The CFTC’s Division of Swap Dealer and Intermediary Oversight (DSIO) issued a no-action letter to mortgage real estate investment trusts (mREITs). The letter states that, although mREITs are within the definition of a commodity pool, the DSIO will not recommend that the CFTC take enforcement action against the operators of mREITs for failure to register as CPOs, provided that the mREIT satisfies certain criteria as described below:
Limits the initial margin and premiums required to establish its commodity interest positions to no more than 5 percent of the fair market value of the mREIT’s total assets;
Limits the net income derived annually from its commodity interest positions that are not qualifying hedging transactions to less than five percent of the mREIT’s gross income;
Interests in the mREIT are not marketed to the public as or in a commodity pool or otherwise as or in a vehicle for trading in the commodity futures, commodity options, or swaps markets; and
o The company has identified itself as a “mortgage REIT” in Item G of its last U.S. income tax return on Form 1120-REIT; or
o The company has not yet filed its first U.S. income tax return on Form 1120-REIT, but has disclosed to its shareholders that it intends to identify itself as a “mortgage REIT” in its first U.S. income tax return on Form 1120-REIT.
In addition, the mREIT would be required to file a claim for exemption with the CFTC.
Lofchie Comment: Yesterday, my comment in response to yesterday’s no-action letter was “ready, fire, aim.” It’s probably too soon to recycle that one. But is hard to know what to say anymore about a rule-making process that threatens to disrupt major segments of the U.S. financial markets with rules that go to the brink of effectiveness, and then are pulled back at the last moment. Maybe the GAO could do a study of whether this is an efficient way for a regulator to rule the financial markets. In the meantime, I will continue to believe that things don’t have to work this way.
See: CFTC Letter 12-44 : Parts 3 and 4 of the Commission’s Regulations; No-Action