SPEED READ

On October 11, 2012, the U.S. Commodity Futures Trading Commission (the CFTC) issued an interpretative letter (the Release) regarding commodity pool issues raised by recent changes to the Commodity Exchange Act (the CEA). The Release can be found here.

THE ISSUE: A "commodity pool" is defined as any investment trust, syndicate or similar form of enterprise operated for the purpose of trading commodity interests. The Dodd-Frank Act amended the definition of "commodity pool" to include "swaps" within the "commodity pool" definition's list of commodity interests. As a result of this change, any securitization vehicle that enters into one or more swaps may be regulated as a commodity pool, subjecting one or more of the relevant parties to regulation by the CFTC and the National Futures Association (NFA). These changes are currently set to take effect October 12, 2012. However, we expect the CFTC to provide temporary relief from registration which will extend the deadline for registration to December 31, 2012, for those entities subject to commodity pool regulation due solely to their swaps activity.

THE LIMITED RELIEF: The Release exempts from classification as "commodity pools" under the CEA, and consequently exempts relevant parties from registration as "commodity pool operators" (CPOs) or "commodity trading advisors" (CTAs), structures that meet all of the following criteria:

  1. the issuer of asset-backed securities is operated consistently with the conditions set forth in Regulation AB (Regulation AB) under the Securities Act of 1933, as amended (the Securities Act), or Rule 3a-7 of the Investment Company Act of 1940, as amended (the Investment Company Act), whether or not the issuer's security offerings are in fact regulated pursuant to either regulation;
  2. the issuer's activities are limited to passively owning or holding a pool of receivables or other financial assets (fixed or revolving), that by their terms convert to cash within a finite time period, plus any rights or other assets which are designed to assure the servicing or timely distributions of proceeds to security holders (including master trust structures);
  3. the issuer's use of derivatives is limited to the uses of derivatives permitted under Regulation AB (including as credit enhancement and the use of interest rate and currency swaps);
  4. the issuer makes payments to securities holders only from cash flow generated by its pool assets and other permitted rights and assets, and not from or otherwise based upon changes in the value of the entity's assets; and
  5. the issuer is not permitted to acquire additional assets or dispose of assets for the primary purpose of realizing gain or minimizing loss due to changes in market value of the vehicle's assets.

While the Release does not provide exemption from regulation for (i) securitization transactions that do not comply with the above criteria, (ii) covered bonds, or (iii) other fund structures, the CFTC invites entities associated with such structures to apply for individual relief based on the facts and circumstances of their transactions.

Background

A "commodity pool" is defined as any investment trust, syndicate or similar form of enterprise operated for the purpose of trading commodity interests. The Dodd-Frank Act amended the definition of "commodity pool" to include "swaps" within the "commodity pool" definition's list of commodity interests.1 A "swap" includes interest rate or basis swaps and currency swaps such as those used on many securitizations and covered bond transactions.2 Historically, the CFTC has interpreted the term "commodity pool" very broadly, and would consider an entity that holds only one commodity interest, even for hedging purposes, to be covered by the definition, notwithstanding the fact that the entity does not actively "trade" commodity interests. As a result, many entities that were not previously considered commodity pools, including securitization vehicles, cover pools for covered bonds, and various funding vehicles that have entered, or will enter, into one or more swaps (each a CP Entity), may now be considered by the CFTC to be "commodity pools" by virtue of the fact that they hold one or more swaps. Any management of, or advice in relation to, a CP Entity may subject one or more of the relevant parties to regulation by the CFTC and the NFA as CPOs and/or CTAs, even if the party and/or the CP Entity is outside of the United States. While the regulations for CP Entities and relevant parties (the Regulations)3 are currently set to become effective as of October 12, 2012, we expect the CFTC to provide temporary registration no-action relief which will extend the deadline for registration to December 31, 2012, for those entities subject to commodity pool regulation due solely to their swaps activity. Even if the CFTC provides such temporary relief, however, any transactions involving CP Entities closed before December 31, 2012, will be subject to registration under the Regulations unless interpretative or no-action relief is obtained.

For further details regarding the concerns that arise for certain structures under the Regulations and for answers to frequently asked questions on this topic, please refer to our original eAlert "Commodity Pool Issues Raised by the Dodd-Frank Act," which can be found here.

Exemption from "commodity pool" status under the limited relief

The Release exempts from classification as "commodity pools" under the CEA, and consequently exempts their affiliates from registration as CPOs or CTAs, structures that meet all of the following criteria:

  1. the issuer of asset-backed securities is operated consistently with the conditions set forth in Regulation AB4 under the Securities Act or Rule 3a-7 of the Investment Company Act5, whether or not the issuer's security offerings are in fact regulated pursuant to either regulation,6 such that the issuer, pool assets, and issued securities satisfy the requirements of either regulation;
  2. the entity's activities are limited to passively owning or holding a pool of receivables or other financial assets7 (fixed or revolving), that by their terms convert to cash within a finite time period8 plus any rights or other assets designed to assure the servicing or timely distributions of proceeds to security holders (including master trust structures)9;
  3. the entity's use of derivatives is limited to the uses of derivatives permitted under Regulation AB10 (including as credit enhancement and the use of interest rate and currency swaps to alter the payment characteristics of the cash flows from the issuing entity);
  4. the issuer makes payments to securities holders only from cash flow generated by its pool assets and other permitted rights and assets, and not from or otherwise based upon changes in the value of the entity's assets; and
  5. the issuer is not permitted to acquire additional assets or dispose of assets for the primary purpose11 of realizing gain or minimizing loss due to changes in market value of the vehicle's assets.

What should you do if your transaction does not satisfy the CFTC's criteria?

While securitizations that do not comply with the CFTC's criteria, covered bonds and other fund structures are not included in the general relief provided by the Release, the CFTC has invited entities to seek relief on an individual basis. In the Release, the CFTC noted that in order to provide individual relief, it will need to fully understand the structure for which relief is requested, and whether or not transaction entities may properly be considered a commodity pool. In addition, current regulation of a particular structure, such as a foreign statutory framework, and the impact on the economy should issuance under a particular structure cease due to application of the Regulations, may also be taken into consideration. The CFTC indicated that it may also be open to other forms of relief that may be appropriate under the circumstances, such as treating a fund as an exempt pool (rather than exempting it from the definition of "commodity pool").

Even if the CFTC provides temporary relief from registration, any transactions involving CP Entities closed before December 31, 2012, will be subject to registration under the Regulations unless interpretative or no-action relief is obtained. For further details on registration and other requirements under the Regulations, please refer to our original eAlert "Commodity Pool Issues Raised by the Dodd-Frank Act," which can be found here.