When a state moves against a prediction market, the first thing the venue builds is a wall. Geofencing, a licensed location vendor, a blocked signup, a market that no longer appears inside the border. All of it answers one question: who may place the next trade. It answers nothing about the contracts those users already hold, and those do not disappear when access does. In the summer of 2026 a Michigan court asked what should happen to them, and the answer arrived as two orders from two authorities that wanted opposite things. Every venue listing in more than one jurisdiction will meet a version of this.
A state court asked for something no rulebook had a page for
On 29 June 2026 the Circuit Court for Michigan's 30th Judicial Circuit in Ingham County entered a temporary restraining order against KalshiEX LLC. The terms are set out in the order the Commodity Futures Trading Commission issued on 14 July 2026: the exchange was barred from offering, listing, matching, executing, clearing or settling anything that counts as internet sports betting under MCL 432.403(s) for any person located in Michigan, and had to use a third party geolocation provider licensed by the Michigan Gaming Control Board, at 120,000 dollars for each day of non compliance with that requirement.
That is an access instruction, and those are buildable. Then the court went further. After the exchange moved to dissolve or modify the restraining order, the court modified it verbally and clarified in correspondence dated 6 July 2026 that the affected trades had to be, in the court's words, "voided, cancelled and refunded." Three verbs about positions that already existed. Daniel O'Boyle wrote for InGame on 15 July 2026 that the trades at issue were those between Michigan residents and Kalshi's own market making affiliate. The Commission's order describes them more broadly, as trades entered into by Kalshi traders located in Michigan, so take the narrower version as reported rather than established.
The exchange wrote the rule after the order arrived
What happened next is the part every operator should sit with. In its notification to the Commission on 6 July 2026, quoted in the order, the exchange listed what compliance would require, and the third item was "the potential need to address open contracts or positions held by persons located in Michigan." The venue was telling its regulator, in writing, that it did not yet know what to do with the open book.
Six days later it decided. On 12 July 2026 the exchange filed an emergency rule providing that the positions of the identified users would be force liquidated on the central limit order book at market value as of the date the rule was executed, and that where liquidation value came in below the user's original cost of entry the exchange would pay the difference from its own funds and absorb the entire shortfall. It said it could bear that cost because the number of affected positions was limited. This was a rule about money already at risk, drafted after the risk materialised, under a court deadline.
The route it used says something about the fit. Under Commission Regulation 40.6(a)(6)(i), a rule adopted to meet an emergency is filed before implementation where practicable and otherwise within twenty four hours afterwards. That deadline tells you what the instrument was built for: emergencies measured in hours and operational in nature, a settlement source that failed or a system that went down. It is a poor instrument for deciding who owns what, because scrutiny arrives after the action.
The regulator stayed the rule and ordered the trades honoured
On 14 July 2026 the Commission did two things in one document. It stayed the emergency rule under Regulation 40.6(c)(1) and directed the exchange to fulfil the trades in accordance with its normal practices under Section 8a(9) of the Commodity Exchange Act, 7 U.S.C. section 12a(9). In the press release announcing it, Chairman Michael S. Selig said that "canceling trades that have already been executed is an unprecedented step that risks a cascading effect on the entire marketplace."
The findings are more useful than the quote. Allowing the rule to take effect, the Commission wrote, would give traders cause to worry that trades executed today may be unwound a week or a year later; participants may hold contracts corollary to the cancelled ones; and a market pricing in the possibility of judicial unwinding loses its price discovery function, which it tied to Core Principle 4 at 7 U.S.C. section 7(d)(4). It rejected the size argument too: a limited number of trades the exchange can afford to absorb does not remove the emergency, because forced liquidation of even one executed trade risks distortion. The generosity in the filed rule did not save it, and the reason matters for anyone writing product rules: a payout hands the holder a number at one instant instead of the exposure they chose, which our piece on why being right about the event is not enough takes apart at length. The order surfaces again in footnote 20 of the emergency order of 11 August 2026, read closely in our piece on what that later order obliged the exchange to do.
The stay carries a sentence that narrows the second attempt
Buried in the authority section of the July order is the sentence with the longest reach. Quoting Regulation 40.6(c)(5)(ii), the Commission recorded that its stay order "shall be presumptive evidence that the entity may not truthfully certify under this part that the same, or substantially the same, proposed rule or rule amendment complies with the Act."
Read that as an operator. The remedy was not merely refused on the day. The ordinary path to putting a substantially similar rule into the book was narrowed from that day forward, so a venue that discovers under pressure that it needs a position closing rule discovers at the same moment that the fast route to writing one has closed. This is the plainest illustration of Directive 01 we have seen this year: resolution rules are published before a market opens and are not revised while money is at risk.
The power the exchange asked for was already in its own rulebook
Here is the part that surprised us. The authority to close those positions did not need to be created. In the KalshiEX rulebook exhibit filed with the Commission in July 2025 as version 1.18, on the CFTC filings site, Rule 2.8 defines an emergency to include "the imposition of any injunction or other restraint by any government agency, court, or arbitrator that may affect the ability of a Trader to perform on Contracts." The rulebook named this scenario before it happened. Rule 2.8(d) then lists the actions available, two of them reduction of positions and exposure by participating traders in certain contracts, and cancellation of a contract with return of the funds paid to enter trades on it.
Nor is this unusual. Commission Regulation 38.350, which implements Core Principle 6, requires every designated contract market to adopt rules providing for emergency authority to liquidate or transfer open positions, to suspend or curtail trading, and to require special margin. Every DCM holds that power by regulation, and the July filing shows that holding it is not the same as having a defensible occasion to use it. What the exchange lacked was a written answer to the narrower question that had arrived: when a subset of holders defined by geography rather than by market condition may be closed out, at what price, and with what said to them in advance.
By the time the federal order landed, the positions were gone
The sequencing is the lesson. Kalshi's head of enforcement, Robert DeNault, told crypto.news on 15 July 2026, in reporting by Rony Roy, that "we already acted and unwound the trades, as the Michigan court order required us to do," and that the exchange was in an impossible position between state and federal obligations. The federal instruction to fulfil those trades therefore reached a book where the positions were already closed, and the practical question became whether to revive them.
Gillian R. Brassil and Rebecca Klar wrote for Bloomberg Law on 16 July 2026 that this was the agency's first direct action against a state court ruling, and quoted Rob Schwartz of Morgan, Lewis and Bockius, a former general counsel of the Commission, on why this order drew a response earlier ones had not: previous court orders had only directed the exchange to stop offering the markets and let participants liquidate their contracts on their own at a time of their choosing. That distinction is the whole design question, and it is available to any venue that thinks about it before a judge does.
The ninety day clock is running and the record is not visibly open
A stay under Regulation 40.6(c) is not a decision. The Commission has ninety days from the notification to review the rule, and paragraph (c)(2) requires a thirty day comment period inside that window. From 14 July 2026 the review runs to roughly the middle of October, so whether an exchange may write a position closing rule of this kind was still open as this was written on 4 September 2026.
The Commission has publicised such reviews before, including a public comment period on Kalshi contracts announced in June 2023. Reading its own press release list on 4 September 2026, we found no announcement of a comment period for the stayed filing among the releases issued since 14 July. That is not proof none exists, only that we could not find one where such announcements normally appear. For a rule deciding what happens to retail positions when a venue loses a state, a readable comment file would be worth having.
The September injunction says nothing about open positions at all
On 1 September 2026 Judge Rosemarie E. Aquilina signed a preliminary injunction in the same case, and Michigan Attorney General Dana Nessel announced it the following day. The order itself enjoins five categories of conduct, all of them forward looking: offering or settling internet sports betting contracts to persons in Michigan, accepting deposits or fees for them, advertising, permitting account creation or funding for that purpose, and operating products functionally similar to internet sports betting, a list that names parlays, moneylines, in game betting and proposition bets. It requires the licensed geolocation provider and sets a penalty of 500,000 dollars for each day the court finds that requirement was not met.
What it does not contain is any instruction about positions that already exist. The words voided, cancelled and refunded do not reappear. The state's second order is an access order and nothing more. The court did write its reasons into the document, and they are consumer protection reasons: it records that Michigan's licensed industry requires a wagering age of 21 while the exchange allowed participation from 18, and points at patron protection mechanisms the state framework requires. That is Directive 03 arriving from outside, written by a judge rather than by the category.
The court reached the brokers and then declined to blame the exchange for them
One provision of the September order deserves more attention than it has had. Within three business days the exchange must give a copy of the order to every futures commission merchant that makes its sports event contracts available to that FCM's customers, with contact details for the state's counsel. The order then says the exchange will not be held liable for what an FCM does or fails to do, because it does not control which customers an FCM serves or the platforms used, and because location data on an FCM's customers sits with the FCM.
That is a court describing the distribution layer accurately and then drawing a liability line at the edge of what the venue can see. It is the same layer we wrote about when the Commission reminded markets that how a price is displayed reaches partners and affiliates too. It also names the next question: for a position held through an intermediary, who knows where the holder is, and how fast can that answer be produced.
What a venue should be able to say about a position it can no longer serve
None of this needs a prediction about how the jurisdiction fight ends. Our reading of the express preemption clause and of the contradiction between the New York and Minnesota rulings points the same way: the map stays unsettled, and what a venue writes for itself holds its value either way. Before the next order lands, these should be answerable without a meeting.
- Which rule, by number, permits closing a position for a reason that has nothing to do with the market, and what does it say the holder receives?
- Where is that written for the holder in the words a first time user reads, before the trade rather than after it?
- Can the book be filtered by holder jurisdiction at position level, not only at login? A venue that geofences access but cannot list its exposure by state has answered half the question.
- What is offered instead of liquidation? Close only mode, no new opening, hold to expiry with settlement paid as written, are product states that can be built and disclosed in advance.
- Who signs the decision, within how many hours, and what does the record of it contain? Rule 2.8 already requires the exchange to document its reasons and to notify holders by website notice, API and email, which is easy with a template and impossible at short notice.
- What goes to an intermediary, and how fast, when the holders that must be reached are not the exchange's own account holders?
A venue with those answers is not protected from a court. It is protected from inventing a policy on the day, and that is the difference between a category that gets sorted by someone else and one that sorted itself first.
Access is a switch and a position is a promise
This episode matters beyond one state and one exchange because it separates two things the industry keeps treating as one. Access is a switch. It can be built, tested, moved to a licensed vendor and turned off in an afternoon, and many orders in 2026 asked for exactly that. A position is a promise, made to a named person, about how a stated question will be answered and what they will be paid when it is. Turning off the switch does not discharge the promise. Michigan's court asked for the promise to be cancelled, the federal regulator said it must be kept, and the exchange had already acted on the first instruction when the second arrived.
The rule you need on the morning a court order lands is the one you wrote a year earlier, when nothing was at stake. The 14 July order is the receipt for that argument.