On December 7, 2012, the Commodity Futures Trading Commission's (CFTC) Division of Swap Dealer and Intermediary Oversight (DSIO) issued a no-action letter to mortgage real estate investment trusts (mREITs). The letter states that DSIO will not recommend that the CFTC take enforcement action against the operators of mREITs for failure to register as commodity pool operators ("CPOs") under the Commodity Exchange Act and the CFTC's regulations, provided that the mREIT satisfies certain criteria described below.

The CFTC has stated that it views mREITs (because of their use of swaps) as falling within the statutory definition of commodity pools and the operators thereof as CPOs. Absent relief, such CPOs would be required to register with the CFTC. However, pursuant to the no-action letter, mREIT operators will not be subject to enforcement action if the mREITs they operate meet the following criteria:

  1. The mREIT limits the initial margin and premiums required to establish its commodity interest positions to no more than five percent of the fair market value of the mREIT's total assets;
  2. The mREIT limits the net income derived annually from its commodity interest positions that are not qualifying hedging transactions (as defined in the Internal Revenue Code) to less than five percent of the mREIT's gross income;
  3. Interests in the mREIT cannot be marketed to the public as or in a commodity pool or otherwise as or in a vehicle for trading in the commodity futures, commodity options, or swaps markets; and either
    1. The company has identified itself as a "mortgage REIT" in Item G of its last U.S. income tax return on Form 1120-REIT; or
    2. The company has not yet filed its first U.S. income tax return on Form 1120-REIT, but has disclosed to its shareholders that it intends to identify itself as a "mortgage REIT" in its first U.S. income tax return on Form 1120-REIT.

The no-action relief is not self-executing. A CPO eligible for the relief must file a claim to perfect the use of the relief by way of email to the CFTC. The required contents of such claim are set forth in the no-action letter.

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