Developing The CFTC Has Found a Sports Contract That Isn't a Swap. Now It Has to Say Where the Line Is

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The Commodity Futures Trading Commission has told two prediction-market exchanges not to list sports contracts they had already self-certified, Front Office Sports reported on Thursday. Novig was told that its micro contracts, such as which team scores the first points of a basketball game, are "susceptible to manipulation." ProphetX was told that its scorigami contracts, which pay out if a game ends in a final score that has never happened before in that sport, "do not meet the definition of a swap under the CEA." Both letters reportedly accuse the companies of false self-certifications. Neither product had gone live, so nobody has traded either one.

The Novig letter is the bigger story for the industry, because micro contracts are where the volume is heading. The ProphetX letter matters more legally. For a year the federal government has argued in court that every sports outcome is a swap. On Thursday its staff said one isn't.

Two letters, two different grounds

The agency did not use one theory for both. That choice is worth slowing down for.

A first-points contract was challenged on Core Principle 3, the duty of an exchange to list only contracts "not readily susceptible to manipulation." That ground assumes the contract is within the CFTC's jurisdiction and is simply unsafe to list. It is the same logic as the September 22 staff advisory on mention markets, which we argued at the time borrows a gaming regulator's integrity test: few people control the outcome, and it happens fast.

The scorigami contract was challenged on definition. Under 7 U.S.C. § 1a(47)(A)(ii), an event contract is a swap if it depends on "the occurrence, nonoccurrence, or the extent of the occurrence of an event or contingency associated with a potential financial, economic, or commercial consequence." If scorigami fails that test, the problem is not that the contract is dangerous. It is that the contract was never the CFTC's to approve. On the reported wording, it does not belong on a designated contract market at all.

We have not seen either letter. FOS's account comes from sources and a CFTC spokesperson who confirmed that letters were sent and declined to say whether the agency had ever before made an operator pull a self-certified sports contract. The PM Pulse and Yogonet repeat FOS's wording, and nobody has published the text. We do not know whether the scorigami letter relies on prong (ii) or on some other part of the definition, or whether it is the view of the Commission or of staff. A letter that turns out to say something narrower would weaken the argument below.

Thirteen days ago, the list had no end

On October 9 the CFTC proposed a rule declaring that "[e]vent contracts, including those based on sports-, politics-, cultural, and weather-related events" are swaps. To show that sports outcomes carry the economic consequence prong (ii) requires, the proposal piled up examples: city economic impact from a championship run, television ratings that depend on close games, per-touchdown player incentives, a coffee chain's buy-one-get-one when the Vikings intercept a pass. "The list of examples could extend indefinitely," the Commission wrote. In our October 10 reading of that proposal we said that was the weakness, not the strength: a test met by a coffee promotion excludes nothing.

Now the staff has found something it excludes. A game's final score is plainly within the proposal's reach. What scorigami adds is a fact about the record book, the novelty of the score, and apparently that is one step too far from any money that changes hands outside the contract itself.

That is a reasonable line. It is also the first line, and the first line is the one that gets quoted. New Jersey has asked the Supreme Court to take up the Third Circuit's ruling for Kalshi, and the justices have not said whether they will. The Ninth and Sixth Circuits have already read the swap definition narrowly to avoid sweeping in every bar bet. A state's lawyers can now say that the federal regulator agrees the economic-consequence prong has a boundary inside a single sporting event, and then ask which side of it a first-basket contract falls on. The NBA's own October 16 memo, reported by ESPN, barred its sportsbook partners from offering bets on the opening tip. It applies only to sportsbooks, not to prediction markets. The economic consequence of the first two points of a basketball game, apart from the bet itself, is hard to name.

The CFTC avoided that question on Thursday by challenging Novig's contract on manipulation instead. It may not get to avoid it in court.

The case that this is the system working

The strongest objection to this reading is that we are making too much of an easy case.

Scorigami is unusual. It is closer to a trivia question than to an outcome. A contract on whether a never-before-seen score occurs is a contract on a statistics website, and it is hard to name anyone outside the contract with money riding on it. Turning it away does not cast doubt on a contract over who wins the game, where playoff revenue, ticket sales and coaching contracts all ride on the result. Drawing the line there is exactly what a regulator should do, and the fact that the line exists strengthens the CFTC's position rather than weakening it. States have spent a year saying the federal agency waves anything through under a derivatives label. This week it turned down two sports products before a single trade, of the kind FOS's sources say drew the leagues' "most negative feedback," and FOS reports that senior officials have told DraftKings and FanDuel they face the same treatment if they list micro contracts. On FOS's account, other exchanges are now complaining that the CFTC is stricter than the state regulators who allow micro bets. That is hard to square with an absentee regulator.

Most of that is right, and the second half of it is the more important half for the preemption fight. A federal regulator turning down sports products the leagues dislike, before any harm, is the strongest evidence yet that Washington will police product design. The states' argument that nobody is minding the store is weaker this week.

What the objection does not rescue is the argument the agency has been making about its own statute. The government cannot say both that the list of economic consequences "could extend indefinitely" and that a scorigami falls off the end of it, unless it says where the end is. A limiting principle stated only in non-public letters to two startups is not one a court can review. The Commission should state the principle in the final rule, where the October 9 proposal is still open for comment.

What self-certification is now worth

There is one more cost, and the exchanges pay it. Self-certification under Part 40 lets a designated contract market list a product by certifying that it complies with the Act, without waiting for approval. A "false self-certification" finding against a product that never listed turns that process into something closer to pre-clearance by letter. ProphetX says staff asked it to "voluntarily defer listing the Scorigami contracts pending further review, not that we withdraw them," and that it has since submitted analysis supporting them. Novig did not respond to FOS. One source described the letters to FOS as "kind of a warning shot."

A warning shot works only if the industry can tell what was being aimed at. As of Friday, it can tell this much: contracts where a handful of players settle the outcome in seconds will be challenged on manipulation, and contracts on facts that have nothing riding on them except the contract will be challenged on jurisdiction. The first is a sports-integrity rule, the second a limit on federal power. The CFTC needs the second one stated clearly in the final rule. The states have every reason to read it as widely as possible.

If the letters are published and the scorigami objection turns out to rest on something other than prong (ii), most of this falls away. If it rests on prong (ii), the case the CFTC is making to the Supreme Court now includes an exception that its own staff wrote.