The Commodities Future Trading Commission (CFTC) has adopted a final rule that makes several amendments to Regulation 4.5, which relates to commodity pool operators. The amendments add new limitations to an exclusion from the definition of a commodity pool operator (CPO) upon which registered investment companies have commonly relied. Currently, the rule excludes from the CPO definition entities that operate under other regulatory regimes, such as registered investment companies, banks, certain pension funds and insurance companies.
The amended regulations now impose two restrictions on registered investment companies that seek to use this exclusion. The first restriction is a trading threshold which would require an adviser to a registered investment company to either certify in a notice of eligibility filed with the NFT that it uses commodity futures, options or swaps only for “bona fide hedging purposes,” or, alternatively, that it meets one of the following two tests:
- Five percent test: In relation to positions in commodity futures, commodity option contracts or swaps, the aggregate initial margin and premiums required to establish those positions will not exceed five percent of the liquidation value of its portfolio, after taking into account unrealized profits and unrealized losses; or
- Net notional value test: the aggregate net notional value of commodity futures, commodity option contracts or swap position not solely used for “bona fide hedging purposes,” determined at the time the most recent position was established, does not exceed 100 percent of the liquidation value of the registered investment company’s portfolio, after taking into account unrealized profits and unrealized losses. The net notional value is calculated as described in CFTC Regulation 4.13(a)(ii)(B)(1) and 4.13(a)(ii)(B)(2).