The Commodity Futures Trading Commission (CFTC) has mandated that Kalshi honor specific trades involving Michigan residents, despite a directive from a state court to cancel and refund those transactions. This development introduces a new chapter in the ongoing conflict between federal regulators and state authorities regarding prediction markets.
In a significant move, the CFTC has exercised its emergency powers for the first time to counter a state court's attempt to reverse completed trades in the prediction market. This situation highlights the ongoing tension between federal oversight and state regulations concerning sports event contracts.
On July 12, Kalshi filed an emergency rule that aimed to liquidate certain trades and reimburse Michigan customers in accordance with the state court's order. However, the CFTC intervened, halting the proposed rule and instructing the exchange to proceed with the trades as per its usual practices.
The CFTC has previously taken legal action against several states that have attempted to regulate or prohibit federally recognized contract markets. It has also submitted amicus briefs in support of exchanges in various legal cases. The order from Michigan represents the first instance of a state court trying to reverse trades that had already been executed.
The conflict originated from a temporary restraining order issued by the Ingham Circuit Court in Michigan on June 29, which barred Kalshi from offering sports contracts in the state. Subsequently, on July 6, the court clarified that certain trades made by Michigan residents should be “voided, cancelled and refunded.”
In response to this order, Kalshi proposed an emergency rule to liquidate the affected positions and compensate customers who incurred losses due to the court's mandate. However, the CFTC rejected this proposal, emphasizing that federal law necessitates a “uniform national market in derivatives transactions” and guarantees “impartial access to CFTC-regulated markets” for all participants.
CFTC Chairman Michael Selig remarked, “A state cannot compel a Designated Contract Market (DCM) to breach its obligations, nor can federal law permit a DCM to discriminate against residents of a state.” He further cautioned that reversing already executed trades could destabilize the marketplace and erode trust in contractual agreements, which are vital for a functioning market.
The chairman reiterated that the CFTC will not permit states or their courts to intimidate registered entities into breaching the Commodity Exchange Act and CFTC regulations. He expressed concerns that allowing the emergency rule to take immediate effect could undermine public confidence, as it would create uncertainty about the permanence of trades executed today.
The agency concluded that state courts lack the authority to mandate the unwinding of executed swap transactions, regardless of whether it pertains to a single contract or a broader category of trades. The CFTC characterized the Michigan court's order as an “unprecedented directive requiring Kalshi to reverse open, previously executed trades.”