Impact of CFTC Swap Regulations on Structured Finance Industry

by Dechert LLP
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Introduction -

In August 2012, the Commodity Futures Trading Commission (CFTC) published a joint rulemaking with the Securities and Exchange Commission (SEC) implementing various Dodd-Frank Act provisions. The newrulemaking, which took effect on October 12, 2012, threatened to subject a wide range of previously excluded or exempted securitization and finance transactions to CFTC regulation as commodity pools. These regulations essentially implement the Dodd-Frank Act’s definition of “commodity pool,” which changed the definition from “a pool that is operated for trading in commodity futures and options on an exchange” to “a pool that is operated for the purpose of trading in commodity interests, including any …swaps.” Thus, the sponsors and advisors to any special purpose vehicle, investment trust or similar entity using swaps, even if only for hedging or risk management purposes, could be required to submit to CFTC registration, disclosure, advertising, recordkeeping, reporting and other regulation. In response to industry and even government requests for relief from the new regulations, the CFTC Staff issued an interpretation letter on Thursday, October 11, 2012, to clarify whether a broad swath of securitization transactions would have to submit to regulation as “commodity pools.” The interpretation letter provides an explicit exception for transactions that meet certain criteria, and keeps open the possibility of individualized no-action or deminimis exceptions, while continuing to defend the CFTC’s broad baseline definition of commodity pools.

CFTC Relief Plan -

The CFTC Staff offered a three-tiered plan for relief. First, the CFTC Staff explained in the interpretation letter noted above its position regarding commodity pool regulation and providing exclusions from the new requirements. In the letter, the CFTC Staff agreed with industry players that “certain entities that meet certain … criteria… are likely not commodity pools, such as securitization vehicles 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 a specific maturity date.” To address transactions such as these, the CFTC Staff stated that transactions such as the foregoing that meet all of the following five criteria would be excluded from status as a commodity pool and thus their sponsors and advisors would be exempt from commodity pool operator (CPO) and commodity trading advisor (CTA) registration and regulation...

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