Alert August 21, 2012

CFTC Provides Guidance to CPOs and CTAs

The CFTC’s Division of Swap Dealer and Intermediary Oversight issued additional guidance, in the form of frequently asked questions, regarding issues surrounding the registration of CPOs and CTAs, a topic covered in the July 17, 2012 Financial Services Alert.  The guidance covers topics such as determining which entity should register as a CPO, the treatment of wholly-owned subsidiaries, Forms CPO-PQR and CTA-PR, the De Minimis Exemption, the revocation of the QEP Exemption, transitioning between exemptions, and compliance dates.

Among the more noteworthy items discussed in the guidance are the following:

  • Timing of Early Swaps. A newly-established fund whose general partner or manager intends to claim the De Minimis Exemption may put swaps in place before putting on its first deal.  Such an action would not prevent the general partner or manager from availing itself of the De Minimis Exemption even though its purchase of a commodity interest as its initial investment would likely cause it to violate the thresholds included in the De Minimis Exemption.  The guidance states that such funds should have a “reasonable time” to comply with the trading thresholds, but expressly declines to identify what a “reasonable time” is because that may vary based on the nature of the CPO and the pool.

  • Timing of De Minimis Calculation. The guidance clarifies that, notwithstanding language in the CFTC regulations pertaining to the De Minimis Exemption that require the thresholds to be complied with “at all times,” compliance with the trading limits is determined “at the time the most recent position was established.” As a result, if a CPO is able to avail itself of the De Minimis Exemption when it puts its positions in place, subsequent market movements, without more, will not prevent the CPO from continuing to use the exemption.

  • Procedure for Moving from the QEP Exemption to the De Minimis Exemption.  The guidance specifies the procedure for CPOs that are currently availing themselves of the QEP Exemption (which has been withdrawn, although affected CPOs may continue to use the QEP Exemption until December 31, 2012) to transition to the De Minimis Exemption.  First, the CPO must withdraw its exemption under the QEP Exemption via written request to the NFA.  Once the NFA has confirmed that the withdrawal has been completed, the CPO may then electronically file with the NFA for the De Minimis Exemption.  The release also reminds readers that the CPO must notify its investors of the change.
  • Interim Guidance to Funds-of-Funds on the De Minimis Exemption.  The release states that, although the CFTC is preparing new guidance to replace Appendix A to Part 4 of the CFTC regulations, CPOs of funds-of-funds may continue to rely on Appendix A until such new guidance is adopted.  Appendix A provides guidance to funds-of-funds regarding how to comply with the De Minimis Exemption, which is complex given the look-through to the holdings of a fund-of-funds in underlying funds.