HOUSE AGRICULTURE COMMITTEE
SUBCOMMITTEE HEARING
For questions on the note below, please contact the Delta Strategy Group team.
On July 21, the House Committee on Agriculture Subcommittee on Commodity Markets, Digital Assets, and Rural Development held a hearing entitled “Examining Customer Protections and Market Integrity in Sports Event Prediction Markets.” The witnesses in the hearing were:
- Robert Schwartz, Partner, Morgan, Lewis & Bockius
- David Bean, Chairman, Indian Gaming Association, Puyallup Tribe
- Christopher Cylke, Senior Vice President, Government Relations, American Gaming Association
- Carl Kennedy, Partner, Co-Chair, Financial Markets and Regulation Practice, Katten Muchin Rosenman LLP
- Asaf Meir, Founder & Chief Executive Officer, Solidus Labs
Below is a summary of the hearing prepared by Delta Strategy Group, which includes several high-level takeaways, followed by summaries of opening statements and discussion.
KEY TAKEAWAYS
CFTC Authority, Jurisdiction & Regulatory Framework
- Schwartz and Kennedy stated that the Commodity Futures Trading Commission (CFTC) has broad, exclusive jurisdiction over exchange-traded derivatives, including event contracts, under the Commodity Exchange Act (CEA). They said that sports contracts were swaps and should be treated as such under the CFTC’s oversight
Sports Event Contracts & Gaming Regulation
- Bean and Cylke said that sports event contracts are indistinguishable from traditional sports betting products and argued they operate without state-style safeguards such as responsible gaming programs, self-exclusion lists, and 21 and older age requirements.
- Multiple members raised concerns about youth exposure and gambling addiction risk, citing data on underage gambling and examples of social media marketing.
- Bean and Cylke argued that prediction markets undermine state and tribal revenue and sovereignty by operating nationwide, including in jurisdictions that have not legalized sports betting.
- Kennedy and Schwartz maintained that consumers retain a choice of regulatory “lane,” whether through a state-licensed sportsbook, a tribal gaming facility, or a CFTC-regulated exchange, and that this choice, along with existing core principles, provides an adequate consumer protection framework.
Self-Certification, Rulemaking & Future Regulation
- Kennedy explained that the CFTC’s self-certification framework requires every listed contract to satisfy the CFTC’s Core Principles. He added that the 2010 special rule allows the Commission to open a public interest review within ten days of listing.
- Schwartz and Kennedy discussed the CFTC’s Rule 40.11 and disagreed with characterizations that the rule constitutes a per se ban on certain event contracts. Both witnesses said the pending rulemaking would better align the rule’s language with the CEA’s public interest standard.
- Bean and Cylke urged Congress to consider legislative options, including H.R. 7840, the Event Contracts Enforcement Act, and CLARITY Act amendments preserving state and tribal gaming authority.
- Schwartz and Kennedy cautioned that a categorical ban could push activity offshore, outside U.S. regulatory oversight.
CFTC Resources & Oversight Capacity
- Multiple members across the aisle noted that the CFTC’s core mission of supporting agricultural derivatives markets must not be diluted as the agency takes on growing oversight responsibilities in prediction markets and digital assets.
- Multiple members raised concerns about the reduction in CFTC staffing alongside the Commission’s increasing oversight responsibilities across prediction markets and digital assets.
- Schwartz and Kennedy stated the CFTC has historically “done more with less” through partnerships with exchanges, the National Futures Association (NFA), and self-regulatory organizations (SROs).
- Cylke discussed how state and tribal regulators provide substantial existing enforcement capacity that could allow the CFTC to focus resources on other priorities such as elections and financial event contracts.
- Bean stated that current CFTC staffing and resource constraints leave the Commission without an adequate regulatory system in place for prediction markets.
Customer Protection, Public Interest, Surveillance, & Market Integrity Safeguards
- Kennedy detailed existing customer protection requirements applicable to Futures Commission Merchants (FCMs) and Designated Contract Markets (DCMs), including segregation of customer funds, risk management programs, disclosure obligations, complaint procedures, and anti-money laundering (AML) and know your customer (KYC) rules consistent with the Bank Secrecy Act (BSA). He said customer funds are segregated from firm assets and protected in the event of an intermediary’s insolvency.
- Members across both parties sought assurance that existing derivatives market safeguards apply equally to sports-related event contracts as to traditional commodity products. Kennedy and Meir stated that sports-related contracts are subject to the same CFTC regulatory framework and customer protection requirements as other derivatives.
- Meir stated that CFTC-regulated exchanges maintain sophisticated surveillance programs combining KYC data, transaction data, and behavioral analytics to detect manipulation, collusion, and insider trading across event contracts.
- Multiple members raised concerns about insider trading in prediction markets. Meir confirmed that information sharing between market participants to detect abusive trading is an established industry practice.
OPENING STATEMENTS
Chairman Thompson (R-PA)
The definitions of a commodity and a swap are sweeping, and the Commission’s authority over transactions on registered exchanges is complete and exclusive. This robust jurisdiction must be protected and respected. The Commission has significant tools currently at its disposal to address many concerns and proposed the first of potentially several rulemakings focused on bringing clear rules to prediction markets. Where the Commission’s authority is found to be insufficient to meet its mandate to support responsible innovation and protect market participants, we will consider legislation as may be appropriate. The Committee must understand if such gaps exist and consider federal preemption and any impact to the federal regulatory framework, which Congress clearly provided under the CEA and has reaffirmed for a century.
Ranking Member Craig (D-MN)
We have seen a number of pieces of litigation, with states suing markets, markets suing states, and the CFTC weighing in with its own litigation. The CFTC needs a fully appointed Commission, additional resources, and increased expert staffing to do its job effectively. If we want safe markets, innovation without exploitation, and risk management tools that serve all Americans, then we must give the CFTC the staff and the funding it needs to do its job. Chairman Selig put forth his personal vision for how to impose some structure and parameters on prediction markets. The proposal contains some positive elements, but it does not go far enough. Protecting consumers and maintaining market integrity should not be partisan issues.
Subcommittee Chairman Johnson (R-SD)
Prediction markets have existed under CFTC oversight for a long time. Technology has supercharged the growth of these prediction markets. Contract markets represent a small fraction of the activity across the markets regulated by the CFTC. The growth of sports-related prediction markets has raised unique questions we want to get to the heart of. Products are not regulated on merit. They should, according to the CEA, serve a purpose in managing risk or surfacing useful information. They are not wagers, and the CFTC is not a gambling regulator. We want customers to be protected and markets to be sound.
Subcommittee Ranking Member Davis (D-NC)
As prediction markets continue to evolve, this discussion is not simply about technology or financial innovation but about whether a regulatory framework is keeping pace with new products, while continuing to protect consumers, preserve market integrity, and provide certainty. Our responsibility is to ask whether existing safeguards are sufficient, whether regulatory responsibilities are clearly defined, and whether consumers understand the protections available to them. We must ensure that when we are talking about these markets, there is no manipulation or insider trading. The CFTC has an essential mission supporting the agricultural markets that our farmers rely upon every day.
Rob Schwartz, Morgan, Lewis & Bockius
Controversy over whether prediction markets are legitimate trading platforms or a form of illegal gambling is new as sports event markets launched just last year. Dodd-Frank swaps were significant because the definition of swap is extraordinarily broad. The definition is virtually agnostic as to subject matter. The definition of swap is sweeping, and as a result, so is the CFTC’s exclusive jurisdiction. Interpreting the CEA is a legal matter separate from the policy debate, and people of good faith question the wisdom of allowing these markets on CFTC regulated platforms. Congress channeled that kind of question to the CFTC, not to the fifty state gambling regulators, and not to courts. The CFTC has broad authority to prevent exchanges from listing contracts contrary to the public interest. Part of what is animating the controversy today is that the CFTC has not done that for sports, but it has proposed new rules that could limit what is listed. When the proposed rules are final and if the CFTC has stumbled, it can be taken to court. If Congress wants to prohibit sports event contracts, it should say so clearly in the CEA.
David Bean, IGA
Tribal gaming operates under strict age, responsible gaming, and consumer protection requirements established through the Indian Gaming Regulatory Act (IGRA) and tribal-state compacts. Prediction markets threaten jobs and the revenue generated for tribal and state government budgets by circumventing our laws and regulations. Prediction market apps offer bets identical to those in legal, regulated sportsbooks: money lines, totals, parlays, and prop bets. The difference is that prediction markets avoid the regulatory systems designed to protect consumers and the integrity of U.S. sports. They ignore the strict age requirements and problem gambling programs that we have established. Prediction markets target young people and those in jurisdictions where sports betting is prohibited. We urge you to advance H.R. 7840, the Event Contracts Enforcement Act; ensure that the CLARITY Act stops sports and casino gambling through prediction markets and provides that IGRA and state and tribal gambling laws have full force and effect; and stop the CFTC’s proposed rules, which constitute the height of regulatory agency capture.
Chris Cylke, AGA
Sports event contracts are sports betting and must be subject to state gambling laws. Prediction market platforms are using CFTC registration to offer nationwide sports betting while bypassing the state and tribal gaming laws that Congress, states, tribes, regulators, and voters have built. Prediction markets make sports betting available nationwide, including in states that have rejected sports betting and in jurisdictions where tribal governments negotiated exclusivity through compacts. They avoid the taxes, licensing fees, responsible gaming obligations, advertising rules, consumer protections, and integrity safeguards that licensed sportsbooks must follow. Legal sportsbooks are built around age verification, geolocation, responsible gaming tools, complaint processes, suspicious activity reporting (SAR), and regulatory oversight. Prediction market sports betting is not subject to comparable gaming-specific requirements. Marketing sports contracts as investing is misleading and dangerous. Licensed operators monitor wagering patterns, report suspicious activity, and coordinate with regulators, leagues, integrity monitors, and law enforcement. If sports betting migrates to platforms outside those gaming-specific systems, the risk is that suspicious activity goes undetected, consumers are confused, and confidence in the games is weakened. The CFTC oversees commodities, futures, derivatives, and emerging digital asset markets. It was not created to regulate gambling, police responsible gaming, referee sports integrity, or become the nation’s sports betting regulator. Gambling policy belongs to states and tribes, consistent with federal laws Congress has enacted to protect consumers, markets, and sovereignty. CFTC-registered entities should not be permitted to offer nationwide sports betting or casino-style gambling through self-certified contracts.
Carl Kennedy, Katten
Congress wrote the words “commodity” and “swap” broadly because it knew new products would show up, and it wanted the CFTC to be ready for them. Federal jurisdiction over sports event contracts does not erase state or tribal authority over gambling. A person who wants exposure to sporting events through a state-licensed or tribal sportsbook remains free to do so. Self-certification is not a rubber stamp or a loophole. Every contract listed on an exchange already must meet distinct Core Principles, including a Core Principle that requires that the contract not be readily susceptible to manipulation. The special rule gives the Commission a real backstop. Within ten days of a listing, it can open a public interest review with a defined ninety-day process, and if the agency finds the contract contrary to the public interest, the contract comes down. Customer protections apply in these markets as they do in other derivatives markets. Brokerage firms that carry customer accounts must register with the CFTC, keep customer money segregated from their own, hold it with approved custodians, provide all customers with important disclosures about trading risks, and answer to NFA. These same protections apply to every other product listed on a CFTC exchange. Nothing about calling a contract sports-related removes those safeguards. The broad definitions gave the Commission a tool to conduct a public interest review for each contract when warranted and that tool is what the CFTC’s June proposal would sharpen. A categorical ban on sports event contracts would take away the express judgment Congress gave this agency, right when the Commission is proposing solutions to address specific concerns. A ban would not make the demand for these contracts go away. It would just push the demand offshore, to platforms with no CFTC oversight, no segregated customer funds, and no one to call when something goes wrong. The better path is to let the Commission do the job Congress gave it: hold every contract to the core principles, apply the public interest review when warranted, and keep working through the rulemaking process that is already underway.
Asaf Meir, Solidus Labs
Strong prediction market protections exist within the CEA and CFTC regulation. To argue that a CFTC-regulated prediction market inherently offers no protection is akin to arguing that the largest CFTC-regulated exchanges inherently do not offer sufficient protection to consumers. It is a working system subject to oversight by the CFTC and required under federal law. Prediction markets and sports contracts raise new challenges and pose unique risks to market integrity. The sheer number of contracts listed, the short-lived nature of most of these contracts, the non-standard symbology, and the lack of market reference data create a novel data topology that introduces specific architectural challenges. The market abuse surveillance landscape is different. The binary nature of outcomes, the combinatorially expensive connections across related contracts and underlying markets, the expanded surface area of insider information leakage, and the highly differential and often fragmented liquidity across markets and market categories demand a shift in detection technology and surveillance mindset.
DISCUSSION
CFTC Authority, Jurisdiction & Regulatory Framework
Subcommittee Chairman Johnson (R-SD): Is there a limiting legal principle that would prevent states from moving into other non-sports betting areas in a way that erodes the authority Congress gave the Commission? Schwartz: It is part of the ongoing litigation, and sports contracts are the most common subject matter, though elections, entertainment, and natural disasters are also at issue. There really is no limiting principle, and if courts carve out sports contracts on their own, it is difficult to see an end to courts’ involvement in this question or to states asserting jurisdiction over other products.
Representative Mann (R-KS): Can you expand on where you believe the CLARITY Act misses the mark in terms of permitting sports event contracts through the language protecting DeFi software developers? Do the DeFi provisions provide an opportunity for the unregulated offer of derivatives? Bean: The CLARITY Act stands up centralized gaming systems without guardrails. It could authorize decentralized prediction markets to issue smart contracts on sports gambling or even casino games. We urge the Senate to include a savings clause that preserves IGRA and state and tribal gaming laws and codifies current CFTC regulations prohibiting DCMs from listing contracts involving or referencing gaming; Schwartz: The DeFi carve-outs are for spot transactions, and swaps are also carved out of the definition of digital commodity, so I do not share that concern.
Representatives Lucas (R-OK) and Messmer (R-IN): How should regulators distinguish sports-related event contracts, security-based swaps, and gaming-related contracts? How should Section 5c of the CEA be interpreted, and what authority does the CFTC retain under the public interest standard? Schwartz: For an event contract to be characterized as a security-based swap, it has to directly affect the financial condition or financial statements of the issuer. The definition of event contract is much broader. The presumption ought to be that it is a CFTC jurisdictional product, but with a carve-out for the SEC’s traditional role over securities issuer disclosures. The way it is written, 5c is not a prohibition but a delegation of discretionary authority to the CFTC to scrutinize contracts for consistency with the public interest. Implementation would be straightforward for clear cases, similar to past prohibitions on onion and box office receipt futures, though difficulties remain in defining terms such as gaming. The CFTC has begun addressing this in its proposed rules.
Representative McDonald-Rivet (D-MI), Subcommittee Chairman Johnson: What does the CFTC’s involvement in Michigan say about deference to states, and how did this situation arise? Schwartz: It was an extraordinary action, and Kalshi had already complied with the court order by the time the Commission’s order was issued, so it was effectively too late, but it was a significant assertion of federal authority. The State of Michigan’s remedy, requiring positions to be closed out entirely rather than limiting only state residents from trading going forward, was without precedent. It had been 46 years since the Commission last issued an order under its emergency authority; Kennedy: Additional clarity and better cooperation between regulators would be beneficial; Cylke: The CFTC issued a memo to registrants last fall telling them to plan for exactly this sort of situation. Chairman Selig, who testified before the Senate that he would defer to the courts on these matters, rescinded that memo, then directed a registrant to ignore a court ruling, which is an extraordinary shift in posture.
Customer Protection & Market Integrity
Subcommittee Chairman Johnson, Representative Jackson (D-IL): What obligations are imposed on FCMs and DCMs? How are customer funds protected during market disruptions or intermediary insolvencies? Kennedy: FCMs must provide disclosures relating to the particular products they offer, and clearing brokers add specific disclosures for event contracts. Clearing brokers must meet significant CFTC compliance requirements, including risk management programs, segregation and protection of customer funds held at custodians, complaint procedures, and AML and KYC rules consistent with the BSA. All contracts are immediately cleared and sent to a clearinghouse, where margin is held until settlement. In the event of an intermediary’s insolvency, customer funds are segregated from firm assets and can be transferred to a solvent entity or returned to the customer.
Representative Bresnahan (R-PA): Are there rules requiring CFTC registered entities to verify the age of users and protect consumer funds? Do CFTC regulated exchanges know who is placing orders on the exchange? Bean: There are young people who are allowed to engage; Kennedy: Exchanges and brokers must comply with the BSA, AML, and KYC rules, including collection of date of birth and, in some cases, Social Security information; Meir: To say CFTC regulated exchanges do not know who is placing orders is factually wrong. We have identified manipulation instances involving multiple accounts trading in collusion with one another.
Sports Event Contracts & Gaming Regulation
Representative Figures (D-AL): Is the solution here for prediction markets to be more regulated, like traditional gaming markets, or for traditional gaming markets to be regulated like prediction markets? Bean: Prediction markets are sports betting and should be regulated as such. Tribes and states have agreements that prevent underage gambling and promote responsible gambling; Kennedy: Choice, for a customer looking to get that exposure, whether it is gold, an interest rate, or another asset or event, should be left to the user.
Representatives Bresnahan, McClain Delaney (D-MD): Do prediction market sports wagers pose a risk of youth gambling addiction, and should they warrant responsible gaming message requirements and youth advertising consumer protections? What safeguards do prediction market platforms lack compared to state-licensed gaming operators? Schwartz: There is an addiction risk. The CFTC’s Office of Consumer Education and Outreach (OCEO) could play a larger role; Bean: The addiction risk is significant, particularly for native youth. The CFTC acknowledged the addictive potential of prediction markets but has not addressed marketing to eighteen-to twenty-year-olds; Cylke: The state and tribal regulated gaming industry takes age access seriously, with 21 as the standard age of access for sports betting. Responsible gaming, including self-exclusion lists, sits at the core of state and tribal gaming regulation and is not addressed by the CFTC’s principles-based framework, since prediction markets do not characterize their products as gambling.
Market Manipulation, Surveillance & Integrity Safeguards
Representative Budzinski (D-IL): How important is it that self-certification submissions spell out exactly what conduct a contract turns on, in enough detail for a regulator to judge whether it is readily susceptible to manipulation? Kennedy: The Commission has made clear that self-certifications must be comprehensive, particularly for single-actor contracts, and has stated it is highly unlikely such contracts would meet the public interest threshold.
Representatives Scott (R-GA), Taylor (R-OH): Does the Commission agree with the importance of information sharing among market participants to detect abusive trading such as insider trading? Will the CFTC’s proposed rule provide adequate oversight to prevent insider trading, and are there gaps requiring legislative action? Meir: The Commission agrees with the importance of information sharing. Current frameworks provide DCMs with the guidance needed to maintain comprehensive compliance programs, and DCMs are independently incentivized to ensure a level playing field. I am not aware of gaps from a compliance standpoint.
Self-Certification & Rulemaking
Chairman Thompson (R-PA), Representative Lucas (R-OK): Can you describe the obligations exchanges must meet under CFTC oversight, whether the core principles adequately address the concerns raised today, and whether the current self-certification process serves its function well or needs refinement? Kennedy: The core principle regime was added to the CEA in 2000 under the Commodity Futures Modernization Act. Exchanges are SROs, operating under 23 core principles that are outcome-based rather than prescriptive. These principles, along with CFTC best practices, can be further developed through future rulemakings to address the concerns raised today. Once the self-certification burden shifted from exchanges to the CFTC, contract volume grew substantially, and in 2010 Congress expanded the Commission’s purpose beyond risk management alone; Schwartz: Before self-certification, exchanges bore the burden of demonstrating a contract was not contrary to the public interest, including an economic purpose test that was difficult to apply to products that did not yet exist. Congress ultimately reversed that burden. The current challenge is Commission resources to review the resulting volume of contracts, and more detailed information at certification helps the Commission evaluate submissions efficiently.
Representative Mann: Why do some argue that Rule 40.11(a) does not faithfully implement Congress’s intent for the CEA’s special rule on event contracts, and how does the current rulemaking address that concern? Kennedy: The 2010 special rule gave the Commission authority to decide, case by case, whether contracts tied to enumerated activities are against the public interest. Some read the existing rule as a per se ban on all such contracts, but the Commission’s actions following the 2011 rule are inconsistent with that reading. The new rulemaking would align the rule’s language with the statutory case-by-case standard.
Representative Messmer: Can you explain how the Commission distinguishes different types of sports-related event contracts under the public interest standard? Kennedy: The Commission’s June proposal distinguishes between broad sports outcome contracts, such as final scores and point differentials, and contracts tied to single actors or integrity-sensitive events, such as injuries or officiating, which would be held to a standard of highly likely to be contrary to the public interest.
CFTC Resources & Oversight Capacity
Ranking Member Davis (D-NC): What steps should Congress take to ensure the CFTC has the resources and focus necessary to carry out its responsibilities, and what happens if those resources are not provided? Schwartz: The CFTC has been understaffed since implementing the Dodd-Frank Act, and staffing is now down twenty percent. The agency has a history of doing more with less through partnerships with exchanges and the NFA, but would continue to triage enforcement matters based on available resources; Kennedy: The agency adopted nearly 100 rulemakings under then Chairman Gensler with just over 700 staff members. The Commission recently upgraded its surveillance technology after using the same systems for roughly two decades, and additional technology investment could further improve efficiency.
Representatives Jackson and Taylor (R-OH): How should oversight responsibilities be divided between the CFTC, state gaming regulators, sports leagues, and exchanges? How do FCMs, exchanges, and the NFA work cooperatively with the CFTC to police derivatives markets given the CFTC’s comparatively small staff? Kennedy: Assessing CFTC capacity based solely on employee count is misleading. Exchanges function as SROs working alongside the NFA and clearing brokers to surveil trading, identify manipulation, and escalate issues collaboratively; Schwartz: Enforcement cooperation between the CFTC and exchanges has been effective because both share an interest in preventing wrongdoing; exchanges regularly refer matters to the CFTC, which pursues the most serious violations to send a deterrent message; Cylke: More than 8,400 state and tribal gaming regulators already enforce fit for purpose regulations daily. Leaving gaming policy to states and tribes would free up CFTC bandwidth to focus on other event contract categories, including elections and financial products.