Hedge funds must hurry up with CFTC registration
The CFTC and SEC have now agreed that foreign currency options, commodity options, non-deliverable forwards in FX, cross-currency swaps, forward rate agreements, contracts for difference, options to enter into swaps and forwards swaps are now subject to the rules.
Hedge funds trading these swaps can no longer cite the “sophisticated investor exemption” to avoid registering with the CFTC following the repeal of Regulation 4.13(a)(4). Hedge funds which had historically relied on this exemption must register as commodity pool operators (CPOs) with the CFTC by December 31, 2012 and become National Futures Association (NFA) members in order to continue trading. CPOs or CTAs (commodity trading advisers) which execute an insignificant number of trades will still be exempted from CFTC registration under Regulation 4.13(a)(3).
“Firstly hedge funds must ascertain whether the rules apply to them and to what extent as some may be able to escape the requirements if they have de minimis trading activities. Managers have just 60 days from the date regulators publish the finalised rules to get compliant, which is going to be tight to say the least. Hedge funds need to get started now and do analysis as to whether they are ensnared by the rules. In particularly, those hedge funds relying on Rule 4.13(a)(3) need to determine whether the inclusion of swaps in the definition of commodity interest tips them over the de minimis limits,” said Greg Worsfold, consultant at Kinetic Partners.
“Managers must get the infrastructure and record keeping procedures in place. Funds must ensure their marketing material and offering documentation is CFTC-compliant. Staff must also become NFA members, which requires taking an examination and even being subjected to fingerprinting,” he added.
Once registered as a CPO with the CFTC, managers will be subjected to a number of CFTC and NFA disclosure, reporting and recordkeeping requirements. They will be expected to submit details on Assets under Management (AuM), leverage, counterparty exposures and trading positions, for example.
Aggregating all of this data will not be straightforward, said John Griffiths, member at Kinetic Partners and compliance expert. “Managers should not underestimate the work involved. They will have to aggregate this data from multiple feeds, often from their fund administrator. They will have to break the data down by performance and geographical sectors, among other criteria, as well,” he said.
CFTC registration has not generated as much noise as other regulatory initiatives of late. This has raised questions as to how prepared hedge funds are, particularly non-US managers– a point raised by a K&L Gates lawyer last week.
“There has certainly been a lot less noise around CFTC registration when the exemptions were repealed back in April 2012. I suspect this was because managers were in full swing fretting about Form ADV with the SEC. However, there has been a lot more comment of late and particularly this week following the CFTC’s announcement that it had properly defined what constituted a swap,” added Griffiths.