The number that should stop you

Pull up the Commodity Futures Trading Commission’s monthly financial data for futures commission merchants, find the prediction market operators, and look at two columns side by side. Customers’ assets in segregation. And funds in separate cleared swap segregation.

As of May 31, 2026, Performance Predictions II LLC, the futures commission merchant affiliated with PrizePicks, reported zero dollars in the first column and $17,288,286 in the second. Sleeper Markets LLC reported zero and $8,449,631. Not a rounding difference. Every dollar of customer money on one side of the line, none on the other.

That is not an accounting quirk. It is a legal position, written into a balance sheet, and it is the position that two federal judges have now questioned.

Why the money sits where it sits

Section 4d(a)(2) of the Commodity Exchange Act governs futures customer funds. A futures commission merchant has to treat that money as belonging to the customer, account for it separately, and keep it out of its own accounts. Section 4d(f) imposes the parallel duty for cleared swaps customer collateral.

Two account classes, two sets of rules. Futures customer funds run through Regulation 1.20. Cleared swaps customer collateral runs through Part 22. Different computations, different permitted depositories, different daily statements.

Which one applies depends entirely on what an event contract is. If it is a swap, the money belongs in the cleared swaps class. That is the position the industry has taken, and the platforms say so themselves. Sleeper’s own terms of use state that the firm engages “exclusively in the execution and clearing of event contracts, which are a type of cleared swap under the CFTC’s regulations.”

The Commission’s own public page on prediction markets says the same thing in fewer words. Event contracts, it says, are typically structured as swaps.

So why is anyone arguing about it?

Because the courts have not settled it, and in the last four months they have gone three different directions.

In April 2026 the Third Circuit held in KalshiEX, LLC v. Flaherty that sports event contracts are swaps under the Commodity Exchange Act, and that federal law preempts state gambling law as applied to contracts traded on a designated contract market. That ruling came at the preliminary injunction stage rather than on final merits, which matters, but it is the appellate court’s reading.

Then it went the other way. On July 29, 2026, Judge Griesbach in the Eastern District of Wisconsin denied the Commission a preliminary injunction, finding it had not shown it was likely to prevail on the argument that the swap definition covers these contracts at all. On August 4, Judge Shelby in the District of Utah granted summary judgment against Kalshi and held that the Commodity Exchange Act does not preempt Utah’s anti-gambling laws.

And in Minnesota, Judge Menendez enjoined a state ban in July while warning that if some listed event contracts do not meet the statutory definition of a swap, any permanent relief may end up much narrower.

Read those together and the picture is uncomfortable. The account classification every operator in this sector uses, the clearing arrangement behind it, and the segregation math on top of it all rest on a reading of the statute that federal judges are actively disagreeing about.

What happens to your numbers if the reading changes

Nobody should restructure a firm around litigation that has not finished. But it is worth knowing which parts of your financial reporting would move, because they are not small parts.

The account class itself would move, which means the segregation computation, the depository acknowledgment letters, and the daily statement you file under Regulation 1.32 by noon the following business day would all follow it. Your clearing organization’s model would be affected, since fully collateralized clearing is built on the same premise. And your auditor would be testing a different set of requirements than the ones tested last year.

None of that is a restatement in itself. It becomes one when the underlying records were not kept cleanly enough to be re-cut against a different rule.

The rules underneath were written for something else

Here is the part that gets less attention and probably deserves more.

Segregation under Regulation 1.20 and the risk-based capital requirement in Regulation 1.17(a)(1)(i)(B) were both written for margined futures. That capital rule asks for 8 percent of your total risk margin requirement. Regulation 1.22 turns on the concept of an undermargined amount. Regulation 1.23 requires a written analysis supporting a targeted residual interest.

Event contracts are fully collateralized. The Commission says so in its own March 2026 advance notice of proposed rulemaking. Nobody posts variation margin.

So how do you compute 8 percent of a risk margin requirement that does not exist in the way the rule contemplates? What is an undermargined amount in a book where nothing is margined? We have looked, and there is no Commission or National Futures Association guidance answering either question for this product. The 2026 rulemakings have been aimed at exchanges and clearing organizations, not at the intermediaries holding the money.

Firms are making judgment calls. Auditors are signing them. That is workable, right up until someone asks how the number was derived and the answer was never written down.

What to do about it now

Document the reasoning, not just the result. If your firm concluded that its contracts are cleared swaps, the memo supporting that conclusion should exist, be dated, and name who approved it. The same goes for however you arrived at your capital computation and your targeted residual interest. A judgment call with contemporaneous support is a defensible position. The identical call with nothing behind it is a finding.

Keep the underlying transaction records at a level of detail that would survive being re-cut under a different account class. That mostly means being able to tie customer balances, exchange records, and your own general ledger to each other without a manual reconciliation project.

And ask your auditor what they tested and why, specifically on segregation. Regulation 1.16(d)(1) requires the audit to cover the procedures for safeguarding customer assets, which for a futures commission merchant means the segregation requirements. If the answer is vague, that is worth knowing before an examiner asks the same question. The threshold question, whether the firm is permitted to sign the report at all, is a narrower test than most people assume.

Where this is heading

The Commission has a proposed rule on prediction markets with comments closed since July, and a second proposal on conflicts and affiliations open for comment until October 5, 2026. Three federal appeals courts have argument behind them and no decision yet. Something is going to resolve, probably within the next few quarters.

Until then the honest position is the one worth taking with investors and examiners alike. The classification is reasonable, it is what the platforms and the Commission both describe, and it is being litigated. Firms that can say that clearly, and show the work behind their numbers, will be fine either way.

Michael Coglianese, CPA, P.C. has been registered with the Public Company Accounting Oversight Board since 2009 and audits futures commission merchants, commodity pool operators, commodity trading advisors, introducing brokers, and hedge funds. If you are running a prediction market operation and want a second read on how your customer funds are classified and documented before year end, send us your registration details and fiscal year end and we will tell you what we would look at first.