CME Group Sues CFTC Over Kalshi Perpetual Futures Approval, Citing Dodd-Frank Swaps Definition

CME Group sued the Commodity Futures Trading Commission, alleging the CFTC should not have approved Kalshi's perpetual futures contracts the way it did and asking a court to vacate the approval and self-certified products.

The CoinDesk account of the dispute says the suit came a day after outgoing CEO Terry Duffy announced it would file over the approval granted at the end of May, and it frames the core issue as whether perps are “swaps” as defined by the Dodd-Frank Act, not “futures.”

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CME’s complaint argues the CFTC did not properly consider the ramifications of approving perps and that the agency’s approval process violated Dodd-Frank and risked harming CME’s company.

CoinDesk reports that CME CEO Terrence Duffy told CNBC last week that “The CFTC did not engage in its own analysis of whether its approval of Kalshi’s Bitcoin perpetual as a future is consistent with law,” and that CME’s lawsuit said the CFTC did not even mention the relevant Dodd-Frank provision defining “swap.”

CoinDesk also says the CFTC “rubberstamped Kalshi's application,” according to the lawsuit, as CME sought to challenge how the approval was handled.

CoinDesk reports that CME’s lawsuit argues perps are actually “swaps” as defined by the Dodd-Frank Act, and not “futures,” because the distinction carries implications for how the products are regulated and what requirements apply to the companies issuing them.

In an email cited by CoinDesk, former Starkware General Counsel Katherine Kirkpatrick Bos said, “Future is not defined anywhere, whereas swap was defined by Dodd-Frank,” and she added that the CFTC has discretion to categorize novel products with the characteristics of a future as opposed to swap.

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CoinDesk further quotes Bos saying there is “no clear precedent” on a “future delivery” being a requirement for a future, tying the definitional fight to how regulators treat perpetual contracts.

The Lowenstein Sandler LLP client alert describes CME’s central legal dispute as whether perps should be classified as “swaps” or as “contracts of sale of a commodity for future delivery” under the Commodity Exchange Act, as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

That same alert says CME argues perps cannot qualify as futures because they lack a fixed expiration date and settlement on a specific future date, emphasizing that a perp has no expiration date, no delivery obligation, and no settlement on a specific future date.

CoinDesk says the CFTC’s approval of Kalshi’s perps was paired with a no-action letter to Coinbase on the same day, which it described as seemingly opening the door for Coinbase to list perps as well through an offshore intermediary.

“CME Group filed a lawsuit against the Commodity Futures Trading Commission alleging it should not have approved Kalshi's perpetual futures contracts the way it did and asking a court to vacate the approval and self-certified products”

CoinDesk

The Lowenstein Sandler LLP alert says CME’s complaint challenges the CFTC’s actions as unlawful agency actions under CEA Section 5c(c)(5)(B) and also alleges the CFTC’s actions were arbitrary and capricious for failing to analyze the applicable statutory provision and for effectively “rubberstamped” Kalshi’s application.

CoinDesk reports that CME is asking a court to vacate the approval and self-certified products, and it frames the stakes as how the classification affects the rules and requirements for participants in perpetual futures markets.

The Lowenstein Sandler LLP alert adds that the distinction carries regulatory and tax consequences, including that swaps are subject to swap dealer registration requirements and different margin and data reporting regimes than futures.

In the same alert, CME’s historical posture is included, noting that in November 2012 CME sued the CFTC to block a rule requiring it to report nonpublic swaps data to third-party swap data repositories, and that the CFTC backed down within the month leading CME to withdraw its lawsuit.