The CFTC continues the journey out of the hole it dug itself. In February the CFTC stated that one swap contract would be enough to trigger the registration requirement. This runs with the CFTC long standing narrow interpretation of the commodity pool definition. The CFTC retreated from this position with respect to REITs in October. The CFTC has also retreated from this position for Mortgage REITs.
Mortgage REITs are a bit trickier because the underlying assets are real estate loans instead of real estate. There is likely to be more financial engineering with derivatives to mange the risks in the portfolio.
The CFTC lays out four tests for relief:
- No more than 5% of assets are for initial margin and premiums
- Net income from derivatives is less than 5% of income
- Interests in the mortgage REIT are not marketed as a commodity pool
- The company has made or will make the IRS filing as a mortgage REIT
Unlike the REIT relief, the mortgage REIT relief is not self-executing. The Mortgage REIT needs to send an email no-action relief claim.
In footnote 19, in bold type, the CFTC continues to backpedal:
The Division notes that we remain open to discussions with mREITs to consider the facts and circumstances of their mREIT structures with a view to determining whether or not they might not be properly considered a commodity pool.
The CFTC also release an interpretative letter offering no action relief for securitization vehicles. Word is that there may be a few more letters providing relief in the works.
- CFTC Letter No. 12-44 (.pdf) No-Action Relief from the Commodity Pool Operator Registration Requirement for Commodity Pool Operators of Certain Pooled Investment Vehicles Organized as Mortgage Real Estate Investment Trusts
- CFTC Letter No. 12-45 (.pdf) Further Exclusions from Commodity Pool Regulation for Certain Securitization Vehicles; No-Action Relief for Certain Securitization Vehicles Formed Prior to October 12, 2012
- REITs and the CFTC
- Are You a CPO?
- What is a Commodity Pool?