Commodity Futures Modernization Act
Whether a transaction is subject to CFTC jurisdiction depends upon the type of contract being negotiated. The CFTC has exclusive jurisdiction over transactions involving sales of a commodity “for future delivery” and commodity option transactions. Historically, U.S. law had not made bright-line distinctions between on-exchange futures contracts, forward contracts (physically delivered commodity contracts) and OTC derivatives. This ambiguity created considerable uncertainty about the enforceability of certain contracts.
Rather than attempt to draw definitive distinctions between various types of commodity contracts, in 2000, the U.S. Congress decided to increase the certainty of OTC derivative contract enforceability by excluding or exempting certain contracts from CFTC regulation.
The Commodity Futures Modernization Act of 2000 (“CFMA”), created, among other things, broad safe harbors for OTC transactions in excluded and exempt commodities, provided that the contract is entered into solely between Eligible Contract Participants (“ECP”) and is not entered into on a trading facility.