This morning, the CFTC published a Notice of Proposed Rulemaking Concerning Event Contracts Involving Enumerated Activities. The proposal is primarily centered on providing a framework for understanding how the CFTC will determine whether a contract “involves” any of the enumerated activities listed under the “Special Rule”: gaming, terrorism, assassination, war, and activity unlawful under federal or state law. Comments on this Rulemaking are due within 45 days after publication in the Federal Register.
While we are working on a more detailed client alert, we wanted to provide you with some key takeaways as soon as possible:
- New definitions of “involve” and “gaming.”
-
-
- If a contract does not “involve” an enumerated activity, it would not be subject to public interest review under the Special Rule.
- The proposal defines when event contracts “involve” an enumerated activity, viz., “if their settlement is determined by an occurrence, extent of an occurrence, or contingency in the activity.”
- It also defines gaming as “any activity that: (i) one or more participants typically engage in for purposes of recreation or to entertain others; (ii) is governed by rules; and (iii) includes measurable occurrences or outcomes that depend on the participants’ luck, skill, or athletic ability during the activity.”
-
- If Special Rule public policy review is triggered, the proposal sets out a review timeline framework.
-
-
- The proposal sets forth a framework for the review of Special Rule contracts:
-
-
-
-
-
-
- Within 10 days, the Commission may initiate a 90-day review of any self-certified event contract that appears to involve an enumerated activity.
- During that window, the prediction market would receive a written statement of concerns by day 15, may submit a response (including any proposed contract modifications) by day 30, and may respond by day 70 to a staff recommendation to be issued by day 60.
- If the Commission does not issue a prohibition order by day 90, the contract may continue trading, and extensions require the prediction market’s consent.
-
-
-
-
- The proposal explains how the Commission would determine whether a contract is contrary to the public interest.
-
-
- The Commission will weigh certain factors based on the type of contract being evaluated. These factors include, but are not limited to, the contract’s price discovery and information aggregation utility, susceptibility to manipulation or settlement integrity deficits, risks of insider information leakage, and whether the prediction market can adequately administer the contract.
-
- Aggregate sports outcome contracts get a favorable signal; certain narrow designs do not.
-
-
- The Commission indicates that event contracts on final scores, point differentials, tournament advancement, and season-long statistics—settled on objective data with appropriate surveillance and sports-league coordination—are unlikely to be found contrary to the public interest. Contracts tied to player injuries, officiating calls, physical altercations, discrete-action triggers, or pre-collegiate sports are flagged as likely problematic.
-
- Broad categories of event contracts are identified as generally outside the Special Rule entirely.
-
-
- The Commission provides illustrative examples of contracts that do not involve an enumerated activity and therefore are generally not subject to Special Rule review (with the caveat that the Commission cannot anticipate every contract design)—including contracts on economic indicators (CPI, GDP, unemployment), financial benchmarks (the federal funds rate, stock indexes), foreign exchange rates, outcomes of award contests, and political elections.
-
Please let us know if you have any questions or if we can assist you with drafting and providing comments to the Proposed Rulemaking.
