July / August 2024 | Volume 44 | Issue 7 Futures and Derivatives Law Report in commerce ( away from any particular execution venue ) no later than 28 days from the date of the transaction . 37 Further , the seller must not retain any interest in , legal right , or control over any of the commodity purchased on margin . 38
The CFTC also believes that the physical settlement involving the entire amount of the purchased commodity must occur , i . e ., no cash settlement or offset mechanism . 39 The CFTC provides relevant examples of actual delivery in the virtual currency context , some of which could be relevant to the purchase and sale of RECs or other environmental attributes , namely :
E “ A record on the relevant public distributed ledger or blockchain address of the transfer of virtual currency , whereby the entire quantity of the purchased virtual currency , including any portion of the purchase made using leverage , margin , or other financing , is transferred from the counterparty seller ’ s blockchain address to the purchaser ’ s blockchain address , over which the purchaser maintains sole possession and control .” 40
E “[ N ] o portion of the purchased commodity could be subjected to a forced sale or otherwise removed from the customer ’ s control .” 41
E “ Actual delivery will not have occurred if , within 28 days of entering into a transaction , the agreement , contract , or transaction for the purchase or sale of virtual currency is rolled , offset against , netted out , or settled in cash or virtual currency ( other than the purchased virtual currency ) between the customer and the offeror or counterparty seller ( or persons acting in concert with the offeror or counterparty seller ).” 42
III . Applying the Law to Virtual PPAs as RECs Purchase and Sale Agreements
Ultimately , whether a specific transaction is a swap or qualifies for the forward contract exclusion is a fact-specific inquiry . Not every virtual PPA will necessarily qualify for the forward contract exclusion , but most RECs purchase and sale agreements clearly fall outside of any definition for futures contracts and likely fall within every construct of the forward contract exclusion .
When understood as an agreement to purchase and sell RECs ( or other environmental attributes ), a virtual PPA is likely to qualify for the forward contract exclusion if the following three criteria are met :
E The commodity is a non-financial commodity ( as is a REC and any consumable environmental commodity ).
E The transaction is for deferred delivery .
E The transaction is intended to be physically settled . 43
The fact that the purchase price is calculated using a formula that resembles a contract-fordifferences is of no significance . As the CFTC has explained , “ to the extent that a transaction is intended to be physically settled , otherwise meets the terms of the forward contract exclusion and uses an index merely to determine the price to be paid for the nonfinancial commodity intended to be delivered , the transaction may qualify for the forward exclusion from the swap definition .” 44
This interpretation is consistent with both the
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