DEFINITION of 'Exempt Commodity'

An exempt commodity is any exchange traded commodity other than those classified as an excluded commodity nor an agricultural commodity. Transactions in an exempt commodity may only take place between eligible contract participants or commercial entities, and cannot usually be executed on a trading facility.

Exempt commodity serves as a residual term for any of the commodities not specified in the Commodities Exchange Act (CEA). These commodities are exempt from the rules outlined in the CEA; however, these transactions are still subject to the prohibitions against fraud and price manipulation. Exempt commodities include energy and metals.

BREAKING DOWN 'Exempt Commodity'

The Commodities Exchange Act (CEA) of 1936 is legislation that regulates the trading of commodity futures in the United States.The CEA, for instance, establishes the statutory framework under which the commodities futures trading commission (CFTC) operates. The CEA also established classifications for types of futures contracts. Agricultural commodities futures are those standardized contracts for the delivery of agricultural products such as livestock, wheat, or other grain.

An excluded commodity is a commodity that is not susceptible to measures of influence or manipulation. Excluded commodities include most financial products and any relevant event associated with the commodity that is outside the control of any interested party. Excluded commodities are created for assets that have no cash market. When an investor trades interest or exchange rate futures, currency contracts or derivatives, that person is trading with excluded commodities.

Exempt commodities are those that fall under neither classifications. Examples of exempt commodities include energy commodities (such as crude oil or natural gas), chemicals, and metals (such as gold or silver). Carbon emissions allowances and weather derivatives are also considered exempt. Exempt commodities may be traded electronic exchange platforms. Exempt Commercial Markets are electronic trading facilities that trade exempt commodities on a principal-to-principal basis solely between persons that are eligible commercial entities. An eligible commercial entity is a market participant approved by the CFTC who has a demonstrable ability to make or take delivery of an underlying commodity of a contract; incurs risks related to the commodity; or is a dealer that regularly provides risk management, hedging services, or market-making activities to entities trading commodities or derivative agreements, contracts, or transactions in commodities.

Exempt commodities are considered exempt since they do not naturally fall under particular rules and guidelines that regulate agricultural commodities - such as rules of standardization, quality control, physical storage and transport. At the same time, they do not fit the mold of excluded commodities, such as financial instrument futures, which lack cash markets for the underlying assets.

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