On December 18, 2014, the Commodity Futures Trading Commission’s Division of Swap Dealer and Intermediary Oversight (DSIO) issued a letter granting relief from commodity pool operator (CPO) registration to certain entities that operate insurance-linked securities (ILS) issuers. In response to a letter from the Securities Industry and Financial Markets Association, DSIO confirmed that certain risk transfer contracts in ILS transactions may constitute swaps under the Commodity Exchange Act. To the extent that the risk transfer contract would be considered a swap, the ILS issuer may fall within the definition of a commodity pool and the entity operating the ILS issuer would be required to register as a CPO, absent an exemption.
DSIO’s no-action relief allows an entity that operates such an ILS issuer to claim an exemption from CPO registration pursuant to Commodity Futures Trading Commission (CFTC) Regulation 4.13(a)(3), subject to certain conditions. In particular, the relief requires an entity operating such an ILS issuer to: (1) restrict collateral investment by the ILS issuer to cash or cash equivalent, highly liquid assets; (2) observe corporate formalities to ensure that the insurance company and the ILS issuer remain separate; (3) restrict the operations and activities of the ILS issuer to only those necessary or appropriate for engaging in an ILS transaction; (4) limit the ILS issuer’s investment in commodity interests to only the swaps necessary and appropriate to support one or more ILS transactions; (5) subject the collateral to legal security arrangements that protect the parties to the transaction in the event the ILS issuer becomes insolvent; (6) provide notice of certain collateral deficiencies to DSIO; and (7) comply with certain requirements pertaining to the maintenance and priority of collateral payments. The operator of an ILS issuer must file a notice of exemption with the National Futures Association pursuant to CFTC Regulation 4.13(b).
The no-action letter is available here.