The latest batch of rules from the US Commodity Futures Trading Commission (CFTC), which come into effect on December 31, 2012, will require many firms currently outside the CFTC’s supervision to register as Commodity Pool Operators (CPOs).
“The ripples from the financial crisis are still being felt as regulators continue to find new ways to monitor control and examine the daily work of asset managers,” said Matt Grinnell, buy-side compliance officer at Fidessa.
“The clock has almost run out for CFTC registration, and by the end of this month, many firms currently outside the CFTC’s supervision will be required to register as CPOs or prove they fall under one of the new exemptions,” Grinnell said.
In February 2012, the U.S. Commodity Futures Trading Commission rescinded Rule 4.13(a)(4) of the Commodity Exchange Act, under which commodity pool operators (CPOs) were exempt from registration if all investors in the CPO’s fund are “qualified eligible persons”, or sophisticated investors.
Funds that relied upon the exemption have until December 31 to decide whether to register with the CFTC.
On November 29, the CFTC provided relief in the form of a no-action letter from CPO registration for family offices and fund of funds operators.
“Since the no-action relief is not self-executing, pool operators that believe they meet the eligibility requirements described in this alert should confirm now whether this no-action relief is in fact applicable,” said Scott Moss, a partner in Lowenstein Sandler's Investment Management Group.
To the extent that a pool operator will avail itself of this no-action relief, it should prepare the relief submission now, so that it may be submitted prior to the December 31 deadline, Moss said.
The CFTC has left in place the exemption available under Rule 4.13(a)(3) for CPOs engaged in a ‘de minimis’ level of futures trading (no more than 5% of the liquidation value of the fund’s portfolio is used to establish futures trading positions or the aggregate net notional value of such positions does not exceed 100% of the liquidation value of the fund’s portfolio).
Firms will need to demonstrate on an ongoing basis that they meet one of the de minimis exemptions. “Significantly, the test needs to be applied daily on all of the asset managers’ pools or portfolios of derivatives to prove qualification – raising the question, which of these two paths will have less of an impact on the firm’s bottom line?” Grinnell said.
The move by the CFTC to change its exemption rules so drastically and introduce the de minimis test underscores again the need for proper, scalable automation of compliance functions.
“You could, in theory, manage the test manually using tools like Excel if it were an occasional requirement,” said Grinnell. “But this is a daily procedure and trying to run this manually is hardly an efficient use of time and resources. More importantly, with perhaps anything between 50 and 100 portfolios to test and on which to provide audit trails, automation is the only realistic option.”
