CFTC Issues No-Action Relief Regarding Exemption of Production Payment Vehicles from CPO Regulation (CFTC Letter 14-96) (with Lofchie Comment)

The CFTC issued no-action relief to an entity and its affiliates for their roles as CPOs and/or CTAs of "volumetric product payment vehicles."

According to the letter, these "vehicles" issued debt or debt-like instruments and used swaps to hedge commodity market risk and interest rate exposure. According to the CFTC, because of the inclusion of swaps as a commodity interest within the definition of a commodity pool under CEA Section 1a(10), such vehicles may be classified as commodity pools; however, their operators and advisors are not required to register given the limited purpose for which the vehicles use swaps (exclusively for hedging) and the fact that the vehicles do not trade once the initial swap positions are established.

The letter provides relief from CEA Section 4m(1), subject to seven conditions listed in the letter that relate primarily to limits on the use of swaps, but also include the requirement that the vehicles establish "reasonable risk management policies."

Lofchie Comment: The requirement that the vehicle establish a reasonable risk management policy is annoying because it is meaningless and because the only purpose seems to be to enable the regulator to second-guess a market participant. The vehicles in question are described in the letter as "passive, non-operating" entities, but what is reasonable risk management for an entity that does nothing? While the requirement may seem to have no meaning and, thus, do no harm, it is indicative of a regulatory mind-set to impose conditions on regulated entities that are inherently ambiguous, so that the regulator can maintain that it has the ability to claim that a regulatory condition was violated. Who is to say what is "reasonable," except to say that, if anything goes wrong, then the regulator can claim that the action was not reasonable?

See: CFTC Letter 14-96.