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==Introduction==
==Introduction==
The U.S. [[Commodity Futures Trading Commission]] (“'''{{tag|CFTC}}'''”) has jurisdiction over ALL products traded on any US exchange (this captures virtually all financial products, except for foreign jurisdiction specific products that are not traded in the US).  
The U.S. [[Commodity Futures Trading Commission]] (“'''{{tag|CFTC}}'''”) has jurisdiction over ALL products traded on any US exchange (this captures virtually all financial products, except for foreign jurisdiction specific products that are not traded in the US).  
All {{tag|ISDA}}s must include certain representations in the {{TAG|ISDA}} Schedule to ensure that the {{isdama}} and the underlying Transactions fall into a safe harbor exempting the {{isdama}} / Transactions from regulation by the [[Commodity Futures Trading Commission]] (“'''{{tag|CFTC}}'''”) and are not deemed illegal off-exchange transactions.
All {{tag|ISDA}}s must include certain representations in the {{tag|ISDA}} Schedule to ensure that the {{isdama}} and the underlying Transactions fall into a safe harbor exempting the {{isdama}} / Transactions from regulation by the [[Commodity Futures Trading Commission]] (“'''{{tag|CFTC}}'''”) and are not deemed illegal off-exchange transactions.


==Background==
==Background==
In order to comply with U.S. Commodity Futures Trading Commission (“{{tag|CFTC}}”) regulations, we include two market standard representations, “{{ISDArep3|eligible|contract|participant}}” (“ECP”) and “{{ISDArep3|Eligible|Commercial|Entity}}” (“ECE”), in our {{tag|ISDA}} Schedule and other [[Master Agreements]]. The United States [[Commodity Exchange Act]] (“CEA”) was passed in 1936 and provides for federal regulation of all commodities and futures trading activities and requires that all futures and commodity options be traded on organized exchanges, and its primary enforcer, the {{tag|CFTC}}, regulates all futures markets in the United States in which commodities are traded. The CEA defines “commodity” very broadly (see definition below, emphasis added).
In order to comply with U.S. Commodity Futures Trading Commission (“{{tag|CFTC}}”) regulations, we include two market standard representations, “[[Eligible Contract Participant]]” (“'''ECP'''”) and “[[Eligible Commercial Entity]]” (“'''ECE'''”), in our {{tag|ISDA}} Schedule and other [[Master Agreements]]. The United States [[Commodity Exchange Act]] (“CEA”) was passed in 1936 and provides for federal regulation of all commodities and futures trading activities and requires that all futures and commodity options be traded on organized exchanges, and its primary enforcer, the {{tag|CFTC}}, regulates all futures markets in the United States in which commodities are traded. The CEA defines “commodity” very broadly (see definition below, emphasis added).


{{quote|7USC.1a.Definitions. (4) '''Commodity'''. The term "commodity" means wheat, cotton, rice, corn, oats, barley, rye, <br> flaxseed, grain sorghums, mill feeds, butter, eggs, Solanum tuberosum (Irish potatoes), wool, wool tops, fats and <br>oils (including lard, tallow, cottonseed oil, peanut oil, soybean oil, and all other fats and oils), cottonseed meal, <br>cottonseed, peanuts, soybeans, soybean meal, livestock, livestock products, and frozen concentrated orange juice, and <br>all other goods and articles, except onions as provided in section 13-1 of this title, and all services, rights, and <br>interests in which contracts for future delivery are presently or in the future dealt in.}}
{{quote|7USC.1a.Definitions. (4) '''Commodity'''. The term “commodity” means wheat, cotton, rice, corn, oats, barley, rye, <br> flaxseed, grain sorghums, mill feeds, butter, eggs, Solanum tuberosum (Irish potatoes), wool, wool tops, fats and <br>oils (including lard, tallow, cottonseed oil, peanut oil, soybean oil, and all other fats and oils), cottonseed meal, <br>cottonseed, peanuts, soybeans, soybean meal, livestock, livestock products, and frozen concentrated orange juice, and <br>all other goods and articles, except onions as provided in section 13-1 of this title, and all services, rights, and <br>interests in which contracts for future delivery are presently or in the future dealt in.}}


This could include a variety of financial products that we do not typically think of as “commodities” such as [[interest rates]] and [[currencies]], potentially pulling in USD swaps and / or USD [[foreign exchange]] transactions.
This could include a variety of financial products that we do not typically think of as “commodities” such as [[interest rates]] and [[currencies]], potentially pulling in USD swaps and / or USD [[foreign exchange]] transactions.
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To promote certainty for the markets and to distinguish between on-exchange futures contracts and over-the-counter derivatives transactions, the United States government enacted the [[Commodity Futures Modernization Act]] of 2001 as an amendment to the CEA, clarifying certain defined terms and exemptions for over-the-counter derivative transactions. Any over-the-counter derivatives transactions in a “commodity” could be considered an illegal off-exchange Futures contract unless the transaction and the parties to such transaction fall into one or more of the categories of trades that are exempt from regulation as a futures contract.  Specifically, certain derivative transactions may only be entered into by “eligible contract participants” to be exempt from regulation as a futures contract.
To promote certainty for the markets and to distinguish between on-exchange futures contracts and over-the-counter derivatives transactions, the United States government enacted the [[Commodity Futures Modernization Act]] of 2001 as an amendment to the CEA, clarifying certain defined terms and exemptions for over-the-counter derivative transactions. Any over-the-counter derivatives transactions in a “commodity” could be considered an illegal off-exchange Futures contract unless the transaction and the parties to such transaction fall into one or more of the categories of trades that are exempt from regulation as a futures contract.  Specifically, certain derivative transactions may only be entered into by “eligible contract participants” to be exempt from regulation as a futures contract.
={{tag|CFTC}} Jurisdiction and the [[Commodity Futures Modernization Act]] =
={{tag|CFTC}} Jurisdiction and the [[Commodity Futures Modernization Act]] =
Whether a transaction is subject to {{tag|CFTC}} jurisdiction depends upon the type of contract being negotiated.  The {{tag|CFTC}} has exclusive jurisdiction over transactions involving sales of a commodity “for future delivery” and commodity option transactions.   
Whether a transaction is subject to {{tag|CFTC}} jurisdiction depends upon the type of contract being negotiated.  The {{tag|CFTC}} has exclusive jurisdiction over transactions involving sales of a commodity “for future delivery” and commodity option transactions.   
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===Points to note on Jurisdiction===
===Points to note on Jurisdiction===
*The governing law of an {{isdama}} or Transaction [[Confirmation]], and the jurisdiction of incorporation of either party '''does not affect the applicability of the [[CEA]]'''.   
*The governing law of an {{isdama}} or Transaction [[Confirmation]], and the jurisdiction of incorporation of either party '''does not affect the applicability of the [[CEA]]'''.   
*There are certain limited circumstances where the [[CEA]] and {{tag|CFTC}} regulation does not apply.  However, Barclays’ trade monitoring systems are generally not set up in such a way to ensure compliance with these particular exceptions.  
*There are certain limited circumstances where the [[CEA]] and {{tag|CFTC}} regulation does not apply.  However, it is difficult to monitor and a firm's systems may not set up in such a way to ensure compliance with these particular exceptions.  
*Accordingly, we request the inclusion of these provisions in all {{isdama}}s.
*Accordingly, we request the inclusion of these provisions in all {{isdama}}s.


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Accordingly, the '''[[Eligible Contract Participant]]''' (“'''ECP'''”) representation is included in our ISDA Schedule to ensure we can meet the standard of having a “reasonable belief” that our counterparty is an ECP, and therefore the transaction in question is considered to be of a class of transaction to be exempt or excluded from the regulatory framework of the CEA and its primary enforcer, the {{tag|CFTC}}.   
Accordingly, the '''[[Eligible Contract Participant]]''' (“'''ECP'''”) representation is included in our ISDA Schedule to ensure we can meet the standard of having a “reasonable belief” that our counterparty is an ECP, and therefore the transaction in question is considered to be of a class of transaction to be exempt or excluded from the regulatory framework of the CEA and its primary enforcer, the {{tag|CFTC}}.   


The definition of '''Eligible Contract Participant''' includes most entities having, or being guaranteed by entities having, total assets exceeding USD 10 million, ERISA plans having total assets exceeding USD 5 million, governmental entities, and some other categories of investors.   
The definition of '''Eligible Contract Participant''' includes most entities having, or being guaranteed by entities having, total assets exceeding USD 10 million, {{tag|ERISA}} plans having total assets exceeding USD 5 million, governmental entities, and some other categories of investors.   


===[[ECP]] Rep wording===
===[[ECP]] Rep wording===
'''Additional Representations'''.  Each party will be deemed to represent to the  
{{quote|'''Additional Representations'''.  Each party will be deemed to represent to the other party on each date on which a Transaction is entered into that: ...
other party on each date on which a Transaction is entered into that: ...
   
   
  ... it is an “[[eligible contract participant]]” as such term is defined  
  ... it is an “[[eligible contract participant]]” as such term is defined in the [[Commodity Exchange Act]], as amended 7 U.S.C. § 1 (a) (12); and}}
in the Commodity Exchange Act, as amended 7 U.S.C. § 1 (a) (12); and


A counterparty may provide a factual representation regarding their status that satisfies the definition of ECP, for example:
A counterparty may provide a factual representation regarding their status that satisfies the definition of [[ECP]], for example:


“Party B has, or is guaranteed by an entity that has, total assets exceeding $10,000,000.”
{{quote|[Counterparty] has, or is guaranteed by an entity that has, total assets exceeding $10,000,000.}}


==[[Eligible Commercial Entity]] representation==
==[[Eligible Commercial Entity]] representation==
The '''[[Eligible Commercial Entity]]''' (“'''ECE'''”) representation is needed  in the {{isdama}} for any entity that intends to transact on a principal to principal basis in an [[Exempt Commodity]] on an [[Electronic Trading Facility]] (an electronic trade matching and execution platform for OTC derivative transactions) in order to ensure the transactions will be exempt from most provisions of the [[CEA]].   
The '''[[Eligible Commercial Entity]]''' (“'''ECE'''”) representation is needed  in the {{isdama}} for any entity that intends to transact on a principal to principal basis in an [[Exempt Commodity]] on an [[Electronic Trading Facility]] (an electronic trade matching and execution platform for OTC derivative transactions) in order to ensure the transactions will be exempt from most provisions of the [[CEA]].   


[[ECE]]s are subset of [[ECP]]s including, among others, entities who have a demonstrable ability to make or take delivery of the underlying [[commodity]], or to incur risk in addition to price risk related to the [[commodity]], or are dealers regularly providing risk management or hedging services to or engaging in market-making activities with other eligible commercial entities.  Because Barclays does not have systems to monitor and track which clients have made the representation and which have not, the representation must be included in all {{tag|ISDA}}s.
[[ECE]]s are subset of [[ECP]]s including, among others, entities who have a demonstrable ability to make or take delivery of the underlying [[commodity]], or to incur risk in addition to price risk related to the [[commodity]], or are dealers regularly providing risk management or hedging services to or engaging in market-making activities with other eligible commercial entities.   
 
===[[ECE]] Rep wording===
===[[ECE]] Rep wording===
{{quote|'''Additional Representations'''.  Each party will be deemed to represent to the other party on each date on which a Transaction is entered into that: ...
{{quote|'''Additional Representations'''.  Each party will be deemed to represent to the other party on each date on which a Transaction is entered into that: ...
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If the parties do not meet the applicable ECP and/or ECE requirement the commodity transaction is considered an illegal off-exchange transaction.  
If the parties do not meet the applicable ECP and/or ECE requirement the commodity transaction is considered an illegal off-exchange transaction.  


Barclays and the counterparty may be subject to fines from the {{tag|CFTC}} and the trade could be considered void.  
There may be fines from the {{tag|CFTC}} and the trade could be considered void.  


The {{tag|CFTC}} Enforcement Division is able to impose significant fines, up to $1MM per day per violation of the CEA. To date, we are not aware of any fines being imposed at this level for this issue but the {{tag|CFTC}} has only relatively recently acquired the ability to impose these hefty fines and we are seeing some very large3 fines being imposed for other violations.  
The {{tag|CFTC}} Enforcement Division is able to impose significant fines, up to $1MM per day per violation of the CEA. To date, we are not aware of any fines being imposed at this level for this issue but the {{tag|CFTC}} has only relatively recently acquired the ability to impose these hefty fines and we are seeing some very large3 fines being imposed for other violations.  


Additionally, there are US cases were a party to a trade has walked away from the deal claiming it was an illegal off-exchange transaction. Barclays has also experienced this claim first hand with a major European Bank claiming an agriculture option trade was void due to Barclays and the counterparty bank not meeting the Agriculture Option exemption requirements in the {{tag|CFTC}} Rules. Barclays was forced to terminate the transaction for no value after there had been a significant market move in our favor.
Additionally, there are US cases were a party to a trade has walked away from the deal claiming it was an illegal off-exchange transaction.  


=See Also=
=See Also=
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