CFTC Clarifies Dodd-Frank Exemption for EVO Forward Contracts | Practical Law

CFTC Clarifies Dodd-Frank Exemption for EVO Forward Contracts | Practical Law

The CFTC adopted a final interpretation clarifying when a contract with embedded volumetric optionality (EVO) is excluded from the "swap" definition under the Commodity Exchange Act and therefore not subject to certain Dodd-Frank swaps rules.

CFTC Clarifies Dodd-Frank Exemption for EVO Forward Contracts

Practical Law Legal Update 1-614-1625 (Approx. 3 pages)

CFTC Clarifies Dodd-Frank Exemption for EVO Forward Contracts

by Practical Law Finance
Published on 21 May 2015 • USA (National/Federal)
The CFTC adopted a final interpretation clarifying when a contract with embedded volumetric optionality (EVO) is excluded from the "swap" definition under the Commodity Exchange Act and therefore not subject to certain Dodd-Frank swaps rules.
On May 12, 2015, the CFTC adopted a final interpretation clarifying when a contract with embedded volumetric optionality (EVO) is excluded from the definition of the term "swap" under the Commodity Exchange Act (CEA) and therefore not subject to certain Dodd-Frank swaps rules. Forward contracts with EVO are forward contracts for the sale of a commodity that grant one party the option of increasing or decreasing the volume of the commodity intended to be physically delivered under the contract.
In response to requests from market participants, in November 2014 the CFTC issued a proposed interpretation of when an agreement, contract or transaction with EVO would be considered a forward contract for purposes of the application of Dodd-Frank swaps rules (see Legal Update, Certain Forward Contracts with Embedded Volumetric Optionality (EVO) to Be Excluded from Dodd-Frank Swaps Rules). The CFTC invited public comment on the proposal and has now finalized its interpretation as proposed, with some additional clarifications regarding the following seven elements which identify when an agreement, contract or transaction that includes EVO falls within the forward contract exclusion from the CEA definitions of "swap" and "future delivery":
  • The embedded optionality does not undermine the overall nature of the agreement, contract, or transaction as a forward contract.
  • The predominant feature of the agreement, contract or transaction is actual delivery.
  • The embedded optionality cannot be severed and marketed separately from the overall agreement, contract or transaction in which it is embedded.
  • The seller of a nonfinancial commodity underlying the agreement, contract or transaction with EVO intends, at the time it enters into the agreement, contract or transaction, to deliver the underlying nonfinancial commodity if the EVO is exercised.
  • The buyer of a nonfinancial commodity underlying the agreement, contract or transaction containing EVO intends, at the time it enters into the agreement, contract or transaction, to take delivery of the underlying nonfinancial commodity if the EVO is exercised.
  • Both parties are commercial parties.
  • The EVO is primarily intended, at the time that the parties enter into the agreement, contract or transaction, to address physical factors or regulatory requirements that reasonably influence demand for, or supply of, the nonfinancial commodity.
As required by Section 712(d)(4) of the Dodd-Frank Act, the final interpretation was issued jointly with the SEC after consultation with the Federal Reserve Board. Although the interpretation was issued jointly, it applies solely to the CFTC and does not apply to the exclusion from the swap and security-based swap (SBS) definitions for security forwards or to the distinction between security forwards and security futures products.
The effective date for the final interpretation is May 18, 2015.
The CFTC also provided a fact sheet.