believes that it is not appropriate to apply a
temporal or quantitative threshold to determine if belligerent military
or violent activities constitute ``war.'' For example, if event
contracts were certified about a single belligerent military activity,
it would not be appropriate to examine whether that activity was
isolated or rather a part of a campaign over a certain time.\191\
Instead, the proposed factors explain that event contracts about a
single belligerent military or organized violent activity would involve
war.
---------------------------------------------------------------------------
\190\ By referring to belligerent military activity, the
Commission does not intend to include any non-belligerent military
activities, such as routine deployments, training or disaster relief
assistance.
\191\ The Commission notes that some definitions of ``war''
refer to a series of actions over time. See, e.g., Oxford English
Dictionary, ``war'' (n.) (``Armed conflict . . . typically
characterized by a campaign or series of campaigns conducted over a
period of time'') (last modified Mar. 2026), available at <a href="https://doi.org/10.1093/OED/1011940408">https://doi.org/10.1093/OED/1011940408</a>. However, at the time an event
contract is certified it may not be clear whether the underlying
event relates to a military campaign (e.g., it may be the first
event in a campaign).
---------------------------------------------------------------------------
Several examples again illustrate this definition. An event
contract that settles on whether the Russian Federation conducts a
missile or drone strike against a target within the city limits of Kyiv
during the second quarter of 2026 involves war within the meaning of
the Special Rule, because the settlement-determining occurrence is
itself a military activity within the war activity. An event contract
that settles on whether the People's Republic of China conducts a naval
or amphibious military action against the territory of Taiwan likewise
involves war, regardless of whether such action is characterized as a
declared war or a more limited military operation, because the event
contract's settlement turns on the occurrence of a belligerent military
activity by an organized armed force.
By contrast, an event contract that settles on whether the front-
month Brent crude oil futures contract on the Intercontinental Exchange
closes above $120 per barrel on any trading day during the second
quarter of 2026 does not involve war within the meaning of the Special
Rule, even though oil prices are sensitive to military and geopolitical
conditions. The settlement-determining occurrence is the published
settlement price of an exchange-traded futures contract, which is a
measurement produced by a registered futures exchange.
The foregoing analysis addresses event contracts whose settlement-
determining occurrence falls within an Enumerated Activity on the face
of the event contract's terms. A separate question arises when an event
contract's settlement-determining occurrence is facially neutral--that
is, when the occurrence on which settlement turns can be reached
through multiple causal pathways, at least one of which falls within
terrorism, war, or assassination. In such cases, the Commission would
understand the event contract to involve the Enumerated Activity unless
the event contract's terms specify the qualifying settlement pathways
with sufficient detail to exclude the Enumerated-Activity pathway. An
event contract drafted at a level of generality that permits settlement
on the basis of an act of terrorism, war, or assassination would be
treated as involving that activity. This approach reflects the
Commission's preliminary view that the Special Rule's protective
purpose would be undermined if prediction markets could avoid its
application by drafting settlement conditions broadly enough to
encompass Enumerated-Activity pathways alongside non-Enumerated ones.
A few examples again illustrate the principle. An event contract
that settles on whether Maduro is out of office by a certain date,
without further specification of the qualifying mechanisms, involves
assassination within the meaning of the Special Rule because
assassination is among the pathways by which the settlement condition
can be satisfied. The same event contract, redrafted to settle only on
whether the named individual ceases to hold office ``by reason of
electoral defeat, resignation, constitutional removal, negotiated
departure, or natural death,'' would not involve assassination, because
the event contract's terms specify the qualifying pathways and exclude
the Enumerated Activity pathway. Similarly, an event contract that
settles on whether Iran's uranium enrichment facilities remain
functional as of a certain date would involve war, because an activity
of war is among the pathways by which the facility could cease to
remain standing; the same event contract, redrafted to settle only on
whether the facility is demolished pursuant to a government order, or
to negotiated terms of a diplomatic deal, would not.
3. Gaming
Neither the CEA nor the Commission's rules define the term
``gaming.'' In the preamble to the adoption of Sec. 40.11, the
Commission acknowledged that ``the term `gaming' requires further
clarification,'' and said that the Commission may issue a future
rulemaking concerning event contracts that involve ``gaming.'' \192\
---------------------------------------------------------------------------
\192\ See Provisions Common to Registered Entities, 76 FR 44776,
44785 (July 27, 2011).
---------------------------------------------------------------------------
The Commission preliminarily agrees with the District Court for the
District of Columbia that ``the word `gaming' in the statute carries
its ordinary, plain meaning and involves playing a game.'' \193\ ``
`When a term goes undefined in a statute, [courts] give the term its
ordinary meaning.' . . . To discern that meaning, courts often begin
with a survey of dictionaries. . . . Dictionaries define gaming' as
`the practice or activity of playing games for stakes' and `the
practice or activity of playing games.' . . . [There is] no reason to
stray from the ordinary definitions of `gaming,' which are `the
practice or activity of playing games' and `playing games for stakes.'
'' \194\
---------------------------------------------------------------------------
\193\ KalshiEX, 2024 U.S. Dist. LEXIS 163925, at *20.
\194\ Id. at *22 (citations omitted). See also, e.g., 25 CFR
part 502 (defining categories of ``gaming'' for purposes of the
Indian Gaming Regulatory Act in terms of various games such as
bingo, card games, casino games, sports games and lotteries).
---------------------------------------------------------------------------
The Commission acknowledges that it previously advanced a far
broader definition of ``gaming'' to the District Court for the District
of Columbia. Specifically, the Commission argued that ``gaming'' is
synonymous with ``gambling''--that is, `` `the practice or activity of
betting' without any limitation of what is being bet on.'' \195\ But in
that view, the District Court concluded, ``all event contracts would be
subject to review under the special rule because they all involve
purchasing (and thus risking money on) some contingent event with the
hope of receiving a payoff.'' \196\ And ``[g]iven that the CEA
authorizes the CFTC to review event contracts only if they involve
specific, enumerated activities, any definition of `gaming' that could
be read to subject all event contracts to the special rule just cannot
be right.'' \197\ The Commission's proposed definition does not repeat
its previous error and instead implements the more natural
interpretation described by the District Court.
---------------------------------------------------------------------------
\195\ KalshiEX, 2024 U.S. Dist. LEXIS 163925, at *8.
\196\ Id.
\197\ Id.
---------------------------------------------------------------------------
In interpreting ``gaming,'' the Commission preliminarily considers
it important to recognize what the Special Rule's other Enumerated
Activities describe. Terrorism, assassination, war, and unlawful
activity each describe activities that happen in the world: wars are
fought, assassinations are carried out, crimes are committed. The term
``gaming'' must play the same
[[Page 35825]]
grammatical and functional role in the statute. ``Gaming'' is the game
itself, the activity that occurs.
This matters for two reasons. First, this structural reading is
essential to giving effect to the Special Rule's operative text. As
discussed above in connection with the term ``involve,'' the Commission
interprets the Special Rule as asking whether event contracts'
settlements are determined by an occurrence in an Enumerated Activity.
That inquiry presupposes a distinction between the event contract and
the underlying activity to which it refers. Enumerated Activities must
therefore be activities in the world that event contracts can
reference.
A definition that characterizes ``gaming'' as a property of the
event contract itself (for example, ``the act of risking something of
value, especially money, for a chance to win a prize'') cannot
coherently be applied because it has no limiting principle. Under such
a definition, every event contract would involve ``gaming'' by
definition, because every event contract stakes value on a contingent
outcome. The ``involve'' inquiry would collapse into a tautology: the
event contract involves gaming because the event contract is gaming.
The Special Rule's requirement of a distinction between the event
contract and the underlying activity would be erased, contrary to the
canon against surplusage. Likewise, the other Enumerated Activities--
activity that is unlawful under any Federal or State law, terrorism,
assassination, war, and other similar activity determined by the
Commission to be contrary to the public interest--would be surplusage
if every event contract involved gaming by definition.
Some commenters on the ANPRM suggested that ``gaming'' should be
defined in terms of elements associated with gambling.\198\ The
Commission preliminarily believes, however, that a wagering- or
gambling-centered definition of gaming is overbroad.\199\ Ordinary
definitions of ``gambling'' include ``the act of risking something of
value, especially money, for a chance to win a prize.'' \200\ If this
definition of gaming built around wagering were implemented, some could
argue that the definition should apply to all event contracts and
render the Special Rule's ``gaming'' category limitless.\201\
Therefore, that definition of gaming is incompatible with the Special
Rule's structure.\202\ The Commission preliminarily believes the
coherent reading is the one the ordinary meaning of the word naturally
supplies: gaming is the game itself--the activity in which occurrences,
the extent of occurrences, or contingencies determine settlement.\203\
---------------------------------------------------------------------------
\198\ See, e.g., Letter from Kalshi, Inc. 20 (Apr. 30, 2026);
Letter from Amadeus Brandes 1-2 (Apr. 13, 2026); Letter from Better
Markets 7-8 (Apr. 30, 2026).
\199\ The Commission acknowledges that in some dictionaries, the
primary definition of the term ``gaming'' is playing games for
stakes, i.e., gambling. See <a href="http://Merriam-Webster.com">Merriam-Webster.com</a> Dictionary,
``gaming'' (n.) (``1. the practice or activity of playing games for
stakes, 2. the practice or activity of playing games (such as board
games, card games, or video games''), available at <a href="https://www.merriam-webster.com/dictionary/gaming">https://www.merriam-webster.com/dictionary/gaming</a> (last visited May 17,
2026); Oxford English Dictionary, ``gaming'' (n.), (``1.a. The
action of engaging in games or entertainments; merrymaking; sport.
Now rare. 1.b. The action or practice of playing games, as cards,
dice, etc., for stakes. 1.c. The playing of war-games or role-
playing games. 1d. The playing of computer (video, etc.) games.'')
(last modified Mar. 2026), available at <a href="https://doi.org/10.1093/OED/1195200884">https://doi.org/10.1093/OED/1195200884</a>. However, the Commission also notes that these
definitions include a variety of activities and do not directly
equate gaming with gambling. For example, if the dictionary
definitions were followed strictly, e-sports, in which individuals
play video games competitively on a professional basis, would be an
Enumerated Activity, but professional sports played athletically
would not--a distinction which does not have any apparent basis.
\200\ Black's Law Dictionary, ``gambling'' (12th ed. 2024).
\201\ This is the position of the District Court in the Kalshi
case. See supra note 197 and accompanying text.
\202\ The Nadex Order equated gaming with gambling, reasoning
that the terms ``are used interchangeably in common usage,
dictionary definitions and several state statutes.'' Nadex Order at
2; see also Kalshi Order at 8-9 (applying essentially the same
reasoning to equate gaming with gambling). The Commission
preliminarily believes that this interpretation was incorrect, for
reasons discussed here.
\203\ Also, the Commission preliminarily believes that
interpreting the term ``gaming'' to mean only wagering by
individuals on the outcome of games would be cumbersome to apply. It
would be difficult to define and validate individuals' actions in
order to base event contracts on the wagering activity.
---------------------------------------------------------------------------
Under this approach, the word ``gaming'' derives from ``game,''
which in turn is a word with many nuances and meanings.\204\ The
Commission preliminarily believes that the meaning of ``game'' relevant
to the Special Rule encompasses the activities that are games in common
parlance--sports games, athletic competitions and recreational games
including games of chance. Rather than simply listing examples of games
or describing this category using a multifactor approach, the
Commission proposes to adopt a specific definition of the term
``gaming'' in Sec. 40.11.
---------------------------------------------------------------------------
\204\ The Commission notes that the <a href="http://Merriam-Webster.com">Merriam-Webster.com</a>
Dictionary definition of the noun ``game'' has 20 categories and
subcategories of meaning. The Oxford English Dictionary definition
has 22 categories.
---------------------------------------------------------------------------
The Commission intends that this definition will capture
conceptually these types of games and preliminarily believes that a
rule defining the term ``gaming'' will be useful in the future because,
as new event contracts reference different activities, prediction
markets, market participants and Commission staff will need an easily
applied standard to determine if those activities constitute gaming.
The Commission's definition of the term ``gaming'' in the Proposal is
limited to the Special Rule context and does not purport to interpret
or displace any other federal or state statutory regime using the same
or a related term.
Proposed Sec. 40.11(b) sets out the following definition: ``Gaming
means any activity that: (i) one or more participants typically engage
in for purposes of recreation or to entertain others, (ii) is governed
by rules; and (iii) includes measurable occurrences or outcomes that
depend on the participants' luck, skill, or athletic ability during the
activity.''
The Commission derived this definition from dictionary definitions
of the term ``game'' to mean ``a physical or mental competition
conducted according to rules with the participants in direct opposition
to each other'' and ``activity engaged in for diversion or amusement,''
\205\ or ``an activity which provides amusement or fun'' and ``a
contest or competition, governed by rules of play, according to which
victory or success may be achieved through skill, strength, or good
luck.'' \206\
---------------------------------------------------------------------------
\205\ <a href="http://Merriam-Webster.com">Merriam-Webster.com</a> Dictionary, ``game'' (n.), available
at <a href="https://www.merriam-webster.com/dictionary/game">https://www.merriam-webster.com/dictionary/game</a> (last visited May
17, 2026).
\206\ Oxford English Dictionary, ``game'' (n.), (last modified
Mar. 2026), available at <a href="https://doi.org/10.1093/OED/3374114774">https://doi.org/10.1093/OED/3374114774</a>.
---------------------------------------------------------------------------
As noted above, the Commission aims to capture the activities that
are games in common parlance. To do so, the purposes for which
participants typically engage in the activity must be an element of the
definition.\207\ The Commission intends that the first clause of the
proposed definition--a typical purpose of ``recreation or to entertain
others''--will reflect the dictionary definitions' reference to
amusement and also capture professional sports, which are commonly
understood to be games. By looking to the typical purpose of the
activity, the proposed definition acknowledges that there may be
atypical circumstances where participants have different purposes for
engaging in an activity that is a game in common
[[Page 35826]]
parlance, but the activity should still be encompassed in ``gaming.''
---------------------------------------------------------------------------
\207\ The Commission notes that, as discussed further below, a
definition of ``gaming'' to encompass any competition with rules and
measurable outcomes depending on skill, without considering the
purpose of the activity, would be very broad and contrary to the
common understanding of games.
---------------------------------------------------------------------------
The Commission intends that the term ``recreation'' in the
definition would include many elements, such as when participants
engage in the activity for the simple pleasure of the activity, the
personal satisfaction of meeting a challenge, and the enjoyment of
competing against others. And to the extent professional participants
are not engaged in recreation, they are engaged in gaming to entertain
others.\208\ The proposed definition encompasses a mix of recreational
and entertainment purposes, as well as the variety of purposes subsumed
within ``recreation.'' \209\
---------------------------------------------------------------------------
\208\ The Commission understands that professional athletes are
paid or receive monetary compensation and are therefore motivated by
the opportunity to earn an income. Nonetheless, the Commission
preliminarily believes it is accurate, and in accordance with common
understanding, to say that the purpose of the participants in a
professional sporting activity is typically to entertain an audience
(and also to gain personal satisfaction through achievement). The
salary or compensation that the participants receive is a result of
fulfilling the entertainment purpose.
\209\ The Commission notes that a recreational or entertainment
purpose is not contrary to the activity having financial or economic
consequences. Recreation and entertainment are large parts of the
U.S. economy.
---------------------------------------------------------------------------
That ``gaming'' must be governed by rules simply conveys what the
Commission believes to be the commonsense understanding of a game and
conforms to the dictionary definitions cited above.
To be covered by the Special Rule, the Commission preliminarily
believes that the activity must have measurable occurrences or
outcomes. These occurrences in the game or outcomes at the end of a
game would be the potential bases for event contracts. And, in keeping
with the recreational or entertainment purpose of the activity, the
occurrences or outcomes must depend on luck, skill or athletic ability
during the activity. Thus, gaming includes all games of chance (e.g.,
roulette), games requiring skill (e.g., chess), and games of mixed
chance and skill (e.g., poker). The definition includes both skill and
athletic ability to be clear that gaming includes all sports, including
e-sports and sports where judges rank participants based on their skill
or athletic ability during the activity.
On the other hand, if the outcome of the activity depends on other
factors such as judges' evaluation of the participants' merit or
qualifications on a broader basis than a certain activity, it is not
gaming.\210\ The requirements that gaming have a recreational or
entertainment purpose, and that the occurrences or outcome of the
activity depend on the participants' luck, skill, or athletic ability
during the activity, distinguish gaming from other competitive
activities. This Proposal uses the term ``contest'' to refer to an
activity where participants compete for a prize, honor, award or
position based on their qualifications or merit displayed in general or
over an extended period. These contests are not gaming.
---------------------------------------------------------------------------
\210\ For example, a figure skating competition is gaming
because the skaters--the participants in the activity--are doing so
for recreation and to entertain others. Under the rules of the game,
judges rank the participants based on an evaluation of their skill
and athletic ability displayed in the competition. On the other
hand, an award of ``figure skater of the year'' based on a vote or
panel of judges is a contest, not gaming, if its purpose is to honor
the person who the judges assess to have displayed the best overall
figure skating ability over the past year.
The same distinction would apply whether the judges are
individual people or algorithms developed by the organizers of the
event. If the outcome is decided by algorithms based only on skill
and ability during the activity, it would be gaming. If the
algorithm considers other factors, it would not be gaming.
---------------------------------------------------------------------------
Political elections illustrate the distinction between gaming, as
defined in the Proposal, and contests.\211\ Elections typically serve
the purpose of selecting political leadership, not recreation or
entertainment. Their outcomes do not turn on the participants' luck,
skill, or athletic ability during the election itself, but rather on
voters' judgment regarding who should hold office, informed by
considerations beyond the discrete election period.\212\ Thus,
political elections are not gaming.
---------------------------------------------------------------------------
\211\ For clarity, and as discussed in this section, the
Commission preliminarily believes that the Nadex Order and the
Kalshi Order were incorrect to find that event contracts involving
political elections were event contracts that involve gaming.
\212\ It would be cynical, at best, to say that a person won a
political election because they got lucky or were more skillful at
convincing voters to vote for them.
---------------------------------------------------------------------------
The District Court for the District of Columbia reached the same
conclusion, reasoning that an event contract on whether a chamber of
Congress will be controlled by a specific party in a given term
involves ``elections, politics, Congress, and party control'' and does
not ``bear any relation to any game--played for stakes or otherwise.''
\213\
---------------------------------------------------------------------------
\213\ KalshiEX, 2024 U.S. Dist. LEXIS 163925, at *38-39.
---------------------------------------------------------------------------
Similarly, contests like the Nobel Prize and the Academy Awards are
not gaming. The outcome of these contests depends on electors' judgment
on who should receive an award based on a range of considerations
beyond the participants' luck, skill, or athletic ability displayed
during the contest. Because the award turns on evaluative judgments,
not on measurable occurrences dependent on the participants' skill or
athletic ability in the activity itself, it is a contest, not gaming.
Mere association with athletic performance does not change this
analysis. For example, the Cy Young Award, which is presented annually
by the Baseball Writers' Association of America to the two best
baseball pitchers, is not gaming.\214\ Although players are recognized
for their athletic performance during the season, the outcome is
ultimately determined by the judgment of a panel of voters, who assess
overall performance without being strictly limited to occurrences in
any game or games. On the other hand, an event contract on which
baseball pitcher will record the most strikeouts in a season is gaming.
Its outcome depends on a measurable outcome of the participants' skill
and athletic ability in games--i.e., who records the most strikeouts.
---------------------------------------------------------------------------
\214\ See Baseball Ref
[…truncated; see source link]Indexed from Federal Register on June 12, 2026.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.