CFTC proposes event contracts count as swaps

At a glance

The Commodity Futures Trading Commission (CFTC) issued an interim final rule saying casino-style gambling, including wagers at sportsbooks and casino games, is not a “swap”. It also published a proposed rule that would add event contracts, “including those based on sports, politics, cultural, and weather-related events”, to the definition.
Neither document had appeared in the Federal Register when we checked at 03:58 UTC on Saturday, so neither 30-day comment period has started.

What the CFTC did

The first item is an interim final rule. An interim final rule takes effect without a prior comment period; the public comments afterwards. The CFTC says it “codifies the CFTC’s longstanding position that casino-style gambling products, including wagers placed on sportsbooks and casino games, are excluded from the ‘swap’ definition”. It takes effect when it is published in the Federal Register, and comments are due on Regulations.gov within 30 days of that date.

The second is a notice of proposed rulemaking. It “proposes providing additional market clarity by expressly further defining the term ‘swap’ to include event contracts”. Comments are also due 30 days after Federal Register publication.

Chairman Michael Selig said in the second release that event contracts “are commodity derivatives squarely within the CFTC’s regulatory remit under the Commodity Exchange Act and are within the agency’s exclusive jurisdiction.”

Why now

States say the platforms that list sports contracts are running unlicensed gambling. Courts have split. CoinDesk counts one federal appellate ruling against the states and two for them; SBC Americas identifies the Sixth and Ninth Circuits as the two that sided with states, partly because they saw no legal difference between a sports event contract and a sportsbook bet.

According to SBC Americas, the CFTC calls that premise “erroneous”. It says the interim rule follows an approach the Third Circuit suggested in its April ruling for Kalshi. SBC also reports the agency lists five differences between event contracts and sportsbook bets. They include a central order book with market-set prices, clearing through a clearinghouse, and listings under federal oversight since the 1990s. The agency acknowledges, SBC says, that “a person can achieve similar economic exposure” through either product.

The Supreme Court is weighing New Jersey’s petition in Flaherty v. KalshiEX. Briefs backing the state have come from gaming regulators, 39 states and the District of Columbia, and the NFL.

What analysts say

TD Cowen analyst Jaret Seiberg wrote to clients, as quoted by CoinDesk: “We view this interim final rule as designed to improve the agency’s position in court as the states are arguing that the CFTC’s definition of a swap would make federally illegal any wager made at a state or tribal casino or sportsbook. Whether this actually works is a different question.”

CoinDesk reported that the actions went to White House review less than two weeks ago, and that Selig is the only sitting commissioner on a five-seat commission, so he can set policy alone. States and some former federal officials have objected to the CFTC’s reading, CoinDesk said.

What happens next

The procedural step to watch is publication in the Federal Register. The comment clocks start then, and the interim rule takes effect that day. After that, the open question is whether judges treat an agency definition as changing the legal picture in the pending cases. The CFTC says the rule does not change anyone’s legal rights, since it already treats sportsbooks as outside its remit, according to SBC.

This article is for information only and is not investment advice.