Are Sports Event Contracts Derivatives or Wagers? Product Structure and the Federal-State Regulatory Boundary

How well do the core legal arguments offered by prediction market platforms hold up when the product’s structure is examined closely?

On January 20, 2026, Robinhood Derivatives, LLC filed a renewed motion for a preliminary injunction in the United States District Court for the District of Massachusetts. Robinhood asks the court to prevent Massachusetts officials from treating Robinhood’s facilitation of sports-related event contracts as unlawful sports wagering while related state litigation over similar contracts plays out. Robinhood is a U.S. Commodity Futures Trading Commission (CFTC)-registered futures commission merchant (FCM), and the sports-related event contracts at issue trade on CFTC-designated contract markets operated by KalshiEx, LLC and ForecastEx, LLC.

Robinhood frames the dispute as a Commodity Exchange Act preemption question. But the broader stakes are policy-facing: where the federal futures-and-swaps framework ends, where state gaming regulation begins, and what the public should expect from federally regulated markets when the instrument being traded is a fixed-payout bet-like proposition.

In Robinhood’s memo, contract markets are framed as liquid, transparent, and disciplined by market pricing. Sportsbooks are framed as house-driven and structurally prone to consumer exploitation. Then comes the pivot: because the risks differ, the memorandum argues the two belong in different regulatory regimes.

Superficially, that distinction appears to make sense. But the details matter, and they change the weight of the argument.

Robinhood’s memo appears to borrow from the prestige of futures markets to normalize a product whose economic feel may be closer to a wager than a hedge. While binary event contracts can be “derivatives” in the broad sense that they are agreements whose value depends on a future contingency. They are not traditional derivatives in the sense that most people, and most regulatory intuition, mean: They are not leveraged, mark-to-market instruments whose risk is dominated by linear exposure and margin dynamics.

This post focuses on what the memorandum treats as background. These contracts pay $1 or $0. They are typically fully funded up front. And getting out early often depends on whether someone is there to take the other side. Put those basics front and center, and the comparison to traditional futures and options starts to look strained.

1. Binary Event Contracts and the “Contract Market” Analogy

The memorandum claims that in contract markets, customers can “manage risk by adjusting or exiting their positions up until the contract expires.” Read quickly, that sounds like the familiar world of futures and options: you are managing a position through time, perhaps hedging an underlying exposure, and you can flatten, roll, or rebalance as the market evolves.

But a sports-related event contract is structured as a yes-or-no proposition. The contract settles to a fixed value based on whether the event occurs. That payoff is not linear. It is a step function. That one feature collapses a lot of the memo’s implied comparison.

Traditional futures and options markets are built around continuous price exposure. A futures position typically gains or loses with each tick move in the futures price, multiplied by the contract size, and it is usually carried on margin. An uncovered short option can expose the seller to losses that are far larger than the premium collected if the market moves sharply. That is why these markets rely on margin requirements, daily mark-to-market, and, when necessary, forced liquidation: losses can exceed the cash a trader initially posts.

A binary event contract, by contrast, has a built-in ceiling on per-contract economic exposure. That is not a moral judgment. It is math.

2. Prediction Markets and Risk Management: Offsetting in Binary Event Contracts

Because the memorandum leans heavily on the idea that exchange-traded participants can “manage risk by adjusting or exiting their positions” before expiration, it is worth being precise about what “offsetting” actually means in a binary event contract market.

Offsetting is not a complete answer to the risk-management question here. In a binary event contract market, “offsetting” usually means one of two things. First, you sell your contract to someone else before settlement. Second, you take the opposite side so your net payoff is locked.

Start with the simplest payoff mechanics. Suppose the contract settles at $1 if Team A wins and $0 if Team A loses. Let the price you pay for “YES” be p, where 0 < p < 1. Then:

1. If you buy YES at price p, your maximum loss is p and your maximum gain is 1 − p.
2. If you sell YES at price p (economically equivalent to buying NO at 1 − p), your maximum gain is p and your maximum loss is 1 − p.

That bounded-loss structure is not a footnote. It is the core reason the memo’s invocation of futures-style risk management feels like a category error. In many event contracts, the primary risk control is not “offsetting.” It is that the contract itself cannot generate per-contract losses beyond the 0-to-1 payoff range.

The “offset” story also hides a practical dependency: liquidity. “You can exit” is only true if someone will take the other side at a price you can accept. The memo advertises liquidity as a feature of contract markets.⁴ But it does not show, in this context, that sports event contracts reliably exhibit the kind of depth that makes exit a meaningful consumer protection feature rather than a slogan.

3. Sports Event Contracts and Consumer Risk: Why the Sportsbook Comparison Is Incomplete

The memorandum contrasts sportsbooks with contract markets by emphasizing that a sportsbook line is set by the house and that “gamblers typically do not have the option to exit their position.” Even if you grant that description as a generalization, it does not save the larger claim.

A retail user’s experience of a sports-related binary contract can still be functionally wager-like: short horizon, sports framing, binary outcome, repeated play. Calling it a “swap” does not change the behavioral incentive structure that makes sports wagering politically and legally sensitive.

The memo frames exploitation as a “house versus gambler” power imbalance. But a platform-based event contract can still concentrate power in other places: how the question is defined, how disputes are handled, what sources govern settlement, and how aggressively the product is pushed through a consumer-facing interface. Those are not traditional sportsbook levers. They are real levers anyway.

Here is the sharper way to put it. Traditional derivatives regulation is excellent at policing market integrity problems: manipulation, surveillance, access, and orderly trading. It is not designed as a responsible gambling code. The memo’s own regulatory citations point to market integrity and access concepts, not to addiction mitigation, advertising restraint, or self-exclusion architecture.

You can believe federal preemption is legally correct and still think the memo’s policy story is incomplete.

4. CFTC Core Principles and “Fair and Efficient Markets”: What the Cited Rules Do and Do Not Show

To justify separate regulatory regimes, the memorandum says that federal regulation of futures and swaps focuses on “creating and maintaining fair and efficient markets for trading,” citing 17 C.F.R. §§ 38.250 and 38.151.² Those provisions do not do what the memo wants them to do.

Section 38.250 is an anti-manipulation, anti-distortion, and market-surveillance obligation.⁵ Section 38.151 is about impartial, transparent, and nondiscriminatory access criteria.⁵ Those are important. They are also not a substitute for the consumer-protection apparatus that states typically invoke when they regulate sports wagering.

This matters because the memo’s big move is not purely legal. It is normative. It tries to persuade you that different risks naturally map to different regulators. That mapping is not self-evident just because a product trades on a designated contract market.

5. The CEA “Special Rule” for Event Contracts: Gaming, Public Interest, and the Federal-State Boundary

Even on the memo’s own terms, the Commodity Exchange Act anticipates that some event contracts sit uncomfortably close to gambling.

The memorandum describes the “special rule” that empowers the CFTC to prohibit certain event contracts if it finds them “contrary to the public interest,” including contracts involving “gaming.”⁶ That statutory language is hard to square with the suggestion that “sports wagering” is simply what states do, while “event contracts” are simply what the CFTC does.

Congress put “gaming” in the event-contract lane for a reason. A more accurate description is that event contracts are an overlap category: derivative form, wager-like function in many retail settings. When you start from that premise, the memo’s brisk “different risks, different regulation” paragraph reads less like analysis and more like positioning.

6. Binary Payoffs, Bounded Risk, and the Regulatory Boundary

1. In a binary market, “offsetting” is not a complete answer to the risk-management question. In practice it often means finding someone to take the other side, and liquidity can be decisive.
2. Traditional futures and options markets are often dominated by leverage and linear exposure. Many binary event contracts, by design, are dominated by capped outcomes and bounded per-contract risk.
3. The memorandum trades on the institutional credibility of futures markets, yet the product category it seeks to analogize does not carry the same futures-style downside profile.

If Robinhood wants to persuade courts that sports event contracts should trigger the same regulatory instincts as classic derivatives, it may want to do more than note that the contracts trade on a designated contract market. The relevant question is also functional: whether the product behaves like the instruments that anchor the traditional derivatives framework. A step-function payoff makes that analogy harder to sustain.

None of this forecloses a serious legal argument for CEA preemption. The memorandum is built around that statutory architecture.⁷ But the policy narrative that treats the outcome as practically inevitable is, at minimum, incomplete. At maximum, it reflects a category mistake about what binary event contracts are, and what risks they do and do not present.

If you would like to discuss how event contract design, platform intermediation, and regulatory classification intersect in your business model, contact us for a discreet, practical conversation.

Sources:

1. Robinhood Derivatives, LLC v. Campbell, No. 1:25-cv-12578-RGS, Memorandum of Points and Authorities in Support of Plaintiff Robinhood’s Renewed Motion for a Preliminary Injunction (D. Mass. Jan. 20, 2026), ECF No. 90.
2. 17 C.F.R. § 38.250 (2025); 17 C.F.R. § 38.151 (2025).
3. 7 U.S.C. § 7a-2(c)(5)(C)(i) (2022).
4. 7 U.S.C. § 2(a)(1)(A) (2022); Robinhood Derivatives, ECF No. 90, at 11–17.
5. Counsel of record listed in the renewed preliminary injunction filing include Eckert Seamans Cherin & Mellott, LLC (Craig Waksler; Nicholas J. Schneider) and Cravath, Swaine & Moore LLP (Kevin J. Orsini; Antony L. Ryan; Brittany L. Sukiennik)