CFTC Votes To Codify CPO/CTA Registration Relief at Open Meeting

In its November 25, 2019 Open Meeting, U.S. Commodity Futures Trading Commission (“CFTC”) commissioners voted to approve final rules amending Part 4 of the CFTC rules addressing registration and compliance requirements for commodity pool operators (“CPOs”) and commodity trading advisors (“CTAs”). The CFTC proposed amendments to Part 4 in October 2018. The final rule will be effective thirty days after publication in the Federal Register.

This post summarizes select key amendments in the rule and what action must be taken by firms intending to take advantage of the new amendments, if any.

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Mutual Fund Corner: Treatment of Leveraged/Inverse Funds

We are still digesting the SEC’s reproposal for regulating how mutual funds, ETFs, closed-end funds and BDCs (“funds”) may use derivatives in compliance with Section 18 of the Investment Company Act of 1940 (proposed Rule 18f-4), but one surprising aspect is proposed Rule 15l-2 under the Securities Exchange Act of 1934. As explained more fully below, Rule 15l-2 would increase the due diligence required before a broker/dealer permits a customer to trade in “leveraged/inverse investment vehicles.” Including this rule in the proposal required the cooperation of both the Trading and Markets and Investment Management Divisions of the SEC. There is even a parallel rule proposed for investment advisers (proposed Rule 211h‑1). This shows that the SEC is taking a more comprehensive view of the SEC’s authority over the use of leverage in securities trading.

Although we find this non-compartmentalized approach heartening, we think that more could be done to fully deploy the SEC’s powers in this area. We even dare to suggest that, having avoided silos within itself, the SEC might try to work with the Fed to better rationalize regulation of leverage in the financial system. Read the full post on our sister blog Asset Management ADVocate.

FINRA Rule 4210 Update: FINRA Proposes To Delay TBA Margining (Again) Until March 25, 2021

FINRA has recently submitted a filing with the Securities and Exchange Commission (“SEC”) to propose another delay to the implementation of TBA margin requirements under Rule 4210. The new implementation date would be March 25, 2021.

FINRA has requested that the deferred implementation date becomes effective immediately upon filing of the rule change by FINRA with the SEC.   Continue Reading

Limited Recourse Provisions in Futures Customer Agreements: Part 2 – I Cannot Guarantee Your Client’s Losses

This post is Part 2 of a series of posts that addresses the impact of recent regulatory developments on the use of limited recourse provisions in futures customer agreements entered into between a futures commission merchant (an “FCM”) and an investment manager on behalf of one or more of the manager’s clients.

In this post, we provide an overview of recent regulatory pronouncements from two divisions of the Commodity Futures Trading Commission (the “CFTC”) and the Joint Audit Committee (the“JAC”) of several large futures exchanges and the National Futures Association that prohibit the use of limited recourse provisions in futures customer agreements. Continue Reading

Limited Recourse Provisions in Futures Customer Agreements: Part 1 – I Only Control My AUM

Historically, many investment managers have negotiated limited recourse provisions into derivatives trading agreements entered into by the managers on behalf of their clients with banks, broker-dealers, and futures commission merchants (FCMs).  In short, these provisions state that only the assets in the specified account under the control of that particular manager can be used to make the other party to the agreement whole for losses and costs that relate to the specified account.

However, recent regulatory pronouncements from two divisions of the Commodity Futures Trading Commission (the “CFTC”) and the Joint Audit Committee (the “JAC”) of several large futures exchanges and the National Futures Association prohibit the use of limited recourse provisions in futures customer agreements.  This blog post is Part 1 of a series of posts that will address the impact of these recent regulatory developments on investment managers.

We start with the basics – investment management relationships and the use of limited recourse provisions in derivatives trading documents.  Additional posts in this series will address the regulatory pronouncements and how those pronouncements may impact relationships that investment managers have with their clients and the FCMs through which the managers are trading on behalf of their clients. Continue Reading

Repo Rates Steady Last Week Thanks to Fed Liquidity

Repo rates were steadier last week, as compared to the wild swings of the prior week,  as the Secured Overnight Financing Rate (SOFR)—a broad measure of the overnight Treasury repo market—fluctuated between 1.82% and 2.01%. The week started with the SOFR rate at 1.85% on Monday, it then increased a bit on Tuesday and Wednesday to 1.96% and 2.01% respectively before falling back to 1.85% on Thursday and to 1.82% on Friday. Continue Reading

Wild Week for Repo Rates

Last week saw a wild ride for repo rates as the Secured Overnight Financing Rate (SOFR)—a broad measure of the overnight Treasury repo market—fluctuated between 1.95% and 5.25%. The week started with the SOFR rate moving higher to a range of 2.43-4.60% on Monday which was a significantly higher range from the prior Friday (2.16-2.40%). Then on Tuesday SOFR spiked to 5.25% with a print in the 99% percent of the range of trades at 9.00%. The rate stabilized a bit on Wednesday falling to a range of 2.10-5.00% with a rate of 2.55%. Then following the Fed Reserves announcement on Wednesday of a 0.25% rate cut to the Fed Funds Rate, SOFR fell to 1.95% on Thursday and to 1.86% on Friday. Continue Reading

U.S. and UK Regulators Make Joint Commitment to Combat “Manufactured Credit Events” in CDS Market

On Monday, June 24, 2019, U.S. Securities and Exchange Commission Chairman Jay Clayton, U.S. Commodity Futures Trading Commission (“CFTC”) Chairman J. Christopher Giancarlo, and U.K. Financial Conduct Authority Chief Executive Andrew Bailey issued a joint statement (“Joint Statement”) regarding collaboration to monitor the credit derivatives markets.  The Joint Statement states, in part, that:

The continued pursuit of various opportunistic strategies in the credit derivatives markets, including but not limited to those that have been referred to as “manufactured credit events,” may adversely affect the integrity, confidence and reputation of the credit derivatives markets, as well as markets more generally.  These opportunistic strategies raise various issues under securities, derivatives, conduct and antifraud laws, as well as public policy concerns.

The Joint Statement also notes that the agencies’ collaborative efforts would not preclude any of the agencies from taking independent actions under their respective authority. Continue Reading

OCIE Issues Risk Alert on Data and Cloud Storage Practices

On May 23, 2019, the Office of Compliance Inspections and Examinations (“OCIE”) of the U.S. Securities and Exchange Commission (“SEC”) issued a Risk Alert to summarize frequent mistakes and effective practices by broker-dealers and investment advisers relating to the storage of clients’ data. In particular, OCIE warned that issues relating to cloud storage arose even when firms had cybersecurity measures for their data storage because firms did not utilize the available security features. Continue Reading

CFTC Begins Implementing Swap Data Roadmap; Proposes Additional Reporting Requirements

On April 25, 2019, the U.S. Commodity Futures Trading Commission (“CFTC”) announced its approval of a proposed rule and request for comment (“Proposed Rule”) that, if finalized, would amend swap data repository (“SDR”) regulations. The Proposed Rule also proposes to amend existing SDR reporting requirements for market participants. In sum, if adopted, the Proposed Rule will require market participants who are subject to reporting obligations under Part 45 of the CFTC Rules (“reporting counterparties”) to:

  • verify the accuracy of swap data against swaps reports generated and provided by the SDR; and
  • correct swap data errors and omissions “as soon as technologically practicable . . . but no later than three business days following” discovery of the error or omission.

Similarly, any non-reporting counterparty that discovers an error or omission would have to lodge a report with the reporting counterparty as soon as technologically practicable but within three business days after discovering the error or omission.

The comment period for the Proposed Rule ends on July 29, 2019. The remainder of this post provides additional information about the Proposed Rule and potential implications for market participants.

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