Introduction

During August 2016, the Commodity Futures Trading Commission (“CFTC” or “Commission”) and National Futures Association (“NFA”) published several items that will affect commodity pool operators (“CPO”) and commodity trading advisors (“CTA”). These actions (1) propose to codify previous staff letters regarding (a) CPO annual reports and (b) conditions that apply to exemptions from registration as a CPO and CTA under the U.S. Commodity Exchange Act (“CEA”) for persons located outside the United States, (2) preserve the status quo regarding treatment of cross-border swaps, (3) provide guidance regarding how upcoming changes in the regulation of money market funds (“MMF”) by the Securities and Exchange Commission (“SEC”) will affect the ability of derivatives clearing organizations (“DCO”) and futures commission merchants (“FCM”) to use MMFs as permissible investments of their own and customer funds, and (4) propose changes to the CFTC’s whistleblower regulations. NFA has also announced certain actions that will affect CPOs and CTAs.

International Accounting Standards

International Accounting Standards

The CFTC requires, with some exceptions, that each registered CPO distribute to each investor in a commodity pool an annual report for the pool that has been audited by an independent public accountant within 90 calendar days after the end of the pool’s fiscal year. Historically, the financial statements in the annual report were required to be presented in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). About seven years ago, the CFTC permitted CPOs to use International Financial Reporting Standards (“IFRS”) in annual reports for pools organized under non-U.S. law, subject to certain conditions. [1] The CFTC is now proposing to amend its regulations to permit a CPO to use generally accepted accounting principles, standards or practices followed in the United Kingdom, Ireland, Luxembourg, or Canada in an annual report, subject to the same conditions for using IFRS. [2]

Exemption from Audited Annual Report Requirement

The CFTC is also proposing an exemption from the audit requirement for the annual report of a pool’s first fiscal year if the period from formation of the pool (which would be defined as the date the CPO first receives funds, securities or other property for the purchase of an interest in the pool) to the end of the pool’s first fiscal year is three months or less. This exemption would also be subject to the conditions that, during the period from pool formation to the end of the pool’s first fiscal year, the pool had no more than 15 participants and total gross capital contributions did not exceed $1.5 million. [3] In addition, the CPO must obtain a specified written waiver of the right to receive an annual report from each participant and file a notice with NFA claiming the relief and certifying that it has received the specified waivers. [4]

CPOs claiming this relief would still be required to prepare and distribute an unaudited annual report for the first fiscal year of three months or less, the cover page of which must prominently include this statement: ‘‘Pursuant to an exemption from the Commodity Futures Trading Commission, this unaudited Annual Report covers the period from the date of formation of the pool to the end of the pool’s first fiscal year, a period of [number] months.’’ Further, the next annual report for the pool must prominently disclose the following statement on the cover page thereof: ‘‘Pursuant to an exemption from the Commodity Futures Trading Commission, this audited Annual Report covers the period from the date of formation of the pool to the end of the pool’s first 12-month fiscal year, a period of [number] months.’’

The CFTC seeks to ensure that an audit is conducted at least once for each pool operated by a registered CPO, so if the CPO took advantage of the relief provided for the first short fiscal year and liquidated the pool before the end of the following full fiscal year, an audited final report would be required and the ability to claim exemption in accordance with CFTC Regulation 4.22(c)(7)(iii) would be unavailable.

Exemption from Registration for Certain Foreign Person

CFTC Regulation 3.10(c)(3) provides an exemption from registration under the CEA for a CPO or CTA provided (1) the CPO or CTA is located outside of the United States, (2) the CPO or CTA acts only on behalf of persons located outside of the United States, and (3) any resulting commodity interest transaction is submitted for clearing through an FCM registered under the CEA. The CFTC is now proposing to eliminate the third condition, which would codify relief provided in CFTC Staff no-action letters. [5]

The CFTC’s rationale for proposing to codify the relief is that numerous swaps are not subject to a clearing mandate and are not yet accepted for clearing by any CFTC-registered DCO, so it is impossible to comply with the third condition in the current exemption with respect to such swaps. The proposed amendments to Regulation 3.10(c) go beyond the relief granted in the Staff no-action letters in that those letters provided relief in connection with swaps not subject to a CFTC clearing mandate or where the customer is an international financial institution such as the International Monetary Fund or World Bank. The CFTC notes that persons located outside the United States will remain subject to any applicable clearing requirement for futures, options on futures and swaps, regardless of any registration exemption for a non-U.S. intermediary. However, the CFTC appears to leave open the question of whether resulting commodity interest transactions that are required to be cleared must be submitted for clearing through an FCM registered under the CEA or whether a “foreign broker” as defined in CFTC Regulation 1.3(xx) could submit the transaction for clearing, assuming the DCO permitted remote clearing members.

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