The U.S. Commodity Futures Trading Commission (CFTC) Division of Swap Dealer and Intermediary Oversight (DSIO) provided no-action relief on February 12, 2016 to commodity pool operators (CPOs) and commodity trading advisors (CTAs) located outside of the United States (Foreign Intermediaries) that trade uncleared swaps on behalf of persons located outside of the United States. The relief will expand the number of Foreign Intermediaries able to rely on a registration exemption under CFTC Regulation 3.10(c)(3)(i) (Rule) when their commodity interest trading involves U.S. markets.
The relief addresses an aspect of the registration exemption that had effectively subjected CPOs and CTAs that otherwise met the conditions under the Rule to CFTC registration if they traded uncleared swaps, whereas if those same CPOs and CTAs traded solely in cleared commodity interests, they would qualify for the exemption. CFTC registration for CPOs and CTAs is a complex and sometimes costly process that involves registering the firm and some individuals with the National Futures Association (NFA), meeting on-going compliance requirements, making periodic reports to the CFTC and NFA, and being subject to onsite NFA audits.
Current Rule and Historical Context
The Rule, in relevant part, provides a registration exemption for Foreign Intermediaries that trade commodity interests only on behalf of persons located outside of the United States, provided that the commodity interest transactions are submitted for clearing through a registered futures commission merchant.
The registration obligation for CPOs and CTAs, and the version of the Rule in effect prior to the adoption of the Dodd-Frank Act in 2010, covered only commodity interests then regulated by the CFTC (i.e., futures and options on futures) – these contracts historically required clearance through a derivatives clearing organization (DCO). Foreign Intermediaries trading for clients located outside of the United States had been exempt from CFTC registration under the Rule, even if they traded in uncleared swaps on U.S. markets.
The Dodd-Frank Act expanded the CFTC’s jurisdiction to include “swaps,” and included the term “swap” in the definitions of the terms CPO, CTA and “commodity pool.” As a result, an asset manager located outside of the United States trading swaps on U.S. markets (e.g., with counterparties that are U.S. persons) would need to consider: whether the asset manager is a CPO or CTA; and, if so, whether it would be subject to registration or could rely on an exemption from registration.
As not all swaps are required to be cleared, and some swaps have not yet been accepted for clearing, Foreign Intermediaries that trade commodity interests only on behalf of persons located outside of the United States could be subject to CFTC registration if they trade uncleared swaps, due to the changes under the Dodd-Frank Act. However, if those same CPOs and CTAs were to trade solely in cleared commodity interests, they would qualify for the exemption under the Rule.
CFTC No-Action Relief and Next Steps
In response to a request for no-action relief to address this problem with the exemption submitted to the DSIO by the Asset Management Group of the Securities Industry and Financial Markets Association, the DSIO granted relief to CPOs and CTAs trading swaps not subject to a CFTC clearing requirement. In doing so, the DSIO stated that it “believes that Regulation 3.10(c)(3)(i) was not intended to impose an independent clearing requirement on commodity interest transactions involving Foreign Intermediaries that the [Commodity Exchange Act] and Commission regulations do not otherwise require to be cleared.”1
Pursuant to the relief, the DSIO will not recommend enforcement action against any Foreign Intermediary which trades or accesses the U.S. commodity interest markets using cleared or uncleared contracts on behalf of persons located outside of the United States. As a result, such an entity will be treated as eligible for the registration exemption. The registration exemption under the Rule, as well as the no-action relief, is self-executing – therefore, eligible CPOs and CTAs do not need to make a filing with the CFTC or the NFA in order to rely on the relief. The relief may be relied upon until the later of the effective date or compliance date of any final rule the CFTC adopts to amend Regulation 3.10(c)(3)(i).
CPOs and CTAs that have been registered with the CFTC with regard to relevant pools and accounts, or which have been relying on an alternative registration exemption (e.g., CFTC Regulation 4.13(a)(3)) may take steps to change their filings with the NFA. With regard to the withdrawal of Regulation 4.13(a)(3) exemption filings, exempt CPOs must contact the NFA exemptions staff via e-mail (firstname.lastname@example.org) to request that the pools be removed entirely from the NFA system. Note that withdrawing the exemption filing through the electronic exemptions filing system, or simply allowing the exemption filing to expire without reaffirming the exemption filing, will not achieve the goal of having the pool removed from the NFA system.