CFTC Releases Latest Guidance With Policy Changes For Prediction Markets

On March 12, The Commodity Futures Trading Commission released new guidance on the rapid growth of prediction markets, including sports contracts.

A staff advisory was issued by the Division of Market Oversight, identified as CFTC Letter No. 26-08, outlining expectations for legal markets offering event-based contracts. It follows an earlier announcement this month on the latest developments. 

The document, titled Prediction Markets Advisory, addresses exchanges with growing demand for event contracts viewed as financial products and information signals. Acting director, Frank N. Fisanich said the agency supports innovation but expects exchanges to operate within established regulatory structures.

According to the advisory, prediction markets allow participants to buy or sell contracts, grouped into binary options or swaps, pertaining to a specific outcome. Contracts are often tied to outcomes with financial, economic or commercial implications. The commission’s guidance also focuses on sports contracts.

Exchanges Required To Maintain Market Integrity

The advisory emphasises that designated contract markets serve as the first line of regulatory oversight. Under existing law, registered exchanges must maintain market integrity by complying with 23 statutory core principles. 

Core Principle 3 requires exchanges to list only contracts that are not easily susceptible to manipulation. 

Core Principle 4 obliges platforms to maintain the capacity and responsibility for preventing price distortions and disruptions via active monitoring and enforcement.

Sports Event Contracts Raise Additional Concerns

The advisory notes that sports-related contracts present specific risks. Hence, there must be active regulation to limit the chances of manipulation.

CFTC staff members encouraged exchanges to work closely with sports leagues and governing bodies to reduce the likelihood of regulatory intervention.

The guidance also prompts market participants that the commission retains authority to investigate misconduct. Activities such as insider trading or the misuse of confidential information could trigger civil enforcement actions.

Regulators emphasised that individuals with privileged knowledge about an event may attempt to profit from prediction markets. Exchanges must remain vigilant in identifying trading patterns linked to non-public information.

Commission Launches Review Of Prediction Market Rules

The advisory coincides with a formal regulatory initiative examining the future of event contract markets. The commission has opened a consultation process to gather public input on potential rule changes.

The agency published an advance notice of proposed rulemaking under the identifier RIN 3038-AF65, inviting public comments on future regulatory standards for prediction markets.

The document was published in the Federal Register, highlighting a sharp rise in market activity. Registered exchanges listed an average of five event contracts yearly between 2006 and 2020.

The number increased to 131 contracts in 2021. By 2025 the total reached approximately 1,600 certified event contracts.

Christopher Kirkpatrick, The secretary of the commission, stated that the agency is seeking feedback on how statutory core principles should operate in these markets.

Public Consultation Opens On Event Contract Regulation

The consultation also examines the public interest standard contained in the Commodity Exchange Act. The commission has authority to block contracts linked to activities, such as assassination, terrorism, war, gaming, or activities deemed contrary to public interest.

The agency seeks input on if some event contracts should face restrictions or outright prohibition. Its released notice highlights a shift in the composition of the industry. Applications for exchange registration have more than doubled over the past year as new firms attempt to enter the prediction markets. Hence, the commission is examining potential economic consequences of new rules.

The Small Business Administration sets the revenue threshold for small securities and commodity exchanges at $47m. Regulators are using this figure to evaluate the effect of policy changes on smaller market operators.

The commission is also studying risks related to inside information and trading surveillance. Officials are considering whether dispute resolution systems used in other derivatives markets could help determine outcomes in contested event contracts.

The public has been given 45 days from 12 March to submit written comments through the commission’s online portal or by mail. A summary of the vote shows that chairman Caroline D. Pham supported the decision to issue the notice, while no commissioners opposed it.