CFTC swap proposal cites Knicks playoff run to anchor federal claim

When Madison Square Garden Sports' valuation nearly doubled during the New York Knicks' NBA championship run, the CFTC was watching — and taking notes. The Commission's October 9 notice of proposed rulemaking cites the playoff's roughly $380 million contribution to New York's economy as direct evidence that sporting event outcomes carry commercial and economic consequences. That is not a rhetorical flourish. It is a jurisdictional argument, constructed around the precise language that has been doing the heaviest legal lifting in this dispute.

The proposed rule would expressly define swaps to include event contracts based on sports, politics, cultural, and weather-related events. The Commission is putting in writing what Chairman Michael Selig has said out loud: these products are commodity derivatives within the CFTC's exclusive jurisdiction under the Commodity Exchange Act, full stop. The timing — released hours before a major football weekend — suggests the Commission understood it was filing into a news cycle and chose it deliberately.

The doctrinal scaffolding comes from the Third Circuit's April ruling in KalshiEX LLC v. Flaherty, where the majority held that sports event contracts qualify as swaps because their outcomes are tied to economic consequences for a broad range of stakeholders: sponsors, broadcasters, franchises, advertisers, the communities around them. The Commission cited that decision repeatedly in the proposed rule, which is itself unusual. Agencies typically cite courts to close arguments. Here, the CFTC is using a favorable circuit ruling as the foundation for a rulemaking it intends to be durable regardless of what happens at the Supreme Court.

That sequencing is the part the market has not fully priced. A Supreme Court petition is pending. If the Court grants certiorari and reverses, the proposed rule becomes irrelevant. But if the Court denies, or if the case settles procedurally before a ruling, the CFTC will have installed a formal regulatory definition in the Code of Federal Regulations that any subsequent challenger must now contest through notice-and-comment rulemaking — a substantially higher bar than litigation. The Commission is not waiting to see what the Court does. It is building the wall while the gate is still open.

The consensus read is that this rulemaking is defensive, a hedge against an adverse Supreme Court outcome. I think it is the opposite. The CFTC is accelerating the formalization of federal jurisdiction precisely because it believes the Court either will not take the case or will affirm. The proposed rule is the Commission betting on its own position — and committing that position to the administrative record so that state regulators, state attorneys general, and future circuit panels all face a published federal definition rather than an agency interpretation delivered in briefs.

Under the Supremacy Clause, an agency acting within a valid statutory grant of authority can preempt conflicting state law. The question that has to be resolved — and is not resolved by this rulemaking alone — is whether the CFTC's interpretation of its own jurisdiction under the Commodity Exchange Act is entitled to deference after Loper Bright, and whether the Commodity Exchange Act's preemption provision covers state gambling laws that do not, on their face, regulate derivatives.