Approximately six months ago (on Dec. 21, 2012), the Commodity Futures Trading Commission staff provided temporary no-action relief[1] allowing certain equity total return swaps on foreign securities — which have been termed "compo equity swaps" or "compo equity total return swaps"[2] — to be treated as "securities-based swaps" (which are regulated by the Securities and Exchange Commission) and not as "mixed swaps" (which are regulated by both the CFTC and SEC).[3] Based on that relief, fund managers claiming a de minimis commodity pool operator registration exemption — either Rule 4.13(a)(3) (for private funds) or Rule 4.5 (for mutual funds) — have heretofore been able to exclude compo swaps from their calculations.

This relief, however, is set to expire on June 30 and, unless additional relief is granted (which is not anticipated at the moment), fund managers — from and after July 1, 2013 — will have to count compo swaps as "commodity interests" when determining their eligibility for a de minimis exemption. Managers should note that the classification of compo equity swaps as mixed swaps could also be applied to other equity swap transactions that have "non-incidental" foreign currency components.[4]

As a result, fund managers relying on either of the two de minimis exemptions should examine their equity-related swaps to determine if they will remain eligible for that exemption after July 1. A fund manager in danger of exceeding a de minimis threshold may need to employ alternative instruments to obtain similar exposures (or may need to register as a commodity pool operator).

The expiration of the interim relief also means that other CFTC swap-specific requirements, such as adherence to the Dodd-Frank Protocols and swap reporting obligations, will be applicable to compo and similar mixed swaps.