On March 5, the National Futures Association (NFA) submitted to the Commodity Futures Trading Commission (CFTC) proposed new Compliance Rule 2-50 and a related Interpretive Notice. Proposed Compliance Rule 2-50 would require each Commodity Pool Operator Member (CPO Member) to provide notice to the NFA by 5:00 p.m. (CT) on the following business day whenever a commodity pool operated by the CPO Member (1) is unable to meet a margin call; (2) is unable to satisfy redemption requests in accordance with its subscription agreements; (3) has halted redemptions, and the halt is not associated with pre-existing gates or lockups, or a pre-planned cessation of operations; or (4) has received notice from a swap counterparty that the pool is in default.
The related Interpretive Notice provides more detailed information regarding the nuances of the events triggering the notice requirement. For example, the Interpretive Notice specifies that a CPO Member is not required to give notice on the day the pool receives a margin call that it cannot meet that same day if it reasonably expects to meet the margin call within the time period imposed by its futures commission merchant. Similarly, the mere fact that a pool is unable to meet a redemption request on the day the request is received does not automatically trigger the notice requirement, provided the redemption request can be met within the terms of the pool participant’s subscription agreement (including any applicable grace period). With respect to commodity pools declared to be in default by a swap counterparty, the Interpretive Notice confirms that notice is required if the CPO Member does not reasonably believe the pool can cure the default within any previously agreed period, regardless of whether the pool is in negotiations with the swap counterparty to liquidate positions or disputes the default.
Overall, the Interpretive Notice emphasizes that the proposed Compliance Rule 2-50 is designed to ensure that CPO Members notify the NFA promptly of potential financial issues that may impact a CPO’s ability to fulfill its obligations to pool participants or may result in a pool’s unanticipated liquidation. In accordance with Section 17(j) of the Commodity Exchange Act, the NFA may make proposed Compliance Rule 2-50 and Interpretive Notice effective as early as 10 days after the CFTC receives the submission, unless the CFTC notifies the NFA that it will review the proposal for approval.