Comment Text:
April 18, 2026
Mr. Christopher Kirkpatrick
Secretary of the Commission
Commodity Futures Trading Commission
Three Lafayette Centre
1155 21st Street, NW
Washington, DC 20581
RE: Prediction Markets; Advance Notice of Proposed Rulemaking (RIN 3038-AF65)
Dear Mr. Secretary:
This comment is submitted in response to the Commission’s Advance Notice of Proposed Rulemaking concerning event contracts and the application of Commodity Exchange Act (“CEA”) § 5h(g) and the special rule at § 7a-2(c)(5)(C). The comment proposes a structural framework for distinguishing event contract activity that falls within the Commission’s core market-regulatory mandate from activity that has historically been regulated by the States as gaming.
The approach proposed here is informed by Commissioner Mersinger’s 2024 dissent from the Commission’s prior event contracts rulemaking, which observed that the Commission “has a role in regulating event contracts as a market regulator, but it is essential that the CFTC does not encroach upon the prerogatives of States,” and that an appropriate proposal “would have struck a balance between Federal oversight and State autonomy by focusing on the CFTC’s core mandate of promoting market stability and protecting market participants from fraud and abusive practices.” The structural safe harbor proposed below operationalizes that balance. It defines the Commission’s regulatory interest by reference to venue architecture rather than contract subject matter, and it preserves State authority over activities that do not meet the structural criteria of a neutral market-making venue.
I. The Analytical Framework: Market-Making Venues and Bookmaking Operations
The Commission’s difficulty in administering CEA § 5h(g) and the special rule at § 7a-2(c)(5)(C) stems from an attempt to define “gaming” by reference to the subject matter of the underlying contract rather than the structure of the venue on which it trades. This subject-matter approach is both constitutionally fraught, inviting the kind of content-based line-drawing that courts have repeatedly found unadministrable, and economically incoherent, because identical contracts can serve legitimate hedging and price-discovery functions in one context and resemble wagering in another.
I respectfully propose that the Commission adopt a structural framework that distinguishes between two categorically different activities.
A market-making venue is a neutral intermediary that matches bids and offers submitted by independent market participants. The venue earns transaction fees, holds no directional position in any listed contract, and extends no economic or informational advantage to any participant. Price formation occurs through the interaction of participant orders, and the venue bears no risk tied to contract outcomes.
A bookmaking operation is a principal counterparty that offers prices, manages a book of exposures, and profits from the differential between offered odds and realized outcomes. Whether the bookmaker is organized as a single entity, a network of affiliated entities, or a nominal exchange operator that extracts economic benefits from participant activity, the defining feature is that the operator is itself a participant in the economic outcome of listed contracts.
This distinction is not novel. It tracks the historical common-law and state statutory treatment of gambling, which has consistently focused on the operator’s economic relationship to the game rather than the nature of the underlying event. It also aligns with the structural premises of the Commodity Exchange Act, which regulates designated contract markets as neutral intermediaries subject to the Core Principles of § 5(d) and prohibits the kinds of principal-trading conflicts that would convert an exchange into a counterparty.
II. The Proposed Safe Harbor
A venue that satisfies the following conditions should be conclusively deemed to be conducting market-making rather than gaming activity, and its listed event contracts should not be subject to prohibition under § 5h(g) on gaming grounds.
Operator Neutrality. Neither the venue operator nor any affiliated person, including parent, subsidiary, or sister entities; principals, officers, directors, or employees; or equity holders exceeding a specified passive-investment threshold, may hold any position, direct or indirect, in any contract listed on the venue. Market-making agreements or designated liquidity provider arrangements that economically replicate principal participation by the operator or its affiliates are prohibited.
Prohibition on Seeded Liquidity. The venue may not provide initial or ongoing liquidity through proprietary accounts, affiliated accounts, or any arrangement in which the venue bears economic risk tied to contract outcomes.
Equal Access to Execution. The venue may not offer rebates, volume discounts conditioned on directional participation, payment for order flow, or any other economic inducement that differentiates among market participants on grounds other than objective operational criteria applied on a non-discriminatory basis.
Equal Access to Information and Infrastructure. The venue may not offer co-location, preferential data feeds, advance notice of order book changes, or any other informational or latency advantage to any participant or class of participants. All market data shall be disseminated on terms that do not privilege any category of participant.
Transparent Fee Structure. All transaction fees and other charges shall be publicly disclosed and applied uniformly to all participants engaged in equivalent activity.
Venues that do not satisfy these conditions would remain subject to the Commission’s full § 5h(g) review, during which the Commission may consider both the structural features of the venue and the subject matter of listed contracts in determining whether the activity constitutes gaming within the meaning of the statute.
III. Grounding the Safe Harbor in the Existing Core Principles
The structural conditions proposed above are not new regulatory concepts. They operationalize commitments already embedded in the Designated Contract Market Core Principles at CEA § 5(d), which the Commission has administered since the Commodity Futures Modernization Act and refined through Part 38 of its regulations. The safe harbor thus asks the Commission to apply its existing statutory framework with greater specificity to the event contract context, rather than to develop new substantive requirements.
Core Principle 2 (Compliance with Rules). Section 5(d)(2) requires a DCM to establish, monitor, and enforce compliance with its rules, including rules prohibiting abusive trade practices. A venue whose operator or affiliates participate as principals in listed contracts, or whose internal accounts provide seeded liquidity, cannot credibly enforce rules against self-dealing, front-running, or manipulative trading, because the entity charged with enforcement is itself a participant whose interests may conflict with impartial rule application. The operator neutrality and seeded liquidity prohibitions in the safe harbor are direct implementations of CP 2’s compliance integrity requirement.
Core Principle 3 (Contracts Not Readily Subject to Manipulation). Section 5(d)(3) requires that listed contracts not be readily susceptible to manipulation. Where the venue operator holds a position in a listed contract, the operator possesses both the means, through control of the trading platform, market data, and surveillance functions, and the motive, through directional economic interest, to influence price formation. The structural prohibition on operator participation addresses the CP 3 concern at its source, rather than relying on post-hoc surveillance to detect manipulative conduct by the very entity charged with surveillance.
Core Principle 7 (Availability of General Information). Section 5(d)(7) requires a DCM to make available to the public information concerning contract terms, trading conventions, mechanisms, and practices. The equal access to information provision of the safe harbor operationalizes CP 7 by prohibiting differential dissemination of market data. Where preferential data feeds or advance notice of order book changes are provided to selected participants, the venue has functionally created private information channels that defeat the public-availability premise of CP 7. The safe harbor clarifies that CP 7 requires not only publication but parity of access.
Core Principle 9 (Execution of Transactions). Section 5(d)(9) requires a DCM to provide a competitive, open, and efficient market mechanism for executing transactions. The equal access to execution provision of the safe harbor, including the prohibition on rebates, differential fee structures, and payment for order flow, implements CP 9 by ensuring that execution quality is determined by order characteristics rather than by the identity or commercial relationship of the submitting participant. Differential execution economics convert a nominally open market into a tiered market in which privileged participants extract value from non-privileged participants, which is inconsistent with the competitive and open market standard.
Core Principle 11 (Financial Integrity of Transactions). Section 5(d)(11) requires a DCM to establish and enforce rules providing for the financial integrity of transactions. Operator neutrality is foundational to financial integrity. A venue that holds directional positions in its own listed contracts introduces a settlement-risk counterparty that is simultaneously the guarantor of market integrity. The structural separation required by the safe harbor eliminates this conflict by ensuring that the venue’s financial exposure is limited to transaction-fee revenue and operational costs, rather than contract outcomes.
Core Principle 12 (Protection of Markets and Market Participants). Section 5(d)(12) requires a DCM to establish rules protecting markets and market participants from abusive practices. The co-location, preferential data feed, and privileged access prohibitions implement CP 12 by foreclosing the structural arrangements through which sophisticated participants can extract value from retail and less-sophisticated participants. In the event contract context, where retail participation is a defining feature of the market, the CP 12 concern is particularly acute. Latency advantages and informational asymmetries in binary-payoff contracts translate directly into wealth transfers from the uninformed to the informed, which is precisely the market structure CP 12 was designed to prevent.
Core Principle 18 (Recordkeeping) and Core Principle 21 (Financial Resources). The safe harbor’s transparent fee structure and disclosure requirements complement CP 18’s recordkeeping obligations and CP 21’s financial resources requirements by ensuring that the economic terms of venue operation are verifiable by the Commission in the ordinary course of oversight. A venue that applies non-transparent or participant-specific fee arrangements presents examination challenges that transparent and uniform fee structures do not.
Taken together, these Core Principles supply the statutory foundation for each of the safe harbor conditions. Operator neutrality draws from CP 2, CP 3, and CP 11. The prohibition on seeded liquidity implements CP 2 and CP 3. Equal access to execution rests on CP 9 and CP 12. Equal access to information and infrastructure is grounded in CP 7 and CP 12. The transparent fee structure requirement is supported by CP 9, CP 18, and CP 21. The structural safe harbor is therefore not an augmentation of the Commission’s existing authority but a specification of it. Each condition reflects an existing Core Principle obligation, articulated with the precision that the event contract context requires. The Commission may adopt the safe harbor without statutory amendment, without expansion of its jurisdictional reach, and without displacement of State regulatory authority over activities that fall outside the structural definition of a market-making venue.
IV. Federalism: The Safe Harbor Preserves State Authority
The Commission has long recognized, and the courts have repeatedly reaffirmed, that the regulation of gambling is a quintessential exercise of the State police power. The Professional and Amateur Sports Protection Act was struck down in Murphy v. NCAA precisely because Congress may not commandeer State regulatory authority over wagering, and the post-Murphy landscape has seen the overwhelming majority of States develop sophisticated regulatory regimes governing sportsbooks, casinos, lotteries, and parimutuel operations. These regimes reflect considered State judgments about consumer protection, problem-gambling mitigation, tax policy, and the social costs of wagering activity. Those judgments vary across States, and the federal structure entrusts them to State democratic processes.
The proposed safe harbor preserves this State authority in three respects.
First, the safe harbor defines federal jurisdiction by reference to venue structure rather than contract subject matter. A federally regulated exchange operating under the proposed conditions is engaged in the same economic activity regardless of whether listed contracts reference interest rates, commodity prices, election outcomes, or sporting events. The Commission’s regulatory interest is the integrity of market intermediation, not the semantic content of the reference event. This framing respects the principle, articulated in Murphy and elsewhere, that the federal government regulates activities falling within its enumerated powers rather than displacing State authority over subject matters reserved to the States.
Second, the safe harbor does not authorize federal preemption of State bookmaking regulation. Venues that operate as principals, extract economic benefits from participant activity, or grant privileged access fall outside the safe harbor and outside the structural definition of a market-making venue. Such operations, whether they style themselves as exchanges, prediction markets, or otherwise, remain fully subject to State gambling law, and nothing in the proposed framework would permit a bookmaking operation to evade State licensing, taxation, or consumer protection requirements by obtaining federal designation. The safe harbor thus functions as a principled jurisdictional line rather than a mechanism for federal encroachment.
Third, the safe harbor permits the co-existence of federally regulated event contract exchanges and State-regulated sportsbooks as complementary rather than competing institutions. A State-licensed sportsbook is definitionally a bookmaking operation: the operator sets lines, holds directional risk, manages its book through adjustment of offered odds, and profits from the spread between offered and realized probabilities. The economic function of a sportsbook is to provide retail wagering services, and States have legitimate interests in regulating the licensing, advertising, consumer protection, and tax treatment of such services. A federally regulated event contract exchange, by contrast, provides a neutral venue for the expression of views on future events through contracts priced by participant order interaction. The economic function is price discovery and risk transfer among independent participants, and federal regulation appropriately addresses market integrity, position limits, surveillance, and systemic considerations.
These are distinct activities serving distinct purposes, and they can co-exist under dual federal-State regulation in the same manner that federally regulated securities exchanges co-exist with State-regulated casino gaming, or that federally regulated commodity futures markets co-exist with State-regulated agricultural marketing orders. The proposed safe harbor makes the jurisdictional line explicit and administrable, rather than leaving it to be worked out through case-by-case § 5h(g) review or litigation under State law.
V. Benefits of the Structural Approach
The structural safe harbor offers several advantages over a subject-matter-based definition of gaming.
It is administrable. The criteria are objective, verifiable through examination of venue operations and corporate structure, and capable of incorporation into DCM Core Principle compliance review. The Commission need not make contested judgments about whether particular events, such as elections, award ceremonies, or sporting contests, are or are not “gaming” in some essential sense.
It is faithful to the statutory text. The CEA regulates designated contract markets as neutral intermediaries, and the Core Principles at § 5(d) already require impartial access, market integrity, and protection against abusive practices. The safe harbor operationalizes these existing statutory commitments rather than layering new conceptual categories onto the Act.
It is institutionally modest. The proposal does not require the Commission to expand its jurisdiction, displace State authority, or resolve contested questions about the social value of particular contract categories. It defines federal regulatory interest by reference to activity the Commission is uniquely positioned to regulate, namely market structure and intermediation, and leaves to the States the matters the States are uniquely positioned to regulate.
It is consistent with the dissenting views expressed by Commissioner Mersinger in connection with the 2024 rulemaking, which emphasized the Commission’s proper role as a market regulator focused on stability and anti-fraud objectives, and cautioned against encroachment upon State prerogatives. The structural safe harbor implements that vision through an administrable framework.
VI. Conclusion
The Commission is presented with a familiar regulatory challenge in an unfamiliar context. Event contracts raise questions about the boundary between federal market regulation and State gambling authority, but the resolution of those questions does not require the Commission to choose between expansive federal oversight and regulatory abdication. The structural safe harbor proposed in this comment offers a third path: a principled, administrable distinction between market-making venues, which fall within the Commission’s core mandate, and bookmaking operations, which do not. The distinction is grounded in the existing Core Principles, faithful to the text of the CEA, and respectful of the State authority that Murphy and the broader federal structure protect.
I respectfully urge the Commission to adopt this framework in any forthcoming proposed rulemaking on event contracts.
Respectfully submitted,
Francis S. Quinn, Jr.
