CFTC Staff Letter 19-02: No-Action Relief from CPO and CTA Registration for Manager of Affiliate with Mineral and Royalty Interests

U.S. COMMODITY FUTURES TRADING COMMISSION
Three Lafayette Centre
1155 21st Street, NW, Washington, DC 20581
Telephone: (202) 418-6700
Facsimile: (202) 418-5547
MKulkin@cftc.gov
Division of Swap Dealer and
Intermediary Oversight
Matthew B. Kulkin
Director
CFTC Letter No. 19-02
No-Action
February 14, 2019
Division of Swap Dealer and Intermediary Oversight Re: No-action Relief from Registration as a CPO and/or a CTA for “A”, the manager of “B” Dear :
This letter is in response to your letter dated September 26, 2018, 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” (“Manager”), the manager of “B” (“Affiliate”) confirmation that the Division would not recommend enforcement action against Manager for failure to register as either a commodity pool operator (“CPO”) or commodity trading advisor (“CTA”) with respect to its activities managing Affiliate. Based upon the representations in your letter, we understand the relevant facts to be as follows. Affiliate owns mineral interests and overriding royalty interests in crude oil and natural gas producing and non-producing properties. The majority of Affiliate’s revenues are derived from sales of crude oil and natural gas. As part of those activities it only conducts business that is reasonably incidental to its ownership of those revenue producing interests, such as signing leases that produce royalty income and revenue from holding surface rights and easements associated with their properties. In connection with the ownership of crude oil and natural gas interests, Affiliate will enter into commodity interest transactions, such as futures, options or swaps, with the intention of hedging its exposure to commodity price risk. Because of the inclusion of commodity interests within the definition of a commodity pool under Section 1a(10) of the Commodity Exchange Act, Affiliate and/or its Subsidiaries may meet the definition of a commodity pool. You state that Affiliate’s commodity interests generally have a notional value of approximately 80 percent of proved producing reserves and are intended to reduce the risk posed to Affiliate by fluctuations in crude oil and natural gas pricing. You further state that the terms and conditions of the commodity interests are consistent with those generally available in the traditional swaps market or listed derivatives markets and that Manager and Affiliate do not