Commodities Forwards Before Dodd-Frank: Zelener & Erskine

Blockchain & E-Transactions Law

Prior to Dodd-Frank, the CFTC and Courts recognized a distinction between traded futures contracts subject to CFTC jurisdiction and individualized non-exchange-traded contracts for the present sale of a cash commodity for deferred or future delivery (a "forward contract" or just "forward"). Forwards are exempt from CFTC jurisdiction. Unlike futures, cash forwards contemplates actual physical delivery, contain individualized terms, involve a commodity of intrinsic value (itself, not just the contract), and are not transferable or traded contracts.

Generally, a cash forward is:

"(1) neither standardized nor traded on an exchange, and is

(2) an individual agreement to buy or sell

(3) some agreed-upon quantity of

(4) some commodity

(5) at some agreed-upon price

(6) at some agreed-upon time in the future."

CFTC v. Erskine, 512 F.3d 309, 324 (6th Cir. 2008). See also CFTC v. Zelener, 373 F. 3d 861 (7th Cir. 2004).

Those authorities were consistent with the Commission's long understanding of excluding cash forwards from regulation. Its Brent Interpretation dealt with excluded forwards for 15-day Brent Crude oil. "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." Generally, they are "commercial," "individually and privately negotiated principal-to-principal transactions" and "do not provide for an exchange-style offset." 55 Fed. Reg. 39188 (Sept. 25, 1990) (reserved as unaffected in the CFTC's post-Dodd Frank 2013 Interpretation, 78 Fed. Reg. 52426 at 52428 & n. 24).

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