[authors: Peter J. Shea, Gregory E. Xethalis]

On October 12, CFTC Staff Interpretive Letter 12-19 provided guidance with respect to the interpretation of bona fide hedging under CFTC Regulations. Under Rule 4.5 of the CFTC’s Regulations, advisers may be excluded from the definition of “commodity pool operator” based on meeting one of two de minimus thresholds for commodity trading activities, as well as a requirement that the fund or funds being advised not be marketed “as a commodity pool or as a vehicle for trading in the commodity futures, commodity options, or swaps markets.” Futures contracts, options on futures or swaps utilized by a fund for bona fide hedging purposes are excluded from the calculations under the de minimus thresholds. The requirements of Rule 4.5 are described in our Client Advisory on Rule 4.5’s amendment, which is linked below.

On September 28, the US District Court for the District of Columbia vacated final CFTC rules regarding position limits. The vacated final rules on position limits included amendments to Rule 1.3(z)(1) and Rule 151.1 that helped to define bona fide hedging for the purposes of Rule 4.5 and the application of the de minimus thresholds. In Staff Interpretive Letter 12-19, the CFTC provided guidance indicating that, notwithstanding the US District Court’s ruling, parties should utilize the standards for bona fide hedging under the vacated amendments to Rule 1.3(z)(1) and Rule 151.1 when determining whether positions may be excluded from such calculations.

Read CFTC Staff Interpretive Letter 12-19 here.

Read the February 22, 2012, Katten Client Advisory “All Advisers to Registered Investment Companies Need to Evaluate Their Exposure to CFTC Regulation After Recent Rule Amendment.”

Read “ISDA and SIFMA Win Summary Judgment on Challenge to CFTC Position Limits Rule,” as reported in the October 5, 2012, edition of Corporate and Financial Weekly Digest.

Please see “CFTC Issues Guidance in Conjunction with “Swap” Definition Effective Date” in CFTC above.