CME Group filed a lawsuit against the Commodity Futures Trading Commission alleging it should not have approved Kalshi's perpetual futures contracts the way it did and asking a court to vacate the approval and self-certified products.

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Futures or swaps?

The narrative

CME Group sued the CFTC on Thursday, alleging the agency did not properly consider prediction market provider Kalshi's application to list perpetual futures contracts before granting the application. The suit came a day after outgoing CEO Terry Duffy announced it would file over the approval granted at the end of May.

Why it matters

It is — not to put too fine a point on it — somewhat unusual for a company as established as CME to sue its primary regulator. Perpetual futures, otherwise known as perps, are relatively new and the crypto industry is a major part of these contracts. CME's lawsuit is alleging procedural issues, saying how the CFTC went about its approval of Kalshi's perps violated Dodd-Frank and risk harming the company.

Breaking it down

CME is arguing that perps are harmful to its long-dated futures products. The lawsuit alleges that the CFTC did not consider the ramifications of approving perps, and that these products are actually "swaps" as defined by the Dodd-Frank Act, and not "futures."

Each term carries implications for how the products themselves are to be regulated and what the requirements are for the companies issuing them are. CME CEO Terrence Duffy, who recently announced he's stepping down next year, told CNBC last week that the distinction mandates different rules for participants.

"The CFTC did not engage in its own analysis of whether its approval of Kalshi’s Bitcoin perpetual as a future is consistent with law," CME's lawsuit said. "The CFTC did not even mention the relevant Dodd-Frank provision defining 'swap.' Indeed, the word 'swap' appears nowhere in the Order."

The CFTC instead just "rubberstamped Kalshi's application," the lawsuit claimed.

What's interesting is that the actual landscape of companies securing designated contract market (DCM) approvals and moving into perps is growing quite rapidly. On the same day the CFTC granted Kalshi's application, it sent a no-action letter to Coinbase, seemingly opening the door for that exchange to list perps as well — albeit through an offshore intermediary.