CFTC Codifies Rule Stating Casino-Style Wagers, Including Sports Bets, Aren’t Swaps

In what some prediction market and sports betting industry insiders are a calling a late Friday surprise, the Commodity Futures Trading Commission (CFTC) announced this afternoon that it is codifying that “casino-style gambling products” don’t fall under the definition of a swap.

The commission, which regulates yes/no exchanges, believes that event contracts are in fact swaps. That’s likely one reason why it pushed operators to cease quoting sports event contracts in a fashion similar to traditional sports wagers.

The commission adds that the Interim Final Rule (IFR) it issued will be subject to a 30-day comment period.

CFTC Also Looking to Expand Swap Definition

Some responses to the CFTC codification were jeers along the lines of “So a football bet on a sportsbook isn’t a swap, but a sports event contract is? Got it.”

Potentially fueling the fire of criticism is the commission’s effort to expand the definition of swap to include event contracts. The CFTC has long held that swaps are used for purposes beyond speculation and that view can be applied to event contracts.

“Americans use event contracts to hedge risks, speculate, and provide the public with information about the outcome of future events,” said Selig in a separate announcement. “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.”

In simple terms, the CFTC is aiming to eliminate some of the murkiness that’s arisen around the definition of swaps. Sweeping event contracts under the swap umbrella is part of that plan.

So What Is a Swap?

Under the Commodity Exchange Act (CEA), the CFTC is granted regulatory authority over exchanges offering swaps. That legislation makes room for a variety of swaps, including rate swaps, currency swaps, commodity swaps, credit default swaps (CDS), and equity and debt swaps.

It also says that swaps can be considered “event-driven” contracts, prompting some prediction market industry supporters to claim that sports event contracts meet the standard of a swap. Legal experts note that the CEA also makes clear that swaps have financial, economic, or commercial consequence.

Prediction market detractors and state regulators argue that isn’t the case with sports derivatives while also claiming that the spirit of the CEA doesn’t intend for the states to be stripped of their regulatory power over gaming. The CFTC sees things differently, reiterating that it, not the states, has regulatory purview over swaps.

“This proposal seeks to clarify that event contracts, including those based on sports-, politics-, cultural-, and weather-related events, are swaps within the CFTC’s jurisdiction. The CFTC has historically recognized that many event contracts are covered by the CEA swap definition,” adds the commission.