Futures and Derivatives Law Report July / August 2024 | Volume 44 | Issue 7
in considering whether a particular instrument falls within the section 2 ( a )( 1 ) exclusion for forward contracts , the Commission and courts traditionally have considered various factors , predicated primarily on the congressional intent underlying the original enactment of the exclusion . The underlying postulate of the exclusion is that the Acts ’ regulatory scheme for futures trading simply should not apply to private commercial merchandising transactions which create enforceable obligations to deliver but in which delivery is deferred for reasons of commercial convenience or necessity . 23
The Commission also highlighted other distinguishing characteristics of forward contracts , describing them “ as transactions entered into for commercial purposes related to the business of a producer , processor , fabricator , refiner or merchandiser who may wish to purchase or sell a commodity for deferred shipment or delivery in connection with the conduct of its business .” 24 Therefore , they can be used to “ acquire raw material , to purchase and sell inventory or for other merchandising or commercial purposes and , concomitantly , to shift future price risks incident to commercial operations and other forward commitments .” 25 The CFTC identified other characteristics of forward contracts , which include ( i ) individually and privately negotiated principal-to-principal transactions ; ( ii ) generally un-assignable without the consent of the parties ; ( iii ) no clearinghouse , variation margining or settlement system involved ; ( iv ) the contracts create specific delivery obligations ; ( v ) delivery obligations of these transactions create substantial economic risk of a commercial nature to the parties required to make or take delivery thereunder ; and ( vi ) parties entering into the contracts have the capacity to bear such risks and cannot discharge obligations through exchange-style offset . 26
In the Swaps Definition Final Rule , the CFTC expressly extended the Brent Interpretation to apply to the forward exclusion from the swap definition , including for all non-financial commodities . Related to environmental commodities , the CFTC clarified that commercial participants that regularly make or take delivery of the referenced commodity in the ordinary course of their business meet the commercial participant standard of the Brent Interpretation . The Commission further clarified certain alternative delivery procedures are consistent with the intent of the book out provision in the Brent Interpretation but that ultimately , book-outs require confirmation in some type of written or electronic form . Bona fide intent when entering into the transaction to make or take delivery of the commodity covered by the transaction remains the CFTC ’ s focus on whether contracts qualify as forward contracts under the Brent Interpretation .
( ii ) Contracts for Intangible , Non- Financial Commodities
The CFTC has interpreted the forward contract exclusion to apply to contracts for deferred delivery of environmental commodities . As the CFTC explained in 2012 , “ renewable energy credits are nonfinancial commodities and . . . transactions therein are eligible for the forward exclusion if they satisfy the terms thereof .” 27 This is consistent with the statutory scope of the forward contract exclusion , which excludes from the definition of “ swap ” contracts involving “ any sale of a nonfinancial commodity or security for deferred shipment or delivery , so long as the transaction is intended to be physically settled .” 28
However , some have suggested environmental commodities are subject to a further obligation that the buyer of the commodity consume the
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