On October 11, 2012, the Division of Swap Dealer and Intermediary Oversight (Division) of the Commodity Futures Trading Commission (CFTC) issued interpretation letter No. 12-14, “Request for Exclusion from Commodity Pool Regulation for Securitization Vehicles” (the CFTC Securitization Interpretation Letter), to the American Securitization Forum (ASF) and the Securities Industry and Financial Markets Association (SIFMA). The letter was issued in response to separate requests by the ASF and SIFMA for an interpretation by the CFTC that certain funds are not “commodity pools” under the CFTC’s Regulation 4.10(d) or, alternatively, for no-action relief for operators of certain funds that issue asset-backed securities (including mortgage-backed securities) for failure to register as commodity pool operators.
On that same date, the Division issued no-action letter No. 12-15, “Staff No-Action Positions: Registration Relief for Certain Persons” (the CFTC Registration Relief Letter), which provides temporary and conditional registration no-action relief for certain “Swap Persons,” (as defined therein), including commodity pool operators (CPOs) and commodity trading advisers (CTAs) who became such solely as a result of their involvement with swaps. The relief under the CFTC Registration Relief Letter includes parties to securitizations that may be, or have become, CPOs or CTAs as a result of their participation in securitization transactions, but that will expire on December 31, 2012 (or upon earlier registration by a related Swap Person).
After reviewing the arguments made by the ASF and SIFMA in their requests for relief (with which the CFTC stated that it tended to agree), the Division stated that it is required to evaluate the facts and circumstances presented in their entirety and determine whether a pooled investment vehicle possessing such characteristics should properly be considered to be a commodity pool. In attempting to make such an evaluation based on the characteristics presented by the ASF and SIFMA, the Division stated that it tended to agree that certain securitization entities are likely not commodity pools, such as securitization entities that do not have multiple equity participants, do not make allocations of accrued profits or losses, and only issue interests in the form of debt or debt-like interests with a stated interest rate or yield and principal balance and a specific maturity date. The CFTC Securitization Interpretation Letter concludes that, based on an evaluation of the facts and circumstances presented regarding securitization entities and their issuance of asset-backed securities, the Division has determined that certain securitization vehicles should not be included within the definition of “commodity pool” and its operator(s) should not be included within the definition of “commodity pool operator.”
Specifically, the Division determined that the applicable criteria for exclusion are that:
- The issuer of the asset-backed securities is operated consistently with the conditions set forth in Regulation AB, or Rule 3a-7, whether or not the issuer’s security offerings are, in fact, regulated pursuant to either regulation, such that the issuer, pool assets and issued securities satisfy the requirements of either regulation;
- The entity’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 period, plus any rights or other assets designed to assure the servicing or timely distributions of proceeds to security holders;
- The entity’s use of derivatives is limited to those permitted under the terms of Regulation AB, which include credit enhancement and the use of derivatives such as interest rate and currency swap agreements to alter the payment characteristics of the cash flows from the issuing entity;
- 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 issuer’s assets; and
- 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.
The CFTC Securitization Interpretation Letter states that the Division believes that compliance with these criteria results in the securitization entity being substantively distinguishable from a fund that is properly considered a “commodity pool” under the definitions in Section 1a(10) of the Commodity Exchange Act (CEA) and the CFTC’s Regulation 4.10(b).
Importantly (and, in fact, set forth in bold font in the CFTC Securitization Interpretation Letter), for securitization entities that do not satisfy these criteria, the Division remains open to discussions with securitization sponsors to determine whether, based on the related facts and circumstances, it would be appropriate to provide similar interpretative relief.
While it is still unclear whether securitization sponsors will seek such relief, or whether the industry can resolve its concerns with opinions or other forms of comfort that address these (and related) matters, the CFTC clarification is welcome and should address the concerns of a significant portion of the securitization market. In preliminary discussions among securitization industry participants and law firms, there appears interest in addressing the commodity pool concern through legal opinions for affected securitization transactions where practicable, without having to obtain further specific guidance from the CFTC.