November 2, 1992
TO: CLOSED-END FUND COMMITTEE NO. 27-92
INVESTMENT ADVISERS COMMITTEE NO. 38-92
SEC RULES COMMITTEE NO. 83-92
RE: CFTC PROPOSES AMENDMENTS TO RULE 4.5
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The Commodity Futures Trading Commission ("CFTC") has
proposed amendments to Rule 4.5 under the Commodity Exchange Act
that would expand the range of futures and options transactions
that certain persons, including investment companies and
investment advisers, could engage in without having to register
as commodity pool operators with the CFTC. The Institute sent a
letter to the CFTC last January recommending changes to Rule 4.5
along these lines. A copy of the amendments proposed by the CFTC
is attached. According to the proposing release, the amendments
are intended to provide "a more ’strategy neutral’ way of
accomplishing the objectives" of Rule 4.5.
Rule 4.5 currently provides an exclusion for otherwise
regulated entities listed in the rule from the definition of the
term "commodity pool operator" under specified conditions. Among
other things, to qualify for the exclusion, an entity must file a
notice of eligibility with the CFTC containing a representation
that the entity will use commodity futures or commodity option
contracts solely for "bona fide hedging" purposes (as that term
is defined in CFTC Rule 1.3(z)(1)). Alternatively, a qualifying
entity is permitted to use long futures or options positions
which are not bona fide hedging positions if the entity
represents that the value of the commodities underlying those
positions is covered by cash or cash equivalents and the
positions are incidental to a qualifying entity’s activities in
the underlying cash market (the "alternative test").
The proposed amendments would expand the alternative test
to permit a qualified entity to enter into commodity futures or
options positions that are neither bona fide hedging positions
nor incidental to the entity’s activities in the underlying cash
market, provided that the gross market exposure collectively
attained through such positions does not predominate the total
market exposure of its portfolio. (Also, the word "long" would
be deleted from the alternative test.)
In addition, the proposed amendments would modify a
provision under current Rule 4.5 that requires a representation
that the entity will not enter into commodity futures and
commodity options contracts for which the aggregate initial
margin and premiums exceed 5% of the fair market value of the
entity’s assets (after taking into account unrealized profits and
unrealized losses on any such contracts it has entered into).
Specifically, the proposed amendments would provide that margins
and premiums on bona fide hedging positions are excluded from the
5% limit.
Comments on the proposed amendments must be filed with the
CFTC by December 4. If there are issues you would like the
Institute to consider addressing in its comment letter, please
call me at (202) 955-3514 by Monday, November 23.
Frances M. Stadler
Assistant Counsel
Attachment