- See, e.g. CFTC v. Co Petro Marketing Group, Inc., 680 F. 2d 573 (9th Cir. 1982). Section 2(a)(1) of the CEA defines the term “commodity” broadly to mean all items enumerated as commodities as well as anything that is the subject of a futures contract. 7 U.S.C. § 2(a)(1). See generally, Schroeder, “Inadvertent Futures Contracts”, 19 Rev. of Sec. & Comm. Reg. 89 (April 16, 1986) wherein the irony of this later statutory premise was explained as follows:
- Any contract that calls for the delivery of something in the future, potentially constitutes a ‘futures contract’. If it does, then the item underlying the contract becomes a commodity, and the contract may not be entered into unless it is traded on an exchange. If contracts of that type are not traded on an exchange, then the particular contract may not be entered into at all, regardless of who the parties are and regardless of its social utility. The situation, which was never intended by Congress but was the result of historical accident, needlessly casts a cloud of legal uncertainty over billions of dollars of transactions by banks and other financial institutions.
- id. at 89. The only agricultural commodity that is excepted from the definition is onions. This exception was the result of pressure from the onion farmers after the crisis in the onion market in the 1940s. See Committee on Commodities Regulation of the Association of the Bar of the City of New York “The Forward Contract Exclusion: An Analysis of Off-Exchange Commodity-Based Instruments”, 41 Bus. Law. 853 n. 1 (May 1986).
- 7 U.S.C. § 6.
- 7 U.S.C. § 2 (1982).
- Committee on Commodities Regulation of the Association of the Bar of the City of New York, supra n. 1 at 854 (May 1986).
- Ibid. See also Memorandum of CFTC Office of the General Counsel, reprinted in [1977–1980 Transfer Binder) Comm. Fut. L. Rep. (CCH) ¶ 20,772 (Exhibit 1) (1978), wherein the Commission said:
- (1) Congress intended generally to prohibit any public marketing of contracts for the future delivery of commodities—in the plain and literal meaning of that phrase—except through the facilities of a designated contract market, and (2) this complete prohibition was intended to be subject to an exception solely for the benefit of persons involved in a commercial cash commodity business, which would allow them to effect cash sales of the commodity, contemplating actual delivery as a matter of course, but in which delivery of the commodity might be deferred for the purposes of commercial convenience or necessity.
- 41 Bus. Law. at 854, supra. For a detailed discussion of the legislative history of the forward contract exclusion see, id. at 856–59. For discussion of the CFTC consideration of the forward contract exclusion see, id. at 859–62. See also CFTC v. Co Petro Marketing Group, Inc., 680 F.2d 573 (9th Cir. 1982). See also CFTC v. National Coal Exch., Inc., [1980–1982 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 21,424 at 26,048 (W.D. Tenn. 1982); In re First Nat'l Monetary Corp., [1982–1984 Transfer Binder] Comm. Fut. L. Rep (CCH) ¶ 21,707 (CFTC 1983); Jackson v. American Gold Dealers Ass'n, [1982–1984 Transfer Binder]Comm. Fut. L. Rep (CCH) ¶ 21,956 (CFTC 1983); CFTC v. Commercial Petrolera Internacional, S.A. et al., [1980–1982 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 21,222 (S.D.N.Y. 1981); In re Stoval, [1977–1980 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 20,941 (1979). See generally Gilberg, “Regulation of New Financial Instruments Under the Federal Securities and Commodities Law”, 39 Vand. L. Rev. 1599, 1603 (1986).
- Stovall, ¶ 20,941, at 23,778. See also Co Petro, 680 F.2d at 578; Commercial Petrolera, ¶ 21,222, at 25,098. One commentator aptly explained:
- [A] futures contract is entered into primarily to assume or shift the risk of fluctuations in a commodity's value. A forward contract, on the other hand, is generally entered into to transfer ownership of the actual commodity, although it can also be used, as are futures, to hedge an exposure in the physical, futures, or forward markets. Most courts agree that using a contract for speculative purposes is indicative of a futures contract. Indeed, most parties to futures contracts offset their contracts prior to the delivery date to accept ‘a profit or loss for any differences in price between the initial and offsetting transactions.’ In contrast, forward contracts are generally entered into by commercial or institutional parties, usually in connection with their business or to hedge a particular exposure. To the extent a contract is generally held by noncommercial or noninstitutional interests (that is, the general public) for speculation, these factors point to the contract in question being a futures contract.
- 41 Bus. Law. at 875 (footnotes & citations omitted).
- See, e.g. CFTC v. Co Petro Marketing Group, Inc., 680 F.2d 573 (9th Cir. 1982).
- See Schroeder, supra n. 1, Committee on Commodities Regulation of the Association of the Bar of the City of New York, supra n. 1.
- See references in n. 6, supra.
- 666 F. Supp. 581 (S.D.N.Y. 1987), motion denied, 677 F. Supp. 777 (S.D.N.Y. 1988), summary judgment motion denied, 1990 US Dist. Lexis 4423 (S.D.N.Y. 1990).
- The price of Brent crude had declined to $15 per barrel by mid-February 1986. See Transnor 666 F. Supp. at 582.
- Brent crude oil is a blend of the crude produced in nine fields in the North Sea and pumped through an underwater pipeline to a loading terminal at Sullom Voe, Scotland. Cargoes of Brent consists of roughly 500,000 barrels of oil. The cargoes are generally sold as “Dated Brent” or “15-Day Brent”. Dated Brent contracts specify the date the cargo will be delivered. 15-Day Brent contracts specify that the cargo will be delivered during a specific month. The seller of 15-Day Brent is obligated to give at least 15 days’ notice of the three-day period during the specified delivery month in which the cargo must be lifted by the purchaser.
- 15 U.S.C. § 1 (1982).
- 7 U.S.C. §§ 6(c), 9(b) and 13(b) (1980 & 1989 Supp.). Plaintiff also alleged that defendant SITCo “cheated Transnor in connection with these contracts of the Brent Market”. Transnor, 666 F. Supp. at 583.
- Transnor, 666 F. Supp. at 583. Plaintiff's attorney has written and spoken widely on this position. See, e.g. Swan, “Litigation and the Unregulated ‘Futures’ Market’” (Unpublished paper presented at Platt's Conference February 2, 1988). See also Letter from Edward J. Swan to the Secretary of the Commodity Futures Trading Commission (December 24, 1987) Commentary on “Regulation of Certain Hybrid and Related Instruments”, dated December 4, 1987.
- 15 U.S.C. §§ 1 et seq.
- 7 U.S.C. §§ 1 et seq.
- 666 F. Supp. 581, 583 (S.D.N.Y. 1987).
- 666 F. Supp. at 583. The court held further that “the fact that [the plaintiff] Transnor is a foreign corporation which suffered its injury on a contract made, and calling for delivery, outside the US does not deny it standing under the antitrust laws” and commodity laws. id. The court explained:
- Plaintiff correctly points out, however, that the injury which is sustained was as the result of a purchase made on the Brent oil market which, according to plaintiff's affidavits, is primarily a US market. Indeed, even if it were not strictly a US market, there is no doubt that the Brent Market is part of US commerce. According to affidavits submitted by plaintiff, two of the three principal trading centres of the Brent Market are in the United States (New York and Houston). Approximately 50% of the traders are in the United States and at least 50% of the brokers are in the US. Most of the foreign traders, brokers and producers maintain offices, agents or affiliates in the US. All traders on the Brent Market are denominated in US dollars and measured in American barrels (not British “tonnes”). All dollar payments for Brent Market trades are cleared in New York. Further, Brent Market contracts can be used to fill contracts on the New York Mercantile Exchange…To begin with, plaintiffs affidavits allege that, in trades on the Brent Market, only 5% of the purchasers ultimately take delivery of the oil. To prove this assertion, plaintiff notes that only 850,000 barrels of Brent Blend are produced each day, while over 17 million barrels are traded each day on the Brent Market. Thus, the delivery point for the oil is not a significant factor in determining the location of the Brent Market for purposes of standing and jurisdiction under US law. Since 95% of the trades are evidently made for speculative or hedging purposes, the more significant factor is the location of the trading market, not the production centre or delivery point for the oil. Since two of the three principal trading centres for the Brent Market are in New York and Houston, US law—and specifically US antitrust and commodities law—must apply to causes of action arising from trades executed on the Brent Market.
- id. at 583–84. Moreover, the court held that the fact that the contracts were made on the London branch of the Brent market, rather than in the New York or Houston branch, did not lessen the ability of plaintiff to bring the claim. id. at 584.
- See 1990 W.L. 47648 (S.D.N.Y. 1990), quoting 677 F. Supp. 777 (S.D.N.Y. 1988).
- 677 F. Supp. 777 (S.D.N.Y. 1988).
- 1990 W.L. 47648 (S.D.N.Y. 1990). The court explained as follows:
- Taking the facts alleged in the complaint as true, as the Court must on a motion to dismiss, the Court found that the Brent Oil Market, in which plaintiff suffered its injury, ‘is primarily a US market'… Relying on well-settled precedent, the Court held that plaintiff had standing under the antitrust laws even though the contracts at issue were made by Transnor through the London branch of the Brent Market, and not in New York or Houston.
- Defendants have now moved the Court to certify for immediate appeal the question of ‘whether Transnor, a foreign corporation which engaged in no business in this country, has standing to sue for injuries allegedly suffered in wholly foreign trading on an international market merely because it is alleged that there are US participants trading in that market as well'…This question, however, misstates the underlying basis for the Court's initial ruling, where the Court specifically accepted as true the unrefuted allegation that the Brent market is a US market, and not merely an international market. Had the Court found that the Brent market was merely an international market with no direct impact on US commerce, defendants’ request for certification for immediate appeal of the issue quoted above might be appropriate.
- If, after conducting pre-trial discovery, defendants uncover evidence indicating that the Brent Market is indeed an international market with no direct impact on US commerce, then it may be appropriate for them to move for summary judgment on the ground that plaintiff lacks standing under the antitrust laws. At this time, however, the issue which defendants wish certified for appeal is a hypothetical one which was not addressed in the Court's original opinion and order.
- 677 F. Supp. 777 (S.D.N.Y. 1988).
- 677 F. Supp. at 778.
- 1990 W.L. 47648 (S.D.N.Y. 1990).
- Id.
- Id.
- Id.
- Id.
- Id.
- Section 2(a)(1) of the CEA established CFTC jurisdiction over “contracts of sale of a commodity for future delivery”. 7 U.S.C. § 2(a)(1). The same section, however, provides that the term future delivery “shall not include any sale of a cash commodity for deferred shipment or delivery”. id.
- 1990 W.L. 47648 (S.D.N.Y. 1990).
- Id. citing Co Petro, 680 F.2d at 578–79; NRT Metals, Inc. v. Manhattan Metals (Non-Ferrous), Ltd., 576 F. Supp. 1046, 1050–51 (S.D.N.Y. 1983).
- 1990 W.L. 47648 (S.D.N.Y. 1990).
- Id. citing 54 Fed. Reg. 30694, 30695 (July 21, 1989).
- 1990 W.L. 47648 (S.D.N.Y. 1990).
- Id. The court explained:
- The Commodity Futures Trading Commission (“CFTC”) has recognised that commodity transactions between commercial participants in certain markets have evolved from privately negotiated contracts for deferred delivery of a physical commodity under which delivery generally occurs to transactions that have highly standardised terms and are frequently satisfied by payments based upon intervening market price changes. 15-day Brent is such a market. The 15-day Brent market involves sales or purchases of a cargo for delivery on an unspecified date of a given month. The actual delivery dates are determined at the seller's option, the buyer being entitled to clear notice of a three-day loading range. 15-day Brent sales are therefore highly specialised forward sales which start out ‘dry’ but ultimately become ‘wet’, subject to liquidation of the contract. Because the contracts do not provide for offset without the consent of the parties and because the sellers cannot predict in advance whether a particular buyer will insist on physical delivery, the market remains one based on physical trading. Yet, because 15-day Brent oil can be sold without physical cover initially, participants can take long or short positions in the market for purposes of hedging and speculation, explaining the high ratio between barrels traded and barrels delivered. The three major motivations in Brent market activity, hedging, speculation and tax spinning, have led at least one commentator to describe the market as an ‘unregulated and unguaranteed form of futures trading.’ The 15-day Brent Market has thus assumed aspects of the futures market while retaining elements of the forward contract.
- Id. (citations omitted).
- Id. citing Co Petro, 680 F.2d at 578; 50 Fed. Reg. 39656, 39657–58 “Characteristics Distinguishing Cash and Forward Contracts and ‘Traded’ Options” (CFTC, September 30, 1985).
- 1990 W.L. 47648 (S.D.N.Y. 1990).
- Id.
- The court explained:
- The Ninth Circuit Court's ‘forced burden of delivery’ language in Co Petro does not mandate forward contract classification of those contracts imposing a forced burden which is not expected to be enforced. The Ninth Circuit Court held only that the absence of a forced burden of delivery is indicative of the speculative nature of futures contracts. That court did not have before it contracts imposing a forced burden of delivery, and thus did not rule on the effect of the presence of such a burden. Accordingly, this Court need not disagree with or deviate from Co Petro, but merely considers as relevant whether the contracts provide for an opportunity to avoid delivery. This is consistent with the reasoning of the Habas court, which speaks in terms of ‘opportunity to offset.’ This Court concludes that even where there is no ‘right’ of offset, the ‘opportunity’ to offset and a tacit expectation and common practice of offsetting suffices to deem the transaction a futures contract.
- id.
- The defendants admitted that “the incentive to spin and respin was to ensure that taxes were paid on the basis of a more favourable market price”. The court, thus, found that “defendants’ 328 tax spin transactions reveal that the underlying purpose was not to transfer physical supplies of oil”. Indeed defendants’ expert stated that, “many participants in the Brent Market have no intention of taking delivery of oil either to store or refine it and others who sell Brent do not produce it”. Evidence produced indicated that “only a minority of transactions in the Brent market result in delivery”. id. citing Securities and Investments Board, Consultative Document on the Future Regulation of the Oil Markets, at 2 (February 1988).
- The court explained that it recognised that “commercial transactions have increased in complexity since the predecessor to the CEA was enacted, the interests of Brent participants, which include investment and brokerage houses, do not parallel those of the farmer who sold grain or the elevator operator who bought it for deferred delivery, so that each could benefit from a guaranteed price”. id.
- The court explained:
- Transnor's contracts for 15-day Brent, a commodity within the CEA's meaning, were dated December 1985 and called for March 1986 delivery, indicating that sales of 15-day Brent could occur several months ahead of the specified loading month. Transnor's Brent contracts established a price for a standardised volume when the contract was initiated in December 1985, despite the +5% volume tolerance, and both parties to the contracts were obligated to fulfill the contract at the specified price. Most importantly, the Brent contracts were undertaken mainly to assume or shift price risk without transferring the underlying commodity. Defendants acknowledge that the volume of Brent contract trading greatly exceeded the amount of physical oil available to satisfy such contracts. The volume of contracts traded and the high standardisation of the contracts demonstrate the essential investment character of the 15-day Brent market. ‘With an eye toward [their] underlying purpose,’ the Court concludes that Transnor's 15-day Brent transactions constitute futures contracts.
- id.
- 55 Fed. Reg. 39188 (September 25, 1990) (hereinafter “Interpretation”).
- Id. at 39189 n. 1.
- CFTC news release Number 3248–90 dated May 16, 1990 at 39189 n. 1.
- CFTC advisory Number 49–90 dated June 29, 1990 (hereinafter “Draft Interpretation Press Release”) at 1 and 2.
- Interpretation, supra, at 39190.
- Id.
- Id. at 11, citing CFTC v. Co Petro Marketing Group Inc. 680 F. 2d at 578.
- Id. citing 50 Fed. Reg. 39657 (September 30, 1985). The release enumerated the following criteria:
- First, the contract must be a binding agreement on both parties to the contract: one must agree to make delivery and the other to take delivery of the commodity. Second, because forward contracts are commercial merchandising transactions which result in delivery, the courts and the Commission have looked for evidence of the transactions’ use in commerce. Thus, the courts and the Commission have examined whether the parties to the contracts are commercial entities that have the capacity to make or take delivery and whether delivery, in fact, routinely occurs under such contracts.
- id. citing 50 Fed. Reg. 39657.
- Id. at 39191.
- Id.
- Id.
- Id.
- Id.
- Id.
- Id. at 39191–39192.
- Id. at 39192.
- Id.
- See e.g. Letter from Koch Industries Inc. dated July 16, 1990 at 1.
- Id.
- Id.
- See e.g. id; see also Letter from MG Refining and Marketing Inc. dated July 18, 1990; Letter from BP Oil dated July 12, 1990; Letter from Goldman, Sachs & Co. dated July 18, 1990.
- Letter from Koch Industries Inc. dated July 16, 1990 at 2.
- Id. BP Oil explained:
- A party hedging its commitments may not enter into a Brent contract with an intent to take physical delivery on that contract. Instead, many parties, particularly trading companies without production or processing capacity, may intend to book-out or cancel their purchase or sale if their counterparty agrees. With the volume of trading in the Brent market far exceeding the volume of oil deliverable at Sullom Voe, it is plain that many participants have no intention to make or take physical delivery at the time of entering into their Brent contracts. To the extent it is the Commission's intention to permit the 15-day Brent market to continue, it should recognise these facts.
- Letter from BP Oil dated July 12, 1990 at 2–3.
- Letter from MG Refining and Marketing, Inc. dated July 18, 1990 at 2. A commentator explained:
- In any commercial transaction, one party or the other may decide that it no longer wishes to make or take delivery. If, and only if, the two parties agree, normal business dealings recognise that the parties can replace their delivery obligations with monetary performance. Such cancellation of a contract for money is well-recognised, not just in the forward markets, but in all forms of day-to-day commerce. The important point is that the parties have the obligation to deliver under their contract and can only cancel by agreement. Such cancellations may take a variety of forms; they are not limited to the ‘book-outs’ and ‘circles’ that the Commission describes in the Brent market. We request that the Commission recognise and expand the forms of permitted cancellations in conformance with accepted commercial practices. id.
- See Letter from Koch Industries Inc. dated July 16, 1990 at 2.
- Letter from MB Refining and Marketing, Inc. dated July 18, 1990 at 2. See also Letter from BP Oil dated July 12, 1990 at 3; Letter from Goldman Sachs dated July 17, 1990 at 4. As one commentator explained:
- [W]hile the Interpretation purports to address the status of commercial forward transactions in general, it is premised on a detailed description of the 15-day Brent market and the relief afforded under the Interpretation may be read to be limited to ‘transactions of this type…which may involve, in certain circumstances, string or chain deliveries of the type described above’ (Interpretation p. 16, emphasis supplied). This language renders it unclear whether the Commission intends the Statutory Interpretation to extend only to certain types of Brent contracts, all Brent contracts, other types of forward contracts as well or all forward markets. In view of the evolution which has occurred in forward markets generally, and not simply in the 15-day Brent market, the Commission should specifically identify other markets (including the cash West Texas Intermediate (“WTI”) and other oil and grain markets) and categories of transactions (which may not involve a ‘string’ or ‘chain’) that are eligible for the 2(a)(1) exclusion from the Commission's jurisdiction.
- Letter from Goldman Sachs dated July 17, 1990 at 4. BP concurs:
- [T]he Commission is not entirely clear as to which commercial entities are proper participants in Brent and other forward markets. In our [Advanced Notice of Proposed Rulemaking] Comment in 1988, we urged the Commission to acknowledge that trading firms which may not be ‘producers’ or ‘processors’ and intermediaries including banks and other financial institutions which extend credit and accept risk should be considered as ‘commercials’. We reiterate that recommendation here. BP could not realise its commercial hedging needs without the participation of trading and financial institutions in the forward markets. They provide important liquidity and promote efficiency in these market. Furthermore, the Commission's Interpretation, by focusing on principal to principal negotiated transactions, fails to recognise the importance of brokers in Brent and other forward market transactions. We estimate that principals dealing through brokers account for approximately half of the Brent transactions. These brokers, who act as agents and do not take principal risk, should be recognised as proper participants in forward markets.
- Finally, the Commission should acknowledge other specific cash markets that, like the 15-day Brent market, are forward markets that fall outside the scope of the CEA. Each of these markets, like the Brent market, involve large minimum delivery quantities and contract value, involve the same types of commercial participants and are used for the sale delivery, hedging and other commercial purposes. Thus, the Commission should acknowledge as legitimate forward markets the cash West Texas Intermediate crude market (delivery usually in 100,000 barrel quantities; not less than 50,000), the Dubai market (500,000 barrels minimum delivery), Russian gas oil (200,000 barrels), Boston Bingo (heating oil) (225,000 barrels) and other US and non-US oil and products markets.
- Letter from BP Oil dated July 12, 1990 at 3.
- Letter from BP Oil dated July 12, 1990 at 3. As was explained:
- [T]he Commission should respond to the District Court's conclusion that individually negotiated contracts between commercial counterparties that require by their terms that the parties make or take delivery without a right of offset are futures contracts. Indeed, the New York Mercantile Exchange, in its statement concerning the Transnor decision, reached the correct conclusion:
- While the concept of actively traded forward contracts was probably never considered when the Act was originally passed in 1921, if those markets are actual commercial markets and its participants are true commercial interests with full obligations to make or take physical delivery which takes place at a defined time (which we understand to be the case with the Brent 15-day market), NYMEX believes those forward contracts may be excluded from the act.
- For the Commission not to respond to the District Court's decision would undermine the intent of the Interpretation to permit commercial forward trading without fear of challenge under the CEA.
- id. at 4.
- Letter from Goldman Sachs & Co. dated July 17, 1990 at 5.
- Letter from BP Oil dated July 12, 1990 at 2.
- Letter from Goldman Sachs & Co. dated July 17, 1990 at 5.
- Letter from BP Oil dated July 12, 1990 at 2.
- Interpretation, supra, at 39189.
- Dissent of Commissioner West, dated September 19, 1990 available on request from the CFTC Press Office, at 17 (hereinafter “Dissent”).
- Id. at 7, citing “Characteristics Distinguishing Cash and Forward Contracts and Trade Options” Interpretive Statement of the Office of the General Counsel, CFTC, 50 F.R. 189,39656 (September 30, 1985).
- Id. at 9.
- Id. at 16.
- Id.
- Id. at 19–20.
- Id. at 21.
- 52 Fed. Reg. 47022 (December 11, 1987). The release also sought consent on a proposed regulatory framework that would “clarify the status of such [hybrid] instruments and permit, by exemption and subject to certain conditions, specified hybrid option instruments to be traded other than on a designated contract market”. id. The CFTC received at least 55 comment letters concerning the proposal, nine of which were from oil companies or companies trading oil and petroleum products. See Memorandum of the Division of Trading and Markets, Summary of Comments on Advance Nature of Proposed Rulemaking Concerning the Regulation of Hybrid and Related Instruments (July 8, 1988) (hereinafter “Staff Memo”). Letters were received from: Atlantic Richfield Company; BP America, Inc.; Cain Chemical, Inc.; Chevron International Oil Company, Inc., Exxon Company International; Koch Industries Inc.; Mobil Oil Corporation; Shell International Petroleum.
- 52 Fed. Reg. 47022 at 47027. The CFTC proposal defined three different classes of hybrid instruments, each of which would be subject to a separate regulatory scheme:
- (1) Hybrid instruments that may possess de minimis futures or commodity option characteristics and therefore may be deemed to be excluded from Commission jurisdiction;
- (2) hybrid option instruments that are within the Commission's jurisdiction but because of the secondary and incidental nature of their commodity option components and the extent of their regulation by another agency may warrant exemption, upon conditions, from general compliance with Commission regulations; and
- (3) certain commercial transactions that have elements of contracts for forward delivery of a cash commodity in conjunction with aspects of futures contracts as to which prospective ‘no-action’ treatment may be appropriate. id. at 47023. For more detailed discussion see also id. at 47024–28.
- Instruments which do not fall clearly within one of the three enumerated categories would be able to avail themselves of the CFTC particularised review process. id. at 47029, citing 17 C.F.R. § 32.4(b) (allowing case by case relief). Otherwise, all hybrid instruments would “remain fully subject to the Act and Regulations”. id. at 47023. For purposes of evaluating the posture of crude oil contracts under the proposed regulations, the only applicable portion of the release would be the third category: “commercial transactions which resemble but do not contain all elements of forward contracts”. See id. at 47026–28.
- Id. at 47027 n. 19, citing Sas, The Legal Aspects of the 15 Day Brent Market, (1987) 5 J.E.R.L., 109; Transnor (Bermuda) Ltd. v. BP North American Petroleum, [1986–1987 Transfer Binder] Comm. Fut. L. Rep. (CCH) § 23,761 (S.D.N.Y. 1987).
- See 52 Fed. Reg. at 47027. The CFTC explained:
- Although such transactions may be settled other than by delivery on more than an occasional basis, it appears that departure from the traditional requirement of settlement by delivery of the physical commodity occurs on the basis of privately negotiated agreements by principals who have the capacity to make or take delivery, who contemplate actual delivery or acceptance of delivery in some of those transactions, but who may be unable to determine at the inception of the transaction that delivery will not be required. While the infrequency of delivery of the commodity in such transactions would tend to preclude their characterisation as forward contracts within the Act's jurisdictional exclusion, such transactions nonetheless appear to be essentially private, commercial transactions that generally involve the exchange of interests in an actual physical commodity.
- Id.
- Each party relying on the no-action position would have had an obligation to use reasonable efforts to confirm that the other party was a “qualified commercial counterparty”, defined as a person or entity “engaged in the direct commercial use of the commodity in the ordinary course of their business as producers, processors, fabricators, refiners or merchandisers of that commodity”. 52 Fed. Reg. at 42027.
- For purposes of this criterion, it would have been presumed that the transaction was for commercial purposes if it was undertaken “as an incident of the parties’ routine course of business”.
- id.
- Id. at 47028.
- Id. With regard to this final criterion, the CFTC said:
- Brokered transactions would not necessarily infringe this criterion provided that the Commission would propose to define such intermediated transactions as only those wherein the intermediary takes no position in the transaction and assumes no risk. id.
- The CFTC explained:
- By contract, transactions that are effected through certain intermediaries, transferred in a secondary marketplace, or occur between a commercial and a counterparty which is not a producer, processor, fabricator, refiner, or merchandiser of the underlying commodity in the course of its business, substantially depart from the context in which the forward contract exclusion has historically operated. In particular, the current commodity swap market reflects both direct transactions that are privately negotiated and entered into by commercial counterparties that are engaged in the commercial use of the commodity that is the subject of the swap transaction, as well as the development of swap markets operated by certain institutional swap issuers that enter into swap transactions that are settled in cash and that do not entail the expectation or even the alternative of physical delivery of the commodity.
- Id. at 47027.
- Staff Memo at 52.
- Id. at 53–4. These criteria are a compilation and generalisation of the specific proposals of the various commentators.
- Id. at 59–62.
- See supra notes 52, 55 and 59 and accompanying text.
- See e.g. supra notes 66 and 69.
- CFTC press release Number 50–90 dated June 29, 1990.
- Letter No. 90–4 at 1.
- Id. at 2.
- Id. at 3.
- Id.
- Id.
- Id. at 4.
- Id.
- Id. at 4–5.
- Id. at 5.
- Id.
- Id.
- Id. at 5–6, citing 50 Fed. Reg. 3956 (September 30, 1987).
- 7 U.S.C. §§ 6(a), 6(c).
- 17 C.F.R. § 32.11 (1989).
- Letter No. 90–4 at 6.
Journal of Energy & Natural Resources Law
Volume 9, 1991 - Issue 1