The CFTC reshapes the definition of swaps with addition and removal, but the key decision lies with whether the Supreme Court will accept the case.

Written by: Huo Huo, Rhythm

On October 9, the Commodity Futures Trading Commission (CFTC) released two opposing documents on the same day. One proposal aims to include contracts for events in prediction markets such as sports, politics, culture, and weather into the definition of swaps, while the other temporary final rule explicitly removes licensed sports betting and casino games from swaps.

Swaps are contracts whose payments are determined by outcomes. Under U.S. derivatives law, once a type of contract is classified as a swap, it is typically under the unified regulation of the CFTC, and state gaming licenses and state taxes do not apply, which is federal preemption.

Therefore, the core issue at stake is who writes the rules for the same NFL game: placing it at a Vegas counter or on the DraftKings app is state-regulated betting; putting it on a federally registered exchange like Kalshi as an event contract, the CFTC claims it is a swap.

CFTC Chairman Michael Selig is the only sitting member of the five-member commission. His statement is straightforward: Americans use event contracts for hedging, speculation, and information gathering; these products fall under the exclusive jurisdiction of the CFTC as commodity derivatives, while casino-style products are not derivatives.

Trading volume is the backdrop for this round of actions. The CFTC reported that in August, the volume of event contracts on U.S. registered exchanges (DCM) was approximately $1.5 billion, of which about $1.2 billion was from sports. The market figure is much larger; Kalshi and Polymarket combined for approximately $8.56 billion in trading volume over a weekend in October, with sports contracts being the main source of this surge.

Registered sports trading far exceeds politics and weather

With addition and removal, the swap definition has been drafted in two directions

The proposal answers what counts as a swap, while the temporary final rule answers what does not. The latter sets boundaries with two tests: only wagers provided by licensed state or tribal gambling operators and not matched by a multilateral exchange are excluded; both criteria must be met to count as casino betting.

Combining the two boundaries essentially splits sports betting in half, with one half remaining in the states and the other half going to the federal level. The same sports bet, if placed at a Las Vegas counter is gambling, but if placed on a federally registered exchange like Kalshi it becomes a swap.

The same game is divided into two regulatory schemes

Similar questions also arise in the court opinion of the American Gaming Association: if sports wagers count as swaps, shouldn’t the wagers at the Las Vegas counter also be subject to DCM?

TD Cowen policy analyst Jaret Seiberg offers another angle. The state repeatedly argues in the lawsuit that the CFTC’s broad definition of event contracts as swaps could render the wagers of state and tribal casinos federally illegal.

The temporary final rule first removes casinos to dismantle this line of attack in court. Seiberg's assessment is that this step mainly improves the court's position, whether it will be effective is another matter.

If this division does not hold up in court, the states can leverage the casino line to pull event contracts back under state law.

NFL and 39 states: Who should set the rules for the same game

There are obvious divisions forming in the courts. New Jersey has submitted a jurisdictional dispute with Kalshi to the Supreme Court, supported by the NFL and 39 states plus Washington, D.C. with court opinions backing New Jersey.

The NFL argues that sports event contracts are a form of gambling that creates new risks and are not swaps that hedge existing risks. They point out that the CFTC has not prohibited easily manipulable lines and does not cover injury-related, referee-related lines, and the 21-year age threshold. On the first Sunday of the season, prediction market trades totaled about $3.3 billion, of which $1.8 billion was related to football.

The U.S. federal appellate courts are divided regionally, where different circuit courts can issue contrary rulings on the same legal issue, and only when circuit splits occur is the Supreme Court more likely to intervene. There have been three federal circuit appellate courts this year that have issued contradictory conclusions:

The Third Circuit (April this year): determined that sports contracts on DCM are swaps, which can preempt state law.

The Sixth Circuit (September) and the Ninth Circuit (August): reached contrary conclusions, determining that these contracts are not swaps and state laws can apply.

The three circuits have completely opposite definitions of swaps

The three circuits hold opposing views, and the same contract may receive contradictory classifications in different jurisdictions, which is precisely why New Jersey wants to bring the issue to the Supreme Court. Kalshi's response deadline is November 9, and the Supreme Court has yet to decide whether to accept the case.

The rules have not yet taken effect, with variables in the court and commission seats

So far, neither document has been published in the Federal Register. The comment period for the proposal starts from the publication date and lasts for 30 days, and the temporary final rule also has to be published to take effect. It is inaccurate to state that it has “entered consultation” or “become effective” now.

The more critical variable is in the court. New Jersey's petition places the disagreement between the Third Circuit and the Sixth and Ninth Circuits before the nine justices, and whether it will be accepted is still unknown. Administrative rules can strengthen arguments for the Third Circuit's template, but the final interpretation of the text lies with the judges.

Selig is the only sitting member of the five-member commission. Advancing rules in an incomplete member state holds legally but has very limited checks and balances. Once the commission is fully staffed, or if the court does not accept this definition, today's security could be rewritten.

In this round of disputes, the protagonists being regulated are surprisingly quiet; Kalshi and Polymarket have yet to make any public comments.