Prediction Markets Face a New Federal Boundary After the CFTC’s October 9 Rules

Two wagers can give a customer virtually the same economic result: pay a price today, receive money if a football team wins, and lose the stake if it does not. In one interface the position may be called a prediction-market contract. In another it is a sportsbook bet. Regulators are now arguing over how much that distinction should matter.　　On October 9, the Commodity Futures Trading Commission made two moves that sharpened the argument. It proposed explicitly including event contracts within the definition of a swap, naming sports, political, cultural and weather outcomes among the examples. Separately, it issued an interim final rule excluding casino-style gambling, including sportsbook and casino wagers, from that definition.　　Read together, the announcements outline the boundary the CFTC wants to enforce. They do not yet provide an easy answer for every sports-linked contract that approaches that boundary.The same payoff, two regulatory arguments　　The agencys case for event contracts rests on the idea that a derivative can reference a future event rather than the price of a commodity or financial asset. A contract tied to rainfall, an election or a sporting result can have an objectively defined settlement condition. The CFTC considers certain contracts of that kind to fall