July / August 2024 | Volume 44 | Issue 7 Futures and Derivatives Law Report commodity for the transaction to qualify for the forward contract exclusion . This view appears to have originated from the CFTC ’ s attempt to distinguish intangible , non-financial commodities from financial commodities . The CFTC looked to consumption as a means of differentiating the two :
“[ A ] n intangible commodity ( that is not an excluded commodity ) which can be physically delivered qualifies as a nonfinancial commodity [ eligible for the forward contract exclusion ] if ownership of the commodity can be conveyed in some manner and the commodity can be consumed . One example of an intangible nonfinancial commodity that qualifies under this interpretation . . . is an environmental commodity , such as an emission allowance , that can be physically delivered and consumed ( e . g ., by emitting the amount of pollutant specified in the allowance [ or by retiring it without emitting the permitted amount of pollutant ].).” 29
Some have suggested in so doing the CFTC added an additional requirement that any transaction involving an environmental commodity must contemplate the buyer consuming the commodity for the transaction to be eligible for the forward contract exclusion . However , this interpretation requires the CFTC ’ s words “ can be consumed ” to be replaced with “ will be consumed ,” or “ must be consumed .” Instead , the CFTC simply relied on the ability to consume an intangible , non-financial commodity to distinguish it from a financial commodity . This understanding — that there is no additional actual consumption requirement — is consistent with the application of the forward contract exclusion to other non-financial commodities ( e . g ., wheat or gold ) where the purchaser need not consume the commodity it purchases to qualify for the exclusion .
Another way to understand the relevance of consumption is to recognize the analysis as a two-step process : ( 1 ) classify the commodity ; ( 2 ) classify the transaction . The consumption requirement is part of classifying the commodity and requires that an intangible commodity be consumable to differentiate it from a financial commodity and qualify it as a non-financial commodity eligible for the forward contract exclusion . 30 Once a commodity is understood to be a non-financial commodity , the test for the forward contract exclusion is the same for all transactions involving non-financial commodities : whether the predominant feature of the contract is actual , albeit deferred , delivery .
Those who have suggested consumption is required may be relying on the CFTC ’ s use of an example where a buyer consumes an environmental commodity when considering whether environmental commodities , unlike other intangible commodities , can be delivered :
“ The CFTC understands that market participants often engage in environmental commodity transactions in order to transfer ownership of the environmental commodity ( and not solely price risk ) so that the buyer can consume the commodity in order to comply with the terms of mandatory or voluntary environmental programs . Those two features — ownership transfer and consumption — distinguish such environmental commodity transactions from other types of intangible commodity transactions that cannot be delivered , such as temperatures and interest rates . The ownership transfer and consumption features render such environmental commodity transactions similar to tangible commodity transactions that clearly can be delivered , such as wheat and gold .” 31
It seems that some have interpreted this example as limiting the application of the forward
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