CFTC's new swap definitions arrive as Kalshi asks two appeals courts to reconsider

The Commodity Futures Trading Commission has put its own definition of a swap on the table at the moment it matters most, and Kalshi is already using it to ask two federal appeals courts to reconsider rulings that went against it.

On Oct. 9 the CFTC approved a proposed rule clarifying that the Commodity Exchange Act's definition of a swap includes event contracts on sports, politics, culture and weather, according to Prediction Express. A companion interim final rule codifies the agency's position that sportsbook wagers and casino games are not swaps. Comments on the proposal are due 30 days after it is published in the Federal Register.

"Americans use event contracts to hedge risks, speculate, and provide the public with information about the outcome of future events," CFTC Chairman Michael Selig said in announcing the proposal.

Why the definition matters

Whether a sports contract is a swap sits at the center of the fight between exchanges and state gambling regulators. The Ninth Circuit, ruling in Nevada's favor in August, and the Sixth Circuit, ruling for Ohio and Tennessee in September, both found that Kalshi's sports contracts likely do not meet the statutory definition. The Sixth Circuit added that state gambling laws would apply even if they did.

The CFTC's rules lean on the statute's language covering any agreement that has become "known to the trade as a swap," and argue that sportsbook bets fall outside the definition because they are not tradable, InGame reported. Congress told the CFTC and the SEC in the Dodd-Frank Act to "further define" the term, which gives the agency more footing than an ordinary interpretation would have. New England College of Law professor Melina Roth told InGame that the Supreme Court's Loper Bright decision, which ended judicial deference to agency readings of ambiguous statutes, "doesn't really apply here."

Lawyers still doubt the rules will decide the cases. A further definition must stay within what Congress wrote, and courts that have already read the statute differently could look past it. "I don't know that it's going to do that much at the end of the day," a commodity futures lawyer told InGame. The proposal mentions the SEC's participation only in a footnote, which some lawyers say could invite a procedural challenge.

Kalshi asks for second looks

Kalshi has asked the full Ninth Circuit to rehear its Nevada case. In a Sept. 25 letter, it asked the court to grant rehearing or hold the petition while the CFTC revised its rules on event contracts. Nevada, represented by Nicole Saharsky of Mayer Brown, argued that a rule change would not alter a decision based on the statute's text and called the request another attempt at delay.

Kalshi also petitioned the Sixth Circuit on Oct. 9 for rehearing by the panel and the full court, citing the new rulemaking, DeFi Rate reported. The petitions do not restore any injunction while they are pending.

What it means for traders

Nothing changes yet. Nevada, Ohio and Tennessee can enforce their gambling laws against sports contracts while those cases continue, and the Sixth Circuit's view that federal law does not preempt state law holds even if the contracts are swaps. The appeals rulings center on sports contracts; markets on the economy are not part of these cases.

The next dates to watch are the Federal Register publication that opens the 30-day comment window, the two appeals courts' decisions on rehearing, and the Supreme Court's decision on whether to take New Jersey's petition. Our guide to CFTC regulation explains how the agency oversees these exchanges.