The U.S. Commodity Futures Trading Commission yesterday said that certain securitization structures would be eligible for exclusion from commodity pool regulation.
In an Oct. 11, letter addressed to the SIFMA and the American Securitization Forum, the regulator said that it had considered the several arguments the industry had made against defining securitization vehicles as commodity pool operators.
A commodity pool is defined as any investment trust, syndicate or similar form of enterprise operated for the purpose of trading commodity interests.
The Dodd-Frank Act amended the definition of commodity pool to include swaps within the commodity pool definition's list of commodity interests. As a result of this change, any securitization vehicle entering into one or more swaps would have to be regulated as a commodity pool, subjecting one or more of the relevant parties to regulation by the CFTC and the National Futures Association (NFA). These changes were set to take effect on Oct. 12, 2012.
The ASF on Aug. 17 outlined in a letter addressed to the CFTC that the new rules would have potentially kept banking institutions from investing in securitizations because under the Volcker Rule, the section of the Dodd-Frank Act restricting banks from proprietary trading, banks are prohibited from entering into or investing in commodity pools.
Stuart Litwin, partner and co-head of the finance practice at Mayer Brown said on a Sept. 13 teleconference hosted by the firm, that the changes could have subjected sponsors or servicers of all ABS transactions for registering as a commodity pool operator and therefore subject these deals to an "unfamiliar" regulatory regime that is both costly and difficult.
Securitizations historically were eligible to enter into interest rate, currency and other types of swaps under the Commodity Exchange Act. Often, the securitization vehicle enters into swaps to hedge against fluctuations in interest rates or exchange rates or to tailor returns for specific classes of investors.
The CFTC has now extended the compliance deadline for its new commodity pool rules to December 31, 2012. The CFTC has also determined that certain securitization vehicles should not be included within the definition of commodity pool and its operator should not be included within the definition of commodity pool operator.
Eligible for exemption are transactions where the issuer of the ABS is operated consistent with the conditions set forth in Regulation AB,23 or Rule 3a-7, whether or not the issuer’s security offerings are in fact regulated pursuant to either regulation.
Also exempt are transactions where the issuer's activities are limited to passively owning or holding a pool of receivables or other financial assets (fixed or revolving), that by their terms convert to cash within a finite time period, plus any rights or other assets which are designed to assure the servicing or timely distributions of proceeds to security holders (including master trust structures).
The CFTC will also exempt deals where the issuer's use of derivatives is limited to the uses of derivatives permitted under Regulation AB (including as credit enhancement and the use of interest rate and currency swaps) and transactions where the issuer makes payments to securities holders only from cash flow generated by its pool assets and other permitted rights and assets, and not from or otherwise based upon changes in the value of the entity's assets.
Additionally, to qualify for exemption, the issuer is not permitted to acquire additional assets or dispose of assets for the primary purpose of realizing gain or minimizing loss due to changes in market value of the vehicle's assets.
No exemption from regulation is provided for securitization transactions that do not comply with the CFTC exemption criteria, covered bonds or other fund structures, explained a report published by Allen & Overy today, but the CFTC invites entities associated with such structures to apply for individual relief based on the facts and circumstances of their transactions.
"We appreciate the CFTC’s letter and its decision to extend the deadline for compliance with the new commodity pool rules," ASF Executive Director, Tom Deutsch said today in a press release." The Commission has taken a thoughtful initial approach to this issue and we are very pleased it has formally recognized that most of the securitization market should not be considered commodity pools and should not be subjected to the new commodity pool compliance regime.”