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The Commodity Futures Trading Commission has warned regulated prediction markets to tighten filings for programs that reward trading activity, saying an increasing number of submissions contain procedural or substantive deficiencies.
The August 12 advisory covers market-maker, liquidity, trading, and other incentive programs submitted by designated contract markets under CFTC Regulations 40.5 and 40.6. Staff said the problem is particularly evident in filings involving event contracts.
Volume-Based Rewards Can Increase Wash-Trading Risks
The CFTC flagged incentive structures that can change trading behavior in ways that create market-integrity concerns.
Rewards tied to steep volume tiers or thresholds can encourage participants to trade primarily to qualify for payments, increasing the risk of wash trading, prearranged transactions and other fraudulent, manipulative or disruptive practices.
Staff also raised concerns about market-maker programs that effectively guarantee profits or cover losses through stipends, rebates or similar benefits. Exchanges are expected to assess how each incentive could affect participant behavior and maintain surveillance appropriate to those risks.
CFTC Sees More Deficiencies in Rule 40.6 Filings
The Division of Market Oversight said it has seen an increasing number of incentive-program filings under Regulation 40.6(a), particularly for event contracts, that are procedurally or substantively deficient.
Incomplete filings can prevent staff from determining whether exchanges adequately disclosed program terms and evaluated compliance with CFTC core principles and other requirements. Submissions should explain factors including a program’s purpose, duration, covered contracts, eligibility requirements, performance thresholds, participant obligations and compensation.
Material Changes Restart 10-Business-Day Review Period
Material changes to payouts, participant obligations, eligible products, enrollment limits, eligibility, or program duration require a fresh certification rather than a supplemental filing. Substantive changes restart the Regulation 40.6 review period.
The advisory does not create a new prediction-market rule. It explains staff expectations under existing CFTC requirements while separate event-contract rulemaking remains underway. In June, the Commission proposed amendments governing public-interest determinations for certain event contracts.
Staff also recommended that DCMs review previously filed incentive programs and submit any necessary amendments by September 14. Prediction markets can continue offering trading incentives, but exchanges must show that their programs are properly disclosed, compliant and designed with controls against abusive trading.
