New York asks judge to ignore CFTC swaps rule cited by Kalshi across states

New York asked a federal judge on Oct. 23 to give no weight to the Commodity Futures Trading Commission's proposed rule that would explicitly classify sports event contracts as swaps, arguing the unfinished regulation carries no legal effect in the federal government's bid to block state enforcement against prediction markets. The filing, from New York Attorney General Letitia James' office, was lodged the same day lawyers debated the rule's influence at the NEXTPredict Summit in New York City.

New York says the CFTC proposal is irrelevant to the injunction request

The state told US District Judge Lorna Schofield that the CFTC's notice of proposed rulemaking "should be given no weight" in deciding the federal government's request for a preliminary injunction that would bar New York from enforcing its gambling laws against exchanges it contends are federally regulated. The attorney general's office described the proposed rule as "irrelevant" and having "no persuasive or evidentiary value." The filing notes that a notice of proposed rulemaking is "simply a proposal" that an agency can adopt, change or withdraw, and pointed to the CFTC's earlier withdrawal this year of a 2024 proposal as an example of shifting regulatory positions.

Challenges to CFTC authority and rulemaking procedure

New York's filing goes further than disputing the proposal's current legal weight. The state argues that even a finalised rule could not expand the statutory definition of swaps beyond what Congress authorised under the Commodity Exchange Act. The attorney general also challenged the CFTC's separate interim final rule, which took effect on Oct. 19 and explicitly excludes conventional sportsbook wagers and casino games from the definition of swaps. New York argued in a second Oct. 23 filing that the agency lacked a basis in federal law to draw a distinction between traditional sports gambling and exchange-traded event contracts, and that the CFTC improperly adopted the interim rule without first seeking public comment.

Debate at NEXTPredict: mixed views from former regulators and counsel

At the NEXTPredict Summit, Milbank partner and former CFTC official Josh Sterling, whose firm represents Kalshi, said the proposed rule could strengthen the exchanges' legal position. "I think that the proposed rule is pretty helpful," Sterling told the panel, arguing that placing the agency's interpretation into federal regulations would bolster its standing in court.

Brigitte Weyls, general counsel at Gemini and also a former CFTC attorney, questioned the agency's authority to draw the line between regulated contracts and gambling. She asked, "Does the CFTC actually have the authority to define gaming?" Weyls predicted litigation regardless of the agency's approach. Moderator Elliott Stein pressed panelists on how courts should treat the CFTC's rulemaking after the Supreme Court's 2024 Loper Bright decision removed Chevron deference. Sterling acknowledged the change but said judges should still consider the agency's analysis and record. "It's just not a matter of Chevron deference anymore," he said, adding that the agency will need to justify decisions and that challenges will be litigated in federal court.

How Kalshi and other exchanges are using the rules in litigation

Kalshi and other exchanges have cited the CFTC's proposed and interim rules in multiple pending cases. On Oct. 9, the day the CFTC announced its proposed swap definition, Kalshi asked the Sixth Circuit to reconsider a ruling that allowed Ohio and Tennessee to enforce their sports gambling laws against the exchange. In its petition, Kalshi argued the CFTC's rules "substantially undermine the panel's holding concerning the meaning of 'swap.'"

Kalshi again relied on the agency's rulemaking in an Oct. 23 lawsuit against Louisiana officials seeking to prevent state enforcement against its sports contracts. In that complaint Kalshi stated that the two rulemakings "confirm that Kalshi's sports event contracts are swaps within the CFTC's exclusive jurisdiction."

The broader litigation picture is fragmented. The Third Circuit sided with Kalshi in its dispute with New Jersey. The Sixth Circuit held that Kalshi's sports event contracts are not swaps. The Ninth Circuit concluded they likely do not qualify as swaps. New Jersey has asked the Supreme Court to review the Third Circuit decision in a Sept. 2 petition; the jurisdictional fight could ultimately reach the high court.

New York enforcement actions continue in parallel

Separately, the New York State Gaming Commission escalated enforcement scrutiny on Oct. 22 by asking a state court to compel Kalshi to comply with investigative subpoenas. The commission seeks records on Kalshi's sports-event contracts, potential offerings to users under 21 (New York's minimum age for sports betting), advertising that describes products as wagers or bets, and ownership and corporate structure. The commission alleges Kalshi has refused some requests and provided insufficient responses to others, and says it needs the records to decide whether to pursue civil penalties against Kalshi or other parties for violations of state gambling laws.

Daniel Wallach, a gaming attorney who shared the New York filings on LinkedIn, wrote that "The CFTC’s recent rulemaking is emerging as an issue in prediction-market cases around the country, as Kalshi and other exchanges urge courts to delay proceedings pending rulemaking or rely on the agency’s evolving definitions to support their jurisdictional arguments."

The question for judges now is whether the CFTC's pending and interim rulemakings will influence jurisdictional rulings, or whether states like New York will succeed in treating the agency's unfinished work as legally meaningless. The dispute ties together agency rulemaking, fragmented federal appeals rulings, and active state enforcement against Kalshi and Polymarket US.

"I think that the proposed rule is pretty helpful," said Josh Sterling, Milbank partner and former CFTC official, describing the potential impact of the agency's proposal.

"Does the CFTC actually have the authority to define gaming?" asked Brigitte Weyls, general counsel at Gemini, during the NEXTPredict Summit.