On August 23, 2012, the Commodity Futures Trading Commission
("CFTC") approved conforming amendments to Part 4 of its
regulations. Among other requirements, Part 4 requires the
registration of commodity pool operators ("CPOs") and
commodity trading advisors ("CTAs") unless such persons
are otherwise excluded or exempted. The conforming amendments
reflect changes made to the Commodity Exchange Act by the
Dodd-Frank Wall Street Reform and Consumer Protection Act
("Dodd-Frank"). These conforming changes will become
effective 60 days after their publication in the Federal
The purpose of the amendments is to clarify the applicability of Part 4 regulations to swap activities. Although the CFTC is still considering whether, for all purposes of the CFTC's regulations, the term "commodity interest" would include "swaps," the amendment makes it clear that for Part 4 purposes, "commodity interest" includes "swaps." In particular, the amendment covers four substantive categories of revisions:
Adding "Swap"-Related Terms to Part 4. Various amendments have been made to the Part 4 provisions specifying the activities to be undertaken by CPOs and CTAs because of the inclusion of "swaps" as "commodity interests." For example, Regulation 4.23(a)(1) is being amended to include "swap type and counterparty" in the itemized daily record that a CPO is required to maintain with respect to a pool's commodity interest transactions. In addition, "swap dealers" will also be among the persons for whom CPOs and CTAs must provide information in their disclosure documents. Other regulations are being amended to include "swap dealers" within the group of persons to which conflicts of interest must be disclosed by CPOs and CTAs. To the extent that a CPO or CTA has availed itself of the "registration lite" procedures under Regulation 4.7, such CPO or CTA may be able to accept a registered "swap dealer" as a pool participant or advisory client, as the case may be, without regard to the size of its investment portfolio. Such registered "swap dealer" would thereby be treated the same as other CFTC-registered financial intermediaries.
Recordkeeping. As a result of the amendments to Part 4, CPOs and CTAs will need to prepare and maintain books and records of the swap transactions in which it engages not only on behalf of its pool participants and clients but also for itself. Moreover, each CPO and CTA will have to retain each acknowledgment of a swap transaction received by it from a swap dealer. Additionally, if a CPO or CTA is itself a counterparty to a swap transaction, it will be subject to the swap data recordkeeping and reporting requirements of Part 45 of the CFTC's regulations. These requirements oblige swap dealers and major swap participants to keep full, complete, and systematic records of all activities relating to their swap business (or, in the case of a non-swap dealer or non-major swap participant, relating to each swap to which it is a counterparty).
Regulation 4.30 Exception. Regulation 4.30 generally prohibits CTAs from soliciting, accepting, or receiving, from any existing or prospective client funds, securities or other property in the trading advisor's name (or extending credit in lieu thereof) to purchase, margin, guarantee, or secure any commodity interest of the client. Certain intermediaries—registered futures commission merchants, leverage transaction merchants, and retail foreign exchange dealers—have been excepted from the prohibitions contained in Regulation 4.30. As a result of the amendment, registered swap dealers who qualify as CTAs (i.e., because they are not otherwise excluded from the definition of "commodity trading advisor" by virtue of their activities) have been added to the list of intermediaries that are not subject to the prohibitions contained in this regulation.
Deletion of Regulation 4.32. The amendment deletes Regulation 4.32, which dealt with trading by a registered CTA on or subject to the rules of a derivatives transaction execution facility for noninstitutional clients. This action was in response to the adoption of Section 734(a) of Dodd-Frank, which repealed the section of the Commodity Exchange Act that addressed the regulation of derivatives transaction execution facilities (former Section 5a).
In addition to the foregoing, the CFTC also considered the economic impact of the Part 4 revisions on small businesses under the Regulatory Flexibility Act ("RFA"). It concluded that an otherwise affected CPO or CTA would either be exempted from registration (and, accordingly, the RFA would not apply to it) under the "small pool" provisions of Regulation 4.13(a)(2) or, if not so exempt, would not be unduly burdened by bringing swap activities within its existing disclosure, reporting, and recordkeeping obligations.
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