Harkening back to the late 19th century, the question of whether or not futures trading is gambling has been a jurisdictional conundrum. The Commodity Futures Trading Commission (CFTC) pointed to that struggle — and a 1905 Supreme Court decision — in a lawsuit it filed Tuesday in response to the state of Minnesota making some prediction market contracts illegal in the state.
The lawsuit is the fourth the CFTC has filed against states, and it came less than 24 hours after Gov. Tim Walz made Minnesota the first state to ban contracts involving sports, casino games, war, national emergencies, elections, government action, death, assassination, short-term weather events, mention markets, and more.
Despite the clear limitations set by the Minnesota legislature in crafting the law, the CFTC leaned into the argument that it has “exclusive jurisdiction” over futures, options, and swaps and claimed that the law’s “unrestrained scope” would completely ban prediction markets from the state. Lawmakers were careful not to include certain contracts in their definition, as farmers in a state rich with agriculture have long used futures trading to hedge against unforeseen commodity price movements.
CFTC interprets ban as ‘all’ event contracts
CFTC lawyers wrote that the law would do “irreparable harm” to the agency, and repeated arguments the commission made in lawsuits against Connecticut and Illinois. In the complaint, attorneys wrote that the Minnesota law would “criminalize the operation of derivatives markets governed by federal law,” and this includes not just the designated contract markets (DCMs) offering them, but also futures commodity merchants, derivatives clearing organizations, verification services, and suppliers and vendors.
“These consequences directly harm the federal government’s legally protected interest in enforcing federal law,” the complaint reads. The “looming threat … casts an immediate pall over the markets that the Commission regulates and generates significant uncertainty among exchanges and participants as to the scope and exclusivity of the Commission’s jurisdiction. The Commission will also have to dedicate staff time and resources to advising registrants” regarding compliance.
But during debate regarding the new law, Minnesota’s bill sponsor was clear that traditional commodities would not be affected by the new law. At an April committee hearing, Sen. John Marty said, “We would allow futures, but spell out what is not allowed.”
In addition, lawmakers specifically called out a ban on weather contracts, also used by farmers for hedging, and amended the language in the bill to ban “short-term” contracts, but not “long-term” contracts.
CFTC lawyers wrote that it is their interpretation that “all event contracts” will be prohibited when the law goes into effect Aug. 1.
One more time: What is a ‘swap’?
The CFTC is requesting preliminary and permanent injunctive relief, saying that the state has no right to “attempt to enforce their existing gambling laws against sports-related event contracts.” Yet the CFTC’s registrants, particularly Kalshi, have consistently advertised their contracts as sports betting.
Writing that event contracts have been “traded under the CFTC for decades,” the agency’s lawyers also revisited an issue that remains unresolved in myriad cases brought by Kalshi against states — “the swap.” Defined as a financial tool traditionally used for hedging, states argue sports event contracts don’t meet the definition of a swap because they are not “associated with a potential financial, economic, or commercial consequence.”
A Nevada judge sided with states on this issue, saying that whether or not a sporting event occurs could be construed as a swap, but the outcome of the game would not be. And a Massachusetts state judge, citing CFTC rule 7 U.S.C. § 5a, said he’s not sure sports event contracts fit the definition of a swap, but he has not ruled yet.
“I understand that who wins a game has an economic impact, but how about [Rule] 5a, when it talks about price risk?” Massachusetts Superior Court Judge Christopher Barry-Smith asked. “Why does it matter?”
Whether or not a sports event contract is ultimately defined as a swap is relevant — the CFTC also argues that the Commodities Exchange Act (CEA) explicitly allows for federal preemption over state laws for swaps. But if sports event contracts are ultimately defined as gambling, the preemption would not apply.
The agency is currently in the process of rewriting its regulations around event contracts. About 1,500 public comments were submitted, including many that say contracts on gambling and sports events should be banned. The CFTC, however, appears to already have decided that it will allow the contracts, a policy analyst said earlier this month.
Been there, done that
Much of the CFTC complaint mirrors its complaints in Connecticut and Illinois, as well as Kalshi’s arguments across the country. The difference in Minnesota is that a law is now in place while other jurisdictions have sent cease-and-desist letters or taken legal rather than legislative action.
Because of this, CFTC lawyers wrote, the situation in Minnesota is more dire, and potentially could have further-reaching affects.
The Minnesota law also “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress,” reads the complaint. “If States can criminalize the offering of event contracts by DCMs, then DCMs would face the prospect of 50 regulators across the country, which defeats Congress’s design of centralizing derivatives regulation under the Commission.”
As in previous lawsuits, the CFTC says the point of it and the CEA is to avoid a “patchwork” of rules, that the law would create impartial access to its markets, and that amendments to the CEA over time have strengthened the preemption clause.
CFTC lawyers wrote that the 2010 Dodd-Frank Act “embraced” the preemption rule for swaps, and cited the CFTC’s “Special Rule,” saying that it allows for “specific oversight and prohibitory authority over event contracts” and allows the CFTC to determine what is “contrary to the public interest.”
That same rule — as well as the CEA itself — also specifically bans “event contracts that reference terrorism, assassination, war, gaming, or an activity that is unlawful under any State or Federal law, or that involves, relates to, or references an activity that is similar to any of those activities and that the CFTC determines by rule or regulation to be contrary to the public interest.”
