Prediction markets have evolved from niche online platforms into a topic of serious discussion among regulators, exchanges and financial institutions around the world. Their growing popularity has prompted regulators to consider a fundamental question: how should contracts based on future events be classified and regulated?
Recent commentary from the European Securities and Markets Authority (ESMA) has reignited this debate. Rather than introducing a new regulatory framework, ESMA reminded firms that the regulatory treatment of an event contract depends on its legal and economic characteristics, not simply the label attached to the product. This reflects a long established regulatory principle that substance should prevail over form (ESMA, 2026; Norton Rose Fulbright, 2026).
While ESMA’s comments were directed at European market participants, the issues extend well beyond Europe. As financial innovation continues to reshape global markets, regulators across jurisdictions are increasingly being required to determine where prediction markets fit within their existing regulatory frameworks.
Looking Beyond the Product Label
Prediction markets allow participants to trade contracts linked to the outcome of future events. These events may include election results, central bank interest rate decisions, inflation releases, or other measurable outcomes. Prices fluctuate as market participants continuously reassess the probability of a particular event occurring.
At first glance, these products may appear similar to traditional financial derivatives. After all, both involve future outcomes, changing prices and risk transfer between counterparties.
However, the comparison quickly becomes more complex.
Traditional derivatives derive their value from an identifiable underlying financial asset or benchmark. Whether referencing a listed share, equity index, commodity, foreign exchange rate or government bond, there is generally an observable market with transparent price formation. These reference markets provide an objective basis for pricing, valuation, settlement and, importantly, hedging.
Prediction markets differ because the reference point is often an event rather than a conventional financial asset.
This distinction raises one of the most significant regulatory questions surrounding these products.
When the Underlying Is an Event
Financial markets have long relied on independent price discovery to support efficient trading and effective risk management. A derivative referencing the JSE Top 40 Index or the USD/ZAR exchange rate derives its value from an underlying market that exists independently of the derivative itself.
Prediction markets operate differently. Rather than referencing an underlying financial market, the contract price typically reflects the collective assessment of participants regarding the probability of a future event occurring.
This naturally raises several regulatory questions.
Where does the reference price originate? How should fair value be determined? Can market participants effectively hedge their exposure? Does the absence of a traditional underlying market alter the legal character of the product?
These questions do not necessarily imply that prediction markets should be prohibited. Rather, they illustrate why classification has become the focal point of regulatory discussions internationally.
Different Jurisdictions, Different Approaches
Internationally, there is no consistent regulatory approach to prediction markets.
Within the European Union, there is currently no dedicated regulatory framework governing prediction markets. Instead, regulators assess individual products against existing legislation to determine whether they constitute financial instruments under the Markets in Financial Instruments Directive (MiFID II). Depending on their structure and characteristics, some event contracts may fall within financial markets regulation while others may not (Norton Rose Fulbright, 2026).
The United States has adopted a different approach. The Commodity Futures Trading Commission (CFTC) has become increasingly involved in determining the regulatory treatment of event-based contracts, particularly as prediction market platforms have expanded into areas such as politics, economics and public policy. Ongoing legal proceedings and regulatory consultations demonstrate that the classification of these products remains an active area of debate rather than a settled issue (CFTC, 2025).
Despite these differing approaches, one common theme is emerging. Regulators are looking beyond product labels and focusing instead on the economic substance, underlying reference and overall characteristics of the contract.
What Does This Mean for South Africa?
Although prediction markets have yet to become a significant feature of South Africa’s financial landscape, they present an important opportunity for regulatory discussion.
South Africa already has a well-developed regulatory framework governing derivatives, contracts for difference and other financial products. However, prediction markets introduce questions that existing legislation was not necessarily designed to address.
If an event-based contract were to be offered to South African investors, several important considerations would likely arise. Does the product constitute a financial instrument under existing legislation? Is the underlying event sufficiently objective and independently verifiable? Does the absence of a traditional underlying market influence the regulatory analysis? Are existing disclosure, governance and investor protection requirements sufficient to address the unique characteristics of these products?
These are ultimately questions of classification rather than innovation.
Importantly, they should not be interpreted as arguments either for or against prediction markets. Instead, they recognise that new financial products often require regulators to determine whether existing legal frameworks remain fit for purpose.
Innovation and Regulatory Clarity
Financial markets have continually evolved through the introduction of new products, technologies and trading models. Exchange traded derivatives, contracts for difference, digital assets and tokenised securities have each required regulators to interpret existing legislation while balancing innovation with investor protection.
Prediction markets represent the next stage of that evolution.
The challenge for regulators is unlikely to be whether these products are innovative. Rather, it will be determining whether their legal and economic characteristics align with the principles that underpin existing financial market regulation.
ESMA’s recent statement reinforces precisely this point. The regulatory outcome should depend on what the product actually is, rather than what it is called.
Looking Ahead
Prediction markets are unlikely to remain a niche product. As global platforms continue to develop and investor interest grows, more jurisdictions will inevitably be required to consider how these products fit within existing regulatory frameworks.
For South Africa, the conversation does not need to begin with the question of whether prediction markets should be permitted. A more constructive starting point is understanding how they should be classified, supervised and regulated if they are offered to local investors.
Ultimately, the debate is not simply about prediction markets. It is about whether existing financial regulatory frameworks remain sufficiently adaptable to accommodate new forms of market innovation while continuing to uphold the fundamental objectives of market integrity, transparency and investor protection.
As regulators around the world continue to grapple with these questions, South Africa has the opportunity to observe international developments, learn from emerging regulatory approaches and contribute its own perspective to what is becoming an increasingly important global discussion.
References
- Commodity Futures Trading Commission (CFTC). 2025. Event Contracts Roundtable and related regulatory developments. Available at: https://www.cftc.gov (Accessed: 7 July 2026).
- European Securities and Markets Authority (ESMA). 2026. ESMA reminds firms of existing rules and obligations under binary option measures. Available at: https://www.esma.europa.eu/press-news/esma-news/esma-reminds-firms-existing-rules-and-obligations-under-binary-option-measures (Accessed: 7 July 2026)
- Norton Rose Fulbright. 2026. The EU’s approach to prediction markets and event contracts. Available at: https://www.nortonrosefulbright.com/en/knowledge/publications/290d594a/the-eus-approach-to-prediction-markets-and-event-contracts (Accessed: 7 July 2026).
