The Division of Swap Dealer and Intermediary Oversight issued an interpretative letter excluding certain securitization vehicles from the definition of commodity pool, subject to certain conditions.

Summary: The Division of Swap Dealer and Intermediary Oversight issued an interpretative letter excluding certain securitization vehicles from the definition of commodity pool, subject to certain conditions.

U.S. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre

1155 21st Street, NW, Washington, DC 20581

Telephone: (202) 418-5977

Facsimile: (202) 418-5407

gbarnett@cftc.gov

Division of Swap Dealer and

Intermediary Oversight

Gary Barnett

Director

CFTC Letter No. 12-14

Interpretation

October 11, 2012

Division of Swap Dealers and Intermediary Oversight

American Securitization Forum

One World Financial Center, 30th Fl.

New York, NY 10281-0006

SIFMA

120 Broadway, 35th Fl.

New York, NY 10271

Re:

Request for Exclusion from Commodity Pool Regulation for Securitization Vehicles

Ladies and Gentlemen:

This is in response to your correspondence, dated August 17, 2012, August 21, 2012, and

October 5, 2012, to the Division of Swap Dealer and Intermediary Oversight (“Division”) of the

Commodity Futures Trading Commission (“Commission”), in which you requested an

interpretation from the Division that certain funds are not commodity pools under Commission

Regulation 4.10(d),1 and Section 1a(10) of the Commodity Exchange Act (“CEA”),2 or

alternatively, a letter providing that the Division will not recommend enforcement action against

the operators of certain funds that issue asset-backed securities (including mortgage-backed

securities) for failure to register as commodity pool operators.

You have made several arguments as to why securitization vehicles should not be

considered commodity pools

dity Exchange Act (“CEA”),2 or

alternatively, a letter providing that the Division will not recommend enforcement action against

the operators of certain funds that issue asset-backed securities (including mortgage-backed

securities) for failure to register as commodity pool operators.

You have made several arguments as to why securitization vehicles should not be

considered commodity pools. You state that such funds generally use swaps only to hedge

interest rate or currency risk.3 You further state that such funds generally pay no initial margin

and there is no leverage in the swap.4 You assert that securitization vehicles typically enter into

swap transactions “at or about the time of the transaction’s closing and the entities generally do

1 Commission rules referred to herein are found at 17 C.F.R. Ch.I (2011).

2 7 U.S.C. 1a(10).

3 Letter from SIFMA, at 3 (Aug. 21, 2012) (“SIFMA Ltr.”).

4Id.

ASF and SIFMA

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not enter into new swaps except as may be necessary to address counterparty downgrade or

default.”5

You argue that when the Commission’s existing guidance of what activities result in

classification of a fund as a commodity pool is viewed in conjunction with the recent inclusion of

swaps within the definition of a “commodity interest,” it could result in securitization vehicles

being captured within the Commission’s jurisdiction, which could impose significant burdens on

the securitization industry that could have a chilling effect on the launch of new securitization

vehicles.6

You argue that securitization vehicles do not satisfy the definition of commodity pool,

and more specifically, that securitization vehicles do not meet the criteria articulated by the

Ninth Circuit in Lopez v

in the Commission’s jurisdiction, which could impose significant burdens on

the securitization industry that could have a chilling effect on the launch of new securitization

vehicles.6

You argue that securitization vehicles do not satisfy the definition of commodity pool,

and more specifically, that securitization vehicles do not meet the criteria articulated by the

Ninth Circuit in Lopez v. Dean Witter Reynolds Inc.7 In particular, you state that most

securitization vehicles do not have multiple equity participants, do not have pro rata allocations

of accrued profits or losses because the issued interests are in the form of debt or debt-like

interests with a stated interest rate or yield and principal balance and a specific maturity date, and

do not have a purpose of trading in swaps or other commodity interests. You also assert that

securitization vehicles are “capital markets financings of sales finance or other financial asset

inventory” as opposed to an investment trust.8

You specifically request “no-action” relief or interpretative guidance for entities that are

operated consistent with the Securities and Exchange Commission’s Regulation AB,9 the

Securities and Exchange Commission’s rule 3a-7,10 or the requirements of a covered bond

statute.11 You also request relief for entities involved in collateralized debt obligations,

collateralized loan obligations, and synthetic securitizations.12 Additionally, you request blanket

relief for securitization transactions that were initiated before the date of this letter or are

otherwise in the process of being executed.13

In 1981, the Commission proposed and adopted the definition of “pool” in Commission

Regulation 4.10(d), which provided that “pool” means “any investment trust, syndicate or similar

form of enterprise operated for the purpose of trading commodity interests.”14 At that time there

was no statutory definition of a commodity pool

this letter or are

otherwise in the process of being executed.13

In 1981, the Commission proposed and adopted the definition of “pool” in Commission

Regulation 4.10(d), which provided that “pool” means “any investment trust, syndicate or similar

form of enterprise operated for the purpose of trading commodity interests.”14 At that time there

was no statutory definition of a commodity pool. The statutory definition of commodity pool, as

it currently appears in Section 1a(10) of the CEA, is substantively identical to the Commission’s

longstanding regulatory definition of the term “pool.”15

5Id.

6 Id.

7 805 F.2d 880 (9th Cir. 1986).

8 SIFMA Ltr. at 4.

9 17 CFR 229.1100, et seq.

10 17 CFR 270.3a-7.

11 American Securitization Forum Letter, October 5, 2012, at 5 (“ASF II”).

12 Id. at 7.

13 Id. at 3.

1446 FR 26004, 26014 (May 8, 1981).

15 See, 7 U.S.C. §1(a)(10), and 17 C.F.R. 4.10(d).

ASF and SIFMA

Page 3

From the time of its adoption in 1981, the Commission has declined to constrain the

phrase “operated for the purpose of trading” to the narrowest of possible interpretations. The

reasons that the Commission articulated for rejecting a narrow understanding of the phrase were

grounded in its dual concerns for customer and market protection. The Commission noted in the

Preamble to the 1981 rule that commenters were concerned that the definition was overly

broad.16 One commenter suggested a brightline percentage test as a function of commodity

interests to other portfolio holdings to determine whether a collective investment scheme should

be considered a pool

were

grounded in its dual concerns for customer and market protection. The Commission noted in the

Preamble to the 1981 rule that commenters were concerned that the definition was overly

broad.16 One commenter suggested a brightline percentage test as a function of commodity

interests to other portfolio holdings to determine whether a collective investment scheme should

be considered a pool. The Commission declined to set a specific percentage as a threshold over

which an entity would be considered a commodity pool due to concerns that an entity which

would not exceed the set trading level could still be marketed as a commodity pool to

participants, who should still be afforded the protections under Part 4 of the Commission’s

regulations.17

Several other commenters suggested that the definition should be narrowed to only those

funds whose “principal purpose” was the trading of commodity interests. The Commission

rejected that suggestion because it could “inappropriately exclude from the scope of the Part 4

rules certain persons who are, in fact, operating commodity pools.”18 Thus, the Commission

recognized that there may be entities whose primary business focus may be outside the

commodity interest sphere, yet may still have a significant exposure to those markets, which may

implicate the Commission’s concerns regarding both customer and market protection. The

rejection of the more narrow “principal purpose” language further indicated the Commission’s

determination to expand the constrained meaning of the phrase “operated for the purpose of.”

There is no evidence in the legislative record to indicate that when Congress adopted a statutory

definition of “commodity pool,” that is substantively identical to the Commission’s longstanding

regulatory definition of “pool,” it intended for the Commission to modify its understanding of

the scope of phrase “operated for the purpose of.”

The determination to not to construe the phrase “operated for the purpose of” in the

narrowest possibl

ndicate that when Congress adopted a statutory

definition of “commodity pool,” that is substantively identical to the Commission’s longstanding

regulatory definition of “pool,” it intended for the Commission to modify its understanding of

the scope of phrase “operated for the purpose of.”

The determination to not to construe the phrase “operated for the purpose of” in the

narrowest possible manner required that a comprehensive qualitative approach to determining a

fund’s status as a pool was necessary. The Commission stated in the 1981 Preamble that

“[d]epending on the facts of a particular case, an entity may or may not be a “pool” within the

scope of § 4.10(d).”19 According to the Commission, this requires “an evaluation of all the facts

relevant to the entity’s operation.”20

16Id. at 26005.

17Id.

18Id. at 26006. The Commission’s conclusion that commodity pools are not limited to those funds whose primary

purpose is trading commodity interests is consistent with the Dodd-Frank Act’s recent amendments to the CEA in

Section 4m(3). Section 4m(3) was amended to exempt certain commodity trading advisors (“CTAs”) from

registration provided that their business does not primarily consist of acting as a CTA, and that the CTA does not

serve as a CTA to a commodity pool that is engaged primarily in trading commodity interests. 7 U.S.C. 6m(3).

This statutory exemption for CTAs recognizes that there may be entities that are properly considered commodity

pools that are not engaged primarily in trading commodity interests. Congress did not include a similar concept in

the definition of commodity pool in CEA section 1a(10) or in the amended commodity pool operator definition in

CEA section 1a(11).

19 Id.

20 Id.

. 7 U.S.C. 6m(3).

This statutory exemption for CTAs recognizes that there may be entities that are properly considered commodity

pools that are not engaged primarily in trading commodity interests. Congress did not include a similar concept in

the definition of commodity pool in CEA section 1a(10) or in the amended commodity pool operator definition in

CEA section 1a(11).

19 Id.

20 Id.

ASF and SIFMA

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The Division believes that, consistent with the Commission’s longstanding statements

regarding the analysis of whether a fund is a pool, although the Lopez factors are useful, they are

not dispositive and the failure of a fund to satisfy one or more of the factors does not mean that

the fund is not a pool. The Division believes that it is required to evaluate the facts and

circumstances presented in their entirety and determine whether a pooled investment vehicle

possessing such characteristics should properly be considered to be a commodity pool. In

attempting to make such an evaluation based on the characteristics you have presented, we tend

to agree that certain entities that meet certain of the criteria you identify are likely not

commodity pools, such as securitization vehicles that do not have multiple equity participants, do

not make allocations of accrued profits or losses,21 and only issue interests in the form of debt or

debt-like interests with a stated interest rate or yield and principal balance and a specific maturity

date. Other sorts of financings or investments, however, based on the descriptions you have

provided, do not preclude the issuer or, in the case of a covered bond, the related covered pool

from being a commodity pool

accrued profits or losses,21 and only issue interests in the form of debt or

debt-like interests with a stated interest rate or yield and principal balance and a specific maturity

date. Other sorts of financings or investments, however, based on the descriptions you have

provided, do not preclude the issuer or, in the case of a covered bond, the related covered pool

from being a commodity pool. Thus, your request for relief for entities operating to some extent

under any covered bond statute, entities involved in collateralized debt obligations, entities

involved in collateralized loan obligations, any insurance-related issuances, and any other

synthetic securitizations is overly broad and does not provide any assurance that the related

entities or a portion of their assets, operations, or activities would not properly be considered a

commodity pool.

Nevertheless, based on an evaluation of the facts and circumstances presented regarding

securitization vehicles and their issuance of asset-backed securities,22 the Division has

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.” The Division has determined that the criteria for exclusion include the

following:

 The issuer of the asset-backed securities is operated consistent with the conditions

set forth in Regulation AB,23 or Rule 3a-7,24 whether or not the issuer’s security

offerings are in fact regulated pursuant to either regulation,25 such that the issuer,

pool assets, and issued securities satisfy the requirements of either regulation;

21 Other than gains or losses resulting from permitted dispositions of defaulted financial assets.

22 When the Division refers to “asset-backed securities” it intends to include mortgage-backed securities within the

term.

23 17 CFR 229.1100, et seq. (as of Apr. 2012)

ssets, and issued securities satisfy the requirements of either regulation;

21 Other than gains or losses resulting from permitted dispositions of defaulted financial assets.

22 When the Division refers to “asset-backed securities” it intends to include mortgage-backed securities within the

term.

23 17 CFR 229.1100, et seq. (as of Apr. 2012).

24 17 CFR 270.3a-7 (as of Apr. 2012).

25 For example, Regulation AB can be relied upon in connection with the determination of whether an issuer of

asset- backed securities is excluded from the definition of commodity pool even in connection with private issuances

and Rule 3a-7 may be relied upon in connection with the determination of whether an issuer of asset-backed

securities is excluded from the definition of commodity pool even where the issuer is utilizing another exemption or

exclusion from registration under the Investment Company Act of 1940, 15 U.S.C. §80a-1, et seq.

ASF and SIFMA

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 The entity’s activities are limited to passively owning or holding a pool of

receivables or other financial assets,26 which may be either fixed or revolving,27

that by their terms convert to cash within a finite time period28 plus any rights or

other assets designed to assure the servicing or timely distributions of proceeds to

security holders;

 The entity’s use of derivatives is limited to the uses of derivatives permitted under

the terms of Regulation AB, which include credit enhancement and the use of

derivatives such as interest rate and currency swap agreements to alter the

payment characteristics of the cash flows from the issuing entity;

 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; and,

 The issuer is not permitted to acquire additional assets or dispose of assets for the

primary purpose29 of realizing gain

f the cash flows from the issuing entity;

 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; and,

 The issuer is not permitted to acquire additional assets or dispose of assets for the

primary purpose29 of realizing gain or minimizing loss due to changes in market

value of the vehicle’s assets.

The Division believes that compliance with the aforementioned criteria results in the

entity being substantively distinguishable from a fund that is properly considered a “commodity

pool” under the definitions in Section 1a(10) of the CEA and Commission Regulation 4.10(b).

Therefore, pursuant to Commission Regulation 140.99, the Division hereby interprets the

definition of commodity pool under Section 1a(10) of the CEA and Commission Regulation

4.10(d) to not include entities that satisfy the criteria listed above.30

As for securitization vehicles that cannot satisfy all the criteria stated above, the

Division notes that we remain open to discussions with securitization sponsors to consider

the facts and circumstances of their securitization structures with a view to determining

26 The term “financial asset” as used in this interpretative letter does not include transactions whereby an entity

obtains exposure to an asset that is not transferred or otherwise part of the asset pool. This is consistent with

guidance provided by the Securities and Exchange Commission in its adopting release for Regulation AB. See 70

FR 1597, 1614 (Jan. 7, 2005).

27 If the issuer is a “master trust,” as that term is defined in Regulation AB, 17 CFR 229.1101(c)(3) (as of Apr

nsactions whereby an entity

obtains exposure to an asset that is not transferred or otherwise part of the asset pool. This is consistent with

guidance provided by the Securities and Exchange Commission in its adopting release for Regulation AB. See 70

FR 1597, 1614 (Jan. 7, 2005).

27 If the issuer is a “master trust,” as that term is defined in Regulation AB, 17 CFR 229.1101(c)(3) (as of Apr.

2012), then the issuer must comply with the terms of Regulation AB and may be permitted to add additional assets

to the pool that backs securities in connection with future issuances of asset-backed securities, which may be done in

connection with maintaining a minimum pool balance in accordance with transaction agreements for master trusts

with revolving periods or receivables or other financial assets that involve revolving accounts.

28 Such would include the residual value realized on the disposition of leased assets to the extent consistent with the

terms of Regulation AB.

29 Nothing in this requirement should be construed to permit the use of derivatives beyond those circumstances set

forth in the third bullet point above.

30 The Division is not providing relief for entities that cannot satisfy the conditions set forth in this letter, although it

is not stating that additional relief for other types of funds may not be available in the future. Such entities may be

entitled to temporary no-action relief pursuant to the terms set forth in a letter issued by the Division concurrent with

this one that provides relief to various classes of Commission registrants.

es that cannot satisfy the conditions set forth in this letter, although it

is not stating that additional relief for other types of funds may not be available in the future. Such entities may be

entitled to temporary no-action relief pursuant to the terms set forth in a letter issued by the Division concurrent with

this one that provides relief to various classes of Commission registrants.

ASF and SIFMA

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whether or not they might not be properly considered a commodity pool, or where not

sufficiently assured, whether other relief might be appropriate under the circumstances,

such as where a fund might be treated as an exempt pool.

This letter, and the positions taken herein, represent the view of this Division only, and

do not necessarily represent the position or view of the Commission or of any other office or

division of the Commission. The relief issued by this letter does not excuse the affected persons

from compliance with any other applicable requirements contained in the Act or in the

Commission’s regulations issued thereunder. Further, this letter, and the relief contained herein,

is based upon the representations made to the Division. Any different, changed or omitted

material facts or circumstances might render this letter void.

Should you have any questions, please do not hesitate to contact Amanda Olear, Special

Counsel, at 202-418-5283.

Very truly yours,

Gary Barnett

cc:

Regina Thoele, Compliance

National Futures Association, Chicago