CFTC Sues to Stop States From Regulating Event Contracts

The Commodity Futures Trading Commission (CFTC) filed separate lawsuits against Arizona, Connecticut and Illinois Thursday (April 2), saying the states have taken actions that intrude on the regulator’s exclusive jurisdiction to regulate prediction markets.

The three states have attempted to outlaw, regulate or otherwise restrain the activities of CFTC-registered designated contract markets (DCMs) that facilitate trading in lawful event contracts, the regulator said in a Thursday press release.

Reached by PYMNTS, the Arizona attorney general’s office declined to comment on the litigation. The Illinois attorney general’s office said they are reviewing the CFTC complaint. The Connecticut attorney general’s office did not immediately reply to PYMNTS’ request for comment.

According to a frequently asked questions file issued by the CFTC along with its press release, Arizona issued cease and desist letters and brought criminal charges against a CFTC-registered DCM, while both Connecticut and Illinois issued cease and desist letters to DCMs to stop listing sports-related event contracts within their states.

The CFTC is seeking a declaration that its exclusive jurisdiction preempts state laws as applied to its regulated event contracts, as well as a permanent injunction prohibiting states from using state gambling laws to interfere with CFTC-regulated event contract activity, per the FAQs file.

The CFTC first officially recognized event contracts in 1992, and it was granted comprehensive authority over these contracts by Congress after the 2008 financial crisis, according to the release.

“The CFTC will continue to safeguard its exclusive regulatory authority over these markets and defend market participants against overzealous state regulators,” CFTC Chairman Michael S. Selig said in the release. “This is not the first time states have tried to impose inconsistent and contrary obligations on market participants, but Congress specifically rejected such a fragmented patchwork of state regulations because it resulted in poorer consumer protection and increased risk of fraud and manipulation.”

The CFTC said Feb. 25 that it has full authority to police illegal trading practices on DCMs. The regulator said this in a press release after DCM Kalshi announced that it reported two insider trading cases to the CFTC.

On March 12, the CFTC said that it is seeking public comment on whether it should amend or issue new regulations governing event contracts traded on prediction markets. Selig said in a press release that the regulator aims to “promote responsible innovation in our derivatives markets.”