United States: CFTC Division Issues Letter Extending Relief For Commodity Pool Operators Of Certain Securitization Vehicles

On March 29, 2013, the Division of Swap Dealer and Intermediary Oversight (the "Division") of the Commodity Futures Trading Commission (the "Commission") issued CFTC Letter No. 13-07. CFTC Letter 13-07 provides time-limited no-action relief for certain securitization vehicles regarding compliance with Commission regulations pertaining to the registration of operators of securitization vehicles that utilize swaps.

CFTC Letter No. 13-07 addresses the circumstances under which operators of securitization vehicles that cannot satisfy the criteria for no-action relief under two previously issued letters (CFTC Letter No. 12-14 and CFTC Letter No. 12-45, issued by the Division on October 11, 2012 and December 7, 2012, respectively). In CFTC Letter No. 12-45, the Division provided time-limited no-action relief until March 31, 2013 for the operator of a securitization vehicle not otherwise afforded relief in that letter or in CFTC Letter No. 12-14 for failure to register as a commodity pool operator with respect to such vehicle.1 Pursuant to CFTC Letter No. 13-07, the Division will not recommend that the Commission take enforcement action against a commodity pool operator of a securitization vehicle for failing to comply with Part 4 of the Commission's regulations with respect to such vehicle until June 30, 2013, subject to the satisfaction of certain conditions.

The conditions under which an operator can claim the relief afforded by CFTC Letter No. 13-07 include (i) the initiation of registration of the commodity pool operator of a securitization vehicle through the filing of Form 7-R, which pertains to the operator, and a Forms 8-R for each of the operator's principals and associated persons, as well as payment of all applicable membership and application fees, by March 31, 2013, (ii) compliance by the commodity pool operator of all the provisions of Part 4 of the Commission's regulations, subject to certain terms and conditions applicable to the operated securitization vehicle, as described in the next three paragraphs, and (iii) the filing by the commodity pool operator of a notice with the Division referencing "Securitization Compliance No-Action."

The vehicle-specific terms and conditions cover three general categories. The first category provides for exemptions from compliance by the operator of certain Commission regulations, specifically Rule 4.25 for operators of vehicles comprising a static pool of assets that do not have either an equity tranche or debt issuances rated lower than BB; Rule 4.21(b); Rule 4.24(a) and (s); the requirement under Rule 4.23 that books and records be maintained at the main business office with respect to the operated securitization vehicle; and Rule 4.25(a)(1)(F) and (G) for operators of vehicles with an amortizing pool of assets.

The second category allows for a type of substituted compliance: namely, in lieu of the financial statement requirement under Rule 4.22 for the securitization vehicle, the operator of that vehicle can provide basic, material information concerning the structure of the securities and the distributions thereon; the nature, performance, and servicing of the assets supporting the securities; and any swaps held in that vehicle's portfolio, including a discussion of the vehicle's counterparties.

The third category provides for mandatory treatment or actions: fixed income securities of the vehicle rated BB and higher should be treated as debt, and all other fixed income securities and equity tranches of the vehicle should be treated as equity, in each case with respect to the calculation of net asset value of the vehicle. Additionally, the operator must use the net notional test under Rule 4.13(a)(3)(ii)(B) to determine eligibility for exemption from registration under that section if the securitization vehicle did not or does not pay any initial margin with respect to the vehicle's swaps positions. Finally, the operator of a securitization vehicle that holds static swap positions must provide full and complete disclosure regarding the swaps positions and their functions within the vehicle in addition to disclosing the percentage of the vehicle's assets used to trade commodity interests as required by Rule 4.24(h).

Given that CFTC Letter No. 13-07 was issued on March 29, a Friday and an exchange holiday, and requires commencement of registration and certain filings, as well as compliance with certain conditions, by March 31 in order to take advantage of the no-action relief provided by the Letter, an obvious dilemma is raised for operators of securitization vehicles who were unable to timely satisfy the requirements of the Letter. CFTC Letter No. 13-07 states that the Division has not finalized its policy determinations regarding what relief, if any, should be provided to the commodity pool operators of securitization vehicles, which suggests that further relief, while not a certainty, might be forthcoming despite the passing of the March 31 deadline.

CFTC Letter No. 13-07 may be accessed here.


1. See " CFTC Division Issues Letter Providing Relief for Certain Securitization Vehicles," December 2012, available on the Jones Day web site.

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