Registration Deadline For Formerly Exempt CPOs Looms

On September 28, the Managed Funds Association and other asset-management industry groups wrote to Gary Gensler, the chairman of the Commodity Futures Trading Commission, expressing their “serious concerns about the consequences on the impending registration and compliance deadlines” especially with regard to whether foreign exchange products are to be treated as “swaps” under the CFTC’s regulatory system.

Under the existing definition of swap, these products are included unless the Treasury decides they shouldn’t be. The MFA et al have also written to Secretary Geithner seeking such a determination, but if Treasury doesn’t act before October 12, the consequences of other regulations, for which it very much matters what does or doesn’t count as a swap, begin to kick in.

By Serendipity
As it happens, just three days before this letter went out, Patricia Cushing and Tracey Hunt, both of the National Futures Association, offered a regulatory update to the Illinois CPA Society that illuminates its significance.

Cushing is the compliance director and Hunt is the associate compliance director at the NFA. They began their presentation by reminding the CPAs that the CFTC rescinded regulation 4.13(a)(4) early in 2012. Under that reg, a commodity pool operator had been exempt from the requirement of registration with the CFTC if all the investors in the pool are qualified eligible persons.

The great thing about this exemption was that it didn’t impose any limits on the number of participants or the amount of futures trading the operator of the pool could conduct. Thus, this was the exemption of choice for hedge fund managers for a long time.

A CPO that had claimed this exemption prior to its rescission can continue to rely thereon through the end of this year. But of course that clock is ticking down.

If you manage such a pool, and if you want to find another exemption under which you can avoid registration, your remaining choices are: 4.5 [an exemption for certain entities that are otherwise regulated]; 4.13(a)(1) [for operators with only one privately operated pol]; 4.13(a)(2) [aggregate subscription of $400,000 or less and participants of 15 or less]; or 4.13(a)(3) [trading in only a minimal amount of futures].

The de minimis test under 4.13(a)(3) has two parts stated in the alternative: first, the exempt entity’s aggregate initial margin/premium must not exceed 5 percent of the liquidation value of its pool’s portfolio; or, second, the aggregate net notional value of its commodity interest positions must not be more than 100 percent of that liquidation value.

More Time
That brings us back to the MFA’s letter to the CFTC Friday, because under the Dodd-Frank Act, swaps have been added to the list of commodity interests, along with futures contracts, options on futures contracts, and options on commodities. The CFTC defined swaps in the relevant sense this July, and it has said that it believes the half year between that definition and the deadline is sufficient time for CPOs to “conduct the necessary calculations” to determine whether they must register or can remain under that threshold.

The MFA et al disagree. Their letter to the CFTC says that most market participants thought a Treasury ruling imminent this summer, and implies that the market has been caught rather flat-footed by Treasury inaction. If the Treasury doesn’t act by October 12, it says, the CFTC should announce that it will not treat FX products as swaps “until the effective date of the Treasury’s final determination,” and that if it becomes apparent the Treasury won’t exclude FX as swaps, “then we respectfully request that the CFTC allow for a significant transition period” before it treats them as such.

Back to the IlCPA Presentation
Cushing and Hunt also discussed changes affecting FCMs. All FCMs now regulated by a U.S. prudential regulator, or registered with the Securities and Exchange Commission, were required to must designate a chief compliance officer by October 1, 2012. FCMs not regulated by a U.S. prudential regulator have until March 29, 2012 to comply with the CCO requirement.

Nominal designation of some complacent near-stranger as a CCO isn’t going to work. The designated CCO must either be already a listed current principal of the FCM, or the FCM must file a CFTC Form 8-R and a set of fingerprint cards. In the latter case, too, the designated CCO has to verify the accuracy of the 8-R. Indeed, however complacent a near-stranger might have been until approached, the news that he’s expected to submit his fingerprints will probably be a good sign he’s entering into a serious commitment.

Part of that commitment is: the CCO of an FCM will have to prepare the annual report outlined in Regulation 3.3(e). A newly appointed CCO will have to file the first such Annual Report as of the date of the FCM’s fiscal year end, electronically through the Winjammer system.