CFTC Defines the Rules of the Road for Prediction Markets

On June 12, 2026, the Commodity Futures Trading Commission (CFTC) published a Notice of Proposed Rulemaking that would amend CFTC Rule 40.11 and add a new Appendix F to Part 40, creating a structured framework for evaluating whether an event contract involves an activity enumerated in Section 5c(c)(5)(C) of the Commodity Exchange Act (CEA)-terrorism, assassination, war, gaming, or unlawful activity-and, if so, whether the contract is contrary to the public interest.

The proposal arrives at a pivotal moment. Prediction markets have moved from niche retail forecasting venues into a significant market-structure question for exchanges, asset managers, trading firms, financial institutions, and commercial participants, and the number and variety of listed event contracts—spanning sports results, elections, economic and interest-rate developments, entertainment awards, and geopolitical events—have grown sharply.

The proposed rule is therefore not only a product-eligibility framework. It is also an important step in determining whether, and how, prediction markets will become a more established part of the regulated derivatives ecosystem. 

At the same time, the Kalshi litigation and a growing wave of federal-state clashes over whether event contracts are regulated derivatives or state-licensed gambling have forced the CFTC to draw sharper lines. The proposal is the CFTC’s most detailed attempt yet to define which products may trade on federally regulated markets, which are vulnerable to public-interest challenge, and where federal commodities jurisdiction ends and state gaming regulation begins.

Three Key Questions Frame the Proposed Analysis

The proposal effectively asks three sequential questions, applied on a contract-by-contract basis.

1. Is the product an event contract?

The threshold question is whether the product is an event contract whose payoff is based on a specified event, occurrence, or value. Examples include contracts tied to: whether the Federal Reserve cuts rates; whether a merger receives regulatory approval; whether a particular candidate wins an election; whether Norway will win the FIFA 2026 World Cup; or whether a ceasefire is reached by a particular date. If the answer is yes, the CFTC proceeds to the next question.

2. Does the contract involve a statutorily enumerated activity?

The second question is whether the contract involves one of the categories enumerated in CEA Section 5c(c)(5)(C): gaming, war, terrorism, assassination, or conduct unlawful under federal or state law. Because that statutory term has never been defined, the proposal would, for the first time, define both “gaming” and what it means for a contract to “involve” an underlying activity.

This is where the proposal reflects the influence of KalshiEX LLC v. CFTC. In that case, the CFTC disapproved Kalshi’s “congressional control” election contracts as involving gaming, but a federal court disagreed and vacated the order—a decision the CFTC chose not to appeal. The episode exposed the fragility of the CFTC’s prior, broader reading of Rule 40.11, which reached any contract that “involve[d], relate[d] to, or reference[d]” an enumerated activity. The proposal narrows that trigger to contracts that simply “involve” such activity, aiming for a more defensible standard while preserving authority over contracts that raise genuine gaming, national-security, or public-interest concerns.

3. If so, is the contract contrary to the public interest?

Even if a contract involves one of these categories, the analysis does not end there. Instead, the CFTC will evaluate whether the product is contrary to the public interest, looking at factors such as market integrity, susceptibility to manipulation, commercial utility, surveillance capabilities and settlement reliability. The proposal places these factors in new Rule 40.11(a)(5) (applicable to all enumerated-activity contracts) and Rule 40.11(a)(6) (activity-specific factors), with Appendix F describing how the CFTC would apply them, and it preserves a 90-day review process with associated procedural protections. This is where the proposal begins drawing practical distinctions between favored and disfavored contracts.

How the Proposal Sorts Contracts

Broad Outcome Contracts

The proposal generally appears receptive to broad, objectively measurable outcomes. For example: will France play in the final of the 2026 FIFA World Cup or which film will win Best Picture at the Academy Awards? The CFTC appears to view these contracts as less vulnerable to manipulation and more likely to provide informational or price-discovery value. Importantly, the proposal suggests that not every event contract should be treated as gambling simply because participants are speculating on an outcome. Under the proposed framework, contracts tied to elections or awards like the Academy Awards and the Nobel Prize, and similar events would not automatically be treated the same as traditional gambling products; although, they would remain subject to the CFTC’s broader event-contract oversight.

Higher-Risk Contracts

By contrast, the proposal signals concern with contracts tied to player injuries, officiating decisions, fights and physical altercations, discrete in-game actions, and pre-collegiate sports. In practical terms, a contract on who wins the World Cup appears very different from a contract on whether a star striker suffers an injury during the tournament. Similarly, a contract on who wins the Super Bowl may be viewed differently from a contract on whether a referee issues more than two penalties in the 4 quarter of the game. The common thread is that the CFTC views contracts tied to narrow, controllable in-game events as more susceptible to manipulation and more likely to resemble traditional sports wagering than contracts tied to broad competitive outcomes.

Contracts Involving War and National Security

Perhaps the clearest message in the proposal concerns contracts involving war, terrorism and assassination. The issue is no longer hypothetical. Prediction markets have hosted contracts tied to ceasefire negotiations, military escalation, regime change and other geopolitical developments. Markets tied to U.S.-Iran ceasefires, Israel-Iran ceasefires and related conflict events illustrate the types of products that have prompted increased regulatory scrutiny. The proposal strongly suggests that contracts allowing participants to profit directly from violence, terrorism or armed conflict will face the greatest regulatory obstacles.

What Institutional Market Participants Should Be Thinking About

For asset managers, banks, broker-dealers, trading firms and corporate clients, the proposal raises questions that go far beyond product eligibility. Among them:

• Investment and hedging use. Can event contracts serve as research, forecasting, or hedging instruments—for example, to hedge event risk around rate decisions, regulatory approvals, or elections, or to express macro and idiosyncratic views that are difficult to access through traditional cash or derivatives instruments?
• Trading strategies and portfolio applications. How might event contracts fit within existing portfolios—as tail-risk hedges, relative-value or cross-market arbitrage opportunities, or a source of returns uncorrelated with traditional asset classes—and what valuation, position-sizing, and risk models are appropriate for binary payoffs?
• Market structure and liquidity. How deep and liquid are these venues, how robust are their settlement and pricing sources, and how should firms assess counterparty, clearing, margining, and operational risk when trading on prediction-market exchanges?
• Business opportunity and product strategy. Should exchanges, intermediaries, data vendors, and asset managers consider listing, distributing, clearing, or building products and analytics around event contracts as the regulatory framework stabilizes and institutional demand develops?
• Compliance and information barriers. Do employee-trading and material non-public information (MNPI) policies address event contracts—particularly where a contract references the firm’s own transactions, counterparties, or industry—and what surveillance controls are appropriate when participants may hold advance knowledge of an outcome?

Taken together, these questions frame prediction markets as both a potential business opportunity and a new source of risk that cuts across the trading, investment and control functions. As prediction markets continue to mature, compliance, information barriers and market-surveillance issues may become just as important as the CFTC’s product-approval framework. Firms should also account for the parallel data-reporting regime the CFTC proposed on June 25, 2026, which would bring certain fully collateralized event contracts within the position- and transaction-reporting rules of Parts 15 through 18. Finally, the proposal carries implications beyond the CFTC’s own jurisdiction: by defining which event contracts may trade on federally regulated markets, it sharpens the ongoing dispute between the CFTC and state gaming regulators over whether these products are derivatives or gambling—a question now actively litigated in the Third and Ninth Circuits and the subject of CFTC preemption suits against multiple states.

The Road Ahead and What to Do Now

The through-line of the proposal is that prediction markets are now part of the regulated derivatives landscape, and the CFTC is drawing the lines that will determine which contracts clear the bar and which do not. For institutional participants, the focus should be on where those lines land and how to position for them.

Firms should use the comment period, which closes July 27, 2026, to shape the rule where their interests are concentrated, and should begin the practical work now: assessing whether and how event contracts fit their investment, hedging, and product strategies; updating trading, MNPI, and surveillance policies to address event-contract exposure; and monitoring the federal-preemption litigation that will determine the map on which this market ultimately operates. Those who engage early, rather than waiting for a final rule, will be best positioned to capture the opportunities and manage the risks associated with this fast-emerging asset class.

If you have any questions about how to navigate the above CFTC rule or need assistance with drafting comments, please contact the Manatt professional with whom you work or any of the authors of this article.

Prediction Markets; Public Interest Determinations, 91 Fed. Reg. 35806 (proposed June 12, 2026) (to be codified at 17 C.F.R. pt. 40) (RIN 3038-AF65).

See CEA § 5c(c)(5)(C)(i), 7 U.S.C. § 7a-2(c)(5)(C)(i).

See 17 C.F.R. § 40.11; CFTC, Contracts & Products: Event Contracts (defining an event contract as a derivative “whose payoff is based on a specified event, occurrence, or value”).

KalshiEX LLC v. CFTC, No. 24-5205 (D.C. Cir. Oct. 2, 2024).

See 91 Fed. Reg. 35806; cf. KalshiEX LLC v. CFTC, 2024 WL 4164694 (election outcomes are not “gaming”).

See CFTC, Press Release No. 9261-26 (June 25, 2026) (proposing amendments to Parts 15, 16, and 17 governing reporting of certain fully collateralized event contracts).

See KalshiEX LLC v. Flaherty, No. 25-1922, slip op. (3d Cir. Apr. 6, 2026) (holding that the CFTC has exclusive jurisdiction over Kalshi’s sports-related event contracts and that the CEA preempts New Jersey’s gambling laws, while noting that related cases are “percolating up to the federal courts of appeal, including several currently pending before the Ninth Circuit,” which “may result in divergent answers across Circuits”); Complaint, CFTC v. [Kentucky officials], No. 3:26-cv-00049 (E.D. Ky. filed June 23, 2026) (challenging H.B. 757’s 14.25% excise tax and H.B. 904’s contracting restrictions as preempted).