• CFTC Issues Further Time-Limited No-Action Relief for Securitization Vehicles Subject to Commodity Pool Regulations
  • April 11, 2013 | Authors: William R.B. Springer; Joshua B. Sterling; Charles A. Sweet
  • Law Firms: Bingham McCutchen LLP - New York Office ; Bingham McCutchen LLP - Washington Office
  • On April 2, 2013, the Division of Swap Dealer and Intermediary Oversight (the “Division”) of the Commodity Futures Trading Commission (the “CFTC”) issued a release (the “Regulatory Letter”)1 providing temporary relief from certain commodity pool regulations for the operators of securitization vehicles that have initiated registration as a commodity pool operator. The Regulatory Letter continues a series of letters and guidance from the CFTC to incorporate securitization vehicles into the commodity pool regulatory structure.

    The Commodity Exchange Act and the rules of the CFTC generally require that, absent an available exemption or exclusion, the “commodity pool operator” of a “commodity pool” be registered with the CFTC. The Commodity Exchange Act, as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act, defines a “commodity pool” as, in pertinent part, “any investment trust, syndicate or similar form of enterprise operated for the purpose of trading in commodity interests, including any commodity for future delivery, security futures product, or swap.”2 Before the Dodd-Frank Act, the definition of “commodity pool” in the CFTC’s regulations did not include any reference to swaps. The new definition became effective on October 12, 2012. As a result, the commodity pool operator registration obligation became effective for sponsors of commodity pools that trade in swaps on October 12, 2012.

    This Regulatory Letter follows previous letters issued by the Division on October 11, 2012, (the “First Interpretive Letter”)3 and December 7, 2012 (the “Second Interpretive Letter”),4 which provided a framework whereby certain securitization vehicles would be excluded from the definition of a “commodity pool.” For securitization vehicles that are not within the exclusions provided in either Interpretive Letter (“Securitization Commodity Pools”), the Division previously granted no-action advice5 whereby an operator of a Securitization Commodity Pool would not need to register as a commodity pool operator until December 31, 2012. This no-action deadline was extended until March 31, 2013, pursuant to the Second Interpretive Letter.

    Necessity for and Terms of the Regulatory Letter

    The CFTC’s previous letters excluded many types of securitization vehicles from the definition of commodity pool, relieving operators of those vehicles from the commodity pool operator registration and regulatory compliance regime.6 Operators of Securitization Commodity Pools, which did not receive any exclusion, were required to register as commodity pool operators by March 31, 2013, and from and after registration, to comply with all commodity pool regulations. The commodity pool regulatory scheme, however, currently is structured for oversight of investment vehicles very different in structure and purpose than securitization vehicles. For this reason, securitization industry groups have been involved in active discussions with the CFTC regarding the applicability of the various commodity pool regulations that are not relevant to securitization vehicles.

    As of the March 31, 2013 deadline, the CFTC had not finally decided on what relief, if any, that it would afford to operators of Securitization Commodity Pools from the CFTC’s commodity pool regulatory scheme. Therefore, the CFTC staff agreed that it will not seek enforcement actions for failure by a Securitization Commodity Pool to satisfy Part 4 of the CFTC’s regulations, which cover Commodity Pool Operators and Commodity Trading Advisors (the “Part 4 Regulations”), if the commodity pool operator and the Securitization Commodity Pool meet the requirements set forth in the Regulatory Letter.

    The commodity pool operator of the Securitization Commodity Pool must have registered as a commodity pool operator by filing the relevant forms and paying the required fees by March 31, 2013, and must comply with all Part 4 Regulations with respect to the Securitization Commodity Pool other than the following:

    • The commodity pool operator of a Securitization Commodity Pool that does not have an equity tranche or a debt tranche rated lower than “BB” and references a static pool of assets will not be required to satisfy the asset value, draws and performance disclosure requirements of Section 4.25.

    • The commodity pool operator of a Securitization Commodity Pool with an amortizing pool of assets will not be required to satisfy the disclosure requirements relating to the pools annual rate of return and draw-down fluctuations contained in Section 4.25(a)(1)(F) and (G).

    • For purposes of net asset value calculation with respect to a Securitization Commodity Pool, only fixed income securities rated “BB” and higher will be treated as debt, and all other fixed income securities and equity tranches will be treated as equity.

    • In determining the eligibility of a Securitization Commodity Pool for the exemption provided by Section 4.13(a)(3) for commodity pools that trade a minimal amount of futures from being required to prepare a commodity pool disclosure document and various other requirements, if the Securitization Commodity Pool did not or does not pay any initial margin on its swaps positions, the operator must use the alternative net notional test under regulation 4.13(a)(3)(ii)(B), which requires the aggregate net notional value of the swaps positions to be less than 100% of the liquidation value of the pool assets (including any unrealized gains or losses).

    • Rather than distributing financial statements in accordance with Section 4.22, the commodity pool operator of a Securitization Commodity Pool can provide basic, material information regarding the securities and the distributions on those securities; the nature, performance and servicing of the pool assets; and any swaps held in the asset pool, including a discussion of their counterparties.

    • The commodity pool operator of a Securitization Commodity Pool need not comply with the CFTC’s offering document requirements for commodity pools under Sections 4.21(b), 4.24(a) and (s), or the requirement under Section 4.23 that books and records of a Securitization Commodity Pool be maintained at the main business office commodity pool operator.

    • Pursuant to the requirement of Section 4.24(h) that a commodity pool operator disclose the percentage of the commodity pool’s assets used to trade commodity interests, the commodity pool operator of a Securitization Commodity Pool that holds static swap positions must provide full and complete disclosure of the swaps positions and “their functions within that” Securitization Commodity Pool in addition to a percentage.

    In order to rely on the relief provided by the Regulatory Letter, the commodity pool operator of a Securitization Commodity Pool must file an email notice with the Division.

    The Regulatory Letter provides operators of Securitization Commodity Pools with some temporary relief from being required to comply with all of the CFTC’s commodity pool regulations. At the present time, it is not certain, however, whether the CFTC will ultimately grant Securitization Commodity Pools permanent relief from any of the Part 4 Regulations, and if they do, the nature of that. Also, Securitization Commodity Pool would be a “covered fund” under the proposed Volcker Rule regulations. Sponsors of Securitization Commodity Pools should consider the possible impact of the Volcker Rule on their structure and operations, in the event that the final Volcker Rule regulations do not exclude Securitization Commodity Pools from the definition of “covered fund.”


    Endnotes

    1 CFTC No-Action Letter No. 13-07 (April 2, 2013), available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/13-07.pdf.

    2 See Dodd-Frank Act Section 721(a)(5).

    3 CFTC Interpretation Letter No. 12-14 (Oct. 11, 2012), available at http://cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/12-14.pdf. Our client alert regarding this letter is available at http://www.bingham.com/Alerts/2012/10/CFTC-Issues-Exclusion-from-Commodity-Pool-Regulation.

    4 CFTC No-Action Letter No. 12-45 (Dec. 7, 2012), available at http://cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/12-45.pdf. Our client alert regarding this letter is available at http://www.bingham.com/Alerts/2012/12/CFTC-Issues-Broader-Interpretive-Exclusion-From-Commodity-Pool-Regulation-for-Securitizations.

    5 CFTC No-Action Letter No. 12-15 (Oct. 11, 2012), available at http://cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/12-15.pdf.

    6 For more information about these exemptions, please see our summaries of the previous CFTC letters referenced and linked to in footnotes 3 and 4.