With recent release, the CFTC hopes to eliminate market uncertainty on forward contracts with embedded volumetric optionality.

The comment period recently closed for a proposed interpretation (the Proposal) to further clarify what constitutes a forward contract with embedded volumetric optionality. On November 14, 2014, the US Commodity Futures Trading Commission (the CFTC or the Commission) issued the Proposal which primarily focuses on modifying the seventh element of the “embedded volumetric optionality” test - a test that has been the center of much concern to the energy industry; an industry that heavily relies on the forward contract exclusion from the definition of “swap” under the Dodd-Frank Wall Street Reform and Consumer Protection Act and the regulations promulgated thereunder (Dodd-Frank Act). The comment period for the Proposal ended on December 22, 2014.

Certainty of whether a forward contract with embedded volumetric optionality would be eligible for the forward contract exclusion, or would otherwise be regulated as an option, is a threshold matter for industry participants — given that options are considered “swaps” under the Dodd-Frank Act and therefore all swap regulations, including position limits, would apply to such contracts. This Proposal would provide greater certainty by clarifying certain industry confusion surrounding regulation on forward contracts with embedded volumetric optionality and stressing that fact-based analysis relies on the intent of the counterparties at the inception of the contract.