CFTC/SEC Joint Final Rule on Swap Product Definitions

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Gavel.png FINAL RULE: Joint CFTC/SEC Final Rule approved at July 10, 2012 open meeting, and by the SEC on July 6, 2012
Dodd-Frank Timeline, Further Defining “Swap Dealer,” “Major Swap Participant” and “Eligible Contract Participant”
Final Rule Issue Effective Date Compliance Date
May 23, 2012 July 23/Dec. 31, 2012 October 12, 2012
Dodd-Frank Timeline, Swap Product Definitions
Final Rule Issue Effective Date Compliance Date
August 13, 2012 October 12, 2012 October 12, 2012

At its July 10, 2012 open meeting the CFTC approved a final joint rulemaking on the further definitions of the terms “swap,” “security-based swap,” and “security-based swap agreement.” [1]

On July 6, 2012, the SEC unanimously approved the joint rule.[2]

The rulemaking appeared in the Federal Register on August 13, 2012,and was set to become effective 60 days later, or October 12, 2012. On that date, however, the CFTC issued several no-action letters, effectively delaying implementation until, in most cases, December 31, 2012.

Note: In November 2014 the commission proposed an interpretation of the product definitions rules that would clarify whether forward contracts with "volumetric optionality" - forward contracts that provide for variations in delivery amount would be considered a forward contract rather than a swap.

Background

Title VII of the Dodd-Frank Act gives the SEC jurisdiction over "security-based" swaps, and jurisdiction to the CFTC on all other swaps, except for a category known as "mixed swaps" which may have both security-based and non-security-based components. For mixed swaps, the two agencies will have joint oversight responsibilities. Dodd-Frank required that the two agencies, in consultation with the Federal Reserve, further define the terms. A joint final rule on entity definitions, including "swap dealer," "major swap participant" and "eligible contract participant" was released in April 2012.

Swap Product Definitions - Summary Table

Swap Category Products
Not Swaps Insurance, provided that the beneficiary has an insurable interest, the contract is not traded in a secondary market ("Product Test"), and the entity providing the contract qualifies as an "insurance company" ("Provider Test"). Insurance products include the following: surety bonds; fidelity bonds; life insurance; health insurance; long-term care insurance; title insurance; property and casualty insurance; annuities; disability insurance; insurance against default on individual residential mortgages (commonly known as private mortgage insurance, as distinguished from financial guaranty of mortgage pools); and reinsurance (including retrocession) of any of the foregoing, so long as that reinsurance or retrocession is not accomplished by entering into swaps or security-based swaps.

Consumer Transactions (for personal, family or household purposes such as real estate transactions, mortgages, and consumer loans)
Commercial Transactions (customary business arrangements and commercial transactions such as leases, service contracts, employment agreements, and commercial loans)
Loan Participations
Forward Contracts for Non-Financial Commodities,in a manner consistent with the CFTC’s historical interpretation of the existing forward exclusion with respect to futures contracts. In previous CFTC guidance, forwards with price optionality were considered forwards. The commission is seeking comment on whether to include contracts with volumetric optionality as well.

Swaps -- CFTC Jurisdiction FX Swaps (except those exempted by Department of Treasury Final Determination, November 16, 2012)

Non-exempt FX products -- FX options, non-deliverable forwards, currency and cross-currency swaps
Forward Rate Agreements not to be confused with "forwards," which are not considered swaps, as explained above.
Interest rates and other monetary rates (including interbank offered rates, money market rates, government target rates, general lending rates, rates from indexes, and other monetary rates)
Credit Default Swaps based on broad-based security indexes.

Security-based Swaps -- SEC Jurisdiction Yields, where “yield” is a proxy for the price or value of a debt security, loan or narrow-based security index (except in the case of certain government debt obligations).

Total Return Swaps on a single security, loan, or narrow-based security index
Instruments on security futures
Credit Default Swaps based on single names, loans and narrow-based security indexes.

Mixed Swaps Total Return Swaps that embed interest-rate optionality (e.g., a cap, collar, call, or put) to shift or limit interest rate exposure, or if a TRS also is based on non-security-based components (such as the price of oil, or a currency)

Participants in a mixed swap transaction must petition the CFTC and SEC, in order to receive a joint order, unless one of the entities involved in the transaction is dually-registered.[3]


The commissions also adopted a rule that defines as swaps those transactions that are willfully structured to evade the provisions of Title VII governing the regulation of swaps.

Related Documents: Fact Sheet, Q&A, and Federal Register Entry

References

  1. CFTC to Hold Open Meeting to Consider Final Rule on the Further Definition of the term “Swap,” Final Rule on the End-User Exception to Clearing, and Proposed Rule to Exempt from Clearing Certain Swaps by Cooperatives. CFTC. Retrieved on July 10, 2012.
  2. CFTC Approves Swap Definition Triggering Dodd-Frank Rules. Bloomberg BusinessWeek. Retrieved on July 11, 2012.
  3. Fact Sheet:Proposed Rules and Interpretive Guidance. CFTC. Retrieved on May 2, 2011.

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