Rewriting the Rulebook: CFTC Proposes Rule Changes for Prediction Market Contracts Against Public Policy

On June 10, 2026, the Commodity Futures Trading Commission (CFTC or the “Commission”) published a Notice of Proposed Rulemaking (RIN 3038-AF65) titled “Prediction Markets; Public Interest Determinations,” proposing amendments to 17 C.F.R., Part 40 (Rule 40.11) governing the review and permissibility of event contract derivatives listed on CFTC-registered prediction markets (the “Proposed Rule”). The Proposed Rule would establish a three-step analytical framework for evaluating whether event contracts “involve” unlawful activity, terrorism, assassination, war, or gaming, thus warranting heightened scrutiny, and, if so, whether they are contrary to the public interest. If adopted, the amended rule would represent the most comprehensive federal regulatory framework for prediction markets to date. Comments on the Proposed Rule are due on July 27, 2026.

The proposed amendments emerge against a backdrop of rapid growth in prediction market activity. Total trading volume on prediction markets grew from less than $1 billion in June 2024 to nearly $24 billion in April 2026,¹ while, according to the CFTC, total contracts traded on prediction markets grew from roughly 220 in the year 2021 to more than 8,000 in the month of May 2026.

The Proposed Rule should not be read as impacting sports betting alone. Rather, it is better understood as part of a broader regulatory contest over federal preemption, event-contract market structure, and the boundaries a federal commodities regulator may expand to displace state gambling regimes.²

BACKGROUND

The “Special Rule” and Its Interpretation

In 2010, Congress, through the Dodd-Frank Act, amended the Commodity Exchange Act (CEA) to add a “Special Rule” for review of certain event contracts.³ The Special Rule authorizes the CFTC to prohibit a designated contract market⁴ or swap execution facility⁵ from listing particular event contracts—even if otherwise compliant with listing requirements—where the contracts “involve” one of five enumerated activities (unlawful activity, terrorism, assassination, war, or gaming) and are determined to be “contrary to the public interest.”⁶ In 2011, the CFTC implemented Rule 40.11 to carry out the Special Rule. Under current Rule 40.11, where a submission “may involve, relate to, or reference” an enumerated activity, the Commission may commence a 90 day review, request that the exchange suspend listing or trading during the review, and by day 90 issue an order approving or disapproving the contract.⁷ Neither the Special Rule nor Rule 40.11 defines “involve,” “gaming,” or “public interest,”⁸ and the application of those terms—particularly to political and sports event contracts—has been the subject of key litigation in the D.C. Circuit, KalshiEX LLC v. CFTC.⁹ The Proposed Rule addresses each of these deficiencies.

In June 2024, while KalshiEX was pending, the CFTC sought to address these ambiguities through proposed amendments to § 40.11.¹⁰ The 2024 proposal sought to further specify the types of event contracts that fall within the scope of the Special Rule and that are “contrary to the public interest,” but did not supply operative definitions of “involve” or “gaming,” nor codify a factor based public interest analysis.¹¹ A little over a year after the U.S. District Court for the District of Columbia ruled in Kalshi’s favor,¹² on February 6, 2026, the CFTC withdrew its 2024 proposal.¹³ Then, on March 16, 2026, the Commission issued an Advance Notice of Proposed Rulemaking announcing the June 2026 proposed rule, which received approximately 3,500 public comments.¹⁴ The Proposed Rule followed from this Advance Notice and includes recommendations intended for clarifying purposes, including (1) defining when an event contract “involves” an enumerated activity; (2) adopting a regulatory definition of “gaming” and distinguishing it from “contests”; (3) codifying multifactor “public interest” tests; and (4) restructuring the 90 day review process.¹⁵

THE PROPOSED RULE

The core architecture of the Proposed Rule rests on a three-step inquiry that the Commission must complete before prohibiting an event contract:

First, the Commission must assess whether the contract qualifies as an “event contract”—i.e., whether it is based upon an occurrence, extent of an occurrence, or contingency in an excluded commodity under the CEA;

Second, the Commission must determine whether the event contract “involves” an Enumerated Activity (or a similar activity designated by the Commission by rule or regulation); and

Third, if the Commission determines that the event contract involves such an activity, it must undertake a public interest analysis and affirmatively find that the contract is contrary to the public interest before it may prohibit listing or clearing.¹⁶

The Proposed Rule provides further clarity to other notable current-form Rule 40.11 items that have been the subject of some controversy, such as adding structure to the 90-day review period and altering the governance structure of sports-related contracts.

Definition of “Involve”

The most significant definitional change in the Proposed Rule is the adoption of an event-focused “involves” standard. Proposed Rule 40.11(a)(3) provides that event contracts “involve an activity if their settlement is determined by an occurrence, extent of an occurrence, or contingency in the activity.”¹⁷ This formulation—consistent with the district court’s holding in KalshiEX¹⁸—focuses the analysis on the underlying event the contract references, not on features of trading behavior, venue mechanics, or incidental relationships among market participants. This would narrow the broader trigger language (“involve, relate to, or reference”) of the current regulation.¹⁹ To illustrate: a contract on whether Iran initiates armed conflict in the Strait of Hormuz would “involve” war because settlement turns on an occurrence in a military activity; however, a contract on how much oil flows through the Strait would not, despite the fact that oil flows could be affected by military conditions, because the settlement-determining occurrence is not itself an occurrence in a war.²⁰

New Definition of “Gaming”

The district court in KalshiEX held that “gaming” carries its ordinary meaning of playing games and rejected the CFTC’s prior interpretation equating “gaming” with “gambling.”²¹ The definition of gaming in the Proposed Rule is aligned with that judicial guidance:

“Gaming means any activity that: (i) one or more participants typically engage in for purposes of recreation or to entertain others; (ii) is governed by rules; and (iii) includes measurable occurrences or outcomes that depend on the participants’ luck, skill, or athletic ability during the activity.”²² The definition is intentionally broad enough to encompass all sports (including e-sports), games of chance like roulette, games of skill like chess, and games of mixed chance and skill like poker.²³

Critically, the definition draws a distinction between “games” and “contests.” A “contest” is defined as a competitive activity where participants compete for a prize, honor, award, or position based on their qualifications or a display of merit over an extended period—not on luck, skill, or athletic ability during a discrete, rule-governed activity.²⁴ Political elections, awards ceremonies (such as, the Academy Awards or Nobel Prize), and similar events are classified by the Proposed Rule as contests, not gaming, and thus fall outside the scope of its gaming prong entirely.²⁵ The distinction set forth in the Proposed Rule effectively resolves the central holding in KalshiEX:²⁶ under the proposed definition, event contracts based on congressional control or election outcomes would not involve “gaming” because elections are considered contests, not games.

Other Enumerated Activities

The Special Rule identifies five categories of Enumerated Activities subject to heightened scrutiny: (1) activity unlawful under federal or state law; (2) terrorism; (3) assassination; (4) war; and (5) gaming.²⁷ The proposal does not alter these statutory categories but provides guidance on each. Contracts involving terrorism, assassination, or war are deemed “highly likely to be against the public interest” given extreme information-leakage risks, settlement uncertainty (e.g., the “fog of war”), and incentive effects incompatible with the protective aims of the CEA.²⁸ For contracts involving unlawful activity, the Commission would survey the relevant law and distinguish between contracts referencing specific criminal acts (which raise heightened manipulation and perverse-incentive concerns) and those referencing broader measures such as crime rate indices (which may have informational utility).²⁹

Public Interest Factors

The Proposed Rule replaces the CFTC’s prior ad hoc approach to “public interest” with a codified multifactor framework. Under Proposed Rule 40.11(a)(5) and (a)(6), the Commission would evaluate two categories of factors, general and activity-specific factors. General factors—applicable to all event contracts subject to review—include: (i) whether the event contracts can facilitate price discovery, information aggregation, or hedging; (ii) potential threats to market integrity, including settlement-integrity deficits, information leakage or misuse of material nonpublic information, and vulnerability to manipulation; and (iii) compliance and self-regulatory challenges, including whether the prediction market’s surveillance, dispute-resolution, and customer-identification infrastructure is adequate to administer the contracts.³⁰ Activity-specific factors provide additional, tailored scrutiny for contracts involving each type of Enumerated Activity.³¹ No single factor is dispositive; rather, the Commission would weigh the relevant factors based on the particular characteristics of the event contract and the Enumerated Activity at issue.³²

Importantly, the Proposed Rule does not authorize categorical or prospective prohibitions. The Commission considered—and expressly rejected—issuing blanket determinations that would apply to entire classes of contracts not yet before the Commission, concluding that such categorical determinations are not permissible under the structure of CEA Section 5c.³³ Each determination must instead be contract-specific, based on the administrative record, and supported by written findings that explain the Commission’s factor-by-factor analysis and review whether they are consistent with prior determinations.

Sports-Related Event Contracts: Presumptions

The Proposed Rule establishes presumptions for specific categories of sports-related contracts. Contracts unlikely to be contrary to the public interest include event contracts on aggregate outcomes of professional or collegiate sports—including final scores, point differentials, win-loss results, tournament advancement, individual or team statistical performance, and season-long performance metrics—provided they are based on objective and verifiable settlement criteria, supported by appropriate surveillance programs, and coordinated with relevant sports governing bodies.³⁴

On the other hand, contracts likely to be contrary to the public interest (and thus presumed prohibited) include contracts on player injuries, officiating-only outcomes, discrete first-action events, altercations between participants, pre-collegiate sports events, and games of pure random chance like roulette or random number generators.³⁵

Contracts Outside the Scope of the Special Rule

Notably, the Proposed Rule clarifies that several categories of event contracts are not within the scope of the Special Rule and are not subject to the gaming-related framework. These include contracts regarding economic indicators (CPI, GDP, unemployment claims); financial indicators (federal funds rate, credit card debt, mortgage rates, stock indexes); foreign exchange rates; political elections; and awards or honor contests (Academy Awards, Nobel Prize).³⁶

90-Day Review Process

The Proposed Rule substantially restructures the procedural framework for the Commission’s 90-day review, departing from the existing Rule 40.11(c) process in several important respects. Under the proposed framework: (i) the Commission must commence review by issuing a written determination—within 10 days of a contract’s listing—that there is a basis to believe the contract both involves an Enumerated Activity and may be contrary to the public interest; (ii) within 15 days of initiation, the director of the Division of Market Oversight must provide the prediction market with a written statement identifying the factual basis, legal theory, specific contract terms, and public interest factors supporting the review; (iii) the prediction market has 30 days from initiation to submit a written response, which may include supporting data, expert analysis, and proposed modifications to the contract; and (iv) by day 90, the Commission must issue a final order or the contract may continue trading.³⁷ Extensions are permitted only with the prediction market’s agreement or at its request.³⁸ Unlike the existing regulation that provides no defined procedural rights to the exchange under review, the proposed framework is designed to ensure that the Commission’s determinations rest on a developed record with the prediction market having had a meaningful opportunity to respond.

TAKEAWAYS

The Proposed Rule, if adopted, would fundamentally reshape aspects of the regulatory landscape for prediction markets. Market participants, compliance professionals, and legal advisors should consider the following:

Business Opportunity and Risk. The Proposed Rule’s express recognition that event contracts serve price discovery, information aggregation, and hedging functions validates prediction markets as a legitimate asset class with commercial utility.³⁹ Businesses in sports media, advertising, analytics, insurance, and financial services should evaluate whether prediction market data can inform commercial decision-making—while simultaneously ensuring that any organizational engagement with these platforms is supported by appropriate compliance infrastructure. Investors considering capital deployment in prediction market operators should conduct diligence on whether the platform’s product mix aligns with the categories the Commission has signaled are unlikely to face prohibition and should assess the operational readiness of the platform to meet the proposed surveillance, regulatory, and documentation requirements.

Procedural Questions and Rule Durability. The Commission’s current composition—short four members—raises questions about the validity of rules promulgated by a limited number of commissioners. While there is a plausible legal basis for a single commissioner to act, this untested posture creates vulnerability to future legal challenges. If promulgated, the rule could be amended, narrowed, or rescinded by a future Commission. Separately, even if the CFTC finalizes the rule before major periods in sports betting occur (e.g., the start of the NFL and NBA season, MLB playoffs), the current federal-state preemption dispute remains an active risk for any enterprise operating within overlapping regulatory regimes.40

CONCLUSION

The CFTC’s Proposed Rule represents a significant step in the development of a more robust regulatory framework for prediction markets—one that balances responsible innovation with public interest protections. While the Proposed Rule provides clarity on several long-contested questions, its ultimate scope and durability remain subject to the comment process, potential legal challenges, and the political dynamics of a Commission operating at reduced capacity. Market participants, exchanges, and compliance professionals should closely monitor developments during the comment period and begin evaluating potential operational and compliance implications now.