ESMA: Event-based prediction contracts may face EU retail ban

The European Securities and Markets Authority on Friday warned that many event-based prediction contracts with binary outcomes and fixed payouts are likely to meet the definition of financial instruments and therefore cannot be marketed, distributed or sold to retail investors across the EU.

ESMA warned firms cannot avoid existing rules simply by labelling products as “event contracts.” The regulator noted assessment depends on a contract’s characteristics rather than its marketing. Contracts that pay a fixed amount when a specified outcome occurs and nothing otherwise will often fall under national measures implementing ESMA’s 2018 restrictions on binary options.

The authority emphasised the statement does not introduce new rules. ESMA issued the reminder after observing a rise in event-contract offerings and rapid growth in prediction markets, and it noted qualifying contracts have been subject to national restrictions in EU member states since 2018.

ESMA also said offering qualifying event contracts to professional or institutional clients requires appropriate authorisation under the EU’s Markets in Financial Instruments Directive (MiFID II), even when retail investors are excluded. Firms must obtain authorisation before providing such contracts to non-retail clients, regardless of how the products are labelled.

The regulator wrote: “Event contracts meeting the definition of financial instruments are already prohibited from being marketed, distributed or sold to retail investors under national measures implementing ESMA’s 2018 binary options restrictions.” It added that the assessment depends on a contract’s characteristics rather than on how it is marketed.

The guidance will require platforms operating in the EU to review product design, marketing and client onboarding. Firms that conclude their products do not qualify should document why they differ in form and substance. Those that do qualify must stop offering them to retail clients or seek MiFID II authorisation to serve professional clients.

Regulatory scrutiny of prediction markets has also intensified in the United States. By March, authorities in 11 states had taken legal or regulatory action against platforms, including Kalshi and Polymarket. Nevada temporarily blocked Kalshi’s operations and Arizona brought criminal charges alleging illegal gambling. In April the Commodity Futures Trading Commission asserted exclusive federal jurisdiction over event contracts and has intervened in related legal proceedings. On June 30 a Massachusetts judge allowed state authorities to file an amended complaint against Kalshi alleging certain sports-event contracts amount to illegal gambling under state law.

Industry and gaming groups, joined by tribal and labour organisations, have asked US lawmakers to amend the CLARITY Act to explicitly prohibit sports-related event contracts on prediction platforms and keep them subject to state gambling laws.