At some point during most people's childhood, there was an evil bogeyman lurking under a bed, or hidden in a closet, ready to make its presence known at a moment's notice. The bogeyman of the day for many market participants has become the commodity pool issue. This issue arises because the Dodd-Frank Act amended the definition of "commodity pool", making it broader by including any enterprise operated for the purpose of trading in swaps. Trading in swaps may seem like a high bar, but there is little guidance as to the type of entity that constitutes a commodity pool and some of that guidance suggests that entering into a single swap may be sufficient to trigger the registration requirement.
Why is commodity pool status to be avoided? Commodity pools and the persons operating them (commodity pool operators) are subject to regulation by the Commodity Futures Trading Commission (CFTC) including a requirement that such persons register as commodity pool operators. Also, an entity that is not a commodity pool may, subject to certain requirements, avail itself of the end-user exception from the mandatory clearing of swap transactions; a commodity pool may not. Before the witching hour of October 12 2012, the CFTC granted limited relief from commodity pool status to equity Reits and to securitisation vehicles meeting certain narrow criteria. The relief was welcome, although some of the discussion in the relief raises additional concerns. For example, the CFTC's Division of Swap Dealers and Intermediary Oversight rejected the premise that an entity could constitute a commodity pool only if its 'principal purpose' is to trade in commodity interests. The Division emphasised that whether an entity constitutes a commodity pool depends on an evaluation of 'the facts and circumstances presented in their entirety'. This leaves many other types of entities (and their advisers) left to wrestle down the CPO issue in the absence of additional interpretative relief from the CFTC.