US derivatives markets regulator The Commodity Futures Trading Commission (CFTC) has issued a fairly interesting release, effectively warding off challenges to its overseeing the operation of event contracts by Prediction Markets operators.

Prediction Markets companies, and CFTC’s dominion over the space, have come under intense pressure by various US state gaming regulators as well as online gaming and sports betting companies, who claim that the CFTC is allowing competition in their space, by (mainly financial services) providers, such as Robinhood, who face far lesser oversight and regulation.

Amicus brief

The CFTC said it has filed an amicus brief in the U.S. Circuit Court of Appeals for the Ninth Circuit, confirming its exclusive jurisdiction over the U.S. commodity derivatives markets, including event contract markets commonly referred to as Prediction Markets. The brief was filed in North American Derivatives Exchange, Inc. et al v. The State of Nevada on relation of the Nevada Gaming Control Board et al.

CFTC Chairman Michael S. Selig said,

“CFTC-registered exchanges have faced an onslaught of lawsuits seeking to limit Americans’ access to event contracts and undermine the CFTC’s sole regulatory jurisdiction over prediction markets. This power grab ignores the law and decades of precedent.

“Event contracts allow businesses and individuals to hedge event-driven risks, enable investors to manage portfolio exposure, and provide the public with information about the outcome of future events. These products are commodity derivatives and squarely within the CFTC’s regulatory remit. As I’ve said before, the CFTC has the expertise and responsibility to defend its exclusive jurisdiction over commodity derivatives, and that’s exactly what we’ll do.”

The amicus brief outlines the legal history of the CFTC’s exclusive jurisdiction over all commodity derivatives markets, including prediction markets. Over the years, courts and Congress have established and affirmed the CFTC’s role in regulating these markets. States and other federal entities do not have the authority to further regulate markets within the CFTC’s exclusive jurisdiction, and attempting to do so would have destabilizing economic effects.

First event contracts

The CFTC first officially recognized event contracts in 1992 when it allowed the Iowa Electronic Markets, a futures market at the University of Iowa in which traders can buy and sell contracts pegged to events such as presidential elections and corporate earnings. In the wake of the 2008 financial crisis, Congress expressly granted the CFTC comprehensive authority over any such contract based on a commodity, which is broadly defined in statute. The Commodity Exchange Act is designed to account for innovation in the financial markets, allowing for new and emerging use cases within CFTC-regulated markets.