CFTC Proposes to Clarify Its Guidance on Embedded Volumetric Optionality in Nonfinancial Commodity Forwards
02 December 2014Swaps Update
On November 13, 2014, the Commodity Futures Trading Commission (the CFTC) and the Securities and Exchange Commission (the SEC) proposed a clarification (the Proposed Clarification) of the CFTC’s interpretation regarding forward contracts with embedded volumetric optionality, building off the 2012 round of rulemaking that defined “swap” for the purposes of the Commodity Exchange Act (the 2012 Interpretation). If adopted as a final interpretation, the Proposed Clarification should give more certainty to market participants who enter into forward contracts allowing for adjustments in delivery amount regarding whether their contracts would be regulated as swaps under the Dodd-Frank Act. The Proposed Clarification may affect contracts entered into by various types of market participants, including energy companies, manufacturers, and commodity trading companies. Comments regarding the Proposed Clarification must be submitted to the CFTC on or before December 22, 2014. While the Dodd-Frank Act requires the Proposed Clarification to be a joint release by the CFTC and the SEC, this alert will refer to both the 2012 Interpretation and the Proposed Clarification as the work of the CFTC, which is the agency tasked with regulating commodity forwards.