                            In the
 United States Court of Appeals
              For the Seventh Circuit
                         ____________

No. 03-4245
COMMODITY FUTURES TRADING COMMISSION,
                                            Plaintiff-Appellant,
                               v.

MICHAEL ZELENER, et al.,
                                         Defendants-Appellees.

                   ____________________
       Appeal from the United States District Court for the
         Northern District of Illinois, Eastern Division.
         No. 03 C 4346—Matthew F. Kennelly, Judge.
                   ____________________
               PETITION FOR REHEARING AND
                   REHEARING EN BANC
                  ____________________
                 DECIDED OCTOBER 20, 2004
                  ____________________



  Before FLAUM, Chief Judge, and POSNER, EASTERBROOK,
RIPPLE, MANION, KANNE, ROVNER, WOOD, EVANS, WILLIAMS,
and SYKES, Circuit Judges.
  Plaintiff-appellant filed a petition for rehearing and
rehearing en banc on August 11, 2004. All of the judges on
the panel voted to deny rehearing. A judge called for a vote
on the petition for rehearing en banc, but a majority of the
active judges did not favor rehearing en banc. Accordingly,
the petition is denied.
2                                                    No. 03-4245

  RIPPLE, Circuit Judge, dissenting from the denial of re-
hearing en banc. This decision warrants the attention of the
full court in an en banc proceeding. The analysis presented
by the panel opinion cannot be squared with our prior pre-
cedent; it creates a conflict among the circuits; and it cre-
ates significant enforcement problems for the Commodity
Futures Trading Commission (“CFTC”).
  Our earlier case law firmly establishes that this circuit,
along with the other courts of appeals to have confronted
the issue, employs the “totality of circumstances” approach
to the determination of whether a contract is a futures con-
tract.1 See Nagel v. ADM Investor Serv., Inc., 217 F.3d 436
(7th Cir. 2000); Lachmund v. ADM Investor Serv., Inc., 191
F.3d 777 (7th Cir. 1999). We established this approach in
Lachmund and Nagel in the context of hedge-to-arrive
contracts for the sale of grain, which allowed the farmer to
defer (rollover) his delivery obligations. In Lachmund, we
recognized that
    Although cash forward contracts and futures contracts
    are easily distinguishable in theory, it is frequently dif-
    ficult in practice to tell whether a particular arrange-
    ment between two parties is a bona fide cash forward
    contract for the delivery of grain or whether it is a
    mechanism for price speculation on the futures market.
    Our task, therefore, is to establish a methodology for
    determining whether a particular contract is a cash
    forward contract exempt from regulation under the
    CEA or a futures contract subject to the requirements
    of the CEA.



1
   The Commodity Exchange Act (“CEA”), 7 U.S.C. § 1 et seq.,
regulates transactions involving contracts for the purchase or sale
of a commodity for “future delivery,” except “any sale of any cash
commodity for deferred shipment or delivery,” 7 U.S.C. § 1a(19).
See Lachmund v. ADM Investor Serv., Inc., 191 F.3d 777, 785-86
(7th Cir. 1999).
No. 03-4245                                                 3

   ....
   [O]ur starting point must always be the words of the
   contract itself. The contract’s terms will provide several
   indications of the nature of the transaction it memorial-
   izes. The document itself will reveal whether the agree-
   ment contemplates actual delivery, by indicating the
   following: whether the parties to the contract are in the
   business of producing or obtaining grain; whether the
   parties are capable of delivering or receiving actual grain
   in the quantities provided for in the contract; whether
   there is a definite date of delivery; whether the agree-
   ment explicitly requires actual delivery, as opposed to
   allowing delivery obligations to be rolled indefinitely
   into the future; whether payment takes place only upon
   delivery; and whether the contract’s terms are individu-
   alized, as opposed to standardized.
   ....
   Indeed, because the CEA regulates transactions, it is
   often necessary to look beyond the written contract. See
   [Andersons, Inc. v. Horton Farms, Inc., 166 F.3d 308,
   319-20 (6th Cir. 1998)] (cautioning that “self-serving
   labels” that parties place on their contracts are not dis-
   positive on the issue whether a contract is a cash for-
   ward or a futures contract); [CFTC v. Co Petro Mktg.
   Group, Inc., 680 F.2d 573, 581 (9th Cir. 1982)] (noting
   that “no bright-line definition or list of characterizing
   elements is determinative”). In order to gain the fullest
   understanding possible of the parties’ agreement and
   their purpose, we often must consider the course of deal-
   ings between the parties and the totality of the business
   relationship. See id. (“The transaction must be viewed
   as a whole with a critical eye towards its underlying
   purpose.”).
Lachmund, 191 F.3d at 787. In Nagel, we refined the “to-
tality of circumstances” approach and held that, when the
4                                                    No. 03-4245

following circumstances are present, a contract will be
deemed a forward contract: (1) the contract specifies in-
dividualized terms such as place of delivery and quantity,
so that the contract is not fungible with other contracts for
the sale of the commodity, except for cases in which the
seller promises to offset the contract; (2) parties to the con-
tract are industry participants contracting in the commodity
rather than non-industry speculators trading for the con-
tract’s price; (3) delivery can not be deferred indefinitely.
Nagel, 217 F.3d at 441. We noted that, if one or more of
these features is missing, the contract may or may not be a
futures contract. Id. The circuits that have addressed this
question follow a similar approach. See Grain Land Coop v.
Kar Kim Farms, Inc., 199 F.3d 983, 990-92 (8th Cir. 1999);
Andersons, 166 F.3d at 317-22; CFTC v. Noble Metals Int’l,
Inc., 67 F.3d 766, 772-73 (9th Cir. 1995); Co Petro, 680 F.2d
at 579-81.
  The present case deals with speculative transactions for
the sale or purchase of foreign currency; the contract called
for settlement within forty-eight hours, however, every two
days, the transaction was rolled forward and the customer
maintained a position in an open currency market. The
panel held that the rollover (indefinite delivery) did not con-
vert these “spot” transactions into futures contracts. Slip
Op. at 13.2 The approach employed by the panel to reach
that result departs substantially from our precedent.3 It


2
  A “spot” transaction is a transaction for the immediate sale and
delivery of a commodity. A “cash forward” transaction, in contrast,
refers to a transaction in which the commodity is presently sold
but its delivery is, by agreement, delayed or deferred. See
Lachmund, 191 F.3d at 786 (citing Saloman Forex, Inc. v. Tauber,
8 F.3d 966 (4th Cir. 1993)).
3
  The present panel opinion describes the hedge-to-arrive con-
tracts which were found not to be futures in Nagel and Lachmund
                                                    (continued...)
No. 03-4245                                                      5

squarely rejects the relevance of delivery in the context of
financial futures:
    Treating absence of “delivery” (actual or intended) as a
    defining characteristic of a futures contract is implausi-
    ble. Recall the statutory language: a “contract of sale of
    a commodity for future delivery.” Every commodity
    futures contract traded on the Chicago Board of Trade
    calls for delivery. Every trader has the right to hold the
    contract through expiration and to deliver or receive the
    cash commodity. Financial futures, by contrast, are
    cash settled and do not entail “delivery” to any partici-
    pant. Using “delivery” to differentiate between forward
    and futures contracts yields indeterminancy, because it
    treats as the dividing line something the two forms of
    contract have in common for commodities and that both
    forms lack for financial futures.
Slip Op. at 7. Notably, the opinion does more than rely on
a factual distinction between the speculative foreign cur-
rency transactions and hedge contracts for the sale of grain.
It simply disagrees with the “totality of circumstances”
approach employed in established law and, as the CFTC
points out, engages in a debate with the approach set forth


3
  (...continued)
as allowing the farmers to roll their obligations indefinitely and
thus to speculate on grain prices. Slip Op. at 4. However, in Nagel
we found that delivery was not deferred forever, because the
contract required the farmer to pay an additional charge every
time he rolled the hedge. See Nagel, 217 F.3d at 436. The foreign
currency transaction in the present case, in contrast, has no
similar cost to rolling the transaction forward every two days.
Based on this inaccurate analogy between the rollover features,
the panel opinion concludes that “Rollover, and the magnification
of gain and loss over a longer period, does not turn sales into
futures contracts here any more than it did in Nagel and
Lachmund.” Slip Op. at 13.
6                                                   No. 03-4245

in Nagel. See Petition of the CFTC at 5 n.2. Indeed, the
panel opinion adheres closely to the view set forth in the
district court in Nagel. See Nagel v. ADM Investor Serv.,
Inc., 65 F. Supp. 740 (N.D. Ill. 1999) (Easterbrook, J., sit-
ting by designation). After disparaging the analysis of Co
Petro, 680 F.2d at 579-81,4 the panel opinion then rebukes
the “totality of circumstances” approach as a general mat-
ter:
    It is essential to know beforehand whether a contract is
    a futures or a forward. The answer determines who, if
    anyone, may enter into such a contract, and where
    trading may occur. Contracts allocate price risk, and
    they fail in that office if it can’t be known until years
    after the fact whether a given contract was lawful.
    Nothing is worse than an approach that asks what the
    parties “intended” or that scrutinizes the percentage of
    contracts that led to delivery ex post. What sense would
    it make—either business sense, or statutory-interpreta-
    tion sense—to say that the same contract is either a
    future or not depending on whether the person obliged
    to deliver keeps his promise? That would leave people
    adrift and make it difficult, if not impossible, for dealers
    (technically, futures commission merchants) to know
    their legal duties in advance. But reading “contract of
    sale of a commodity for future delivery” with an empha-
    sis on “contract,” and “sale of any cash commodity for
    deferred shipment or delivery” with an emphasis on
    “sale” nicely separates the domains of futures from
    other transactions.
Slip Op. at 6. Compare Nagel, 65 F. Supp. at 752. The panel
in Nagel, acknowledging the concern, was not persuaded


4
  The panel said that Co Petro “dealt with a fungible contract and
trading did occur ‘in the contract.’ That should have been enough
to resolve the case.” Slip Op. at 8.
No. 03-4245                                                  7

that the problem required the rejection of the totality of the
circumstances test but rather its refinement. More pre-
cisely, it found “the problem of legal uncertainty under the
‘totality of circumstances’ is less serious than it appears to
be.” Nagel, 217 F.3d at 441.
  The panel’s opinion seizes on the statement in Nagel that
the “ ‘totality of circumstances’ approach turns out in
practice to give controlling significance to a handful of cir-
cumstances; and fortunately they can usually be ascertained
just by reading the contract.” Id. at 441. It then morphs that
statement into the distortion that Nagel observed that in
most cases “totality of circumstances” boils down to whether
the trading is in fungible contracts. Slip Op. at 11. Conse-
quently, the CFTC, the agency charged with the administra-
tion of the statute, justifiably is concerned that the panel’s
opinion will make application of the CEA (and CFTC’s reg-
ulatory jurisdiction over futures contracts) solely hinge upon
the concept of “fungibility” and whether fungibility is evident
within the four corners of the contract. This restrictive view
of the statute does not comport with Nagel and Lachmund’s
recognized need to consider the full terms of an agreement
in context. Again, Nagel recognized that fungibility is a key
consideration—if the contract has idiosyncratic terms such
as quantity or place of delivery, then the contract is not
fungible. The panel opinion, however, conflates this consid-
eration with the second factor of Nagel, that the parties are
industry participants (e.g., farmers/grain elevator vs. a
stockbroker) and, therefore, are trading in the commodity
(forward contract), not in the price of the contract (futures
contract). Slip Op. at 10.
  Additionally, the CFTC asks that we rehear this matter
to ensure uniformity of approach in an area of law in which
the pronouncements of this circuit are particularly influen-
tial beyond the boundaries of our circuit. We need to hear
this matter en banc and engage in thoughtful collegial de-
liberation before burdening the regulatory system with the
8                                               No. 03-4245

ambiguity created by the decision now before us. I respect-
fully dissent from the court’s decision to let this ambiguity
stand.
A true Copy:
       Teste:

                        ________________________________
                        Clerk of the United States Court of
                          Appeals for the Seventh Circuit




                   USCA-02-C-0072—10-20-04
