The CME Group has initiated legal action against the Commodity Futures Trading Commission (CFTC), contesting the agency’s approval of Kalshi’s perpetual futures contracts. The lawsuit, filed on Thursday, claims that the CFTC failed to adequately evaluate Kalshi’s application prior to granting approval.
This legal move follows an announcement from CME CEO Terry Duffy, who indicated the company’s intention to challenge the CFTC’s decision made in late May. The lawsuit marks a rare instance of a major financial institution taking legal action against its primary regulator.
CME’s lawsuit argues that the approval process for Kalshi’s contracts did not comply with the Dodd-Frank Act, which governs derivatives trading. The company contends that the CFTC overlooked significant procedural requirements, potentially jeopardizing CME’s own long-dated futures products.
According to CME, the perpetual futures contracts should be classified as swaps rather than futures. This distinction carries important regulatory implications, including different requirements for the companies involved. Duffy emphasized the necessity of this classification in a recent interview, stating that the CFTC’s failure to analyze the legal consistency of its approval could have far-reaching consequences.
“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,” the lawsuit claims. “The CFTC did not even mention the relevant Dodd-Frank provision defining ‘swap.’ Indeed, the word ‘swap’ appears nowhere in the Order.”
The lawsuit further alleges that the CFTC merely approved Kalshi’s application without thorough scrutiny, a process described as a “rubber stamp.” This situation is particularly notable given the increasing number of firms seeking designated contract market (DCM) approvals for perpetual futures.
On the same day that Kalshi received approval, the CFTC issued a no-action letter to Coinbase, suggesting a potential pathway for the exchange to offer similar perpetual futures contracts through an offshore intermediary.
Perpetual futures represent a relatively new product in the derivatives market, and their classification has not been explicitly addressed in the Dodd-Frank Act. Legal experts have noted that while the term “future” lacks a clear definition in the Act, “swap” is well-defined, allowing the CFTC some discretion in categorizing new products.
Katherine Kirkpatrick Bos, a former general counsel at Starkware, remarked on social media that there is no established precedent regarding the necessity of “future delivery” for a product to be classified as a future. This ambiguity adds complexity to the ongoing legal debate.
As the situation unfolds, the implications of this lawsuit could reshape the regulatory landscape for perpetual futures and other innovative financial products.
CME Group has filed a lawsuit against the CFTC, arguing that the approval of Kalshi's perpetual futures contracts was improperly handled. The case raises significant questions about regulatory classifications and the future of derivatives trading.