Refereeing the Fine Print: CFTC Staff’s Advice for FCMs and IBs on Navigating the Quickly Evolving Sports Event Contract Market

Sports-related event contracts have expanded rapidly, but their legal footing remains unsettled.[1] These contracts currently trade on designated contract markets (DCMs). The Commodity Futures Trading Commission (CFTC) has not determined whether any such products fall within the definition of “gaming” in the Commodity Exchange Act (CEA) section 5c(c)(5)(C) or CFTC Regulation 40.11, such that those products could be against public policy. At the same time, some state regulators and courts have taken the position that state gambling and wagering laws may apply to sports-related event contracts, creating real risk of trading halts, forced liquidations, or accelerated terminations on short notice. In light of the above, CFTC staff from the Market Participants Division, the Division of Market Oversight and the Division of Clearing and Risk issued CFTC Staff Advisory 25-36, which urges futures commission merchants (FCMs) and introducing brokers (IBs) to move beyond generic frameworks and adopt product-specific contingency planning, risk management, and customer disclosures that can withstand fast‑moving developments.[2] 

Unlike other articles and law firm summaries on this topic, this article provides practical recommendations and guidance, which FCMs and IBs can follow in revising their risk management programs, compliance procedures, customer-facing disclaimers and risk disclosures.

FCM Risk Management Programs: Practical Recommendations

FCMs should build product‑specific procedures for sports-related event contracts into their risk management programs (RMPs) required by CFTC Regulation 1.11. Regulation 1.11 requires each FCM to establish, maintain, and enforce written policies and procedures to identify, monitor, and manage risks — including legal, operational, segregation, and capital risks — with an independent risk unit, periodic risk exposure reports, and documented reviews and testing.[3]

Firms should define actionable triggers (e.g., a cease-and-desist order issued by a state gaming regulator, a court injunction, a DCM or derivatives clearing organization (DCO) trading halt or termination notice, or a directive from the CFTC or National Futures Association (NFA)). They should spell out, in writing, the steps the firm will take when a trigger occurs. The firm’s legal and risk units should be able to convene immediately and decide whether to stop new risk, move affected products or accounts to liquidation‑only, block activity by state, or conduct orderly close‑outs, and they should document each step consistent with the recordkeeping requirements of CFTC Regulation 1.31.[4] Firms should also write playbooks that show how termination values will be applied, how partial or delayed DCO distributions will be handled, and how segregation and residual interest will be maintained.

Firms should also demonstrate operational readiness in ways examiners can verify. For example, firms should maintain the ability to produce timely books and records that identify impacted positions by customer and state; deploy geolocation or equivalent controls consistent with customer agreements; send accurate customer notices explaining status changes and settlement methodology; and reconcile DCM/DCO cash flows on compressed timelines. Firms should provide targeted training for risk, operations, technology and customer support teams on state‑specific controls, liquidation mechanics, segregation calculations and complaint handling. 

Further, customer agreements should expressly authorize the firm to impose liquidation‑only status, force close‑outs, restrict activity by jurisdiction, and apply DCM/DCO termination values, with flexibility to use electronic channels for sending urgent notices to customers.

Risk Disclosures to Customers

Under CFTC Regulation 1.55, which governs public disclosures by FCMs (or, in the case of an introduced account, IBs), firms must provide customers with a risk disclosure statement and make firm‑specific disclosures, including a current summary of risk practices, controls, and procedures, and update promptly for material changes.[5] For sports-related event contracts, disclosures should clearly explain the evolving legal risk, including the potential application of state gambling or wagering laws, and the possibility of trading halts, cancellations, forced liquidations or accelerated terminations that could prevent customers from entering or exiting positions or require closure at non‑preferred prices. In plain language, firms should describe how funds and property will be treated if positions are halted or terminated, including the use of exchange or DCO termination values, the handling of partial or delayed distributions, and ongoing segregation of customer property.

Disclosures must be accurate, complete, and consistent across onboarding materials, the Regulation 1.55 document, product pages, and promotional content, avoiding any implication of universal legality or regulatory “approval” of sports event contracts. Where the firm has material affiliate relationships with a DCM or DCO, conflicts disclosures should be prominent and tailored.  Further, firms should maintain records of updates and customer notifications and be prepared to show these materials, along with their contingency playbooks, during routine CFTC or NFA exams. 

The goal is not to predict the outcome of any particular legal or regulatory challenge, but to show that the firm is monitoring developments in real time, that its RMP or other compliance procedures are equipped to handle potential disruptions, and that its disclosures enable customers to understand and bear the attendant risks.

For more information on implementing CFTC Staff Advisory 25-36, please contact Katten’s Financial Markets and Regulation attorneys.