Industry Escapes Threat of CFTC Oversight

It looks like the Commodity Futures Trading Commission will give securitization professionals everything they were hoping for in the way of regulatory relief.

In what amounts to a major victory for the sector, the CFTC has signaled that it will declare virtually all types of securitizations exempt a Dodd-Frank Act mandate that would have exposed issuers to regulation as commodity-pool operators.

After industry leaders rang an alarm in September, the futures regulator agreed on Oct. 12 to a temporary exemption covering a range of asset-backed securities and mortgage bonds, while hinting that permanent relief would follow later in the year. But questions remained about the fates of certain types of structured products, including asset-backed commercial paper and collateralized loan obligations.

A so-called interpretive relief letter the CFTC plans to issue next week not only makes the Oct. 12 order permanent, but adds conduit paper, CLOs and most other asset-backed instruments to the list of securitizations exempt from regulation as commodity pools. The edict also covers all previously issued transactions.

“The light finally went on over there,” one securitization lawyer said. “We’ve been saying, ‘Do you realize the havoc you are wreaking?’ ”

Still to be determined is whether issuers of certain synthetic structured products and insurance-linked securities such as catastrophe bonds will have to register with the CFTC — an obligation that entails a slew of disclosure requirements. For now, the commission plans to issue a “no-action” letter granting those issuers a three-month extension from the current Jan. 1 registration deadline pending a final decision.

But even there, compliance experts see signs that the regulator may be inclined to yield. “The CFTC could have just said no, but they didn’t, which means they are considering the exemption and want to hear more,” another attorney said.

The CFTC’s decision follows several months of intense lobbying by the American Securitization Forum, which didn’t fully realize until September that issuers faced an October deadline to comply. Under the Dodd-Frank rule, adopted by the CFTC in July, all vehicles that hold non-security-based swaps are subject to regulation as commodity pools — potentially including asset-backed bond deals that encompass currency and interest-rate swaps.

“This was a pretty big priority for the securitization industry,” another lawyer said. “In the end, the CFTC heard from enough people and understood they really shouldn’t have a role in regulating securitized products.”

The decision also has implications for investors, including hedge funds. Industry groups including the Managed Funds Association and Sifma wrote to the CFTC on Nov. 30 expressing concern that investors’ exposures to swaps embedded in structured products could force them, too, to register as commodity pool operators. But now that the securitizations themselves will be exempt, buyside players can breathe a sigh of relief.

“Once the product is exempt, then it doesn’t matter,” one source said. “The relief will focus on the securitization vehicle not being a commodity pool.”

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