CFTC Puts Prediction-Market Rewards Under the Microscope

The Commodity Futures Trading Commission (CFTC CFTC The 1974 Commodity Exchange Act (CEA) in the United States created the Commodity Futures Trading Commission (CFTC). The Commission protects and regulates market activities against manipulation, fraud, and abuse trade practices and promotes fairness in futures contracts. The CEA also included the Sad-Johnson Agreement, which defined the authority and responsibilities for the monitoring of financial contracts between the Commodity Futures Trading Commission and the Securities and Exchange Commiss The 1974 Commodity Exchange Act (CEA) in the United States created the Commodity Futures Trading Commission (CFTC). The Commission protects and regulates market activities against manipulation, fraud, and abuse trade practices and promotes fairness in futures contracts. The CEA also included the Sad-Johnson Agreement, which defined the authority and responsibilities for the monitoring of financial contracts between the Commodity Futures Trading Commission and the Securities and Exchange Commiss Read this Term) warned prediction-market exchanges yesterday (Wednesday) that deficient incentive-program filings may delay regulatory review. The advisory covers market-maker, liquidity and trading rewards submitted through the agency's self-certification process.

For designated contract markets (DCMs), material changes require a fresh submission. That restarts the 10-business-day review. Staff also recommended reviewing previously filed programs and submitting relevant amendments by September 14.

The Division of Market Oversight said the guidance "does not create new obligations." It sets out what staff expects exchanges to disclose under Regulations 40.5 and 40.6.

Material Changes Start a New Review

DCMs must file incentive-program rules before launch. Regulation 40.6 then provides a streamlined 10-business-day review unless the CFTC intervenes.

A submission must explain the program's purpose and duration, covered contracts, participant duties, performance thresholds, eligibility and compensation. It must also assess compliance with the statutory core principles governing market integrity, access, competition and conflicts.

Supplements are not enough. A change to payouts, participant obligations, asset classes, eligibility, enrollment limits or duration requires a new certification with additions and deletions identified.

That standard puts public disclosure at the center of the review. FinanceMagnates.com reported in May that public details of a DraftKings Exchange market-maker program were limited, although its posted fees were available.

Each program goes in separately through the CFTC portal, with all related documents in one submission. Exchanges must publish non-confidential materials on their own websites at the same time.

Substantive edits reset the process. The exchange Exchange An exchange is known as a marketplace that supports the trading of derivatives, commodities, securities, and other financial instruments.Generally, an exchange is accessible through a digital platform or sometimes at a tangible address where investors organize to perform trading. Among the chief responsibilities of an exchange would be to uphold honest and fair-trading practices. These are instrumental in making sure that the distribution of supported security rates on that exchange are effectiv An exchange is known as a marketplace that supports the trading of derivatives, commodities, securities, and other financial instruments.Generally, an exchange is accessible through a digital platform or sometimes at a tangible address where investors organize to perform trading. Among the chief responsibilities of an exchange would be to uphold honest and fair-trading practices. These are instrumental in making sure that the distribution of supported security rates on that exchange are effectiv Read this Term must withdraw the pending submission and file again. The CFTC may also seek more information, request changes or stay a program when the material is incomplete, complex or potentially inconsistent with federal law.

Guaranteed Profits and Random Rewards Draw Warnings

The Division focused on incentives that may alter trading behavior. Steep volume tiers or threshold bonuses can encourage trading solely to reach a target, raising the risk of wash trades, pre-arranged transactions and other abusive conduct.

Guaranteed profits pose another problem. Programs that cover participant losses or offer unlimited rebates may distort activity, the advisory said. DCMs should map each reward to the behavior it may encourage and build surveillance around that risk.

Suggested controls include real-time monitoring, wash-trading alerts and closer review of clusters near reward thresholds. The scrutiny arrives as market makers and hedge funds gain access to Kalshi through institutional trading systems.

The CFTC also warned against secret discount codes, informal VIP access and selectively faster market data or application programming interface access. Within the same participant category, criteria and benefits should be objective, transparent and applied uniformly.

Chance-based promotions receive separate treatment. Sweepstakes, casino-style rewards and spin-the-wheel offers are likely inconsistent with impartial-access requirements when luck, instead of defined performance, determines the benefit.

Affiliate Relationships Face Conflict Review

Exchanges remain responsible when affiliates or intermediaries deliver rewards. The guidance recommends recordkeeping for qualifying customer orders, periodic access reviews and controls to ensure intermediaries pass incentives to customers.

DCMs may also limit rewards to non-discretionary customer orders and require intermediaries to keep supporting records. Those safeguards are meant to stop an affiliate from applying a published program differently once the benefit reaches an end customer.

Staff identified a conflict when a market maker is owned by or affiliated with the exchange. Such a relationship gives the DCM a financial reason to set terms that favor its affiliate, requiring controls under the conflict-of-interest core principle.

Competition is part of the review as well. Staff said short, fixed and transparent terms with constrained privileges are more likely to satisfy the prohibition on unreasonable restraints of trade.

The advisory adds an operational layer to the CFTC's broader rulemaking for federally regulated event-contract platforms. Unlike that proposed framework, Letter 26-23 is staff guidance under existing law.

The same core-principle and filing requirements apply to incentive programs for other derivatives traded on DCMs. "Complete, transparent, and well-supported submissions facilitate Commission review," the Division said.