Futures and Derivatives Law Report July / August 2024 | Volume 44 | Issue 7
plain language of the statutory exclusion and the CFTC ’ s interpretation of the exclusion . When these three criteria are satisfied , the contract ’ s predominant feature is the physical delivery of RECs and not the financial settlement of a contract for differences .
The result also is consistent with the approach taken by courts even without resolution of the current circuit split . Applying the underlying purpose test , most virtual PPAs today are used to facilitate the transfer of RECs ; applying the standardization and fungibility tests , virtual PPAs tend to be bespoke and idiosyncratic contracts for the physical delivery of RECs that force the parties to participate in the cash market for RECs .
Finally , although related to a different section in the CEA , the CFTC ’ s guidance on the characteristics of actual delivery for digital assets also supports treatment of RECs purchase and sale agreements as forward contracts . Most virtual PPAs result in the transfer of full payment upon receipt of the RECs , the buyer takes title and full and permanent control of the RECs upon delivery , and the delivery of RECs is not rolled or offset , netted out , or financially settled .
Because the proper classification of a transaction turns on the totality of the facts and circumstances , each transaction must be evaluated on its own merits . However , to the extent that the near universal treatment of virtual PPAs as swaps was ever proper , changes in the nature and purpose of virtual PPAs warrants reconsideration of this practice and likely a new presumption that any virtual PPA that involves the sale of RECs is likely a forward contract and not a swap .
ENDNOTES :
1
Further Definition of “ Swap ,” “ Security- Based Swap ,” and “ Security-Based Swap Agreement ”; Mixed Swaps ; Security-Based Swap Agreement Recordkeeping , Final Rule , 77 Fed . Reg . 48208 , 48232-35 ( Aug . 13 , 2012 ) ( providing an interpretation that intangible commodities , including environmental commodities , can qualify as forwards ) ( hereinafter “ Swaps Definition Final Rule ”).
2
7 U . S . C . A . § 2 ( 2023 ). Proper classification of contracts is important . Pursuant to the CEA , all futures transactions must be conducted on or subject to the rules of a registered board of trade , 7 U . S . C . A . § 6 , and it is unlawful for any person other than an eligible contract participant ( ECP ) to enter into a swap except pursuant to the rules of a designated contract market . 7 U . S . C . A . § 2 . All swaps are subject to regulation pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act ( Dodd-Frank Act ). Public Law 111-203 , 124 Stat . 1376 ( 2010 ).
3
7 U . S . C . A . § 1a .
4
Id .
5
Swaps Definition Final Rule at 48227 , citing Further Definition of “ Swap ,” “ Security- Based Swap ,” and “ Security-Based Swap Agreement ”; Mixed Swaps ; Security-Based Swap Agreement Recordkeeping , 76 Fed . Reg . 29818 , 29827 ( May 23 , 2011 ) (“ The wording of the forward contract exclusion from the swap definition with respect to nonfinancial commodities is similar , but not identical , to the forward contract exclusion from the definition of ‘ future delivery ’ in the CEA .”).
6
Swaps Definition Final Rule at 48227 .
7
See , e . g ., Commodity Futures Trading Commission v . Monex Credit Company , 311 F . Supp . 3d 1173 , 1182 ( C . D . Cal . 2018 ), rev ’ d and remanded , 931 F . 3d 966 , Comm . Fut . L . Rep . ( CCH ) P 34538 ( 9th Cir . 2019 ) ( discussing “ actual delivery ” exception for retail commodity transactions ).
8
Commodity Futures Trading Com ’ n v . Co Petro Marketing Group , Inc ., 680 F . 2d 573 , 580-
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