The fight between U.S. federal derivatives regulators and certain state authorities over the regulation of prediction markets has escalated further, with the U.S. Commodity Futures Trading Commission (CFTC) taking action to prevent KalshiEX LLC from carrying out a court order requiring it to cancel certain trades.
The CFTC issued an order staying an emergency rule that was proposed by KalshiEX so that it could carry out a court order issued in a Michigan state court, directing the company to cancel certain transactions involving Michigan residents.
On July 12, KalshiEX submitted a proposed rule to the CFTC providing for the forced liquidation of certain event contracts, following the issuance of a temporary restraining order that was entered against Kalshi on June 29, by the circuit court in Michigan prohibiting the market from listing, trading, clearing or settling any contracts that amount to sports bets. Additionally, the court ordered Kalshi to cancel and refund those trades.
The regulator said that it’s staying the exchange’s proposed rule, and it directed the firm to fulfill the trades in accordance with its normal practices.
“The commission finds that the emergency rule, adopted in response to a Michigan circuit court’s unprecedented order requiring Kalshi to unwind open, previously executed trades constitutes an emergency because it is a ‘major market disturbance which prevents the market from accurately reflecting the forces of supply and demand’ with respect to event contracts,” the regulator said in its order.
The CFTC added that if it allowed Kalshi’s emergency rule to take effect, “it would risk shattering public confidence by giving traders cause to worry that the trades they execute today may be unwound a week — or a year — later.”
In addition, it said that state courts can’t order executed swap transactions to be unwound, as this would create uncertainty about whether they could interfere with other derivatives transactions.
“Forced unwinding of previously settled contracts risks financially damaging market participants — including the retail participants that make up a large portion of Kalshi’s trading population — who may have made budgeting and risk management decisions based on the expected or likely outcome of their trades,” it said.
“A state cannot force a [regulated market] to violate its obligations, and federal law does not permit a [market] to discriminate against a state’s residents,” said CFTC chairman, Michael Selig, in a release.
“Canceling trades that have already been executed is an unprecedented step that risks a cascading effect on the entire marketplace and undermines the certainty in contracting that is a necessary component of a functioning market,” he added. “The commission will not allow states or state courts to bully registered entities into violating the Commodity Exchange Act and CFTC regulations.”