The Commodity Futures Trading Commission has exempted covered bonds from being treated as “commodity pools” for regulatory purposes, thereby removing the threat of burdensome compliance requirements.

Market participants had been concerned that covered bonds could be unfortunately caught up in the new regulations, which are a consequence of the Dodd-Frank Act, because of the swaps involved in covered bond structures. Their fears increased when covered bonds were not included in an exemption the CFTC granted some asset backed securities on 11 October.

However, in a second letter (12-45) clarifying its position that was released on Friday, the CFTC extended the exemption to include various further types of securitisation vehicles, with covered bonds explicitly cited in the expanded relief.

“The 12-45 Letter relaxes significantly the criteria for relief and broadens the scope of transaction types for which relief is available,” said Linklaters partners in a note.

According to Lewis Cohen, partner at Clifford Chance, exemption has been extended to securitisation vehicles that are actively managed as long as they meet the following three criteria:

• The use of swaps by the vehicle is no greater than that contemplated by Regulation AB and Rule 3a-7;
• The swaps are not used in any way to create an investment exposure; and
• The activities of the vehicle are limited to the holding of financial assets.

Among examples given by the CFTC to illustrate the new scope of the exemptions it said:

In a covered bond transaction, the collateral pool (and the special purpose vehicle in a structured model) would not be a commodity pool if it contains no commodity interests other than any swaps which are used only for purposes permitted by Regulation AB, and covered bond holders are only entitled to receive payments of accrued interest and repayment of principal of their covered bonds, without any condition to payment based upon any derivative exposure.

Cohen said that although issuers are advised to check with counsel on the exact status of programmes given their varied structures, the relief is good news for issuers of covered bonds, as long as the structure used does not for some reason involve other “commodity interests” besides basic interest or currency hedging, and bond repayment is not conditioned on performance by a hedge counterparty.

“It was initially thought that highly tailored jurisdiction-specific relief from the CFTC might be required – a cumbersome and costly process,” he said. “For whatever reason – to some extent because of pressure from the financial industry, I presume – the light bulb went off that this approach was completely impractical, and hence the CFTC gave us the broad relief for covered bonds we now have.”