BOCA RATON, Florida, March 12 (Reuters) - Prediction markets - one of the hottest U.S. asset classes over the past year - need tighter rules that clearly separate outcome-based financial contracts from event wagers that amount to gambling, the head of a major exchange operator told Reuters.

CME Group Chief Executive Terry Duffy said in an interview that the "lines have become blurred" between swaps, which let investors hedge risk, and products that are essentially bets.

His comments come as lawmakers intensify scrutiny of platforms such as Polymarket and Kalshi amid concerns over potential insider trading, weak investor protections and betting on harmful or violent outcomes. 

SUPREME COURT TO DECIDE?

Kalshi and Polymarket, both regulated by the U.S. Commodity Futures Trading Commission, have increasingly clashed with state gaming authorities, including in Massachusetts, where regulators argue their event contracts violate gambling laws.

CME last year launched its own events-trading product with sports betting firm Fanduel. The outcome-based service, "FanDuel Predicts," lets customers trade contracts tied to global benchmarks such as the S&P 500, Nasdaq-100, oil and gas as prices, as well as major economic indicators.

"The courts have gone both ways here, as we've seen - some in favor and some opposed to the prediction markets. The states are all over the map on this. I don't see how it doesn't go to the Supreme Court for a definition of what is a prediction market on sports, and if that is the same as gambling," said Duffy. 

In February, a Massachusetts judge denied Kalshi's request to keep offering sports-events contracts in the state while it appeals an injunction that will bar it from operating without a state gaming license in 30 days. Nevada regulators have also sued to stop Kalshi offering contracts that would let residents bet on sports including football and basketball.

Democratic lawmakers Representative Mike Levin and Senator Chris Murphy are working on a bill to curb prediction markets after well-timed bets made ahead of the U.S.-Israeli airstrikes in Iran raised fresh concerns over the legality and ethics of such trades.     

"If you would have said that the outcome of a game has an economic impact to the vendor who sells beer because he's going to sell more beer if it's a good game, or less if it's a bad game, you could actually make an economic cause for putting a swap on their contract," said Duffy. "But to say that a player is going to get four rebounds and not five, I'd have to ask, what's the economic sense in that?"