CFTC Exercises Rare Emergency Authority to Keep Kalshi Open

The CFTC, in a rare move, exercised its emergency authority and ordered KalshiEX LLC to keep operating in line with the Commodity Exchange Act's core principles.

The exchange had told the agency it faced a market emergency after New York Attorney General Letitia James sued it in state court on July 31. New York is asking a judge for a temporary restraining order that would bar Kalshi from offering all event contracts anywhere in the country, plus more than $36 billion in damages, according to the CFTC's announcement.

CFTC Chair Michael S. Selig claimed New York is trying to make event-contract derivatives "waste away under its iron curtain of state gaming laws before the courts get the chance to issue final rulings," and said Congress never intended derivatives exchanges to be policed by a patchwork of state gambling rules. Exchanges like Kalshi, he argued, match a buyer in one state with a seller in another and route the trade through a national clearinghouse, which in his view makes them interstate financial markets beyond a single state's reach.

The legal power behind the order is rare. Under CEA Section 8a(9) ("Registration of commodity dealers"), the Commission may direct a registered exchange, whenever the agency has reason to believe an emergency exists, to take whatever action the CFTC judges necessary to maintain or restore orderly trading or liquidation. The statute defines "emergency" to include threatened or actual market manipulations and corners, an act of a government affecting a commodity, or any other major market disturbance that keeps a market from accurately reflecting supply and demand. Courts reviewing such an order are limited to the record before the Commission, and may not stay it unless they find the agency acted arbitrarily, capriciously, or otherwise contrary to law.

The CFTC declared a market emergency in December coffee futures in November 1977 to bring down open interest amid manipulation worries, and in March 1979 it voted to halt trading in Chicago Board of Trade March wheat, the first time it ordered a market closed to head off manipulation, an authority the Seventh Circuit later upheld. In January 1980 it suspended futures trading in wheat, corn, oats, soybean meal, and soybean oil across four exchanges for two days after President Jimmy Carter embargoed farm sales to the Soviet Union. (Those events predate the agency's online docket; the CFTC's own history pages are the agency's record of them.)

This is the second time in a month the CFTC has intervened on Kalshi's behalf. In July, the Commission stayed a Kalshi emergency rule that would have force-liquidated Michigan customers' positions after a state court ordered completed trades voided and refunded, and told the exchange to honor those trades instead; the agency called the state court's unwinding of settled trades unprecedented and warned it would shake confidence in the market. Kalshi has fared considerably worse in court than at the agency. A federal judge in Manhattan refused in July to block New York from enforcing its gambling laws, rejecting all three of Kalshi's preemption theories and noting the company could simply obtain a state gambling license, then turned down an emergency injunction pending appeal later that month. Judges in Michigan and Connecticut have since reached similar conclusions in cases involving Kalshi and rival Coinbase Financial Markets, per a Connecticut ruling and a Michigan ruling.