The CFTC’s initial event contract rules tell us what to expect moving forward.
The debate over event contracts pushes from both directions. One camp wants the CFTC to allow virtually anything and claim exclusive authority over all of it. The other wants whole categories walled off—sports, entertainment, and anything else that reads as gambling. My own goal is narrower and more practical: the broad adoption of event contracts by traditional finance.
A few weeks ago I went looking for a clean line that would screen out the most objectionable markets without strangling the legitimate ones, and I proposed a bona fide hedger test to draw it. The idea wasn’t intended to restrict the CFTC’s ability to claim jurisdiction, but rather to provide a defensible position from which any legitimate market could be included. It was a question of contract design: whether a counterparty could plausibly exist with exposure to the event independent of the contract itself.
The trouble is that any test like that is trivially gameable. Anything can be dressed as a hedge, especially when you consider that companies can manufacture scenarios they need to hedge simply to justify the basis for any theoretical market. How long before a casino claims it needs a roulette market to hedge its own table?
“Is there a hedger?” doesn’t separate a Treasury-yield contract from a roulette wheel, because someone is always hedging something. A test that admits everything isn’t a test. What survives is the intuition underneath it: a contract should derive from real economic substance to belong in serious markets. But that turns out to be a matter of judgment, not a rule you can write down and apply mechanically.
And the thing I was really chasing—whether Schwab and a pension fund would be comfortable putting this in front of clients—isn’t a property you can certify with a formula at all. Palatability isn’t measured. It’s judged.
The CFTC didn’t write a test either
That’s the lens that made the proposed rule click into place. The Commission had the chance to define a bright line for what counts as a legitimate event contract, and it declined. What it built instead is a multi-factor “public interest” analysis applied contract by contract, with a heavy thumb on how a market looks and how it would land with the public. The sports section makes it unmistakable. Contracts on final scores and season stats are fine. Contracts on player injuries are out.
The stated reason for the injury ban is that it creates “perverse incentives” to harm athletes—except that same incentive runs through the player performance contracts the rule explicitly allows, since an “under” on a player’s stat line also pays off when they’re hurt. The distinction isn’t falling out of a principle. It’s a judgment about what the public would find objectionable. Injuries read badly; an “under” doesn’t.
Managing perception is the point
A few months ago I’d have read that as a flaw. It’s a rule reaching for optics instead of a standard. But I get it now. It’s what I was trying to do, and the CFTC understands the ground realities more clearly than my test did. There is no clean standard. The category becomes legitimate by being palatable to the general public. That’s a precondition for the traditional finance adoption that follows. The CFTC is, in effect, running the category’s public relations as much as regulating its mechanics. It’s curating which markets the mainstream sees so the whole asset class reads as serious. Given where event contracts sit on their adoption curve, this is probably the right call for now.
Should we call it what it is?
Dressing a legitimacy judgment as a per-contract “public interest” finding invites the exact criticism that it’s arbitrary—because, as a test, it is. The Commission is managing the category’s reputation on the way to mainstream adoption, drawing and redrawing the line as public comfort shifts. That’s defensible, and it’s evolving. Today’s objectionable market is tomorrow’s normal, the way sports and elections already traveled from unthinkable to routine. A framework that admits it’s managing perception can adapt as perception changes. One that insists it’s applying a fixed test has to keep pretending the line was principled all along.
I should caveat that none of this is settled. It’s still a proposal and is open for comment through July. But the direction is clear, and I think it’s the right one. I don’t love the means, but they might be justified by the ends. I’ll be filing a comment to that effect.
