CFTC and Event Contracts Regulation

Authority Under the Commodity Act

The regulation of financial prediction markets at the federal level is governed by the Commodity Exchange Act (CEA), codified at 7 U.S.C. Sections 1-26, and administered by the Commodity Futures Trading Commission (CFTC). Created by Congress in 1974 to regulate agricultural commodities and industrial futures, the CFTC's jurisdiction was dramatically expanded by the Commodity Futures Modernization Act of 2000 and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

Under the CEA, an event contract is a derivative contract whose payoff is determined by the outcome of a specified occurrence or event, such as a macroeconomic metric, temperature reading, statutory passage, or election outcome.

Unlike state gaming control boards, which regulate games of chance under state police powers, the CFTC regulates contracts as financial derivatives traded on federally licensed Designated Contract Markets (DCMs). DCMs are subject to rigorous federal core principles under Section 5 of the CEA, requiring transparent order books, automated clearinghouse custody, financial surveillance, and strict anti-manipulation systems.

Prohibited Categories Under Section 5c

The central statutory battlefield between the CFTC and event contract exchanges is codified in Section 5c(c)(5)(C) of the Commodity Exchange Act (7 U.S.C. § 7a-2(c)(5)(C)), enacted under Dodd-Frank in 2010.

Under Section 5c(c)(5)(C), Congress directed the CFTC to prohibit the listing and trading of event contracts that involve:

• 1. Activity that is unlawful under any Federal or State law;
• 2. Terrorism;
• 3. Assassination;
• 4. War;
• 5. Gaming; or
• 6. Other similar activity determined by the Commission, by rule or regulation, to be contrary to the public interest.

Congress enacted this provision primarily to prevent Wall Street exchanges from creating speculative derivatives on catastrophic national security events, such as the assassination of political leaders or acts of war. However, the inclusion of the single word gaming alongside war and terrorism created an intractable administrative controversy.

CFTC 90-Day Review and Public Interest

Under CFTC Rule 40.2, a licensed DCM can list a new contract through self-certification, provided the contract complies with the CEA. However, if the contract involves any of the enumerated Section 5c categories, the CFTC initiates a formal 90-day public interest review under CFTC Regulation 40.11.

During an administrative review, the Commission must make two affirmative statutory determinations to block a contract:

• First, it must prove that the underlying event contract involves gaming or one of the prohibited statutory categories.
• Second, it must determine that trading in the contract would be contrary to the public interest.

In its September 2023 order denying Kalshi's congressional control contracts, the CFTC adopted an expansive definition of gaming, asserting that gaming encompasses any game of chance, event, or contest, including political elections. The Commission further concluded that allowing multi-million-dollar financial bets on elections was contrary to the public interest because it risked incentivizing political sabotage, voter suppression, and election manipulation.

Judicial Rebuke and CFTC Rulemaking

The CFTC's aggressive regulatory stance suffered a catastrophic judicial collapse in 2024. In KalshiEX LLC v. CFTC (Case No. 23-cv-3274), Judge Jia Cobb of the U.S. District Court for the District of Columbia rejected the Commission's interpretation, ruling that election outcomes are not games and that political contests do not constitute gaming under the plain meaning of the CEA. The D.C. Circuit affirmed the district court, noting that the CFTC could not stretch the word gaming to encompass core democratic processes.

Confronted with defeat in federal court, the CFTC in May 2024 published a proposed rulemaking notice to explicitly ban all event contracts tied to political contests, awards shows, and athletic events across all registered DCMs.

However, by 2026, the Commission's proposed rules face overwhelming opposition from financial industry leaders, academic institutions, and federal courts. Certified contracts on political outcomes and athletic events remain actively listed on CFTC-regulated exchanges, creating a permanent regulatory reality that integrates political and sports event derivatives into the mainstream American commodities system.

CEA § 5c(c)(5) Review and Public Interest Tests

The primary statutory battleground between prediction market exchanges and federal regulators is Section 5c(c)(5) of the Commodity Exchange Act (7 U.S.C. § 7a-2(c)(5)), enacted under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. This provision authorizes the CFTC to review and prohibit event contracts if the agency determines that the contract involves activity that is unlawful under federal or state law, terrorism, assassination, war, gaming, or other activity contrary to the public interest.

In administrative proceedings and federal litigation, the CFTC has historically attempted to define the statutory term "gaming" to encompass sovereign political elections. The Commission argued that because state laws traditionally banned betting on elections, trading binary contracts on congressional control constituted gaming contrary to the public interest, asserting that election contracts could undermine public confidence in democratic institutions.

However, legal scholars and financial economists have vigorously contested this interpretation. They demonstrate that in the 2010 statutory text, Congress listed "gaming" alongside "terrorism, assassination, [and] war"-activities that are inherently illicit or violent. Under the statutory construction canon of noscitur a sociis (a word is known by its company), "gaming" refers to traditional games of chance, casino wagering, or sports betting, not the peaceful, constitutional process of electing public officials, establishing a rigorous textual standard that circumscribes administrative agency overreach.

The legislative history of the Dodd-Frank Act confirms that Congress intended the Section 5c public interest review to target genuinely dangerous or destabilizing derivative products, such as contracts based on catastrophic war casualties or corporate bankruptcies that could create moral hazards. Event contracts on macro-political outcomes, conducted under transparent clearing rules and position limits, lack these destructive incentives, reinforcing the legal argument that standard political derivatives fall outside the statutory exclusion.

CFTC’s 2024 Election Derivatives Rulemaking

In May 2024, the CFTC issued a contentious Notice of Proposed Rulemaking (NPRM) seeking to formally amend 17 C.F.R. Part 40 to categorically ban all event contracts related to political elections, athletic contests, and awards ceremonies. The proposed rule would have amended the administrative definition of "gaming" to include any contract where the payoff is based on an election contest, effectively shutting down DCM political derivative markets across the nation.

The rulemaking proposal provoked severe backlash from financial exchanges, institutional investors, and constitutional scholars. Public comment dockets filed with the CFTC highlighted that the Commission was attempting an administrative end-run around federal court rulings and the Administrative Procedure Act. Commenters noted that Congress had repeatedly considered and declined to enact explicit statutory bans on election contracts, meaning the agency was exceeding its delegated statutory authority.

Furthermore, following the Supreme Court's landmark 2024 ruling in Loper Bright Enterprises v. Raimondo (144 S. Ct. 2244), which overturned Chevron deference, federal courts no longer defer to administrative agencies' statutory interpretations. If a federal agency attempts to invent new prohibitions without clear congressional statutory authorization, federal judges must independently interpret the text, rendering the CFTC's proposed blanket prohibition highly vulnerable to immediate judicial invalidation.