CFTC files two 'swap' definition change rules to White House

• Key insight: The CFTC is proposing changes to the definition of "swaps," which are under their jurisdiction, to include event contracts, according to OIRA filings.
• What's at stake: Event contracts are at the center of the current debate between state and federal regulators on who is in charge of prediction markets.
• Expert quote: "We need to wait until the Supreme Court ruling because it could supersede that rulemaking." —Arche Capital's Vanessa Grellet.

The Commodity Futures Trading Commission, or CFTC, submitted two proposals to the White House this week to adjust how the agency defines "swaps" under federal law as part of its legal strategy to exert authority over regulating prediction markets.

The submissions, one filed as a "proposed" rule and the other as an "interim final" rule, were filed to the Executive Office of the President's Office of Information and Regulatory Affairs, or OIRA, on Monday. Neither has been published in full yet, but the titles of each rule indicate that they seek to change the definition of "swaps" as defined by the government.

The interim final rule, labeled as "AF-81," is titled in the OIRA's executive submissions page as "Further Definition of 'Swap' to Exclude Casino-Style Gambling Products." The proposed rule, labeled as "AF-82," is titled "Further Definition of 'Swap' to Include Event Contracts."

Event contracts, also known as futures contracts, are traded on prediction market platforms, which have been rapidly rising in trading volume and investor funding over the past couple of years. 

Investment firms are starting to fund and partner with prediction markets, but banks have yet to formally enter the space. Firms such as JPMorganChase and Goldman Sachs have expressed interest in exploring potential avenues for participation, but neither one has publicly solidified a strategy for the nontraditional markets.

The CFTC, under its Trump-appointed chairman Michael Selig, has asserted both support of and authority over prediction markets over the past year through multiple public statements and involvements with state-level lawsuits regarding prediction market platforms. 

Some federal legislators have challenged that position due to what they perceive as the prevalence of sports contracts on prediction market platforms and how, in turn, that could impact state gaming commission regulations.

The specification of "casino-style" for gambling products excluded from swaps, alongside expanding the definition to include contracts, has the potential to expand the CFTC's jurisdictional definition to include sports contracts, according to Arche Capital co-founder and managing partner Vanessa Grellet.

"The CFTC has not been shy about that positioning," she told American Banker. "Sports contracts are a very large percentage of Kalshi's market. Polymarket is a little bit less but still in the majority."

Calling an event contract a swap, Grellet said, would cause event contracts to legally fall under derivatives, which are overseen exclusively by the CFTC. Grellet worked in derivatives markets at the New York Stock Exchange earlier in her career.

"That's what the CFTC is trying to achieve, in my view," she said.

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The CFTC also released a separate notice of proposed rulemaking in June of this year for a third rule, which is still undergoing the draft process and has not yet been submitted to OIRA. In that notice, the agency said that it wants to establish a new framework for evaluating prediction market contracts to determine whether they run "contrary to the public interest" or fall under restricted categories.

Many industry participants, including Grellet, say the jurisdictional question of who regulates event contracts on prediction markets could ultimately be decided by the Supreme Court instead of rulemaking from the CFTC.

"We need to wait until the Supreme Court ruling because it could supersede that rulemaking," she said. "In the meantime, we'll have the CFTC framework. There could be a middle ground if there is a legislative proposal, but in the meantime a Supreme Court decision would be the most certain outcome."