CFTC Issues Further Guidance on Certain Commercial Agreements on Energy Commodities

19 November 2012
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Key takeaways 

  • The Office of General Counsel ("OCG") of the CFTC issued responses to frequently asked questions as to whether facility use agreements in which payment is bifurcated into a fixed component (a demand charge or reservation fee) and a variable component (tracking use-related costs with respect to an underlying commodity) will be classified as commodity options subject to the swap definition.
  • OCG clarified that a facility use agreement is not a commodity option if: (1) the agreement includes a two-part fee structure; (2) the right to use the facility is legally established upon entering the agreement; (3) the demand charge or reservation fee is paid in a commercially reasonable timeframe; (4) the use of the facility does not depend on the further exercise of an option; and (5) the usage fee is in the nature of a reimbursement for variable costs incurred by the operator of the facility in rendering the service.
  • The OCG also clarified that usage of a specified facility for the creation, transportation, processing or storage of a commodity could be considered a "nonfinancial commodity" such that an agreement involving such usage could still be eligible for the CFTC's trade option exemption from the swap definition even if fails to meet certain other conditions that would exclude it from being a commodity option.