Commodity Futures Trading Commission v. Erskine
2008 WL 80556, 2008 U.S. App. LEXIS 365, 512 F.3d 309 (2008)
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Rule of Law:
An off-exchange transaction is not a 'futures contract' subject to CFTC jurisdiction if the trade is in the commodity itself and the underlying contract is not standardized or fungible, regardless of the parties' subjective intent to take delivery. The defining characteristic of a futures contract is that the trade is 'in the contract' itself, which must be standardized and tradable on an exchange.
Facts:
- In 2001-2002, Ross Erskine and his company, Goros, LLC, solicited 20 customers to open accounts for trading foreign currency, granting Goros power of attorney to trade on their behalf.
- Goros conducted trades through 'futures commission merchants' (FCMs) on a 'negotiated market' where the FCMs constructed the currency prices using software.
- The FCMs acted as the 'counter-parties' to all trades, meaning they recorded the transactions in their own systems without actually buying or selling any foreign currency on an open market.
- The trading agreements stated that all transactions anticipated delivery of the currency, typically within 48 hours.
- In practice, the 48-hour delivery date was continuously 'rolled over' each night, pushing the delivery date forward indefinitely so that no customer ever took physical delivery of the foreign currency.
- Customers could trade currencies in any amount of their choosing; the transactions were not for standardized or fungible unit batches.
Procedural Posture:
- The Commodities Futures Trading Commission (CFTC) sued Ross Erskine and Goros, LLC in federal district court, alleging violations of the Commodity Exchange Act (CEA).
- Goros moved for summary judgment, arguing that the CFTC lacked jurisdiction because the transactions were not 'futures contracts' as defined by the CEA.
- The district court granted summary judgment in favor of Goros, holding that the transactions were not futures contracts and the CFTC therefore lacked jurisdiction.
- The CFTC, as appellant, filed a timely appeal to the U.S. Court of Appeals for the Sixth Circuit against Goros, the appellee.
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Issue:
Do individualized, off-exchange foreign currency transactions that are continuously rolled over to avoid actual delivery constitute 'futures contracts' subject to the jurisdiction of the CFTC under the Commodity Exchange Act?
Opinions:
Majority - Batchelder, J.
No, these transactions are not 'futures contracts' subject to CFTC jurisdiction. The court rejects the older 'totality of the circumstances' test that focuses on the parties' subjective intent to take delivery, finding it unworkable. Instead, adopting the reasoning from the Seventh Circuit's decision in CFTC v. Zelener, the court holds that the key distinction between a futures contract and a spot or forward contract is whether the trade is 'in the contract' or 'in the commodity.' A futures contract involves trading a standardized, fungible agreement on an exchange. Here, the transactions were for the commodity itself (foreign currency), were not standardized in size or terms, were not fungible, and were not traded on an exchange. Therefore, even though delivery was perpetually postponed, the form of the transaction was a spot sale, not a futures contract.
Analysis:
This decision aligns the Sixth Circuit with the Seventh Circuit's objective, form-based test for identifying futures contracts, creating a circuit split with other courts that use a subjective, intent-based approach. By prioritizing the objective characteristics of the contract (standardization, fungibility, exchange-trading) over the parties' subjective intentions regarding delivery, the ruling provides greater legal certainty for market participants. However, it also narrows the CFTC's regulatory reach over certain off-exchange retail foreign currency markets, potentially leaving investors in such markets with fewer protections under the Commodity Exchange Act.
