CFTC Advises DCMs on Listing Event Contracts in Prediction Markets

In an advisory on the listing and trading of event contracts, CFTC staff outlined expectations for designated contract markets ("DCMs") on product design and surveillance. 

The CFTC explained that prediction markets are growing rapidly, raising concerns about the potential for market manipulation and insider trading. The guidance addressed the uncertainty surrounding how these novel "event contracts"—which often feature binary payoffs based on real-world occurrences like sporting events—fit into existing regulatory frameworks and how exchanges can safely list them without running afoul of anti-manipulation mandates.

The CFTC emphasized that exchanges must proactively ensure these contracts are not readily susceptible to manipulation. Staff highlighted that contracts that resolve based on the actions of a single individual, such as a referee's call or a player's injury, or within very short time windows, carry heightened risks. To address these problems, exchanges are expected to implement robust surveillance, identify precise and reliable data sources for settlement, and avoid "overly broad ... contract specifications" in their product submissions.

For sports-related contracts specifically, the regulator recommended that exchanges engage directly with "sports leagues and their integrity units" during the contract design phase. Staff advised that establishing information-sharing agreements and relying on official league data for settlement can help mitigate the risks of insider trading and market distortion.

Staff reminded DCMs that "the Commission retains the authority to stay the listing of self-certified contract[s]" or pursue enforcement actions if exchanges fail to meet their self-regulatory obligations.