USA: The CFTC publishes a consultation on prediction markets and issues regulatory guidelines

The U.S. Commodity Futures Trading Commission (CFTC) announced the publication of an Advanced Notice of Proposed Rulemaking (ANPRM) to evaluate the regulatory treatment of event-based contracts traded in so-called prediction markets.

The initiative opens a public consultation to analyze issues such as market manipulation risks, insider trading, monitoring mechanisms, and the potential prohibition of certain contracts linked to activities contrary to the public interest, such as terrorism, war, or illicit activities.

Context: Growth of prediction markets

Prediction markets allow the trading of financial contracts whose outcome depends on the occurrence of a future event, such as election results, economic indicators, or sporting events.

The price of the contract reflects the probability that the market assigns to the event. Many of these instruments have a binary structure (payment or no payment) and may qualify as financial derivatives -such as swaps, futures contracts, or binary options- under the jurisdiction of the CFTC.

New supervisory guidance

In addition to the public consultation, the CFTC’s Division of Market Oversight issued guidance directed at registered derivatives markets (Designated Contract Markets – DCMs), reminding them of three key regulatory obligations:

i. Prevention of manipulation:Markets may only list contracts that are not readily susceptible to manipulation. This requires assessing whether the underlying event could be influenced by an individual or a small group.

ii. Trading surveillance:Markets must have real-time monitoring systems to detect anomalies, irregular conduct, and potential practices such as market manipulation or misuse of insider information.

iii. Settlement transparency:Markets must ensure that the determination of a contract’s outcome is transparent and based on reliable data sources, particularly for cash-settled contracts.

Relevance for the industry

Prediction markets operate in a hybrid space between financial derivatives and event-based betting, raising increasingly complex regulatory challenges. The outcome of this process in the United States could influence how other jurisdictions approach the regulation of these models in the future.