                            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.
                         ____________
      ARGUED JUNE 1, 2004—DECIDED JUNE 30, 2004
                     ____________



 Before EASTERBROOK, KANNE, and ROVNER, Circuit
Judges.
  EASTERBROOK, Circuit Judge. This appeal presents
the question whether speculative transactions in foreign
currency are “contracts of sale of a commodity for future
delivery” regulated by the Commodity Futures Trading
Commission. 7 U.S.C. §2(a)(1)(A). Until recently almost
all trading related to foreign currency was outside the
CFTC’s remit, even if an equivalent contract in wheat or oil
2                                                 No. 03-4245

would be covered. See Dunn v. CFTC, 519 U.S. 465 (1997)
(describing the Treasury Amendment to the Commodity
Exchange Act). But Congress modified the Treasury
Amendment as part of the Commodity Futures Moderniza-
tion Act of 2000, and today the agency may pursue claims
that currency futures have been marketed deceitfully,
unless the parties to the contract are “eligible contract
participants”. 7 U.S.C. §2(c)(2)(B). “Eligible contract partici-
pants” under the Commodity Exchange Act are the equiva-
lent of “accredited investors” in securities markets: wealthy
persons who can look out for themselves directly or by
hiring experts. 7 U.S.C. §1a(12); 15 U.S.C. §77b(a)(15).
Defendants, which sold foreign currency to casual specula-
tors rather than “eligible contract participants,” are not
protected by the Treasury Amendment except to the extent
that it permits them to deal over-the- counter, while most
other futures products are restricted to registered ex-
changes (called boards of trade) or “derivatives transaction
execution facilities” (specialized markets limited to profes-
sionals).
  The agency believes that some of the defendants deceived
some of their customers about the incentive structure:
salesmen said, or implied, that the dealers would make
money only if the customers also made money, while in fact
the defendants made money from commissions and mark-
ups whether the customers gained or lost. This allegation
(whose accuracy has not been tested) makes it vital to know
whether the contracts are within the CFTC’s regulatory
authority. The district judge concluded that the transac-
tions are sales in a spot market rather than futures con-
tracts. 2003 U.S. Dist. LEXIS 17660 (N.D. Ill. Oct. 3, 2003).
   AlaronFX deals in foreign currency. Two corporations
doing business as “British Capital Group” or BCG solicited
customers’ orders for foreign currency. (Michael Zelener, the
first-named defendant, is the principal owner and manager
of these two firms.) Each customer opened an account with
No. 03-4245                                                  3

BCG and another with AlaronFX; the documents made it
clear that AlaronFX would be the source of all currency
bought or sold through BCG in this program, and that
AlaronFX would act as a principal. A customer could
purchase (go long) or sell (short) any currency; for simplicity
we limit our illustrations to long positions. The customer
specified the desired quantity, with a minimum order size
of $5,000; the contract called for settlement within 48
hours. It is agreed, however, that few of BCG’s customers
paid in full within that time, and that none took delivery.
AlaronFX could have reversed the transactions and charged
(or credited) customers with the difference in price across
those two days. Instead, however, AlaronFX rolled the
transactions forward two days at a time—as the AlaronFX
contract permits, and as BCG told the customers would
occur. Successive extensions meant that a customer had an
open position in foreign currency. If the dollar appreciated
relative to that currency, the customer could close the
position and reap the profit in one of two ways: take
delivery of the currency (AlaronFX promised to make a wire
transfer on demand), or sell an equal amount of currency
back to AlaronFX. If, however, the dollar fell relative to the
other currency, then the client suffered a loss when the
position was closed by selling currency back to AlaronFX.
  The CFTC believes that three principal features make
these arrangements “contracts of sale of a commodity for
future delivery”: first, the positions were held open inde-
finitely, so that the customers’ gains and losses depended on
price movements in the future; second, the customers were
amateurs who did not need foreign currency for business
endeavors; third, none of the customers took delivery of any
currency, so the sales could not be called forward contracts,
which are exempt from regulation under 7 U.S.C. §1a(19).
This subsection reads: “The term ‘future delivery’ [in
§2(a)(1)(A)] does not include any sale of any cash commodity
for deferred shipment or delivery.” Delivery never made
4                                                No. 03-4245

cannot be described as “deferred,” the Commission submits.
The district court agreed with this understanding of the
exemption but held that the transactions nonetheless were
spot sales rather than “contracts . . . for future delivery.”
Customers were entitled to immediate delivery. They could
have engaged in the same price speculation by taking
delivery and holding the foreign currency in bank accounts;
the district judge thought that permitting the customer to
roll over the delivery obligation (and thus avoid the costs of
wire transfers and any other bank fees) did not convert the
arrangements to futures contracts.
  In this court the parties debate the effect of Nagel v. ADM
Investor Services, Inc., 217 F.3d 436 (7th Cir. 2000), and
Lachmund v. ADM Investor Services, Inc., 191 F.3d 777 (7th
Cir. 1999). These decisions held that hedge-to- arrive
contracts in grain markets, which allow farmers to roll their
delivery obligations forward indefinitely and thus to
speculate on grain prices (while selling their crops on the
cash market), are not futures contracts. The rollover feature
offered by AlaronFX gives investors a similar option, and
thus one would think requires a similar outcome. The CFTC
seeks to distinguish these decisions on the ground that
farmers at least had a cash commodity, which they nomi-
nally sold to the dealer that offered the hedge-to- arrive
contract (though they did not necessarily deliver grain to
that entity). AlaronFX and BCG acknowledge this differ-
ence but say that it is irrelevant; they rely heavily on
Chicago Mercantile Exchange v. SEC, 883 F.2d 537, 542
(7th Cir. 1989), where we wrote:
    A futures contract, roughly speaking, is a fungible
    promise to buy or sell a particular commodity at
    a fixed date in the future. Futures contracts are
    fungible because they have standard terms and
    each side’s obligations are guaranteed by a clearing
    house. Contracts are entered into without pre-
    payment, although the markets and clearing house
No. 03-4245                                                  5

    will set margin to protect their own interests.
    Trading occurs in “the contract”, not in the com-
    modity. Most futures contracts may be performed
    by delivery of the commodity (wheat, silver, oil,
    etc.). Some (those based on financial instruments
    such as T-bills or on the value of an index of stocks)
    do not allow delivery. Unless the parties cancel
    their obligations by buying or selling offsetting
    positions, the long must pay the price stated in the
    contract (e.g., $1.00 per gallon for 1,000 gallons of
    orange juice) and the short must deliver; usually,
    however, they settle in cash, with the payment
    based on changes in the market. If the market
    price, say, rose to $1.50 per gallon, the short would
    pay $500 (50¢ per gallon); if the price fell, the long
    would pay. The extent to which the settlement price
    of a commodity futures contract tracks changes in
    the price of the cash commodity depends on the size
    and balance of the open positions in “the contract”
    near the settlement date.
These transactions could not be futures contracts under
that definition, because the customer buys foreign currency
immediately rather than as of a defined future date, and
because the deals lack standard terms. AlaronFX buys and
sells as a principal; transactions differ in size, price, and
settlement date. The contracts are not fungible and thus
could not be traded on an exchange. The CFTC replies that
because AlaronFX rolls forward the settlement times, the
transactions are for future delivery in practice even though
not in form; and the agency insists that fixed expiration
dates and fungibility are irrelevant. It favors a multi-factor
inquiry with heavy weight on whether the customer is
financially sophisticated, able to bear risk, and intended to
take or make delivery of the commodity. See Statutory
Interpretation Concerning Forward Transactions, 55 Fed.
6                                                 No. 03-4245

Reg. 39188, 39191 (Sept. 25, 1990). See also CFTC v. Co
Petro Marketing Group, Inc., 680 F.2d 573, 577 (9th Cir.
1982).
  Instead of trying to parse language in earlier decisions
that do not wholly fit this situation, we start with the stat-
ute itself. Section 2(a)(1)(A) speaks of “contracts of sale of a
commodity for future delivery”. That language cannot
sensibly refer to all contracts in which settlement lies
ahead; then it would encompass most executory contracts.
The Commission concedes that it has a more restricted
scope, that it does not mean anything like “all executory
contracts not excluded as forward contracts by §1a(19).”
What if there were no §1a(19)? Until 1936 that exemption
was limited to deferred delivery of crops. (Compare the
Grain Futures Act of 1922, 42 Stat. 998 (1922), with the
Commodity Exchange Act of 1936, 49 Stat. 1491 (1936).)
Then until 1936 a contract to deliver heating oil in the
winter would have been a “futures contract,” and only a fu-
tures commission merchant could have been in the oil busi-
ness! (Moreover, those contracts could have been secured
only on boards of trade, because with rare exceptions, such
as foreign currency under the Treasury Amendment, all
futures contracts must be traded on exchanges or not at
all.) Can it be that until 1936 all commercial contracts for
future delivery of newspapers, magazines, coal, ice, oil, gas,
milk, bread, electricity, and so on were unlawful futures
contracts? Surely the answer is no, which means that
“contract for future delivery” must have a technical rather
than a lay meaning.
  The Commission’s candidate for that technical meaning is
a multi-factor approach concentrating, as we have re-
marked, on the parties’ goals and sophistication, plus the
likelihood that delivery will occur. Yet such an approach
ignores the statutory text. Treating absence of “delivery”
(actual or intended) as a defining characteristic of a futures
contract is implausible. Recall the statutory language: a
No. 03-4245                                                  7

“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 participant.
Using “delivery” to differentiate between forward and
futures contracts yields indeterminacy, 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.
  It may help to recall the text of §1a(19): “The term ‘future
delivery’ does not include any sale of any cash commodity
for deferred shipment or delivery.” This language departs
from the definition of a futures contract by emphasizing
sale for deferred delivery. A futures contract, by contrast,
does not involve a sale of the commodity at all. It involves
a sale of the contract. In a futures market, trade is “in the
contract.” See Chicago Board of Trade v. SEC, 187 F.3d 713,
715 (7th Cir. 1999); Robert W. Kolb, Understanding Futures
Markets (5th ed. 1997); Jerry W. Markham, The History of
Commodity Futures Trading and its Regulation (1986);
Louis Vitale, Interest Rate Swaps under the Commodity
Exchange Act, 51 Case W. Res. L. Rev. 539 (2001).
   In organized futures markets, people buy and sell con-
tracts, not commodities. Terms are standardized, and each
party’s obligation runs to an intermediary, the clearing
corporation. Clearing houses eliminate counterparty credit
risk. Standard terms and an absence of counterparty-spe-
cific risk make the contracts fungible, which in turn makes
it possible to close a position by buying an offsetting con-
tract. All contracts that expire in a given month are iden-
tical; each calls for delivery of the same commodity in the
same place at the same time. Forward and spot contracts,
by contrast, call for sale of the commodity; no one deals “in
the contract”; it is not possible to close a position by buying
8                                                No. 03-4245

a traded offset, because promises are not fungible; delivery
is idiosyncratic rather than centralized. Co Petro, the case
that invented the multi-factor approach, dealt with a fun-
gible contract, see 680 F.2d at 579-81, and trading did occur
“in the contract.” That should have been enough to resolve
the case.
  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-interpretation 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 emphasis
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.
  Any contention that it is appropriate to ignore the con-
tract’s form and focus on economic effects—here, that
rollover without full payment (AlaronFX allows customers
to use margin while positions are open) can give the buyer
the economic equivalent of a long position on a futures
exchange—produces a sense of déjà vu. We’ve been here
before, but in securities rather than commodities law. A
business can be transferred two ways: the corporation may
sell all of its assets, then liquidate and distribute to inves-
tors the cash received from the buyer; or the investors may
sell their securities directly to the buyers. With sufficient
No. 03-4245                                                  9

care in drafting, these two forms may be made economically
equivalent. This equivalence led to arguments that the sale
of stock to transfer a whole business should not be regu-
lated by the federal securities laws. Because the sale of
assets would be governed by state contract law, it would
upset expectations to handle the functionally equivalent
transaction under federal law just because stock played a
role. Many courts adopted this sale-of-business doctrine, but
the Supreme Court rejected it, ruling that form must be
respected. See Landreth Timber Co. v. Landreth, 471 U.S.
681 (1985). One reason is that the securities laws are about
form, and one can say much the same about the commodi-
ties laws. Another powerful reason was the need for
certainty. The sale-of-business doctrine led to all sorts of
questions. What if there were a significant minority
shareholder? What if the new buyer did not plan to run the
business as an entrepreneur? The list of questions turned
out to be long and the uncertainty considerable—just as the
CFTC’s list of factors has made it hard to determine when
rollovers turn spot or forward deals into futures contracts.
By taking form seriously the Supreme Court was able to
curtail, if not eliminate, that uncertainty and promote
sensible business planning. See also Reves v. Ernst &
Young, 494 U.S. 56 (1990) (simplifying the approach to
determining when notes are securities). Since the main
battle in the sale-of-business cases was whether fraud
litigation would occur in state or federal court, the Justices
saw no reason for prolonged litigation about the forum:
fraud is illegal in every state. So, too, for the definition of
futures contracts. The Commission’s principal substantive
contention is that BCG deceived its clients. That could form
the basis of a mail-fraud or wire-fraud prosecution, a civil
or criminal action under RICO, or fraud litigation in state
court. Consumers or state attorneys general could invoke
consumer-protection laws as well. It is unnecessary to
classify the transactions as futures contracts in order to
provide remedies for deceit. Why stretch the Commodity
10                                              No. 03-4245

Futures Act—with resulting uncertainty, litigation costs,
and potentially unhappy consequences for other economic
arrangements that may be swept into a regulatory system
not designed for them—when other remedies are ready to
hand?
  Recognition that futures markets are characterized by
trading “in the contract” leads to an easy answer for most
situations. Customers of foreign exchange at AlaronFX
did not purchase identical contracts: each was unique in
amount of currency (while normal futures contracts are for
fixed quantities, such as 1,000 bushels of wheat or 100
times the price of the Standard & Poors 500 Index) and in
timing (while normal futures contracts have defined expir-
ation or delivery dates). Thus the trade was “in the commod-
ity” rather than “in the contract.” Cf. Marine Bank v.
Weaver, 455 U.S. 551 (1982) (a non-fungible contract that
could not be traded on an exchange is not a security);
Giuffre Organization, Ltd. v. Euromotorsport Racing, Inc.,
141 F.3d 1216 (7th Cir. 1998) (a sports franchise linked to
a single owner is not a security).
  Citing Chevron U.S.A. Inc. v. Natural Resources Defense
Council, Inc., 467 U.S. 837 (1984), the Commission contends
that its position that rollovers turn spot sales into futures
contracts should be respected without independent judicial
inquiry. Yet when deciding what is (or isn’t) a “security,”
courts have not deferred to the SEC; there is no greater
reason to defer to the CFTC when defining futures con-
tracts. In Dunn the Supreme Court addressed de novo the
question whether an over-the-counter option on foreign
currency was excepted under the pre-2000 version of the
Treasury Amendment. Perhaps Dunn could be distin-
guished on the ground that the very name of the Treasury
Amendment implied deference to its namesake, the Trea-
sury Department (a possibility the Court mused about, 519
U.S. at 479 n.14). But the central point is that deference
depends on delegation. See United States v. Mead Corp., 533
No. 03-4245                                                11

U.S. 218 (2001). When Congress has told an agency to
resolve a problem, then courts must accept the answer.
When, however, the problem is to be resolved by the courts
in litigation—which is how this comes before us—the
agency does not receive deference. Adams Fruit Co. v.
Barrett, 494 U.S. 638, 649-50 (1990). Courts must heed the
agency’s reasoning and give it the benefit of the doubt. But
the CFTC has avoided rather than addressed the central
issue: is trading “in the contract” a defining characteristic?
The agency has assumed a negative answer without
explanation. In Nagel, Chicago Mercantile Exchange, and
other decisions, this circuit addressed the subject without
extending Chevron deference to the Commission; we adhere
to that position today. Both Nagel and Lachmund hold that
rollovers of grain sales do not turn them into futures; it is
hard to see why we should treat rollovers of currency sales
differently.
  Our decision in Nagel observed that in the great majority
of situations even opinions emphasizing “the totality of
the circumstances” boil down to whether trading has oc-
curred in fungible contracts. 217 F.3d at 441. Best to take
Occam’s Razor and slice off needless complexity. We rec-
ognized a qualification, however: “there is an exception for
the case in which the seller of the contract promises to sell
another contract against which the buyer can offset the first
contract, as in In re Bybee, 945 F.2d 309, 313 (9th Cir.
1991), and CFTC v. Co Petro Marketing Group, Inc., supra,
680 F.2d at 580. That promise could create a futures
contract.” Ibid. A promise to create offsets makes a given
setup work as if fungible: although the customer can’t go
into a market to buy an equal and opposite position, the
dealer’s promise to match the idiosyncratic terms in order
to close the position without delivery means that the cus-
tomer can disregard the absence of a formal exchange.
 Because the parties’ briefs did not address this possibility,
we inquired at oral argument whether the customers’
12                                                No. 03-4245

contracts with BCG and AlaronFX entitled customers to
close their positions by offset. Counsel for the CFTC an-
swered with a ringing “yes” and counsel for the defendants
with an equally confident “no.” So they agree that the an-
swer is clear; they just don’t agree on what that answer is.
Because neither side has made anything of the contracts
between customers and BCG, we limit attention to the
contracts that AlaronFX required all customers to sign. The
Commission relies on paragraphs 5, 8, and 9 of that con-
tract. Paragraph 8 provides that if a customer’s account
contains “two or more open and opposite Contracts provid-
ing . . . for the purchase and sale of the same Foreign
Currency . . . on the same Value Date, such Contracts shall
automatically be canceled and replaced by an obligation to
settle only the net difference”. So far, so good; offset is a
standard feature of trading in the contract on a futures
market. But the question we posed in Nagel is whether the
dealer has promised to sell the offsetting position, and thus
allow netting on demand. Such an obligation is harder to
find in the AlaronFX contract.
  Paragraph 9, on which the Commission places its prin-
cipal reliance, does not contain any promise. What it says
instead is that, if the client fails to give timely instructions
about the disposition of the positions, then “AlaronFX is
authorized, in AlaronFX’s sole discretion, to deliver, roll
over or offset all or any portion of the Open Position in
Customer’s Account at Customer’s risk.” This paragraph
does not give the client a right to purchase an offsetting
position and thus close a transaction; that option belongs to
AlaronFX rather than to the customer. As for ¶5: subsection
5.3 says that “AlaronFX will attempt to execute all Orders
that it may, in its sole discretion, accept from Customer in
accordance with Customer’s instructions . . . .” That’s not a
promise to close any given position by offset. This subsec-
tion continues: “AlaronFX or its affiliates may, at a future
date, establish a trade matching system . . . . In that event,
No. 03-4245                                                13

AlaronFX . . . shall have the right (but not the obligation) .
. . to act for its own account, and as a counter party or as a
broker to AlaronFX customers, in the making of markets”.
The Commission does not contend that such a “trade
matching system” was ever established. Customers thus
had no assurance that they could close their positions by
offset. The only promise was that, if AlaronFX did not buy
back the currency (and thus create an offset under ¶8), it
would deliver. This looks more like the business of a
wholesaler in commodities such as metals or rare coins than
like the system of trading in fungible contracts that charac-
terizes futures exchanges.
  These transactions were, in form, spot sales for delivery
within 48 hours. Rollover, and the magnification of gain
or loss over a longer period, does not turn sales into futures
contracts here any more than it did in Nagel and
Lachmund. The judgment of the district court therefore is
                                                  AFFIRMED.

A true Copy:
       Teste:

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




                   USCA-02-C-0072—6-30-04
