By a vote of 4-1, on February 9, 2012, the Commodity Futures Trading Commission (the “CFTC”) amended Rule 4.5 under the Commodity Exchange Act to sharply limit the ability of registered investment companies that use derivatives from relying on an exclusion from the definition of a commodity pool operator (“CPO”). Advisers to funds that fail to qualify for the exclusion would also have to register as CPOs.

Reinstatement of the “5 percent threshold.” The new rule reinstates the “5 percent threshold test,” which the CFTC eliminated in 2003. Generally, the 5 percent threshold test requires registered investment companies that hold certain commodity futures, commodity options contracts, or swaps whose aggregate initial margin and premiums exceed 5 percent of the liquidation value of the fund’s portfolio to register as CPOs. The new rules distinguish between use of derivatives for risk management and for bona fide hedging. The new rules count derivatives trades used for the purposes of managing portfolio risk toward the 5 percent limit, but exclude transactions used for “bona fide hedging.”

In the case of an option that is in-the-money at the time of purchase, funds may exclude the in-the-money amount in computing the 5 percent threshold.

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