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The Boundary of Futures Regulation: From UK and US Judgments Regarding Commodity Forward Contracts

This paper focuses on the distinction between regulated futures contracts and unregulated commercial sale of goods contracts. Though the U.K. provides several guidelines to distinguish between the two, uncertainties remain, as shown in the judgment of CR Sugar. Certain U.S. judgments also illustrate how commodity traders might incorporate features of futures exchange into a spot contract and the legal risk involved. This paper argues that physical delivery or the intention to deliver should not be used as an absolute criterion. By comparing with the key characteristics of futures trading, this paper will show that the boundary between unregulated commercial sale of goods contracts and regulated futures contracts depends on whether a trading scheme offers a factual facility to offset contrary trades between two or among multiple parties. Thus, the boundary of futures regulation lies in the transition point between physical trading and notional trading, where transactions could be offset and settled in cash.