[15304]
October 28, 2002
TO: CLOSED-END INVESTMENT COMPANY COMMITTEE No. 42-02
COMPLIANCE ADVISORY COMMITTEE No. 95-02
SEC RULES COMMITTEE No. 87-02
RE: CFTC PROPOSES AMENDMENT TO RULE 4.5 AND ISSUES RELATED NO-ACTION
POSITION
The Commodity Futures Trading Commission has proposed an amendment to Rule 4.5,
the CFTC rule that provides a conditional exclusion from the definition of “commodity pool
operator” (“CPO”) to certain regulated entities, including registered investment companies.1 In
conjunction with proposing the amendment, the CFTC is providing no-action relief that allows
eligible persons, effective immediately, to rely on the new standard it has proposed under the
rule, pending final action on the proposal. The proposed amendment and the no-action
position are briefly summarized below.
Comments on the proposal must be filed with the CFTC by December 12th. If there
are issues you would like the Institute to consider addressing in its comment letter, please
contact Tami Salmon at (202) 326-5825 or Frances Stadler at (202) 326-5822 by November 11th.
Proposed Amendment
Rule 4.5 permits investment companies and other specified entities to trade commodity
futures and options thereon without having to register with the CFTC as CPOs if they file a
notice making certain representations related to their commodity trading activities. The rule
currently permits the unlimited use of commodity futures or options contracts by qualifying
entities “solely for bona fide hedging purposes” (as defined in CFTC Rule 1.3(z)) and, in
addition, allows non-hedge trading of commodity futures and options so long as the aggregate
initial margins and premiums required to establish non-hedge positions do not exceed five
percent of the liquidation value of the entity’s portfolio (the “five percent test”).
According to the Proposing Release, concerns recently have been expressed to the CFTC
staff about the five percent test because the margin levels for certain stock index futures
significantly exceed five percent, and the required margin for security futures products, which
1 Commodity Futures Trading Commission, Exclusion for Certain Otherwise Regulated Persons From the Definition
of the Term “Commodity Pool Operator,” 67 Fed. Reg. 65743 (October 28, 2002) (“Proposing Release”). A copy of the
Proposing Release is attached.
2
are scheduled to begin trading in the near future, will be 20 percent of contract value.
Consequently, the five percent test would limit the use of such contracts for non-hedge
purposes to a much greater extent than other types of futures contracts with lower margins. To
address these concerns, the CFTC is proposing to add a new, alternative test to Rule 4.5 that
would allow a qualifying entity to represent that the aggregate notional value of non-hedge
commodity interest positions does not exceed the liquidation value of the entity’s portfolio.2
For purposes of this test, notional value would be calculated for futures by multiplying, for each
futures position, the size of the contract, in contract units, by the current market price per unit
and, for options, by multiplying for each such position the size of the contract, in contract units,
by the strike price per unit. The Proposing Release includes two examples to illustrate the
different effects of the existing and proposed non-hedging tests with respect to different types
of futures contracts.
No-Action Position
The Proposing Release notes that the proposed amendment would facilitate the use of
the commodity interest markets by persons and entities that are “otherwise regulated” and that
it may benefit other market participants through increased liquidity. On this basis, the CFTC
has determined that, pending action on the proposal, it will not commence any enforcement
action for failure to register as a CPO where a qualifying entity is operated in accordance with
Rule 4.5 as proposed to be amended. According to the Proposing Release, eligible persons who
have claimed relief under Rule 4.5 or who claim such relief in the future do not need to take any
additional action beyond making the representations currently required by the rule, including
the representation concerning the five percent test. The no-action position will remain in effect
until final action is taken on the proposal, at which time compliance with the terms of any
amendment to the rule or with the existing five percent test will be required. The Proposing
Release states that in the event the CFTC adopts an alternative non-hedge test that differs from
its proposal, it will provide sufficient time for affected persons to comply with that test.
Frances M. Stadler
Deputy Senior Counsel
Attachment (in .pdf format)
2 The Proposing Release notes that the proposal would not affect the ability of persons relying on Rule 4.5 to use
commodity futures and options for bona fide hedging purposes on an unlimited basis.