A CME lawsuit against the Commodity Futures Trading Commission (CFTC) might not directly concern event contracts, but it’s the latest sign that the regulator’s main allies are now crypto and prediction markets more than the titans of the commodities world.
CME sued the CFTC in the U.S. District Court for the District of Columbia Wednesday over the federal regulator’s approval of Kalshi’s perpetuals.
The CFTC approved Kalshi’s application to list perpetuals, products similar to futures contracts but with no expiration date, on May 29. Instead of settling at the price of the asset on a given date, perpetuals use payments between long and short holders to ensure that the contract’s price is aligned with the price of the commodity itself. For now, Kalshi’s perpetuals offering is focused on cryptocurrency.
Within two weeks of launch, more than $5 billion was traded on the products.
Crucially, in CME’s view, the application that was approved listed perpetuals as futures contracts, while CME argues that they should be classed as swaps, which are subject to tighter regulation.
CME is worried that the approval could lead to Kalshi offering a version of its core products, like bond futures, with lower regulatory requirements. Shares in the CME Group are down 25% since early March, wiping $30 billion off the company’s market cap. That may sound familiar to sportsbook executives and investors.
The lawsuit comes as CME struggles to put up any sort of challenge in event contracts. The commodities giant partnered with both DraftKings and FanDuel last year, but both now also route their customers to Crypto.com. CME’s volume on Thursday was less than $6 million, well under 1% of Kalshi’s volume.
But the most relevant part of the lawsuit for those following the rise of prediction markets might be what it represents. The interests of CME, as the largest commodity exchange business in the world, had typically aligned with the CFTC until now.
“There’s a lot of antagonism right now between the CME and CFTC, which is atypical,” David Aron, special counsel at Lowenstein Sandler, told InGame. “The CFTC has traditionally listened to CME’s concerns to a large extent. But now, the CFTC seems more driven by the crypto industry concerns and prediction market.”
The rise of prediction markets was a big part of that change.
CFTC change of policy?
As with prediction markets, the change involves a U-turn in policy from the CFTC. Past enforcement actions against offshore crypto platforms offering perpetuals, such as Binance in 2023, had considered them to be swaps. Now, the CFTC calls them futures.
Aron said he is skeptical of the idea that a change in policy from an agency of the federal government should be seen as proof something is wrong.
“It looks odd, flip-flopping, but it’s a different policy,” he said. “It’s a different chairman, a different president.
“Agencies can change their approaches when they have new leadership. It has happened forever. There was a lot of stricter enforcement when I was there.”
What is a swap?
A further parallel with event contracts is that an important question is whether the product in question should be defined as a swap.
In this case, the CFTC approved Kalshi’s application to list the products as futures instead of swaps. Futures tend to have more favorable tax treatment and looser regulatory requirements — including less strict margin rules — than swaps, which are often seen as riskier products.
Historically, futures were contracts for future delivery of an actual commodity, though this is no longer a requirement, making the definitions a little blurrier. Futures are generally defined as requiring a direct or indirect ownership interest in the underlying asset.
Swaps, meanwhile, include contracts where one party makes a payment to another based on the price of the asset without either one being a direct or indirect owner. CME says perpetuals fit this definition.
“With one stroke of his pen, the Chairman overrode Congress’s definition of the term ‘swap’ and circumvented the regulatory regime Congress required for that form of derivative,” its complaint says.
Perpetual predictions
There is also the question of whether Kalshi could combine its perpetual products and event contracts, offering prediction markets with no expiration date.
“The CFTC has said over and over that event contracts can be listed in different forms. Most are swaps or binary options, but some can be listed as futures,” Aron says. “I don’t think the idea of perpetual predictions has come up yet. You could do ‘Will GDP growth ever exceed 10% in one year?’”
