What Is an Excluded Commodity?

An excluded commodity is a commodity that, according to the Commodity Exchange Act (CEA), does not fall under the regulations of the CEA. In order to qualify as an excluded commodity, the asset in question must not have any intrinsic cash value and must not be traded on an exchange like a stock market.

Derivatives qualify as excluded commodities because their value is dependent on fluctuations to other assets. For instance, futures contracts depend on the price fluctuations of physical commodities like oil or grain, while interest rate swaps depend on changes in interest rates.

Key Takeaways

  • An excluded commodity is one that is exempt from the regulations of the CEA.
  • Examples of excluded commodities include futures contracts and other derivatives.
  • Excluded commodities are presumed to be less vulnerable to price manipulation and other undue influences, as compared to commodities like wheat or oil.

Understanding Excluded Commodities

The CEA is a piece of federal legislation, first introduced in 1936, which established the U.S. Commodity Futures Trading Commission (CFTC). As its name suggests, its purpose is to establish rules and regulations for commodities trading in the U.S. 

One of the principal goals of this regulatory regime is to prevent the undue manipulation of commodities prices by market participants. For this reason, the act distinguishes between three categories of commodities, each of which receives different levels of regulatory oversight.

The first of these categories are "agricultural commodities," or simply "commodities." These are goods like oil, wheat, or livestock, against which futures contracts are written. These commodities receive the full weight of regulatory oversight by the CFTC.

The second category are exempt commodities, which are defined as any commodity that is not otherwise identified in the CEA. Examples of exempt commodities include energy and metals, such as copper and steel. These commodities fall outside the scope of the CEA, although separate laws and regulations exist that prohibit outright fraught or manipulation.

Lastly, the CEA defines "excluded commodities" as financial assets that do not have any intrinsic or cash value outside of the underlying assets they refer to. As stated above, futures contracts and other derivatives are examples of excluded commodities. These assets are exempt from the regulations specified in the CEA, based in part on the presumption that they are less vulnerable to manipulation than physical and finite assets, such as oil and grain.

Real World Example of an Excluded Commodity

The passage of the Commodity Futures Modernization Act (CFMA) in 2000 revised national commodity futures regulations. According to the CFMA, excluded commodities can include any of the following instruments:

  • An interest rate, exchange rate, currency, security, security index, credit risk or measure, debt or equity instrument, index or measure of inflation, or other macroeconomic index or measure.
  • Any other rate, differential, index, or measure of economic risk, return, or value that is (1) not based in substantial part on the value of a narrow group of commodities not described above or (2) based solely on one or more commodities that have no cash market.
  • Any economic or commercial index based on prices, rates, values, or levels that are not within the control of any party to the relevant contract, agreement, or transaction.
  • An occurrence, extent of an occurrence, or contingency (other than a change in the price, rate, value, or level of a commodity not described above) that is (1) beyond the control of the parties to the relevant contract, agreement, or transaction and (2) associated with a financial, commercial, or economic consequence.