Futures and Derivatives Law Report July / August 2024 | Volume 44 | Issue 7
“ consistent with the entire body of CFTC precedent .” 6
Most of the case law interpreting the forward contract exclusion predates the creation of the regulatory regime for swaps developed post- Dodd-Frank , and the most recent cases focus on distinguishing foreign exchange transactions and spot transactions from futures and do not directly address the forward contract exclusion or its application in the context of potential swaps . 7 Nevertheless , the efforts to define futures and apply the forward contract exclusion add color to the analysis of virtual PPAs and RECs purchase and sale agreements .
A . Circuit Split : Subjective ( Purpose ) vs Objective ( Fungibility ) Standards
While some courts have embraced a subjective approach to evaluating the applicability of the forward contract exclusion that focuses on discerning the purpose of the contract ( i . e ., financial speculation or physical delivery ), others have rejected an intent-based or purpose-based approach and attempted to distinguish futures contracts from forward contracts using objective criteria .
( i ) “ Underlying Purpose Test ” ( Ninth Circuit )
In a landmark decision in 1982 , finding that “ no bright-line definition or list of characterizing elements is determinative ,” the Ninth Circuit in CFTC v . Co Petro Marketing Group established a subjective test in which “[ t ] he transaction must be viewed as a whole with a critical eye toward its underlying purpose .” 8 The court distinguishes futures contracts from forward contracts based on evidence of whether the contracts are marketed and used for speculative purposes ( futures contracts ) or if the parties deal in and contemplate actual delivery of the underlying commodity ( forward contracts ). 9
( ii ) “ Trading in the Contract ” ( Seventh Circuit ) and “ Standardization and Fungibility Test ” ( Sixth Circuit )
In CFTC v . Zelener , the Seventh Circuit rejected delivery ( actual or intended ) as a plausible distinction between futures contracts and forward contracts , noting that the plain language of the CEA describes futures contracts as a “ contract of sale of a commodity for future delivery .” 10 Instead , the Seventh Circuit concluded a forward contract involves the sale of a commodity ( for deferred delivery ) while a futures contract “ involves a sale of the contract .” 11 According to the court , by trading in the contract , futures markets were able to create standardized , clearable contracts that were fungible . 12 “ Forward and spot contracts , by contrast , call for sale of the commodity ; no one deals ‘ in the contract ’; it is not possible to close a position by buying a traded offset , because promises are not fungible ; delivery is idiosyncratic rather than centralized .” 13 The court pointed to the fungible nature of the contract as dispositive , observing that Co Petro (“ the case that invented the multi-factor approach ”) also dealt with a fungible contract , and “[ t ] hat should have been enough to resolve the case .” 14
In 2008 , the Sixth Circuit likewise rejected the importance of “ anticipated or actual delivery ( or lack thereof )” in CFTC v . Erskine . 15 Instead , according to the court , “ the distinction [ between futures contracts and forward contracts ]— as commonly understood — turns on the standardization and fungibility of the contract , and as the
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