In 2012, the Commodity Futures Trading Commission issued an interpretation that identifies the circumstances in which an agreement, contract or transaction would fall within the forward contract exclusions from the “swap” and “future delivery” definitions in the Commodity Exchange Act, notwithstanding that it allows for variations in the delivery amount (i.e., contains “embedded volumetric optionality”).

On May 12, the CFTC revised its previously issued interpretation to clarify that the embedded volumetric optionality must be 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, a nonfinancial commodity. The CFTC has construed the phrase “physical factors” to include facts or circumstances that could reasonably influence the relevant nonfinancial commodity’s supply or demand, including environmental factors, operational considerations and broader social forces such as changes in demographics or geopolitics.

In addition, the CFTC has construed the phrase “regulatory requirements” to include (1) formal or informal guidance received from a public utility commission or other similar governing body to obtain or provide the lowest price and (2) electric demand response agreements.

The CFTC’s interpretation is available here. The CFTC’s accompanying fact sheet is available here.