The Commodity Futures Trading Commission (CFTC) on Thursday took its most significant step yet toward regulating prediction markets, launching a rulemaking process and issuing new guidance for exchanges that list event contracts.
The agency published an Advance Notice of Proposed Rulemaking (ANPR) seeking public comment on whether new regulations or amendments are needed to govern event contracts traded on prediction markets. At the same time, staff from the CFTC’s Division of Market Oversight released an advisory outlining regulatory expectations for exchanges that list event contracts.
Together, the actions begin what could become the first comprehensive federal regulatory framework for prediction markets.
“Today’s action is an important step in the Commission’s continued effort to promote responsible innovation in our derivatives markets,” CFTC Chairman Mike Selig said in a statement. “This begins the process of new rulemaking grounded in a rational and coherent interpretation of the Commodity Exchange Act, while reassuring the American people that the CFTC will exercise its exclusive jurisdiction over prediction markets.”
The rulemaking notice opens a 45-day public comment period and asks industry participants to weigh in on how existing CFTC regulations should apply to prediction markets.
Speaking earlier Thursday in an interview with CNBC, Selig said the exchanges themselves play a central role in determining whether contracts can be listed for trading.
“Our exchanges are the first line of defense,” Selig said. “They’re self-certifying contracts every day for listing on the exchange, and they need to understand what the CFTC’s expectations are.”
Advisory highlights manipulation risks in certain event contracts
The staff advisory provides additional detail on how exchanges should evaluate event contracts before listing them for trading, emphasizing that certain types of markets may carry elevated manipulation risks.
Under the Commodity Exchange Act (CEA), Designated Contract Markets may only list contracts that are not “readily susceptible to manipulation.” The advisory reminds exchanges that this requirement applies equally to event contracts.
In the CNBC interview, Selig said the agency’s focus is on preventing abuses in markets built around real-world events. “It’s really important that we don’t have manipulation and insider trading and all sorts of abuse in our derivatives markets,” he said.
The advisory notes that some sports-related event contracts could create incentives for participants to influence outcomes tied to a specific action or individual decision.
Examples cited in the advisory include contracts that resolve based on player injuries, unsportsmanlike conduct, or physical altercations during a sporting event. Contracts tied to the actions of an official, such as a referee’s call, may also present heightened risks because the outcome could be influenced by a single person.
Contracts that settle based on the performance of multiple participants over an extended period, like the outcome of an entire game or season, may be less susceptible to manipulation because influencing the final result would be more difficult, the advisory states.
The advisory also encourages exchanges offering sports-related event contracts to engage with sports leagues or governing bodies when designing markets, including coordinating on settlement data and integrity monitoring.
Beyond product design considerations, the guidance reiterates that exchanges must maintain systems capable of monitoring trading activity in real time and investigating suspicious behavior. The guidance also reminded exchanges that existing CFTC anti-manipulation rules apply to event contracts, including prohibitions on trading based on misappropriated confidential information.
Rulemaking notice asks how prediction markets should be regulated
The rulemaking notice lays out a wide-ranging set of questions about how prediction markets should fit within the CFTC’s existing regulatory framework and whether new rules are needed as the sector expands. In the document, the agency said it is seeking information on “statutory core principles and Commission regulations that apply to prediction markets,” along with the potential costs and benefits of additional regulation.
As part of the rulemaking, the agency is asking how exchanges should apply core regulatory requirements when listing event contracts, including market surveillance, position limits, and protections against abusive trading practices. The notice also raises questions about how insider information should be treated in markets built around real-world events, where some participants may have early knowledge about the outcome of an event. Regulators asked commenters to weigh whether trading by participants with such advantages improves price discovery in prediction markets or creates fairness and manipulation concerns.
The ANPR also asks how the CFTC should apply provisions of the CEA that allow the Commission to block certain event contracts. Under the statute, the agency can prohibit contracts tied to the outcome of future events if it determines they conflict with the public interest. The law specifically identifies several categories that may raise such concerns, including contracts involving terrorism, assassination, war, gaming, or other unlawful activity.
The agency is seeking feedback on how those categories should be interpreted and what factors the Commission should consider when determining whether particular contracts should be prohibited.
One question the rulemaking does not resolve is whether sports event contracts should ultimately be permitted on regulated exchanges. While the advisory discusses manipulation risks associated with certain types of sports contracts, the ANPR instead asks commenters to weigh in on how the CEA’s prohibition on contracts involving “gaming” should be interpreted, leaving open whether sports markets could fall within that category.
The notice also suggests the agency may be weighing gambling-style consumer protections as part of the analysis, asking commenters what aspects of “responsible gaming standards,” including self-exclusion programs, monetary or time limits, advertising restrictions, disclaimers, or warnings, it should consider.
In other section of the ANPR, the CFTC also asks whether event contracts should be eligible for margin trading, including for retail participants, and what safeguards might be needed if leveraged trading is permitted. Most prediction markets today operate on a fully collateralized basis, meaning traders must fund positions upfront. Allowing margin would move event contracts closer to the structure of traditional derivatives markets, where traders can use leverage to increase exposure, potentially expanding trading activity but also raising questions about risk controls and investor protections.
Notice cleared White House review before release
Before publishing the rulemaking notice Thursday, the proposal was reviewed by the White House Office of Information and Regulatory Affairs (OIRA), a step required for many federal regulatory actions.
A filing in the federal regulatory review system shows the CFTC submitted the prediction markets rulemaking to OIRA on March 2. The review concluded on March 9 with a determination of “consistent with change,” meaning the proposal was cleared to proceed after revisions were made during the interagency review process. The OIRA review is part of the executive branch oversight process for significant regulatory actions.
These recent moves come as federal regulators are increasing coordination on emerging financial products. On Wednesday, the CFTC and the U.S. Securities and Exchange Commission announced a memorandum of understanding aimed at improving collaboration and providing clearer regulatory guidance across markets where their jurisdictions overlap.
What happens next
With the notice now published, market participants will have 45 days to submit feedback on the questions raised in the ANPR, including how existing derivatives rules should apply to prediction markets and whether additional regulatory clarity is needed.
After reviewing those comments, the Commission will decide whether to move forward with formal proposed rules establishing specific requirements for event contracts. Any such proposals would undergo another round of public comment before the agency considers adopting final regulations.
The outcome of that process is expected to shape how the CFTC interprets its authority over prediction markets and which types of event contracts may ultimately be permitted to trade on regulated exchanges.
