The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) established a comprehensive new regulatory framework for swaps and security-based swaps which would bring many market participants within the ambit of CFTC regulation, including requiring numerous entities to register with the CFTC. See “Do You Need to Be a Registered Commodity Pool Operator Now and What Does It Mean If You Do? (Part Two of Two)
,” Hedge Fund Law Report, Vol. 5, No. 19 (May 10, 2012). Hedge fund managers were principally concerned that the inclusion of swaps as “commodity interests” would cause their hedge funds to be treated as “commodity pools,” which in turn could subject the hedge fund manager to compliance and registration obligations as a commodity pool operator (CPO) or a commodity trading advisor (CTA). This concern was amplified when the CFTC and SEC jointly adopted rules refining the definition of the term “swap” and related terms, on August 13, 2012. Specifically, the August 13 rules required hedge fund managers to determine whether their swaps-related activities would subject them to CFTC regulation and require them to register as a CPO or CTA by October 12, 2012, the effective date of the rules. In light of the complexity of the definitions and the business arrangements to which the definitions applied, many hedge fund managers struggled to arrive at a conclusive determination. See “CFTC Issues Responses to Frequently Asked Questions Concerning Registration Exemption Eligibility and Compliance Obligations for Commodity Pool Operators and Commodity Trading Advisors
,” Hedge Fund Law Report, Vol. 5, No. 32 (Aug. 16, 2012). Fortunately for managers grappling with this issue, on October 11 and 12, 2012, the CFTC issued two no-action letters relevant to the registration obligations of hedge fund managers that trade swaps. This article summarizes the key practical points arising out of the two no-action letters for hedge fund managers that trade foreign exchange and other swaps and foreign exchange forwards.