Dodd-Frank’s Impact on Investment Funds and Managers American Conference Institute’s 2nd National Advanced Summit on Reform, Regulation, and Enforcement of Derivative Transactions January 14-15, 2014 How Equinox Utilizes Derivatives

• Equinox Funds:

– is a registered investment adviser (“RIA”) as well as a commodity pool operator (“CPO”) registered with the NFA and CFTC – operates a number of commodity pool funds as well as 1940 Act commodity mutual funds – operates funds that are multi-adviser CTA funds and fund-of-funds

• Equinox primarily utilizes OTC swaps to access various CTA managers’ strategies—known as “reference managers”.

• In addition, underlying reference managers will trade all different commodity interests such as futures contracts (physical and financial), and OTC swaps.

1 Benefits to Equinox of OTC Swaps

• The OTC swaps Equinox uses allows it to:

– Manage and/or minimize counterparty risk exposure to various CTAs – Manage reference manager style drift (because the swap dealer counterparty will indemnify against impermissible trades) – Invest in reference managers’ strategies utilizing less capital – Address certain 40 Act rules (e.g., rules related to coverage and permissible leverage) – Other benefits such as positional-level transparency, aggregation of sector exposure across managers, third-party backup and cost-savings

2 Expanded Commodity Pool Definition

• “Commodity Pool Operator” refers to any person engaged in the business of soliciting investors for an investment trust operating for the purpose of trading in commodity interests (a “commodity pool”).

– Commodity interests include futures contracts, commodity options and, post Dodd-Frank, swaps. – Swaps include interest rate swaps, currency swaps, energy and metal swaps, commodity swaps, broad-based indices swaps, etc.

• Funds of funds may also fall within the definition of commodity pools depending on the investment activities of underlying funds.

3 Registration Requirements of Commodity Pool Operators

• Requirements are for commodity pool operators (and not commodity pools) and commodity trading advisors to register with the CFTC and the NFA unless the manager meets certain exemptions that have recently been narrowed.

• Principals and associated persons:

– Associated persons engaged in marketing (and their supervisors) will need to prepare and pass Series 3 license exams – Individual principals required to be listed and fingerprinted

• Substantial annual CFTC disclosure requirements pertaining to, for example, historical performance, fees, break-even tables, etc., must be filed with the NFA for review (unless an exemption is available, for example, under Rule 4.7).

– “Disclosure Document” equivalent to prospectus

4 Post-Registration Obligations of CPOs and CTAs

• Registration imposes upon the investment firm additional obligations:

– Annual filing requirements to maintain registration – Testing obligations (e.g., Series 3) applicable to individuals engaged in soliciting investors (and their supervisors) – Periodic filings with the NFA (e.g., disclosure documents) – Compliance with NFA compliance rules and bylaws – Periodic NFA examinations – Periodic CFTC examinations – Form CPO-PQR filings on a quarterly and/or annual basis

• Staffing and operational considerations:

– Chief Compliance Officer will need to be familiar with NFA/CFTC rules including testing requirements, sales literature rules (which may be different than FINRA/SEC rules) – Accounting/operations personnel will need to be trained on compilation of data required for periodic filings 5 Form CPO-PQR

• General reporting obligations:

– Commodity pool operators are required to file quarterly and annual statements with the NFA/CFTC – Complexity of reports depends on the size of pools (greater the pool, more info required) – Info regarding pool size, investments, counterparties, auditors, administrators, custodians, monthly performance, etc. – Reports due 60 or 90 days after each calendar quarter, depending on pool size

• Staffing and operational considerations:

– Coordination required between accounting, compliance, operations and portfolio management personnel – Depending on sizes of pools operated, there may be significant operational needs every quarter – This increases demands on personnel at each quarter as other reporting needs arise at the same time (e.g., periodic filings and reviews)

6 Mitigation of New Disclosure Requirements

• Relief from CFTC disclosure requirements available to registered investment companies with more than de minimus exposure to commodity futures

– “Substituted compliance” accepted by the CFTC with notice filings to the NFA – Managers are still required to be registered as commodity pool operators and subject to CFTC and NFA oversight (in addition to SEC oversight)

• Also, relief from broad CFTC disclosure requirements available to:

– CPOs with respect to pools and accounts limited to QEPs not offered to the public – Family offices (no-action relief from CPO registration upon filing of claim for relief) – Certain securitization vehicles – REITS – BDCs (upon compliance with Rule 4.5 de minimus thresholds)

7 New Swaps Documentation Changes

• Dodd-Frank has necessitated new ISDA documentation updates

– ISDA August 2012 DF Protocol (“DF Protocol 1.0”) – ISDA March 2013 DF Protocol (“DF Protocol 2.0”)

• Protocols address:

– Business conduct standards (DF Protocol 1.0) – Additional transaction-level requirements not addressed in existing ISDA forms (DF Protocol 2.0)

8 New Swaps Documentation Changes (Continued)

• Practical considerations with respect to adherence to DF Protocols:

– Out-of-pocket cost of compliance – Time, personnel and operational overhead – Due diligence considerations – Implementation of operational, monitoring and review changes – Counterparty coordination and reporting

9 Other Developing Issues

• Proposed margin requirements for uncleared swaps:

– Initial margin for all uncleared swaps exposure except for certain low-risk counterparties – Restricting margin to cash, U.S. Treasuries and, for initial margin only, government agency securities (versus equity pledges, etc.) – Margin requirements may be substantially greater than for cleared swaps – Margin may be required to be held at independent, third-party custodians with restrictions on rehypothecation and reinvestment

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