The Commodities Futures Trading Commission (CFTC) has no authority to second-guess election contracts, according to recent statements issued by a US Judge.
The opinion on the Kalshi‘s lawsuit brought against the CFTC may have significant potential implications for an ongoing/current proposal that aims to place a ban all political prediction markets.
According to court documents filed recently, this latest lawsuit concerns the interpretation of the Commodity Exchange Act (CEA)’s special rule “for the review of event contracts, a type of derivative contract whose payoff is based on the outcome of a contingent event.”
The special rule authorizes the Commodity Futures Trading Commission (CFTC) to review, and “prohibit, event contracts that it determines are contrary to the public interest if, and only if, they involve specific activities, including ‘activity that is unlawful under any Federal or State law’ and ‘gaming.’”
Plaintiff KalshiEX LLC, a financial services company, tried “to offer event contracts that would allow participants to take positions and trade on the outcome of United States congressional elections.”
The CFTC issued an order prohibiting Kalshi from “offering the contracts after it determined that such contracts involve unlawful activity and gaming, and are contrary to the public interest.”
Kalshi filed this suit challenging the CFTC’s decision “as arbitrary, capricious, and otherwise not in accordance with the law under the Administrative Procedure Act (APA).”
Unless otherwise indicated, the formatting of citations has “been modified throughout this opinion, for example, by omitting internal quotation marks, emphases, and alterations and by altering capitalization.”
According to the Judge’s opinion, the CFTC’s order exceeded its statutory authority.
Kalshi’s contracts do “not involve unlawful activity or gaming,” the court papers noted.
They involve elections, which are “neither,” the Court Judge determined.
Although the Court acknowledges the CFTC’s concern that “allowing the public to trade on the outcome of elections threatens the public interest, this Court has no occasion to consider that argument.”
This case is not about whether the Court “likes Kalshi’s product or thinks trading it is a good idea.”
The Court’s only task is to determine “what Congress did, not what it could do or should do.”
And Congress did not “authorize the CFTC to conduct the public interest review it conducted here.”
Accordingly, the Court grants Plaintiff’s motion “for summary judgment, ECF 17, and denies Defendant’s cross-motion for summary judgment, ECF 30.”
The CFTC is an independent federal agency “that regulates financial derivative markets.”
A derivative is a financial instrument or contract whose price is “directly dependent upon (i.e.[,] derived from)” the value of one or “more underlying assets—for example, commodities (like corn and wheat), securities, or debt instruments.”
