The Commodity Futures Trading Commission (CFTC) issued a new staff advisory on March 12 that aims to add regulatory guardrails around event contract markets—particularly focusing on controversial sports-related event contracts. The advisory letter, CFTC Staff Letter No. 26-08, is directed to all registered designated contract markets (DCMs) who offer event contract markets and provides the Division of Market Oversight’s (DMO) current views on how exchanges should evaluate, structure, and monitor event contracts under the Commodity Exchange Act (CEA). The letter breaks the CFTC’s silence on how it intends to regulate novel markets like sports-related contracts and attempts to address some critics’ concerns with the markets. However, days later, Arizona brought criminal charges against a DCM—Kalshi—alleging that its event contracts, including sports-related contracts, are illegal under Arizona law.
Arizona Raises the Stakes with Criminal Charges
In a recent escalation from the existing various cases involving states and prediction markets, on March 17, Arizona charged one prediction markets operator, Kalshi, with criminal charges for its operations. Arizona Attorney General Kris Mayes filed a twenty-count criminal information in Maricopa County Superior Court, marking the first time a state has sought criminal penalties against a DCM-registered platform registered with the federal government. The charges specifically consist of various counts of illegal election and sports wagering, consistent with state-level theories that sports-related event contract markets are not valid federally-regulated commodities or swaps and are instead wagers in violation of state law without a state license.
Previously as the states were fighting these new markets in courts, the CFTC had generally taken a back seat and allowed the markets to operate; this passivity created legal uncertainty as state regulators claimed the markets were illegal under state law, despite the apparent CFTC regulatory regime. State regulators and some federal legislators have argued in these cases that prediction markets evade state and tribal consumer protections and create “regulatory arbitrage” that cost states over $600 million in tax revenue in 2025. As a result, swaths of states are now actively challenging the markets in court, arguing, amongst other things, that the sports-related contract markets are effectively illegal sports wagering.
Recently, however, the new CFTC Chair Michael Selig took a more affirmative position in court, asserting that event contract markets—including sports prediction markets—are subject to the exclusive jurisdiction of the CFTC and therefore are not subject to state sports wagering laws. Selig framed the Arizona prosecution as “entirely inappropriate,” though the current judicial landscape remains fragmented as various courts have taken inconsistent approaches to the issue in various stages of litigation.
The criminal charges may present new challenges for existing civil litigation against prediction markets brought by various states; the “Younger abstention doctrine” may pose a procedural hurdle, as federal courts might defer to ongoing state criminal proceedings regardless of preemption arguments.
Despite the ongoing and increasingly hostile action from the states, the CFTC is continuing to assert its jurisdiction over prediction markets.
The CTFC Letter and New Guardrails
In line with the current CFTC’s stance that it has exclusive jurisdiction over these markets, the CFTC’s latest letter outlines specific expectations and principles for DCMs—particularly those offering sports markets—that are subject to the CFTC’s jurisdiction. Although the CEA does not expressly define “event contracts,” the advisory reiterates that such products may fall within the statute’s broad definition of “swap” or, depending on structure, may also constitute futures contracts. As a result, DCMs listing prediction market products—such as sports prediction markets—remain subject to the same statutory core principles and regulatory obligations applicable to other listed derivatives. The advisory letter specifically highlights:
- Core Principle 3: Requires DCMs to list only contracts that are not readily susceptible to manipulation. DCMs are now strongly encouraged to utilize authoritative league data or official government reports as settlement sources rather than a “consensus of yet-to-be-determined sources.”
- Core Principle 4: Requires surveillance and controls designed to prevent manipulation and price distortion.
- Core Principle 12: Requires rules protecting market participants from abusive practices and promoting fair and equitable trading.
The letter also underscores that CFTC regulatory prohibitions on fraud, manipulation, and insider trading in connection with DCM-listed contracts remain applicable.
In the context of sports-related markets, the letter signals that the CFTC sees heightened risks depending on how the contract is structured; while the CFTC has previously acknowledged the risk of state-level litigation against these markets, this appears to be the Commission’s first affirmative guidance on sports-related prediction markets. The DMO notes that cash-settled event contracts can create incentives to influence the outcomes; the Division also notes the risk is heightened for where outcomes turn on smaller actions/participants (e.g. “proposition-style” contracts for a single athlete), but that aggregated performance contracts (e.g. over a full season) are likely less vulnerable to manipulation. Of note, these concerns are mirrored and addressed in existing state-level sports wagering regulatory regimes.
The guidance also puts pressure on exchanges to be more precise when self-certifying new event contracts. Under current rules, DCMs can launch new products through self-certification rather than formal prior approval, but they must provide a complete explanation of how the contract complies with the law. The CFTC warns that overly broad contract specifications or vague settlement methodologies may not be enough—especially when a single product framework could cover many different event permutations with different manipulation risks.
The Policy Shift – New Rulemaking
Along with this advisory, the CFTC released an Advanced Notice of Proposed Rulemaking, specifically signaling potential changes to currently unenforced categorical restrictions on certain markets in 17 CFR 40.11, while increasingly bringing the newer markets into the regulated fold. After withdrawing its 2024 event contracts rule proposal and an earlier 2025 sports event contracts advisory in February, the agency appears to be favoring a principles-based, case-by-case oversight model rather than the broad categorical restrictions under previous CFTC leadership.
However, this principles-based model faces legislative uncertainty. Congress is currently considering the DEATH BETS Act and the Prediction Markets Security and Integrity Act, which could override the CFTC’s current permissive model with explicit statutory prohibitions.
Absent an act of Congress, the resolution of these jurisdictional disputes will likely require a definitive ruling from the U.S. Supreme Court or a comprehensive legislative mandate to define the boundary between a financial exchange and a gambling operation.
Key Takeaways
For DCMs and prospective market operators, the practical takeaway from the new advisory letter (if taken at face value) is that event contracts—particularly sports-related contracts—will require more rigorous product design, more granular self-certification support, and more proactive engagement with both regulators and, where relevant, underlying event stakeholders. And of course, while there are pending criminal and civil cases against certain prediction markets, uncertainty and risk remains.