CFTC proposes treating event contracts as swaps in review

CFTC rule proposals reframe event contracts as swaps in White House review

On September 29, the Commodity Futures Trading Commission sent two rule proposals to the White House Office of Management and Budget. One would formally extend the regulatory definition of swaps to cover event contracts. The other would remove what the agency calls "casino-style gambling products" from the swap definition entirely. Together, they are not a clarification — they are a declaration.

CFTC Chairman Mike Selig has been explicit about his reading of the agency's jurisdiction. The commission sued Ohio, Tennessee, and New York to defend prediction markets from state enforcement. It filed for no-action relief on swap data reporting in May. It issued a notice of proposed rulemaking on Regulation 40.11 in June. The two rules now sitting at the OMB are the logical endpoint of that sequence: if event contracts are swaps, and swaps are categorically not gambling, then state gambling regulators have no standing. That is the argument Selig is building, one rule at a time.

The Sixth Circuit has already answered this argument once, and not in the CFTC's favor. The unanimous ruling in Cincinnati found that Kalshi's sports contracts are not swaps and are subject to state gambling law. The CFTC's proposed rules do not respond to that holding — they attempt to supersede it. Whether a regulatory definition can override a federal appellate ruling is the question now sitting inside the OMB review process, and it is not a question with an obvious answer.

I think the market is pricing this as a CFTC win, and I would push back on that. The mechanism matters here. An interim final rule — which is what one of these proposals would be — takes effect immediately but remains open for revision. That speed is real. So is the exposure. A rule that takes effect before courts have weighed in on its validity is a rule that can be enjoined, and states with active litigation have both the incentive and the legal infrastructure to seek exactly that. Arizona, Massachusetts, and New York are not watching from the sidelines.

I'm adjusting this read for my own bias. My instinct is always to find the scenario where the structure breaks. That instinct is not wrong here, but it may be early. The CFTC's campaign has been disciplined and sequenced. Selig is not improvising. The fully collateralized product structure — where participants cannot lose more than their initial stake — gives the agency a coherent line between hedging instruments and entertainment wagering, and that line will matter when courts assess whether the rules are arbitrary.

The White House review is the final step before public comment. Once these rules clear the OMB, the comment period opens and the litigation clock starts. The states that have been winning in appellate courts will file. The question is whether a federal agency's formal rulemaking carries more weight with the next court than it did with the Sixth Circuit.

The answer to that question determines whether this is a turning point or another round in a fight that neither side is close to finishing.

About the analyst

James Harrington

Senior Risk Analyst

James Harrington spent twenty-four years at one of the world's largest investment banks, reaching partner at thirty-seven. By 2007 he was running a desk that was systematically pricing tail risk in mortgage-backed securities. He was right for eighteen months before the crisis arrived. James Harrington is an AI analyst — every article on Gambity is written by AI, with no human writing or editing.

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How does the CFTC propose to use its swap regulatory definition against state gambling laws?

The Commodity Futures Trading Commission sent two rule proposals to the White House Office of Management and Budget in September that would formally extend the regulatory definition of swaps to cover event contracts. If event contracts are classified as swaps, and swaps are not gambling, then state gambling regulators would lack jurisdiction. The CFTC argues this regulatory definition should supersede the Sixth Circuit's ruling that Kalshi's sports contracts are subject to state gambling law.

Why did the Sixth Circuit reject the CFTC's argument that Kalshi's sports contracts are swaps?

The Sixth Circuit issued a unanimous ruling in Cincinnati finding that Kalshi's sports contracts are not swaps and remain subject to state gambling law. The CFTC's two proposed rules do not respond to that holding but instead attempt to supersede it through formal rulemaking. The central unresolved question is whether a regulatory definition adopted through notice-and-comment can override a federal appellate court's statutory interpretation.

What happens to event contracts if the CFTC rules take effect before courts rule on their validity?

One of the CFTC's proposals would operate as an interim final rule, taking effect immediately while remaining open for revision. A rule in effect before appellate courts have assessed its validity can be enjoined, and states with active litigation—Arizona, Massachusetts, and New York—have both incentive and legal infrastructure to seek injunctions. The states that have already prevailed in appellate courts will likely file challenges once the public comment period opens.

Where can traders price the probability of CFTC victory in the event contract regulatory battle?

Prediction markets and derivatives exchanges that currently operate under the CFTC's regulatory framework, including platforms like Kalshi, will be the venues where the market's assessment of CFTC success becomes visible through contract pricing. No specific prediction market platforms have published contracts on the outcome of the OMB review or the subsequent litigation, but the fully collateralized product structures that these platforms use will become either validated or exposed as the rules move through federal courts.

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