On March 29, 2013, the Division of Swap Dealer and Intermediary Oversight (the “Division”) of the CFTC issued CFTC Letter No. 13-07, which extends from March 31, 2013 to June 30, 2013 the date by which the operators of certain securitization vehicles must register as a commodity pool operator (a “CPO”). In order to claim the relief, the operator of a securitization vehicle must: (1) have filed Forms 7-R and 8-R, as appropriate, and paid any required fees, by March 31, 2013; (2) file a notice with the CFTC requesting relief and (3) comply with Part 4 of the CFTC’s regulations during the relief period, except for certain terms and conditions specified in the March 29th Letter relating to, among other things, performance disclosures, information required in a disclosure document, reporting requirements, recordkeeping requirements and the treatment of fixed income securities in respect of net asset value calculations.
As discussed below, as an alternative to the time limited no-action relief provided by CFTC Letter No. 13- 07, the operator of a securitization vehicle would not be required to register as a CPO if it can satisfy the conditions set forth in either CFTC Letter No. 12-14 or CFTC Letter No. 12-45.
CFTC Letter No. 12-14. On October 11, 2012, the Division issued CFTC Letter No. 12-14, which stated that certain securitization vehicles would not be included within the definition of “commodity pool” under Section 1a(10) of the CEA and CFTC Regulation 4.10, and that operators of such securitization vehicles would not be included within the definition of “commodity pool operator,” if certain conditions were met, including that the securitization vehicle issuing asset-backed securities (i) comply with either Regulation AB or Rule 3a-7 under the Investment Company Act (as well as compliance by such entity’s assets and its issued securities with either Regulation AB or Rule 3a-7 under the Investment Company Act), (ii) limit its activities to “passively owning or holding a pool of receivables or other financial assets, which may be either fixed or revolving, that by their terms convert to cash within a finite time period plus any rights or other assets designed to assure the servicing or timely distributions of proceeds to security holders,” (iii) limit derivative use to that which is permitted by Regulation AB, (iv) pay investors only from cash flow generated by its assets but not from or otherwise based upon changes in the value of its assets and (v) not be allowed to trade assets primarily to realize gain or minimize loss as a result of fluctuations in such assets’ market value.
CFTC Letter No. 12-45. On December 7, 2012, the Division issued CFTC Letter No. 12-45, which provided further guidance on exclusions from the definition of commodity pool for certain securitization vehicle structures that do not satisfy the requirements of CFTC Letter No. 12-14 because they do not meet all of the technical requirements of either Regulation AB or Rule 3a-7 under the Investment Company Act. In CFTC Letter No. 12-45, the Division also affirmed that “swaps used to provide credit support to financial assets in a securitization or the notes issued by a securitization entity, to the extent contemplated by Item 1114 of Regulation AB, should not be viewed as creating investment exposures” and would not require registration as a CPO. The CFTC noted, however, that if the use of swaps as credit support to financial assets in a securitization is “commercially unreasonable,” the Division may determine that the securitization vehicle is a commodity pool.
In addition, CFTC Letter No. 12-45 provided relief for operators of certain securitization vehicles formed prior to October 12, 2012 if the issuer (i) “issued fixed income securities before October 12, 2012 that are backed by and structured to be paid from payments on or proceeds received in respect of, and whose creditworthiness primarily depends upon, cash or synthetic assets owned by the issuer,” (ii) has not and will not issue new securities on or after October 12, 2012 and (iii) provides the CFTC with certain documentation and information relating to the offering of interests in the pool.