Alert December 18, 2012

CFTC Provides No-Action Relief from Commodity Pool Operator Registration Requirement for Certain Mortgage REITs

The Division of Swap Dealer and Intermediary Oversight (the “Division”) issued a no-action letter providing relief from the commodity pool operator (“CPO”) registration requirements for operators of mortgage real estate investment trusts (“mREITs”) that meet specified conditions.  Briefly, those conditions are as follows:

  1. the mREIT limits the initial margin and premiums required to establish its commodity interest positions to no more than 5% of the fair market value of the mREIT’s total assets;
  2. the mREIT limits the net income derived annually from its commodity interest positions that are not qualifying hedging transactions to less than 5% of the mREIT’s gross income;

  3. interests in the mREIT are not marketed to the public as or in a commodity pool or otherwise as or in a vehicle for trading in the commodity futures, commodity options, or swaps markets; and

  4. the mREIT has either (a) identified itself as a “mortgage REIT” in Item G of its last tax return on Form 1120‑REIT, or (b) if it has not yet filed its first tax return on Form 1120‑REIT, the mREIT has disclosed to its shareholders that it intends to so identify itself when it does.

To take advantage of the relief, the operator of an mREIT must electronically file a claim of relief providing certain identifying information with the CFTC.  For an mREIT operating as of December 1, 2012, the claim must be filed prior to December 31, 2012; an mREIT that commences operations after December 1, 2012 must file a claim of relief within 30 days after the date such operations commence.  In addition to describing the relief, the no-action letter notes that the Division remains “open to discussions with mREITs to consider the facts and circumstances of their mREIT structures with a view to determining whether or not they might not be properly considered a commodity pool.”