The U.S. Commodity Futures Trading Commission [CFTC] has ordered Kalshi to honour certain event contracts involving Michigan residents. It argues that states cannot compel federally regulated derivatives exchanges to cancel trades that have already been executed.
The decision comes after the regulator exercised its emergency authority to stay an emergency rule. The rule was proposed by Kalshi in response to a Michigan state court order requiring the company to unwind certain previously executed trades.
CFTC blocks Kalshi’s emergency rule
According to the CFTC, Kalshi submitted an emergency rule on July 14 that would have force-liquidated certain event contracts held by Michigan users. This was after a state court ordered the trades to be “voided, cancelled and refunded”.
In response, the Commission stayed the proposed rule. It directed Kalshi to fulfil the affected trades in accordance with its normal operating procedures while it reviews the matter.
The dispute stems from a temporary restraining order issued by a Michigan court on June 29 that barred Kalshi from facilitating what the state considers internet sports betting for Michigan residents.
The court later clarified that certain existing trades should be unwound, prompting Kalshi to seek emergency regulatory approval for changes to its market rules.
Regulator warns against unwinding completed trades
The CFTC said allowing executed derivatives contracts to be cancelled would undermine confidence in regulated markets. Also, it would threaten the certainty required for price discovery and orderly trading.
In its order, the Commission said forcing exchanges to unwind completed trades could create broader market distortions, damage confidence among market participants and potentially affect pricing across related derivatives markets.
It argued that certainty in contracting is fundamental to the proper functioning of U.S. derivatives markets.
CFTC Chairman Michael Selig also criticized the state court’s intervention.
“A state cannot force a DCM to violate its obligations, and federal law does not permit a DCM to discriminate against a state’s residents,” Selig said.
He added that cancelling completed trades risked undermining certainty in contracting and that the Commission “will not allow states or state courts to bully registered entities into violating the Commodity Exchange Act and CFTC regulations”.
Decision highlights broader jurisdictional battle
The CFTC framed the case as part of a wider effort to defend its exclusive authority over federally regulated derivatives markets.
The agency noted that Michigan is the first state to seek cancellation of previously executed derivatives trades. It said it has already brought legal actions or filed court briefs in several other states regarding attempts to regulate CFTC-supervised markets.
Those include Arizona, Connecticut, Illinois, Kentucky, Minnesota, New Mexico, New York, Rhode Island, Wisconsin, and Massachusetts.
The Commission said its emergency intervention is intended to preserve market integrity while it reviews Kalshi’s proposed emergency rule. It emphasized that executed trades should continue to be fulfilled in the ordinary course of business.
Final Summary
- The CFTC has stayed Kalshi’s emergency rule and ordered the exchange to honour executed trades involving Michigan residents.
- The regulator argues that states cannot require federally regulated derivatives exchanges to unwind completed trades. It warns that doing so would undermine market certainty and price discovery.
