Futures and Derivatives Law Report July / August 2024 | Volume 44 | Issue 7
contract exclusion to instances where the buyer intends to consume the commodity . However , a better reading is that the CFTC uses the ability to consume environmental commodities as a way to distinguish environmental products from other intangible commodity transactions that settle financially ( e . g ., weather and interest rates swaps ). In this way , the consumption test is just a way to confirm physical delivery is possible : if the commodity can be consumed , it can be delivered . And delivery is the lynchpin to the forward contract exclusion . This narrower reading and more permissive interpretation is consistent with the examples of tangible commodities referenced by the CFTC . Wheat and gold can both be consumed , but consumption is not required to qualify for the forward contract exemption .
The CFTC effectively summarized the standard for applying the forward contract exclusion to environmental commodities in its final conclusions on the subject :
“ For such transactions , in addition to the factors discussed above , intent to deliver is readily determinable , delivery failures generally result from frustration of the parties ’ intentions , and cash-settlement is insufficient because delivery of the commodity is necessary for compliance purposes . For the foregoing reasons , environmental commodities can be nonfinancial commodities that can be delivered through electronic settlement or contractual attestation . Therefore , an agreement , contract or transaction in an environmental commodity may qualify for the forward exclusion from the swap definition if the transaction is intended to be physically settled .” 32
The requirement that intangible commodities must be “ consumable ” to qualify for the forward contract exclusion has been misunderstood by some to require that the purchaser must in fact consume the commodity . That misunderstanding has led some to mistakenly suggest that environmental commodities may be swaps when they are traded by speculative traders or merchants and not consumed by the purchaser . Instead , because environmental commodities are consumable , they qualify as intangible , non-financial commodities and , therefore , are eligible for the forward contract exclusion .
( iii ) Digital Asset Delivery Guidance
The CFTC issued interpretive guidance on the meaning of the term “ actual delivery ” in the context of CEA section 2 ( c )( 2 )( D ) transactions in virtual currency . CEA section 2 ( c )( 2 )( D ) applies to any agreement , contract , or transaction in any commodity that is ( i ) entered into with , or offered to ( even if not entered into with ), a person that is neither an eligible contract participant nor an eligible commercial entity , ( ii ) on a leveraged or margined basis , or financed by the offeror , the counterparty , or a person acting in concert with the offeror or counterparty on a similar basis . 33 The CEA treats these agreements as contract of sale of a commodity for future delivery . 34 There is an exception for contracts of sale resulting in “ actual delivery ” within 28 days . 35
In interpreting the term “ actual delivery ,” the CFTC determined it would examine how the contract or transaction is marketed and performed instead of relying solely on the language employed in the contract . 36 In the Commission ’ s view , “ actual delivery ” has occurred when a customer secures : ( i ) possession and control of the entire quantity of the commodity ( whether purchased on margin , using leverage , or any other financing arrangement ) and ( ii ) the ability to use the entire quantity of the commodity freely
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