In response to a perceived gap in coverage, Section 742(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") granted the U.S. Commodity Futures Trading Commission ("CFTC") broad jurisdiction over retail commodity transactions, including those that take the form of spot contracts but function as futures contracts (so-called rolling spot contracts). On December 2, 2011, the CFTC issued an interpretation ("Interpretation") of the term "actual delivery" as used in section 742(a).1 The Interpretation provides guidance on how the CFTC will apply the "actual delivery" exception to its jurisdiction over retail commodity transactions.

Background

For many years prior to the enactment of Dodd-Frank, participants in the retail commodity markets avoided CFTC regulation by using so-called rolling spot contracts. These contracts nominally required delivery of the underlying commodity within three days. In practice, however, a customer's position was often held open indefinitely; delivery of the underlying commodity never occurred. The effect of this arrangement was an off-exchange, unregulated futures transaction.

Rolling spot contracts on foreign currencies fell beyond the CFTC's regulatory reach due to the decision in CFTC v. Zelener.2 In Zelener, the U.S. Court of Appeals for the Seventh Circuit narrowly construed the term "contract of sale of a commodity for future delivery"—the statutory term for a futures contract—and found that the rolling spot contracts were not futures contracts. In so holding, the court focused on the form of the agreements, without regard to the commercial reality of the underlying transactions.

In 2008, Congress responded to Zelener by granting the CFTC additional jurisdiction over retail foreign currency transactions. However, this "Zelener fraud fix" did not address other types of retail commodity transactions. In 2010, Congress closed that gap. As a result of section 742(a) of Dodd-Frank, the CFTC's exchange-trading requirements and anti-fraud authority now apply broadly to retail transactions in all commodities, not just foreign currency transactions. The CFTC has said it will use its new authority "to prosecute ponzi schemes and other frauds that are perpetrated in the retail commodities markets, such as scams by people acting as legitimate providers of investments in precious metals like gold and silver."3

Retail Commodity Transactions; "Actual Delivery" Exception

Section 742 of Dodd-Frank defines "retail commodity transaction" as any transaction in commodities offered to, or entered into with, a person that is not an eligible contract participant or eligible commercial entity, on a leveraged or margined basis.4 Such a transaction must comply with both the on-exchange trading requirement of CEA section 4(a) and the anti-fraud provisions of CEA section 4b, as if the transaction were a futures transaction.5 An exception is provided for contracts of sale that "[result] in actual delivery within 28 days or such other longer period as the Commission may determine ... based upon the typical commercial practice in cash or spot markets for the commodity involved."6 This "actual delivery" exception is the subject of the Interpretation.

Interpretation of Actual Delivery

Under the Interpretation, in determining whether actual delivery has occurred, the CFTC will consider evidence beyond the four corners of a contract, including evidence of how the contract is marketed, managed, and performed. Factors relevant to this determination will include the following: ownership, possession, title, and physical location of the commodity purchased or sold, both before and after execution of the contract; the nature of the relationship between the buyer, seller, and possessor of the commodity purchased or sold; and the manner in which the purchase or sale is recorded and completed.

The Interpretation provides five examples illustrating how the CFTC will determine whether actual delivery has occurred. These examples conclude that actual delivery will have occurred if, within 28 days, the seller has physically delivered to the buyer, or a qualified depository of the buyer, the entire quantity of the commodity purchased and has transferred title to the buyer. Conversely, actual delivery will not have occurred if, within 28 days, (i) the seller has recorded the delivery as a book entry but has not physically delivered the commodity, even if the contract purports to create an enforceable obligation on the part of the seller to deliver, (ii) the seller has purported to deliver the commodity to a qualified depository of the buyer, but the title transfer document fails to identify sufficiently the depository or certain characteristics of the commodity, or (iii) the transaction is rolled, offset, or otherwise netted with another transaction or settled in cash between the buyer and the seller, but the seller has not physically delivered the commodity, even if the contract purports to create an enforceable obligation on the part of the seller to deliver.

Limited Scope of Interpretation

The Interpretation by its terms addresses only the "actual delivery" exception to the retail commodity transaction definition and not any other exception. More significantly, the Interpretation does not address the meaning or scope of contracts of sale of a commodity for future delivery, the forward contract exclusion from the term ''future delivery'' set forth in CEA section 1a(27), or the forward contract exclusion from the term ''swap'' set forth in CEA section 1a(47)(B)(ii). Nor does the Interpretation alter any statutory interpretation or statement of CFTC policy relating to the forward contract exclusion.7

Effective Date and Comment Period

The Interpretation became effective December 14, 2011; however, the CFTC is soliciting public comments by February 13, 2012 on whether the Interpretation accurately construes the statutory language, and may revise its interpretation in response to those comments.

Footnotes

1. Retail Commodity Transactions Under Commodity Exchange Act, 76 Fed. Reg. 77670 (published December 14, 2011), available at http://www.cftc.gov/LawRegulation/FederalRegister/FinalRules/2011-31355.

2. 373 F.3d 861 (7th Cir. 2004).

3. CFTC Press Release, CFTC Issues interpretation Concerning Dodd-Frank Anti-Fraud Authority (December 2, 2011), available at http://www.cftc.gov/PressRoom/PressReleases/pr6151-11.

4. See section 2(c)(2)(D)(i) of the Commodity Exchange Act ("CEA").

5. CEA section 2(c)(2)(D)(iii).

6. CEA section 2(c)(2)(D)(ii)(III)(aa).

7. See, e.g., Statutory Interpretation Concerning Forward Transactions, 55 FR 39188 (Sept. 25, 1990) (''Brent Interpretation'') (excluding certain forward contracts from regulation by the CFTC as futures contracts).

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