CFTC Takes Two-Pronged Approach to Defining Event Contracts as "Swaps"
Commentary by Steven Lofchie
The CFTC issued two documents intending to define most event contracts as within its jurisdiction: (i) a notice of proposed rulemaking ("NPRM") that would define "event contracts, including those based on sports-, politics-, cultural-, and weather-related events," as "swaps" and (ii) an interim final rule ("IFR") that would exclude "casino-style" gambling products from the "swap" definition.
In the NPRM, the CFTC said that the "swap" label would place the event contracts within its exclusive jurisdiction. The agency said the change would not create new rights or obligations because such event contracts already are swaps. Instead, the proposal said, it would reduce legal uncertainty and allow the same treatment of event contracts across the nation. The proposal noted that (i) retail investors could trade the contracts only on designated contract markets ("DCMs"); (ii) DCMs would still have to follow federal standards, such as listing only contracts that are not easily manipulated and protecting market participants; and (iii) no new reporting, recordkeeping, or disclosure requirements would apply beyond those that apply to swaps generally.
The agency asserted that an event contract is within the definition of a swap if the outcome depends on an event tied to a "potential financial, economic, or commercial consequence." The Commission gave examples of such "potential" consequences associated with sports events, focusing particularly on the New York Knicks' 2026 championship-winning postseason run, which produced an estimated $380 million in economic activity for the city. Where it is unclear whether an event carries financial stakes, the proposal said the agency's power to define a swap lets it decide which contracts qualify.
The proposal added that the CFTC would retain its authority to block event contracts involving gaming that are contrary to the public interest or contracts that are of no potential economic consequence. In this regard, it pointed to a separate June 2026 proposal that would treat contracts based on a team's performance over a longer period differently from bets on a single pitch, shot, play, or penalty. The CFTC said such single-moment bets do not provide meaningful information.
In the separately issued IFR, the CFTC disclaimed regulatory authority over casino-style gambling, leaving that to existing regulation. The IFR described casino-style gambling as "bilateral transactions between a casino or bookkeeper (a 'house') and its customer rather than on an organized market. Prices are not set by market forces and are not subject to negotiation; rather, customers must accept the price set by the house. Because of these dynamics, gambling products are not inherently tradeable. . . ." (emphasis in the original).
Comments for both documents are due 30 days after publication in the Federal Register.
Commentary
From a political/legal standpoint, these actions were very astute on the part of the CFTC. While asserting that the CFTC has broad authority over event contracts based on sports and culture, (i) the NPRM concedes that for an event contract to be a "swap" (and thus for the agency to have jurisdiction), an event contract must be one that has a potential economic consequence (albeit it appears that the economic consequence may be limited) and (ii) the IFR concedes that the Commission would not assert jurisdiction over "casino-style" gambling, on the theory that such contracts are not tradeable.
These concessions are an attempt to defeat two arguments that have been advanced by opponents of the CFTC's declaration of jurisdiction: (i) that Congress limited the "swap" definition to matters of economic consequence and (ii) that the agency would put casinos and sports betting establishments out of business.
While the question of the CFTC's jurisdiction seems one that is best left ultimately to Congress, it is very likely that Congress is too dysfunctional to act on the matter. That would leave the question (at least for an interim period) to the courts, likely to the Supreme Court. These two actions by the CFTC will figure prominently in its legal arguments.