CHICAGO MERCANTILE EXCHANGE INC. v. SELIG — Entry #42: Memorandum in opposition to re [41] MOTION for Discovery on Facts Related to Plaintiff's Standing filed by CHICAGO MERCANTILE EXCHANGE INC
Case: CHICAGO MERCANTILE EXCHANGE INC. v. SELIG dcd · 1:26-cv-02157
filed June 18, 2026
What this document is
Docket entry #42 · filed September 18, 2026
Memorandum in opposition to re [41] MOTION for Discovery on Facts Related to Plaintiff's Standing filed by CHICAGO MERCANTILE EXCHANGE INC.. (Attachments: (1) Exhibit Excerpted Administrative Record, (2) Text of Proposed Order)(Goelman, Aitan)
Who is involved
- CHICAGO MERCANTILE EXCHANGE INC.
- COMMODITY FUTURES TRADING COMMISSION
- HYPERLIQUID POLICY CENTER
- MICHAEL S. SELIG
Why we have it
We follow this case because it names a company we track, although that company is not a party:
- Marathon Digital: a spelling of its name “Marathon Digital Holdings” appears in a filing in this case.
…hedging programs in SEC filings:MarathonDigitalHoldings (now MARA Holdings) ran…
- CleanSpark: its project “Washington” appears in a filing in this case.
…Lafayette Centre 1155 21st Street, N.W. Washington, D.C. 20581 Re: KalshiEX LLC – Commission…
A free copy from the RECAP archive of federal court filings (mirrored at the Internet Archive), retrieved October 06, 2026. Federal court filings are public records.
Document text
23 page(s), 97,758 characters, converted from the PDF's text layer · plain text.
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Case 1:26-cv-02157-CKK Document 42-1 Filed 09/18/26 Page 1 of 23
EXCERPTS FROM
ADMINISTRATIVE
RECORD
Case 1:26-cv-02157-CKK Document 42-1 Filed 09/18/26 Page 2 of 23
33160 Federal Register / Vol. 91, No. 106 / Wednesday, June 3, 2026 / Notices
program in the same application under under the pilot program in favor of a status outside the jurisdiction of the
appeal during the next quarter of the continuing application. A continuing PTAB. Additionally, any request by an
program, but both of these filings count application will not be granted special appellant causing a delay in the conduct
towards appellant’s petition filing limit. status based on the petition filed in the of the appeal, such as for an extension
parent application. Each application of time under 37 CFR 1.136(b) or for
III. Prosecution of the Application
(including each continuing application) additional briefing, will be cause for
Granted Special Status Under the Pilot
must, on its own merit, meet all removal of expedited status.
Program
requirements for special status under
John A. Squires,
A. Replies by the Applicant Under the the pilot program, and be accompanied
by its own petition as detailed in Part Under Secretary of Commerce for Intellectual
Pilot Program
Property and Director of the United States
The time periods set for reply in I above. Patent and Trademark Office.
Office actions for an application granted IV. Conduct of Appeals Accepted Into [FR Doc. 2026–11098 Filed 6–2–26; 8:45 am]
special status under the pilot program the Pilot Program BILLING CODE 3510–16–P
will be the same as those set forth in
section 710.02(b) of the MPEP. A reply A. Hearings
to an Office action must be fully A petition to participate in the pilot COMMODITY FUTURES TRADING
responsive to the rejections, objections, program may be filed for ex parte COMMISSION
and requirements made by the appeals in which the appellant seeks an
examiner. Any amendment filed in oral hearing before the PTAB, that is, Policy Statement Concerning the
reply to an Office action may be treated ‘‘heard’’ appeals, as well as those Listing of Perpetual Contracts
as not fully responsive if it attempts to: appeals for which no oral hearing is
(1) add claims that would result in more requested, that is, ‘‘on-brief’’ appeals. AGENCY: Commodity Futures Trading
than three independent claims or more Hearings in ex parte appeals accorded Commission.
than 20 total claims pending in the special status under the pilot program ACTION: Policy statement.
application; or (2) add any multiple will be conducted according to the
SUMMARY: This policy statement
dependent claim(s). standard PTAB hearing procedures.
describes the views of the Commodity
If a reply to a non-final Office action Appellants seeking an oral hearing
Futures Trading Commission (the
is not fully responsive for failing to should submit, along with the request
‘‘CFTC’’ or ‘‘Commission’’) concerning
comply with the pilot program’s claim for oral hearing, any preferences as to
the listing of perpetual contracts.
requirements but is a bona fide attempt the time, date, or location of the hearing.
Contemporaneously with the issuance
to advance the application to final The PTAB will make best efforts to
of this policy statement, the
action, the examiner may, at the schedule a hearing in accordance with
Commission has issued an order (the
examiner’s discretion, issue a Notice of such preferences. If the PTAB is unable
‘‘Order’’) permitting the listing of a
Non-Responsive Amendment and to accommodate an appellant’s
perpetual contract that references the
provide a shortened statutory period of preferences, it will schedule the hearing
spot price of bitcoin by a designated
two months for the applicant to supply in an available hearing room at any
contract market (‘‘DCM’’) as a futures
a fully responsive reply. Extensions of office, including a regional office. An
contract. Given the unique
this time period under 37 CFR 1.136(a) appellant may waive the hearing and
characteristics of perpetual contracts,
to the Notice of Non-Responsive continue under the pilot program for
which tend to vary based on the
Amendment will be permitted, but in no consideration and decision on the
underlying asset they reference, the
case can any extension carry the date for briefs. An appellant may not reschedule
Commission is of the view that the case-
reply to this notice beyond the the date or time of a hearing and remain
by-case review process detailed in
maximum period of six months set by in the pilot program. If an appellant in
Commission Regulation 40.3 is
statute (35 U.S.C. 133). However, any an ex parte appeal accorded expedited
appropriate for the listing of perpetual
further non-responsive amendment status must reschedule the date or time
contracts that reference asset classes
typically will not be treated as bona of a hearing and is not willing to waive
that are not contemplated in the Order.
fide, and as such, the time period set in the oral hearing, then the appellant may
opt out of the pilot program, thereby DATES: The Commission’s policy
the prior notice will continue to run.
regaining the ability to reschedule or statement is adopted as of May 29, 2026.
B. After-Final and Appeal Procedures relocate the hearing as per standard FOR FURTHER INFORMATION CONTACT:
Any amendment, affidavit, or other PTAB hearing procedures. Roger Smith, 202–418–5344, rsmith@
evidence after a final Office action and cftc.gov, Division of Market Oversight,
B. Termination of Expedited Status of Commodity Futures Trading
prior to appeal must comply with 37
Appeal Commission, 77 West Jackson Blvd.,
CFR 1.116. During the appeal process,
the application will be treated in Under the pilot program, special Suite 800, Chicago, Illinois 60604 or
accordance with the normal appeal status will be maintained in an ex parte Stephen Andrews, Deputy General
procedure (see MPEP Chapter 1200) appeal from the date the petition for Counsel for Regulation, 202–308–7563,
unless the appeal is granted special inclusion in the pilot program is granted [email protected], Office of the
status under this program or another until the PTAB’s jurisdiction ends General Counsel, Commodity Futures
program. under 37 CFR 41.35(b). Activities Trading Commission, Three Lafayette
subsequent to an appellant’s withdrawal Centre, 1151 21st Street NW,
C. Application Cannot Be Withdrawn from the pilot program or the PTAB’s Washington, DC 20581.
From the Pilot Program decision, including any reopened SUPPLEMENTARY INFORMATION:
There is no provision to withdraw an prosecution, will not be treated as
application undergoing expedited subject to expedited status, nor will I. Introduction and Background
examination from the pilot program. An filing a petition to expedite an appeal Perpetual contracts are derivative
applicant may abandon an application under the pilot program cause an contracts that have no fixed expiration
that has been granted special status application to be accorded expedited date, and which rely on a periodic
AR10
Case 1:26-cv-02157-CKK Document 42-1 Filed 09/18/26 Page 3 of 23
Federal Register / Vol. 91, No. 106 / Wednesday, June 3, 2026 / Notices 33161
funding rate mechanism, rather than a the benefit of registrants, market between the perpetual contract’s market
fixed expiration date, to maintain participants, and the public, its view price and the underlying asset’s spot
relative price parity with the underlying that perpetual contracts that reference price. When a perpetual contract trades
asset’s spot price. Perpetual contracts underlying asset classes that are not above the spot price, the traders with
have become a dominant form of crypto contemplated in the Order 5 should be long positions make payments while the
derivative trading in global markets. submitted for Commission review and traders with short positions receive
However, given the regulatory approval pursuant to the voluntary payments; and vice versa. These
uncertainty concerning the appropriate product approval process under payments are intended to create an
classification of these types of contracts Commission Regulation 40.3.6 economic incentive for market
in the U.S. derivatives markets, the This policy statement is a general participants to arbitrage away the price
market for perpetual contracts has statement of policy issued under 5 differential by opening positions on
largely developed outside of the United U.S.C. 553(b)(A). It does not impose any whichever side of the market is accruing
States, with the majority of trading obligation on any person, modify or the payments. In this way, the funding
occurring on offshore trading venues. supersede any provision of the rate is designed to keep closely aligned
The Commission has taken a series of Commodity Exchange Act (‘‘CEA’’) or a perpetual contract’s price to the
steps over the past year to develop a the Commission’s regulations underlying asset’s price and functions
workable domestic framework for these thereunder, create any right or benefit as a replacement to the traditional
products. On April 21, 2025, enforceable at law or in equity, and is expiration-based convergence
Commission staff issued a Request for not subject to the notice-and-comment mechanism upon which a futures
Comment on the Trading and Clearing requirements of the Administrative contract typically relies.
of ‘‘Perpetual’’ Style Derivatives (the Procedure Act. Each contract submitted Perpetual contracts raise novel and
‘‘Request’’).1 The Request solicited to the Commission under part 40 will complex questions relating to market
public input on the characteristics, use continue to be evaluated on its own structure, customer protection,
cases, regulatory classification, and risks terms. resilience during periods of market
of perpetual contracts. The Request was stress, and consistency with the Core
issued in conjunction with a Request for II. The Structural Distinctiveness of Principles applicable to registrants
Comment on Trading and Clearing Perpetual Contracts under the CEA. For example, a
Derivatives on a 24/7 Basis, which Traditional futures contracts rely perpetual contract’s design and
sought public input on the operational, primarily on a fixed expiration date to characteristics raise important
surveillance, clearing, and margin achieve convergence with the considerations with respect to DCM
implications of extending CFTC- underlying asset’s spot price. Futures Core Principle 3, which requires that a
regulated derivatives trading to a contracts have emerged as a primary DCM list only those contracts that are
continuous basis.2 instrument in the U.S. derivatives not readily susceptible to
On July 30, 2025, the President’s markets for hedgers and traders to manipulation.7 For a traditional, cash-
Working Group on Digital Asset Markets effectively secure a price for an asset settled futures contract, the
issued its report, Strengthening today in connection with a transaction susceptibility-to-manipulation analysis
American Leadership in Digital that will occur in the future. Price directed at the cash settlement reference
Financial Technology (the ‘‘PWG convergence with the underlying spot price is an analysis of one moment in
Report’’).3 The PWG Report price at expiration is thus inherent to time: the settlement reference price
recommended that the Commission and the design of a traditional futures must be reliable at expiry. For a
the U.S. Securities and Exchange contract and ultimately what makes perpetual contract, however, the
Commission permit eligible market them a useful instrument for hedging reference must be reliable at every
participants to access derivatives, and price discovery. funding interval, without interruption,
including perpetual contracts, through A perpetual contract has no fixed for as long as the contract remains
regulated intermediaries and that the expiration date through which it can active.
agencies use existing exemptive and achieve convergence. It therefore It is therefore the Commission’s view
interpretative authorities to provide requires a substitute mechanism to that perpetual contracts that reference
near-term clarity for innovative maintain relative price parity with the asset classes that are not contemplated
derivatives products. underlying spot price of the asset that it in the Order should be submitted for
As discussed, this policy statement is references. The mechanism that has Commission review and approval
being released in conjunction with the emerged in the global crypto asset pursuant to the voluntary product
Order,4 which approved the listing of a markets is known as a funding rate, or approval process under Commission
perpetual contract that references the a periodic payment between the long Regulation 40.3.
spot price of bitcoin by a DCM as a and short sides of the contract, the The Commission notes that
futures contract. The Commission issues direction and magnitude of which is Regulation 40.2 permits registrants to
this policy statement to articulate, for generally determined by the difference self-certify new products where the
submitting registrant determines that
1 CFTC Release No. 9069–25, Request for 5 These types of asset classes include, but are not the product complies with the CEA and
Comment on the Trading and Clearing of limited to, agricultural products, precious metals, Commission regulations thereunder.8
‘‘Perpetual’’ Style Derivatives (April 21, 2025). equity securities, and narrow-based security
2 CFTC Release No. 9068–25, Request for
However, given the novel characteristics
indexes. Each asset class will raise different
Comment on Trading and Clearing Derivatives on considerations and merit independent analysis and of perpetual contracts, including their
a 24/7 Basis, (April 21, 2025). review based on their unique circumstances. For lack of a traditional expiration date and
3 President’s Working Group on Digital Asset example, perpetual contracts are likely particularly the complex questions concerning,
Markets, Strengthening American Leadership in ill-suited for agricultural products based on the among others, market structure and
Digital Financial Technology (July 30, 2025), considerations identified in the Order, while
available at https://www.whitehouse.gov/wp- perpetual contracts that reference equity securities customer protections, the Commission
content/uploads/2025/07/Digital-Assets-Report- or narrow-based security indexes, among others,
EO14178.pdf. would benefit from review by the Commission and 7 7 U.S.C. 7(d)(3); see also 17 CFR part 38, app.
4 See Order Approving KalshiEX LLC BTCPERP the U.S. Securities and Exchange Commission. C.
Futures Contract, May 29, 2026. 6 17 CFR 40.3. 8 17 CFR 40.2.
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Case 1:26-cv-02157-CKK Document 42-1 Filed 09/18/26 Page 4 of 23
33162 Federal Register / Vol. 91, No. 106 / Wednesday, June 3, 2026 / Notices
believes that the public interest is best Policy Statement Concerning the Listing received without change, including any
served by requiring perpetual contracts of Perpetual Contracts—Commission personal identifiers or contact
that reference assets that are not Voting Summary information.
contemplated in the Order to undergo On this matter, Chairman Selig voted FOR FURTHER INFORMATION CONTACT: To
Commission review and approval in the affirmative. No Commissioner request more information on this
pursuant to Commission Regulation voted in the negative. proposed information collection or to
40.3. [FR Doc. 2026–11020 Filed 6–2–26; 8:45 am] obtain a copy of the proposal and
associated collection instruments,
III. Submissions Under Commission BILLING CODE 6351–01–P
please write to the Office of the
Regulation 40.3
Assistant Secretary of War for
The Commission believes that the DEPARTMENT OF DEFENSE International Armaments Control, 3010
Commission Regulation 40.3 process Defense Pentagon, Washington, DC
provides important benefits for Office of the Secretary 20301–3010, Katherine Coyne, 703–
regulators, market participants, and the 545–5899.
[Docket ID: DOD–2026–OS–1222]
public. Prior review promotes SUPPLEMENTARY INFORMATION:
transparency, facilitates engagement Proposed Collection; Comment Title; Associated Form; and OMB
Request Number: America First Arms Transfer
between Commission staff and
Strategy OMB Control Number 0704–
registrants during product development, AGENCY: Office of the Under Secretary of AFAT.
and provides greater regulatory clarity Defense for Acquisition and Needs and Uses: Effective execution
for market participants and members of Sustainment (OUSD(A&S)), Department of Executive Order 14383 requires
the public seeking to responsibly of Defense (DoD). immediate, up-to-date market
innovate within the CFTC’s regulatory ACTION: 60-Day information collection intelligence regarding defense articles
framework. notice. and the private sector’s current
In accordance with the purpose of the production capabilities, supply chain
CEA, the Commission remains SUMMARY: In compliance with the dependencies, product offerings, and
committed to promoting responsible Paperwork Reduction Act of 1995, the export readiness. This information
innovation and fair competition in the OUSD(A&S) announces a proposed collection is a strategic market research
U.S. derivatives markets.9 The public information collection and seeks effort to inform execution of Executive
public comment on the provisions Order 14383. It is not an acquisition or
Commission believes that clear
thereof. Comments are invited on: procurement action, and no federal
regulatory pathways and transparent
whether the proposed collection of contracts will be solicited or awarded
supervisory expectations are essential to information is necessary for the proper
ensuring that emerging technologies and based on these submissions. The
performance of the functions of the analysis derived from this collection
novel financial products can develop agency, including whether the will facilitate the analytical
responsibly within regulated U.S. information shall have practical utility; prioritization of U.S. defense articles,
markets rather than migrating to less the accuracy of the agency’s estimate of enabling the curation of a
regulated jurisdictions outside of the the burden of the proposed information comprehensively assessed data set for
United States. collection; ways to enhance the quality, the Government.
This policy statement is intended utility, and clarity of the information to Affected Public: Businesses or other
solely to provide the Commission’s be collected; and ways to minimize the for-profit.
views concerning the listing of burden of the information collection on Annual Burden Hours: 375.
perpetual contracts and does not alter or respondents, including through the use Number of Respondents: 150.
amend the CEA or the Commission’s of automated collection techniques or Responses per Respondent: 5.
other forms of information technology. Annual Responses: 750.
regulations thereunder. Nothing in this Average Burden per Response: 30
policy statement is intended to be DATES: Consideration will be given to all
comments received by August 3, 2026. minutes.
binding or foreclose the possibility that, Frequency: As required.
on appropriate facts and contract ADDRESSES: You may submit comments,
identified by docket number and title, Dated: May 29, 2026.
design, the Commission might in the
by any of the following methods: Aaron T. Siegel,
future address perpetual contracts
Federal eRulemaking Portal: http:// Alternate OSD Federal Register Liaison
through separate policy statements,
www.regulations.gov. Follow the Officer, Department of Defense.
interpretative guidance, or the
rulemaking process; the Commission instructions for submitting comments. [FR Doc. 2026–11025 Filed 6–2–26; 8:45 am]
Mail: Department of Defense, Office of BILLING CODE 6001–FR–P
makes no determination as to that
the Director of Administration and
possibility here. Management, Oversight and Compliance
Issued in Washington, DC, on May 29, Directorate, Regulatory Division, 4800 DEPARTMENT OF EDUCATION
2026, by the Commission. Mark Center Drive, Mailbox #24, Suite
Christopher Kirkpatrick, 05F16, Alexandria, VA 22350–1700. DEPARTMENT OF LABOR
Secretary of the Commission. Instructions: All submissions received
must include the agency name, docket Notice Announcing American History
Note: The following appendix will not number and title for this Federal and Civics Education National
appear in the Code of Federal Regulations. Register document. The general policy Activities Program Competition;
for comments and other submissions Correction
from members of the public is to make AGENCY: Department of Education;
these submissions available for public Department of Labor.
viewing on the internet at http://
ACTION: Notice; correction.
9 7 U.S.C. 5(b). www.regulations.gov as they are
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Case 1:26-cv-02157-CKK Document 42-1 Filed 09/18/26 Page 5 of 23
S&C Draft of February 27, 2026
CONFIDENTIAL
[Kalshi Letterhead]
17 C.F.R. § 40.2(c)
February [●], 2026
Via E-mail
Frank Fisanich
Acting Director
Division of Market Oversight
Commodity Futures Trading Commission
Three Lafayette Centre
1155 21st Street, N.W.
Washington, DC 20581
Re: Request for No-Action Position Concerning CFTC Regulation 40.2(c)
Dear Mr. Fisanich:
KalshiEx LLC (Kalshi) is writing to request that the Division of Market Oversight (the
Division) of the Commodity Futures Trading Commission (Commission or CFTC) issue
a no-action letter pursuant to 17 C.F.R. § 140.99 confirming that the Division will not
recommend that the Commission stay Kalshi’s listing of Perpetual Contracts (as
described in Part II below) under Regulation 40.2(c) 1 or commence enforcement action
against Kalshi for a false certification, solely on the basis that Kalshi certifies the
Perpetual Contracts as contracts of sale of a commodity for future delivery (futures
contracts), rather than swaps.
I. Background on Kalshi
Kalshi was designated as a contract market (DCM) in 2020, when it became the first
federally-regulated platform for event-contract trading. Kalshi currently lists a wide
variety of fully collateralized event contracts on the outcomes of events ranging from
global news, to macro-economic indicators to popular culture and sports. All contracts
traded on Kalshi are cleared by Kalshi Klear LLC (Klear), a registered designated
clearing organization (DCO). Klear’s order of registration currently limits its activities
to clearing fully collateralized positions in swaps.
II. Proposed Perpetual Contracts
Klear has applied to the Commission to expand its DCO registration to permit it to
clear margined positions. As an initial matter, Klear intends to clear margined
positions in Perpetual Contracts, which will be listed on Kalshi and trade in its central
1
17 C.F.R. § 40.2(c)
CONFIDENTIAL TREATMENT REQUESTED BY KALSHI
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Case 1:26-cv-02157-CKK Document 42-1 Filed 09/18/26 Page 6 of 23
limit order book, with pre- and post-trade transparency.
Each Perpetual Contract will provide its holder either long or short, as applicable,
exposure to the spot price of a standard, fixed unit amount of digital asset that is
neither a security nor a representation of, or an interest in, a nonfinancial commodity
(such a digital asset, a Subject Digital Asset). Initially, Perpetual Contracts will
reference 0.0001 Bitcoin.
Perpetual Contracts will provide exposure to a Subject Digital Asset by providing for
the holder to make or receive “funding” payments that vary based on the price of the
Subject Digital Asset relative to the price of a Perpetual Contract. When the Perpetual
Contract price exceeds the price of the Subject Digital Asset, payment will be due
from the long-side holders to short-side holders, and vice versa if the price of the
Subject Digital Asset exceeds the Perpetual Contract price.
This funding mechanism is intended to align the price of the Perpetual Contracts with
the price of the Subject Digital Asset by incentivizing market participants to (i) take on
short positions in the Perpetual Contracts when the Perpetual Contract price exceeds
the price of the Subject Digital Asset, thereby bringing the Perpetual Contract price
down towards the price of the Subject Digital Asset and (ii) take on long positions in
the Perpetual Contracts when the price of the Subject Digital Asset exceeds the
Perpetual Contract price, increasing the Perpetual Contract price towards the price of
the Subject Digital Asset.
Settlement in the Perpetual Contracts will occur twice daily and, upon settlement,
Klear will calculate the mark-to-market value of all open positions in the Perpetual
Contracts and, accordingly, determine and distribute or collect margin obligations
from all of its members with open long or short positions in the Perpetual Contracts. A
member’s net margin obligation for each settlement period will include aggregate
funding payment obligations and/or entitlements accrued since the prior settlement
period, in addition to other risk-based margin charges.
The Perpetual Contracts will have an indefinite (or “perpetual”) term. As such, they will
not expire on a fixed date. Instead, a member of Kalshi wishing to exit all or part of its
position in a Perpetual Contract will enter into an offsetting Perpetual Contract on Kalshi.
Because Perpetual Contracts will be standardized and centrally cleared by Klear, acting
as DCO and central counterparty, they will be fungible with each other. The Perpetual
Contracts will not provide for physical settlement of the Subject Digital Asset, and will
settle solely via the cash payments and offset.
III. Need for No-Action Position
There is considerable uncertainty regarding the regulatory categorization of perpetual-
term derivative contracts, such as the Perpetual Contracts, under the Commodity
Exchange Act (CEA) and Commission regulations thereunder. For example, in a recent
2
CONFIDENTIAL TREATMENT REQUESTED BY KALSHI
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Case 1:26-cv-02157-CKK Document 42-1 Filed 09/18/26 Page 7 of 23
request for comment regarding “perpetual” style digital-asset derivatives, Commission
Staff expressly requested public comment regarding the proper regulatory categorization
of these contracts.2 That uncertainty presents challenges because swaps and futures
contracts are subject to substantially different regulatory frameworks. For example,
categorization of the Perpetual Contracts will affect matters such as the minimum initial
margin requirements for the Perpetual Contracts, 3 reporting obligations for Kalshi and
Klear, and registration obligations for market participants trading in the Contracts. 4 As a
result, key aspects of Klear’s pending application to amend its DCO registration depend
on the categorization of the Perpetual Contracts.
The Commission has previously made clear that a DCM may self-certify a product as a
futures contract, even if the product is “indistinguishable in material economic effects”
from a swap.5 In the present instance, however, Kalshi cannot self-certify the Perpetual
Contracts in either category until the Commission approves Klear’s application to amend
its DCO registration because, in the absence of such approval, Kalshi could not list the
Perpetual Contracts in compliance with the CEA and Commission regulations thereunder.
On the other hand, determining the categorization of the Perpetual Contracts is a
prerequisite to amending Klear’s DCO registration to permit the listing and clearing of
the Perpetual Contracts.6 Accordingly, Kalshi is seeking the requested no-action position
so that Klear’s DCO application can proceed on the basis that, following approval, Kalshi
can self-certify the Perpetual Contracts in a category that is consistent with how Klear’s
application treats them.
2
CFTC, Request for Comment on the Trading and Clearing of “Perpetual” Style Derivatives question 13
(Apr. 21, 2025). Further, the Commission has taken the view in past enforcement actions that certain
perpetual-duration digital-asset derivative products constitute swaps. See, e.g., Complaint, CFTC v.
Changpeng Zhao, et. al., No. 23-cv-01887 (March 27, 2023) (“Binance”); Complaint, CFTC v. MEK
Global Limited, et. al., No. 24-cv-2255 (March 26, 2024); Complaint, CFTC v. Eisenberg, No. 23-cv-
00173 (Jan. 9, 2023); Complaint, CFTC v. HDR Global Trading Limited, et. al., No. 20-cv-8132 (Oct. 1,
2020); In the Matter of Deridex, Inc., CFTC No. 23-42 (Sept. 7, 2023). The Commission did not, however,
analyze address whether such products were futures contracts in any of these enforcement actions.
Moreover, the products at issue in each of these cases differ from the Perpetual Contracts in that they were
not listed on Commission-regulated DCMs or centrally cleared by registered DCOs.
3
See Commission Regulation 39.13(g)(2)(ii), 17 C.F.R. 39.13(g)(2)(ii) (setting different minimum
liquidation times for futures, options, and swaps).
4
These considerations are discussed in greater detail in Part IV.B. below.
5
Specifically, the Commission noted, in response to a market participant’s question regarding whether a
DCM can “list for trading a futures contract regardless of whether it could be viewed as a swap if traded
over-the-counter or on a [swap execution facility], since futures and swaps are indistinguishable in material
economic effects”, that “[i]f a DCM has a view that a particular product is a futures contract, it may self-
certify the contract consistent with that view.” Further Definition of “Swap,” “Security-Based Swap,” and
“Security-Based Swap Agreement”; Mixed Swaps; Security-Based Swap Agreement Record Keeping, 77
Fed. Reg. 48,208, 48303 (Aug. 13, 2012) (“2012 Definitions Release”).
6
For the same reasons, it would not be practicable for Kalshi to seek Commission review and approval of
the Perpetual Contracts under Regulation 40.3.
3
CONFIDENTIAL TREATMENT REQUESTED BY KALSHI
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Case 1:26-cv-02157-CKK Document 42-1 Filed 09/18/26 Page 8 of 23
IV. Rationale for No-Action Position
The requested no-action position is supported by Kalshi’s exercise of reasonable
discretion to categorize the Perpetual Contracts for purposes of Regulation 40.2. In
addition, regulating the Perpetual Contracts as futures contracts would reduce regulatory
arbitrage and promote competition.
A. Kalshi Has Exercised Reasonable Discretion to Categorize the Perpetual
Contracts for Purposes of Regulation 40.2
Regulation 40.2 requires a DCM’s product self-certification to include, among other
items, a concise explanation and analysis of the product’s compliance with applicable
provisions of the CEA, including core principles, and the Commission’s regulations
thereunder.7 CEA Section 5(d)(1)(B)8 and Regulation 38.100(b)9 provide that a DCM
has reasonable discretion in establishing the manner in which it complies with the core
principles. Through the analysis laid out below, Kalshi has exercised reasonable
discretion by categorizing the Perpetual Contracts as futures contracts for purposes of
compliance with the core principles and other provisions of the CEA and Commission
regulations thereunder.10
First, we analyzed whether the Perpetual Contracts would fall within the CEA’s “swap”
definition. Section 1a(47) of the CEA 11 provides that, “[e]xcept as provided in
subparagraph (B), the term ‘swap’ means any agreement, contract, or transaction” that
meets any of six clauses set out in subparagraph (A) of that definition. Subparagraph (B)
then sets out ten exclusions from the “swap” definition. If the Perpetual Contracts fall
within one of the exclusions, they are not swaps, regardless of whether they would
otherwise fit within one of the clauses set out in subparagraph (A). 12 One of those
exclusions—clause (B)(i)—covers futures contracts. 13 We therefore turned to analyzing
whether the Perpetual Contracts would constitute futures contracts.
7
17 C.F.R. § 40.2(a)(3)(v).
8
7 U.S.C. § 7(d)(1)(B).
9
17 C.F.R. § 38.100(b).
10
Consistent with self-certification under Regulation 40.2, Kalshi and Klear intend to treat the Perpetual
Contracts as futures contracts for purposes of compliance with the CEA and Commission regulations
thereunder by themselves and their participants.
11
7 U.S.C. § 1a(47).
12
Our analysis here is limited to the Perpetual Contracts. In contrast, the event contracts listed on Kalshi
can be “structured as options” or “futures contracts.” 73 Fed. Reg. 25,669, 25,670-71 (May 7, 2008).
13
The per se nature of this exclusion is illustrated by the treatment of traditional, cash-settled futures
contracts, such as a financially settled, quarterly Bitcoin contract. Such a contract provides for cash
settlement at quarterly expiry based on the price of Bitcoin, without any physical delivery. But for
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Next, we evaluated the characteristics of the Perpetual Contracts against relevant judicial
precedent and Commission guidance. Neither the CEA nor Commission rules offer a
fixed definition for what constitutes a “futures contract.” Instead, the Commission and
the courts assess each transaction “as a whole with a critical eye toward its underlying
purpose”14 by evaluating whether certain characteristics common to futures contracts are
present.15
The Commission has historically described futures contracts as “standardized contracts
for the purchase or sale of commodities which provide for future, as opposed to
immediate, delivery, and which are directly or indirectly offered to the general public and
generally secured by earnest money, or ‘margin’ . . . [and that] are entered into primarily
for the purpose of assuming or shifting the risk of change in value of commodities, rather
than for transferring ownership of the actual commodities.”16 Courts have similarly
focused on standardization, fungibility, and offset as the key characteristics of futures
contracts.17
subparagraph (B) of the “swap” definition, such a contract would fall within clause (A)(iii) of that
definition as an agreement, contract, or transaction “that provides on an executory basis for the exchange,
on a fixed or contingent basis, of 1 or more payments based on the value or level of 1 or more . . .
commodities . . . and that transfers, as between the parties to the transaction, in whole or in part, the
financial risk associated with a future change in any such value or level without also conveying a current or
future direct or indirect ownership interest in an asset (including any enterprise or investment pool) or
liability that incorporates the financial risk so transferred.” 7 U.S.C. § 1a(47)(A)(iii). However, contracts
of this sort are listed by other DCMs and regulated by the Commission as a futures contract because they
fall within clause (B)(i), which provides, in relevant part, that “the term ‘swap’ does not include . . . any
contract of sale of a commodity for future delivery.” 7 U.S.C. § 1a(47)(B)(i)
14
See CFTC v. Co Petro Marketing Group, Inc. 680 F.2d 573, 581 (9th Cir. 1982) (“Co Petro”).
15
See CFTC Interpretive Letter No. 98-73, Comm. Fut. L. Rep. ¶27, 449 (Oct. 8, 1998) (“Letter 98-73”);
see, also CFTC Interpretive Letter No. 97-01, Comm. Fut. L. Rep. ¶26, 937 (Dec. 12, 1996); CFTC v.
UForex Consulting, 551 F.Supp.2d, 513, 529 (W.D.La. 2008), CFTC v. Fleury, 2010 WL 5146283 (S.D.
Fl.) at *7.
16
See In re Stovall, et. al., [1977-1980 Transfer Binder] Comm. Fut. L. Rep. (CCH) 20,941, p. 6 (CFTC
Dec. 6, 1979) (“Stovall”). See, also Policy Statement Concerning Swap Transactions, 54 Fed. Reg. 30,694
(July 21, 1989) (adopting a safe harbor from futures regulation for a swap if: the swap has individually
tailored terms; there is an absence of exchange-style offset; there is no clearing organization or margin
system; the swap is undertaken in connection with a line of business; and the swap is not marketed to the
public) and Exemption of Certain Swap Agreements, 58 Fed. Reg. 5,587 (Nov. 12, 1993) (adopting an
exemption that, similarly, distinguished swaps from futures contracts based on whether: the swap
agreement was entered into solely between sophisticated parties (“eligible swap participants”) at the time
such persons entered into the swap agreement; the swap agreement is not part of a fungible class of
agreements that are standardized as to their material economic terms; the creditworthiness of any party
having an actual or potential obligation under the swap agreement would be a material consideration in
entering into or determining the terms of the swap agreement, including pricing, cost, or credit
enhancement terms of the swap agreement; and the swap agreement is not entered into and traded on or
through a multilateral transaction execution facility).
17
See, e.g., Co Petro at 579-80 (“Except for price, all the futures contracts for a specified commodity are
identical in quantity and other terms. The fungible nature of these contracts facilitates offsetting
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More recently, courts have turned away from the “totality of circumstances” analysis
reflected by the foregoing precedent. Instead, at least in the cases of contracts involving
intangible commodities, courts have identified whether an executory contract is a futures
contract based on whether there is trading “in the contract.” 18 When evaluating whether
trading “in the contract” exists for a given contract, courts have looked to whether the
contract is standardized and fungible,19 as evidenced by (i) the contract trading at a fixed,
standardized unit quantity,20 (ii) each party’s obligations being guaranteed by a clearing
house that sets margin requirements,21 and (iii) the ability of holders to exit their
positions by offset.22
The Perpetual Contracts will exhibit all of these futures contract characteristics: the
Perpetual Contracts will have a fixed, standardized unit quantity; each party’s obligations
will be guaranteed via novation to Klear, which will act as central counterparty; holders
will be able to exit their positions via offset; the Perpetual Contracts will be available to
the general public, including retail participants; parties will enter into the Perpetual
Contracts for the purpose of assuming or shifting the risk of change in value of the
Subject Digital Asset, without the possibility of transferring ownership of the Subject
Digital Asset; and the Perpetual Contracts will trade on the centralized market of a DCM.
transactions by which purchasers or sellers can liquidate their positions by forming opposite contracts.”);
see, also Transnor (Bermuda) Ltd. v. BP N. Am. Petroleum, 738 F. Supp. 1472, 1492-93 (S.D.N.Y. 1990)
(following Stovall and Co Petro to define what constitutes a futures contract) and Salomon Forex, Inc. v.
Tauber 8 F.3d 966, 971 (4th Cir. 1993) (“Tauber”) (“To facilitate the development of a liquid market for
these transactions, these contracts are standardized and transferrable. Trading in futures seldom results in
physical livery of the subject commodity, since the obligations are often extinguished by offsetting
transactions that product a net profit or loss.”).
18
See, e.g., CFTC v. Erskine, 512 F.3d 309, 325 (6th Cir. 2008) (“Erskine”), CFTC v. Zelener, 373 F.3d
861, 865 (7th Cir. 2004) (“Zelener”), and Chicago Mercantile Exchange v. SEC, 883 F.2d 537, 542 (7th Cir.
1989) (“CME v. SEC”). Courts evaluating the regulatory categorization of contracts on tangible
commodities have, at least in some instances, stuck with the “totality of circumstances” approach from Co
Petro. See Andersons, Inc. v. Horton Farms, Inc., 166 F.3d 308, 318 (6th Cir. 1998). Because the
Perpetual Contracts are derivatives on Subject Digital Assets, which are intangible commodities, this
request does not address the regulatory categorization of contracts on tangible commodities.
19
See Erskine at 325 (“the distinction [between futures and forward contracts] turns on standardization and
fungibility of the contract.”)
20
Id.
21
CME v. SEC at 542. Although the Dodd-Frank Act arguably changed the historical analysis, at least in
part, by reducing the saliency of central clearing as a distinguishing factor of futures contracts, other
characteristics remain relevant, given that even many centrally cleared swaps (such as interest rate swaps)
are not fully standardized as to tenor or size (among other terms) and trading can take place on swap
execution facilities, which may lack the centralized market characteristics of a DCM because they can
permit trading via request for quote in addition to an order book.
22
Zelener at 868, quoting Nagel v. ADM Investor Services, Inc., 217 F.3d 436, 441 (7th Cir. 2000) (noting
that a seller’s promise to “sell another contract against which the buyer can offset the first contract” makes
a contract “work as if fungible.”)
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Finally, we analyzed whether the Perpetual Contracts’ indefinite duration should affect
their categorization. We focused on this term of the Perpetual Contracts because courts
have, at times, described a futures contract as providing for the purchase or sale of a
commodity “at a fixed date in the future,” 23 or “on a date certain,”24 or “at or before a
stated future time.”25 Courts have not, however, viewed this characteristic as necessary
to conclude that a contract is a futures contract. To the contrary, courts have repeatedly
explained that, “While futures contracts generally have a specified future delivery date, or
settlement date, that date is not always specified thus allowing some futures contracts to
be of ‘indefinite duration.’”26 For example, the Seventh Circuit in CME v. SEC
concluded that contracts of “indefinite duration” can possess the attribute of “futurity” –
generally associated with futures contracts 27 – because futurity means “value that is set in
the future” and exists where contracts provide for future executory payment obligations,
not only where a contract has a final-settlement date and fixed term. 28 And, in Zelener,
the Commission took the position that the transactions at issue were futures contracts
because customers’ positions were held open indefinitely. 29
23
CME v. SEC at 542.
24
Tauber at 971.
25
Erskine at 323.
26
Standard Forex II, 1996 WL 435440, at *10, 1996 U.S. Dist. LEXIS 14778, at *29. See, also CFTC v.
Intern. Fin. Servs., 323 F.Supp.2d 482. 498 (S.D.N.Y. 2004) (“As a matter of law, defendants wrongly
characterize certain indicia of futures contract as essential features of such contracts. Principally, they argue
at length that without a fixed date for future delivery, a transaction cannot be a futures contract within the
Commission’s jurisdiction. They cite no authority for this proposition, however”) and CFTC v.
International Foreign Curren., 334 F.Supp.2d 305, 312 (E.D.N.Y. 2004) (“[T]he fact that Defendants’
contracts failed to have a specified future delivery date is not determinative”).
27
See CFTC v. First Lexington Group, LLC et. Al., 03 CV 9124 (GBD) (S.D.N.Y. Mar. 24, 2008).
28
CME v. SEC at 541. The contracts at issue in CME v. SEC – “index participations” or “IPs” – were
perpetual-term contracts based on the value of a securities index. The seller of an IP promised to pay the
buyer the value of the underlying index as measured on a “cash-out day”, while the buyer paid the seller for
the IP in cash on the date of the sale. Id. at 539. The IPs were settled on a quarterly basis, and upon
settlement the seller would owe the buyer a payment obligation approximating the value of dividends the
stocks in the index paid out during the prior quarter. Id. The IPs thus resemble the Perpetual Contracts in
that (i) long-side holders were not subject to a binding, final-settlement date and (ii) they provide for
executory payments (for the IPs, the seller’s quarterly dividend payments; for the Contracts, the funding
payments) determined following initiation of the contract. Although long-side holders of the IPs could
exercise, on a quarterly or semi-annual basis, their privilege to “cash-out” and thereby trigger the short-side
holder’s obligation to pay the value of the underlying index, delivery on the “cash-out” date was not the
dominant characteristic of the IPs as final-settlement was not a binding obligation on both parties to the
contract (i.e., long-side holders would ordinarily never face an obligation to cash-out).
29
See Zelener at 863. Although the Court ruled against the CFTC in Zelener, the facts in that case contrast
with those here. In that case, retail customers traded foreign exchange on an over-the-counter basis with a
company controlled by the defendant, and the parties rolled their transactions so that customers were
exposed to foreign currency prices without taking delivery. Zelener at 863. Notably, customers in that
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Based on this analysis, Kalshi intends to categorize the Perpetual Contracts as futures
contracts in its Regulation 40.2 self-certification.
B. Regulating the Perpetual Contracts as Futures Contracts Would Reduce
Regulatory Arbitrage and Promote Competition
As indicated above, categorization of the Perpetual Contracts as futures contracts or
swaps will have significant implications for their regulatory treatment, and the
regulatory categorization of perpetual digital-asset derivative contracts is unclear under
existing law. The lack of clarity regarding the categorization of such contracts creates
opportunity for unnecessary regulatory arbitrage due to the inconsistent treatment of
substantively similar products.
The indefinite term of the Perpetual Contracts aligns them with similar products
offered by non-U.S. exchanges. Meanwhile, other DCMs and DCOs have already
begun offering “perpetual-style” futures contracts that are designed to mimic the
economics of true perpetual contracts, but with an expiry date that presents unwanted
risk near the contracts’ expiry. One of those DCMs and DCOs has also begun to offer
retail leveraged spot digital asset transactions, which it offers as futures contracts
under Section 2(c)(2)(D) of the CEA.30 Those transactions also bear a high degree of
economic similarity to the Perpetual Contracts, but with the added potential for
custody and other risks associated with physical digital asset trading.
Confirmation that Kalshi may self-certify the Perpetual Contracts under Regulation 40.2,
like these other transaction types, without the threat of a stay or other enforcement action
for false certification, would promote a consistent regulatory treatment across
economically equivalent transactions. In contrast, requiring such contracts to be
case did not purchase identical contracts, and their contracts did not provide a right of offset. Id. at 867.
By contrast, here each Perpetual Contract would be identical, and offset would be guaranteed by operation
of Klear as central counterparty to all Perpetual Contracts bought or sold on Kalshi.
30
Section 2(c)(2)(D)(iii) of the CEA applies the exchange-trading requirement in Section 4(a) of the CEA
to retail leveraged commodity transactions as though they are futures contracts. Congress added this
provision to the CEA as part of the Dodd-Frank Act, at the same time it amended the CEA to regulate
swaps. We think it is notable that Congress elected, at that time, to treat retail leveraged commodity
transactions as though they are futures contracts, not swaps. Congress did so in order to fix the Zelener
“loophole” by subjecting rolling spot contracts to futures regulation, not swaps regulation. See 156 Cong,
Rec. S5,924 (daily ed. July 15,2010) (statement of Sen. Lincoln); see also Hearing to Review Implications
of the CFTC v. Zelener Case Before the Subcomm. on General Farm Commodities and Risk Management
of the H. Comm. on Agriculture, 111th Cong. 52-664 (2009) (statement of Hon. Jim Marshall, United
States Representatives) (“What we are talking about [regarding expanding the Commission’s authority over
retail commodity transactions] though is expanding the-well, correcting would be the argument the Zelener
interpretation of what a futures contract is. If in substance it is a futures contract, it is going to be regulated.
It doesn’t matter how clever your draftsmanship is.”). It would contradict Congressional intent to place the
Perpetual Contracts, which likewise provide for cash-settled, leveraged retail exposure to commodities, in a
different regulatory category.
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categorized as swaps would subject them to higher initial margin requirements, 31
transaction reporting under Parts 43 and 45 of the Commission’s regulations in addition
to Part 16, and counting towards the swap dealer de minimis threshold. Applying those
additional requirements to the Perpetual Contracts would discourage trading in them,
even though they exhibit less risk than the over-the-counter swaps those requirements
were designed to address. Regulating the Perpetual Contracts as swaps also would foster
continuing incentives for U.S. market participants to seek to trade on unregulated, non-
U.S. markets offering similar contracts without the protections of Commission regulation.
V. Requested No-Action Position
For the foregoing reasons, and without asking that the Division or the Commission
concur with our categorization analysis, we request that the Division issue a no-action
letter confirming that it will not recommend that the Commission stay Kalshi’s listing of
Perpetual Contracts under Regulation 40.2(c) or commence enforcement action against
Kalshi for a false certification, solely on the basis that Kalshi certifies the Perpetual
Contracts as futures contracts, rather than swaps. This no-action position would expire
on the effectiveness of any future rulemaking or interpretation by the Commission,
guidance by the Division, or federal legislation addressing the categorization of Perpetual
Contracts.
* * *
Thank you for your consideration of this letter. Please do not hesitate to contact me at [•]
with any questions you may have.
Pursuant to Regulation 140.99(c)(3), the undersigned hereby certifies that the material
facts set forth herein are true and complete to the best of their knowledge, and undertakes
that, if at any time prior to the issuance of a no-action letter, any material representation
made in this letter ceases to be true and complete, they will promptly inform Commission
Staff in writing of all materially changed facts and circumstances.
Respectfully submitted,
31
See Note 3, supra.
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Confidential Treatment Requested by Klear
February 18, 2026
MEMORANDUM TO: KalshiEX LLC
Kalshi Klear LLC
FROM: Colin D. Lloyd
Natasha Vasan
(Sullivan & Cromwell LLP)
RE: Categorization of Proposed Perpetual Contracts
Kalshi Klear LLC (“Klear”) has submitted to the Commodity Futures
Trading Commission (the “Commission” or “CFTC”) an application to amend Klear’s
order of registration as a derivatives clearing organization (“DCO”) to permit it to clear
perpetual contracts referencing Bitcoin (the “Contracts”), which will be traded on
KalshiEX LLC (“KalshiEx”), a board of trade designated by the Commission as a
contract market (“DCM”).
To assist Klear with this application, you have asked that we address the
categorization of the Contracts under the Commodity Exchange Act (“CEA”) and
Commission rules thereunder. Categorization of the Contracts will affect such matters as
the scope of Klear’s amended order of registration,1 the minimum initial margin
requirements for the Contracts,2 reporting obligations for KalshiEx and Klear, and
registration obligations for market participants trading in the Contracts.3 For the reasons
and subject to the assumptions set out below, in our view the Commission should
categorize the Contracts as contracts of sale of a commodity for future delivery (“futures
contracts”), not swaps.4
1
Klear’s existing order of registration permits it to clear fully collateralized swaps. Klear is applying to
amend the order because the Contracts will be leveraged, not fully collateralized.
2
See Commission Regulation 39.13(g)(2)(ii), 17 C.F.R. 39.13(g)(2)(ii) (setting different minimum
liquidation times for futures, options, and swaps).
3
These considerations are discussed in greater detail in Part II.C. below.
4
The analysis herein is limited in scope to the Contracts and does not address any other contract listed or
proposed to be listed by Kalshi, including event contracts. The regulatory categorization of any contract
necessarily must take into account all of its terms, characteristics and other relevant facts and
circumstances.
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Confidential Treatment Requested by Klear
I. Factual Background
Each Contract will provide its holder either long or short, as applicable,
economic exposure to the spot price of Bitcoin5 by providing for the holder to make or
receive “funding” payments that vary based on the price of Bitcoin relative to the price of
a Contract. When the Contract price exceeds the price of Bitcoin, payment will be due
from the long-side holders to short-side holders, and vice versa if the price of Bitcoin
exceeds the Contract price. This funding mechanism is intended to align the price of the
Contracts with the Bitcoin price by incentivizing market participants to (i) take on short
positions in the Contracts when the Contract price exceeds the price of Bitcoin, thereby
bringing the Contract price down towards the Bitcoin price and (ii) take on long positions
in the Contracts when the Bitcoin price exceeds the Contract price, increasing the
Contract price towards the Bitcoin price.
Klear will calculate funding payments due or owing to each Member with
an open position in the Contracts every eight hours.6 A Member that holds Contract
positions through a funding rate period (i.e., every eight hours) will accrue a funding
payment obligation or entitlement. Contract settlement will take place in U.S. dollars,
and will occur twice per day, at mid-day and end-of-day. Upon settlement, Klear will
calculate the mark-to-market value of all open Contract positions and, accordingly,
determine and distribute or collect margin obligations from all Members with open long
or short positions in the Contracts. A Member’s net margin obligation for each
settlement period will include aggregate funding payment obligations and/or entitlements
accrued since the prior settlement period, in addition to other risk-based margin charges
(i.e., a base margin obligation, a liquidity risk charge and an anti-procyclicality buffer).
Each Contract will have a standard notional size corresponding to 0.0001
Bitcoin. They will trade on KalshiEx’s central limit order book, with pre- and post-trade
price transparency. The Contracts will be centrally cleared by Klear, acting as central
counterparty. Standardization and central clearing will make the Contracts fungible with
each other.
The Contracts will have an indefinite (or “perpetual”) term. As such, they
will not expire on a fixed date. Instead, a Member wishing to exit all or part of its
position will enter into an offsetting Contract on KalshiEx. The Contracts will not
provide for physical settlement of Bitcoin; they will solely settle via the cash payments
described above.
The indefinite term of the Contracts aligns them with similar products
offered by non-U.S. exchanges. Klear has considered instead offering a product that has
a fixed final settlement date but with margin payments adjusted to reflect spot prices,
5
Klear will calculate the spot price of Bitcoin by reference to CF Benchmark’s Bitcoin Real Time Index.
6
Each funding payment will be the product of (i) a funding rate, determined by Klear pursuant to the Klear
Margin Risk Framework, (ii) the Member’s open position quantity, (iii) the Member’s position side (long
or short) and (iv) the Contract’s mark-to-market price as determined by a 60-second volume-weighted
average price formula.
-2-
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Confidential Treatment Requested by Klear
which some other DCMs and DCOs offer as “perpetual-style” futures. However, Klear
has received feedback from its Members that the residual expiry risk associated with
those products, and resulting need to “roll” positions around expiry, presents risk
management challenges and causes confusion, even if the expiry date is far into the
future.
II. Discussion and Analysis
Below we address why, from legal and policy perspectives, the
Commission should categorize the Contracts as futures contracts.
A. The CEA’s “Swap” Definition Per Se Excludes Futures Contracts
Section 1a(47) of the CEA7 provides that, “[e]xcept as provided in
subparagraph (B), the term ‘swap’ means any agreement, contract, or transaction” that
meets any of six clauses set out in subparagraph (A) of that definition. Subparagraph (B)
then sets out ten exclusions from the “swap” definition. The exclusions are not qualified
in any respect; if an agreement, contract, or transaction falls within one of the exclusions,
it is not a swap, regardless of whether it would otherwise fit within one of the clauses set
out in subparagraph (A).
The per se nature of these exclusions is illustrated by the treatment of
securities options. Clause (A)(i) covers any agreement, contract, or transaction “that is a
put, call, cap, floor, collar, or similar option of any kind that is for the purchase or sale, or
based on the value, of 1 or more . . . . securities.”8 Clause (B)(iii) then further provides
that “the term ‘swap’ does not include . . . any put, call, straddle, option, or privilege on
any security, certificate of deposit, or group or index of securities, including any interest
therein or based on the value thereof, that is subject to . . . the Securities Act of 1933
[and] the Securities Exchange Act of 1934.”9 As a consequence, securities options are
not categorized as swaps, even though they would, but for the exclusion in clause (B)(iii),
fall within clause (A)(i) of the “swap” definition.
The same is true for futures contracts. Take the financially settled Bitcoin
futures contract listed by the Chicago Mercantile Exchange (“CME”). That contract
provides for cash settlement at expiry (which is either monthly or quarterly) based on the
price of Bitcoin, without any physical delivery.10 But for subparagraph (B) of the “swap”
definition, this CME contract would fall within clause (A)(iii) of that definition as an
agreement, contract, or transaction “that provides on an executory basis for the exchange,
on a fixed or contingent basis, of 1 or more payments based on the value or level of 1 or
more . . . commodities . . . and that transfers, as between the parties to the transaction, in
7
7 U.S.C. § 1a(47).
8
7 U.S.C. § 1a(47)(A)(i).
9
7 U.S.C. § 1a(47)(B)(iii).
10
For more details about this contract’s specifications, see
https://www.cmegroup.com/markets/cryptocurrencies/bitcoin/bitcoin.contractSpecs.html.
-3-
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Confidential Treatment Requested by Klear
whole or in part, the financial risk associated with a future change in any such value or
level without also conveying a current or future direct or indirect ownership interest in an
asset (including any enterprise or investment pool) or liability that incorporates the
financial risk so transferred.”11 However, this contract is instead listed by CME and
regulated by the Commission as a futures contract because it falls within clause (B)(i),
which provides, in relevant part, that “the term ‘swap’ does not include . . . any contract
of sale of a commodity for future delivery.”12
As these examples demonstrate, if the Contracts qualify as futures
contracts, then they are not swaps.
B. The Contracts Should Qualify as Futures Contracts
Neither the CEA nor Commission rules offer a fixed definition for what
constitutes a “futures contract.” Instead, the Commission and the courts assess each
transaction “as a whole with a critical eye toward its underlying purpose”13 by evaluating
whether certain characteristics common to futures contracts are present.14 As laid out
below, the Contracts exhibit all of the relevant characteristics of futures contracts.
1. The Contracts Exhibit the Characteristics of Futures Contracts
The Commission has historically described futures contracts as
“standardized contracts for the purchase or sale of commodities which provide for future,
as opposed to immediate, delivery, and which are directly or indirectly offered to the
general public and generally secured by earnest money, or ‘margin’ . . . [and that] are
entered into primarily for the purpose of assuming or shifting the risk of change in value
of commodities, rather than for transferring ownership of the actual commodities.”15
Courts have similarly focused on standardization, fungibility, and offset as the key
characteristics of futures contracts.16
11
7 U.S.C. § 1a(47)(A)(iii).
12
7 U.S.C. § 1a(47)(B)(i).
13
See CFTC v. Co Petro Marketing Group, Inc. 680 F.2d 573, 581 (9th Cir. 1982) (“Co Petro”).
14
See CFTC Interpretive Letter No. 98-73, Comm. Fut. L. Rep. ¶27, 449 (Oct. 8, 1998) (“Letter 98-73”);
see, also CFTC Interpretive Letter No. 97-01, Comm. Fut. L. Rep. ¶26, 937 (Dec. 12, 1996); CFTC v.
UForex Consulting, 551 F.Supp.2d, 513, 529 (W.D.La. 2008), CFTC v. Fleury, 2010 WL 5146283 (S.D.
Fl.) at *7.
15
See In re Stovall, et. al., [1977-1980 Transfer Binder] Comm. Fut. L. Rep. (CCH) 20,941, p. 6 (CFTC
Dec. 6, 1979) (“Stovall”).
16
See, e.g., Co Petro at 579-80 (“Except for price, all the futures contracts for a specified commodity are
identical in quantity and other terms. The fungible nature of these contracts facilitates offsetting
transactions by which purchasers or sellers can liquidate their positions by forming opposite contracts.”);
see, also Transnor (Bermuda) Ltd. v. BP N. Am. Petroleum, 738 F. Supp. 1472, 1492-93 (S.D.N.Y. 1990)
(following Stovall and Co Petro to define what constitutes a futures contract) and Salomon Forex, Inc. v.
Tauber 8 F.3d 966, 971 (4th Cir. 1993) (“Tauber”) (“To facilitate the development of a liquid market for
these transactions, these contracts are standardized and transferrable. Trading in futures seldom results in
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In the 1980s and 1990s, the Commission distinguished swaps from
futures contracts based on similar characteristics. In 1989, the Commission adopted a
safe harbor from futures regulation for a swap if: the swap has individually tailored
terms; there is an absence of exchange-style offset; there is no clearing organization or
margin system; the swap is undertaken in connection with a line of business; and the
swap is not marketed to the public.17 In 1993, the Commission adopted an exemption
that, similarly, distinguished swaps from futures contracts based on whether: the swap
agreement was entered into solely between sophisticated parties (“eligible swap
participants”) at the time such persons entered into the swap agreement; the swap
agreement is not part of a fungible class of agreements that are standardized as to their
material economic terms; the creditworthiness of any party having an actual or potential
obligation under the swap agreement would be a material consideration in entering into
or determining the terms of the swap agreement, including pricing, cost, or credit
enhancement terms of the swap agreement; and the swap agreement is not entered into
and traded on or through a multilateral transaction execution facility.18
More recently, courts have turned away from the “totality of
circumstances” analysis reflected by the foregoing precedent. Instead, at least in the
cases of contacts involving intangible commodities, courts have identified whether an
executory contract is a futures contract based on whether there is trading “in the
contract.”19 When evaluating whether trading “in the contract” exists for a given contract,
courts have looked to whether the contract is standardized and fungible,20 as evidenced
by (i) the contract trading at a fixed, standardized unit quantity,21 (ii) each party’s
obligations being guaranteed by a clearing house that sets margin requirements,22 and (iii)
the ability of holders to exit their positions by offset.23
physical livery of the subject commodity, since the obligations are often extinguished by offsetting
transactions that product a net profit or loss.”).
17
See Policy Statement Concerning Swap Transactions, 54 Fed. Reg. 30,694 (July 21, 1989).
18
Exemption of Certain Swap Agreements, 58 Fed. Reg. 5,587 (Nov. 12, 1993).
19
See, e.g., CFTC v. Erskine, 512 F.3d 309, 325 (6th Cir. 2008) (“Erskine”), CFTC v. Zelener, 373 F.3d
861, 865 (7th Cir. 2004) (“Zelener”), and Chicago Mercantile Exchange v. SEC, 883 F.2d 537, 542 (7th Cir.
1989) (“CME v. SEC”). Courts evaluating the regulatory categorization of contracts on tangible
commodities have, at least in some instances, stuck with the “totality of circumstances” approach from Co
Petro. See Andersons, Inc. v. Horton Farms, Inc., 166 F.3d 308, 318 (6th Cir. 1998). The Contracts are
derivatives on Bitcoin, an intangible commodity. Accordingly, the analysis herein does not address the
regulatory categorization of contracts on tangible commodities.
20
See Erskine at 325 (“the distinction [between futures and forward contracts] turns on standardization and
fungibility of the contract.”)
21
Id.
22
CME v. SEC at 542.
23
Zelener at 868, quoting Nagel v. ADM Investor Services, Inc., 217 F.3d 436, 441 (7th Cir. 2000) (noting
that a seller’s promise to “sell another contract against which the buyer can offset the first contract” makes
a contract “work as if fungible.”)
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The Dodd-Frank Act arguably changed this analysis, at least in part, by
granting the Commission authority to mandate swaps for central clearing at DCOs24 and
trading on DCMs and swap execution facilities (“SEFs”).25 These changes led market
participants to ask the Commission to clarify that a DCM can “list for trading a futures
contract regardless of whether it could be viewed as a swap if traded over-the-counter or
on a SEF, since futures and swaps are indistinguishable in material economic effects.”26
The Commission declined to provide that clarification, noting, “Prior distinctions that the
CFTC relied upon (such as the presence or absence of clearing) to distinguish between
futures and swaps may no longer be relevant.”27 The Commission then went on to say,
“If a DCM has a view that a particular product is a futures contract, it may self-certify the
contract consistent with that view.”28
Taken together, this precedent evidences a clear understanding, over
multiple decades, that futures contracts are distinguished by standardization, fungibility,
offset, and exchange trading. Even post-Dodd-Frank, those characteristics should remain
relevant, given that even many centrally cleared swaps (such as interest rate swaps) are
not fully standardized as to tenor or size (among other terms) and trading can take place
on SEFs, which may lack the centralized market characteristics of a DCM (e.g., SEFs can
permit trading via request for quote in addition to an order book). The Commission’s
post-Dodd-Frank guidance also makes clear that a DCM can self-certify a product as a
futures contract, even if the product is “indistinguishable in material economic effects”
from a swap.29
The Contracts will exhibit all of the futures contract characteristics
described above:
• The Contracts will have a fixed, standardized unit quantity;
• Each party’s obligations will be guaranteed via novation to Klear,
which will act as central counterparty;
24
See 7 U.S.C. 2(h)(1).
25
See 7 U.S.C. 2(h)(8).
26
Further Definition of “Swap,” “Security-Based Swap,” and “Security-Based Swap Agreement”; Mixed
Swaps; Security-Based Swap Agreement Record Keeping, 77 Fed. Reg. 48,208, 48303 (Aug. 13, 2012)
(“2012 Definitions Release”).
27
Id.
28
Id.
29
We recognize that the Dodd-Frank Act also envisions that a DCM can list swaps. In particular, Section
2(e) of the CEA makes it unlawful for a person that is not an eligible contract participant to enter into a
swap that is not entered into on, or subject to the rules of, a DCM. 7 U.S.C. 2(e). This accords with the
fact that some exchange-traded contracts can fall within subparagraph (A) of the “swap” definition without
being excluded by subparagraph (B)’s futures contract exclusion. For example, commodity options
contracts (other than options on futures contracts) are swaps under the CEA. See 2012 Definitions Release
at 48236.
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• Klear will set and collect margin;
• Holders will be able to exit their positions via offset;
• The Contracts will be available to the general public, including
retail participants;
• Parties will enter into the contracts for the purpose of assuming or
shifting the risk of change in value of Bitcoin, without the
possibility of transferring ownership of Bitcoin; and
• The Contracts will trade on, and be self-certified as futures
contracts by, a DCM.30
2. The Contracts’ Indefinite Duration Does Not Make Them Swaps
One characteristic that could be argued to distinguish the Contracts from a
conventional futures contract is that they have an indefinite duration. Courts have, at
times, described a futures contract as providing for the purchase or sale of a commodity
“at a fixed date in the future,”31 or “on a date certain,”32 or “at or before a stated future
time.”33
But that is a red herring. Courts have repeatedly explained that, “While
futures contracts generally have a specified future delivery date, or settlement date, that
date is not always specified thus allowing some futures contracts to be of ‘indefinite
duration.’”34 For example, the Seventh Circuit in CME v. SEC concluded that contracts
30
Trading on a DCM is not a necessary precondition for a transaction to qualify as a futures contract and be
excluded from the “swap” definition. When legislating to enact Dodd-Frank, Congress considered the
possibility of limiting the futures exclusion from the CEA’s swap definition only to exchange-traded
futures, but ultimately determined not to do so. See, H.R. 4173, as engrossed in the House of
Representatives, excluded "(i) any contract of sale of a commodity for future delivery … traded on or
subject to the rules of any board of trade designated as a contract market under section 5 or 5f” (emphasis
added). See H.R. 4173 (E.H.), Section 3101. The Senate incorporated a similar exclusion in the Bill in its
considerations in March 2010: "any contract of sale of a commodity for future delivery or security futures
product traded on or subject to the rules of any board of trade designated as a contract market under section
5 or 5f.” (emphasis added); but see 7 U.S.C. 1a(47)(B)(i) (excluding the requirement that futures contracts
subject to exclusion from the swap definition be exchange-traded). Also, Section 4(a) of the CEA still
prohibits off-exchange futures contracts, without treating them as swaps. That said, the fact that the
Contracts will trade on a DCM and be cleared by a DCO bolsters the conclusion that there is trading “in the
contract.”
31
CME v. SEC at 542.
32
Tauber at 971.
33
Erskine at 323.
34
Standard Forex II, 1996 WL 435440, at *10, 1996 U.S. Dist. LEXIS 14778, at *29. See, also CFTC v.
Intern. Fin. Servs., 323 F.Supp.2d 482. 498 (S.D.N.Y. 2004) (“As a matter of law, defendants wrongly
characterize certain indicia of futures contract as essential features of such contracts. Principally, they
argue at length that without a fixed date for future delivery, a transaction cannot be a futures contract within
the Commission’s jurisdiction. They cite no authority for this proposition, however”) and CFTC v.
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of “indefinite duration” can possess the attribute of “futurity” – generally associated with
futures contracts35 - because futurity means “value that is set in the future” and exists
where contracts provide for future executory payment obligations, not only where a
contract has a final-settlement date and fixed term.36 And, in Zelener, the Commission
itself took the position that the transactions at issue were futures contracts because
customers’ positions were held open indefinitely.37
Accordingly, the Contracts’ indefinite duration does not disqualify them
from categorization as futures contracts. And, as discussed above, if the Contracts
qualify as futures contracts, then they are not swaps.
3. Prior Commission Enforcement Actions Do Not Bear on
Categorization of the Contracts
The Commission has, in some of its enforcement actions, taken the view
that perpetual-duration digital-asset derivative products constitute swaps.38 In all but one
of these cases, the Commission looked only to features of the products at issue relevant to
whether they fell within the scope of CEA Section 1a(47)(A)(iii). The Commission did
not address whether such products were futures contracts, which would be excluded from
the swap definition. As discussed above, the fact that a contract falls within the scope of
CEA Section 1a(47)(A)(iii) because it “transfers, as between the parties to the transaction
International Foreign Curren., 334 F.Supp.2d 305, 312 (E.D.N.Y. 2004) (“[T]he fact that Defendants’
contracts failed to have a specified future delivery date is not determinative”).
35
See CFTC v. First Lexington Group, LLC et. Al., 03 CV 9124 (GBD) (S.D.N.Y. Mar. 24, 2008).
36
CME v. SEC at 541. The contracts at issue in CME v. SEC – “index participations” or “IPs” – were
perpetual-term contracts based on the value of a securities index. The seller of an IP promised to pay the
buyer the value of the underlying index as measured on a “cash-out day”, while the buyer paid the seller for
the IP in cash on the date of the sale. Id. at 539. The IPs were settled on a quarterly basis, and upon
settlement the seller would owe the buyer a payment obligation approximating the value of dividends the
stocks in the index paid out during the prior quarter. Id. The IPs thus resemble the Contracts in that (i)
long-side holders were not subject to a binding, final-settlement date and (ii) they provide for executory
payments (for the IPs, the seller’s quarterly dividend payments; for the Contracts, the funding payments)
determined following initiation of the contract. Although long-side holders of the IPs could exercise, on a
quarterly or semi-annual basis, their privilege to “cash-out” and thereby trigger the short-side holder’s
obligation to pay the value of the underlying index, delivery on the “cash-out’ date was not the dominant
characteristic of the IPs as final-settlement was not a binding obligation on both parties to the contract (i.e.,
long-side holders would ordinarily never face an obligation to cash-out).
37
See Zelener at 863. Although the Court ruled against the CFTC in Zelener, the facts in that case contrast
with those here. In that case, retail customers traded foreign exchange on an over-the-counter basis with a
company controlled by the defendant, and the parties rolled their transactions so that customers were
exposed to foreign currency prices without taking delivery. Zelener at 863. Notably, customers in that
case did not purchase identical contracts, and their contracts did not provide a right of offset. Id. at 867.
By contrast, here each Contract would be identical, and offset would be guaranteed by operation of Klear as
central counterparty to all Contracts bought or sold on KalshiEx.
38
See, e.g., Complaint, CFTC v. Changpeng Zhao, et. al., No. 23-cv-01887 (March 27, 2023) (“Binance”);
Complaint, CFTC v. MEK Global Limited, et. al., No. 24-cv-2255 (March 26, 2024); Complaint, CFTC v.
Eisenberg, No. 23-cv-00173 (Jan. 9, 2023); Complaint, CFTC v. HDR Global Trading Limited, et. al., No.
20-cv-8132 (Oct. 1, 2020); In the Matter of Deridex, Inc., CFTC No. 23-42 (Sept. 7, 2023).
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… the financial risk associated with a future change” in the price of the underlying asset
is not determinative of its regulatory categorization if the product qualifies as a futures
contract.
The only instance in which the Commission has addressed the possibility
that perpetual-duration digital-asset derivative products could be excluded from the
“swap” definition as futures contracts is in a single footnote in the Commission’s
response to Binance’s Motion to Dismiss.39 However, as noted by the Commission,
Binance failed to meaningfully address why the perpetual contracts at issue were futures
contracts under the Zelener line of precedent; in particular, Binance relied on the sole
point that positions in their contracts could be closed by offset, and they failed to
reference any particular facts that indicated “trading in the contract.”40
Because no party in the Binance litigation, or any other litigation or
enforcement action that we have identified, has raised the question of whether perpetual-
duration digital-asset derivative products are futures contracts under Zelener, the
Commission has yet to squarely address this question. In fact, in a recent request for
comment regarding “perpetual” style digital-asset derivatives, Commission Staff
expressly requested public comment regarding the proper regulatory categorization of
these contracts.41
C. Categorizing the Contracts as Futures Contracts Would Reduce
Regulatory Arbitrage and Promote Competition
As noted above, other DCMs and DCOs already offer “perpetual-style”
futures contracts that are designed to mimic the economics of the Contracts, but with an
expiry date that presents unwanted risk near those contracts’ expiry. One of those DCMs
and DCOs has also begun to offer retail leveraged Bitcoin spot transactions, which it
offers as futures contracts under Section 2(c)(2)(D) of the CEA.42 Those transactions
39
Plaintiff Response to Defendants’ Motion to Dismiss, Binance at note 14 (Sept. 22, 2023).
40
Brief in Support of Defendants’ Motion to Dismiss, Binance at note 19 (July 27, 2023).
41
CFTC, Request for Comment on the Trading and Clearing of “Perpetual” Style Derivatives question 13
(Apr. 21, 2025).
42
Section 2(c)(2)(D)(iii) of the CEA applies the exchange-trading requirement in Section 4(a) of the CEA
to retail leveraged commodity transactions as though they are futures contracts. Congress added this
provision to the CEA as part of the Dodd-Frank Act, at the same time it amended the CEA to regulate
swaps. We think it is notable that Congress elected, at that time, to treat retail leveraged commodity
transactions as though they are futures contracts, not swaps. Congress did so in order to fix the Zelener
“loophole” by subjecting rolling spot contracts to futures regulation, not swaps regulation. See 156 Cong,
Rec. S5,924 (daily ed. July 15,2010) (statement of Sen. Lincoln); see also Hearing to Review Implications
of the CFTC v. Zelener Case Before the Subcomm. on General Farm Commodities and Risk Management
of the H. Comm. on Agriculture, 111th Cong. 52-664 (2009) (statement of Hon. Jim Marshall, United
States Representatives) (“What we are talking about [regarding expanding the Commission’s authority over
retail commodity transactions] though is expanding the-well, correcting would be the argument the Zelener
interpretation of what a futures contract is. If in substance it is a futures contract, it is going to be regulated.
It doesn't matter how clever your draftsmanship is.”). It would contradict Congressional intent to place the
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also bear a high degree of economic similarity to the Contracts, but with the added
potential for custody and other risks associated with physical Bitcoin trading.
Categorizing the Contracts as futures contracts, like these other transaction
types, would ensure a consistent regulatory treatment across economically equivalent
transactions. In contrast, categorizing the Contracts as swaps would subject them to
higher initial margin requirements,43 transaction reporting under Parts 43 and 45 of the
Commission’s regulations in addition to Part 16,44 and counting towards the swap dealer
de minimis threshold. Applying those additional requirements to the Contracts would
discourage trading in the Contracts, even though they exhibit less risk than these others
transaction types. It also would foster continuing incentives for U.S. market participants
to seek to trade on unregulated, non-U.S. markets offering perpetual contracts similar to
the Contracts without the protections of Commission regulation.
III. Conclusion
For the foregoing reasons, the Commission should categorize the
Contracts as futures contracts, not swaps.
* * *
Please do not hesitate to contact me at (212) 558-3040 or
[email protected] if you have any questions regarding these matters.
C.D.L.
N.V.
Contracts, which likewise provide for cash-settled, leveraged retail exposure to commodities, in a different
regulatory category.
43
See Note 2, supra.
44
Commission Staff have previously provided a no-action letter to KalshiEx and Klear from Part 43 and 45
reporting for fully collateralized swaps, but that letter would not apply to the Contracts because they are not
fully collateralized.
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