Dodd-Frank CPO/CTA Rules Amended by CFTC to Add Swap-related Obligations | Practical Law

Dodd-Frank CPO/CTA Rules Amended by CFTC to Add Swap-related Obligations | Practical Law

The CFTC approved final amendments to Part 4 of its regulations, which govern the operations and activities of commodity pool operators (CPOs) and commodity trading advisors (CTAs). The amendments are designed to conform the regulations to the Dodd-Frank Act.

Dodd-Frank CPO/CTA Rules Amended by CFTC to Add Swap-related Obligations

Practical Law Legal Update 1-521-1092 (Approx. 4 pages)

Dodd-Frank CPO/CTA Rules Amended by CFTC to Add Swap-related Obligations

by PLC Finance
Published on 30 Aug 2012 • USA (National/Federal)
The CFTC approved final amendments to Part 4 of its regulations, which govern the operations and activities of commodity pool operators (CPOs) and commodity trading advisors (CTAs). The amendments are designed to conform the regulations to the Dodd-Frank Act.
On August 23, 2012, the CFTC approved final amendments to its regulations covering the operations and activities of commodity pool operators (CPOs) and commodity trading advisors (CTAs). The amended regulations require CPOs and CTAs to provide information on their swap activities under the disclosure, reporting and recordkeeping rules of Part 4 of the CFTC's regulations.
To create a comprehensive regulatory framework for CPOs and CTAs, the CFTC has amended CFTC regulations 4.7, 4.22, 4.23, 4.24, 4.30, 4.32, 4.33 and 4.34 to include specific reference to swaps and swap activities. Prior to amendment, these regulations required CPOs and CTAs to undertake certain recordkeeping, reporting and operational activities for so-called "commodity interest" transactions (transactions involving futures contracts, commodity options and off-exchange retail foreign currency). The amendments extend these recordkeeping, reporting and operation activity requirements to their swap transactions as well.
Under the amended regulations, CPOs and CTAs must disclose to the CFTC or investors in the commodity pool, or both, as applicable:
  • Any material business dealings between any of the pool, the CPO, the CTA, the applicable futures commission merchant (FCM), retail foreign exchange dealer (RFED) or swap dealer (SD) or principals of any of these that were not previously disclosed.
  • Retain copies of each transaction confirmation or acknowledgement for each commodity interest transaction, as well as each purchase and sale statement and monthly statement received from a FCM, RFED or SD.
  • Principal risk factors involved in participation in the offered pool or the trading program.
  • The approximate percentage of the pool's assets that are or will be used to trade commodity interests, securities and other types of interests.
  • Costs and fees included in the spread between bid and ask prices for retail forex and swap transactions and how those fees are calculated.
  • Fees determined by reference to a base amount (such as "net assets," "gross profits," "net profits," "net gains," or "bid-asked spread"), accompanied by an explanation of how the base amount is calculated.
  • The identity of the pool's FCMs, RFEDs, SDs and introducing brokers.
  • The identity of any other person providing services to the pool, soliciting participants for the pool, acting as a counterparty to the pool's retail forex or swap transactions or acting as a SD for to the pool.
  • Any arrangement under which a person may benefit from:
    • the maintenance of the pool's account or of the client's commodity interest account with the FCM or RFED;
    • the maintenance of the pool's swap position or the client's swap positions with an SD;
    • the introduction of the pool's account to an FCM, RFED or SD by an introducing broker;
    • the introduction of an investment of pool assets in investee pools, funds or other investments;
    • the maintenance of the client's commodity interest account with an FCM or retail foreign exchange dealer; or
    • the introduction of the client's commodity interest account through an introducing broker.
  • The identity of any introducing broker through which the CTA's client will be required to introduce its account to the FCM, RFED or SD.
CPOs and CTAs must also refrain from soliciting, accepting or receiving from an existing or prospective client funds, securities or other property in the CTA's name to purchase, margin, guarantee or secure any commodity interest of the client (with exceptions in regulation 4.30(b) for certain FCMs, CTAs, RFEDs and SDs that are registered under the Commodity Exchange Act (CEA)).
CPOs and CTAs must also maintain itemized daily records of commodity interest transactions undertaken by the pool, the CPO and the CTA. CPOs and CTAs that are counterparties to swap transactions are also subject to final swap data recordkeeping and reporting requirements added as Part 45 to the CFTC's regulations by the Dodd-Frank Act.
Registered swap dealers are also included among the persons listed in CFTC regulation 4.7(a)(2) that do not have to satisfy a portfolio requirement to be a qualified eligible person. As a result, a CPO or CTA claiming relief under CFTC regulation 4.7 may accept the SD as a pool participant or advisory client without regard to the size of its investment portfolio.
These amended rules become effective 60 days after they are published in the Federal Register.
For more information on the regulation of swaps under Dodd-Frank, see Summary of the Dodd-Frank Act: Swaps and Derivatives, Road Map to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and Final Rules Amending CPO, CTA Registration and Compliance Obligations Issued by CFTC.