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SEC and CFTC Finalize Rules and Interpretations on Key Terms for Regulating Derivatives

This month, the SEC and the Commodity Futures Trading Commission (CFTC) adopted final rules defining what derivative products will be regulated under Title VII of Dodd-Frank. That Title establishes a comprehensive new regulatory framework for swaps and security-based swaps, giving the SEC and the CFTC authority to oversee the over-the-counter derivatives market.

The new rules define the terms “swap,” which fall within the purview of the CFTC, and “security-based swap,” falling within the purview of the SEC. The rules and interpretations also provide guidance as to what constitutes a “mixed swap,” which are security based swaps with a commodity component that the SEC and CFTC oversight. Security-based swap agreements are related to securities, but do not come within the security based swap definition, and are regulated by the CFTC but subject to the SEC’s anti-fraud provisions.

Under the final joint rulemaking, swaps and security based swaps include:

- Foreign exchange swaps and forwards;

- Foreign currency options (other than foreign currency options traded on a national securities exchange);

- Commodity options; and

- Cross-currency swaps and forward rate agreements.

The regulators’ interpretations also clarify that the determination of whether a particular agreement, contract or transaction is a swap, SBS or mixed product is made at the inception of the instrument and that the characterization remains through the life of the instrument (unless the instrument is later amended or modified). Also of note, the definitions create a safe harbor for certain insurance products and exempt some consumer and commercial transactions, such as life, property and casualty insurance.

Importantly, the new rules also set in motion the registration requirements for “swap dealers,” who have 60 days to register with the National Future Association after the final definitions are published in the Federal Register.

For additional information about the new regulations for derivatives, or any other securities law concern, please contact Sarah Weber at or (619)298-2880.