SEC, CFTC Reveal Swap Definitions

(April 28, 2011) — As part of the Dodd-Frank law, financial regulators have approved a 300-page proposal to define a new swaps plan.

The plan will explain which agency — the Securities and Exchange Commission or the Commodity Futures Trading Commission — will regulate what types of transactions. The proposals provide the market with increased clarity, as regulators have faced scrutiny and mounting criticism for not acting on the swaps definitions rule sooner.

Under the proposals — aimed at limiting risk and boosting transparency in the $583 trillion global swaps market — swaps would include foreign exchange swaps and forwards, foreign currency options, commodity options, cross-currency swaps, and forward rate agreements. An exemption would apply to certain insurance products, consumer and commercial transactions.

However, while the two agencies are largely aligned, they are still split on their definitions of ‘swaps’, ‘security-based swaps’ and other products in their joint rule-making, according to The Deal. The SEC voted unanimously to put the definitions out for public comment, and the CFTC approved its measure 4-1 — Republican Jill Sommers dissented, claiming that the agency was exceeding its mandate.

“The proposed definitions balance several policy and legal issues in a way I believe is practical, takes into account the specific nature of derivatives contracts, and is consistent with existing securities regulations,” said SEC Chairman Mary L. Schapiro in a statement. “The proposal seeks to provide guidance in rules and interpretations by using clear and objective criteria that should clarify whether a particular instrument is a swap regulated by the CFTC, a security-based swap regulated by the SEC, or a mixed swap regulated by both agencies.”

President Obama signed the Dodd-Frank financial regulation bill last July, giving the CFTC and SEC oversight of the OTC derivatives market while forcing most swaps to be cleared on a regulated exchange. Obama’s signature marked a legislative push that has become increasingly aggressive since the 2008 financial crisis pummeled the US economy.

The report established a code of conduct for all registered swap dealers — the CFTC must publish an “interim final rule” for how to report data for swaps that predate the reform act. Furthermore, the report ordered the commission to establish timelines on how new swap trades will be reported. “When acting as counterparties to a pension fund, endowment fund, or state or local government, dealers are to have a reasonable basis to believe that the fund or governmental entity has an independent representative advising them,” the House Financial Services Committee stated in June.