• Recent CFTC Developments
  • January 31, 2014
  • Law Firm: Proskauer Rose LLP - New York Office
  • In the crush of dealing with the new rules and mechanisms for trading and clearing swaps, private fund managers may have missed a few developments of particular relevance to Commodity Futures Trading Commission (CFTC) registered commodity pool operators (CPOs) and commodity trading advisors (CTAs).

    CPOs Must File Notice with NFA if Records Kept by Third Party

    CFTC rules require that a registered CPO maintain certain books and records at its main business office. The CFTC recently amended its recordkeeping rules to allow all CPOs (including CPOs operating pools pursuant to the partial exemption under CFTC Rule 4.7) to maintain required records with a third party, including a pool's administrator or custodian. However, if records are kept by a third party, the CPO must file a notice with the National Futures Association (NFA) and attach a required form of certification from the third party holding the records.

    CTAs that Are Members of a Designated Contract Market or Swap Execution Facility Must Record Oral Conversations

    The CFTC recently extended until May 1, 2014 the compliance date for new rules that require a registered CTA that is also a member of a Designated Contract Market (DCM) or Swap Execution Facility (SEF), as defined under CFTC rules, to record, and store for a period of one year, oral communications made in the course of the business of dealing in commodity interests and cash commodities. The new rule defines a member of a DCM or SEF to include persons having trading privileges on a registered DCM or SEF.  Notably, the new recording requirement does not apply to either funds or managers registered only as CPOs.

    New U.S. Person Definition for Cross-Border Swaps

    A new definition of the term "U.S. person" for purposes of cross-border swaps came into effect in October 2013, with potentially very broad implications for private fund managers.  The new definition is already being challenged by three industry trade groups in U.S. court proceedings. The new definition replaces a narrower interpretation of U.S. person adopted by the CFTC on an interim basis in January 2013. Importantly, the new definition significantly expands the definition of U.S. person to include two new categories applicable to many private funds:

    • a fund with its principal place of business in the United States: The CFTC for this purpose interprets the "principal office" of a fund as including the principal location of senior personnel responsible for either formation and promotion of the fund, or making investment decisions on behalf of the fund.  As a result, many investment funds managed by an investment manager located in the United States will be deemed to be a U.S. person for purposes of the new interpretation, without regard to where the fund was formed or the nationality or residence of its investors.

    • a fund that is majority-owned by U.S. persons: For this purpose, majority ownership is measured by either vote or equity, and requires a look-through to the owners of any entity that controls or is under common control with the fund.

    The consequences to a private fund of being characterized as a U.S. person are complex and can affect, among other things, the willingness of non-U.S. counterparties to deal with the fund, and the reporting obligations applicable to both parties to a swap. Swap counterparties are likely to ask private funds that use swaps either to make new representations under the new interpretation, or to confirm the accuracy of prior representations. Private funds also may need to review existing swap agreements in order to determine whether or not representations previously made need to be updated.

    Note that the new definition of U.S. person with respect to cross-border swaps is not the same as the definition of U.S. person in CFTC Rule 4.7, which has traditionally been used for most purposes under CFTC rules.