As a result of changes made to the Commodity Exchange Act (CEA) by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), swaps are now treated as “commodity interests” (along with futures contracts). Any pooled investment vehicle that trades in commodity interests must be operated by a “commodity pool operator” (CPO) registered with the Commodity Futures Trading Commission (CFTC) or exempt from such registration.

While the exact definition of the term “swap” is not yet final, it is clear that most OTC derivative instruments, other than “security-based swaps” and options on securities, will become commodity interests under the CEA. This could cause many pooled investment vehicles — such as private equity funds, real estate funds, hedge funds and securitization vehicles (such as CBOs and CLOs) — to be deemed commodity pools due to their use of interest rate swaps, OTC foreign exchange contracts and other common hedging contracts, even if they do not trade futures or other products commonly thought of as “commodities.”

The CFTC has announced that various provisions of the CEA that have been amended by Dodd-Frank but that require further definition will not be enforced until 60 days after the CFTC has adopted final rules defining the term “swap” and certain other terms.

On February 9, 2012, the CFTC eliminated the exemption from CPO registration contained in CFTC Rule 4.13(a)(4), effective April 24, 2012. That exemption allowed for unlimited trading in commodity interests by commodity pools for which the CPO claimed the exemption and that were privately offered only to certain qualified eligible persons. The CFTC gave any CPO that properly claimed the 4.13(a)(4) exemption prior to the April 24 effective date until December 31, 2012, to come into compliance with the revised rules. (See our previous Client Advisory summarizing the CFTC rules eliminating the exemption here.) Operators of funds and vehicles that are likely to be considered commodity pools due to the use of swaps or futures should consider claiming the 4.13(a)(4) exemption immediately to give themselves until December 31, 2012, to evaluate the effect of the new rules and to come into compliance, if necessary.