Articles By Topic
By Topic: Commodities
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From Vol. 5 No.19 (May 10, 2012)
Do You Need to Be a Registered Commodity Pool Operator Now and What Does It Mean If You Do? (Part Two of Two)
On February 9, 2012, the Commodity Futures Trading Commission (CFTC) amended the CFTC Rules to rescind an exemption from commodity pool operator (CPO) registration heavily relied upon by hedge fund managers. This development, in combination with statutory changes to the Commodity Exchange Act enacted by the Dodd-Frank Wall Street Reform and Consumer Protection Act, will require many hedge fund managers to register as CPOs. This article is the second part of a two-part series by Stephen A. McShea, General Counsel and Chief Compliance Officer of Larch Lane Advisors LLC, providing an overview of the current regulatory landscape of CFTC regulations impacting CPOs. Part one of this series focused on the managers of private funds and their CPO registration and compliance obligations. In particular, part one discussed: the regulatory framework governing commodity pools and CPOs and the remaining exemption from CPO registration for managers who operate or control a private fund; the compliance obligations of a registered CPO; and the enforcement mechanisms and penalties for non-compliance. See “Do You Need to Be a Registered Commodity Pool Operator Now and What Does It Mean If You Do? (Part One of Two),” The Hedge Fund Law Report, Vol. 5, No. 8 (Feb. 23, 2012). This part two focuses on the funds (i.e., commodity pools) operated or controlled by registered CPOs. Specifically, this article discusses: general fund disclosure and reporting obligations applicable to CPOs; the exemptions from certain of those disclosure and reporting obligations available under CFTC Rules 4.7 and 4.12; and the reporting obligations applicable to funds operating under those exemptions.
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From Vol. 5 No.18 (May 3, 2012)
How Do New Commodities Regulations Impact Hedge Fund Managers with Respect to Registration, Marketing, Trading, Audits and Drafting of Governing Documents?
On February 9, 2012, the U.S. Commodity Futures Trading Commission (CFTC) rescinded an exemption from commodity pool operator (CPO) registration found in CFTC Rule 4.13(a)(4) that was previously heavily relied upon by many hedge fund managers. The rescission of that exemption also narrowed the availability of an exemption from commodity trading adviser (CTA) registration found in CFTC Rule 4.14(a)(8) which was also relied upon heavily by many hedge fund managers. As such, many hedge fund managers will need to register as CPOs or CTAs with the CFTC, become members of the National Futures Association (NFA) and become subject to CFTC and NFA regulations. See “Do You Need to Be a Registered Commodity Pool Operator Now and What Does It Mean If You Do? (Part One of Two),” The Hedge Fund Law Report, Vol. 5, No. 8 (Feb. 23, 2012). Bearing this in mind, law firm Kleinberg, Kaplan, Wolff & Cohen, P.C. (KKWC) and hedge fund administrator CACEIS jointly hosted a webinar (Webinar) on April 19, 2012 to outline changes in the regulatory regime for CPOs and CTAs. During the Webinar, Martin D. Sklar, a Member of KKWC, and Darren J. Edelstein, an Associate at KKWC, shared their expertise on numerous topics, including a discussion of the remaining exemptions from CPO and CTA registration for hedge fund managers; the steps taken to register a CPO or a CTA and its respective principals and associated persons; the various CFTC and NFA regulations impacting CPOs and CTAs; and the reporting requirements applicable to registered CPOs and CTAs, including completion and filing of Form CPO-PQR and CTA-PR. The Hedge Fund Law Report interviewed Sklar and Edelstein following the Webinar to conduct a deeper dive into some of the topics discussed during the Webinar, including a discussion of: the Rule 4.13(a)(3) de minimis exemption; which hedge fund management entities should register as CPOs and CTAs; what marketing, trading and other regulations affect registered CPOs and CTAs; whether and to what extent registered CPOs and CTAs are subject to CFTC and NFA audit; whether hedge fund managers must add additional disclosures or change their subscription documents to allow them to comply with CFTC and NFA regulations; and the biggest challenges hedge fund managers face with respect to registering as a CPO or CTA and becoming subject to CFTC and NFA regulations.
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From Vol. 5 No.17 (Apr. 26, 2012)
Recent CFTC Settlement Highlights Regulatory Focus on Manipulation of Commodity Futures and High Frequency Trading
On April 19, 2012, Chief Judge Loretta Preska of the U.S. District Court for the Southern District of New York approved a consent order detailing a settlement entered into among the U.S. Commodity Futures Trading Commission (CFTC), high frequency global proprietary trading firm Optiver Holding BV, two of its subsidiaries (collectively, Optiver) and three individual principals. The settling parties were accused of manipulating the market for light sweet crude oil, New York harbor heating oil and New York harbor gasoline futures contracts. This settlement demonstrates a renewed government emphasis on stamping out market manipulation in these markets. While Optiver is a proprietary trading firm that utilizes high frequency algorithmic trading, as opposed to a hedge fund manager, the legal points raised by the action apply with equal force to hedge fund managers that trade commodity futures or that employ high frequency strategies. For a discussion of a CFTC action brought against a hedge fund trader, see “Recent CFTC Settlement with Former Moore Capital Trader Illustrates a Number of Best Compliance Practices for Hedge Fund Managers that Trade Commodity Futures Contracts,” The Hedge Fund Law Report, Vol. 4, No. 30 (Sep. 1, 2011). This article describes the complaint initially brought by the CFTC in 2008, the terms of the settlement and the stiff sanctions imposed on the defendants, including disgorgement, civil monetary penalties, trading restrictions imposed on Optiver and statutory bars imposed on each of the individual defendants.
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From Vol. 5 No.9 (Mar. 1, 2012)
National Futures Association COO Dan Driscoll Discusses Registration, Reporting and Related Challenges Facing Hedge Fund Managers with Strategies Involving Commodities or Derivatives
Hedge fund managers with strategies that involve commodities or derivatives are facing complicated new registration and reporting requirements. On the registration side, on February 9, 2012, the Commodity Futures Trading Commission (CFTC) adopted final rules that rescinded the CFTC Rule 4.13(a)(4) exemption from commodity pool operator (CPO) registration that has been heavily relied upon by many hedge fund managers and their affiliates. See “CFTC Adopts Final Rules That Are Likely to Require Many Hedge Fund Managers to Register as Commodity Pool Operators,” The Hedge Fund Law Report, Vol. 5, No. 7 (Feb. 16, 2012). As a result, many hedge fund managers will either have to qualify for another exemption from CPO registration (most likely the Rule 4.13(a)(3) exemption for de minimis commodity interest trading activity), or register as a CPO. See “Do You Need to Be a Registered Commodity Pool Operator Now and What Does It Mean If You Do? (Part One of Two),” The Hedge Fund Law Report, Vol. 5, No. 8 (Feb. 23, 2012). On the reporting side, with the adoption of new CFTC Rule 4.27(d), CPOs that manage private funds and that are dually registered with the SEC as investment advisers and with the CFTC as CPOs will need to complete Form PF, which requires detailed information about the private funds managed by the adviser/CPO. See “Form PF: Operational Challenges and Strategic, Regulatory and Investor-Related Implications for Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 5, No. 4 (Jan. 26, 2012). With these registration, reporting and related challenges in mind, a session at the Regulatory Compliance Association’s Spring 2012 Regulation & Risk Thought Leadership Symposium will identify and address critical issues and pitfalls with respect to Form PF. That Symposium will be held on April 16, 2012 at the Pierre Hotel in New York. For more information, click here. To register, click here. (Subscribers to The Hedge Fund Law Report are eligible for discounted registration.) One of the anticipated speaking faculty members for the Form PF session at the RCA Symposium is Dan Driscoll, the Chief Operating Officer of the National Futures Association (NFA). We recently interviewed Driscoll, who spoke with The Hedge Fund Law Report about Form PF and other issues related to CFTC and NFA regulation of hedge fund managers. Specifically, our interview covered topics including: interpretational and operational issues related to qualification for the Rule 4.13(a)(3) de minimis exemption from CPO registration; the applicability of the relief granted under Rule 4.7 to hedge fund managers; the NFA examination and enforcement paradigm, including questions about how registrants are targeted for examination, what are the focus areas for NFA audits and how audits can lead to NFA enforcement activity; prospective NFA regulation of swap dealers and major swap participants; and Form PF, including issues related to the use of Form PF data for NFA enforcement activity, interpretation and confidentiality.
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From Vol. 5 No.8 (Feb. 23, 2012)
Do You Need to Be a Registered Commodity Pool Operator Now and What Does It Mean If You Do? (Part One of Two)
In light of recent CFTC rule amendments repealing the exemption from CPO registration most commonly relied upon by managers of private funds (Rule 4.13(a)(4)), now, more than ever before, it is critical for managers who operate or control private funds to understand: (1) if they must become a registered CPO; and (2) what it means for the operation of their firms and their funds if they do. See “CFTC Adopts Final Rules That Are Likely to Require Many Hedge Fund Managers to Register as Commodity Pool Operators,” The Hedge Fund Law Report, Vol. 5, No. 7 (Feb. 16, 2012). In this article – the first of a two-part series – Stephen A. McShea, General Counsel and Chief Compliance Officer of Larch Lane Advisors LLC, provides an overview of the current regulatory landscape of Commodity Futures Trading Commission (CFTC) regulation of commodity pool operators (CPOs). Specifically, McShea discusses: the regulatory framework governing commodity pools and CPOs, and the remaining exemption from CPO registration for managers who operate or control a private fund; the compliance obligations of a registered CPO; and the enforcement mechanisms and penalties for non-compliance. This article also provides a quick-reference compliance checklist for registered CPOs. Part two of this series will discuss exemptions available to the funds (i.e., commodity pools) operated by registered CPOs that provide relief from some of the disclosure and periodic reporting obligations to which the funds would otherwise be subject. For additional insight from McShea, see “What Do Hedge Fund Managers Need to Know to Prepare For, Handle and Survive SEC Examinations? (Part Two of Three),” The Hedge Fund Law Report, Vol. 4, No. 5 (Feb. 10, 2011).
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From Vol. 5 No.7 (Feb. 16, 2012)
CFTC Adopts Final Rules That Are Likely to Require Many Hedge Fund Managers to Register as Commodity Pool Operators
On February 9, 2012, the Commodity Futures Trading Commission (CFTC) adopted final rules (Final Rules) amending Part 4 of its regulations promulgated under the Commodity Exchange Act governing commodity pool operators (CPOs) and commodity trading advisers (CTAs). Notably for hedge funds, the Final Rules, among other things, rescind the exemption from CPO registration contained in Rule 4.13(a)(4), which is relied on substantially in the hedge fund industry. Notably for hedge funds, the Final Rules differ from the rule amendments proposed by the CFTC (Proposed Rules) on January 26, 2011, in that the Final Rules do not rescind the exemption from CPO registration under Rule 4.13(a)(3) for hedge funds that conduct a de minimis amount of trading in futures, commodity options and other commodity interests. For an in-depth discussion of the Proposed Rules, see “CFTC Proposes New Reporting and Compliance Obligations for Commodity Pool Operators and Commodity Trading Advisers and Jointly Proposes with the SEC Reporting Requirements for Dually-Registered CPO and CTA Investment Advisers to Private Funds,” The Hedge Fund Law Report, Vol. 4, No. 5 (Feb. 10, 2011). As a result, unless an exemption is otherwise available, the Final Rules will require a CPO to register with the National Futures Association if the managed commodity pool (i.e., hedge fund) conducts more than a de minimis amount of speculative trading in futures, commodity options and other commodity interests; and CPO registration imposes significant obligations on registrants. This article provides a detailed summary of the CFTC’s Final Rules and highlights relevant changes from the Proposed Rules. The article focuses on the provisions of the Final Rules with most direct application to hedge fund managers following commodities-focused investment strategies.
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From Vol. 4 No.45 (Dec. 15, 2011)
CFTC Position Limit Rules Challenged in Lawsuit by ISDA and SIFMA
On Friday, December 2, 2011, the International Swaps and Derivatives Association (ISDA) and the Securities Industry and Financial Markets Association (SIFMA) jointly filed a complaint in the U.S. District Court for the District of Columbia against the Commodity Futures Trading Commission (CFTC). Their complaint challenges the final rules adopted by the CFTC at its October 18, 2011 meeting establishing speculative position limits on 28 commodity futures, option contracts and economically equivalent commodity swaps (the Position Limit Rules). This article summarizes the Position Limit Rules and the lawsuit challenging them. For hedge fund managers that trade covered commodities or derivatives based on them, the Position Limit Rules and the lawsuit can directly affect trading volumes and strategies. See also “Recent CFTC Settlement with Former Moore Capital Trader Illustrates a Number of Best Compliance Practices for Hedge Fund Managers that Trade Commodity Futures Contracts,” The Hedge Fund Law Report, Vol. 4, No. 30 (Sep. 1, 2011).
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From Vol. 4 No.30 (Sep. 1, 2011)
Recent CFTC Settlement with Former Moore Capital Trader Illustrates a Number of Best Compliance Practices for Hedge Fund Managers that Trade Commodity Futures Contracts
The Commodity Futures Trading Commission (CFTC) recently entered an order (Order) settling charges that former Moore Capital trader Christopher Louis Pia attempted to manipulate the settlement prices of palladium and platinum futures contracts by “banging the close.” Specifically, the CFTC alleged that Pia caused market-on-close (MOC) buy orders to be entered in the last ten seconds of the closing periods for both types of contracts in an effort to exert upward pressure on the settlement prices for the contracts. The Order has attracted considerable attention for various reasons, including the prominence of Moore Capital, the obscure allure of the metals at issue and the Wall Street Journal’s report that Pia “tooled around town in an orange Lamborghini.” But less attention has been paid to the more important implications of the Order for the hedge fund industry. Those implications fall into two general categories, one of which focuses on best compliance practices for hedge fund managers that trade commodity futures contracts. This article discusses the factual allegations and legal analysis in the Order, then outlines some of the more noteworthy implications of the Order for hedge fund managers focused on commodities. See also “CFTC and SEC Propose Rules to Further Define the Term ‘Eligible Contract Participant’: Why Should Commodity Pool and Hedge Fund Managers Care?,” The Hedge Fund Law Report, Vol. 4, No. 21 (Jun. 23, 2011).
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From Vol. 4 No.26 (Aug. 4, 2011)
SEC Order against Pegasus Investment Management Suggests That a Hedge Fund Manager Cannot Keep the Proceeds of an Undisclosed “Rental” of Its Trading Volume
A recent SEC order instituting administrative and cease-and-desist proceedings against a small hedge fund manager confirms the principle that hedge fund investors – not managers – own the assets in funds and any assets generated with those assets, subject to specific exceptions. The matter also addresses, albeit indirectly and inconclusively, the question of whether hedge funds may agree by contract to permit conduct by the manager that, absent such agreement, would constitute fraud or a breach of fiduciary duty.
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From Vol. 4 No.21 (Jun. 23, 2011)
CFTC and SEC Propose Rules to Further Define the Term “Eligible Contract Participant”: Why Should Commodity Pool and Hedge Fund Managers Care?
On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act” or “Dodd-Frank”) into law. Section 721(c) of Title VII of the Dodd-Frank Act made certain changes to the definition of the term “eligible contract participant” (“ECP”). Subsequently, as part of their efforts to implement Dodd-Frank, the Commodity Futures Trading Commission (the “CFTC”) and the Securities and Exchange Commission (the “SEC” and, together with the CFTC, the “Commissions”) proposed rules to further refine the definition of ECP under the Commodity Exchange Act (“CEA”) (the “Proposed Rules”). Unless the Commissions withdraw or revise the Proposed Rules before they become effective, the definitional change will negatively affect many commodity pools that engage in over-the-counter (“OTC”) foreign currency (“FX”) transactions. In a guest article, Steven M. Felsenthal, General Counsel and Chief Compliance Officer of Millburn Ridgefield Corporation, The Millburn Corporation and Millburn International, LLC, and Stephanie T. Green, a legal and compliance intern at The Millburn Corporation: (1) introduce the Proposed Rules as applied to commodity pools engaged in OTC FX transactions; (2) highlight the adverse result of the Proposed Rules; and (3) discuss revisions or alternatives to the Proposed Rules that could help to avoid such adverse results. While the focus of this article is the adverse results on commodity pools, the same adverse results would apply to any pooled investment vehicle that seeks to trade OTC FX forward contracts, including hedge funds that trade such instruments, because they would likely fall within the definition of commodity pool under Dodd-Frank.
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From Vol. 4 No.15 (May 6, 2011)
Federal Energy Regulatory Commission Upholds Administrative Law Judge Ruling that Imposes $30 Million Penalty on Former Amaranth Trader Brian Hunter for Natural Gas Market Manipulation During 2006
Defendant Brian Hunter (Hunter) was an executive and head natural gas trader at hedge fund manager Amaranth Advisors, LLC (Amaranth). The Federal Energy Regulatory Commission (FERC), which has jurisdiction over interstate sales of natural gas and electricity, has upheld in all respects the findings of a FERC administrative law judge who found Hunter guilty of manipulation of the natural gas market and imposed a $30 million penalty on him. At the end of February, March and April 2006, Hunter sold large volumes of natural gas futures contracts on their expiration dates in order to drive down the settlement prices of those contracts. Gas futures contracts trade on the New York Mercantile Exchange (NYMEX). FERC argued that, unbeknownst to traders on the NYMEX, Hunter had amassed short positions in natural gas swap agreements that referenced the settlement prices of the gas futures contracts. Consequently, he stood to profit from the drop in the settlement price of gas futures contracts that occurred when Amaranth dumped those contracts on their expiration dates. Amaranth collapsed in late 2006, in large part because of the bets it had made on the natural gas market. FERC determined that Hunter’s trading was intended to manipulate the price of natural gas futures contracts, was done knowingly and had an effect on the market for natural gas. FERC bills this case as the “first fully litigated proceeding involving FERC’s enhanced enforcement authority under section 4A of the Natural Gas Act, which prohibits manipulation in connection with transactions subject to FERC jurisdiction.” The trading at issue occurred only in the futures market, rather than in the physical gas market. We summarize FERC’s decision. See also “Federal District Court Dismisses Lawsuit Brought by San Diego County Employees Retirement Association against Hedge Fund Manager Amaranth Advisors and Related Parties for Securities Fraud, Gross Negligence and Breach of Fiduciary Duty,” The Hedge Fund Law Report, Vol. 3, No. 12 (Mar. 25, 2010).
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From Vol. 4 No.5 (Feb. 10, 2011)
CFTC Proposes New Reporting and Compliance Obligations for Commodity Pool Operators and Commodity Trading Advisers and Jointly Proposes with the SEC Reporting Requirements for Dually-Registered CPO and CTA Investment Advisers to Private Funds
On January 26, 2011, the U.S. Commodity Futures Trading Commission (CFTC) proposed amendments to Part 4 of its regulations promulgated under the Commodity Exchange Act (CEA) governing Commodity Pool Operators (CPOs) and Commodity Trading Advisers (CTAs). The CFTC announced a joint effort with the U.S. Securities and Exchange Commission (SEC) proposing the adoption of a new rule on reporting for investment advisers required to register with the SEC that advise one or more private funds and that are also CPOs or CTAs required to register with the CFTC (dual registrants). This joint endeavor, mandated by Section 406 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), would obligate dual registrants to file newly-created Form PF with the SEC in order to satisfy both Commissions’ filing requirements. In an effort to harmonize its rules with this regulatory scheme, the CFTC separately announced a proposed amendment requiring all registered CPOs and CTAs to electronically file newly-created Forms CPO-PQR and CTA-PR with the National Futures Association (NFA) pursuant to § 4.27 of the CFTC regulations, forms substantively identical to Form PF. The CFTC has also proposed further changes to its regulations that it deemed necessary in the wake of recent economic turmoil and the new regulatory environment engendered by the Dodd-Frank Act. These proposed amendments would: (1) rescind the exemption from registration for CPOs provided in §§ 4.13(a)(3) and (a)(4) of its regulations; (2) revise § 4.7 so that CPOs may no longer claim an exemption from certifying certain annual reports; (3) incorporate the definition of “accredited investor” promulgated by the SEC in Regulation D into § 4.7; (4) reinstate the criteria for claiming an exclusion from the definition of CPO provided in § 4.5; (5) require any CPO or CTA seeking exemptive relief pursuant to §§ 4.5, 4.13 and 4.14 to annually renew their request with the NFA; and (6) require an additional risk disclosure statement under §§ 4.24 and 4.34 for any CPO or CTA engaged in swap transaction. The CFTC intends to promulgate these new rules in an effort to provide effective oversight of the commodity futures and derivatives markets and to manage the risks, especially systemic risks, posed by any pooled investment vehicles under its jurisdiction. This article provides a detailed summary of the CFTC’s proposed amendments.
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From Vol. 3 No.48 (Dec. 10, 2010)
Peak Ridge Hedge Fund Alleges that Morgan Stanley Breached its Prime Brokerage Agreement with the Fund by, Among Other Things, Tripling Margin Requirements over Ten Months
On November 8, 2010, Morgan Stanley & Co. Incorporated (Morgan Stanley) filed suit against commodities hedge fund Peak Ridge Master SPC LTD, claiming $40.6 million in damages resulting from losses stemming from bad bets on natural gas. See “Morgan Stanley Sues Commodities Hedge Fund Peak Ridge for Alleged Failure to Satisfy Margin Calls,” The Hedge Fund Law Report, Vol. 3, No. 45 (Nov. 19, 2010). On November 29, 2010, Peak Ridge Master SPC Ltd. (obo The Peak Ridge Commodities Volatility Master Fund Segregated Portfolio (CVF)), brought counterclaims against Morgan Stanley, alleging that Morgan Stanley acted in a commercially unreasonable manner by, among other things: (1) tripling CVF’s margin requirements over a period of ten months; (2) giving notice of default and seizing the account without making a margin call or allowing any opportunity to cure; (3) assigning the fund’s management to a conflicted trader who mismanaged the fund, causing significant losses; and (4) selling its remaining open positions to a competitor, a Morgan Stanley affiliate, that recognized an immediate $23 million gain from the acquisition. Morgan Stanley’s suit claimed $40.6 million in damages for losses caused by CVF’s failure to meet contractually required margin calls. CVF’s Counterclaim seeks at least $30 million in damages. In its Counterclaim, CVF accuses Morgan Stanley of terminating the fund's account to further Morgan Stanley’s own interests. This article reviews CVF’s presentation of the sequence of events from the inception of the relationship between the parties through the disputed seizure and subsequent liquidation, and details CVF’s breach of contract counterclaim.
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From Vol. 3 No.45 (Nov. 19, 2010)
Morgan Stanley Sues Commodities Hedge Fund Peak Ridge for Alleged Failure to Satisfy Margin Calls
On November 8, 2010, Morgan Stanley & Co. Incorporated filed suit against commodities hedge fund Peak Ridge Master SPC LTD (Peak Ridge), claiming $40.6 million in damages resulting from losses stemming from bad bets on natural gas. According to Morgan Stanley, the losses resulted from Peak Ridge’s inability to meet contractually required margin calls, which Morgan Stanley had tripled over a period of ten months leading up to Peak Ridge’s alleged default due to the increasing level of risk the fund had taken on since it began trading through Morgan Stanley’s futures commission merchant (FCM) unit. Morgan Stanley took control of the fund’s positions from June 10, 2010, and undertook several transactions in the following two weeks “in order to reduce risk and stabilize the book in an orderly fashion.” We review the background of the action and the main points in Morgan Stanley’s Complaint.
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From Vol. 3 No.39 (Oct. 8, 2010)
Does Dodd-Frank Enable Certain Hedge Fund Managers to Elect Between Registration with the SEC and CFTC?
The working consensus in the hedge fund industry appears to be that Dodd-Frank will materially expand the range of hedge fund managers required to register with the SEC as investment advisers. A less-frequently told story, if it has been told at all, is that the plain language of Dodd-Frank may, subject to rulemaking, enable certain hedge fund managers to elect between registration with the SEC and CFTC – a sort of regulatory franchise previously reserved for banking institutions. Put slightly differently, Dodd-Frank may contain an expansive but as yet under-examined exemption from SEC registration for certain hedge fund managers – an exemption, moreover, that is not based on assets under management. That exemption – if indeed it is one – is contained in Section 403 of Dodd-Frank. Here’s how it would work.
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From Vol. 3 No.36 (Sep. 17, 2010)
Vitol Capital Management and Affiliate Settle CFTC Charges That They Failed to Disclose the Extent of Information Flow between Them and Thereby Circumvented Position Limits
By Order dated September 14, 2010, Vitol Inc. (VIC) and Vitol Capital Management Ltd. (VCM) settled charges brought by the Commodity Futures Trading Commission (CFTC) that they failed to disclose material information to the New York Mercantile Exchange (NYMEX) and, as a result, were able to circumvent NYMEX position limits for approximately two years. Specifically, according to the order, VIC and VCM learned in 2007 that NYMEX misperceived the nature of the relationship between VIC and VCM, including the extent to which trading information flowed between the two entities. While the Order does not say so explicitly, the Order implies that NYMEX was under the impression that VIC and VCM had established robust barriers preventing the flow trading information between the two entities, when in fact they had imposed only limited information barriers. VIC and VCM were aware of NYMEX’s misperception on this point, but, according to the Order, failed to correct it. As a result, NYMEX did not aggregate the trading positions of VIC and VCM for purposes of accountability levels and position limits until March 2009. (NYMEX was acquired by the CME Group in March 2009.) We describe the allegations and implications of the Order.
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From Vol. 3 No.3 (Jan. 20, 2010)
CFTC Proposes Position Limits for Four Energy Contracts in the Energy Futures and Options Markets to Curb Volatility
On January 14, 2010, the Commodity Futures Trading Commission (CFTC) proposed limits for certain futures and option contracts in the major energy markets that may curtail the investments of large banks and swaps dealers in the markets for oil, natural gas, heating oil and gasoline. The proposal aims to curb some of the significant price volatility that occurred in 2007 and 2008. Under the proposal, speculators in the futures markets will no longer be grouped together with commodity-linked businesses like airlines and oil companies that may exceed limits on the number of energy futures one trader can hold. In addition, the proposal establishes consistent, uniform exemptions for certain swap dealer risk management transactions while maintaining exemptions for bona fide hedging. This article outlines the proposed rule, the exemptions and the rule’s implications for hedge fund participants in the futures markets.
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From Vol. 2 No.47 (Nov. 25, 2009)
New CFTC Rules Significantly Amend Reporting Requirements Applicable to Commodities-Focused Hedge Fund Managers
On November 9, 2009, the Commodity Futures Trading Commission (CFTC) adopted several amendments to its regulations applicable to commodity pool operators (CPOs). These Final Rules specify detailed information that must be included in periodic account statements and annual reports for commodity pools with more than one series or class of ownership interest; clarify that periodic account statements must disclose either the net asset value (NAV) per outstanding participation unit in the pool, or the total value of a participant’s interest in the pool; extend the time period for filing and distributing annual reports of commodity pools that invest in other funds; codify existing CFTC staff interpretations regarding proper accounting and financial statement presentation of certain income and expense items in financial reports; streamline annual reporting requirements for pools ceasing operation; establish conditions for use of International Financial Reporting Standards in lieu of U.S. Generally Accepted Accounting Principles and clarify and update several other requirements for periodic and annual reports to be prepared and distributed by CPOs. The Final Rules become effective on December 9, 2009 and apply to commodity pool annual reports for fiscal years ending December 31, 2009 or later. The amended rules will have a significant effect on the regulatory environment in which commodities-focused hedge fund managers operate. Accordingly, this article offers a detailed explanation of the amendments and the resulting new reporting obligations applicable to CPOs.
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From Vol. 2 No.33 (Aug. 19, 2009)
Third Circuit Holds that a Commodity “Feeder Fund” Must Register as a Commodity Pool Operator, Even Though the Feeder Fund Itself Does Not Trade in Commodities
On July 13, 2009, the U.S. Court of Appeals for the Third Circuit affirmed a district court decision holding that Equity Financial Group – a “feeder fund” that invested in underlying funds that traded commodities, but that did not itself trade commodities – along with its president and sole shareholder and lawyer violated the Commodity Exchange Act (CEA) by failing to register as a commodity pool operator (CPO) and engaging in other fraudulent conduct. The case, which appears to be one of first impression, confirms a view long held by the Commodity Futures Trading Commission (CFTC): that investors in commodity markets are exposed to the same risk whether they invest directly or indirectly, and thus direct and indirect investors are entitled to the same degree of regulatory protection. See, e.g., “Michigan Couple Ordered to Pay More Than $3.1 Million for ‘Private Hedge Fund’ Fraud,” The Hedge Fund Law Report, Vol. 1, No. 9 (Apr. 29, 2008). For hedge fund managers, the decision’s impact may be mitigated by various exceptions from CPO registration that may be available to them; those exceptions are discussed more fully below. However, hedge funds that are required to register and elect not to take advantage of an exception or are not eligible for an exception are well advised to review the obligations that registration as a CPO entails. These obligations include, among others, disclosure, record keeping and operating requirements. See “Should Hedge Funds Register as Commodity Pool Operators?,” The Hedge Fund Law Report, Vol. 2, No. 26 (Jul. 2, 2009). This article details the factual background and legal analysis in the Equity Financial Group case; discusses exclusions and exemptions from CPO registration that generally are available to hedge fund managers; addresses whether managed accounts are a viable means of structuring around the holding in the Equity Financial Group case; and highlights various consequences of CPO registration.
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From Vol. 2 No.26 (Jul. 2, 2009)
Should Hedge Funds Register as Commodity Pool Operators?
A common mistaken belief among many is that hedge funds are unregistered and unregulated investment vehicles. While certain exemptions exist under the Investment Company Act of 1940 for registration, a hedge fund that trades in commodity options and futures contracts may be required to register as a commodity pool operator (CPO). In a guest article, Ernest Edward Badway and Amit Shah, Partner and Associate, respectively, at Fox Rothschild LLP, discuss the questions that a hedge fund should consider in evaluating whether to register as a CPO, including what a commodity pool is, who must register as a CPO, registration exemptions, registration requirements, compliance requirements and more.
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From Vol. 1 No.27 (Dec. 9, 2008)
Who Should Regulate Energy Markets?
The FERC’s administrative case against defunct hedge fund manager Amaranth Advisors and certain of its managed funds and traders, along with an action arising out of similar facts brought by the CFTC in federal district court in New York, have raised important questions for U.S. energy regulation: which agency is responsible for ensuring that traders do not cross the line from legal speculation into illegal price manipulation? If two or more agencies share that responsibility, how are those agencies supposed to coordinate their activities? Answers to these questions can have a profound effect on hedge funds that trade commodities or commodity derivatives.
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From Vol. 1 No.12 (May 20, 2008)
District Court Denies Motions by Amaranth and Brain Hunter to Dismiss CFTC’s Claims of Attempted Market Manipulation and Attempted Cover Up
- District Court found that the CFTC had alleged sufficient facts regarding Amaranth’s attempted manipulation of natural gas futures markets – including two sets of “marking the close” trades in early 2006 – to survive motions to dismiss.
- Court also found that the CFTC had adequately pleaded its cover up case, based on allegations of misrepresentations in a letter from Amaranth to the NYMEX Compliance Department.
- Court held that it had personal jurisdiction over Hunter based on NYMEX orders he placed from Canada through a broker in New York.