Event contracts—often referred to as “prediction markets”—are used by market participants to forecast elections, economic indicators, weather events, economic policy decisions and even sporting event outcomes. Other types of event contracts are replacing traditional long-dated derivatives contracts that rely on these markets to hedge commercial risk. The rapid growth of these markets has led to an increase in the number of entities not only trading in these markets but also seeking to operate as either an exchange or an intermediary.
This client alert provides an overview of the regulatory framework and the primary registration categories under the Commodity Exchange Act (CEA) and Commodity Futures Trading Commission (CFTC or the Commission) regulations for those seeking to be involved in event contracts. WilmerHale’s Futures and Derivatives Group has experience navigating this journey with clients, from corporate formation and registration with the CFTC or National Futures Association (NFA) to operate as a regulated entity and strategic investment and transactions involving event contract market participants.
I. History: Event Contracts and the Commodity Exchange Act
The term “event contract” is not defined in the CEA. However, the CEA defines a “swap,” in part, as “any agreement, contract, or transaction ... that provides for any purchase, sale, payment, or delivery (other than a dividend on an equity security) that is dependent on the occurrence, nonoccurrence, or the extent of the occurrence of an event or contingency associated with a potential financial, economic, or commercial consequence.”1
This definition is broad. The CFTC has not elaborated on what this provision means or does not mean, other than in a joint release with the Securities and Exchange Commission (SEC) that states that the SEC and the CFTC “do not interpret this clause to mean that products historically treated as insurance products should be included within the swap or security-based swap definitions.”2
By contrast, the definition of “security-based swap” is narrower. The CEA defines a security-based swap as “any agreement, contract, or transaction that ... is based on ... the occurrence, nonoccurrence, or extent of the occurrence of an event relating to a single issuer of a security or the issuers of securities in a narrow-based security index, provided that such event directly affects the financial statements, financial condition, or financial obligations of the issuer.”3 Unlike the “potential consequence” in the definition of “swap,” the “security-based swap” definition requires the event to directly affect the financial statements, financial condition or financial obligations of the issuer.
The CFTC has long regulated event contracts market activity, going back decades to weather-related and economic-indicator markets listed on designated contract markets (DCMs). As the CFTC recently noted, since the early 1990s, parties have sought Commission staff guidance regarding prediction markets, and the Commission first designated a prediction market as a DCM in February 2004.4 Further, going back to 1993 with a staff no-action letter issued to the Iowa Electronic Markets, the CFTC has exercised oversight over event contract markets.5 More recently, in January 2022, the CFTC exercised jurisdiction over Blockratize, Inc. d/b/a Polymarket.com in an enforcement matter, where the CFTC identified that Polymarket contracts “vary widely, and include predicting the future price of cryptocurrencies (e.g., ‘Will $BTC break $20k before 2021?’ and ‘What will the price of $ETH be on July 19?’) and other economic indicators (e.g., ‘Will inflation be 0.4% or more from April to May?’ and ‘Will US GDP growth be more than 4.9% in Q1 2021?’).” The CFTC asserted that these “event contracts, each of which is composed of a pair of binary options, constitute swaps under the CFTC’s jurisdiction, and therefore can only be offered on a registered exchange in accordance with the [CEA] and CFTC regulations.”6
Under the CEA and CFTC regulations, event contracts are not regulated based on what they predict but on how they are structured, offered, traded, cleared and intermediated.7 Similarly, market participants are regulated based on the specific types of activity they conduct. As a result, those who want to be involved in event contracts should carefully evaluate existing registration categories that govern those regulated activities.
Below, we outline several registration categories that individuals or entities may consider when engaging in event contracts markets. We first discuss intermediaries (introducing brokers and futures commission merchants), then market infrastructure (designated contract markets, swap execution facilities and derivatives clearing organizations) and finally market participant types (swap dealers, commodity trading advisors and commodity pool operators).
II. CFTC-Registered Entity Categories: Intermediaries
Certain registered intermediaries play a central role in facilitating customer participation in the derivatives market. Introducing brokers (IBs) and futures commission merchants (FCMs) act as key intermediaries between market participants and trading venues. This section provides an overview of the regulatory framework and registration requirements applicable to these intermediaries.
A. Introducing Brokers
IBs allow their customers to enter orders to trade event contracts, but IBs do not hold customer funds or execute trades. This registration category would be appropriate for those who wish to act as an intermediary in connection with event contracts by introducing customers to registered counterparties or platforms offering such products. IBs generally do not carry accounts or handle customer funds, and their involvement is typically limited to taking orders, making referrals and engaging in relationship‑management activities.
Specifically, CFTC Regulation 1.3 defines an IB as any person “who, for compensation or profit, whether direct or indirect,” is “engaged in soliciting or in accepting orders (other than in a clerical capacity) for the purchase or sale of any commodity for future delivery, security futures product, or swap.”8 The Futures Trading Act of 1982 first required the registration of IBs.9 The CFTC has said that the purpose of the Futures Trading Act was “to require those persons who performed the type of activities traditionally engaged in by agents to register with the Commission as an IB.”10 In determining whether an entity is required to register as an IB, the CFTC will consider both (i) whether the entity solicits or accepts orders and (ii) whether the entity receives compensation or profit.11
To become an IB, registration with NFA is required. To register with NFA, applicants must submit an online Form 7‑R and NFA membership application, satisfy applicable compliance requirements, complete an online member questionnaire and pay the required non‑refundable fees.12 IBs who handle event contracts, which are treated as swaps, must ensure that their associated persons (APs) comply with the NFA’s swap proficiency requirements.13 Under CFTC regulations, an AP is generally defined as an individual who “solicits orders, customer funds (or who supervises persons so engaged) on behalf of ... an IB.”14 In addition, all APs and principals, who are defined as “any person in charge of a principal business unit, division or function” of the IB, must complete the online Form 8-R and submit an application.15
B. Futures Commission Merchants
Similar to an IB, FCMs can facilitate transactions of event contracts listed on DCMs in addition to other types of products. This registration category would be appropriate for those who wish to participate in the event contracts market by acting as the intermediary for customer accounts and transactions. FCMs typically provide clearing, margining and customer account services, and their compensation is tied to transaction‑based fees and related account services. FCMs would be tasked with onboarding customers, accepting and holding customer funds in segregation, transmitting customer orders to the DCM, and facilitating clearing and settlement of positions.16
CFTC Regulation 1.3 defines FCMs as individuals, associations, partnerships, corporations and trusts that “solicit or accept orders for the purchase or sale of any commodity for future delivery on or subject to the rules of any exchange and that accept payment from or extend credit to those whose orders are accepted.”17 The key difference between an FCM and an IB is that an FCM holds customer accounts and funds and executes and clears trades, whereas an IB introduces clients to the FCM and does not handle funds or trade clearing.
CFTC regulations and NFA rules subject FCMs to a comprehensive regulatory regime. Under Part 1 of CFTC regulations, for example, FCMs must maintain certain net capital levels.18 In addition, CFTC regulations provide that FCMs must separately account for customer funds and segregate such funds as belonging to customers.19 Similarly, FCMs are permitted to deposit customer funds only in certain types of depositories set forth in CFTC regulations.20 Furthermore, FCMs are also subject to periodic examinations by NFA, including on-site examinations that may lead to written examination reports.21
The FCM registration process is governed by NFA, which requires all registered FCMs to be NFA members and subject to NFA rules.22 Registration with the NFA requires applicants to submit an online Form 7‑R and an NFA membership application, meet applicable compliance requirements, complete an online member questionnaire and pay the required non‑refundable fees.23 In addition to their own registration requirements, FCMs are required to file registration materials for their principals and APs.24 Each principal and AP must submit an online Form 8-R, provide fingerprint cards and pay the applicable application fee.25 APs must also satisfy applicable proficiency requirements, including complying with AP swap proficiency standards.26
III. CFTC-Registered Entity Categories: Market Infrastructure
In the U.S. derivatives landscape, DCMs and swap execution facilities (SEFs) serve as regulated platforms where futures, options and swaps are executed. Once trades are executed, derivatives clearing organizations (DCOs) clear such transactions and act as central counterparties to mitigate counterparty risk. Together, this registrant category provides market participants with access to CFTC-regulated trading and clearing venues through which they can engage in event contracts.
A. Designated Contract Market
Registration as a DCM is applicable to entities that may want to operate a regulated exchange venue and oversee market integrity and operations of event contracts. A DCM is a CFTC‑registered exchange or trading venue on which futures, options on futures and certain swaps are listed and traded.27 DCMs are responsible for maintaining fair and orderly markets, enforcing trading rules, monitoring market manipulation, and ensuring transparency, as detailed in Part 38 of the CFTC regulations.28 To obtain and maintain its designation, a DCM must also comply on an initial and an ongoing basis with 23 core principles in accordance with CFTC regulations.29 Any market that seeks to provide a trading facility for non-eligible contract participants to trade futures, options on futures or options on commodities must apply to the CFTC for designation as a DCM unless an exemption or exclusion applies to the facility.30
An entity seeking to register as a DCM must file an application electronically with the CFTC via the CFTC Portal, including a completed Form DCM cover sheet and all applicable exhibits and supplemental materials.31 Once an application is electronically filed, the CFTC will review the applicant materials and determine if the applicable documents provided are materially complete to begin its 180-day review period.32 Applications that are not complete with applicable exhibits and supplemental materials will be deemed not materially complete, and the CFTC will not begin its 180-day review period.33 Applications that are deemed materially complete will be posted on the CFTC website as pending when the review period begins. Applicants should expect thorough engagement with CFTC staff, who may request clarifications and additional information.
B. Swap Execution Facility
Registration as a SEF is appropriate for entities seeking to provide a regulated trading venue for event contracts structured as swaps. In this capacity, SEFs are able to provide market access to their platform. However, because SEFs are restricted to eligible contact participants (ECPs), this limitation can narrow the potential investor base for event contracts traded on SEFs, as only sophisticated participants may access the platform. ECPs are entities and individuals who meet specific financial or professional thresholds as defined in CFTC regulations.34 Accordingly, registrants seeking broad retail participation should consider alternative trading venues, such as DCMs, to reach a wider range of market participants.
As defined in the CEA, a SEF is a trading system or platform in which multiple participants have the ability to execute or trade swaps by accepting bids and offers made by multiple participants in the facility or system through any means of interstate commerce, including any trading facility, that (i) facilitates the execution of swaps between persons and (ii) is not a DCM.35 Under CFTC regulations, only instruments that qualify as swaps may be traded on a SEF, and such trading is limited to ECPs.36
Unlike DCMs, which list futures and option contracts and can be accessible to a broader set of market participants, SEFs focus on over-the-counter derivatives, which are privately transacted and brought onto a regulated platform. As a result, participants trading such contracts on a SEF must represent that they meet the applicable ECP thresholds, excluding retail customers from trading through SEFs.
CEA and CFTC regulations require entities seeking to become a SEF to register with the Commission or instead be designated as a DCM operating under the regulatory oversight of the CFTC unless an exemption or exclusion applies.37 To register as a SEF, an applicant must request that the CFTC grant registration by submitting a Form SEF; provide applicable supporting documentation, including rules and procedures; and pay the required non‑refundable fees.38 Additionally, SEFs must demonstrate compliance with the 15 core principles in the CEA to register and maintain designation as a SEF.39
C. Derivatives Clearing Organizations
Registration as a DCO is appropriate for entities seeking to provide clearing services in connection with event contracts. Registrants in this category would act as the central counterparty, collecting and holding margins, marking positions to market, maintaining financial resources, and performing other roles that would support the clearing of trades.
A DCO is a registered clearinghouse that clears and settles trades executed on DCMs or other platforms, acts as the central counterparty to both sides of a transaction, and arranges or provides for the settlement or netting of obligations.40 Under Part 39 of the CFTC regulations, DCOs manage counterparty risk through margin requirements, default management procedures and financial safeguards, making them critical to market stability and systemic risk management.41 Like DCMs and SEFs, DCOs are required to be registered with the CFTC unless an exemption or an exclusion applies.42
To register, an entity must file an application electronically with the CFTC via the CFTC Portal, including a completed Form DCO cover sheet and all applicable exhibits and supplemental materials.43 The application must include information sufficient to demonstrate compliance with core principles. Once the application is filed, the CFTC will review the applicants’ materials and determine if the application is materially complete.44 The CFTC will not begin its 180-day review period unless the application is materially complete, which requires the Form DCO and applicable exhibits to sufficiently demonstrate compliance with the core principles.45 Once the application is deemed materially complete, applicants should expect thorough engagement with CFTC staff where additional follow-ups and requests for additional information may be provided.
In practice, entities frequently pursue DCO registration alongside DCM registration, particularly where an integrated trading and clearing model is contemplated. That said, it is not a requirement under the CFTC regulations that the same entity hold both registrations, but integrated structures are common for entities that seek to control both the trading and the clearing functions.
IV. CFTC-Registered Entity Categories: Market Participants
Certain registered market participants play a key role in managing investments and trading activity in derivatives markets. Swap dealers (SDs) and commodity trading advisors (CTAs) provide professional advice and services to clients, while commodity pool operators (CPOs) organize and operate pooled investment vehicles that aggregate investor funds. Together, CTAs and CPOs facilitate participation by individual and institutional investors, providing access to professional expertise, strategies and compliance with regulatory standards.
A. Swap Dealers
Registration as an SD may be relevant for firms seeking to engage in event contracts on a principal basis. CFTC Regulation 1.3 defines an SD as any person who (i) holds itself out as a dealer in swaps, (ii) makes a market in swaps, (iii) regularly enters into swaps with counterparties as an ordinary course of business for its own account, or (iv) engages in any activity causing it to be commonly known in the trade as a dealer or a market maker in swaps.46
SDs are subject to various regulatory requirements, including annual reporting requirements, maintaining books and records, swap data reporting requirements under Parts 43 and 45 of CFTC regulations, and more.47 In addition, SDs are subject to the business conduct standards under Part 23 of CFTC regulations.48 Under the business conduct standards, SDs must have written policies and procedures that meet certain disclosure, communications and fair-dealing obligations when transacting with counterparties.49 Key obligations include verifying counterparty eligibility, disclosing material risks and daily marks, ensuring fair communication, and adhering to strict antifraud and anti-manipulation rules.50
Registration as an SD is required when an entity engages in swap dealing as part of the ordinary course of business. However, a de minimis exception is available when a person who is currently not registered as an SD will not be deemed an SD if they fall below a specified notional or transaction-based limit. So long as the entity in the preceding 12 months has an aggregate gross notional amount of no more than $8 billion, registration is not required.51 Absent an exemption, SDs must register with the CFTC and become members of the NFA.52
To register with the NFA, SDs must complete an online Form 7‑R and NFA membership application, provide documentation of compliance with the CEA Section 4s implementing regulations and pay the required non‑refundable fees.53 SDs are required to list their principals as part of the registration, and each principal must complete an online Form-8R, submit fingerprint cards and pay a non-refundable registration fee.
B. Commodity Trading Advisor
CTA is the only registrant category that allows market participants to engage in advisory relations and help develop strategies for clients. This registration category would be appropriate for entities seeking to provide discretionary or non‑discretionary trading advice on strategies in connection with event contracts.54
Under CFTC Regulation 1.3, a CTA is defined as “any person who, for compensation or profit, engages in the business of advising others, either directly or through publications, writings or electronic media, as to the value of or the advisability of trading in any contract of sale of a commodity for future delivery, security futures product, or swap; any agreement, contract or transaction described in section 2(c)(2)(C)(i) or section 2(c)(2)(D)(i) of the CEA; any commodity option authorized under section 4c of the CEA; any leverage transaction authorized under section 19 of the CEA; any person registered with the Commission as a CTA; or any person, who, for compensation or profit, and as part of a regular business, issues or promulgates analyses or reports concerning any of the foregoing.”55 Under Part 4 of CFTC regulations, CTAs are prohibited from certain activities, including soliciting, accepting or receiving client funds to purchase, margin, guarantee or secure any commodity interest of the client.56 Additionally, CTAs must comply with applicable disclosure, reporting and recordkeeping requirements.57
Registration to become a CTA is required unless a statutory or regulatory exemption is applicable.58 To register as a CTA, applicants must become members of the NFA and satisfy applicable registration and compliance requirements.59 This includes submitting an online Form 7‑R and NFA membership application, completing an online member questionnaire and paying the required non‑refundable fees.60
C. Commodity Pool Operator
CPO registration is appropriate for entities seeking to organize, operate or manage pooled investment vehicles. Registration allows CPOs to legally operate the pool, collect management and performance fees, and provide access to otherwise restricted markets while complying with applicable obligations under CEA and CFTC regulations.
A CPO is “any person engaged in a business which is of the nature of a commodity pool, investment trust, syndicate, or similar form of enterprise, and who, in connection therewith, solicits, accepts, or receives from others, funds, securities, or property, either directly or through capital contributions, the sale of stock or other forms of securities, or otherwise, for the purpose of trading in commodity interests, including any commodity for future delivery, security futures product, or swap; any agreement contract or transaction described in section 2(c)(2)(C)(i) or section 2(c)(2)(D)(i) of the Act; any commodity option authorized under section 4c of the Act; any leverage transaction authorized under section 19 of the Act; or any person who is registered with the Commission as a commodity pool operator.”61 Simply put, a CPO is the fund sponsor or manager that pools investor money into a vehicle that trades commodity interests.
Under Part 4 of the CFTC regulations, CPOs are prohibited from certain activities, including operating the pool as an entity that is legally separate from the pool operator, ensuring that funds received by the CPO are operated in the pool’s name and avoiding commingling the property of any pool they operate.62 In addition, CPOs are subject to additional disclosure, recordkeeping and reporting requirements.63
As with the other registration categories, registration is required unless an exemption is provided.64 CPO registration requires entities to become a member of the NFA and satisfy applicable registration and compliance requirements.65 This includes submitting an online Form 7‑R and NFA membership application, completing an online member questionnaire and paying the required non‑refundable fees.66
V. NFA’s Registration and Oversight Authority
In many of the registration categories relevant to event contracts—including IBs, FCMs, SDs, CTAs and CPOs—the CFTC has delegated primary registration processing, membership administration and day‑to‑day compliance oversight to the NFA.67 Under NFA authority, applicants file registration materials through the NFA, which conducts background checks, proficiency testing and ongoing supervision, while the CFTC retains ultimate statutory authority, rulemaking power and enforcement jurisdiction. Registrants agree to comply with NFA rules and interpretive notices, including requirements relating to ethics training, recordkeeping, supervisory systems, financial reporting and customer protection standards.68 NFA members are subject to routine examinations, targeted reviews, investigative inquiries and the NFA’s disciplinary process, which can result in fines, suspensions, expulsions or other sanctions.69 NFA membership operates as a continuing condition with which registrants must comply and supplements the CFTC’s statutory oversight and enforcement authority.
This delegation framework also reflects the long-standing relationship between the CFTC and NFA, under which the CFTC relies on the NFA as its primary self‑regulatory organization in the oversight of applicable CFTC registrants.70 By contrast, market infrastructure entities such as DCMs, DCOs and SEFs register directly with and are supervised primarily by the CFTC.
VI. Conclusion
As prediction markets expand into areas with significant political, economic and social implications, the question of how market participants may get involved has taken on heightened importance. As discussed above, involvement in event contracts may trigger registration obligations across several different registration categories, depending on a participant’s role in the market. These categories form the regulatory framework designed to ensure market integrity and customer protection throughout the event contract life cycle. Market participants should carefully evaluate their proposed activities and business models to determine which registration requirements may apply and whether multiple registrations or exemptions may be implicated. For further information or to discuss potential registration in one of the primary categories, please contact a member of our team.
