In no-action letter 21-06, the Market Participants Division of the Commodity Futures Trading Commission (“CFTC”) agreed that a company with a primary business of biopharmaceutical royalty returns needn’t register as a commodity pool operator when hedging its debt with interest rate swaps. No-action letter 21-06 is perhaps most notable because it was given to a company, Royalty Pharma LLC, concerned that it was no longer exempt from the definition of a “commodity pool operator” via the CFTC’s regulation 4.13(a)(3) because Royalty Pharma LLC had recently become a public company. Royalty Pharma LLC represented that it would not change the size or nature of the swaps that it entered into, and intended to continue to use swaps only to hedge its debt risk. The Market Participants Division reiterated a position taken by the CFTC staff in other contexts by extending no action relief, emphasizing that the purpose of the company’s proposed swaps was hedging interest rate risk, rather than as a business purpose. Among other conditions to the relief from registration as a “commodity pool operator”, the CFTC staff highlighted that the only risk any swap should introduce would be counterparty, and that the initial margin, premiums, or security deposit and notional amounts of any swap should meet the requirements for the “de minimus” exemption (i.e., initial margin, premiums, or security deposits in aggregate cannot exceed 5% of the portfolio’s liquidation value, or notional amounts cannot exceed 100 percent of the portfolio’s liquidation value).

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