February 9, 2012
Commodity Pool Operators and Commodity Trading Advisors: Amendments to Compliance Obligations
I support the final rule increasing the transparency to regulators of commodity pool operators (CPOs) and commodity trading advisors (CTAs) acting in the derivatives marketplace – for both futures and swaps. This rule reinstates the regulatory requirements in place prior to 2003 for registered investment companies that trade over a de minimis amount in commodities or market themselves as commodity funds. This rule enhances transparency in a number of ways and increases customer protections through amendments to the compliance obligations for CPOs and CTAs.
First, these amendments are consistent with the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), as these changes bring the swaps activities of CPOs and CTAs under the CFTC’s oversight. If CPOs and CTAs are trading swaps, they will have to register with the Commission, giving their customers the benefit of the protections in the Dodd-Frank Act.
Second, these amendments addressed the concerns raised by the National Futures Association (NFA) in its petition requesting the Commission to reinstate Commission oversight of CPOs and CTAs for futures that existed prior to 2003. Since 2003, the participation of registered investment companies in commodity futures, swaps, and options markets has increased significantly. Some registered investment companies have been marketing commodity pools to retail investors and are operating without the supervision of the CFTC and the NFA. In addition, foreign advisors with U.S. customers have been exempt from supervision since 2003. The final rule reinstates the protections that futures customers of CPOs and CTAs had prior to the exemptions the Commission granted in 2003. It is critical to bring the pools that have been in the dark since 2003 back into the light so their customers can benefit from the CFTC’s oversight.
Third, the final rule increases transparency to regulators by enhancing data available to the Commission and the NFA, providing a much more complete understanding of how these pools are operating in the derivatives markets for futures and swaps. The data, which CPOs and CTAs will submit through Form CPO-PQR and Form CTA-PR, will help the Commission develop further regulatory protections for customers of these entities, market participants and the American public.
The Commission benefited from significant public comment on this rule. Some commenters raised questions about the definition of bona fide hedging under section 4.5, in particular that risk mitigation positions were not included in such bona fide hedging transactions. The final rule provides treatments consistent with the Commission’s treatment of registered investment companies prior to 2003, and, in fact, this rule reinstates criteria in place before 2003. The Commission determined not to include risk management positions within the bona fide hedging exemption because many, if not most, positions in a portfolio could potentially be characterized as serving a risk management purpose. This would result in an overly broad exclusion from the definition of CPO.
Further, bona fide hedging transactions are excluded from determining whether a registered investment company has to register under 4.5, though these transactions are not excluded when determining whether commodity pools not registered with the Securities and Exchange Commission (SEC) will be required to register with the CFTC under section 4.13 (a)(3). With respect to the consideration of bona fide hedging positions under 4.13(a)(3), the Commission previously stated its position that bona fide hedging positions should not be excluded within the de minimis exemption in 4.13(a)(3) when it proposed that rule. In the proposal for 4.13(a)(3) (68 FR 12622, 12627), the Commission stated its belief that 4.13(a)(3) should not differentiate between trading for bona fide hedging and non-hedging purposes because the rule is intended to apply to strictly de minimis situations, where trading is limited regardless of purpose. Conversely, the exclusion under 4.5 was not solely determined by the de minimis nature of the trading, but rather the combination of the de minimis amount of trading and the fact that the investment vehicle was otherwise regulated by the SEC. See 67 FR 65743.
Several commenters asked the Commission to reconsider the treatment of family offices under these rules. The Commission will continue to permit family offices to rely on existing guidance for family offices seeking relief from the requirements of Part 4. The Commission also is directing staff to look into the possibility of adopting a family offices exemption that is similar to the rule recently adopted by the SEC and is soliciting comment from the public.
Proposal on Harmonization of Compliance Obligations for Investment Companies Required to Register as Commodity Pool Operators
The Commodity Futures Trading Commission’s (CFTC) part 4 rules require recordkeeping, reporting and disclosures from Commodity Pool Operators. I support the proposed rule that would harmonize such requirements with those of the Securities and Exchange Commission (SEC) for investment companies registered with both the CFTC and SEC. The Commission is committed to ensuring that customers of registered investment companies receive basic protections while also seeking to balance the compliance requirements for the operators of these funds. I look forward to comments from the public to further build on this harmonization effort.
Last Updated: February 9, 2012