Safe Harbors and Securitizations: Loan Payments in Connection with a Commercial Mortgage-Backed Securitization Protected from Clawback under the U.S. Bankruptcy Code Safe Harbors

By Andrea Pincus, Paul Turner, and Sarah Kam

You can find a detailed analysis in our client alert on the order Safe Harbors and Securitizations: Loan Payments in Connection with a Commercial Mortgage-Backed Securitization Protected from Clawback under the U.S. Bankruptcy Code Safe Harbors

The Swap Report

The U.S. Bankruptcy Court, Northern District of Illinois issued a decision of particular importance to lenders and securitization servicers facing complications from the bankruptcy of a borrower involved in a commercial mortgage-backed securitization. The court clarified the scope of safe harbor protections for loan payments which are “related to” a securities contract, dismissing a chapter 7 trustee’s avoidance claims seeking to claw back over $5 million in pre-petition loan payments made to repay loan obligations owed to a trust.

CFTC Issues Enforcement Order Regarding “Risk Management” Services and CTA Registration

On, January 16, the CFTC ordered Summit Energy Services, Inc. (“Summit Energy”) to pay a $140,000 civil penalty to resolve allegations that it violated the Commodity Exchange Act (“CEA”) by failing to register as a commodity trading adviser (“CTA”) with the CFTC.

You can find a detailed analysis in our client alert on the order, CFTC Penalizes Energy Company for Failing to Register as a CTA. The CFTC order is available here and a CFTC press release about the order is available here.

Summit Energy advised clients with respect to physical natural gas and electricity transactions. However, it also advised clients entering into over the counter natural gas swaps and listed futures as part of a “risk management” program. Moreover, Summit Energy included descriptions of its “risk management services” on its website, which the CFTC considered to be holding itself out publicly as a CTA.

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2015 CFTC Regulatory Agenda

By Tom Watterson and Patricia Dondanville

As 2015 is now underway, we wanted to highlight some of the potential regulatory developments from the CFTC that may arise in the new year.

Overall we expect 2015 to be a year of continued CFTC implementation of the Dodd-Frank rules and related “tweaks” to those rules to address the concerns of end-users and market participants.

At the end of last year, the Office of Management and Budget published the regulatory agenda for the CFTC. Although additional items will likely arise and the CFTC may not get to every entry, the agenda gives us a good view of the CFTC’s regulatory priorities for the next year. The agenda is available here, and we highlight a few items of note below.

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Comparing Collateral Segregation Regimes for Uncleared Swap Margin

The proposed margin rules from the CFTC and the prudential regulators, when considered alongside the existing CFTC collateral segregation rules, present the potential for three different collateral segregation regimes applying to initial margin posted to a swap dealer. To compare the differences, we have created a chart of the three collateral segregation regimes, available here.

The Dodd-Frank Act provided the customers of swap dealers the “right” to require segregation of initial margin for uncleared swaps, instead of posting such margin directly with the swap dealer. In November of 2013, the CFTC released the final rules implementing collateral segregation for initial margin on uncleared swaps (the “CFTC Collateral Segregation Rules”). See our prior post for a Q&A on the CFTC Collateral Segregation Rules.

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CFTC Chairman Massad Announces Open Meeting on Three End-User Issues

This afternoon, CFTC Chairman Timothy Massad announced a public meeting of the CFTC to take place on November 3, 2014 at 10:30 am (Eastern). The meeting will address the “further fine-tuning of [the CFTC] rules” with respect to commercial end-users. The meeting is scheduled to consider:

  1. clarification to the rules regarding when forward contracts with volumetric optionality should be classified as “swaps”;
  2. whether the CFTC should codify in a rule prior no-action relief with respect to the CFTC Rule 1.35 recordkeeping obligations (see our prior coverage here and some of the letters here and here); and
  3. whether the CFTC should require CFTC action before moving the deadline for FCMs to post “residual interest” to any earlier than 6:00 pm on the next business day after the trade date (this ultimately affects when end-users must post margin with an FCM).

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Approaching Ambiguities in the Financial Entity Definition

The third installment of our ongoing series on the 2014 CFTC Reauthorization Act covers a potential change to the definition of a “financial entity”, which has been a particularly troublesome and confusing definition for end-users, and the banks that enter into swaps with them. In addition, the CFTC may be able to address the confusion through its rule making and interpretations, without the need for a legislative change.

We will start with an overview of the financial entity definition and some background as to its ambiguities.

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CFTC Approves Important Rule Amendment for Government-Owned Utilities and Their Swap Counterparties

By Patricia Dondanville and Tom Watterson

On September 17, 2014, at the first Open Meeting of the Commodity Futures Trading Commission chaired by Timothy Massad, the CFTC approved an important amendment to its Dodd-Frank Act rules for government-owned electric and natural gas utilities (“utility special entities,” in the parlance of the Dodd-Frank world) and their swap counterparties. The rule amendment provides a permanent regulatory fix to a serious problem for utility special entities arising out of the CFTC rules published in 2012 defining which entities must register with the CFTC as “swap dealers.”

The CFTC’s fact sheet summarizing the final rule amendment is here, and the CFTC’s Q&A is here. The final rule amendment will be effective when published in the Federal Register. The rule amendment is in response to a Petition originally filed by government-owned utilities in July of 2012 (a copy of the Petition is here), and it codifies a no-action letter issued by the CFTC staff in March of 2014 (a copy of the no-action letter is here). Continue Reading

CFTC Staff Provides JOBS Act Harmonization Exemptive Relief

Attention hedge funds, private equity funds, venture capital funds, and other private funds (collectively, “private funds”). This evening (September 9, 2014) , the CFTC Division of Swap Dealer and Intermediary Oversight (“DSIO”) issued CFTC Letter 14-116 providing exemptive relief (for some funds) from the general solicitation restrictions in CFTC Rule 4.7 and CFTC Rule 4.13(a)(3) to harmonize the CFTC rules with the SEC rule changes arising from the Jumpstart Our Business Startups Act (the “JOBS Act”).

CFTC Letter 14-116 is available here.

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Bank Regulators Re-Propose Rule for Margin on Uncleared Swaps

This afternoon, the Federal Reserve, Federal Deposit Insurance Corp, Office of the Comptroller of the Currency, Farm Credit Administration, and the Federal Housing Finance Agency (the "Prudential Regulators") released re-proposed rules requiring swap dealers and major swap participants* to hold margin for uncleared swaps (the "Re-Proposed Margin Rules"). The Re-Proposed Margin Rules are available here. The Federal Reserve press release on the Re-Proposed Margin Rules is available here.

The Re-Proposed Margin Rules, if adopted, would apply to swap dealers and major swap participants that are regulated by a Prudential Regulator. The CFTC has released proposed margin rules for swap dealers not regulated by a Prudential Regulator and it is unknown at this time whether the CFTC will finalize those margin rules or re-propose new margin rules.

The Prudential Regulators initially released proposed rules on requiring swap dealers to hold margin for uncleared swaps in 2011 (the "Initial Margin Rules") under the Dodd-Frank Act provisions regarding swap dealer regulation, but the rules were never finalized. Since the release of the Initial Margin Rules, the Basel Committee on Banking Supervision and the International Organization of Securities Commissions produced a framework for margin requirements on uncleared swaps, which the Re-Proposed Margin Rules generally follow.

Comments on the Re-Proposed Margin Rules will be due within 60 days after the proposal is published in the Federal Register.

Stay tuned for further updates on margin rules for uncleared swaps. The Swap Report

* These also apply to security-based swap dealers and major swap participants, but for ease of reference, we only refer to swap dealers in this post

Attention Mutual Funds–Potential Relief for CPO and CTA Regulation in the 2014 CFTC Reauthorization Act

By Tom Watterson and Crystal Travanti

As the second part of our ongoing series on the 2014 CFTC Reauthorization Act, we wanted to highlight what could become important relief for mutual funds and their investment advisers with respect to registration as commodity pool operators (“CPOs”) or commodity trading advisers (“CTAs”).

In a late addition to the proposed 2014 CFTC Reauthorization Act, the House added a section 361, “Treatment of certain funds”, amending the definitions of a CPO and CTA in the Commodity Exchange Act to exclude investment advisers of mutual funds (registered investment companies) in certain circumstances. Section 361, as passed by the House, excludes from the definition of a CPO, investment advisers that provide advice to mutual funds where the only “commodity interests”, or CFTC regulated products, that the mutual fund invests in are “financial commodity interests.” Similarly, section 361 excludes from the definition of a CTA, investment advisers who provide advice to mutual funds where the adviser provides advice on commodity interests only in relation to “financial commodity interests.”

Section 361 would define “financial commodity interests” as “a futures contract, an option on a futures contract, or a swap, involving a commodity that is not an exempt commodity or an agricultural commodity.” Practically, a financial commodity interest would be a swap or future on interest rates, credit, foreign exchange, stock indices, indices based on rates or prices. For example, an adviser of a mutual fund using treasury futures to manage its duration, or using credit default swaps to gain credit exposure to certain entities would be covered by the exclusion in section 361. The exclusion would not apply to advisers of mutual funds that use futures or swaps on agricultural or energy products.

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