This post ends our series critiquing the proposed definition of “unfunded commitment agreement” in re-proposed Rule 18f-4. This definition is important because it would create an exception from the Value at Risk (VaR) limitations the proposed rule would impose on “derivatives transactions” by investment companies. This post will recap the problems with the proposed definition and the approach we would recommend for addressing these shortcomings. Read the full article on our sister blog Asset Management ADVocate.

In a previous post, we compared loan commitments, which re-proposed Rule 18f-4 would treat as “unfunded commitment agreements,” and “to be announced” (“TBA”) mortgage-backed securities (“MBS”) trades and put options, which Rule 18f-4 would treat as “derivative transactions,” to identify features that may be unique to loan commitments. Our last post showed how one feature, greater uncertainty as to the term of eventual loans as compared to the average life of the mortgages that underlie TBAs (in each case resulting from prepayments of the loans and mortgages, respectively), could prevent loan commitments from fluctuating in value. If the value of the commitment does not fluctuate substantially, the commitment cannot “present an opportunity for the fund to realize gains or losses between the date of the fund’s commitment and its subsequent investment” and thus will not have a leveraging effect on the fund. Read the full article on our sister blog Asset Management ADVocate.

This post continues our consideration of a carveout from the proposed Value at Risk (“VaR”) limitations of Rule 18f-4 for unfunded commitment agreements “because they do not present an opportunity for the fund to realize gains or losses between the date of the fund’s commitment and its subsequent investment ….” Our last post dealt with commitments to invest in a company’s equity. But the definition of “unfunded commitment agreement” would also include a contract “to make a loan to a company.”  Read the full article on our sister blog Asset Management ADVocate.

Having completed our detour into regulations and interpretations other than re-proposed Rule 18f-4, this post returns to considering possible justifications for carving out “unfunded commitment agreements” from the proposed Value at Risk limitations of Rule 18f-4. We have previously explained why the first two justification identified in the proposing release are ill-founded. Read the full article on our sister blog Asset Management ADVocate.

Not content with Steve’s detour into the relationship between Rule 2a-7 and re-proposed Rule 18f-4, we would also like to point out a set of rules under which the Securities and Exchange Commission (“SEC”) and the Commodity Futures Trading Commission (“CFTC”) have wrestled with the distinctions between “swaps, security-based swaps and security-based swap agreements” and non-derivative transactions. Release No. 33-9938 (the “Release”) not only adopted regulations distinguishing swaps from other types of derivatives instruments (such as securities forwards) and securities, but also included interpretive guidance for distinguishing swaps from consumer and commercial agreements, contracts, and transactions. Read the full article on our sister blog Asset Management ADVocate.

FINRA and the CFTC each issued recent advisories on commodity-linked exchange traded products. Directed at retail investors and broker-dealers, the advisories each highlighted certain issues unique to commodity-linked exchange traded products that were recently demonstrated by market reactions to fluctuating oil prices caused by the COVID-19 pandemic. The advisories provided guidance on relevant considerations in connection with oil-linked and commodity-linked exchange traded products. Read the full article here.

On May 28, 2020, commissioners of the U.S. Commodity Futures Trading Commission (CFTC) unanimously voted to approve:

(1) an interim final rule (IFR) that would defer the next phase of the compliance schedule for the initial margin (IM) requirements for uncleared swaps in response to operational challenges certain entities are facing due to the COVID-19 (coronavirus) pandemic; and

(2) a proposed rule (Proposed Rule) which, if finalized, would amend the CFTC Regulation 3.10 exemption from registration as a commodity pool operator (CPO) for certain foreign persons. Continue Reading CFTC Unanimously Approves Uncleared Margin Interim Final Rule and a Foreign CPO Exemption Amendments

3 Things About…

This is an inaugural post in an occasional series that will attempt to distill a select current event to its essence.

Consistent with the (arguably bland yet) very accurate name of our blog, the focus of this series will be on regulatory and transactional issues related to derivatives and repurchase agreements.  Our first topic is..

…The CFTC’s Proposed Amendments to Form CPO-PQR

Continue Reading 3 Things About…The CFTC’s Proposed Amendments to Form CPO-PQR

Re-Proposed Rule 18f-4: How Not to Distinguish Commitments from Derivatives is the second in a series of posts about the proposed treatment of so-called “unfunded commitment agreements” under re-proposed Rule 18f-4 under the Investment Company Act of 1940.

We thank our colleague Stephen A. Keen, who originally published this post at our sister blog, the Asset Management ADVocate.

Good day. Good to pause and think about commitments before we commit to a regulatory course of action! DR2