CFTC Staff Letter 14-96: No-Action Relief for VPP Vehicles from CPO and CTA Registration

Gary Barnett
Director
U.S. COMMODITY FUTURES TRADING COMMISSION
Three Lafayette Centre
1155 21st Street, NW, Washington, DC 20581
Telephone: (202) 418-5977
Facsimile: (202) 418-5407 gbarnett@cftc.gov
Division of Swap Dealer and Intermediary Oversight CFTC Letter No. 14-96 No-Action July 25, 2014 Division of Swap Dealer and Intermediary Oversight Re: “A” and affiliates request for exemption of Production Payment Vehicles from commodity pool regulation Dear :
This letter is in response to your letter dated June 18, 2014, to the Division of Swap Dealer and Intermediary Oversight (the “Division”) of the Commodity Futures Trading Commission (the “Commission”), as well as additional email correspondence with Division staff. You request on behalf of “A” and its swap dealer affiliates (collectively, “B”) confirmation that the Division would not recommend enforcement action against “B” for its roles as commodity pool operator and/or commodity trading advisor of “volumetric production payment vehicles” (“VPP Vehicles”) for failure to register as such. Based upon the representations in your letter, we understand the relevant facts to be as follows. VPP Vehicles are oil and gas financing structures used by U.S. oil and natural gas producers which execute swaps to hedge market risks of a physical commodity production payment asset that they own and interest rate exposure enabling them to service any fixed income securities that the vehicle may issue. Because of the inclusion of swaps as a commodity interest within the definition of a commodity pool under Section 1a(10) of the Commodity Exchange Act, such vehicles may be classified as commodity pools. You describe VPP Vehicles as special purpose entities that own passive, non-operating, overriding royalty interests in oil and natural gas well production that entitle their owner to receive delivery of a certain volume or value of liquid or gaseous hydrocarbons, typically each month, for a specified period of time, determined without regard to production costs. Stated another way, the oil or natural gas company (the “Seller”) conveys the right to receive production from the subject wells that are identified in the conveyance up to an agreed upon volume or value. You state that the production payment vehicle issues debt or debt-like instruments, which are fixed income securities, the proceeds of which it uses to acquire the royalty interests from the Seller. Alternatively, the VPP Vehicle may be financed via a syndicated loan. You also state that the vehicle receives and immediately sells the hydrocarbons received by it each month under the production payment at a then-market price. You state that the transaction is structured such that the scheduled production volumes delivered would generate cash proceeds, if sold at market prices in existence on or around the execution date of the conveyance, sufficient to repay the issued securities. In the event that there is a shortfall in the scheduled production delivery, you state that a cash calculated make-up amount