Illinois court rules derivatives exchange lacks swap authority

Illinois ruling on Kalshi swap status creates a circuit split with real stakes

A federal judge in Illinois reached a conclusion last week that no court in the Ninth Circuit has been willing to reach: that Kalshi's sports event contracts are likely swaps, and that the CFTC probably has jurisdiction over them. The ruling is preliminary, and it sits in direct tension with what the Ninth Circuit decided in August. That tension now has a name. It is a circuit split, and circuit splits have a way of ending up in Washington.

The Illinois judge's reasoning matters more than the outcome. Where the Ninth Circuit read the Commodity Exchange Act's text and found sports contracts outside federal jurisdiction, the Illinois court read the same statute and found the opposite probable. Nicole Saharsky, arguing for Nevada before the Ninth Circuit, has been insisting the statutory text is unambiguous. The Illinois ruling suggests at least one federal bench disagrees, not on policy, but on what the words mean. That is the harder problem for states to argue around.

The CFTC has submitted two proposed rules to the White House Office of Information and Regulatory Affairs — one that would define swaps to include event contracts, and one that would exclude casino-style products. Saharsky told the Ninth Circuit this changes nothing, that the court's August ruling rested on the statute itself and not on Section 40.11. She is right about the Ninth Circuit. She is not right about the broader litigation map. If the CFTC finalizes both rules before a circuit split reaches the Supreme Court, every district court that hasn't already ruled will have a new regulatory baseline to work with. Illinois may have just given the agency a template.

The reporting frames this as a win for Kalshi. The more accurate read is that it is a win for the CFTC's theory of jurisdiction, which is not quite the same thing. Kalshi needs the CFTC to win in order to survive in states where it is currently losing. The Illinois decision validates the federal swap interpretation that Kalshi has been arguing everywhere. But Kalshi's specific contracts — its sports book — remain legally contested in seven states simultaneously, and a district court's preliminary finding in Illinois does not reach Ohio, Nevada, or the Ninth Circuit's enrolled panel.

The piece of this that the market coverage has not connected is what happens to Kalshi's valuation argument if the CFTC wins its jurisdiction claim while simultaneously being required to exclude casino-style products from the swap definition. The company's stated ambition is to be the regulated infrastructure layer for all event-based trading, including sports. A rule that establishes federal jurisdiction over swaps but defines its own carve-out for gambling products would give Kalshi the regulatory imprimatur it wants while potentially gutting the product lines that drive its volume. The Illinois ruling advances the first part of that scenario without addressing the second at all.

The CFTC's dual submission — define swaps broadly, exclude gambling narrowly — is a drafting problem the agency has not solved in public. The agency is asking courts and the White House simultaneously to accept that it has authority and that it will use that authority to draw a line that nobody has yet defined with legal precision. A circuit split accelerates the timeline for someone else to draw it instead.