New US Regulatory Regime for Commodity Pools
As some readers may be aware, under the US Dodd-Frank Wall Street Reform and Consumer Protection Act, US regulatory reforms designed to reform the over-the-counter derivatives market will go into effect by the end of 2012. The US Commodity Futures Trading Commission ("CFTC") issued a staff letter on 12 October 2012 granting no-action relief to persons that are required to register as a commodity pool operator solely as a result of "swap" activity. This relief effectively sets the compliance date for such persons at 31 December 2012.
Despite uncertainty as to whether the final form of the new regulations will apply to any particular structured finance deal with swaps, directors of Cayman SPVs that fall into this category have been, and should be, reaching out to the relevant market participants to determine whether it is necessary to prepare for the new regulatory regime and what steps will need to be taken to ensure that transactions comply with the new requirements.
The fundamental reason for requiring this analysis is due to the revised definition of a "commodity pool". This definition has been expanded to include any form of enterprise operated for the purpose of trading in commodity interests, including swaps, which catches most swaps entered into by CLOs and other structured finance vehicles. The new definition of commodity pool also applies to any transaction where there is a US swap counterparty or any US investors and applies equally to US and non-US issuers. As a consequence of applying the new rules, an issuer that is caught by the new rules will fall within the definition of a commodity pool and its operator will be subject to potentially extensive registration and reporting requirements. Unless otherwise exempt, commodity pools must be operated by commodity pool operators that are registered with the CFTC.
On 11 October 2012, the CFTC's Division of Swap Dealer and Intermediary Oversight issued interpretative relief (the "CFTC Staff Letter") that excludes any securitisation vehicle that satisfies five specified criteria from the definition of commodity pool. Broadly speaking, our understanding from discussions with some of our US legal colleagues is that the exclusion will generally not cover CDOs, CLOs, CP conduits or covered bonds. The CFTC have indicated that they are still open to considering requests for relief on a case by case basis where such relief would be consistent with the broader principles set out in the CFTC Staff Letter. It is not known at this time how such requests for relief would be processed and whether further categorical relief might be available. The good news, however, is that many legacy transactions may be able to qualify for an exemption under the de minimus thresholds in CFTC Rule 4.13(a)(3), which would reduce the reporting and administrative burden otherwise applicable to the managers or sponsors of such transactions. Issuers will still have to file for the exemption by 31 December 2012 and will need to continue to monitor continued eligibility for the exemption but significantly, no financial reporting will be required.
We are aware that these new regulations may impact both new and existing transactions. MaplesFS, which provides administration services to a large portfolio of structured finance issuers and hedge funds, is keeping abreast of developments and pro-actively exploring options with respect to services it may be able to provide commodity pools. If your transaction is expected to fall within the new rules, we encourage you to obtain appropriate US legal advice and contact us as soon as possible so that we can work together with you and your US counsel to find an appropriate solution.