Selig's swap definition faces legal challenge in Third Circuit

When the CFTC released its notice of proposed rulemaking on 9 October, Chairman Michael Selig did not wait for the Supreme Court to move. He put the jurisdictional claim in writing first — sports, politics, culture, weather, all of it expressly defined as swaps under the Commodity Exchange Act — and let the sequencing do the work.

The strategy is legible. The Third Circuit's April ruling in KalshiEX v. Flaherty gave the Commission what it needed: a federal appellate court holding that event contract outcomes carry commercial and economic consequences broad enough to clear the CEA's swap definition. Selig cited it repeatedly. Madison Square Garden's valuation during the Knicks' playoff run, the $380 million the series generated for New York's economy — these were not rhetorical flourishes. They were the evidentiary scaffolding for a rulemaking that now has to survive whatever the Supreme Court decides to do with the petition already in front of it.

The sequencing problem is real. If the Court grants certiorari and reverses, a proposed rule that quotes the Third Circuit approvingly becomes a document that cites its own invalidated foundation. If it denies cert, the CFTC emerges with both a circuit win and a completed rulemaking that would be extraordinarily difficult for any state regulator — or future Commission — to unwind without going through notice-and-comment from scratch.

I have seen regulators play this move before, in a different context. An agency that cannot be certain of judicial protection builds administrative mass instead — layers of process that make reversal expensive, slow, and politically visible. The rulemaking is not just about swaps. It is about the cost of unwinding the CFTC's position once the rule is final.

What the Commission cannot fully control is the gap between the Third Circuit's reasoning and the circuits that have not yet weighed in. The commercial-consequences test reads expansively in Philadelphia. It does not yet have the same weight everywhere the prediction market industry operates, and state regulators in Nevada, Ohio, and New York have been explicit that they do not accept the federal preemption argument. The proposed rule asserts exclusive jurisdiction. It does not resolve the fact that enforcement depends on courts that have not all moved in the same direction.

The markets tracking CFTC jurisdiction — and there are active ones — are pricing a world in which the rulemaking is proceeding and the Third Circuit held. Neither of those facts is in dispute. The dispute is whether a final rule issued before Supreme Court review insulates the industry or simply concentrates the risk into a single, higher-stakes moment.