Last Thursday, the U.S. Commodity Futures Trading Commission
(“CFTC”) responded to ASF’s
requests for relief from the new CFTC rules
which implemented certain Dodd-Frank amendments
that brought swaps within the purview of the CFTC. The new rules, which took effect on October 12, 2012, threatened to regulate many securitization vehicles as commodity pools even though these vehicles typically only use swaps for hedging or risk management purposes. The crux of the issue, and possibly the unintended consequence of the new CFTC rules, is that, without relief, sponsors and advisors (such as depositors, trustees, collateral managers and servicers) would be subject to CFTC registration and regulation as commodity pool operators and/or commodity trading advisors.
In its interpretive letter, the CFTC acknowledged that certain securitization vehicles are likely not commodity pools and provided an explicit exclusion for securitizations that meet the following criteria:
the issuer of the asset-backed securities is operated consistent with conditions of SEC Regulation AB or SEC Rule 3a-7 of the Investment Company Act of 1940;
the entity’s activities are limited to passively owning or holding a pool of receivables or other financial assets that by their terms convert to cash within a finite period of time;
the entity’s use of derivatives is limited to the use of derivatives permitted under Regulation AB;
the issuer makes payments to securities holders only from cash flow generated by its pool assets and other assets, and not from changes to value in the entity’s equity assets; and
the issuer may not acquire additional assets or dispose of assets for the primary purpose of realizing gain or minimizing loss due to changing values of the vehicle’s assets.
Traditional CMBS and RMBS transactions should fall within the criteria for exclusion, but most CLOs and CDOs do not. Instead, these vehicles will need to consider other avenues for exclusion or exception, such as CFTC Rule 4.13(a)(3) which exempts commodity pool operators from registration and regulation who engage only in de minimis pool trading. Patrick Dolan, Holland West, Cynthia Williams and Ava Jacobi provide a comprehensive breakdown of the CFTC’s interpretive letter in a recent Dechert On-Point, which can be found here.