In a recent speech to NYU Law School’s Program on Corporate Compliance, Commodity Futures Trading Commission (CFTC) Director of Enforcement David Miller announced the agency’s prioritization of enforcement efforts against insider trading in prediction markets as well as changes to the commission’s policies governing cooperation by bad actors. Prediction markets offer a platform where market participants can enter into contracts based on the outcomes of future events. The economic incentive of accurately "predicting" the outcome is intended to reflect public sentiment regarding the most likely outcome of the event.

Miller expressly rejected the notion that insider trading principles do not apply in prediction markets. The Commodity Exchange Act and CFTC Rule 180.1, both created as part of the Dodd-Frank Act, provide the CFTC with authority akin to the anti-fraud provisions of the Securities Exchange Act of 1934 and Rule 10b-5. The CFTC’s enforcement authority reaches insider trading in commodity markets, including prediction markets, particularly where a person trades or tips on material non-public information obtained in breach of a duty of trust and confidence.

Consistent with that view, Miller also stated that event contracts, such as those offered by the popular contract platform Kalshi, constitute swap contracts, a private agreement to the future exchange of cash based on the outcome of an event. Therefore, event contracts are federally regulated and subject to the CFTC’s authority to enforce the anti-fraud rules and statutes. Miller made clear that those provisions apply "with full force" in the prediction markets context.

The CFTC is particularly focused on contracts tied to information that may be known in advance by a limited set of insiders and misappropriated for their benefit, such as the status of an athlete’s injury or government-related developments. Recent developments, including the agency’s newly announced memorandum of understanding with Major League Baseball to insulate event contracts, underscore the CFTC’s increasing focus on safeguarding sports-related prediction markets against insider trading. Miller also emphasized that the agency intends to aggressively police unlawful trading on non-public government information in prediction markets.

CFTC Previews New Framework for Cooperation

In addition, Miller previewed a forthcoming staff advisory on cooperation that would replace the CFTC’s existing policy. Under the revised framework, parties may have a clear path to declination if they self-report promptly and cooperate and remediate fully, absent aggravating circumstances. Full cooperation will require providing substantial assistance to the CFTC, while full remediation will include resolving root causes, improving compliance controls, disciplining responsible personnel where appropriate, and paying restitution and disgorgement as needed.

Key Takeaways for Companies

The CFTC is signaling a potentially aggressive enforcement posture with respect to insider trading in prediction markets. Miller’s remarks also underscore the agency’s expectation that prediction markets, and companies with access to potentially market-moving non-public information, police themselves through robust controls designed to prevent insider trading and manipulation.

In light of that posture, companies with exposure to these markets should reassess their compliance policies and procedures and prioritize implementation of internal controls designed to prevent the misuse of material non-public information in trading, educating employees on what constitutes insider information and the duty to protect that information. Effective monitoring and supervision policies can also help prediction markets avoid an inquiry from the CFTC’s enforcement division.

For more information, please contact me or your regular Parker Poe contact. Click here to subscribe to our latest alerts and insights.