Proposed Swap Definitions Under Title VII of the Dodd-Frank Act: CFTC and SEC Propose Rules and Guidance to Further Define the Terms “Swap Dealer,” “Security-Based Swap Dealer,” “Major Swap Participant,” “Major Security-Based Swap Participant” and “Eligible Contract Participant”

Sullivan & Cromwell LLP - December 14, 2010
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The CFTC and SEC have issued a joint release proposing rules to define further certain terms in the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) relating to swap dealers, security-based swap dealers, major swap participants, major security-based swap participants and eligible contract participants, and proposing interpretive guidance with respect to those terms. The proposing release and the proposed rules, among other things:

  • identify certain indicators that would be used to determine whether a person is a swap dealer or security-based swap dealer;
  • set forth the conditions for meeting the de minimis exemption from registration as a swap dealer or security-based swap dealer;
  • establish minimum thresholds that will determine whether a swap position qualifies as a “substantial position,” or a person has “substantial counterparty exposure,” for purposes of registering as a major swap participant or major security-based swap participant; and
  • define which swap positions are included in the definition of “hedging or mitigating commercial risk” for purposes of qualifying for an exemption from registration as a major swap participant or major security-based swap participant.

The proposing release does not set forth any proposed rules regarding substantive compliance issues to which swap dealers, security-based swap dealers, major swap participants or major security-based swap participants would be subject, but highlights that such rules are being addressed through separate rulemaking. The CFTC and SEC request comments on all aspects of these proposals, including comments that would suggest alternative approaches to defining the terms discussed in the proposing release. Comments are due within 60 days after their publication in the Federal Register, which we expect to occur shortly. For further background on the Dodd-Frank Act provisions that these proposed rules would implement, please see our memoranda entitled “United States Adopts Historic Revision of Financial Services Regulation” and “Implications of Financial Services Reform for Hedge Funds and Private Equity Funds.”