July / August 2024 | Volume 44 | Issue 7 Futures and Derivatives Law Report
Seventh Circuit suggested , whether there is ‘ trading in the contract ,’ rather than trading only in the underlying commodity .” 16 Despite recognizing standardization and fungibility as dispositive , the court nevertheless defined , “ in common parlance ,” futures contracts based on six elements and contrasted forward contracts using the same elements except with respect to standardization and fungibility . 17
( iii ) Reconciling the Circuit Split
Ultimately , at their heart , the two approaches drive at the same difference : futures ( and swaps ) provide market participants a mechanism to transfer price risk without having to participate in the underlying cash commodity while forward contracts create binding delivery obligations that are not easily avoided . Although the Seventh Circuit and Sixth Circuit reject the focus on physical delivery , their reliance on the fungibility of the futures contract gets to the same end , albeit using a more objective measure . Fungible contracts ( i . e ., the ability to offset a long / short contract with a subsequent short / long contract ) are the key to avoiding physical delivery of the underlying commodity . 18 Recognizing that the forward contract exclusion is tied to physical delivery also makes the futures precedent more relevant to the swaps forward contract exclusion , which expressly incorporates an intent to deliver requirement .
B . The CFTC Approach : Subjective ( Purpose / Intent )
The CFTC has taken an approach most consistent with the Ninth Circuit , applying a “ facts and circumstances ” analysis that turns on whether the contract ’ s predominant characteristic is physical delivery . 19 This intent to deliver has historically been an element of the CFTC ’ s analysis of whether a particular contract is a forward contract . 20 It has taken this approach pre-Dodd- Frank with respect to futures contracts and has adopted this approach in the Swaps Definition Final Rule and interpretive guidance included therein . 21
( i ) Brent Interpretation
In 1990 , the CFTC issued guidance clarifying that certain transactions are excluded from regulation under the CEA as sales of cash commodities for deferred shipment or delivery . 22 The CFTC ’ s Brent Interpretation related to the purchase or sale of Brent crude oil commonly known as 15-day Brent contracts . “ Dated Brent ” contracts specify the date of delivery of the cargo at the time the contract is executed whereas “ 15- day Brent ” contracts specify that delivery of the cargo is to be made during a specific month in the future . “ 15-day Brent ” contracts do not provide for a right of offset , do not rely on variation margining or a settlement system , and prohibit assignment of contractual obligations without counterparty consent . If there are disruptions in the delivery chain , which come with assumption of credit , delivery and related risks , parties have the option to terminate the executed 15-day Brent contract and negotiate payment-of-differences pursuant to a separate , individually negotiated cancellation agreement referred to as a “ bookout .”
In its Brent Interpretation , the Commission clarified the 15-day Brent contracts and resulting payment-of-differences cancellation agreements do not fall under the purview of the CEA . The Commission also provided guidance on characteristics of forwards contracts covered by the exclusion . Specifically , that
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