New US Regulatory Regime for Commodity Pools

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1 New US Regulatory Regime for Commodity Pools As some readers may be aware, under the US Dodd-Frank Wall Street Reform and Consumer Protection Act, US regulatory reforms designed to reform the over-the-counter derivatives market will go into effect by the end of The US Commodity Futures Trading Commission ("CFTC") issued a staff letter on 12 October 2012 granting no-action relief to persons that are required to register as a commodity pool operator solely as a result of "swap" activity. This relief effectively sets the compliance date for such persons at 31 December Despite uncertainty as to whether the final form of the new regulations will apply to any particular structured finance deal with swaps, directors of Cayman SPVs that fall into this category have been, and should be, reaching out to the relevant market participants to determine whether it is necessary to prepare for the new regulatory regime and what steps will need to be taken to ensure that transactions comply with the new requirements. The fundamental reason for requiring this analysis is due to the revised definition of a "commodity pool". This definition has been expanded to include any form of enterprise operated for the purpose of trading in commodity interests, including swaps, which catches most swaps entered into by CLOs and other structured finance vehicles. The new definition of commodity pool also applies to any transaction where there is a US swap counterparty or any US investors and applies equally to US and non-us issuers. As a consequence of applying the new rules, an issuer that is caught by the new rules will fall within the definition of a commodity pool and its operator will be subject to potentially extensive registration and reporting requirements. Unless otherwise exempt, commodity pools must be operated by commodity pool operators that are registered with the CFTC. On 11 October 2012, the CFTC's Division of Swap Dealer and Intermediary Oversight issued interpretative relief (the "CFTC Staff Letter") that excludes any securitisation vehicle that satisfies five specified criteria from the definition of commodity pool. Broadly speaking, our understanding from discussions with some of our US legal colleagues is that the exclusion will generally not cover CDOs, CLOs, CP conduits or covered bonds. The CFTC have indicated that they are still open to considering requests for relief on a case by case basis where such relief would be consistent with the broader principles set out in the CFTC Staff Letter. It is not known at this time how such requests for relief would be processed and whether further categorical relief might be available. The good news, however, is that many legacy transactions may be able to qualify for an exemption under the de minimus thresholds in CFTC Rule 4.13(a)(3), which would reduce the reporting and administrative burden otherwise applicable to the managers or sponsors of such transactions. Issuers will still have to file for the exemption by 31 December 2012 and will need to continue to monitor continued eligibility for the exemption but significantly, no financial reporting will be required. We are aware that these new regulations may impact both new and existing transactions. MaplesFS, which provides administration services to a large portfolio of structured finance issuers and hedge funds, is keeping abreast of developments and pro-actively exploring options with respect to services it may be able to provide commodity pools. If your transaction is expected to fall within the new rules, we encourage you to obtain appropriate US legal advice and contact us as soon as possible so that we can work together with you and your US counsel to find an appropriate solution.

2 FATCA - Impact on Cayman CLO Issuers The US Foreign Account Tax Compliance Act ( FATCA ), which was enacted to combat offshore tax evasion by United States ("US") taxpayers who hold their investments and other assets in foreign accounts, will impose a US withholding tax on US source interest, dividends, and certain other types of passive income of foreign financial institutions ( FFI ) and other non-financial foreign entities ( NFFE ) that fail to perform certain diligence and provide information regarding their US account holders and, in certain circumstances, US investors. The US Treasury has issued proposed FATCA regulations addressing these FATCA provisions. The final regulations are expected to be issued later this year, and could differ significantly from the proposed regulations. Effective Date Although FATCA is effective as of 1 January 2013, the proposed regulations provide that FFIs and NFFEs that do not comply with FATCA will only become subject to a 30% withholding tax with respect to such US source income from 1 January Withholding on gross proceeds is delayed until 1 January Grandfathered Obligations While FATCA does not apply to payments under any obligation outstanding as of 18 March 2012, the proposed regulations have extended this date to any obligation outstanding as of 1 January Intergovernmental Agreements In recognition of the burdens associated with FATCA compliance and to facilitate coordination with local law restrictions, the US Internal Revenue Service (the IRS ) is developing an alternative approach for FFI compliance with FATCA that will require: (i) the FFI to collect and report the required information to its own government; and, (ii) the relevant government to enter into an intergovernmental agreement with the US (an "IGA") to report this information annually to the IRS. The Cayman Islands Government has established a FATCA Task Force to evaluate the recently published US Treasury s Model 1 IGA to Improve Tax Compliance and to Implement FATCA and the soon to be released Model 2 IGA currently being developed with the US Treasury, Japan and Switzerland. Industry Representations The Securities Industry and Financial Markets Association ("SIFMA") provided detailed comments on the proposed FATCA regulations to the IRS and the US Treasury Department in April In particular, SIFMA suggested that: (i) the final regulations should contain a certified deemed-compliant FFI exemption for certain types of existing securitization vehicles (including CLO vehicles) and, importantly, new securitization vehicles; and, (ii) as IGAs will not be in effect by the time many of the FATCA provisions take effect, FFIs in countries where there is not an IGA in place, and the local laws prohibit the transmittal of personal information be deemed-compliant until such time as the US government reaches a solution with such countries. In cases where countries are in negotiations with the US to develop an IGA, FFIs should be deemed-compliant until sometime after either such IGA is adopted or the countries have concluded that they cannot agree to an IGA. MaplesFS MaplesFS, which provides administration services to a large portfolio of structured finance issuers and hedge funds, commenced an evaluation of the impact of FATCA on its business and clients in early 2011, reviewing systems and processes across all business units and client profiles to ensure the requirements of FATCA can be met. MaplesFS continue to

3 monitor announcements to ensure that both MaplesFS and its clients are well prepared. MaplesFS engaged an experienced team from Deloitte to assist with the ongoing assessment of FATCA and the implementation of changes to documentation, systems and processes in order to ensure compliance and assist clients in addressing their FATCA requirements. Clearly the final impact of FATCA on CLO and other structured finance issuers remains uncertain. However, Maples and Calder and MaplesFS will each continue to monitor the implementation of these regulations and to work with clients towards appropriate compliance solutions. PJB// v1

4 Stamp Duty and Share Charges No stamp duties or other similar taxes or charges are payable under the laws of the Cayman Islands in respect of the execution or delivery of transaction documents or the performance or enforcement of any such documents, unless they are executed in, or thereafter brought within the jurisdiction of the Cayman Islands (e.g. for the purposes of enforcement). Although we would ordinarily try to make arrangements to ensure that any relevant mortgage or charge is executed outside the Cayman Islands to avoid any unnecessary liability to stamp duty being incurred at that stage, there is always a possibility that a liability to stamp duty may occur at a later date, for the purpose of enforcement or otherwise. The Stamp Duty Law (2011 Revision) of the Cayman Islands (the "Law") sets out the rates at which stamp duty will be calculated. For example, a liability to stamp duty of CI$50.00 (US$60.97) will arise in the case of any power of attorney or other document executed by way of deed, and a stamp duty liability of CI$40.00 (US$48.78) will arise in relation to any declaration of trust. A liability to stamp duty will also arise in respect of the execution or enforcement of a legal or equitable mortgage or charge over any moveable property located within the Cayman Islands, including shares in a Cayman company (where the register of members is held in the Cayman Islands) and also limited partnership interests of a Cayman Exempted limited partnership, at the rate of up to 1.5% of the sum secured. However, the Law goes on to provide that the 1.5% stamp duty rate will be reduced to a cap of CI$ (US$609.76): "in the case of a legal or equitable mortgage or charge granted by an exempted company, an ordinary nonresident company (as defined in the Companies Law (2011 Revision)), an exempted trust (as defined in the Trusts Law (2011 Revision)) or a body corporate incorporated outside the [Cayman] Islands of moveable property situated in the Islands or over shares in such exempted company or ordinary nonresident company " It is a common requirement in aircraft financing transactions for the financiers to request that the shares of the Cayman Islands SPV are charged by the shareholder (normally the share trustee) by way of security for the obligations of the SPV. However, there is some ambiguity as to the circumstances in which a share charge would fall within the exception above; and thereby allow the applicable transaction parties to avail themselves of the CI$ cap. The drafting of the applicable section of the Law containing the exception referred to above is unclear. It could be read to mean that the cap will only apply where the share charge is granted by an exempted company, an ordinary nonresident company or an exempted trust and the relevant shares relate to an exempted or nonresident company. Alternatively, it could be read as applying to any mortgage or charge over shares in an exempted or non-resident company, regardless of the status of the owner of those shares. This is an important distinction. It is the parent company of the SPV (i.e. the share trustee), and not the SPV itself, which enters into the share charge. Although it would not make any significant difference in cases where the shares in the SPV were held by a parent company that was an exempted or non-resident company, there has been a concern that, where the shares are owned by a company that is resident in the Cayman Islands, but is not an exempted company, then the share charge would not be

5 eligible to fall under this exemption. This would be the case, for example, in those transactions where the shares in the SPV are held by a trust company such as MaplesFS Limited, which is located in the Cayman Islands. The question, then, is how would a Cayman Islands court interpret the relevant provisions of the Law? Where the intention of any legislation is unclear, the Cayman Islands courts will look to find a purposive construction of the relevant legislation, and "even in cases where there are obvious omissions, resulting in gaps in the express wording of the statute, the court is allowed to remedy the omission provided that the real legislative intention can be identified with an acceptable degree of certainty." 1 When the Law was discussed by the Legislative Assembly, it is clear that the reference to charges over shares in exempted companies was included as an improvement to the Law, and had not been covered in previous forms of the Law. This is clearly demonstrated by the relevant extract from the Hansard Report of the proceedings, as follows: "As noted in paragraph 2 of the Memorandum of Objects and Reasons, in addition to the reposition there are two other improvements made to the proviso. First, legal and equitable mortgages, or charges granted by an exempt trust have been added as a logical extension; and secondly, it is made clear that legal or equitable mortgages; or charges over shares in exempted companies; or ordinary non-resident companies are covered by the proviso". 2 (Emphasis added) The intention of this wording must have been to cover, for example, security granted by any entity over shares in the capital of an exempted company and not just security over shares granted by an exempted company. It is therefore our view that the ability to take advantage of the capped rate for mortgages and charges was intended to apply either to mortgages or charges granted by exempted or non-resident companies or to mortgages and charges over shares in an exempted or nonresident company. This means that any share charges executed by MaplesFS Limited in relation to shares held in exempted or nonresident Cayman Islands companies should be able to benefit from the CI$ stamp duty cap. 1 R v Tibbetts 2006 CILR 308 at 311 per Smellie C.J.. 2 The Official Hansard Report dated 19 September 2001, p PJB// v1