Swapping Out the Rules: How “Financial Event Contracts” May Provoke a Regulatory Confrontation

Prediction market platforms like Kalshi are perhaps best known for sports betting—and the attendant controversy over whether they’re side-stepping long-standing state and tribal gambling laws to enable their nationwide digital casinos.1

But a growing category of bets may prove to be another significant attempt at regulatory arbitrage: “financial event contracts.” These event contracts are bets that allow users to gamble on whether companies hit certain financial metrics. Earlier this month, Kalshi launched a “public companies hub” where traders can gamble on myriad corporate outcomes, including whether rideshare company Lyft will report more than 230 million rides next quarter; whether Ford will sell more than 2 million vehicles this year; or whether Yum! Brands’ Taco Bell locations will have same-store sales growth next quarter exceeding 5 percent.

On any given day, there are dozens of available bets open to traders. Kalshi’s CEO has himself predicted that financial bets will be one of the fastest-growing categories on the platform.

There’s just one problem.

Betting on the performance of public companies in the U.S. already has a name and 90 years’ worth of rules and protections: it’s a core component of the stock market, and it’s overseen by the Securities and Exchange Commission (SEC). And we are likely headed for a regulatory confrontation that may pit prediction market platforms against traditional securities exchanges as well as test the professed regulatory harmonization between the SEC and the Commodity Futures Trading Commission (CFTC).

The Prediction Markets’ Maneuver

Prediction market platforms like Kalshi are attempting to maneuver around the SEC’s longstanding legal framework in order to benefit from lighter-touch rules at the CFTC. Much like these platforms argued that betting on the outcome of an NFL game is a type of financial derivative known as a “swap,” they’re now trying to pull the same sleight of hand with betting on corporate key performance indicators (KPIs).

It’s helpful to step back and reiterate what swaps are to understand how these new products are different. Generally, swaps are financial contracts overseen by the CFTC that allow traders to bet on the occurrence or non-occurrence of an event associated with potential financial, economic, or commercial consequences. Traditionally, it has been a way for producers to hedge their exposure to a particular commodity’s price by taking out an insurance policy that guards the producer against volatile price movements. A paradigmatic example is an airline wanting to lock in oil prices to ensure operating costs don’t go too high, and an oil producer wanting to lock in oil prices to guarantee a certain level of profits. Each side has an interest in securing fixed prices rather than subjecting their business to fluctuations in the market.

As Better Markets has extensively covered, when the underlying bet is tied to physical commodity prices or financial commodities like interest rates, the CFTC is, indeed, the appropriate regulator. But when it’s tied to an NFL game? Well, that clearly falls within state and tribal gaming authority.

Now, when it comes to bets on the performance of corporations, prediction market platforms are attempting the same gambit as they did with sports. Just in this case, when what’s underlying a bet is tied to corporate KPIs, the bet becomes a security under the jurisdiction of the SEC, rather than a swap overseen by the CFTC.

Explaining How Financial Event Contracts Work

When one typically thinks of an option on a stock, you think of paying a premium for the right to buy a share of a public company at a later date. So, if Apple stock is trading for $300 per share today, perhaps you pay $10 for the right to buy one share of Apple at $325 in 6 months (that is, if you’re bullish on the company’s growth prospects). If Apple’s stock rises to $350, you can net $15 without ever owning Apple stock ($350 sale price at the end of the 6-month period minus the $325 purchase price you locked in, less the $10 fee). If Apple’s stock price stays flat, you’d be out just $10.

The new bets launched by Kalshi under the CFTC framework are a cousin of the above option example. In this case, you pay a premium—say $0.30—for a dollar bet that Apple’s revenue will hit $100 billion next quarter. If you’re right, the contract pays out $1. If you’re wrong, you get nothing, and you’re out $0.30. While the payout of $1 stays constant, the price of the premium fluctuates based on the likelihood of the underlying event happening. Rare events may cost just a few cents, while likely events may cost close to a dollar. And obviously this scales so that traders can bet $10, $1,000, or $1,000,000, depending on their risk appetite.

These financial event contracts tied to corporate KPIs easily meet the definition of security-based swaps or binary options, traditional products regulated by the SEC.2 Because the underlying “event” relates to financial metrics materially and directly linked to the equity value of a public company, the bets should be—and currently are, based on the SEC and CFTC’s previous actions—classified as securities.3 Inputs like revenue, earnings, net income, sales growth, or new customers are all key determinants of a company’s equity price and therefore are encompassed by the definition of a security. In other words, one can’t evade securities laws simply by structuring bets around direct proxies for a company’s stock price.

The CFTC Hustle

Prediction market platforms have been able to sidestep the SEC because the swaps regime under the CFTC is governed by a permissive self-certification framework. Under that framework, platforms decide which contracts they want to make available without any need for regulatory pre-approval. And because the CFTC is led by a prediction markets cheerleader, the result has been an explosion of these line-blurring bets. As Better Markets has previously pointed out, over 2500 self-certification contracts have gone live under the CFTC’s current permissive regulatory posture.4

The problem is that by skirting the SEC, investors and market integrity lose out. We’ve covered previously how the CFTC’s insider trading authority is feeble compared to the powers at the SEC. Securities law also includes stronger controls around the handling and dissemination by company insiders of material nonpublic information. This is particularly relevant because bets on corporate KPIs are just as susceptible to insider trading as bets on the stock price itself.

Further, in terms of rules that affect retail customers, securities markets offer the protections inherent in transacting through brokers, including protection under the Securities Investor Protection Corporation (which covers up to $500,000 in securities/cash if a broker-dealer fails), coverage under Regulation Best Interest, a requirement for brokers to act in customers’ best interests, and a duty of best execution when routing customer trades. Finally, SEC-regulated products include strict requirements on paid promoters disclosing their compensation, while CFTC-regulated products include no such limits on pumping by influencers.

SEC and CFTC Request for Comment

The SEC and CFTC are currently soliciting comment on whether the agencies should rewrite the definitions of what’s a swap regulated by the CFTC versus security-based products within the purview of the SEC. Better Markets urged the Commissions not to modify their rules to exclude financial event contracts from the definition of a security-based swap. That’s because the agencies in 2012 already provided a clear roadmap for when products fall within the jurisdiction of securities laws. And there’s a strong argument to be made that the already-launched prediction market financial event contracts have already crossed that line. As discussed above, changing the rules to retrofit them to prediction markets’ overreach could threaten investors.

While the agencies have a request for comment pending, market participants may force the issue even sooner. Right now, the Chicago Board Options Exchange (CBOE) has a filing pending with the SEC to list what they call binary KPI options under the securities framework, which could go live as early as this quarter. Recently, the securities exchange MEMX has announced its intention to seek approval to do the same.

Meanwhile, as we explained earlier, Kalshi ran ahead under the CFTC framework and launched the products under the self-certification framework. They and other firms with an economic stake in prediction markets have asked the SEC to pause in approving CBOE’s petition until the larger comment process described below is resolved—something that could take months or years. The request to go slow and consider reasoned public comments around a wider rulemaking overhaul is ironic considering it is prediction markets that jumped the gun and self-certified these bets under the CFTC framework in a manner that pushes, if not breaks, the boundaries established in 2012.

What’s Next

Prediction market platforms like Kalshi are emboldened, offering up splashy press releases about their new range of corporate bets. The SEC may or may not let traditional securities exchanges move forward with their own offerings, setting up the potential for a regulatory morass where legally and economically identical products are offered under very different frameworks.

Importantly, state securities regulators and investors themselves may have a role to play. If these financial event contracts do indeed fall within the securities laws, as traditional exchanges attest, then prediction market platforms have exposed themselves to state and/or private litigation related to the offer or sale of unregistered securities. The SEC, of course, could also bring an enforcement action—though that seems less likely given that Commission leadership has been silent on the issue to date.

More generally, this is another example of prediction markets moving fast and breaking things. Policymakers should take a hard look at the CFTC’s self-certification framework, which has now enabled both the encroachment into state and tribal gambling authority and the securities laws.