Yesterday, in a 3-0 opinion, the Ninth Circuit Court of the United States offered up an opinion on prediction markets and state regulation. Here is a good breakdown.
Most of us have said this will become a Supreme Court case, and the latest ruling isn’t going to be the end of it. If the SCOTUS decides to take it up, look for it next year.
The Ninth Circuit decision comes less than one week ahead of a Sept. 3 deadline for New Jersey to submit its appeal of the Third Circuit case to the Supreme Court. The deadline had been pushed back repeatedly.
Two circuit courts disagreeing is the most typical reason for the Supreme Court to take up a case, and those following the issue overwhelmingly believe that the court will take the case at some point.
Kalshi’s legal team includes the $3,250-an-hour Neal Katyal, one of the country’s best-known Supreme Court litigators, who has been more involved with authoring Kalshi’s briefs in recent months.
The Second, Fourth, Sixth, Seventh, and Tenth Circuits are all also hearing appeals regarding Kalshi’s sports event contracts.
A lot of gray-haired market people like me have been consistent in our opinion. We don’t see a fundamental theoretical difference between gambling at a casino on sports or a prediction market in sports.
It’s not that we are against innovation. Many of us were highly innovative in our careers and continue to circulate in those circles. However, we understand markets, how to make a market, a lot better than the execs at the upstarts. We aren’t popular because we are direct and blunt. Putting one of us on your board might be a good idea.
Certainly, the casino is like an OTC bet, and the prediction market functions like an exchange. You can get out of the trade before the game ends.
It was also predictable that whichever side lost, the lawyers for that side would have a problem with the opinion. Lawyers have a way of arguing that way. That’s what they are paid to do.
I am not a lawyer. But I can connect dots.
Here is how prediction markets in sports happened. In 2000, the Commodity Futures Modernization Act was passed. That allowed for a lower level of regulation, which exchanges and the industry needed. In 2010, Dodd-Frank was passed, which opened the tunnel the prediction market companies used to make the case that the CFTC and not states should regulate them.
Kalshi and Polymarket contend that what they are offering are “swaps”. Prediction markets are not swaps.
Swaps are used all the time in finance. Here is how they are defined and how they work. Treasury Secretary Scott Bessent set up a swap facility with Argentina, and it is intuitively obvious to even the most casual of observers that Elizabeth Warren and her crowd have no idea what it is.
When I traded the yield curve at CME, many of the bank trading desks were hedging the floating part of their swap trades where I made markets.
A financial market swap is an over-the-counter (OTC) derivative contract in which two counterparties agree to exchange streams of cash flows (or, in some cases, other financial exposures) over a defined period. The exchange is calculated on a notional principal amount that usually never changes hands. One leg is typically fixed; the other is floating and tied to a reference rate, index, currency, commodity price, or credit event.
Core mechanics
The contract specifies the notional, payment frequency, start/end dates, and the formulas for each leg.
Payments are usually netted: only the difference is paid on each settlement date.
In a plain-vanilla interest-rate swap (the most common type), one party pays a fixed rate and receives a floating rate such as SOFR (or vice versa). The notional is used only to compute the interest amounts.
Currency swaps typically do exchange principal at the beginning and end, plus interest in each currency.
Credit-default swaps function more like insurance: the protection buyer pays a periodic premium and receives compensation if a specified credit event occurs.
Why they exist
Swaps let institutions change the character of an existing cash-flow stream without selling the underlying asset or liability. A company with floating-rate debt can lock in a fixed rate; a bank can transform a fixed-rate loan book into floating; a multinational can hedge currency mismatch. They are also used for speculation and relative-value trading.
Key market features
Customized and privately negotiated (though many interest-rate swaps are now centrally cleared).
Documented under an ISDA Master Agreement.
Carry counterparty credit risk (mitigated by collateral, netting, and clearinghouses).
The global outstanding notional is measured in hundreds of trillions of dollars.
The most liquid and widely used variety remains the interest-rate swap; currency, equity, commodity, and credit-default swaps form the other major families.
That’s not a prediction market in sports.
Also predictably, many in the Nevada congressional delegation crowed about the ruling. My question is: why did they sit on their hands? Legislators are supposed to fix legislation that is passed with more legislation or amendments. No one in the Nevada delegation lifted a finger. In the past month, Steve Horsford introduced a bill, but it is only because he has a tough campaign against Cody Whipple. Cody would be a far better representative and deserves your support and vote.
Prediction markets are very valuable markets, just not in sports. They offer easy risk transfer, can produce price transparency, and make life a lot more efficient.
As I have said before, the only reason the operators chose sports is that the educational hurdles were far lower. The market size was established and huge.
The next battle in this fight between established exchanges and the startups is in perpetual futures. Perp futures have a far better chance of winning a legal argument than sports.
The response of Treasury Secretary Bessent to Senator Warren is absolutely epic. Probably one of my favorite retorts of the decade, and illustrates her ignorance and arrogance simultaneously:
"**Treasury Secretary Scott Bessent’s public response (via X/Twitter on August 28, 2026) to Sen. Elizabeth Warren’s letter on the yen intervention was:**
> “In her latest sciolistic letter to me, @SenWarren made it clear that she knows even less about foreign exchange markets than she does about banking.
>
> What is equally shocking, but not surprising: not a single member of the media mob has a rudimentary-enough level of financial market literacy to spot her remedial error.
>
> To reiterate: under @POTUS, the United States delivers for America’s trusted partners.
>
> For a fuller explanation, I recommend Senator Warren take any entry level course in international finance for her and her staff, or I can personally give her a tutorial on Foreign Exchange for Dummies. Although I am not holding my breath, I hope her next letter will demonstrate that she has learned the difference between a currency purchase and a swap or a loan.”
This accompanied (and summarized) his formal letter reply (dated around August 27–28, 2026) to Warren’s August 13 letter questioning Treasury’s Exchange Stabilization Fund (ESF) intervention to buy yen (selling euros). Key excerpts from the letter, as reported:
- “Treasury exchanged existing Exchange Stabilization Fund foreign-currency assets for yen. No new congressional appropriation was involved, and no credit was extended to Japan. Japan owes Treasury nothing. There is therefore no risk that Japan will fail to repay a debt that does not exist.”
- On the opening of Warren’s letter (which referenced taxpayers bearing costs if Japan could not “repay”): It is “wrong about where the money came [from], what the transaction was, and whether there was even a borrower.” / “Terrifyingly, the opening paragraph is wrong...”
- Legal authority: “Your legal question is answered by the statute cited in your own footnote... Section 5302 expressly authorizes the Secretary, with presidential approval, to deal in foreign exchange in support of orderly exchange arrangements. Treasury’s legal analysis begins with reading the statute. I recommend you try the same.”
- Justification: “Disorderly yen markets can trigger forced unwinds, which could destabilize global markets and ultimately raise borrowing costs for American families and businesses.”
- Closing: “The American people deserve oversight grounded in facts rather than slogans. Although I am not holding my breath, I hope your next letter will demonstrate that you have learned the difference between a currency purchase and a swap or a loan.” (He also offered the “Foreign Exchange for Dummies” tutorial in the letter itself.)
Bessent has had multiple exchanges with Warren (hearings on stocks/conflicts, Fed nominee issues, Argentina support, etc.), but the yen letter + accompanying X post is the most recent widely covered pointed response matching the query. Full primary letter text is not publicly posted in complete form beyond the quoted passages in reporting."
Could you give an example, with real numbers, of an interest rate swap?