What does the CFTC have to do with private equity?

PEI PFC Forum 2013

These are my notes from the Private Fund Compliance Forum 2013. They are live from the Forum so please forgive my typos.

Robert E. Phay, Jr., Associate General Counsel & Chief Compliance Officer, Commonfund

The common sense answer should be “nothing”. But that does not seem to be the case. The CFTC seems to be trying to broaden its grasp.

Dodd-Frank pulled interest rate derivatives and foreign exchange derivatives into the definition of a “commodity”.

Interest rate swaps and foreign exchange hedges are now commodities so trading in those could trigger CFTC registration. There is an exemption under Rule 4.13(a)(3) called the de minimis rule. You have to have less 5% of the liquidation value of the fund in commodities or the notional value is less than 100% of the fund value.

Regulation 4.13(a)(3) requires that the trading limits must be complied with “at all times.” However, the provisions of Regulation 4.13(a)(3) qualify that requirement, stating that such limits are determined “at the time the most recent position was established.” When these requirements are read together, staff believes that it is clear that the regulation only requires that a CPO be in compliance with the trading thresholds at the time a position is established. A CPO would not otherwise be required to reconfigure its portfolio to comply with such limits.

If you have more commodities in excess of the de minimis amounts then you need to worry about other registration and the requirements of the Commodities Exchange Act.

Fund of funds have special rules under 4.13(a)(3) with a look through to the underlying funds.

This all ties back to the jurisdiction over swaps and adherence to the ISDA protocol.

There is a Department of the Treasury exemption for Foreign exchange swaps and forwards. You still need to adhere to the ISDA protocol for these. You just don’t need to comply with the central clearing requirement. It’s not an exemption from the business conduct rule.

The Commodity Exchange Act definition of “commodity pool”:

(10) Commodity pool

(A) In general
The term “commodity pool” means any investment trust, syndicate, or similar form of enterprise operated for the purpose of trading in commodity interests, including any—

(i) commodity for future delivery, security futures product, or swap;
(ii) agreement, contract, or transaction described in section 2 (c)(2)(C)(i) of this title or section 2 (c)(2)(D)(i) of this title;
(iii) commodity option authorized under section 6c of this title; or
(iv) leverage transaction authorized under section 23 of this title.

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