Temporary Relief for ABS CPOs Issued by CFTC | Practical Law

Temporary Relief for ABS CPOs Issued by CFTC | Practical Law

The CFTC issued no-action relief for operators of securitization vehicles that were required to register as commodity pool operators (CPOs) with the CFTC by March 31, 2013.

Temporary Relief for ABS CPOs Issued by CFTC

Practical Law Legal Update 3-525-6895 (Approx. 3 pages)

Temporary Relief for ABS CPOs Issued by CFTC

by PLC Finance
Published on 10 Apr 2013 • USA (National/Federal)
The CFTC issued no-action relief for operators of securitization vehicles that were required to register as commodity pool operators (CPOs) with the CFTC by March 31, 2013.
On March 29, 2013, the CFTC's Division of Swap Dealer and Intermediary Oversight (Division) issued No-action Letter 13-07 providing time-limited no-action relief until June 30, 2013 for securitization vehicles that do not satisfy the conditions and criteria set forth in CFTC No-action Letter 12-14 and No-action Letter 12-45 whose operators were therefore required to register with the CFTC as commodity pool operators (CPOs) by March 31, 2013 (see Legal Update, CFTC Expands CPO Registration Exemption for ABS Issuers under No-action Letter). Securitization vehicles that are exempt under no-action letters 12-14 and 12-45 are generally those that do not use derivatives as part of the asset pool for speculative investment purposes. This standard is meant to capture synthetic securitizations such as synthetic CDOs in which the asset pool is primarily composed of derivatives, usually credit default swaps (CDS). Operators of these vehicles were generally required to register with the CFTC as CPOs.
The letter provides an exemption for failure of these entities to fully comply with Part 4 of the CFTC's Regulations, which governs CPOs, provided the "operator" of the vehicle:
  • Registered as a CPO by filing the appropriate forms and paying the required fees.
  • Files an e-mail notice of its reliance on the no-action relief with the Division at the e-mail address [email protected] containing the subject line "Securitization Compliance No-action."
  • Complies with all Part 4 regulations except that:
    • the CPO of the securitization vehicle comprised of a static (unchanging) pool of assets that does not have an equity tranche or debt issuances rated lower than BB does not need to comply with CFTC Regulation 4.25 in connection with the securitization vehicle;
    • when calculating net asset value for a securitization vehicle, fixed income securities rated BB or higher should be treated as debt while other fixed income securities and equity tranches should be treated as equity;
    • regarding CFTC Regulation 4.13(a)(3), the CPO of the securitization vehicle that does not pay initial margin for the vehicle's swaps positions must use the net notional test under CFTC Regulation 4.13(a)(3)(ii)(B) to determine eligibility for exemption from registration;
    • instead of distributing financial statements under CFTC Regulation 4.22, the CPO of the securitization vehicle must provide basic, material information regarding the structure of the securities and their distribution, the nature, performance and servicing of the assets supporting the securities, and any swaps held in the portfolio, including a discussion of the vehicle's counterparties;
    • the CPO of the securitization vehicle does not need to comply with the requirements in CFTC Regulations 4.21(b), 4.24(a) and (s) or the requirement in CFTC Regulation 4.23 that books and records of a securitization vehicle be maintained at the main business office of the CPO;
    • the CPO of a securitization vehicle with an amortizing pool of assets does not need to comply with CFTC Regulation 4.25(a)(1)(F) and (G) in connection with the securitization vehicle; and
    • regarding the requirement under CFTC Regulation 4.24(h) that a CPO of a securitization vehicle disclose the percentage of the vehicle's assets used to trade commodity interests, the CPO of a securitization vehicle that holds static swap positions must provide, in addition to a percentage, full and complete disclosure of the swap positions and their function within the vehicle.
For more details on the exemption from CPO registration for securitization vehicles under no-action letters 12-14 and 12-45, see Practice Note, The Dodd-Frank Act: Expanded "Commodity Pool" Definition and CPO/CTA Rules: Expanded CPO Registration Exemption for ABS Issuers.