Swaps Definitions Regulation - Interpretive Guidance on Product Definitions - Summary Table

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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, 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 it final rules on swap product definitions, adding additional guidance and clarity to prior proposals on swaps and security-based swaps definitions.[1]

On July 6, 2012, the SEC unanimously approved the joint rule.[2] The rulemaking was published in the Federal Register on August 13, 2012. The effective date is October 12, 2012.

A table summarizing the product definitions can be found below. For more information, visit the swap entity and product definitions page.

Contents

Background

The Dodd-Frank Act divides regulatory authority over swaps between the SEC and the Commodity Futures Trading Commission (CFTC).

  • The SEC has authority over “security-based swaps,” which are broadly defined as swaps based on (1) a single security or (2) a loan or (3) a narrow-based group or index of securities or (4) events relating to a single issuer or issuers of securities in a narrow-based security index.
  • The CFTC, on the other hand, has primary regulatory authority over all other swaps.
  • Meanwhile, the CFTC and SEC share authority over “mixed swaps,” which are security-based swaps that also have a commodity component.[3]

Final Swap Product Definitions, August 2012

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.[4]


Swap Product Definitions as Proposed, April 2011

Swap Category Products
Not Swaps Insurance, provided that the beneficiary has an insurable interest, the contract is not traded in a secondary market, and the entity providing the contract qualifies as an "insurance company"

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.

Swaps -- CFTC Jurisdiction FX Swaps (except those exempted by Department of Treasury Proposed Determination, April 29, 2011)

Non-exempt FX products -- FX options, non-deliverable forwards, currency and cross-currency swaps
Forward Rate Agreements
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)

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

Mixed Swaps Where counterparties embed interest-rate optionality or a non-securities component into the TRS (e.g., the price of oil, a currency hedge)

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.[5]

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. Definitions Contained in Title VII of Dodd-Frank Wall Street Reform and Consumer Protection Act. Federal Register. Retrieved on March 18, 2011.
  4. Fact Sheet:Proposed Rules and Interpretive Guidance. CFTC. Retrieved on May 2, 2011.
  5. Fact Sheet:Proposed Rules and Interpretive Guidance. CFTC. Retrieved on May 2, 2011.

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