CFTC Staff Letter 17-48: No-action relief from CPO and CTA registration for entity managing swaps to hedge commodity price risk

Eileen T. Flaherty
Director
U.S. COMMODITY FUTURES TRADING COMMISSION
Three Lafayette Centre
1155 21st Street, NW, Washington, DC 20581
Telephone: (202) 418-5000 eflaherty@cftc.gov
Division of Swap Dealer and
Intermediary Oversight
CFTC Letter No. 17-48
No-Action
August 2, 2017
Division of Swap Dealer and Intermediary Oversight Re: No-action Relief from Registration as a CPO and/or a CTA for “A”, the operator of “B”, and Subsidiaries Dear :
This letter is in response to your letter dated June 27, 2017, to the Division of Swap Dealer and Intermediary Oversight (the “Division”) of the Commodity Futures Trading Commission (the “Commission”). You request on behalf of “A”, the commodity pool operator (“CPO”) of “B” and its subsidiaries (“Subsidiaries”) confirmation that the Division would not recommend enforcement action against “A” for failure to register as either a CPO or commodity trading advisor (“CTA”) with respect to its activities managing “B”. Based upon the representations in your letter, we understand the relevant facts to be as follows. “B” owns working interests, mineral interests, and overriding royalty interests in crude oil and natural gas producing and non-producing properties in certain counties in Montana, North Dakota, and Oklahoma. When “B” acquires crude oil and natural gas interests, “B” will concurrently enter into over-the-counter (“OTC”) swap transactions with the intention of hedging its exposure to commodity price risk. 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, “B” and/or its Subsidiaries may meet the definition of a commodity pool. You state that “B’s” OTC swaps generally have a notional value of approximately “X” percent of proved producing reserves and are intended to reduce the risk posed to “B” and the Subsidiaries by fluctuations in crude oil and natural gas pricing. You further state that the terms and conditions of the OTC swaps are consistent with those generally available in the traditional swaps market and that “B” and its Subsidiaries do not intend to trade in and out of the swaps to generate profits or mitigate losses. You represent that the OTC swap positions will not be established, held, altered, or terminated for the purpose of seeking to generate investment income and that the swaps will not introduce any new risks to “B” other than counterparty credit risk associated with the swaps. You state that all OTC swaps, including those intended to hedge risks incurred by the Subsidiaries, are currently held by “B”. You state that in the future “A” may determine that it would be more appropriate for a Subsidiary to enter into the swap transaction rather than “B” for reasons wholly driven by the business needs of the Subsidiary, “B”, or the “B” complex of entities as a whole.