Co-authored by Ross Pazzol and Christian B. Hennion.


In light of the numerous regulatory changes triggered by the definition of “swap” taking effect on October 12, Commodity Futures Trading Commission staff released a series of no-action letters and interpretations late last week.

  • Registration Relief and Clarification. The CFTC’s Division of Swap Dealer and Intermediary Oversight (DSIO) has provided temporary no-action relief from registration as an introducing broker (IB), commodity pool operator (CPO), commodity trading advisor (CTA), floor broker (FB), floor trader (FT), or as an associated person (AP) of an IB, CPO, CTA or futures commission merchant (FCM), if such registration requirement would be solely by virtue of involvement with swaps or in connection with the transition of certain contracts on ICE and NYMEX to futures and options. Such no-action relief is available until December 31, 2012. The no-action letter is available here.

DSIO also provided two interpretative letters on the definition of “commodity pool.” In particular, DSIO determined that real estate investment trusts (REITs) do not fall within the statutory definition of “commodity pool” so long as certain criteria are satisfied. In the second letter, DSIO determined that certain securitization vehicles that meet specified criteria for exclusion should not be included within the definition of “commodity pool,” though DSIO’s grant of relief was not as broad as had been initially requested. The letters are available here and here.

  • Swap Dealer, Major Swap Participant, and ECP Status and Exemptions. DSIO issued a series of no-action letters affecting the swap dealer (SD) and major swap participant (MSP) de minimis exemptions. In accordance with the no-action letters, transactions in certain agricultural commodities and exempt commodities executed prior to October 20, 2012, do not need to be counted in calculating the aggregate gross notional amount of swaps connected with SD/MSP swap dealing activity. Certain foreign exchange swaps and foreign exchange forwards also do not need to be counted in calculating the aggregate gross notional amount of swaps connected with SD swap dealing activity. However, if such person trades other swaps that put it over the SD threshold, that person must add back the foreign exchange swaps and foreign exchange forwards for purposes of determining the date by which it needs to register. The no-action letters are available here, here, and here.

DSIO also issued a no-action letter affecting foreign SDs and MSPs. Pursuant to the no-action letter, until the earlier of December 31, 2012, or the effective date of a final definition of “US person” in an order adopted by the CFTC, a foreign person need only include certain swaps for purposes of calculating whether it is a SD or MSP. The no-action letter is available here.

In a separate no-action letter issued by DSIO, persons may engage in swap dealing activities with a total amount of up to $800 million with municipal public utilities without SD registration. The no-action letter is available here.

The CFTC’s Office of General Counsel also issued a no-action and interpretative letter regarding eligible contract participant (ECP) status. The letter states that a swap guarantor must be an ECP unless the swap is executed on a designated contract market (DCM) or the trade option exemption is applicable. The deadline for a guarantor to be an ECP is March 31, 2013. In addition, cash proceeds from a loan count toward total assets for purposes of qualifying as an ECP under the $10 million threshold. The letter is available here.

Finally, DSIO published responses to a series of frequently asked questions regarding swap entities, including guidance on the calculation of the notional amount of a swap, the aggregation of positions across affiliates, and swap dealing activity. The FAQ is available here.

  • Preservation of Regulatory Status Quo for Certain Swaps. The CFTC issued two no-action letters that maintain the status quo for certain swaps for a limited amount of time. In the first letter, the Division of Clearing and Risk is taking a no-action position regarding Commodity Exchange Act (CEA) Sections 4d(f)(2)-(6) until November 8, 2012, which will temporarily maintain the status quo with respect to swaps cleared by a derivatives clearing organization (DCO) and related collateral. In the second letter, the CFTC Division of Market Oversight, Division of Clearing and Risk, and DSIO are taking a no-action position regarding certain electric operations-related transactions entered into solely between certain not-for-profit electric entities. The no-action letters are available here and here.
  • Bona Fide Hedging Exemption. Finally, DSIO issued an interpretation clarifying the bona fide hedging exclusion for purposes of the de minimis calculation of CFTC Regulation 4.5, applicable to registered investment companies. CFTC Regulation 4.5 provides an exclusion from CPO registration for certain “otherwise regulated” entities. DSIO restated the terms that were incorporated by reference in the CFTC Regulation 4.5 adopting release for the CFTC’s recently vacated position limit rules. The interpretation letter is available here.

Please see “CFTC Provides Guidance on Bona Fide Hedging for Rule 4.5 Compliance” in Investment Companies below.

Press releases for all the recent CFTC issuances are available here.