The CFTC stretched the swap definition to cover prediction markets. The sportsbook industry may not survive the logic.
WILLIAMS BAY, WI (JLN) ― April 13, 2026 ― Every week, I receive an email from the CFTC with a link to the latest edition of its Swaps Report, a publication the commission has voluntarily elevated from its statutory semiannual obligation to a weekly release, so that market participants and the public can track developments in the swaps markets in something closer to real time. The report aggregates data submitted to the three registered Swap Data Repositories, CME Group SDR, DTCC Data Repository, and ICE Trade Vault, and makes it freely available in a format designed to be useful to everyone, from regulators to ordinary citizens.
This week, I noticed something missing. For all the talk, in courtrooms, in Congress, in regulatory comment letters, and in the financial press, about event contracts being “swaps” under the Commodity Exchange Act, the CFTC’s own Swaps Report contains precisely nothing about them. No volume. No open interest. No participant data. No product breakdowns. One of the hottest, most contentious, most litigated sectors of what the CFTC itself calls the swaps market is absent from the CFTC’s own weekly accounting of that market.
That is a square peg in a round hole — and it raises a question that cuts to the heart of the current regulatory and legal debate: if event contracts are truly swaps, why aren’t they showing up in the swaps data? And if they aren’t in the data, what does that say about the argument that they belong in the definition? So, what exactly is a “swap“?
The Ancient DNA of a Swap
The word “swap” is intuitive: you give something, you get something. But in the world of derivatives, the concept was given precise legal and commercial form in a specific moment, in a specific transaction. In 1981, the World Bank and IBM entered into the first formalized swap agreement. The World Bank needed German marks and Swiss francs to finance its operations, but had hit its borrowing caps in those currencies. IBM, meanwhile, held large amounts of mark- and franc-denominated debt and wanted dollar exposure. In an arrangement by Salomon Brothers, the parties simply swapped their respective obligations; the World Bank took on IBM’s Swiss franc and Deutsche mark debt service, and IBM assumed the World Bank’s dollar obligations. They exchanged not a single payment, but a series of interest payments over the life of the transaction.
This foundational architecture, the periodic, bilateral exchange of cash flows over time, became the defining DNA of every swap that followed. An interest rate swap, the most common form today, involves one party paying a fixed rate while receiving a floating rate, with payments made periodically over a set period. The legs of the swap, the fixed leg and the floating leg, flow back and forth across multiple payment dates. The notional principal typically never changes hands; what moves is the stream of calculated payments, reset at regular intervals to benchmarks such as SOFR or, formerly, LIBOR. As one textbook definition captures it precisely: “a swap is a bilateral over-the-counter derivatives contract in which two parties agree to exchange cash flows on a ‘notional amount’ over a period of time… made up of one or more payment dates throughout the life of the contract.”
Swap agreements were originally conceived as back-to-back loans. Two companies in different countries would mutually swap loans in their respective domestic currencies. The bilateral, reciprocal, and serial nature of these obligations was not incidental; it was the structural core that distinguished a swap from a simple forward, a futures contract, or an option. A general swap, as finance textbooks note, can be understood as a series of forward contracts, resulting in a common series of exchange dates and two streams of instruments known as “legs.”
The Regulatory Struggle to Define the Swap
For years after 1981, the swap market grew explosively in an ambiguous legal environment. Because swaps bore some resemblance to futures contracts – they were executory contracts, they referenced commodity or financial prices, and they settled in cash – the CFTC faced recurring questions about whether swaps required exchange trading under the Commodity Exchange Act (CEA). The uncertainty was genuine: the CEA requires futures contracts to be traded on exchanges but does not specifically define futures contracts, describing them generally as involving the purchase or sale of a commodity for future delivery.
The CFTC’s first formal response came in 1989, when it issued a Policy Statement on swap transactions, providing a regulatory safe harbor for transactions meeting specified criteria. The key features the CFTC identified as distinguishing swaps from futures included their individually negotiated terms, the absence of standardization and fungibility, the creditworthiness-based bilateral relationship between sophisticated parties, and critically, their character as executory arrangements involving the ongoing exchange of obligations. The CFTC was essentially codifying what the market already understood: a swap was an ongoing bilateral relationship, not a one-time contingent payout.
In 1992, Congress granted the CFTC explicit exemptive authority for swaps. In 1993, the commission adopted the Part 35 safe harbor exemption, cementing this framework into regulation. The exemption applied to swap agreements meeting specified criteria, chiefly that they be entered into by eligible swap participants acting bilaterally, individually negotiated, and not standardized or fungible. The International Swaps and Derivatives Association (ISDA), founded in 1985, had already been working to standardize swap documentation through its Master Agreement framework, first issued in 1987. The 1987 ISDA Agreement established the template for documenting the series of payment dates, the fixed and floating legs, and the netting arrangements that characterize a proper swap.
The Commodity Futures Modernization Act of 2000 (CFMA) largely deregulated OTC derivatives, exempting qualifying swap agreements between Eligible Contract Participants (ECPs) from the CEA’s exchange-trading requirements, provided they were not executed on a trading facility. The swap was still understood as a bilateral, individually negotiated transaction between sophisticated parties, a far cry from what would come two decades later on prediction market platforms.
Dodd-Frank and the Statutory Definition
The 2008 financial crisis changed everything. Credit default swaps — perhaps the instrument most unlike a traditional interest rate swap in structure, given their contingent single-payout nature — had been cited as a primary contributor to the economic collapse. Congress responded in 2010 with the Dodd-Frank Wall Street Reform and Consumer Protection Act, whose Title VII created the first comprehensive federal framework for swap regulation.
Section 721 of Dodd-Frank amended the CEA to add a statutory definition of “swap” at Section 1a(47). The definition was deliberately broad, encompassing any agreement, contract, or transaction that:
- is a put, call, cap, floor, collar, or similar option based on the value of rates, currencies, commodities, securities, or indices;
- provides for any purchase, sale, payment, or delivery dependent on the occurrence, nonoccurrence, or the extent of the occurrence of an event or contingency associated with a potential financial, economic, or commercial consequence;
- provides on an executory basis for the exchange, on a fixed or contingent basis, of one or more payments based on the value or level of rates, currencies, commodities, securities, or indices, and that transfers the financial risk associated with a future change in any such value or level.
The CFTC and SEC finalized joint rules further defining these terms in August 2012, effective October 2012. The adopting release ran more than 600 Federal Register pages. That document does not discuss sports wagering, gaming contracts, or prediction markets as a category of products that might fall within — or outside — the statutory swap definition. The proposing release, published in May 2011, framed its questions and requests for comment around categories such as foreign exchange, insurance, commercial forward contracts, and consumer agreements. It posed no specific questions about sports betting, gaming products, or prediction markets, and the agencies received no comment letters focused on those topics during the rulemaking. By contrast, the commissions devoted extended analysis to excluding or clarifying the treatment of traditional insurance contracts, residential energy supply agreements, and certain commercial forward contracts that commenters had raised. Neither regulators nor commenters squarely addressed sports-related event contracts or binary-style retail products. The word “gaming” does not appear. The word “sports” does not appear. “Binary options” merits no substantive discussion. “Event contracts” surface only in passing — once in a discussion of the contingency-payment prong of the swap definition and, notably, in a footnote cross-reference in the section dealing with credit default swaps — without any separate analytical framework. The inference is clear: no one at the time of the 2012 rulemaking understood the statutory swap definition as reaching sports betting or its economic equivalents.
The critical clause — covering agreements dependent on the “occurrence, nonoccurrence, or extent of occurrence of an event or contingency” — was crafted primarily to capture credit default swaps and similar contingent instruments that transfer economic risk associated with commercial events. It is this hook that prediction market platforms have seized upon to argue that binary event contracts qualify as swaps. That argument deserves scrutiny.
The Structural Mismatch: Why a Prediction Contract Is Not a Swap
A traditional swap, from the 1981 IBM/World Bank transaction through every vanilla interest rate swap documented under an ISDA Master Agreement, involves a bilateral exchange of a series of payments over time. Both legs flow; both parties bear periodic obligations. The notional principal anchors a schedule of payment dates. The parties’ obligations are mutual, ongoing, and interlocking. That is why the instrument is called a “swap” — the parties are genuinely swapping cash flow streams.
A prediction market contract is none of these things. A trader who buys a “Yes” contract on whether Team A will win the Super Bowl pays a single purchase price — say, $0.65 — and either receives $1.00 at settlement or receives nothing. There is no bilateral exchange. There is no series of payments. There are no legs. There is no ongoing executory relationship. The seller is not making periodic payments to the buyer in exchange for periodic payments flowing the other direction. The entire economics resolve in a single, binary, terminal payout. As one analysis of prediction market mechanics puts it precisely: “you’re not rewarded for how far something moves, only for being right about the outcome at the moment of settlement.”
This is not a swap. This is a wager with exchange-style price discovery. The prediction contract is structurally identical to a binary option, a fixed-payout, single-settlement instrument that represents the far boundary of derivatives design. The CFTC acknowledged after Dodd-Frank that commodity options, including binary options, were to be treated as swaps for regulatory purposes, but that was a regulatory classification decision, not an acknowledgment of structural equivalence. Forcing binary event contracts into the “swap” category because the statute’s contingency language is broad enough to arguably cover them is not the same as saying they are what Congress meant when it enacted a comprehensive swap regulatory framework inspired by the IBM/World Bank transaction and its descendants.
A credit default swap, which in some ways resembles an event contract, at least partially retains the bilateral-flow structure of traditional swaps: the protection buyer makes a series of periodic premium payments to the protection seller; the seller then makes a contingent lump-sum payment if a credit event occurs. Even this hybrid instrument has an ongoing periodic leg. A prediction market sports contract dispenses with even that; it is entirely binary, with no periodic exchange and no ongoing obligation after purchase. The buyer pays once and waits.
The University of Chicago Business Law Review has argued directly that event contracts are “a step too far for derivatives regulation,” contending that the CFTC has authority to require exchanges to delist event contracts that fail to serve the public interests motivating the CEA. The structural argument supports this view: derivatives regulation under the CEA was designed for instruments that serve hedging, price discovery, and risk transfer functions in commercial and financial markets, not for terminal binary bets on sporting outcomes.
Dodd-Frank Title VII and the Retail Problem
Even accepting, for the sake of argument, that prediction market contracts constitute swaps under the broad statutory definition, Dodd-Frank Title VII creates a second, equally serious legal problem.
Section 723(a)(2) of Dodd-Frank amended Section 2(e) of the CEA to provide that “it shall be unlawful for any person, other than an eligible contract participant, to enter into a swap” unless the swap is entered into on, or subject to the rules of, a board of trade designated as a designated contract market (DCM). The ECP definition is demanding: ECPs generally include entities with at least $10 million in total assets, or $1 million in net worth for hedging purposes, as well as regulated financial institutions, registered commodity pools, and similar sophisticated market participants.
The average retail participant on Kalshi or Polymarket is almost certainly not an ECP. Retail investors, by definition, have never been the intended participants in swap markets — a foundational principle since the market’s inception. Yet prediction market platforms have invited millions of retail participants to trade binary event contracts that the CFTC now characterizes as falling within the definition of a swap.
If these contracts are swaps, then under Section 2(e) of the CEA, retail traders may enter into them only on, or subject to, the rules of a DCM. Kalshi operates as a CFTC-licensed DCM, so Kalshi’s retail customers may be on the right side of this provision. But what about Polymarket, which operates on blockchain infrastructure and is not a CFTC-registered DCM? What about the hundreds of offshore and decentralized platforms that accept American retail users without regulatory registration? If prediction contracts are swaps, those platforms are facilitating transactions flatly illegal under federal law for any non-ECP counterparty, not as a technical regulatory matter, but as a matter of black-letter statutory prohibition. The CFTC’s March 2026 Advance Notice of Proposed Rulemaking acknowledged this tension by inviting public comment on whether event contracts should be excluded from the swap definition under the existing interpretation covering contracts entered into by natural persons for personal, family, or household purposes, an implicit admission that the current framework is both inadequate and potentially incoherent.
The Sports Bookie in the Room
The deepest irony in the prediction market debate concerns the relationship between DCM-traded sports event contracts and traditional sports bookmaking.
Under CEA Section 5c(c)(5)(C), added by Section 745(b) of Dodd-Frank, the CFTC is authorized to prohibit event contracts that involve five enumerated activities: activity unlawful under federal or state law, terrorism, assassination, war, and gaming. Congress placed “gaming” in that list deliberately. The legislative record is unambiguous on this point. The act’s own text warned that the CFTC must be empowered to block “derivatives contracts that are contrary to the public interest because they exist predominantly to enable gambling through supposed ‘event contracts.'” Sports-event contracts were specifically dismissed as products that “would not serve any real commercial purpose” and would instead function solely as gambling instruments.
Blanche Lincoln, who chaired the Senate Agriculture Committee that drafted Section 745(b), was the Senate’s principal architect of these gaming restrictions. She has since become a paid lobbyist for Kalshi, her firm received $180,000 from Kalshi in 2024 alone, according to OpenSecrets, and she submitted comments to the CFTC in 2025 urging the agency to assert exclusive jurisdiction over all prediction markets and to protect them from state interference, directly contradicting the restrictions she wrote into law. Her letter argued that sporting events “have strong commercial value because they have major impacts on advertising, apparel sales and the hospitality industry.” Whatever one makes of that argument on its merits, it is a remarkable reversal from the legislator who wrote the statutory text now being interpreted to bar precisely these products.
The CFTC, after years of prohibiting sports event contracts under the gaming prong of Section 5c(c)(5)(C), reversed course under the current commission. In February 2026, it withdrew the 2024 proposed rule that would have categorically prohibited gaming event contracts and an accompanying staff advisory cautioning DCMs against listing sports contracts. In March 2026, the commission issued a new Staff Advisory that signals regulatory openness to sports event contracts on DCMs, alongside the Advance Notice of Proposed Rulemaking inviting comment on a new regulatory framework.
The consequences of this reversal ripple outward in a deeply problematic direction. A licensed sportsbook operating in New Jersey under a state gaming license takes bets on NFL games from retail customers. Its products are functionally equivalent to Kalshi’s sports event contracts: a customer pays a premium, the event either happens or it doesn’t, and the customer receives a fixed payout or loses their stake. The payout structure is economically identical — a single binary settlement. The only difference is the regulatory label applied to the instrument and the venue on which it trades.
Under the logic now being advanced — that sports event contracts on DCMs are swaps subject to the CEA’s exclusive jurisdiction — the sportsbook’s products may be economically equivalent swaps being offered to retail customers off a DCM, in violation of Section 2(e) of the CEA. The state-licensed sportsbook is not a DCM. Its customers are retail, non-ECP participants. If sports bets are swaps, then every American sports bettor at a state-licensed book is potentially participating in a transaction that violates federal law.
Legal scholars have noted exactly this implication: that if state-authorized sports bets constitute swaps, “such transactions may violate federal law” and that “CEA § 2(e) may preempt the application of any state law that permits sports gambling constituting swaps with non-ECPs entered other than on or subject to the rules of a DCM.” The CFTC’s amicus brief in the Ninth Circuit litigation asked courts not to “resolve the outer limits of the definition of a swap or engage in line drawing between a swap and a wager” — an extraordinary request from a regulator whose core function is precisely to draw those lines.
The Third Circuit’s April 6, 2026 ruling in KalshiEX LLC v. Flaherty affirmed the preliminary injunction barring New Jersey from enforcing its gambling laws against Kalshi’s DCM-traded sports event contracts. The majority held that Kalshi’s contracts are swaps under the CEA and that the CEA’s field preemption shields them from state gaming regulation. Dissenting judge Jane Richards Roth characterized Kalshi’s products as “virtually indistinguishable from the betting products available on online sportsbooks” and argued that the presumption against preemption should apply with special force in the gambling field. Judge Roth’s dissent captures the fundamental problem precisely. If Kalshi’s sports event contracts are virtually indistinguishable from sportsbook products, and if the former are swaps, then the latter may be unlawful off-DCM swaps with non-ECPs — rendering the economically equivalent sportsbook potentially illegal under Dodd-Frank, not because Congress intended to ban sports betting, but because the CFTC’s aggressive expansion of the swap definition into territory Congress specifically identified as gaming has created a logical chain with explosive consequences.
The ICE Futurization: A Case Study in Regulatory Arbitrage
If the prediction market debate illustrates the dangers of expanding the swap definition too broadly, the “futurization of swaps” episode a decade earlier illustrates the dangers of making that definition too costly to inhabit. ICE’s 2012 mass conversion of cleared energy swaps into economically equivalent futures contracts is perhaps the most dramatic demonstration in market history that the legal boundary between a swap and a futures contract is a regulatory construction, one that market participants will arbitrage with ruthless efficiency when the cost differential becomes large enough.
The trigger was Dodd-Frank itself. As the CFTC’s Title VII rulemaking took shape in 2011 and 2012, it became increasingly clear that cleared swaps would face a substantially heavier compliance burden than economically equivalent futures contracts, including more demanding margin liquidation periods (five days for financial swaps versus one day for futures), swap dealer registration requirements, swap execution facility trading mandates, and swap data reporting obligations. Futures contracts were explicitly excluded from the statutory definition of “swap,” yet for cleared energy products, oil, natural gas, power, freight, and environmental credits, the economic difference between a cleared swap and a futures contract was functionally negligible. Both instruments referenced the same underlying commodity prices, were cleared through the same clearinghouse, and settled in the same manner.
ICE drew the obvious conclusion. In July 2012, the company announced it planned to transition all cleared OTC energy swap and option products listed on its OTC energy market to economically equivalent futures contracts. ICE COO Charles Vice stated bluntly: “Based upon our extensive analysis of new swap rules and consultations with a wide variety of customers, we believe that these policies will increase the cost and complexity for swaps market participants, both in absolute terms and relative to that of futures market participants.” The company initially planned to execute the conversion in January 2013, but after consulting with customers, who were eager to escape the looming compliance requirements as quickly as possible, ICE accelerated the timeline. On October 15, 2012, ICE flipped the switch: cleared North American natural gas, electric power, and environmental products moved to ICE Futures US, while cleared oil products, freight, iron ore, and natural gas liquid swaps moved to ICE Futures Europe. All products continued to clear at ICE Clear Europe. ICE described the transition as seamless, with no change to execution or clearing fees or margin requirements, because the economic substance of the instruments was identical.
The scale was staggering. Thousands of contracts, representing a dominant share of the world’s cleared OTC energy derivatives market, changed their legal classification overnight without changing their economic character. A Bloomberg Government analysis at the time identified this as classic regulatory arbitrage, noting that ICE and Goldman Sachs had “circumvented swaps regulations by converting swaps contracts into futures” and warning that “this futurization of swaps is likely to gather steam” — a prediction that proved accurate as other markets followed. CME Group had already been moving in a similar direction with its ClearPort facility, though with a structural difference: ClearPort products were negotiated as swaps before being submitted for clearing, which meant they potentially remained subject to swap rules even after clearing as futures.
The CFTC, recognizing the significance of what was happening, convened a public roundtable on the futurization of swaps on January 30, 2013. CFTC Chairman Gary Gensler acknowledged the phenomenon without condemning it outright, noting that the best response was to accelerate the finalization of the SEF rules so that swaps trading would have transparency requirements comparable to those of futures, thereby eliminating the regulatory incentive for conversion. One roundtable participant captured the underlying danger precisely: “We don’t want to take sort of relaxed rules that have been in the swaps space and transfer them to the futures industry, and the futures industry has operated really well. That was the problem with the mess in 2008.” Bloomberg LP, facing the prospect that its planned swap execution facility would be rendered economically unviable by the margin arbitrage, sued the CFTC in April 2013, arguing that the differential treatment of futures and commodity-based swaps had “improperly created an opportunity for arbitrage” that threatened the viability of the very SEF marketplace Congress had sought to foster.
ICE completed its two-phase transformation in October 2013, when it transferred its remaining uncleared energy swaps markets to ICE Swap Trade, a newly registered swap execution facility. The futurization episode had demonstrated several things simultaneously: that the economic distinction between a swap and a futures contract can be vanishingly thin; that market participants will reorganize enormous volumes of activity to track regulatory cost differentials; and that the legal label applied to a financial instrument, swap versus futures, or for that matter, swap versus wager, has profound regulatory consequences entirely disconnected from the instrument’s economic function. That lesson applies with equal force to the prediction market debate today. When regulators stretch or compress legal definitions to fit policy preferences, markets respond, sometimes producing exactly the outcomes the regulation was designed to prevent.
The Definitional Incoherence and Its Costs
There is a legal and conceptual incoherence at the heart of this regulatory landscape that deserves blunt acknowledgment.
The swap, as an instrument, was defined by its structure: bilateral, executory, involving a series of payments exchanged over time between sophisticated counterparties. The CFTC’s 1989 Policy Statement, the 1993 Part 35 exemption, the CFMA of 2000, and the ISDA Master Agreement framework all reflected and reinforced this understanding. The Dodd-Frank definition was written broadly to capture modern iterations of this bilateral risk-exchange architecture — credit default swaps, total return swaps, equity index swaps — while excluding futures, forwards, and securities.
A binary prediction contract settling on whether the Chiefs win the Super Bowl is not a bilateral exchange of ongoing payments. It is not executory in any traditional sense beyond the settlement date. It does not transfer financial risk associated with a “change in value or level” of an underlying rate or index over time. It is a terminal bet dressed in derivatives clothing.
The CFTC’s attempt to claim jurisdiction over prediction markets by characterizing event contracts as swaps serves institutional interests; it expands the agency’s domain dramatically into what are fundamentally gambling markets. But it does so at the cost of definitional integrity, by stretching the swap concept beyond its historical and structural meaning, and by creating the dangerous implication that economically equivalent products offered by state-licensed sportsbooks are illegal federal violations. Notably, the term “event contracts” does not appear in the Commodity Exchange Act as a defined category. Congress wrote a functional test for certain outcomes-based products without coining a new statutory product class. The CFTC has acknowledged this — “event contract” is not a CEA term of art — yet it now treats the phrase as if it were a recognized statutory category.
The CFTC’s March 2026 ANPRM at least signals awareness that new regulatory frameworks are needed. The right path forward is not to force prediction contracts into an ill-fitting swap definition, but to acknowledge their distinct character and create a purpose-built regulatory framework, one that addresses the gaming dimension Congress specifically identified in Section 5c(c)(5)(C), rather than burying it under a definitional fiction that the first interest rate swap trader in 1981 would not recognize.
