Alert October 16, 2012

CFTC Issues Interpretive Guidance Concluding That Some Securitization Vehicles Are Not Commodity Pools

The CFTC’s Division of Swap Dealer and Intermediary Oversight issued interpretive guidance finding that some, but not all, securitization vehicles should not be included within the definition of “commodity pool.”  Issued in response to correspondence from the American Securitization Forum and from the Securities Industry and Financial Markets Association, the guidance rejects the commentators’ requests for relief for certain categories of issuers, such as “entities operating to some extent under any covered bond statute, entities involved in collateralized debt obligations, entities involved in collateralized loan obligations, any insurance-related issuances, and any other synthetic securitizations,” stating that such exclusions would be “overly broad.”  Instead, the guidance states that vehicles that meet various criteria “are likely not commodity pools” and lists specific criteria that, if met, warrant exclusion of the vehicle from the definition of “commodity pool” and of its operator from the definition of “commodity pool operator.”  The listed criteria are:

  • The issuer of the asset-backed securities is operated consistent with the conditions set forth in Regulation AB, or Rule 3a-7 under the Investment Company Act of 1940, whether or not the issuer’s security offerings are in fact regulated pursuant to either regulation, such that the issuer, pool assets, and issued securities satisfy the requirements of either regulation;
  • The entity’s activities are limited to passively owning or holding a pool of receivables or other financial assets, which may be either fixed or revolving, that by their terms convert to cash within a finite time period plus any rights or other assets designed to assure the servicing or timely distributions of proceeds to security holders;
  • The entity’s use of derivatives is limited to the uses of derivatives permitted under the terms of Regulation AB, which include credit enhancement and the use of derivatives such as interest rate and currency swap agreements to alter the payment characteristics of the cash flows from the issuing entity;
  • The issuer makes payments to securities holders only from cash flow generated by its pool assets and other permitted rights and assets, and not from or otherwise based upon changes in the value of the entity’s assets; and
  • The issuer is not permitted to acquire additional assets or dispose of assets for the primary purpose of realizing gain or minimizing loss due to changes in market value of the vehicle’s assets.

The guidance includes a statement that the Division is willing to discuss and consider whether specific securitization vehicles that do not satisfy all of the specified criteria might also be excluded from the definition, and would be willing to consider lesser forms of relief for those that do not merit exclusion.