On September 30, 2025, the Commodity Futures Trading Commission (CFTC) issued Advisory 25-36, cautioning futures commission merchants (FCMs), introducing brokers (IBs), designated contract markets (DCMs), derivatives clearing organizations (DCOs), and registered futures associations (RFAs) about the legal and regulatory risks associated with sports-related event contracts. The advisory urges market participants to remain vigilant for possible state-level regulatory actions and emphasizes the importance of robust contingency planning, clear disclosures, and effective risk management policies.
Key Points
- Regulatory Actions and Litigation. The CFTC highlights ongoing state regulatory actions and pending litigation over the legality of sports-related event contracts listed on DCMs. Notably, several state regulators have issued cease-and-desist letters covering unlicensed sports wagering activities. Furthermore, a federal district court recently ruled that the Commodity Exchange Act does not preempt state gambling laws in this context, raising questions about the enforceability and continuity of sports-related event contracts across jurisdictions.
- Contingency Planning and Risk Management. The advisory emphasizes the necessity for FCMs, IBs, DCMs, and DCOs to develop comprehensive contingency plans and robust risk management policies. These measures should be fully integrated into routine registration, oversight, and examination protocols to ensure that market participants are prepared for potential market disruptions stemming from state regulatory actions or litigation that could impact the trading and clearing of sports-related event contracts.
- Disclosure Obligations. The CFTC advises that market participants provide clear and regular disclosures to customers, other market participants, and clearing members, particularly in situations where state regulatory actions or litigation may lead to the termination of contract positions. These communications should outline the possible effects of state regulatory actions or litigation on their positions and funds, including details on liquidation or close-out procedures and the handling of customer assets in case of contract terminations.
Implications for Trading Platforms and Investment Managers
The issuance of Advisory 25-36 does not create new regulatory obligations but emphasizes the importance of proactive risk management and transparent communication strategies for entities involved in sports-related event contracts. Trading platforms and investment managers should:
- Monitor Legal Developments. Stay informed about state regulatory actions and litigation that may affect the legality and enforceability of sports-related event contracts, including appeals in cases such as KalshiEX LLC v. Martin, which addresses the issue of federal preemption of state gambling laws.
- Enhance Risk Management Frameworks. Implement and regularly update risk management policies to address potential disruptions in the trading and clearing of these contracts.
- Strengthen Customer Disclosures. Ensure that clients are fully aware of the risks associated with sports-related event contracts, including the potential for contract termination due to regulatory or legal challenges.
Takeaways
Advisory 25-36 underscores the importance of proactive governance, legal risk assessment, and transparent client communication when dealing with sports-related event contracts.
By adhering to the guidance provided in the advisory, trading platforms and investment managers can better navigate the complexities associated with sports-related event contracts and uphold their fiduciary responsibilities to clients.
Alston & Bird can assist clients in conducting legal risk assessments, preparing necessary disclosures, and developing comprehensive contingency plans.
If you have any questions, or would like additional information, please contact one of the attorneys on our Investment Funds team.
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