For a year the fight over prediction markets in American courts looked like a fight about who decides. One side argued that the Commodity Futures Trading Commission holds exclusive jurisdiction over everything traded on a designated contract market, the other that state gambling statutes still reach the trade. Two federal appeals courts have now ruled and neither decided the case on that question. On 28 August 2026 the Ninth Circuit held in KalshiEX, LLC v. Assad that sports event contracts are likely not swaps under the Commodity Exchange Act. On 25 September 2026 the Sixth Circuit reached the same conclusion by a different route in KalshiEX LLC v. Schuler. On 9 October 2026 the CFTC moved to settle the point by regulation. The argument shifted from jurisdiction to classification, and classification is something a venue documents about itself, one contract at a time.
The preemption point was granted and it changed nothing
The Ninth Circuit gave Kalshi the argument its briefs were built on. Writing for the panel, Judge R. Nelson accepted that section 2(a)(1)(A) of the Commodity Exchange Act confers exclusive jurisdiction on the Commission over transactions involving swaps that are traded or executed on a designated contract market, and that the provision preempts state regulation of those transactions. The panel declined to apply any presumption against preemption and read the clause on its plain wording. It also noted that nobody disputed where Kalshi's contracts trade.
That is where the case turned. Having granted the preemptive effect, the panel wrote that "the dispositive issue is whether the sports event contracts are 'swaps' under the CEA's definition." The exclusive jurisdiction grant is a sentence about a category of instrument. Win the sentence and you still have to be inside the category. We described this gap in our reading of the express preemption clause in September 2026, when three courts had read the same statutory silence three ways. Two appeals courts have now closed it from the product side instead.
Nine words of definition carry the whole category
The definition at issue sits in 7 U.S.C. section 1a(47)(A)(ii), which covers any agreement, contract or transaction providing for a payment dependent on the occurrence, nonoccurrence or extent of the occurrence of an event or contingency associated with a potential financial, economic or commercial consequence. Three elements have to hold at once: a payment that depends on something, an event or contingency, and an association with a potential financial, economic or commercial consequence.
Kalshi argued the second and third elements on their broadest dictionary meaning. An event is a thing that happens, a sporting result is a thing that happens, and sporting results carry economic consequences for sponsors, broadcasters, franchises and towns. The Third Circuit accepted that reading on 6 April 2026, when Judge Porter affirmed an injunction against New Jersey and held that sports event contracts fit within the definition of swaps, over a dissent by Judge Roth. Two other circuits took the same words to the opposite result.
The test that decided it was written by a district judge in Nevada
Neither appeals court invented its own standard. Both adopted a reading first set out by the District of Nevada in KalshiEX, LLC v. Hendrick, 817 F. Supp. 3d 1014, at 1027 to 1028, which held that an event must be, in the district court's words, "inherently associated with a potential financial [or economic] consequence, not just that the event or contingency have some potential downstream financial consequence." The Ninth Circuit quoted that passage and endorsed it. The Sixth Circuit reached the same formulation on its own and cited the same page.
It is worth noting what that test is not. The phrase sometimes attributed to the panel, a direct nexus between the event and the economic consequence, is not in the opinion: we read the full text of No. 25-7516 as published by the court and the word nexus does not appear once. The operative words are inherently associated, and they came from a trial court weighing a preliminary injunction.
The Sixth Circuit conceded the easy half and still said no
Judge Julia Smith Gibbons, writing for a panel that also included Judges Clay and Bloomekatz, did not fight about the word event. Her opinion accepts that dictionaries commonly define an event to include an outcome and that nothing in the statute clearly excludes outcomes. The contracts failed on the third element instead.
The panel's working test is that the consequence must be intrinsic enough that a reader can see why hedging or price discovery for that event would be useful. Her illustration is precise. A change in interest rates has financial consequences in itself. Who is named Super Bowl MVP does not, because any consequence depends on a later decision by somebody else, such as a sponsor paying a bonus. The opinion also records that at oral argument the court asked how a contract on the number of corner kicks in a match could carry economic consequences, and that counsel conceded a layperson might find it hard to see.
That exchange is the category's exposure in one line. A product that cannot explain its own hedging rationale to a non specialist has a classification problem before it has a jurisdiction problem.
Two courts agreed on the result and split on the reason
The two opinions are not interchangeable, and a venue reading them as one line of authority will misjudge its position. The Ninth Circuit granted that section 2(a)(1)(A) preempts state regulation of swaps on a designated contract market and then held the contracts are not swaps. The Sixth Circuit held in the alternative that even assuming they are swaps, the exclusive jurisdiction provision does not expressly preempt the Ohio and Tennessee gambling statutes, and that neither field nor conflict preemption applies either. So the one point Kalshi won in the Ninth Circuit it did not win in the Sixth, and on that reasoning a favourable classification ruling would not by itself end state enforcement.
A missing limiting principle is a question about your own venue
The reasoning that did most of the work in the Ninth Circuit was not about sport. It was that Kalshi's reading had no stopping point. If a bet on a point spread is a swap because the result is an event with downstream economic effects, the panel wrote, an identical bet in a sportsbook is a swap too, and since the Act makes it unlawful for a retail participant to enter a swap off a designated contract market, every ordinary sports bettor would be in breach of federal law.
The panel then closed the escape route the industry had assumed. It wrote that the definition of swap does not exclude a transaction because the counterparty is a casino or a sportsbook, and that the usual distinctions, no house position, no odds setting, no profit when the customer loses, have no connection to the statutory definition at all. The panel refused to let the identity or the business model of a venue do the classifying, which is the mirror image of the point we made in our piece on venue risk: the venue decides which rulebook settles the position, but it cannot decide what the instrument is.
The agency drew the line the courts said was missing
On 9 October 2026 the Commission answered that argument directly. An interim final rule under RIN 3038-AF81, announced in press release 9309-26, adds a paragraph to the definition of swap in 17 CFR 1.3 excluding casino style gambling products. Chairman Michael S. Selig put it in one sentence: "Casino-style gambling products are not derivatives."
The structure of the exclusion is worth reading twice. According to the text of the interim final rule, a transaction falls outside the swap definition only if two conditions hold together: it is offered by a person licensed to accept wagers under state law or under the Indian Gaming Regulatory Act, acting within that authorisation and regulated as gambling under it, and it is not traded on a board of trade, an organised exchange, a swap execution facility or any other market where trades execute multilaterally or by individual negotiation. Sports wagers, casino games, bingo, lotteries and raffles are listed as examples.
Nothing in that line turns on the nature of the event. It turns on who holds the licence and what kind of market the trade crosses. The limiting principle the Ninth Circuit said was missing now exists on paper, drawn around the venue rather than the product, which makes a venue's own registration, licence status and execution model the operative test.
A rule that names your product does not yet describe it
The companion document goes the other way. Under RIN 3038-AF82, announced in press release 9310-26, the Commission proposed to add event contracts, including those based on sports, politics, cultural and weather related events, to the swap definition. Comments are due 30 days after publication in the Federal Register, which as of 10 October 2026 had not happened: a query of the Federal Register for Commission documents published since 1 September 2026 returns seven items and none is this one.
The proposal itself is unusually direct about the litigation. It records that the Ninth Circuit never addressed whether sports event contracts could qualify under other prongs, including sections 1a(47)(A)(i) and (iv), and argues that many event contracts are structured as binary options and so may satisfy the first prong independently. It also notes that a petition for rehearing and rehearing en banc was filed in Assad on 9 September 2026, so the mandate has not issued. On the Commission's own account, as of 9 October 2026 that petition was still pending.
Where the proposal is most exposed is on what a definitional rule can do to a judicial reading of a statute. The Commission writes that to the extent the Ninth Circuit's reasoning rested on 17 CFR 40.11, the proposal would clarify by regulation that event contracts are swaps, leaving no valid basis for reading Commission rules the other way. That answers the part of the opinion leaning on a regulation. It does not obviously answer the part that read the statute, and the panel itself cited Loper Bright Enterprises v. Raimondo for the courts' ordinary role in resolving statutory ambiguity. We wrote in August 2026 that the June proposal gave the category a measuring stick for the word gaming. This one asks whether a measuring stick issued by an agency can reset a definition two circuits have already construed.
Election contracts went back for a separate look
The Ninth Circuit did not decide the whole book. It affirmed as to sports related contracts and remanded so the district court could consider Nevada's challenges to the election contracts on their own, the court below having never analysed whether those fit the swap definition. Judge Lee's concurrence adds that some unique sports events might still qualify.
Read as an operating fact rather than as procedure, that is the most important line in either opinion. Classification is resolved contract by contract, not firm by firm, and a venue cannot carry one legal conclusion across its whole listing surface. It is also why the contest exclusion we examined in the June proposal matters at the level of the individual market rather than the licence.
The help page that changed after the brief was filed
One footnote in the Ninth Circuit opinion deserves its own paragraph. Addressing Kalshi's claim that it is not a market maker, the panel observed that Kalshi Trading, an affiliate, had been described on the company's own page explaining who a user trades with as a significant player on the exchange, largely as a market maker. The panel recorded that the reference was removed shortly after Nevada filed its brief, and cited an archived copy supplied by Nevada rather than the live page.
Whatever the reason for the edit, the lesson is Directive 02 in its plainest form. Conflicts of interest and counterparty arrangements have to be stated in plain language on the surface where the trade happens, which means stating them in a form you are willing to have read back from an archive. A disclosure that is accurate until it becomes inconvenient is not a disclosure. It is a liability with a timestamp.
What a venue should be able to put on paper this week
None of this depends on how the appeals end. Four documents answer most of what a court, a regulator or a counterparty will ask.
- A classification memo per contract family. Which prong of section 1a(47)(A) is relied on, and why the event is inherently associated with a financial consequence rather than a downstream one. If that sentence cannot be written, the contract is the problem, not the brief.
- A hedging and price discovery rationale in plain words. The Sixth Circuit's test is whether a reader can see why hedging or pricing that event is useful.
- A venue and authorisation record. The interim final rule keys its exclusion to licence status and execution model, so registration, execution venues and the basis of any state or tribal authorisation belong in one place.
- Archived disclosures. Every public statement about counterparties, affiliates, fees and settlement sources, captured with dates, so changes read as corrections rather than deletions.
One related rule is often misread. 17 CFR 38.151(b) requires impartial access criteria, and the Ninth Circuit rejected the argument that it makes compliance with state law impossible, noting that regulated entities in Nevada use geofencing.
Where the question sits as of 10 October 2026
Nothing is settled. The Third Circuit says these contracts are swaps, the Sixth and Ninth say they are likely not, the Commission has one rule in force and one proposed, and the Supreme Court has the Third Circuit case in front of it. According to the docket in Flaherty v. KalshiEX, LLC, No. 26-299, the case was docketed on 8 September 2026, the response is due 9 November 2026, and eleven amicus briefs had been filed by 9 October 2026, ten of them in the eight days from 2 October.
Congress has said in 15 U.S.C. section 3001(a)(1) that states should have the primary responsibility for deciding what forms of gambling may legally take place within their borders, while the Special Rule in 7 U.S.C. section 7a-2(c)(5)(C) assumes a federal determination about contracts involving gaming. Both are on the books and courts are reading them against each other.
A venue that waits for that to resolve is waiting on other people. A venue that writes down what each of its contracts is, why it is that, where it executes and under whose authorisation has answered the question the courts actually asked, in the only form that survives whichever way the appeals go. That is Directive 05 stated as a filing cabinet: set the standard against the jurisdiction that regulates next, and keep the evidence where somebody else can read it.