Key CFTC Considerations for Asset Managers

Transcription

1 Key CFTC Considerations for Asset Managers Apex Fund Services Seminar January 25, 2013

2 Agenda for Discussion Main Points: Overview of CFTC / Commodity Futures Laws Summary of Recent Rule Changes Exemptions from CPO & CTA Registration Why Getting Analysis Right Matters Registration Considerations Key Ongoing Requirements Potential Pitfalls 2

3 Overview of CFTC / Commodity Futures Laws Commodity Futures Trading Commission (CFTC) US regulator since 1974 with jurisdiction over trading commodity derivatives Commodity is broadly defined CFTC has own civil enforcement powers; very active Key products under CFTC jurisdiction Commodity futures and options Security futures (shared w/ SEC); Broad-based products Swaps Forex Broadly defined because of history of retail abuse Leverage instruments 3

4 Overview of CFTC / Commodity Futures Laws Swaps & Security-Based Swaps Swaps are now under CFTC jurisdiction Broadly defined; some instruments excluded (e.g., some forwards, insurance) Security-Based Swaps are under SEC jurisdiction Single names; narrow-based indexes Mixed Swaps = joint jurisdiction Some swaps are being converted to futures ICE, CME energy contracts Avoids uncertainties under Dodd-Frank 4

5 Overview of CFTC / Commodity Futures Laws CFTC regulates market intermediaries, including Commodity Pool Operators (CPOs) Commodity Trading Advisors (CTAs) CPO = fund sponsor CTA = investment manager of fund or account Same entity can play both roles in some fund structures It may be possible to delegate CPO responsibilities in some cases 5

6 Summary of Recent Rule Changes Key Developments in 2012 Broad CPO Exemption Eliminated (February 2012) Had no limit on amount of commodity interest trading Remaining exemptions are much narrower More products included under CFTC s jurisdiction as swaps (October 2012) Key Point: Much more difficult now to rely on an exemption from registration if funds trade CFTCregulated products to any significant degree 6

7 Summary of Recent Rule Changes Relief from Registration Deadline Registration for existing firms was generally required by December 31, 2012 Some key exceptions include: Swaps Only Firms Only file application by December 31; good faith compliance thereafter Fund of Funds Firms Register by six months after release of new fund of funds guidance by CFTC, upon application by December 31 Family Offices General relief from CPO registration, upon application 7

8 Exemptions from CPO Registration General CPO Exemption (Rule 4.13(a)(3)) Must satisfy 1 of 2 portfolio tests at all times 5% Test (initial margin, premium, etc.) 100% Test (notional value) Tests re-apply each time put on new position Non-US Firm Exemptions: Non-US trading of futures/options (Part 30) Non-US clients/investors (Rule 3.10(c)(3)(i)) Status of CPO exemption may affect CTA exemption 8

9 Exemptions from CTA Registration Firms not primarily providing commodity trading advice (Rule 4.14(a)(8)) Similar statutory exemption for SEC-registered advisers (Section 4m(3)) Firms with 15 or fewer clients not generally holding themselves out as CTAs (Section 4m(1), Rule 4.14(a)(10)) CFTC takes very broad view of what constitutes holding out Piggyback exemptions for a registered or exempt CPO as to same pool (Rules 4.14(a)(4), 4.14(a)(5)) Non-US Firm Exemptions 9

10 Why Getting Analysis Right Matters The CFTC has a roadmap to review exempt status in most cases Sanctions for failure to register: Civil Monetary Penalties (US$140,000 or 3x any gains) Cease & Desist Orders, Injunctions Suspensions/Bars from CFTC Registration Trading Bans Private Lawsuits Asset manager won t be able to trade Key Point: Under NFA Bylaw 1101, member firms cannot deal with non-members required to be registered with the CFTC Critical for counterparties, investors, and intermediaries that are NFA members Serious damage to reputation 10

11 Registration Considerations Registration Required or Exemption Applies? Key Point: Registration or reliance on exemption should generally be decided before launching a new fund For General CPO Exemption, run baseline portfolio tests For a Non-US Exemption, confirm trading markets or sources of funds (as applicable) CTAs should evaluate exempt status following CPO review If exemption available, make filing with NFA as required Ongoing recordkeeping and affirmation requirements in some cases If exemption not available, then register Key Point: Even if exempt, other swaps-related requirements may apply (e.g., clearing, recordkeeping, reporting) 11

12 Registration Considerations Key Point: Registration process can take 2-3 months Separate Registrations for Firms and Individuals Register with CFTC Join National Futures Association (NFA) required Swaps Firm approval Swaps Associated Person designation 12

13 Registration Considerations Key Points on Individual Registration/Filing: Associated Persons (APs) must satisfy proficiency requirement Generally must pass exam (Series 3) Exceptions or waivers may apply APs and Principals must submit to fingerprinting for criminal background checks Some exceptions for principals possible Statutory disqualifications 13

14 Key Ongoing Requirements Core Requirements for Registered Firms Mandatory Disclosure Document Very detailed; subject to NFA review Investor Account Statements / Annual Reports (CPOs) Detailed Recordkeeping Reporting on Firm/Fund Business CPO report mirrors SEC Form PF CTA report less detailed Annual Compliance Review and Compliance Manual 14

15 Key Ongoing Requirements Partial Relief for Registered Firms under CFTC Lite" Investors/clients must be qualified eligible persons (QEPs) Complicated definition, but in general includes 3(c)(7) fund investors and non-us persons Portfolio requirement may apply to some QEPs May be relevant for 3(c)(1) funds Securities Pools CPOs Limited commodity interest trading; solely incidental to securities trading Other Relief 15

16 Systemic Risk Reporting Key Point: SEC exempt advisers don t report on Form PF, but must report under CFTC regime CFTC and NFA have overlapping reporting requirements for CPOs and CTAs All reporting is done through the NFA s online system, EasyFile Process is somewhat in flux given rule changes CPOs Form PQR Schedules A, B, and C Partial reliance on Form PF is possible for SEC registered advisers CTAs Form PR CFTC Lite does not exempt registered firms from these requirements For newly-registered firms, reporting will begin for Q

17 Systemic Risk Reporting En#ty Type Form When to File? Contents of Filing? Small CPO AUM of less than $150 million Mid Sized CPO AUM of at least $150 million and less than $1.5 billion Large CPO AUM of at least $1.5 billion PQR PQR PQR Quarterly, within 60 days of the quarters ending March, June, and September Annually, within 90 days of December 31 Quarterly, within 60 days of the quarters ending March, June, and September Annually, within 90 days of December 31 Quarterly, within 60 days of the quarters ending March, June, and September Schedule A + Schedule of Investments Schedule of Investments covers investments that exceed five percent of the pool s net asset value at the end of the period. Schedule A + Schedule of Investments Schedule A + Schedule B Schedule B includes a Schedule of Investments. Schedule A + Schedule B + Schedule C CPOs also filing on Form PF must file NFA Form PQR (Schedule A + Schedule of Investments) quarterly within 60 days of quarter end; provided that, for the quarter ending December 31, the filing is due within 90 days. CTA PR Quarterly, within 45 days of the quarters ending March, June, and September CFTC Form PR + Other InformaWon Other InformaWon covers certain relawonships (e.g., carrying broker, introducing broker), AUM for trading programs, and monthly performance. Annually, within 45 days of December 31 CFTC Form PR + Other InformaWon 17

18 Potential Pitfalls Enforcement environment Looking for cases to promote compliance with new provisions Violations of General CPO Exemption, including fund of funds firms Reporting/recordkeeping requirements False statements to NFA/CFTC May include inaccurate claims of exemption NFA Bylaw 1101 strict liability; need reasonable procedures for compliance Disclosures to investors Trading and allocation Special concerns with forex 18

19 Thank You Joshua Sterling Stephen Tirrell

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