CFTC Blocks Kalshi Emergency Rule, Orders Exchange to Honor Michigan Trades

The Commodity Futures Trading Commission on Tuesday took the unusual step of blocking an emergency rule change by KalshiEX and ordering the federally regulated exchange to honor certain open trades involving Michigan residents.

In an order dated July 14, the CFTC said it had stayed Kalshi’s self-certified emergency rule under Commission Regulation 40.6(c) and, using its emergency authority under Section 8a(9) of the Commodity Exchange Act, directed Kalshi to fulfill the affected open trades “in accordance with its normal practices.”

The move matters beyond a dispute between Michigan and Kalshi. At issue is whether a state can force the unwinding of trades already executed on a CFTC-regulated market. The agency framed its intervention as necessary to protect the certainty of completed transactions on nationally regulated derivatives exchanges, even as a broader federal-state fight continues over whether Kalshi’s sports-related event contracts are regulated derivatives or illegal gambling under state law.

The immediate clash grew out of a lawsuit filed March 5 by Michigan Attorney General Dana Nessel, who alleged Kalshi violated the state’s Lawful Sports Betting Act. In a March press release tied to that suit, Nessel said, “Corporations cannot circumvent state gaming laws.”

On June 29, Michigan’s Ingham County Circuit Court granted a temporary restraining order against Kalshi. The order barred the company from offering, listing, matching, executing, clearing, settling or facilitating products that constitute internet sports betting to people located in Michigan. It also required Kalshi to use an approved third-party geolocation provider and imposed a civil penalty of $120,000 per day for noncompliance. The TRO was set to remain in effect for 14 days, through July 13.

According to the CFTC’s order, the Michigan court then clarified in correspondence on July 6 that certain trades had to be “voided, cancelled and refunded.”

Kalshi responded by telling the CFTC on July 12 that it had adopted an “Emergency Rule” to force-liquidate certain open positions held by users identified by the Michigan court. According to the CFTC, Kalshi said those positions would be closed at current market value and that if a user received less than the cost of entering the trade, the company would cover the shortfall from its own operational funds.

Two days later, the CFTC stepped in and halted that plan.

The agency said canceling or unwinding already-executed swaps would create a “major market disturbance” and threaten market integrity, price discovery and contractual certainty. In the press release accompanying the order, CFTC Chairman Michael S. Selig said, “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.” A DCM, or designated contract market, is a CFTC-regulated exchange.

Selig also said: “Canceling trades that have already been executed is an unprecedented step that risks a cascading effect on the entire marketplace and undermines the certainty in contracting that is a necessary component of a functioning market.”

KalshiEX has been a CFTC-designated contract market since November 2020, and the agency treats its event contracts as within federal derivatives jurisdiction. The CFTC said Michigan is the first state to directly attempt to unwind executed derivatives transactions on a CFTC-regulated exchange.

Public documents do not disclose how many trades are affected or their dollar value. The CFTC’s order says only that Kalshi represented the number of impacted positions was limited.