Washington Reporter Op-Ed | The CFTC is Modernizing Rule 40.11, Thereby Furthering America’s Leadership in Responsible Financial Innovation

America's derivatives markets are the most liquid and innovative in the world because our regulations have evolved alongside changes in our markets. From agriculture futures to financial futures and electronic trading, the history of American derivatives market regulation has been defined by our ability to apply enduring principles to new technologies and new forms of market activity.

Today's proposal by the Commodity Futures Trading Commission (CFTC) to modernize Rule 40.11 - the "Special Rule" that authorizes the Commission to determine that an event contract involving certain enumerated activities such as terrorism, assassination, war, or gaming is contrary to the public interest-continues that tradition by ensuring our regulatory framework is fit for purpose.

Prediction markets have grown dramatically in recent years. New technologies, new participants, and new ways to discover and share information have transformed the traditional financial landscape. Market participants increasingly rely on prediction markets to aggregate information and generate insights about future events, often faster and more accurately than conventional forecasting tools. Yet, the regulatory framework governing these markets has remained shrouded in ambiguity due to regulatory inaction. And when the prior administration finally did act, its approach was to sidestep this framework and ban prediction markets outright.

As Chairman of the CFTC, my job is to safeguard the integrity of the markets Congress has entrusted the CFTC to oversee, not to decide which ones should or should not exist. Prediction markets fall squarely within this oversight. Under my leadership, the CFTC is not only modernizing the rules that govern these markets but is also reinforcing its statutory authority to ensure that responsible innovation takes place on American soil and under the CFTC's federal regulatory framework.

The Commodity Exchange Act (CEA) and CFTC regulations establish important safeguards for prediction markets and provide a framework for evaluating event contracts. But these safeguards work best when they provide clarity, predictability, and transparency concerning how they will be applied in practice. That is why the CFTC recently issued an advanced notice of proposed rulemaking to evaluate whether new or amended rules for event contracts are necessary. As thousands of public comments rolled in, it became clear that the Commission needed to prioritize updating Rule 40.11 to ensure it remains properly calibrated for modern prediction markets and aligns with Congressional intent.

To meet that need, the amendments proposed today are designed to deliver regulatory clarity by setting out clear criteria for determining when an event contract "involves" an enumerated activity and the parameters of the CFTC's public policy review. The amendments interpret the terms war, terrorism, and assassination broadly. War refers to all belligerent military activities - not just to formal, declared, wars. Terrorism includes physical and non-physical attacks, such as cyberattacks - whether inside or outside the United States. Assassination includes any intentional killing of an individual.

These terms must be defined broadly to protect the public interest. The public often cannot know the true likelihood of these events occurring, and individuals with sensitive national security information may be incentivized to profit from their privileged knowledge. Bad actors may manipulate the price of contracts to send misleading signals to the public and our national-security agencies. And the inherent uncertainty and limited access to reliable information during these events means the resolutions of these contracts will often be clouded in ambiguity.

The agency also proposed amendments identifying categories of gaming-related contracts that pose heightened public policy risks, like player-injury contracts, officiating and altercation contracts, pre-collegiate sports contracts, and casino-style games of chance.

Together, these reforms to the Special Rule should offer market participants the clarity, predictability, and transparency they require while ensuring that prediction markets develop responsibly in a way that aligns with the public interest.

The challenge, however, is that even with safeguards and clearer standards, many event contracts that could be contrary to the public interest may continue to be offered by offshore platforms that operate outside the CFTC's regulatory remit. This gap is a reminder of what is at stake: either prediction markets responsibly develop within the CFTC's transparent, accountable, and time-tested framework, as our derivatives markets have done for decades, or they drift into the shadows offshore. The latter is unacceptable.

Prediction markets serve as a new tool for discovering truth and can bring clarity to an uncertain future, equipping Americans with a sharper sense of what may lie ahead.

Our role as regulators is to ensure these markets benefit from a framework that encourages responsible innovation while upholding market integrity.

Under my leadership, the Commission will continue to foster this type of framework as we continue the march to maintain America's leadership at the forefront of responsible financial innovation.

This op-ed was originally published in the Washington Reporter.