Federal regulators define prediction market limits

Michael Selig draws the boundary that defines federal prediction market authority

On October 9, the Commodity Futures Trading Commission issued two rulemakings that together do something regulators had avoided for years: they say, in formal legal text, what a prediction market contract is and what it is not.

The first rule proposes expanding the definition of a "swap" under federal law to include event contracts — those tied to elections, weather, sports, cultural outcomes. The second, an interim final rule effective on publication in the Federal Register, confirms that sportsbook wagers and casino games sit outside that definition entirely. Chairman Michael Selig put it plainly: casino-style gambling products are not derivatives, and the CFTC's jurisdiction stops where theirs begins.

The structural logic is clean. The political situation is not.

The CFTC filed both proposals with the Office of Information and Regulatory Affairs on September 28 — the White House office that reviews federal rules before they move. The timing is not incidental. The Supreme Court is considering whether to hear New Jersey's petition in Flaherty v. KalshEX, a case that could resolve the circuit split between the Third and Ninth Districts over whether event contracts qualify as federally regulated swaps. Gaming regulators from 39 states and the District of Columbia have filed in support of New Jersey. The NFL has done the same, arguing states are better positioned to govern sports-related contracts.

Selig is not waiting to find out what the Court decides. He is trying to give the justices a fait accompli — a formal rulemaking record establishing federal authority before oral argument begins.

I have watched agencies try this before. A regulator who is losing on the merits moves to the procedural terrain, hoping the institutional weight of a published rule changes the gravity of the dispute. It sometimes works. The condition is that the underlying legal claim has to be defensible on its own, because a rule that exceeds statutory authority survives nothing. What Selig has going for him is that the Commodity Exchange Act's definition of a swap is genuinely broad, and event contracts fit more comfortably inside it than the NFL's briefing suggests. What he has against him is a Supreme Court that has spent three terms narrowing agency deference.

The two-rule structure is the move worth watching. By isolating traditional gambling in an interim final rule — not a proposal, a final rule — the CFTC is signaling that the sportsbook exclusion is settled law, not a negotiating position. That does two things: it removes the industry argument that the agency is trying to subsume sports betting, and it sharpens the jurisdictional claim to exactly the ground Selig wants to defend. Whether the Supreme Court reads it that way is a different matter.

Prediction market operators now hold a stronger federal license to operate under than they had a month ago. State regulators hold the same arguments they had before, plus a formal rulemaking to attack.