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The Commodity Futures Trading Commission has released a detailed advisory that sets out how prediction markets should operate under federal oversight.
The Division of Market Oversight explained that event contracts, derivatives tied to the outcome of real-world events, are becoming more popular with the public and are now used by media outlets, sports leagues, and financial institutions as sources of information.
The Commission said it wants to encourage innovation but stressed that exchanges must meet strict standards under the Commodity Exchange Act. Designated contract markets, which act as front-line regulators, are expected to monitor trading closely, prevent manipulation, and protect participants from abusive practices.
Exchanges must comply with 23 statutory Core Principles
The Commission reminded exchanges that they must comply with 23 statutory Core Principles, including obligations to prevent manipulation and protect market integrity.
Core Principle 3 requires that only contracts not susceptible to manipulation be listed, while Core Principle 4 demands surveillance systems to detect price distortions. The advisory highlighted risks in cash‑settled contracts, where incentives may exist to influence settlement data.
Sports‑related contracts were singled out as particularly sensitive, with concerns about outcomes tied to injuries, officiating decisions, or misconduct. Exchanges are urged to engage with Commission staff early in the design process to address these risks.
CFTC open to public comments
The CFTC has opened the door for public input as it reviews how prediction markets should be regulated. A central issue raised in the notice is the public interest test under the Commodity Exchange Act, which gives the Commission authority to block contracts tied to activities such as terrorism, assassination, war, or gaming.
The agency is now asking for feedback on how these prohibitions should be applied in practice and whether certain categories of event contracts should be restricted altogether.
The notice also reflects the changing shape of the industry. Applications for exchange registration have more than doubled in the past year, with many new entrants focused solely on prediction markets. To address this growth, the Commission is weighing the costs and benefits of new rules, including how they might affect small businesses.
Using the Small Business Administration’s threshold of $47 million in receipts, the agency is evaluating the economic impact of its decisions on smaller exchanges.
Beyond financial considerations, the Commission is exploring risks tied to insider information and whether current surveillance systems are strong enough to detect abuse. It also raises questions about dispute resolution, aksing if mechanisms used in other derivative markets, such as credit default swaps, could work for event contracts.
The public has been given 45 days from March 12 to submit comments either through the Commission’s portal or by mail. A summary of the vote shows Chairman Selig supported issuing the notice, with no commissioners opposing the move.
