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The Commodity Futures Trading Commission has stepped in to block Kalshi from unwinding trades held by Michigan residents, directing the exchange to process them as usual.
The order came after Kalshi filed an emergency rule change on July 12 that would have liquidated positions and refunded customers in line with a state court ruling. Instead, the CFTC stayed the proposal and told the platform to fulfill the contracts “in accordance with its normal practices.”
This marks the first time the regulator has used emergency powers to override a state court’s attempt to cancel executed prediction market trades.
“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,” said Chairman Michael S. Selig on Tuesday.
“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. The Commission will not allow states or state courts to bully registered entities into violating the Commodity Exchange Act and CFTC regulations.”
The Commission has already taken legal action against several states, including Arizona, Connecticut, Illinois, Kentucky, Minnesota, New Mexico, New York, Rhode Island, and Wisconsin, and filed briefs in support of exchanges. However, the Michigan case is the first where a court sought to cancel trades that had already been completed.
“We are being put in an impossible position,” Kalshi states
The clash between federal regulators and Michigan courts left Kalshi caught in the middle. A temporary restraining order issued on June 29 barred the exchange from offering sports contracts in the state.
Days later, the court went further, ruling that trades entered into by Michigan residents had to be “voided, cancelled and refunded.”
Kalshi responded with an emergency rule filing, arguing that immediate action was needed to “comply with the Court’s order, maintain orderly markets, protect the interests of all market participants, and preserve the financial integrity of the Exchange.”
The company said the order applied only to “sports positions originally matched between Michigan traders and Kalshi Trading LLC,” describing those trades as a “minute percentage” of its overall sports volume.
Kalshi pledged to absorb any losses itself, stating, “No other market participant will bear any loss arising from this specific forced liquidation. The Exchange will absorb the entire shortfall.”
But the CFTC rejected the filing, insisting trades be honored under normal rules. By then, Kalshi had already unwound the positions in line with the Michigan court’s instructions. Head of Enforcement Robert DeNault voiced frustration, writing: “We are disappointed by this decision and believe it is unfair to Kalshi. We already acted and unwound the trades, as the Michigan court order required us to do.”
He added: “We are being put in an impossible position, looking to follow state court orders that may contradict our federal regulatory obligations.”
