CFTC proposes treating sports and political event contracts as swaps, carves out sportsbooks

The Commodity Futures Trading Commission on Oct. 9 proposed a rule that would define event contracts on sports, politics, culture and weather as “swaps,” the class of derivatives Congress put under the agency’s watch. The Securities and Exchange Commission joined the proposal, as the Dodd-Frank Act requires for changes to the swap definition. Comments are due 30 days after it appears in the Federal Register.

The same day, the agency issued an interim final rule, a rule that takes effect before public comment closes, saying casino-style gambling products, including sportsbook wagers and casino games, are excluded from that definition. That one is effective the moment it is published.

“Casino-style gambling products are not derivatives,” Chairman Michael S. Selig said in the CFTC’s release. On the other filing, he called event contracts “commodity derivatives squarely within the CFTC’s regulatory remit” and “within the agency’s exclusive jurisdiction.”

The line between the two rules is how the price gets made. The interim rule describes gambling as a deal between a “house” and its customer, where “customers must accept the price set by the house.” On a prediction exchange, in the agency’s telling, traders post prices against each other.

The agency writes that state actions and court rulings have moved to “undermine the CFTC’s jurisdiction over event contracts.” Minnesota made prediction markets a crime. New York asked a state court for an order that, because the exchange involved is headquartered there, “threatens to prohibit it from offering event contracts nationwide.” State judges in Michigan, Washington and Nevada ordered that exchange to geofence sports contracts, meaning block users located in those states.

Three federal appeals courts have also weighed in, the proposal notes. A divided Third Circuit panel sided with the swap reading in April. The Ninth Circuit in August and the Sixth Circuit in September went the other way, for different reasons. The Ninth Circuit put the problem sharply: if there is no difference between sports betting on Kalshi and sports betting in Caesar’s Sportsbook, then every person betting at Caesar’s is violating federal commodities law. The interim rule is written as the answer to that line.

As ReadWrite noted, a swap label does not by itself decide whether federal oversight stops states from applying their gambling laws. The New Jersey case on that question is sitting at the Supreme Court.

Read the two filings by their effective dates and the trade is lopsided. The give to the states, sportsbooks and casinos stay theirs, takes effect the day it is published in the Federal Register. The take, sports and political contracts on exchanges belong to Washington alone, waits through a comment period, a final vote and almost certainly a lawsuit.

The agency is handing state regulators a written guarantee about the business they already license, then asking judges to see the exchange product as something different. The Ninth Circuit leaned on the idea that a sports contract is just a bet with a new wrapper. The interim rule gives the next judge a federal regulation that takes effect when published and that defines the wrapper.

The cleanest test of whether the bargain lands is the next ruling that cites both documents, because the states now get to argue against a proposal while the CFTC argues from a rule that takes effect when published.