On October 9 the Commodity Futures Trading Commission released two rulemakings that settle where it thinks its authority over betting-style products starts and stops. A proposed rule would name event contracts, including those on sports, politics, culture and weather, as swaps. An interim final rule, effective on publication in the Federal Register, excludes state-licensed casino and sportsbook wagers from the swap definition.
Two rules, one boundary
The proposal (RIN 3038-AF82) adds a new paragraph (G) to the swap definition in 17 CFR 1.3, that lists event contracts, including those based on sports, politics, culture and weather, as swaps. The Commission says event contracts qualify as swaps under four separate clauses of the Commodity Exchange Act, and that its power to further define the term gives it an independent legal basis.
The interim final rule (RIN 3038-AF81) adds paragraph (7) to the same section, covering casino-style gambling products Its effect is that wagers placed with a licensed sportsbook or casino operator are not swaps. Both documents open a 30-day comment period that starts when each is published in the Federal Register. A footnote in the proposal says the new event-contract language would not reach casino-style gambling products, which the Commission handles in the separate rule.
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CFTC Chairman Michael S. Selig put the first position this way in the agency’s release: “These products are commodity derivatives squarely within the CFTC’s regulatory remit under the Commodity Exchange Act and are within the agency’s exclusive jurisdiction.” On the second, he said: “Casino-style gambling products are not derivatives.”
The two tests that define the carve-out
The exclusion is not a topic list. It works through a provider test and a product test, and a contract has to pass both.
Under the provider test, the contract must be offered by a person licensed or otherwise authorized under state law, or under tribal law through the Indian Gaming Regulatory Act, to offer gambling or accept wagers. That person must be acting within the scope of the license, and the contract must be regulated as gaming under that state or tribal law.
Under the product test, the contract must not be traded on a board of trade, an organized exchange, a swap execution facility, or any other market where trades are executed multilaterally or subject to individual negotiation. The rule then lists three examples: sports wagers accepted by a licensed sportsbook, casino table games, slot machines and other electronic gaming devices, and other licensed games of chance such as bingo, pool wagering, lotteries and raffles.
The Commission borrows the logic from its 2012 swap-definition rule with the SEC, which carved out traditional insurance on two grounds: insurance is not traded on an organized market, and it is regulated as insurance under state law. The interim rule applies the same pair of grounds to gambling products.
Why the Commission acted now
The interim rule describes courts and states reading the swap definition in conflicting ways. It says the Sixth Circuit treated sports event contracts as legally indistinguishable from casino sports wagers, and that the Ninth Circuit found the substance of the sports event contracts before it was sports gambling. Both courts, the interim rule says, worried about the reach of federal law if the contracts were swaps. The Third Circuit went the other way, holding that sports-related event contracts traded on a CFTC-licensed designated contract market fit within the swap definition. It also pointed to the Commission’s power to further define swaps as the fix for far-fetched cases such as bingo or ping-pong. The interim rule says it implements that approach.
States are part of the dispute. The interim rule notes that 40 states and the District of Columbia told the Commission in a comment that sports event contracts are indistinguishable from traditional sports betting. The American Gaming Association argued in a Sixth Circuit brief that if sports wagers qualify as swaps, the Act would require all sports bets to be traded on designated contract markets.
We covered the federal-state fight when the Commission stepped into it in August in CFTC Draws a Federal Line Around Prediction Markets. These two rules move the argument from an emergency order to the rulebook.
What the proposal says it changes
Less than the headline suggests, by the Commission’s own account. In its cost-benefit discussion the Commission says it preliminarily believes the proposal would not change the legal rights or obligations of market participants, because it already treats event contracts as swaps. It expects the proposal to reduce interpretive uncertainty and support uniform nationwide treatment under its exclusive jurisdiction, and says it cannot quantify the effect of greater regulatory certainty.
The proposal also lays out the history behind that position. It cites a 1993 staff no-action letter for election contracts, the 2004 designation of the first contract market dedicated to event contracts, and a January 2022 order penalizing an operator for offering event contracts without registering, which described them as swaps. It adds that exchanges have self-certified thousands of sports, politics, culture and weather event contracts to the Commission over the past several years.
What it means for the finance leader
This section is our read, not the Commission’s.
The line the two rules draw depends on where and how a contract trades, not on what it is about. The same sports outcome is a swap when it trades on a federally regulated market and is outside the swap definition when a licensed sportsbook takes the bet in a bilateral transaction under state or tribal rules. Banks, payment processors and fintech platforms that serve either kind of operator should check which side of that line each customer sits on, because the compliance regime attached to each side differs.
Two things are worth tracking. The Federal Register publication dates start both 30-day comment clocks. The interim rule takes effect on its own publication date, before comments are in. The Commission has asked for comment on whether the provider test should cover more categories of provider and whether a better objective line exists between swaps and gambling products, so firms with a view on the tests have an open invitation.
Earlier this month the Commission also asked for comment on a registration category for crypto asset markets, which we covered in CFTC Seeks Comment on a Registration Category for Crypto Asset Markets. Operators that touch both crypto and event contracts will be reading several comment deadlines at once.
Courts have not finished with the question. The interim rule cites a September 2 Supreme Court brief in which New Jersey argued that the Act does not make the CFTC the sole regulator of sports gambling. The Commission also says it may modify the interim rule after reading comments, so legal teams should plan for the text to change.
Source: CFTC press release 9310-26 and CFTC press release 9309-26
