Extension to CFTC registration deadline highly likely for funds of funds
Funds of funds are likely to be given an extension to CFTC registration amid concerns that many organisations are still struggling to identify whether they can claim the Regulation 4.13(a)(3) exemption.
Regulators have been criticised for not communicating properly with market participants about the rules, which are due to be implemented from December 31, 2012.
“The CFTC has not been very open about explaining its plans. Industry associations such as the Managed Funds Association and market participants have urged regulators to delay the rules for funds of funds for another six months beyond the deadline. The CFTC has hinted this could be a possibility and I predict there will be confirmation of such in the next few weeks. However, this extension will only apply to funds of funds and not single managers,” said George Mazin, partner at Dechert in New York.
The CFTC published FAQs in August 2012 while Regulation 4.13(a)(3)’s Appendix A outlines the methods in which funds of funds can use to claim the de minimis trading exemption. While this may have helped clarify some confusion, complexities still remain. Appendix A in its existing form does not work well following the addition of swaps to the CFTC’s remit although the CFTC is making amendments. Mazin said the CFTC had planned to release an updated version of Appendix A earlier this year but it is unlikely to be published until Q1 2013.
The biggest challenge for funds of funds is aggregating data on whether their underlying hedge fund managers meet the de minimis trading requirements. Not only is this a lot of work, but there are concerns that funds of funds might struggle to obtain data from managers which have claimed CFTC Rule 4.7 or “registration lite.” Registered Commodity Pool Operators (CPOs) and CTAs claiming Rule 4.7 are excused from certain disclosure, recordkeeping and reporting requirements providing all of their clients are “qualified eligible persons.”
“These managers, while required to register, will not be subject to limits on swaps trading nor will they be able to claim the Regulation 4.13(a) (3) exemption. Obtaining information from these managers might be a challenge for funds of funds,” said Mazin.
This could mean some unsuspecting funds of funds will be required to register if their underlying managers claiming CFTC Rule 4.7 do not meet the de minimis requirements. It could also result in funds of funds parting ways with these managers to save them the hassle of registering.
The rules apply to hedge funds trading interest rate swaps, OTC foreign currency options, commodity options, non-deliverable forwards in FX, cross-currency swaps, forward rate agreements, contracts for difference and total return swaps on underlying commodity interests, options to enter into swaps and forwards swaps.