Sure, My Project Has Swaps (In Fact, My Lenders Required These Hedges), But Why Does That Make It A Commodity Pool And Why Am I Now A Commodity Pool Operator?

Keywords: project, swaps, commodity pool, commodity pool operator

Title VII of the Dodd-Frank Wall Street Accountability and Consumer Protection Act (the Dodd-Frank Act) is called the "Wall Street Transparency and Accountability Act of 2010" and covers "swaps." Title VII is intended to establish a comprehensive regulatory framework for over-the-counter derivatives to reduce risk, increase transparency, and promote market integrity within the financial system by, among other things (and in the words of the Commodity Futures Trading Commission (CFTC) and the Securities Exchange Commission (SEC)): "(i) Providing for the registration and comprehensive regulation of swap dealers and major swap participants; (ii) imposing clearing and trade execution requirements on standardized derivative products; (iii) creating rigorous recordkeeping and real-time reporting regimes; and (iv) enhancing the Commission's rulemaking and enforcement authorities with respect to all registered entities and intermediaries subject to the Commission's oversight."1

Among the more significant amendments made by Title VII to the Commodity Exchange Act (CEA) are Section 721(a)(5), which added a definition of "commodity pool," and Section 721(a)(6), which expanded the scope of the term "commodity pool operator" to include those that invest in non security-based swaps.

Through a series of orders, the CFTC has provided temporary exemptive relief from certain provisions of the CEA, including certain self-effectuating provisions that reference terms that require further definition. As the term "swap" required further definition, many entities have awaited the final definition to determine if they would fall within the definition of "commodity pool operator" and, thus, determine whether they would be required to register with the CFTC or could avail themselves of an exemption from registration. With the recent adoption2 by the CFTC of a final rule that defines a "swap," and the related publication thereof in the Federal Register,3 the amendments made by Section 721(a)(5) and (6) will become fully effective on or around October 12, 2012.

Notably, the CFTC has historically taken the view that a single swap or other commodity interest can constitute a commodity pool and that an "investment trust" need only have a single owner.4

Accordingly, unless exemptive or equivalent (see below) relief is available, a project company that has one or more swaps may be a commodity pool and the...