Securities Regulation Daily CFTC approves proposed CPO exemption rule and interim final rule for uncleared swaps
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Friday, May 29, 2020

CFTC approves proposed CPO exemption rule and interim final rule for uncleared swaps

By Brad Rosen, J.D.

At an open meeting of the CFTC, the full Commission unanimously approved a proposed regulation relaxing registration requirements for foreign CPOs, as well as an interim final rule extending margin compliance requirements for swap dealers and major swap participants.

At a recent CFTC open meeting held via conference call in accordance COVID-19 social distance protocols, the CFTC unanimously approved two matters before it. The first agenda item involved a proposed rule amending CFTC Regulation 3.10(c)(3), which provides an exemption from registration for foreign persons acting as commodity pool operators (CPOs) on behalf of offshore commodity pools.

The second matter considered by the Commission addressed an interim final rule which amends CFTC Regulation 23.161 by extending the compliance schedule for initial margin requirements for uncleared swaps in response to the COVID-19 pandemic. Division of Swap Dealer and Intermediary Oversight (DSIO) Director Joshua Sterling, along with supporting staff, provided presentations on both matters.

The CPO exemption rule. The CFTC approved a proposed rule exempting certain foreign persons from registration as CPO’s of offshore commodity pools where such persons are located outside the U.S. and are operating offshore commodity pools that are neither offered nor sold to U.S. participants. Additionally, the proposal would exempt U.S.-based affiliates of fund sponsors who put seed money into offshore funds that have only foreign investors. The proposed rule has a 60-day comment period following publication in the Federal Register.

Each of the commissioners issued further comments about the rule, which included the following observations:

  • Chairman Tarbert cites President Grover Cleveland. Quoting from Grover Cleveland’s second inaugural address in 1893, Chairman Heath Tarbert asserted that regulating funds never offered to U.S. investors was "a waste of public money" and "a crime against the citizen." Accordingly, the chairman enthusiastically supported the proposal as it would eliminate the potential need for the CFTC to require the registration and oversight of non-U.S. CPOs whose pools have no U.S. investors.
  • Commissioner Quintenz is pleased with proposal’s safe harbor provisions. In expressing his support for the proposed rule, Commissioner Brian Quintenz noted that the proposal would permit a foreign fund manager to satisfy the exemption’s requirement that its pool does not contain funds of U.S. investors, by complying with certain safe harbors. Quintenz further observed, "The proposal recognizes that the manner in which fund interests are sold in the real world often makes it impossible for a fund manager to make a blanket attestation that there is no U.S. investment in a given commodity pool."
  • Commissioner Behnam sees proposal as reducing regulatory burdens, but still has questions. In noting his general support for the proposal, Commissioner Rostin Behnam stated that the rule was reasonable, and would reduce regulatory burdens without sacrificing key regulatory protections. While noting that the proposed rule was drafted in observance of the high standards for exercising exemptive authority under section 4(c) of the CEA, Behnam also indicated that he had some questions and would be interested in hearing from commenters on the specific issues raised with regard to seed money as well as certain other aspects of the proposal.
  • Commissioner Stump views proposed rule in keeping with important regulatory principles. In her comments, Commissioner Dawn Stump observed that the proposal was in keeping with two significant principles she has noted in connection with prior rulemaking. First, the proposed rule reflects the benefits of codifying staff relief where appropriate, as well as periodically re-visiting Commission rules. Additionally, the rule carries on the CFTC’s long tradition of deference to its international colleagues who regulate individuals and activities in their own countries where their regulatory interest is paramount.
  • Commissioner Berkovitz lauds regulatory clarity but is concerned with potential abuses. Commissioner Dan Berkovitz noted that the proposed rule addressed several specific scenarios where the registration exemption would apply, which previously had created potential uncertainty for market participants. However, Berkovitz expressed concerns that the control affiliate provision, whereby U.S. entities with U.S. investors could provide capital to non-U.S. pools, could be used to improperly evade the CPO registration and regulatory requirements. Specifically, the commissioner stated that he will be interested in reviewing comments on whether that provision is appropriate, and whether additional conditions or limitations should apply to prevent such abuse.

COVID-19 pandemic warrants extending time to comply with uncleared swaps initial margin requirements. The Commission also approved an interim final rule (IFR) granting an extension of the compliance schedule for initial margin requirements for uncleared swaps. Specifically, the compliance date of September 1, 2020 for the initial margin requirements under the CFTC Margin Rule was deferred to September 1, 2021. The IFR is intended to provide entities subject to the September 1, 2020 compliance date with additional time in light of the COVID-19 pandemic.

Moreover, the Commission’s action with regard to the IFR is consistent with the Basel Committee on Banking Supervision and the International Organization of Securities Commissions’ (BCBS/IOSCO) recent revisions to the implementation schedule for margin requirements for non-centrally-cleared derivatives. Chairman TarbertCommissioner QuintenzCommissioner BehnamCommissioner Stump, and Commissioner Berkovitz each issued statements in support of the IFR.

The IFR will be effective when published in the Federal Register. Comments on the IFR are due 60 days after the date of publication in the Federal Register.

Speaking of the COVID-19 pandemic. At the open meeting, Chairman Tarbert also took the opportunity to summarize and highlight a number of steps the CFTC has previously taken in response to the COVID-19 pandemic and its impact on the derivatives market. The CFTC’s next open meeting is scheduled for Thursday, June 4, 2020 at which time it will consider a final rule amending certain registration and compliance requirements for CPOs and CTAs.

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