CFTC Issues Interpretation Of The Term 'Actual Delivery' For Retail Commodity Transactions

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...