Final Product Definitions Under Title VII of Dodd-Frank: CFTC and SEC Adopt Rules and Guidance to Further Define “Swap”, “Security-Based Swap”, “Mixed Swaps” and Other Swap-Related TermsSullivan & Cromwell LLP - August 27, 2012
Pursuant to the regulatory framework established by Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), the Commodity Futures Trading Commission (“CFTC”) has regulatory authority over swaps under the Commodity Exchange Act (“CEA”), the Securities and Exchange Commission (“SEC”, and with the CFTC, the “Commissions”) has regulatory authority over security-based swaps under the Securities Exchange Act of 1934 (the “Exchange Act”), and the Commissions share jurisdiction with respect to “mixed swaps” (generally, security-based swaps that are also based on specified elements indicative of swaps). Section 721 of Dodd-Frank sets forth definitions of the terms “swap” and “mixed swap”, and Section 761 of Dodd-Frank defines a “security-based swap”; Section 712(d)(1) requires that the Commissions, in consultation with the Board of Governors of the Federal Reserve System (the “Board”), further define certain terms used in Title VII of Dodd-Frank, including “swap” and “security-based swap”.
The CFTC and SEC have issued a joint release (the “Adopting Release”) adopting final rules (the “Final Rules”) and interpretive guidance to clarify the treatment of certain agreements, contracts and transactions under the defined terms. The Adopting Release addresses, among other things:
- insurance products;
- forward contracts (including forward contracts with embedded optionality on certain terms);
- consumer and commercial contracts;
- loan participations;
- foreign-exchange related instruments;
- instruments based on interest rates (or other monetary rates) and yields;
- total return swaps (“TRS”);
- instruments based on futures contracts;
- the definition of a “narrow-based security index” in determining whether an instrument is a swap or security-based swap and the definition of an “index” in connection with an indexed credit-default swap (“index CDS”);
- procedures for requesting guidance from the Commissions on the characterization of an instrument; and
- “mixed swaps” and the mechanism for evaluating the applicability of certain regulatory requirements to mixed swaps.
The Adopting Release also adopts rules addressing the CFTC’s anti-evasion authority and provides guidance on how the CFTC will exercise that authority.
The Adopting Release was published in the Federal Register on August 13, 2012. The Final Rules will be effective October 12, 2012, provided that the “compliance date” with respect to the definition of “security-based swap” solely for purposes of the Exchange Act Exemptive Order and the SB Swaps Interim Final Rules will be December 11, 2012 and the “compliance date” for the interpretation regarding guarantees of swaps (discussed in Section I. B) will be the same as the effective date of the rules the CFTC will promulgate to define the obligations applicable to such guarantees. The “swap”, “security-based swap” and “mixed swap” definitions will determine when the regulatory responsibilities of many market participants, and compliance with many of the CFTC’s requirements under Title VII will be required. Compliance with the SEC’s requirements under Title VII will not be required earlier than 180 days after the effective date.