Comment Text:
Docket No:
CFTC-2026-0331-0001
RIN:
3038-AF65
Subject:
Advance Notice of Proposed Rulemaking – Prediction Markets
Date:
March 23, 2026
COMMENT ON ADVANCE NOTICE OF PROPOSED RULEMAKING
1. Executive Summary
The Commodity Futures Trading Commission's (CFTC) Advance Notice of Proposed Rulemaking(ANPRM) regarding prediction markets requires a regulatory framework that prioritizes operationalresilience and strict adherence to the statutory text of the Commodity Exchange Act (CEA). The rapidproliferation of event contracts listed by Designated Contract Markets (DCMs) exposes structuralvulnerabilities in traditional market surveillance and clearing paradigms. This submission providesfunctional, textually grounded implementation guidance to optimize administrative predictability and ensurethe statutory framework functions as written.
While prediction markets offer demonstrable benefits in price discovery, information aggregation, andmarket efficiency—purposes explicitly fostered under CEA § 3(b)—these benefits are contingent onstructural safeguards. Innovation cannot outpace the mathematical realities of risk management. Thefollowing recommendations offer actionable mechanisms to preserve these market efficiencies whiledifferentiating permissible economic hedging from prohibited activities under CEA § 5c(c)(5)(C),minimizing agency litigation risk.
2. Procedural & Statutory Alignment
The Commission’s authority to prohibit contracts contrary to the public interest is strictly enumerated. Tosurvive judicial review, the final rule must anchor its definitions directly within the statutory text, avoidingexpansive interpretations of terms like "gaming" that lack explicit congressional instruction. In the currentjurisprudential environment, where courts exercise independent judgment on statutory ambiguities, relyingon subjective qualitative assessments to define prohibited contracts invites immediate vacatur. To satisfy thelogical outgrowth test under the Administrative Procedure Act (APA), the Commission must adopt bright-line, empirically verifiable criteria for an event contract's legal and operational viability.
3. Section-by-Section Technical Analysis
A. Margin and DCO Core Principles (Question 2.f and 3.c)
"What factors should the Commission consider in determining whether prediction markets should bepermitted to offer trading on margin..."
Issue:
Applying traditional historical Value-at-Risk (VaR) models to binary event contracts creates systemicunder-collateralization risks. The binary payoff convexity vs VaR breakdown at the extreme tails ofprobability means that short, volatile resolution windows cannot be safely margined using legacy futuresmethodologies.
Proposed Redline/Fix:
"DCMs and DCOs may permit margined trading for event contracts exclusively forEligible Contract Participants (ECPs). Retail participant positions must remain fully collateralized unless theDCO demonstrates a Commission-approved risk model specifically calibrated for binary option decaydynamics."
Operational Safeguard:
This bifurcation aligns with CEA § 5b(c)(2)(D) by ensuring margin remains strictlyrisk-based while ring-fencing the clearinghouse from sudden retail liquidation cascades.
B. Public Interest and Gaming (Question 19.b)
"How should the Commission distinguish between various types of contests? For example, should asports competition be treated differently than an award competition..."
Issue:
Relying on the thematic nature of a contest to define "gaming" establishes an arbitrary baseline. Thedistinction must be grounded in the presence of underlying commercial risk and price discovery utility perCEA § 3(a).
Proposed Redline/Fix:
"An event contract is presumed to involve 'gaming' under CEA § 5c(c)(5)(C)(i)(V) ifthe underlying occurrence lacks a demonstrable, measurable financial, commercial, or economicconsequence applicable to market participants outside the transaction itself."
Operational Safeguard:
This objective test shifts the evidentiary burden to the DCM to prove an "economicpurpose," effectively providing the Commission with a defensible, textually grounded standard that avoidsarbitrary and capricious challenges regarding the cultural value of specific events.
C. Information Asymmetry and Manipulation (Question 30)
"Some events underlying event contracts are under the control of a single individual or small group ofindividuals."
Issue:
Contracts susceptible to single-actor resolution bypass standard market surveillance mechanisms,rendering traditional Position Limits (CEA § 5(d)(5)) ineffective against deterministic insider manipulation.
Proposed Redline/Fix:
"DCMs must establish hard position limits proportional to the Shannon entropy ofthe outcome space, defined as H(X) = -Σ P(x
i
) log
2
P(x
i
). For highly centralized events where outcomeprobability is deterministically controlled by a single actor (approaching zero entropy), aggregate openinterest must be capped at statistically immaterial thresholds."
Operational Safeguard:
By formally linking position accountability to the mathematical entropy of theoutcome space, the Commission neutralizes the financial mechanism for insider manipulation, effectivelysatisfying Core Principle 3 (listing contracts not readily susceptible to manipulation) through a defensible,quantitative standard.
4. Operational Impact Assessment
In practice, DCMs will fail to maintain compliance if the Commission implicitly requires them todynamically adjudicate state-by-state variations in gaming laws (Question 16). Placing this burden oncentralized exchanges will result in fractured liquidity and regulatory gridlock. The Commission shouldestablish a federal functional safe harbor for listing determinations, without displacing underlying state lawapplicability. If a contract meets the federal economic hedging utility test, the DCM can satisfy its CFTClisting obligations without the Commission becoming an arbiter of 50 disparate state gaming codes. Thisformulation preserves state sovereignty while ensuring federal markets function predictably.
Furthermore, mandating real-time swap data repository (SDR) reporting (Question 5.a) for micro-durationevent contracts using legacy infrastructure will jam existing reporting pipelines. For <24-hour contracts, themessage traffic volume scales exponentially against a fixed set of liquidity providers. The Commissionshould adopt a batched, end-of-day reporting mechanism for binary event contracts with a duration of lessthan 24 hours to prevent operational network congestion while preserving full market transparency andauditability.
Rohan Sharma
Aspen Institute Civic AI Leader
Member, U.S. Technical Advisory Group to ISO/IEC (AI)
Member, ACM Technology Policy Committee
Author,
AI & the Boardroom
(Springer)
Submitted in an individual expert capacity.
All views expressed are my own and do not represent any institution or organization.
