September 25, 2022

SUBMITTED VIA CFTC PORTAL

Secretary of the Commission

Office of the Secretariat

U.S. Commodity Futures Trading Commission

Three Lafayette Centre 1155 21st Street, N.W.

Washington, D.C. 20581

Re: Comments Responding to the Commission’s Specific Questions Related to KalshiEX, LLC’s

Proposed Congressional Control Contracts

To Whom It May Concern:

KalshiEX, LLC (“Kalshi” or “Exchange”) is grateful to the Commission for its consideration of

Kalshi’s proposed contracts. The Exchange welcomes the opportunity to address the

Commission’s questions. This comment addresses the first question and the third question that

the Commission asked:

1. Do these contracts involve, relate to, or reference gaming as

described in Commission regulation 40.11(a)(1) and section

5c(c)(5)(C) of the Commodity Exchange Act, or in the alternative,

involve, relate to, or reference an activity that is similar to gaming

2. as described in regulation 40.11(a)(2) or section 5c(c)(5)(C) of the

Commodity Exchange Act?

3. Do these contracts involve, relate to, or reference “an activity that

is unlawful under any State or Federal law” as described in

Commission regulation 40.11(a)(1) and section 5c(c)(5)(C) of the

Commodity Exchange Act?

This comment is divided into two parts. Part 1 discusses the statute. In particular, Part 1 of the

comment addresses section 5c(c)(5)(C) of the Commodity Exchange Act (“CEA”), codified1 at 7

U.S.C. 7a-2(c)(5)(C).2 Of particular importance, Part 1 is based on an analysis of the statute

2 The Exchange will address the applicability of the regulations at 17 C.F.R. 40.11 in a separate comment, and also

in the appendix to this comment in the Counsel Analyses. However, the Exchange notes here that the regulation

cannot exceed the authority in the statute that the regulation implements. This is axiomatically true even under the

Chevron deference from Chevron, Inc. v. Natural Resources Defense Council, 467 U.S. 837 (1984). Indeed, step one

of Chevron is to determine whether Congress expressed intent in the statute and, if so, whether or not the statute's

intent is ambiguous. It is black letter law that if the statute is clear, the regulating agency cannot regulate contrary to

the statute. Indeed, earlier this year in Empire Health, Justice Kagan, writing for the Court, held that the

government’s regulation was valid only because the “regulation correctly construes the statutory language at issue.”

Becerra v. Empire Health Foundation, 142 S. Ct. 2354 (2022). Had that not been the case, Justice Kagan and the

Court would have held the regulation invalid.

1 The CEA section designations do not align with the section designations in the United States Code. Because this is

a public comment, the Exchange will generally use citations to the United States Code as opposed to the CEA,

which will enhance the public’s ability to research and analyze the issues presented.

1
irrespective of any rule, including 40.11, which the Commission has issued or may, in the future,

promulgate to implement this statutory provision.

As a threshold matter, the Exchange notes that the majority of the Commission’s questions for

public comment assume that the Special Rule in CEA 5c(c)(5)(C) (“Special Rule”) applies or can

apply to Kalshi’s political control contract (“Contract”), a question that the Commission invites

the public to address in questions 1 and 3. If the answers to questions 1 and 3 are no, many of the

other questions become moot, at least in regard to the Contract, which is the sole matter under

Consideration in this Commission action.3

Part 2 includes analyses from Jonathan Marcus and Dan Davis that directly address Questions 1

and 3. Messrs. Marcus and Davis both served as General Counsel of the Commission prior to

assuming their current positions in private practice.

Part 1

Contracts, events, and other important terms

There are several terms that are key to understanding the framework that Congress created for

the Special Rule that appear throughout this comment and are helpful to define here:

● “Event Contract”

● The “Event Contract’s Event” (also, referred to as the “contract’s Event”)

● The “contract, considered as a whole” (also, referred to as the “contract, as a whole”, the

“contract, itself”, and the “contract itself, considered as a whole”)

An “Event Contract” is a contract that is based on an occurrence, extent of an occurrence, or a

contingency. For example, a contract whose terms and conditions specify that the holder of the

contract will receive payment based on the occurrence of a hurricane is an Event Contract

because it is based on an occurrence, a hurricane. The terms and conditions of Kalshi’s Contract

specify that holders of the contract will receive money based on the occurrence of political

control over Congress.4It is an event contract because it is based on an occurrence, political

control.5

A contract’s “Event” refers to the specific occurrence, extent of an occurrence, or contingency on

which the contract is based. A hurricane contract’s event is the hurricane. Kalshi’s Contract’s

event is political control

The phrase “contract, considered as a whole” refers to a broad view of a contract and all factors

that surround or are a part of the contract. For example, this would include the activity of buying

and selling the contract ie. the activity of trading the contract, the information embedded in the

contract’s pricing, and in the case of an Event Contract, the contract’s Event.

5 Specifically, the contract is based on the party membership of the Speaker of the House and the President Pro

Tempore.

4 Please see the full filing for the full terms and conditions of the Contract.

3 Specifically, if the answers to questions 1 and 3 are no, the following questions would be moot insofar as they

would not apply to the Contract: 2, 4, 6, 7, 8, 9, 10, 11, 12, 13, 14, 17. Question 5, which assumes the soundness of

the legal reasoning in the Nadex Order, see infra, would also be moot.

Accordingly, any suggestion that the Commission’s regulation 40.11, which implements the statute at 7

U.S.C. 7a-2(c)(5)(C), applies to a contract to which the statute itself does not apply is specious. If the regulation did,

it would be invalid. Regardless, a careful reading of the regulation shows that the regulation does not apply to any

contract to which the statute does not apply. We address the regulation in more depth in Part 2.

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The statute

Part 1 of this comment focuses on the correct interpretation of the Special Rule, which is set

forth in a statute. The full text of the statute6is included here, for the reader’s convenience:

(C) Special rule for review and approval of event contracts and swaps contracts

(i) Event contracts

In connection with the listing of agreements, contracts, transactions, or swaps in excluded

commodities that are based upon the occurrence, extent of an occurrence, or contingency

(other than a change in the price, rate, value, or levels of a commodity described in

section 1a(2)(i) of this title), by a designated contract market or swap execution facility,

the Commission may determine that such agreements, contracts, or transactions are

contrary to the public interest if the agreements, contracts, or transactions involve-

(I) activity that is unlawful under any Federal or State law;

(II) terrorism;

(III) assassination;

(IV) war;

(V) gaming; or

(VI) other similar activity determined by the Commission, by rule or regulation,

to be contrary to the public interest.

(ii) Prohibition

No agreement, contract, or transaction determined by the Commission to be contrary to

the public interest under clause (i) may be listed or made available for clearing or trading

on or through a registered entity.

General background on the CEA’s Special Rule

Under the CEA, contract listing is not a “permission” regime. Contracts do not need Commission

approval to be listed, and although the CEA provides a mechanism that exchanges may utilize to

put a contract before the Commission for approval, whether or not to utilize that method is solely

6 7 U.S.C. 7A-2(c)(5)(C).

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in an exchange’s discretion.7

Indeed, the overwhelmingly vast majority of contracts are never

presented to the Commission for approval under this mechanism. Even in those rare instances

when the Commission is formally presented with a contract for approval, the Commission’s

discretion over whether to grant or withhold approval is limited; under the statute and the

regulations, the Commission must approve every contract that does not violate the CEA or the

regulations.8 The Commission was not granted authority to conduct a “is this a contract that I am

comfortable with” analysis and the Commission was not granted authority to disapprove a

contract because it does not like it.9

The Commission was also not granted the authority to prohibit any contract on the grounds that it

violates the public interest. There is one exception to this rule, where Congress did give the

Commission the authority to prohibit a contract that the Commission determines is contrary to

the public interest.10 This exception is the Special Rule in 5c(c)(5)(C) of the Commodity

Exchange Act.11 This Special Rule gives the Commission discretion to consider, for very specific

types of contracts, whether a contract is contrary to the public interest.12

There are two aspects to the Special Rule. The first is the Special Rule’s eligibility requirements;

the Special Rule does not apply to all contracts. It only applies to a specifically defined subset of

contracts, identified through a two-step process described below, that are eligible for the Special

Rule. If a contract is determined to be eligible for the Special Rule, it is not automatically

prohibited. The Special Rule only prohibits contracts that are eligible for the Special Rule al Rule

if the Commission determines that the contract is contrary to the public interest. The second

aspect of the Special Rule thus is determining whether the contract that is eligible for the Special

Rule is contrary to the public interest. Congress laid out the process for the Special Rule in three

steps.

The three steps of the Special Rule

There are three steps in the Special Rule.

Step one of the Special Rule (“Step One”) is to determine if the contract is eligible for the

Special Rule. The statute limits the scope of the Special Rule to contracts that are “based upon

[an] occurrence, extent of an occurrence, or contingency” (collectively “Event”). In other words,

to be eligible for the Special Rule, a contract must be based on an Event, i.e., the contract must

be an Event Contract. If a contract is not an Event Contract, it is not eligible for the Special Rule

and the contract fails Step One. The analysis then terminates and the Special Rule does not apply

to that contract. If the contract is an Event Contract, the analysis proceeds to step two.

Step two of the Special Rule (“Step Two”) is to determine if the Event Contract’s Event

involves13 certain activities that were listed by Congress in the Special Rule. These activities are:

1. an activity that is unlawful under any Federal or State law;

13 Please see infra the “A further look at step two of the Special Rule” for more discussion on the correct

interpretation of step two and why step two is limited to the contract’s Event.

12 Id.

11 7 U.S.C. 7a-2(c)(5)(C).

10 As explained below and in a second comment letter, even if, argunedo, the Special Rule applied to the Contract

(which it does not), the Special Rule would still not prohibit the Contract because it is in the public interest, and

therefore certainly not contrary to the public interest.

9

Id.

8 7 U.S.C. 7a-2(c)(5)(B); 17 C.F.R. 40.3(b).

7 This process is set forth in 17 C.F.R. 40.3, which the Commission titled “Voluntary submission of new products for

Commission review and approval.”

4
2. terrorism;

3. assassination;

4. war;

5. gaming;

In addition to these five specific activities, Congress included a sixth activity: “other similar

activity determined by the Commission, by rule or regulation, to be contrary to the public

interest.”14 This sixth activity gives the Commission discretion to identify other similar activities

that are contrary to the public interest. If the Event Contract’s Event does not involve any of the

six activities that are listed in the Special Rule, the Event Contract is not eligible for the Special

Rule. The analysis terminates and the Special Rule does not apply to prohibit the contract. If the

Event Contract’s Event does involve at least one of these activities, the analysis continues to step

three.

Step three of the Special Rule (“Step Three”) is for the Commission to determine whether the

contract itself, considered as a whole, is contrary to the public interest.15If the Commission does

not determine that the contract is contrary to the public interest, the contract is not prohibited

under the Special Rule. If the Commission determines that the contract is contrary to the public

interest, the Special Rule applies and the contract is prohibited.16

The three steps that the Commission follows in applying the Special Rule are therefore:

Step 1: Is the contract an Event Contract? If no, stop. If yes, continue to step 2.

Step 2: Does the Event Contract’s Event involve an activity that was included by Congress in the

Special Rule? If no, stop. If yes, continue to step 3.

Step 3: Is the contract itself, considered as a whole, contrary to the public interest? If no, the

contract is not prohibited. If yes, the contract is prohibited.

Graphically, the flow of the three steps looks like this:

16 7 U.S.C. 7a-2(c)(5)(C)(ii). (“No agreement, contract, or transaction determined by the Commission to be contrary

to the public interest under clause (i) may be listed or made available for clearing or trading on or through a

registered entity.”)

15 The phrase “contrary to the public interest” is used three times in the Special Rule. It is used in clause (i) in

reference to the sixth activity in the list of activities Congress included in step two of the Special Rule. In this

context, it is the contract’s Event that is contrary to the public interest, not the contract itself. It is also used in clause

(i) in step three and in the prohibition in clause (ii) in reference to the contract itself.

14 7 U.S.C. 7a-2(c)(5)(C)(i)(VI).

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Step One and Step Two limit the scope of contracts to which the Special Rule applies. Step One

limits the Special Rule only to Event Contracts. Step Two limits this scope further. Step Two

provides that the Special Rule does not apply to all Event Contracts, but only to those contracts

whose Events involve one of the activities Congress listed in the statute. Step Three provides that

even a contract that passes Steps One and Two is not prohibited unless the Commission

determines that the contract, considered as a whole, is contrary to the public interest. The

following graphic illustrates how each step of the Special Rule functions to narrow the scope of

the contracts that are prohibited under the Special Rule.

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To further explain the role of Step Three, Congress did not prohibit an Event Contract whose

Event involves an activity listed in the Special Rule.. It is possible that an Event Contract’s Event

involves an activity listed in the Special Rule but the Commission does not determine that the

contract, considered as a whole, is contrary to the public interest. That contract would not be

prohibited under the Special Rule. For example, an Event Contract on the invasion of Ukraine

would satisfy Steps One and Two because it is an Event Contract (Step One) and the Event

Contract’s Event involves war, one of the activities that is listed in the Special Rule (Step Two).

That does not mean that the contract is prohibited; it moves to step three for the Commission to

determine if the Event Contract, considered as a whole, is contrary to the public interest. The

Commission may determine that it is contrary to the public interest, in which case the Event

Contract would be prohibited by the Special Rule.17 And the Commission may determine that it

is not contrary to the public interest. As Commissioner Johnson recently noted, “Geopolitical

events in Europe, specifically, the invasion of Ukraine has led to remarkable disruptions in

energy and agriculture markets.”18 Accordingly, the Commission may find that the Event

Contract has hedging utility and/or other economic utility or benefits and thus could not

determine that the Event Contract is contrary to the public interest. This point, that a contract’s

event can involve an activity listed in the statute and still be allowed because the contract itself is

not contrary to the public interest was made by then-Commissioner Berkovitz in his statement on

ErisX’s RSBIX contracts.19

19 Commissioner Berkovitz’s statement is available here:

https://www.cftc.gov/PressRoom/SpeechesTestimony/berkovitzstatement040721. Commissioner Berkovitz

concluded his statement by noting that, “If sporting event contracts with an economic purpose, such as hedging, are

allowed to be traded on a DCM, the general public must be able to access and trade those contracts on the exchange.

The public cannot be barred from trading a contract listed on a DCM. However, gaming contracts without any

economic purpose should not be permitted on a DCM.”

18 Opening Statement of Commissioner Kristin N. Johnson before the Energy and Environmental Markets Advisory

Committee | CFTC, September 20, 2022.

17 7 U.S.C. 7a-2(c)(5)(C)(ii).

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A further look at step two of the Special Rule

Once an Event Contract passes Step One, the analysis moves to Step Two of the Special Rule.

Step Two is to determine if the Event Contract involves an activity that was listed by Congress in

the Special Rule. For the purposes of step two of the Special Rule, an Event Contract only

involves an activity if the Event Contract’s Event involves that activity.

20 For example, an Event

Contract can only involve war if the Event Contract’s Event involves war. Conversely, if the

Event Contract’s Event does not involve war, then the Event Contract does not involve war.

Similarly, an Event Contract will involve gaming only if the Event Contract’s Event involves

gaming. For the purposes of Step Two, it is irrelevant if something else surrounding the Event

Contract, such as the market activity of trading the contract, involves a listed activity. The only

relevant factor for Step Two is whether the Event Contract’s Event involves the listed activity,

not whether the Event Contract, considered as a whole, involves the listed activity.

There are many reasons why the analysis of whether an Event Contract involves a listed activity

in Step Two is limited to the Event Contract’s Event, and does not include the consideration of

the Event Contract as a whole. Many of these reasons are stated in the letters in Part 2 of this

comment, as well as by other commenters.21 The Exchange provides two reasons here. (For

convenience, this comment refers to the incorrect reading that the analysis under Step Two

includes the Event Contract, considered as a whole, and is not limited to only the Event

Contract’s Event, as the “Contract as a Whole view of Step Two”.)

The Contract as a Whole view of Step Two is wrong. An Event Contract cannot be considered to

involve a listed activity based on the Event Contract considered as a whole, and not only the

Event Contract’s Event. If step two were so broad, it would (1) defeat Congress’ intended

narrowing function, and (2) render the statute internally inconsistent.

The sixth activity illustrates the flaw in applying Step Two broadly, ie. Contract as a whole View

of Step Two. Congress included as the sixth activity a “similar activity [to the first five activities,

that is] determined by the Commission, by rule or regulation, to be contrary to the public

interest.” Under the Contract as a Whole view of Step Two, the sixth activity means that the

Commission can determine that any factor that is part of an Event Contract is contrary to the

public interest.22 For example, the Commission can determine that trading contracts on a certain

event is a “similar activity” to the listed activities and is contrary to the public interest. These

contracts would satisfy Step Two even though the Event contracts are based on Events that are

not contrary to the public interest because the trading on the contract is contrary to the public

interest per the Commission’s determination, and trading on the contract is part of the contract

when considered as a whole.

The analysis would then move to Step Three. But Step Three calls for a public interest analysis

22 This is because under the Contract as a Whole view of Step Two, Step Two is not limited only to looking at the

Event Contract’s Event. The analysis in Step Two looks at the Event Contract as a whole. Accordingly, the activities

included in the list in Step Two are not confined to the Event Contracts’ Events, and can include anything related to

the Event Contract.

21 See e.g. the comments of Josh Sterling, Timothy McDermott, Daniel Gorfine, Lewis Cohen, Jeremy Weinstein,

and Railbird Technologies.

20 The analysis of the Event Contract in Step Three is different from Step Two. The analysis in Step Three considers

the Event Contract as a whole, and is not limited to the Event Contract’s Event. Conversely, the analysis in Step Two

is limited to what activities the Event Contract’s Event involves.

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of the Event Contract, considered as a whole, where it has already been determined under Step

Two that the trading itself is contrary to the public interest, i.e. that the Event Contract,

considered as a whole, is contrary to the public interest. This results in two consecutive steps that

do the exact same thing:

● Step Two: the Commission determines that the Event Contract, considered as a whole, is

contrary to the public interest

● Step Three: the Commission determines that the Event Contract, considered as a whole,

is contrary to the public interest (again)

This illustrates the fundamental flaw in the Contract as a Whole view of Step Two. What

Congress clearly designed is a statute that allows the Commission to apply special scrutiny to

contracts based on particular events that Congress identified as problematic. Congress did not

shut the door to such contracts, but recognized that trading on an Event Contract whose Event is

a problematic activity that involves, say, assassination or terrorism might neverthless have

redeeming features (such as hedging utility) that would justify the conclusion that the Event

Contract, considered as a whole, is not contrary to the public interest. In this way, Congress

clearly differentiated the Event Contract’s Event (which may be disfavored), and trading in the

Event Contract (permitted where trading on the disfavored activity offers economic and other

societal benefits). When trading in the Event Contract itself is included in the analysis at Step

Two, the distinction Congress sought to draw between the underlying event and trading in the

contract is obliterated.23

23 This defect in the statute that emerges from the Contract as a Whole view of Step Two is from the sixth activity.

The fact that the defect stems from the sixth activity does not mean that defect is limited to the sixth activity and that

the Contract as a Whole View of Step Two is fine with regard to activities one through five. That would

misapprehend the way that statutes work. Once it is demonstrated that step two cannot be about the contract,

considered as a whole, for even one activity, that view is proven wrong. Therefore, the Contract as a Whole view of

Step Two is an incorrect reading of the statute regardless of the activity.

9
10
Additionally, the Contract as a Whole view of Step Two actually renders all of the first five

activities in Step Two superfluous. Once a contract passes Step Two, no matter which activity the

contract involves, it must pass Step three to be prohibited by the Special Rule. The analysis in

Step Three is for the Commission to determine whether the Event Contract, considered as a

whole, is contrary to the public interest. Any Event Contract that the Commission determines is

contrary to the public interest in step three necessarily would also satisfy the sixth activity in

Step Two. For example, an Event Contract that involves war will pass Step Two. The analysis of

the Event Contract will then move to Step Three, and assume that the Commission finds that the

contract is contrary to the public interest. At that point, the Event Contract actually involves two

of the listed activities: (i) it involves the activity of war, and (ii) it also involves an activity that

the Commission has determined is contrary to the public interest. It is impossible for an Event

Contract to pass Step Three and not involve the sixth activity in Step Two. Accordingly, there is

no point in the first five activities listed in Step Two, only the sixth activity. In fact, there would

be no point in Step Two at all. As noted, the sixth activity in Step Two and Step Three are

identical. Accordingly, if the Contract as a Whole view of Step Two is correct, Congress would

have just skipped Step Two altogether. The Special Rule would have been a simple six line

statute that said only:

In connection with the listing of agreements, contracts, transactions, or swaps in

excluded commodities that are based upon the occurrence, extent of an

occurrence, or contingency (other than a change in the price, rate, value, or

levels of a commodity described in section 1a(2)(i) of this title), by a designated

contract market or swap execution facility, the Commission may determine that

such agreements, contracts, or transactions are contrary to the public interest.

The inevitable collapse of all of the Step Two activities into the sixth activity and the collapse of

the sixth activity into Step Three under this expansive interpretation of Step Two shows that the

Contract as a Whole view of Step Two is wrong. The correct view of Step Two is that it, like

Step One, simply describes what the contract is based on, and the analysis in Step Two is limited

to the Event Contract’s Event. Accordingly, there is a big difference between Step Two,

including the sixth activity, and Step Three. Step Two is focused only on the Event Contract’s

Event. If an Event Contract passes Step Two because the Event Contract’s Event involves any of

the listed activities, even the sixth activity, the analysis under Step Two will always be different

from the analysis under Step Three. The analysis under Step Two will be whether the Event

Contract’s Event involves the activity. The analysis under Step Three is very different. Step

Three does not only consider the Event Contract’s Event alone, it considers the Event Contract,

considered as a whole. Thus, all of the anomalies that directly stem from the Contract as a Whole

view of Step Two disappear under the view that the analysis in Step Two (like Step One)

considers only the Event Contract’s Event.

The correct reading of the statute is that the analysis in Step Two, like Step One, is limited to the

Event Contract’s Event. Steps One and Two work in concert to create the eligibility requirements

for the type of contract that the Special Rule applies to (i.e., an Event Contract whose Event

involves a listed activity), and Step Three serves as an independent step whose analysis considers

the Event Contract, as a whole. Together, all three steps form a coherent and cohesive statutory

rule that implements Congress’s intent to have the Commission review a narrow subset of event

contracts whose underlying events involve activities (such as terrorism and assasination)

Congress did not want to automatically legitimize via futures and swaps trading on them.

Congress nevertheless gave the Commission discretion to allow such contracts to be listed if

11
trading them would not be contrary to the public interest.

The Nadex Order’s incorrect reading of the Special Rule

In the Commission’s 2012 Nadex Order24(“Nadex Order”) (see Question 5), the Commission

applied the Special Rule to contracts on the occurrences of political control and the election of

the President of the United States. These occurrences do not involve any of the activities in step

two of the Special Rule. Despite this, the Nadex Order concluded that the Special Rule applied

and prohibited the contracts. The Nadex Order adopted the Contract as a Whole view of Step

Two, and assumed that the analysis in Step Two considers the Event Contract as a whole, not just

the Event Contract’s Event. The Nadex Order found that the election contracts involved the

activity of gaming even though the contract’s Event did not, because the act of trading on the

contract was gaming and therefore, those contracts, considered as a whole, satisfied Step Two.

This Contract as a Whole view of Step Two that the Nadex Order adopted is wrong, and should

be rejected. As discussed at length, it violates the structure and the framework of the statute, and

it leads to absurd results. The correct view of the statute is that Step Two, like Step One, relates

to what the contract is based on, or the contract’s Event.

The Nadex Order’s misreading of the statute would apply to every futures and swap contract on

an occurrence

The consequence of the Contract as a Whole view of Step Two that the Nadex Order adopted is

that the Special Rule applies to all futures, commodity options, and swap contracts that are based

on an occurrence, extent of an occurrence, or a contingency. The Nadex Order found that the

contracts at issue there were gaming because the act of trading the contracts would fit within

state law and federal law definitions of gaming. That same reasoning would apply to all futures,

commodity options, and swaps that are based on an occurrence, extent of an occurrence, or

contingency, because the act of trading these contracts would also fit within definitions of

gaming. For example, the Nadex Order cited the law in North Dakota that “'Gambling' means

risking any money ... upon ... the happening or outcome of an event, including an election .. .

over which the person taking the risk has no control.”25 The Nadex Order also cited the New

Hampshire law that “'Wager' means a monetary agreement between 2 or more persons that a sum

of money ... shall be paid to one of them on the happening or not happening of an uncertain

event.”26

The approach the Commission adopted in the Nadex Order expands the scope of the Special

Rule far beyond what Congress intended. Under the Nadex Order and in light of the breadth of

some definitions of gaming activity, the Commission could deem the staking of value on any

type of future event gaming. Alternatively, the Commission could determine via the authority

granted in the Sixth Activity, that trading on any type of future event is similar to the other

enumerated activities. The vast breadth of such discretion cannot be squared with the specific

enumeration of activities, which Congress clearly designed to cabin the Special Rule's scope.

26 It is true that the Nadex Order also cited state laws that were more tailored to elections specifically, but that does

not negate the point that there are also state laws that define gaming broadly that would include trading any futures,

commodity options, or swap contracts that pass step one. Picking and choosing which state statutes to consider

informative in a manner that is expedient for a desired outcome is not the proper way for the Commission to adopt

its definitional framework.

25 Nadex Order fn. 1

24 CFTC Order Prohibiting North American Derivatives Exchange’s Political Event Derivatives

Contracts” (Apr. 2, 2012) available here: CFTC Issues Order Prohibiting North American Derivatives Exchange’s

Political Event Derivatives Contracts | CFTC.

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This reality illustrates the Nadex Order's flaw in going beyond the event underlying the contract

-- elections -- to determine whether the contract was gaming.

This argument is addressed in greater detail in Part 2 of this comment. However, the Exchange

notes here that this overbreadth is a problem exclusive to the approach to the Contract as a

Whole view of Step Two adopted in the Nadex Order. Under the more tailored approach where

step two of the Special Rule is limited to the contract’s Event, this overbreadth disappears..

Applying the three steps of the Special Rule to Kalshi’s Contract

Applying the three steps to Kalshi’s contract shows that the contract is not subject to the Special

Rule.

Kalshi’s Contract passes Step One. It is a contract based on the occurrence of political control.

The Contract is an Event Contract, meeting the eligibility requirements in Step One, and the

analysis proceeds to Step Two.

Step Two is whether the Event Contract’s Event involves an activity that was listed in Step Two.

The Contract’s Event is political control, specifically the dual occurrences of the party

membership of the Speaker of the House and the President Pro Tempore. These do not involve

any of the listed activities.

● The occurrence of political control does not involve activity that is illegal under either

Federal or State Law.

● The occurrence of political control does not involve the activity of terrorism.

● The occurrence of political control does not involve the activity of assassinations.

● The occurrence of political control does not involve the activity of war.

● The occurrence of political control does not involve the activity of gaming.27

● The occurrence of political control does not involve an activity that the Commission has

determined to be contrary to the public interest.

The Contract’s Event, therefore, does not involve an activity that was included by Congress in

the list of activities in Step Two of the Special Rule, and therefore the contract fails the Step Two

eligibility requirements. The analysis therefore terminates and does not proceed to Step Three,

and Congress did not authorize the Commission to apply the Special Rule to prohibit the

Contract.

Conclusion to Part 1

Congress granted the Commission in the Special Rule the authority to prohibit certain contracts.

This grant of authority is subject to the rules that Congress created. Congress included three

distinct steps to determine if a contract is prohibited under the Special Rule. The Commission

must abide by these rules. Step Two is clear; the analysis only considers whether the Event

Contract’s Event involves a listed activity, and it does not consider the Event Contract, as a

whole. The Kalshi Contract’s Event is political control. Political control does not involve any of

the activities that Congress included in Step Two. Accordingly, the Contract fails Step Two, and

the Special Rule cannot prohibit the Contract.

27 The Commission has never stated, or even implied, that the occurrence of elections involves gaming. In the

Commission’s Nadex order, the Commission stated that “taking a position in a Political Event Contract” is gaming

because elections are a “a contest between electoral candidates.” See North American Derivatives Exchange, April 2,

2012 (cftc.gov), pg. 3. However, the Commission was careful to not suggest that elections themselves, the very

bedrock and foundation of our democracy, are a game.

13
As required by the CEA in 7 U.S.C. 7a-2(c)(5)(B), the Commission should approve the Contract.

14
Part 2

The following two letters contain analyses on the Special Rule, as well as the

implementing regulations at 17 C.F.R. 40.11. They were originally submitted to the

Commission for consideration as part of the original 40.3 submission, and the

Exchange includes them now in a public comment for the Commission’s further

consideration.

15
Reed Smith LLP

1301 K Street, N.W.

Suite 1000 - East Tower

Washington, D.C. 20005-3373

+1 202 414 9200

Fax +1 202 414 9299

reedsmith.com

Jonathan L. Marcus

Direct Phone: +1 202 414 9188

Email: jonathan.marcus@reedsmith.com

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September 21, 2022

Sebastian Pujol Schott

Acting Deputy Director, Product Review Branch

Division of Market Oversight

Commodity Futures Trading Commission

Three Lafayette Centre

1155 21st Street, NW

Washington, DC 20581

Re: Non-Application of Event Contracts Provisions to KalshiEX LLC’s Political Control 

Contracts

Dear Mr. Pujol Schott:

I write to you on behalf of KalshiEX LLC (“Kalshi”) with respect to its intention to selfcertify certain political control contracts (the “Contracts”) to be listed for trading on its designated 

contract market (“DCM”), and to address any outstanding concerns the Commodity Futures Trading Commission (“CFTC” or “Commission”), including the Division of Market Oversight 

(“DMO”), might have. We greatly appreciate the Commission’s and DMO’s continued willingness 

to allow Kalshi to highlight the many reasons why the Contracts should be listed, including the 

demonstrated economic purposes they serve.

In the spirit of building upon that productive dialogue, and in advance of Kalshi’s selfcertification of the Contracts, we wanted to elaborate on why Section 5c(c)(5)(C) of the Commodity Exchange Act (“CEA”) and CFTC Regulation 40.11 (together, the “Event Contracts Provisions”) do not provide a legal basis for the staff or the Commission to impede self-certification of 

the Contracts. 

As further explained below, Section 5c(c)(5)(C)(i) of the CEA does not hinder self-certification of the Contracts because the activity on which they are based does not “involve” any of the 

enumerated event categories in the provision. Although the Commission previously determined 
Sebastian Pujol Schott

September 21, 2022

Page 2

that other political event contracts that were self-certified by a different exchange, the North American Derivatives Exchange (“Nadex”), were subject to the Event Contracts Provisions, that determination was based on a misinterpretation of the Event Contracts Provisions. Therefore, the Commission’s previous determination on Nadex’s proposed contracts should not be followed here with 

regards to the Contracts.

1 Under the Event Contracts Provisions, and contrary to the Commission’s 

order relating to Nadex’s political event contracts (“Nadex Order”), which determined that the 

trading of contracts based on the outcomes of elections constituted gaming activity, the Commission must consider whether the occurrence or contingency on which the Contracts are based –

elections – involves one of the enumerated activities. And because elections do not fit within any 

of the enumerated event categories, the Event Contracts Provisions provide no basis to delay selfcertification. CFTC Regulation 40.11 calls for the same result. Accordingly, even if, arguendo, 

CFTC Regulation 40.11 contains language that could be construed to support a different result, the 

Commission should read CFTC Regulation 40.11 to be consistent with Section 5c(c)(5)(C) and, 

accordingly, the Contracts should be self-certified without delay or encumbrance. 

As explained in greater detail below, because the Event Contracts Provisions do not establish any legal or regulatory basis for impeding the Contracts, the Commission should take no action 

that would delay Kalshi from self-certifying them pursuant to CFTC Regulation 40.2.

I. SECTION 5C(C)(5)(C) OF THE CEA PROVIDES NO BASIS TO IMPEDE SELF-CERTIFICATION

OF KALSHI’S POLITICAL CONTROL CONTRACTS.

Section 5c(c)(5)(C)(i) of the CEA establishes that, in connection with the listing of agreements, contracts, or transactions on “excluded commodities that are based upon the occurrence, 

extent of an occurrence, or contingency[,]”

the Commission may determine that such agreements, contracts, or 

transactions are contrary to the public interest if the agreements, 

contracts, or transactions involve[:] (I) activity that is unlawful under any Federal or State law; (II) terrorism; (III) assassination; (IV) 

war; (V) gaming; or (VI) other similar activity determined by the 

Commission, by rule or regulation, to be contrary to the public interest.

Section 5c(c)(5)(C)(ii) further specifies that “[n]o agreement, contract, or transaction determined 

by the Commission to be contrary to the public interest under clause (i) may be listed or made 

available for clearing or trading on or through a registered entity.” Thus, the CEA, through this 

1

In the Matter of the Self-Certification by North American Derivatives Exchange, Inc. of Political Event Derivatives 

Contracts and Related Rule Amendments under Part 40 of the Regulations of the Commodity Futures Trading Commission (April 2, 2012), available at: https://www.cftc.gov/stellent/groups/public/@rulesandproducts/documents/ifdocs/nadexorder040212.pdf. 

- 2 -
Sebastian Pujol Schott

September 21, 2022

Page 3

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provision, establishes a clear framework under which the Commission can – but is not obligated 

to – review an event contract that is based upon an “occurrence, extent of an occurrence, or contingency” that involves one of the enumerated underlying activities in order to determine if those 

contracts would be contrary to the public interest. A Commission determination that the contract 

is contrary to the public interest would render its listing prohibited. 

In short, through Section 5c(c)(5)(C), Congress granted the Commission the discretion to 

determine that a given event contract is contrary to the public interest, and thereby prohibited, only 

when the event underlying that contract involves one of the statute’s specifically enumerated activities. Congress did not grant the Commission the authority to prohibit a contract based upon an 

event that involves an unenumerated activity on the grounds that it would be contrary to the public 

interest.2

The plain language and structure of Section 5c(c)(5)(C)(i) make clear that the scope of the 

Commission’s discretionary review is narrowly focused on the nature of the contract’s underlying 

event, not of trading in the contract itself. Section 5c(c)(5)(C)(i) begins with the clause: “[i]n connection with the listing of agreements, contracts, transactions, or swaps in excluded commodities 

that are based upon the occurrence, extent of an occurrence, or contingency[.]” (emphasis added). 

Thus, at the outset of the controlling provision, the statute establishes that the distinguishing feature of the contract is the nature of the occurrence or contingency. The final clause of Section 

5c(c)(5)(C)(i), immediately prior to the provision’s enumeration of the covered activities, refers 

back to the first clause of the provision when it says: “the Commission may determine that such 

agreements, contracts, or transactions are contrary to the public interest if the agreements, contracts, or transactions involve” the enumerated activities. (emphasis added). When the clauses are 

read together, Section 5c(c)(5)(C)(i) grants the Commission only limited authority to review a 

contract that is “based upon [an] occurrence, extent of an occurrence, or contingency” that “involve[s]” one of the enumerated activities. 

The plain language of the enumerated events themselves bolsters this interpretation. As 

Kalshi has pointed out in previous submissions,3 Section 5c(c)(5)(C)(i)’s first and sixth categories 

are defined respectively as an “activity that is unlawful under any Federal or State law” and “other 

similar activity determined by the Commission, by rule or regulation, to be contrary to the public 

interest.” (emphasis added). The inclusion of the noun “activity” (and the reference in the sixth 

2 This lack of authority includes the sixth enumerated activity (“other similar activity determined by the Commission, 

by rule or regulation, to be contrary to the public interest”), as that provision requires the Commission to conduct a 

rulemaking to determine that another activity is contrary to the public interest and then only if it is similar to one of 

the other specified underlying activities (crimes, terrorism, assassination, war, or gaming). 

See Commission Rulemaking Explained, available at: https://www.cftc.gov/LawRegulation/CommissionRulemakingExplained/index.htm#_ftn1. 

3 Memorandum in Support of Kalshi’s Political Control Contracts, submitted to DMO March 28, 2022.
Sebastian Pujol Schott

September 21, 2022

Page 4

- 4 -

category to all five preceding “similar activit[ies]”) makes clear that Congress intended the underlying activity, not the contract itself, to be the subject of review and scrutiny and it must be assumed 

that decision was intentional.4 

The sixth enumerated activity (“other similar activity determined by the Commission, by 

rule or regulation, to be contrary to the public interest”), further highlights that Congress’s intention was for the Commission to analyze the activity underlying the contract rather than trading in 

the contract itself. This final enumerated activity provides the Commission a sort of catchall to 

determine whether the event involves “similar activity” to the preceding categories and thus might

be inappropriate for listing. Since terrorism, assassination, war, and activity unlawful under state 

or federal law unquestionably refer to the occurrence or contingency underlying the contract, the 

sixth catch-all category must be read consistently with the rest of the enumerated list (apples must 

be compared to apples).5

Another reason that Section 5c(c)(5)(C) must be read as focusing on the underlying activity 

is that such focus is congruent with the nature of event contracts themselves. If Congress was 

concerned about trading in the contract itself, there is no indication why it would have limited the 

provision to event contracts rather than establishing a general rule that would have authorized the 

Commission to prohibit any derivatives contract that the trading in is, for example, unlawful under 

state law.

In the Nadex Order,6the Commission did not interpret Section 5c(c)(5)(C) as focusing on 

the underlying activity. Instead, the Commission appears to have read the gaming provision (the 

fifth enumerated activity) to refer to trading in the contract itself. Accordingly, the Commission 

determined that the gaming provision applied to Nadex’s political event contracts because the contracts involved “a person staking something of value upon a contest of others.”7 The Commission 

likened this trading activity to activity prohibited by state anti-gambling laws. The Commission’s 

interpretation in this instance ran counter to the plain language and structure of the statute, as 

explained above.

4 The scant legislative history – a colloquy between Senators Diane Feinstein and Blanche Lincoln during the Senate’s 

consideration of Dodd-Frank’s regulation of event contracts – does not change the analysis. The colloquy did not 

address whether the underlying event, rather than trading in the contract itself, is the proper subject of analysis; instead, 

the Senators discussed the distinction in economic purpose between contracts that serve hedging utility and contracts 

that are designed predominantly for speculation. See 56 Cong. Rec. S5906-07 (July 15, 2010) (statements of Sen. 

Diane Feinstein and Sen. Blanche Lincoln), available at: https://www.congress.gov/111/crec/2010/07/15/CREC2010-07-15-senate.pdf. In any event, the language and structure of the statute are clear, so resorting to legislative 

history is unnecessary. 

5 We explain below why, notwithstanding the Commission’s Nadex Order, the gaming provision must also refer to 

the underlying activity and not trading in the contract itself.

6

See supra note 1.

7 Nadex Order at 3 (internal quotation marks omitted).
Sebastian Pujol Schott

September 21, 2022

Page 5

- 5 -

Other principles of statutory construction also undercut the application of the Event Contracts Provisions in the Nadex Order. Under the Commission’s interpretation, a person trading a 

political event contract is engaged in gaming – “staking something of value upon a contest of 

others.”8 By parallel reasoning, a person trading a terrorism contract is engaged in terrorism and a 

person trading a war contract is engaged in war. That is not a tenable interpretation of the statute. 

If Congress intended the Commission to focus on the underlying event for some of the enumerated 

categories, but to focus on trading in the contract itself for others, it would have said so. It certainly 

cannot be presumed or inferred from silence that Congress intended the Commission to apply disparate analytical approaches to the single list of enumerated activities. When the correct interpretation of Section 5c(c)(5)(C) is applied to the Contracts, the result is clear. Elections are not illegal 

under state or federal law, are not gaming, and are not similar to any of the enumerated activities 

– federal or state crimes, terrorism, assassination, war, and gaming – all of which are activities that

Congress did not want to legitimize or encourage via event contracts without careful consideration

by the Commission. The Commission should therefore not impede Kalshi from self-certifying the

Contracts and lacks a legal basis to invoke Section 5c(c)(5)(C) to do so.

While we could stop here, we believe it is worth pointing out that the Nadex Order not only 

contravenes the language and structure of Section 5c(c)(5)(C), but also threatens to upend the CEA 

itself. Virtually every futures or swaps contract can be described as staking something of value on 

the outcome of some future event.9 Yet the CFTC’s exclusive jurisdiction over derivatives markets 

means that the CEA preempts any state law that would attempt to regulate derivatives markets.10

Therefore, regulated futures and swaps contracts cannot be illegal gambling under state law. 

In fact, many states ban “gambling” not just on elections, but more generally on the outcomes of future events. These laws would prohibit the entire category of event contracts (at a 

minimum), which both Congress and the CFTC have expressly permitted to be listed on DCMs. 

Some of these states provide carve-outs for CFTC-regulated products, or otherwise for activities 

like commodities and securities trading. However, not all do. New Hampshire, for example, bans 

gambling and defines it as, “to risk something of value upon a future contingent event not under 

one’s control or influence.”11 Alaska also bans gambling and defines it similarly as when:

8

Id. 

9 This overly broad interpretation of the term “gaming” would threaten to render 5c(c)(5)(C)’s other enumerated provisions superfluous, given that, as explained above, virtually all event contracts could potentially qualify for that 

categorization. As the Supreme Court has repeatedly observed, there is a “canon against interpreting any statutory 

provision in a manner that would render another provision superfluous.” Bilski v. Kappos, 561 U.S. 593, 607-8 (2010).

10 See Am. Agric. Movement v. Bd. of Trade, 977 F.2d 1147, 1156-57 (7th Cir. 1992) (holding that “When application 

of state law would directly affect trading on or the operation of a futures market, it would stand ‘as an obstacle to the 

accomplishment and execution of the full purposes and objectives of Congress,’ and hence is preempted.” (quoting 

Hines v. Davidowitz, 312 U.S. 52, 67 (1941)).

11 NH Rev Stat § 647:2(II)(d), available at: https://www.gencourt.state.nh.us/rsa/html/lxii/647/647-2.htm/. 
Sebastian Pujol Schott

September 21, 2022

Page 6

- 6 -

...a person stakes or risks something of value upon the outcome of 

a contest of chance or a future contingent event not under the person’s control or influence, upon an agreement or understanding that 

that person or someone else will receive something of value in the 

event of a certain outcome.12

Finally, at least one federal law that addresses gambling specifically carves out regulated 

derivatives products from their definitions of “bet or wager,” highlighting that Congress views the 

two types of transactions as fundamentally distinct. The Unlawful Internet Gambling Enforcement 

Act of 2006’s (“UIGEA”) definition of “bet or wager” specifically “does not include [as relevant 

here:]”

(ii) any transaction conducted on or subject to the rules

of a registered entity or exempt board of trade under

the Commodity Exchange Act;

(iii) any over-the-counter derivative instrument;

(iv) any other transaction that—

(I) is excluded or exempt from regulation

under the Commodity Exchange Act; or

(II) is exempt from State gaming or bucket

shop laws under section 12(e) of the

Commodity Exchange Act or section

28(a) of the Securities Exchange Act of

1934.13

Notably, the Commission relied upon UIGEA’s definition of “bet or wager” in its Nadex Order,14

but made no mention of the carve out for derivatives products.

All of these various provisions illustrate the flaw in evaluating whether trading a futures 

or swaps contract constitutes gaming or gambling activity, as the Commission did in the Nadex 

Order, or whether trading a futures or swaps contract is unlawful under federal or state law. Instead, to maintain the structural integrity of Section 5c(c)(5)(C) and the CEA itself, the Commission should evaluate whether the Contracts involve an underlying activity – elections – that fits 

into one of the enumerated categories of activities in Section 5c(c)(5)(C). Because elections do not 

12 AK Stat § 11.66.280(2).

13 31 U.S.C. § 5362(1)(E) (2006).

14 Supra note 1 at 3.
Sebastian Pujol Schott

September 21, 2022

Page 7

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Confidential Treatment Requested by KalshiEX LLC

fit within any of the enumerated activities, the Commission should not impede self-certification of 

the Contracts.

II. CFTC REGULATION 40.11 CALLS FOR THE SAME RESULT.

A determination that Section 5c(c)(5)(C) does not present an obstacle to Kalshi’s self-certification of the Contracts should be dispositive, because CFTC Regulation 40.11, which the CFTC 

adopted to implement Section 5c(c)(5)(C), should likewise be read to allow only for the Commission’s consideration of the contract’s underlying activity, rather than its consideration of trading 

in the contract itself. While the language of the rule is not identical to the statute, there is no reason 

to read the language of CFTC Regulation 40.11 to require an analysis of trading in the contract 

rather than the contract’s underlying activity that constitutes the event.

The scope of CFTC Regulation 40.11 should not be read to go beyond the scope of the 

special rule in the statute. By using the words “relates to, or references” in addition to “involves,” 

the regulation only reinforces that the relevant activity is the underlying event, not trading on the 

underlying event. It would not make sense for a futures contract or swap to “reference” trading in 

the contract; to the contrary, the word “reference” is a clear direction to focus on the underlying 

event that the contract “references.” Thus, under the regulation, like the statute, the relevant activity for purposes of the Commission’s event contract analysis is the activity on which the contract 

is based (or to which the contract refers) rather than the contract itself.15 Even if the different words 

in the regulation could conceivably be read to support a different analysis that would broaden the 

scope of contracts subject to the statute, courts have held that, even under a standard of review that 

is highly deferential, an agency interpretation will not stand if “it is contrary to clear congressional 

intent or frustrates the policy Congress sought to implement.”16

15 Because the Contracts are not based on an enumerated activity, the Commission does not need to consider undertaking a public interest analysis. If the Commission were to conclude otherwise, however, the Commission could 

either permit the contracts to be listed (the statute authorizes prohibition only upon a Commission determination that 

the contract would be contrary to the public interest, a determination that the Commission “may” undertake) or conduct 

a public interest analysis. CFTC Regulation 40.11 should not be read to constitute a blanket prohibition, as that reading 

could not be squared with the statute. See Statement of Commissioner Dan M. Berkovitz Related to Review of ErisX 

Certification of NFL Futures Contracts, available at: https://www.cftc.gov/PressRoom/SpeechesTestimony/berkovitzstatement040721 (“if sports event contracts involving gaming are found to have an economic purpose, they should be 

permitted to be listed on a DCM and retail customers cannot be prohibited from trading those contracts”); Statement 

of Commissioner Brian D. Quintenz on ErisX RSBIX NFL Contracts and Certain Event Contracts, available at: 

https://www.cftc.gov/PressRoom/SpeechesTestimony/quintenzstatement032521 (“Congress [through Section 

5c(c)(5)(C) of the CEA] unambiguously provided a default rule that all event contracts, including the enumerated 

ones, are allowed”). 

16 Garcia Carias v. Holder, 697 F.3d 257, 271 (5th Cir. 2012); CHW W. Bay v. Thompson, 246 F.3d 1218, 1223 (9th 

Cir. 2001) (“deference is not owed to an agency decision if it construes a statute in a way that is contrary to congressional intent or frustrates congressional policy”).
Sebastian Pujol Schott

September 21, 2022

Page 8

- 8 -

III. CONCLUSION

For all of the reasons stated above, the Commission has no reason to stay Kalshi’s selfcertification of the Contracts. We welcome your feedback on this position and would appreciate 

the opportunity to follow-up on these specific considerations in a conference call or in-person 

meeting to the extent you have further questions. 

Cc: Eliezer Mishory

Chief Regulatory Officer and Counsel, Kalshi
2900 K Street NW

North Tower - Suite 200

Washington, DC 20007-5118

+1.202.625.3500 tel

katten.com

DANIEL J. DAVIS

daniel.davis@katten.com

+1.202.625.3644 direct

KATTEN MUCHIN ROSENMAN LLP

CENTURY CITY CHARLOTTE CHICAGO DALLAS LOS ANGELES

NEW YORK ORANGE COUNTY SHANGHAI WASHINGTON, DC

A limited liability partnership including professional corporations

LONDON: KATTEN MUCHIN ROSENMAN UK LLP

May 31, 2022 

Elie Mishory

KalshiEx LLC

594 Broadway 

New York, NY 10012 

Re: Political Event Contracts, Section 5c(c)(5)(C) of the CEA, and CFTC Rule 40.11

Dear Mr. Mishory: 

This letter is in response to your request for legal advice regarding KalshiEx LLC’s (“Kalshi”)

engagement with the Commodity Futures Trading Commission (“CFTC” or “Commission”) about 

the listing of certain event contracts relating to the partisan makeup of Congress, specifically the

political control of Congress. One of the factors that Kalshi considers in listing contracts is 

ensuring regulatory compliance and, as such, you requested advice on the following question: 

Are Kalshi’s proposed political control contracts subject to the Commodity 

Exchange Act’s (“CEA’s”) special rule for event contracts described in Section 

5c(c)(5)(C) of the CEA and the implementing regulations at 17 C.F.R. § 40.11? 

By way of background, in 2012, Nadex listed similar contracts (although with different 

characteristics) which the Commission prohibited by order (“Nadex Order”),1 finding that trading 

in the Nadex contracts violated the CEA. Specifically, the Nadex Order found that Section 

5c(c)(5)(C) of the CEA applied to the Nadex contracts because the Nadex contracts constituted 

gaming.2

 The Nadex Order also determined that the Nadex contracts were contrary to the public 

interest because the Nadex contracts could have an adverse effect on the integrity of elections.3

Section 5c(c)(5)(C) and Rule 40.11, however, are limited to only the underlying activity (not 

participating in the contract itself) and, because Kalshi’s political control contracts do not match 

1 In the Matter of the Self-Certification by North American Derivatives Exchange, Inc. of Political Event Derivatives 

Contracts and Related Rule Amendments under Part 40 of the Regulations of the Commodity Futures Trading 

Commission (Apr. 2, 2012) (https://www.cftc.gov/sites/default/files/stellent/groups/public/@rulesandproducts/-

documents/ifdocs/nadexorder040212.pdf) (last visited May 30, 2022). 

2 Nadex Order at 2-3.

3 Id. at 4.
Kalshi

May 31, 2022 

Page 2 

any of the enumerated activities which the statute is expressly limited to, those contracts are not 

subject to the statute and implementing regulation. In reaching this conclusion, I will first provide 

some background of principles of interpretation and the relevant text of Section 5c(c)(5)(C) and 

Rule 40.11. I will then apply those principles to the Kalshi political control contracts and describe 

how the Nadex Order’s conclusions to the contrary are incorrect. 

I. BACKGROUND

A. Principles of Interpretation

Since the Nadex Order, the Supreme Court has significantly modified the method through which 

regulatory text should be interpreted and the circumstances in which an agency will receive 

deference for its interpretation of regulatory text. The tools for interpreting regulatory text are 

similar to those for evaluating statutory text. I first discuss these principles and then use them to

evaluate Section 5c(c)(5)(C) and CFTC Rule 40.11 and their application to Kalshi’s political event 

contracts. 

The Supreme Court revamped the process for evaluating regulatory text in the 2019 case of Kisor 

v. Wilkie.

4

 In Kisor, the court considered whether to overrule Auer v. Robbins5 and Bowles v.

Seminole Rock,

6 cases which found that an agency was entitled to deference of its interpretation

of an agency rule so long as it was not “plainly erroneous or inconsistent with the regulation.”7 In

Kisor, the Court did not overrule Auer and Seminole Rock, but significantly limited their

application: “The deference doctrine we describe is potent in its place, but cabined in its scope.”8

In reviewing the meaning of Rule 40.11, according to Kisor, one must “exhaust the ‘traditional 

tools’ of statutory construction.’”9 “Agency regulations can sometimes make the eyes glaze over. 

But hard interpretive conundrums, even relating to complex rules, can often be solved.”10 One

must “resort[ ] to all the standard tools of interpretation,”11 including a careful consideration of 

4

139 S. Ct. 2400 (2019).

5

519 U.S. 452 (1996).

6

325 U.S. 410 (1945).

7

Seminole Rock, 325 U.S. at 414. 

8 Kisor, 139 S. Ct. at 2408.

9

Id. at 2415 (quoting Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 843, n. 9 (1984)).

10 Kisor, 139 S. Ct. at 2415.

11 Id. at 2414. 
Kalshi

May 31, 2022 

Page 3 

“the text, structure, history, and purpose of a regulation”12 to determine whether a rule has “one 

reasonable construction of a regulation”13 or can “at least establish the outer bounds of reasonable 

interpretation.”14 In discussing this approach to regulatory construction, the Supreme Court relied 

heavily on the principles of statutory construction discussed in Chevron and its progeny.

B. The Statute And The Rule

With these key principles in mind, I turn to the statute and rule. This analysis begins, of course,

with the statutory text of Section 5c(c)(5)(C) of the CEA, from which the CFTC promulgated Rule 

40.11. That section of the CEA states:

In connection with the listing of agreements, contracts, transactions, or swaps in excluded 

commodities that are based upon the occurrence, extent of an occurrence, or 

contingency (other than a change in the price, rate, value, or levels of a commodity 

described in section 1a(2)(i) [2] of this title), by a designated contract market or swap 

execution facility, the Commission may determine that such agreements, contracts, or 

transactions are contrary to the public interest if the agreements, contracts, or transactions 

involve— 

(I) activity that is unlawful under any Federal or State law;

(II) terrorism;

(III) assassination;

(IV) war;

(V) gaming; or

(VI) other similar activity determined by the Commission, by rule or

regulation, to be contrary to the public interest.15

In relevant part for purposes of this analysis, Rule 40.11(a) states: 

A registered entity shall not list for trading or accept for clearing on or through the 

registered entity any of the following: 

(1) An agreement, contract, transaction, or swap based upon an excluded

commodity, as defined in Section 1a(19)(iv) of the Act, that involves, relates to,

12 Id. at 2415.

13 Id.

14 Id. at 2416. The Kisor court goes on to explain that an agency’s interpretation of an ambiguous regulation may still 

not receive deference. The Court must then determine if “the character and context of the agency interpretation entitles 

it to controlling weight.” Id. 

15 7 U.S.C § 7a-2(c)(5)(C)(i)(I)-(VI) (emphases added). If the Commission determines that such an agreement, 

contract, or transaction is contrary to the public interest, such agreement, contract, or transaction may not “be listed 

or made available for clearing or trading on or through a registered entity.” Id. § 7a-2(c)(5)(C)(ii). 
Kalshi

May 31, 2022 

Page 4 

or references terrorism, assassination, war, gaming, or an activity that is unlawful 

under any State or Federal law; or

(2) An agreement, contract, transaction, or swap based upon an excluded

commodity, as defined in Section 1a(19)(iv) of the Act, which involves, relates to,

or references an activity that is similar to an activity enumerated in § 40.11(a)(1)

of this part, and that the Commission determines, by rule or regulation, to be

contrary to the public interest.16

II. APPLICATION TO KALSHI’S POLITICAL CONTROL CONTRACTS

To help frame the matter, the key question here requires understanding the limitations on the scope 

of Section 5c(c)(5)(C) and Rule 40.11. Is the scope (1) limited to contracts when the activity 

underlying the event contract involves one of the enumerated activities or do they (2) include the 

act of participating in the contract is itself? 

Applying the principles of statutory and regulatory construction shows that Section 5c(c)(5)(C) 

and Rule 40.11 are limited to only the underlying activity (not participating in the contract itself) 

and, because Kalshi’s political control contracts do not match any of the enumerated activities 

which the statute is expressly limited to, those contracts are not subject to the statute and 

implementing regulation. 

A. Section 5c(c)(5)(C) and Rule 40.11 Apply Only To Event Contracts Where The

Activity Underlying The Event Contract Is One Of The Enumerated Activities.

The plain text of Section 5c(c)(5)(C) demonstrates that Congress limited the statute’s scope to 

instances where the underlying activity of an event contract is one of the enumerated events. If the 

activity underlying the event contract does not involve one of the enumerated activities, the listing 

is outside the scope of the Statute and Rule 40.11, regardless of how the act of participating in the 

event contract itself is classified. An interpretation of the statute that extends the applicable scope 

to also include contracts where the underlying activity is not one of the enumerated events is 

overbroad and incorrect. 

First, Section 5c(c)(5)(C) limits the scope of the Commission’s authority to “activities” and 

activities only. The Commission only has discretion to take action on (1) an “activity” that is 

unlawful under federal or state law; (2) one of four specifically listed “activities” (terrorism, 

assassination, war, or gaming); or (3) other similar “activity” determined by the Commission to be 

contrary to the public interest. The Commission itself has previously acknowledged that Section 

5c(c)(5)(C)’s textual focus is on “activities,” i.e., the underlying conduct. In describing Section 

16 17 C.F.R. § 40.11(a) (emphases added).
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5c(c)(5)(C), the Commission stated that the rule applied to contracts that “involve one or more 

activities enumerated in the Dodd-Frank Act.”17 These “activities” are not the contracts 

themselves. They are the events that create the basis for the relevant contract. 

To give but one straightforward example, in the statute events two through four are terrorism, 

assassination, and war. The inclusion of these activities clearly demonstrates that the scope of 

Section 5c(c)(5)(C) and Rule 40.11 includes contracts when the activity underlying the event 

contract involves one of the enumerated activities. The act of participating in a contract is not 

itself an act of terrorism, assassination, or war.18 The same analytical approach, by extension, 

should apply to each of the items on the list, including an “activity that is unlawful under any 

Federal or State law” and “gaming.” Otherwise, Section 5c(c)(5)(C) would be internally 

inconsistent, contrary to the traditional tools of construction. 

Second, Section 5c(c)(5)(C) and Rule 40.11 allow the Commission to prohibit the listing of an 

event contract only “if the agreements, contracts, or transactions involve” any of the enumerated 

activities that are against the public interest. Event contracts that do not involve any of the 

enumerated activities may be listed for trading because the special rule would not prohibit the 

listing of those contracts by a DCM. 

Third, Section 5c(c)(5)(C) places an additional, key limitation on the “agreements, contracts, or 

transactions” within the scope of the text. Those “agreements, contracts, or transactions” must be 

“in excluded commodities that are based upon the occurrence, extent of an occurrence, or 

contingency.” The reference to “occurrence” or “contingency” can only mean to the underlying 

event of the contract, not the contract itself. The contract cannot reasonably be described as an 

occurrence or a contingency. Indeed, the headings of the section—“Special rule for review and 

approval of event contracts and swap contracts” (Section 5c(c)(5)(C)) and “Event Contracts” 

(Section 5c(c)(5)(C)(i))—reinforce Congress’ focus on the “event” or occurrence, not the trading 

17 Provisions Common to Registered Entities: Proposed Rule, 75 Fed. Reg. 67,282, 67,283 (Nov. 2, 2010) (“Section 

745 of the Dodd-Frank Act also authorizes the Commission to prohibit the listing of event contracts based on certain 

excluded commodities if such contracts involve one or more activities enumerated in the Dodd-Frank Act.”) 

(emphasis added) (“40.11 Proposed Rule”); see id. at 67,289 (“If [] the Commission determines that such product may 

involve an activity that is enumerated in 40.11 . . . .”) (emphasis added).

18 To illustrate this point, consider hypothetical contracts on whether a foreign leader will be assassinated, how many 

Russian planes will be shot down by Ukrainian forces, or how many murders will occur in a given city over a certain 

time period. Section 5c(c)(5)(C) and Rule 40.11 would apply to these hypothetical contracts because the activities 

underlying the contracts in these hypothetical examples are the enumerated activities of “assassination,” “war,” and 

“an activity that is unlawful under Federal or State law.” The purchasing of the contract itself, however, is not “an 

activity” of “assassination,” “war,” or “an activity that is unlawful under Federal or State law.” 
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of the contract. Thus, the text and structure of Section 5c(c)(5)(C) clearly and meaningful limit 

the Commission’s reach regarding event contracts. 

Because the text and structure is clear, there is no need to resort to legislative history. That is a 

bedrock principle of the traditional tools of statutory construction. Nevertheless, the sparse 

legislative history regarding Section 5c(c)(5)(C)19 provides no guidance as to whether Congress 

intended the Commission to limit the scope of Section 5c(c)(5)(C) to instances where the 

underlying activity of an event contract is one of the enumerated events. 

This reading of Section 5c(c)(5)(C) is consistent with the terms used by the Commission in Rule 

40.11. Rule 40.11 borrows heavily from the terms used in the statute, including multiple uses of 

“activity” in both subsections 40.11(a). The Regulation also uses the same term “involves” which 

appears in the Statute, but also adds the phrase “relates to, or references” when describing 

enumerated activities. Because “involves” is the only statutory authority provided by Congress, 

the Commission cannot expand upon the scope of that term. Thus, the only way to read “relates 

to, or references” consistent with the Commission’s authority is that they are the specific meanings 

of “involves” that the Commission adopted.

20 The terms “relates to” and “references,” in turn, 

clearly describe the underlying activity upon which the event contract is based. It would be 

nonsensical to interpret “relates to” and “references” as describing the act of participating in the 

event contract itself.

To be clear, Congress could certainly promulgate a law that covers the participation in an event 

contract. But Section 5c(c)(5)(C) is not that law. Instead, applying the traditional tools of 

construction, Congress enacted Section 5c(c)(5)(C) to prohibit a narrow group of contracts whose 

underlying activities are the enumerated activities and the CFTC has determined are contrary to 

19

 The only legislative history that has been cited by the Commission regarding Rule 40.11 involves a short colloquy 

between Senator Feinstein of California and Senator Lincoln of Arkansas on July 15, 2010. See, e.g., 40.11 Final 

Rule, 76 Fed. Reg. at 44,786 & nn. 34-35; see also Nadex Order, Whereas Clauses 2 & 7. This 555-word back-andforth between two Senators, which takes up less than two columns of one page of the Congressional Record (Volume 

156, Issue 105, S5906-5907 (July 15, 2010)), is particularly weak evidence of the intent of Congress as a whole and 

the meaning of the provision. See, e.g., NLRB v. SW General, Inc., 137 S. Ct. 929, 943 (2017) (“[F]loor statements 

by individual legislators rank among the least illuminating forms of legislative history.”). The text is by far the more 

probative evidence of Congress’ meaning. The Nadex Order’s extensive reliance on this sparse legislative history is 

simply inconsistent with the interpretive approach laid out in Kisor and provides an additional reason why Kalshi can 

self-certify the contracts notwithstanding the Nadex Order. In any event, none of the short legislative history 

specifically addresses the question about whether Section 5c(c)(5)(C) applies only to the underlying events or the 

trading of the contracts as well, so it has nothing to add to this analysis. 

20 Rule 40.11 cannot exceed the scope of Section 5c(c)(5)(C). Any interpretation of Rule 40.11 that views it as 

expanding the scope delineated in Section 5c(c)(5)(C) would run afoul of the Constitution’s separation of powers and 

the Administrative Procedure Act. 
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the public interest and those limitations apply to Rule 40.11. If the underlying activity of a contract 

is not an enumerated event, it is outside the scope of Section 5c(c)(5)(C) and Rule 40.11. 

B. The Nadex Order Incorrectly Interprets And Applies Section 5c(c)(5)(C) And

Rule 40.11 To Apply To Political Control Contracts Like Kalshi’s.

As described above, Section 5c(c)(5)(C) and Rule 40.11 apply only to the listing of event contracts 

whose underlying activity involves one of the six enumerated activities. They do not apply to 

event contracts whose underlying activity does not involve one of the enumerated activities. This 

key distinction between the activity itself or a contract on the activity is of particular importance 

for the Kalshi contracts at issue here. The underlying activity of Kalshi’s contracts is political 

control of the chambers of Congress. Political control of Congress is none of the activities 

identified in Section 5c(c)(5)(C) and, as such, Kalshi’s political control contracts are not subject 

to the special rule. 

The Nadex Order’s contrary conclusion was incorrectly reasoned and misapplied in several 

aspects.21 First, contrary to the above explanation, the Nadex Order incorrectly expanded the scope 

of the statute and regulation to include the act of participating in the contract, and not just the 

underlying activity. Second, the Nadex Order incorrectly includes election contracts in the 

enumerated activities of illegal under state law and gaming. 

The Nadex Order incorrectly expanded the scope of Section 5c(c)(5)(C) and Rule 40.11 to include 

the act of participating in the contract, and not just the underlying activity. The first enumerated 

activity of Section 5c(c)(5)(C) is “activity that is unlawful under any Federal or State law.” The 

underlying activity of Kalshi’s contracts is political control of the chambers of Congress. There is 

no Federal or State law that makes political control of Congress illegal. There is also no Federal 

or State law that prohibits elections or voting in elections which result in the political control of 

Congress. Accordingly, political control contracts would not fall under the special rule’s 

enumerated act of “illegal activity.” 

To be sure, 27 states do prohibit, in one form or another, betting on elections. And the Nadex Order 

(incorrectly) stated that “state gambling definitions of ‘wager’ and ‘bet’ are analogous to the act 

of taking a position in the Political Event Contracts”22 as a justification for prohibiting those 

contracts’ listing. In this regard, however, the Nadex Order overextended. Section 5c(c)(5)(C) is 

limited to the activity underlying the contract, not the participation in the contract itself. 

21 As noted previously (see supra nn. 4-14), the Commission adopted the Nadex Order prior to the Supreme Court’s 

decision in Kisor v. Wilkie and thus the Order did not use the framework now required by the Supreme Court for 

evaluating the scope and implications of Rule 40.11. 

22 Nadex Order at 2.
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The Nadex Order also misapplies the enumerated activity of “gaming.” There are at least two 

fundamental differences between the relevant state gaming or gambling laws and event contracts. 

As Commissioner Brian Quintenz described with regards to the withdrawn ErisX sports event 

contract, trading an event contract with a binary outcome is not automatically considered a 

gamble.23 Indeed, if Section 5c(c)(5)(C) had assumed that participating in any event contract 

involved making a wager or gamble, there would have been no need for Congress to individually 

enumerate “gaming” as a distinct category of event contracts upon which the Commission could 

make a public interest determination. The fact that Congress separated “gaming” from other event 

contracts is a clear indication that Congress did not intend for all event contracts to be considered 

gaming. 

In fact, the statutory definition of “bet” or “wager” used by the Nadex Order itself, in the same 

statute, clearly indicates that not all CFTC regulated products are gaming. The statute cited by the 

Nadex Order24 for defining “bet” or “wager” is 31 U.S.C. § 5362(1), a part of the Unlawful Internet 

Gambling Enforcement Act of 2006. That definition of “bet or wager,” however, includes two 

relevant exclusions. First, the term “bet or wager” does not include “any transaction conducted on 

or subject to the rules of a registered entity or exempt board of trade under the Commodity 

Exchange Act.”25 The term also does not include “any other transaction that is excluded or exempt 

from regulation under the Commodity Exchange Act.”26 The statute cited by the Nadex Order 

itself demonstrates that the Nadex Order’s expansive application of Section 5c(c)(5)(C) and Rule 

40.11 is incorrect. 

The Nadex Order’s broad interpretation of gaming under the statute and rule would result in 

prohibiting much of the legally registered activity that the CFTC has previously approved. Indeed, 

many states ban “gambling” not just on elections, but specifically on the outcomes of future events. 

For example, New Hampshire bans gambling and defines it as “to risk something of value upon a 

future contingent event not under one’s control or influence”27 while North Carolina includes a 

23 See Statement of Commission Brian D. Quintenz on ErisX RSBIX NFL Contracts and Certain Event Contracts 

(Mar. 25, 2021) (available at https://www.cftc.gov/PressRoom/SpeechesTestimony/quintenzstatement032521) (last 

visited May 30, 2022). The many other distinctions between an event contract and a gamble include the fact that 

betting is a game of pure chance without any economic utility while event contracts are non-chance driven outcomes 

with economic utility. 

24 Nadex Order at 3.

25 31 U.S.C. § 5362(1)(a)(E)(ii).

26 Id. § 5362(1)(a)(E)(iv)(I).

27 NH Rev Stat § 647:2(II)(d) (2017); see also Alaska Stat. § 11.66.280(3) (“gambling” means that a person stakes or 

risks something of value upon the outcome of a contest of chance or a future contingent event not under the person's 

control or influence, upon an agreement or understanding that that person or someone else will receive something of 
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wager on an “unknown or contingent event” in its statutory definition of gambling.28 New York 

defines gambling as staking or risking something of value upon the outcome of a contest of chance 

or a future contingent event not under his control or influence, upon an agreement or understanding 

that he will receive something of value in the event of a certain outcome.29 Other states explicitly 

prohibit trading on the future delivery of securities and commodities without delivery and which 

are purely cash-settled, as is normal for products like stock index futures and eurodollar futures.30 

In all, 19 states contain provisions in their state codes that prohibit the listing of at least some 

subset of contracts that the CFTC has approved.31 

Under the Nadex Order’s reasoning, because Rule 40.11 prohibits the listing of contracts that 

“involve” “gaming,” laws like these would prohibit all event contracts. For example, event 

contracts on the weather and various economic indicators would be considered “risking something 

of value upon a future contingent event not under one’s control or influence.” And yet, not only 

are these event contracts a staple of CFTC regulated DCMs, but the Commission’s Core Principles 

require that event contracts be specifically outside the control or influence of a market participant 

and not readily susceptible to manipulation. The Nadex Order’s application of Rule 40.11 would 

therefore preclude the CFTC from regulating any event contract because event contracts are 

considered gambling under (some) state laws.32 Because such an interpretation of “gaming” 

would lead to absurd results, the traditional tools of interpretation and the process required by the 

value in the event of a certain outcome”); Or. Rev. Stat. § 167.117(7) (“‘Gambling’ means that a person stakes or risks 

something of value upon the outcome of a contests of chance or a future contingent event not under the control or 

influence of the person . . .”).

28 N.C. Gen. Stat. § 16-1.

29 NY Penal Law, Chapter 40, Part 3, Title M, Article 225.

30 For example, the laws of South Carolina, Oklahoma, and Mississippi use the following language: “Any contract of 

sale for the future delivery of cotton, grain, stocks or other commodities . . . upon which contracts of sale for future 

delivery are executed and dealt in without any actual bonafide execution and the carrying out or discharge of such 

contracts upon the floor of such exchange, board of trade, or similar institution in accordance with the rules thereof, 

shall be null and void and unenforceable in any court of this state, and no action shall lie thereon at the suit of any 

party thereto.”

31 Moreover, the purpose of the CEA, CFMA and other laws was to create clear and consistent national guidelines; a 

contrary interpretation would lead to the undesirable result that if one state prohibited a specific kind of contract then 

the Commission could use the special rule to ban that contract in all states.

32 On this point, it seems that at the very least, Rule 40.11 would be an APA violation, or even unconstitutional, if the 

analysis in Nadex Order was taken to its logical conclusion because of its dramatic impacts on the regulatory scheme. 

Cf. Whitman v. American Trucking Ass’ns, Inc., 531 U.S. 457, 468 (2001) (“Congress, we have held, does not alter 

the fundamental details of a regulatory scheme in vague terms or ancillary provisions—it does not, one might say,

hide elephants in mouseholes.”). 
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Supreme Court in Kisor demonstrate that the Nadex Order’s view cannot be the correct way to 

interpret Rule 40.11.33 

Seen in this context, the state laws that prohibit gambling on elections do not and cannot refer to 

CFTC regulated event contracts. The laws of many states prohibit gambling on event contracts, 

case-settled commodity futures contracts, and elections as one. Yet, the CFTC clearly continues 

to regulate and approve of the event contracts and cash-settled commodity futures markets even 

though it may seem to conflict with those state laws.34 Event contracts relating to elections should 

be no different. Indeed, just as other event contracts regulated by the CFTC, Kalshi’s political 

control contract should also not be precluded by the gaming provisions of Rule 40.11. 

Furthermore, the CFTC’s actions and inactions since the Nadex Order indicate that even the 

Commission has not continued the Nadex Order’s reasoning in this regard. Consider, for example,

the Small Cannabis Equity Index Futures Contract listed by the Small Exchange. The Cannabis 

Index involves the stock prices of companies in the cannabis industry that produce and distribute 

cannabis for consumption—an activity that is unlawful under Federal law and many State laws. 

The contract is “dependent on the occurrence, nonoccurrence, or the extent of the occurrence” of 

an event with “potential financial, economic, or commercial consequence,”35 namely the value of 

the Cannabis Index. The activities of these companies are production and distribution of cannabis 

for consumption, which are all activities that are “unlawful under Federal and [many] State laws,” 

33 See, e.g., Tennessee Wine & Spirits Retailers Ass’n v. Thomas, 139 S. Ct. 2449, 2462 (2019) (“reading § 2 [of the 

Twenty-First Amendment] to prohibit the transportation or importation of alcoholic beverages in violation of any state 

law would lead to absurd results that the provision cannot have been meant to produce”) (emphasis in original). 

Indeed, the “Commission agrees that the term ‘gaming’ requires further clarification and that the term is not 

susceptible to easy definition.” Provisions Common to Registered Entities: Final Rule, 76 Fed. Reg. 44,776, 44,785 

(July 27, 2011). In the 40.11 Final Rule, the Commission noted that it had previously sought comments regarding 

event contracts and gaming in 2008 and that the “Commission continues to consider these comments and may issue a 

future rulemaking concerning the appropriate regulatory treatment of ‘event contracts,’ including those involving 

‘gaming.’” 40.11 Final Rule at 44,785. “In the meantime, the Commission has determined to prohibit contracts based 

upon the activities enumerated in Section 745 of the Dodd-Frank Act and to consider individual product submissions 

on a case-by-case basis under 40.2 or 40.3.” Id. That process is undermined if the Nadex’s Order’s approach to 

“gaming” stands. 

34 The CFMA explicitly preempts the application of state gambling statutes when it applies to legal commodity futures 

contracts and as such there is also a federal preemption argument here that the state gambling statutes should not be 

considered, regardless of the Nadex Order’s misapplication of Rule 40.11. See 7 U.S.C. § 16(e)(2) (“This chapter shall 

supersede and preempt the application of any State or local law that prohibits or regulates gaming or the operation of 

bucket shops (other than antifraud provisions of general applicability) in the case of—(A) an electronic trading facility

excluded under section 2(e) of this title; and (B) an agreement, contract, or transaction that is excluded from this 

chapter under section 2(c) or 2(f) of this title or sections 27 to 27f of this title, or exempted under section 6(c) of this 

title (regardless of whether any such agreement, contract, or transaction is otherwise subject to this chapter).”).

35

See 7 U.S.C. § 1a(19) (definition of excluded commodity). 
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and should otherwise fall under the purview of Section 5c(c)(5)(C) and Rule 40.11. Certainly, if 

Section 5c(c)(5)(C) was given the same broad reading that the Commission gave to it in the Nadex 

Order, the Cannabis Equity Index would certainly “involve” an enumerated activity and be subject 

to Section 5c(c)(5)(C) and Rule 40.11. Yet, the Cannabis Index contract was self-certified and the 

Commission did not invoke Section 5c(c)(5)(C) or Rule 40.11. Therefore, it is clear that the 

Commission has not maintained the Nadex Order’s overbroad and incorrect reading of the Statute 

and Rule 40.11. 

Even if the proposed Kalshi contracts somehow came within the scope of Section 5c(c)(5)(C) and 

Rule 40.11, that does not preclude them from being listed. I understand that Kalshi has made 

submissions to the Commission demonstrating offering the contracts would be in the public 

interest. A full discussion of those points is outside the scope of this letter. I do note, however, 

that the Commission is not limited to using an economic purpose test for determining whether a 

contract is within the public interest. That test is found nowhere in the text of Section 5c(c)(5)(C) 

or Rule 40.11. One reference to the economic purpose test between two Senators in a brief 

discussion of what would become Section 5c(c)(5)(C) is insufficient to bind the Commission to 

that test.36 The Commission recognized as much in the Nadex Order itself, stating “the 

Commission has the discretion to consider other factors in addition to the economic purpose test 

in determining whether an event contract is contrary to the public interest.”37 

Furthermore, as a procedural matter, there is nothing in the CEA or Rule 40.11 requiring the 

Commission to act on Kalshi’s self-certification of the political control contracts discussed in this 

letter. Both Section 5c(c)(5)(C) and Rule 40.11 speak in terms that the Commission “may 

determine.”38 

At the end of the day, Kalshi has various arguments to justify the self-certification of the contracts 

described above.

36 See supra note 19 (discussing limitations of floor statements as persuasive evidence of a statute’s meaning).

37 Nadex Order at 4.

38 7 U.S.C. § 7a-2(c)(5)(C)(i) (“the Commission may determine that such agreements, contracts, or transactions are 

contrary to the public interest . . .”) (emphasis added); 7 C.F.R. § 40.11(c) (“The Commission may determine . . . 

that a contract . . . be subject to the 90-day review.”) (emphasis added).
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Please let me know if you need anything further. 

Sincerely,

Daniel J. Davis

DJD:dml