A federal judge in Arizona has issued a preliminary injunction favoring the Commodity Futures Trading Commission (CFTC) against state officials, indicating that federal law likely supersedes Arizona's efforts to enforce its gambling regulations on Kalshi’s sports event contracts.
In a detailed 17-page ruling released on Tuesday, U.S. District Judge Michael Liburdi asserted that the Commodity Exchange Act (CEA) likely grants the CFTC exclusive authority over event contracts traded on federally regulated designated contract markets (DCMs), which includes Kalshi.
This ruling extends a temporary restraining order that was initially put in place in April, effectively preventing Arizona from enforcing its gambling laws or initiating any criminal or civil actions against Kalshi and other exchanges regulated by the CFTC while the legal proceedings are ongoing.
Judge Liburdi stressed that Congress deliberately established a federal regulatory framework for derivatives markets, and that any state-level attempts to impose regulations would undermine this framework.
He noted, “The plain meaning of Congress’s entrustment of ‘exclusive’ jurisdiction ‘necessarily denies jurisdiction’ to any entity besides the CFTC.”
A significant aspect of the case revolved around whether Kalshi’s sports event contracts could be classified as “swaps” under the CEA. Arizona contended that the outcomes of sports events should not be considered “events” as defined by the CEA, attempting to differentiate between the event itself and its results.
Judge Liburdi dismissed this argument, stating, “The statutory definition of swap therefore reaches how an event unfolds, not just whether it happens.” He highlighted that Congress had intentionally crafted a broad definition of swaps, encompassing contracts related to “the occurrence, nonoccurrence, or the extent of the occurrence of an event or contingency associated with a potential financial, economic, or commercial consequence.”
Furthermore, he rejected Arizona’s claim that sports outcomes do not possess sufficient economic significance, pointing out that while temperature and precipitation may lack intrinsic financial value, the CFTC and the Securities Exchange Commission have consistently classified weather derivatives as swaps.
Judge Liburdi concluded that both sports and election event contracts function similarly, allowing stakeholders to hedge financial risks tied to their outcomes.
In examining the preemption argument, the court determined that both field preemption and conflict preemption are likely applicable. The judge found that Congress had established a comprehensive federal regulatory framework, leaving states without authority over swaps traded on federally regulated exchanges.
He stated, “The CEA occupies the field of swaps and futures traded on DCMs.” Additionally, he emphasized that the CFTC’s “exclusive jurisdiction” over swaps markets preempts state laws that attempt to regulate contracts falling within this jurisdiction.