In the ongoing debate about whether or not sports event contracts meet the definition of a swap, the Commodity Futures Trading Commission (CFTC) has weighed in.
The regulator last week published two rules, which would enshrine in CFTC regulation that prediction market trades on sports are indeed swaps, as defined in the Commodity Exchange Act (CEA).
“The rules do two different things that are two sides of the same coin. Number one, amending the swap definition to explicitly include these types of contracts, and the other one amending it to explicitly exclude casino games and sportsbook bets,” one commodity futures lawyer told InGame.
What is a swap?
The text of the CEA says a swap should be “dependent on the occurrence, nonoccurrence, or the extent of the occurrence of an event or contingency associated with a potential financial, economic, or commercial consequence.”
Prediction markets such as Kalshi argue that this is an intentionally broad definition and would include trades on sports given the economic consequences of sporting events. States say otherwise, arguing that in context the definition is referring to events that are inherently financial or economic. Perhaps unsurprisingly, the CFTC took the prediction markets’ side.
In part, the rules also lean on another part of the swap definition in the CEA. The act says that any agreement that has become “known to the trade as a swap” is one. Sports event contracts have been offered as swaps for almost two years. To the average customer, they may not necessarily be known as swaps, but to exchanges and brokers they are.
The CFTC also said that a key distinction between a swap and non-swap is that swaps must be “tradable.” It says that sportsbook bets are not tradable. The regulator acknowledged that this definition does not appear directly in the CEA but says it can be understood from the context of the act. The CFTC determined that sportsbook bets are not tradable, and so don’t fit the definition.
Motivated by lawsuits
The motivations look clear enough. The new definitions come as prediction markets and states are engaged in litigation all across the country. Many cases have gone the way of states, due, at least in part, to the definition of a swap. Ultimately, the issue is likely to be decided by the Supreme Court, which is currently considering whether or not to take up the case.
“If you’re a skeptic, you might say they’re doing it now because of the litigation. Maybe even if you’re not a skeptic,” New England College of Law Professor Melina Roth told InGame.
But, Roth said, this doesn’t mean it’s a bad thing to try to come up with a more specific definition of the nebulous word “swap.”
“The further definitions are potentially helpful,” she said. “Because courts have expressed an opinion that Kalshi’s definition of a swap covers everything, the fact that they’re carving out casino games and other stuff is helpful going forward. The fact that they’re eliminating wholesale categories where courts have said, ‘Well, if you’re right, this is included too,’ that clarification is helpful.”
CFTC explicitly authorized to ‘further define’
The CFTC’s authority here goes beyond just being a regulator. In the Dodd-Frank amendments to the CEA, Congress specifically said “the Commodity Futures Trading Commission and the Securities and Exchange Commission, in consultation with the [Federal Reserve’s] Board of Governors, shall further define” a list of terms including the word “swap.”
Importantly, that means that its definition has some authority from Congress, rather than simply being one organization’s opinion.
Under the 2025 Supreme Court case Loper Bright Enterprises v. Raimondo, courts no longer give deference to a regulator’s definitions of ambiguous words in statute. However, if the statute explicitly says the regulator can further define the phrase, that is authority from Congress.
“They have the legal ability to further define what a swap means,” Roth said. “Loper Bright doesn’t really apply here.”
Not going to have major impact?
But, while the new definitions may have some effect, lawyers do not expect them to have a dramatic impact on prediction market lawsuits.
“I don’t know that it’s going to do that much at the end of the day,” the commodity futures lawyer said.
“Further define” is not a phrase without limits. The CFTC’s further definition of swap would have to be consistent with Congress’ definition. If a court feels sports contracts are not swaps, they may simply look past the CFTC’s attempt to contradict that interpretation. Before the new definitions, courts found that including sports contracts as swaps was inconsistent with the definition in the CEA. If they wanted, could they just use the same reasoning to ignore the CFTC’s definitions? It seems like a possibility.
“Where they’re saying these products are swaps, they’d have to convince a court that they’re not expanding the definition beyond what Congress intended, which is basically what the courts are already deciding,” the commodity futures lawyer said.
“If they came up with a further definition of a swap that included a purchase of a used car, courts would say that’s not further defining a swap. So there’s a limiting principle somewhere.”
The CFTC also can’t do so much about the preemption side of the argument. The U.S. Court of Appeals for the Sixth Circuit and a number of district courts have found that regardless of whether or not sports event contracts are swaps, the CEA does not preempt state gambling laws. Even if the swap question were solved unambiguously in the prediction markets’ favor, the question of preemption would still remain.
“The Sixth Circuit says no preemption even if it’s a swap,” Roth said. “So no matter what, you still have a circuit split.
“Could this have an impact on whether the Supreme Court takes up the issue? Maybe some small incremental possibility.”
How involved were SEC and Fed?
One other element of that “further define” provision is worth noting. Congress says the CFTC can make these definitions in consultation with the SEC and the Federal Reserve Board of Governors. How involved were they in the swap definition? Typically with joint agency work, both the SEC and CFTC would be listed on page one of a document in all caps. Here, it is mentioned only in a footnote that “the SEC joins in proposing this rule in satisfaction of the statutory requirement.”
“If the CFTC just said the SEC joined it in publishing the NPRM when in fact the SEC had nothing to do with it, that would clearly not satisfy 712(d)(1),” a source told InGame. “Even if the SEC was involved but somehow didn’t put its name on this or vote on its publication in the Federal Register, it would seem that these things could technically not satisfy 712(d)(1) or APA procedural requirements.”
With the Fed’s Board of Governors, the CFTC’s rulemaking says it “consulted with the Federal Reserve Board by sharing this Proposal,” but what “sharing” entails is not completely clear.
Both rules will face consultation
For now, neither rule is in effect. The rule to exclude sportsbook bets and casino games was published as an interim final rule, giving it an expedited path to going into effect, but it still faces a public comment period. The rule including sports event contracts as swaps is currently a notice of proposed rulemaking, which involves a more extensive notice-and-comment process. In both cases, stakeholders will have a chance to share their views on the rules.
Writing the definitions into its rules and going through the rulemaking process may potentially be a way for the CFTC to try to deflect litigation attempts away from the exchanges it regulates. Kalshi has previously argued that states that have a problem with the CFTC allowing sports contracts should take it up with the CFTC, via the Administrative Procedure Act (APA). The new rules may bolster that argument to some degree, but it is unlikely to prevent states from aiming their enforcement directly at exchanges.
“I don’t think there’s a good argument that you would have to go through the APA,” the commodity futures lawyer said. “It’s not like an APA challenge is a last chance to dispute what an agency has done.”
Ultimately, the CFTC’s move may help prediction markets, but it is unlikely to truly upend the litigation. As ever, eyes remain on the Supreme Court for the final answers.
“I think the courts will basically be asking the same question as before,” the commodity futures lawyer added. “Does it fit within what Congress laid out?”
