On March 29, 2013, the Division of Swap Dealer and Intermediary
Oversight (the "Division") of the Commodity Futures
Trading Commission (the "Commission") issued CFTC Letter
No. 13-07. CFTC Letter 13-07 provides time-limited no-action relief
for certain securitization vehicles regarding compliance with
Commission regulations pertaining to the registration of operators
of securitization vehicles that utilize swaps.
CFTC Letter No. 13-07 addresses the circumstances under which
operators of securitization vehicles that cannot satisfy the
criteria for no-action relief under two previously issued letters
(CFTC Letter No. 12-14 and CFTC Letter No. 12-45, issued by the
Division on October 11, 2012 and December 7, 2012, respectively).
In CFTC Letter No. 12-45, the Division provided time-limited
no-action relief until March 31, 2013 for the operator of a
securitization vehicle not otherwise afforded relief in that letter
or in CFTC Letter No. 12-14 for failure to register as a commodity
pool operator with respect to such vehicle.1 Pursuant to
CFTC Letter No. 13-07, the Division will not recommend that the
Commission take enforcement action against a commodity pool
operator of a securitization vehicle for failing to comply with
Part 4 of the Commission's regulations with respect to such
vehicle until June 30, 2013, subject to the satisfaction of certain
conditions.
The conditions under which an operator can claim the relief
afforded by CFTC Letter No. 13-07 include (i) the initiation of
registration of the commodity pool operator of a securitization
vehicle through the filing of Form 7-R, which pertains to the
operator, and a Forms 8-R for each of the operator's principals
and associated persons, as well as payment of all applicable
membership and application fees, by March 31, 2013, (ii) compliance
by the commodity pool operator of all the provisions of Part 4 of
the Commission's regulations, subject to certain terms and
conditions applicable to the operated securitization vehicle, as
described in the next three paragraphs, and (iii) the filing by the
commodity pool operator of a notice with the Division referencing
"Securitization Compliance No-Action."
The vehicle-specific terms and conditions cover three general
categories. The first category provides for exemptions from
compliance by the operator of certain Commission regulations,
specifically Rule 4.25 for operators of vehicles comprising a
static pool of assets that do not have either an equity tranche or
debt issuances rated lower than BB; Rule 4.21(b); Rule 4.24(a) and
(s); the requirement under Rule 4.23 that books and records be
maintained at the main business office with respect to the operated
securitization vehicle; and Rule 4.25(a)(1)(F) and (G) for
operators of vehicles with an amortizing pool of assets.
The second category allows for a type of substituted compliance:
namely, in lieu of the financial statement requirement under Rule
4.22 for the securitization vehicle, the operator of that vehicle
can provide basic, material information concerning the structure of
the securities and the distributions thereon; the nature,
performance, and servicing of the assets supporting the securities;
and any swaps held in that vehicle's portfolio, including a
discussion of the vehicle's counterparties.
The third category provides for mandatory treatment or actions:
fixed income securities of the vehicle rated BB and higher should
be treated as debt, and all other fixed income securities and
equity tranches of the vehicle should be treated as equity, in each
case with respect to the calculation of net asset value of the
vehicle. Additionally, the operator must use the net notional test
under Rule 4.13(a)(3)(ii)(B) to determine eligibility for exemption
from registration under that section if the securitization vehicle
did not or does not pay any initial margin with respect to the
vehicle's swaps positions. Finally, the operator of a
securitization vehicle that holds static swap positions must
provide full and complete disclosure regarding the swaps positions
and their functions within the vehicle in addition to disclosing
the percentage of the vehicle's assets used to trade commodity
interests as required by Rule 4.24(h).
Given that CFTC Letter No. 13-07 was issued on March 29, a Friday
and an exchange holiday, and requires commencement of registration
and certain filings, as well as compliance with certain conditions,
by March 31 in order to take advantage of the no-action relief
provided by the Letter, an obvious dilemma is raised for operators
of securitization vehicles who were unable to timely satisfy the
requirements of the Letter. CFTC Letter No. 13-07 states that the
Division has not finalized its policy determinations regarding what
relief, if any, should be provided to the commodity pool operators
of securitization vehicles, which suggests that further relief,
while not a certainty, might be forthcoming despite the passing of
the March 31 deadline.
CFTC Letter No. 13-07 may be accessed here.
Footnotes
1. See " CFTC Division Issues Letter Providing Relief for Certain Securitization Vehicles," December 2012, available on the Jones Day web site.
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