Security Based Swap Agreement Definition

On July 9 and 10, 2012, the Commodity Futures Trading Commission and the Securities and Exchange Commission (together the “Commissions”) approved common final rules and interpretations (the “swap definitions”) relating to the definition and regulation of swaps, security-based swaps, mixed trading contracts and security-based swap agreements. Swap definitions were adopted in accordance with Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act” (“DFA”), which instructed the CFTC and the SEC to “continue to define” and refine the definitions in the DFA with respect to security swaps and swaps (together “Title VII Instruments”). In this context, the SEC has the power to regulate security-based swaps, the CFTC has the power to regulate swaps, agencies will jointly regulate mixed swaps, and the SEC will continue to have anti-fraud powers on certain instruments regulated by the CFTC, including security-based swap agreements. The definition of instrument status as a security-based swap, swap or mixed swap should take place before the instrument is executed and at the latest when the parties propose to enter the instrument. When an instrument is characterized as a swap or security swap, such characterization remains the same throughout the life of the instrument, unless the terms are materially altered. For example, when an instrument is based on a securities index (i.e. a security-based swap) at the time of the parties` implementation, the instrument is not again called a “swap” if the index becomes a large-scale securities index thereafter and vice versa. Commissions define a security-based swap agreement (unlike a security-based swap) as a swap (for example. B a total return swap on a large-scale securities index), regulated by the CFTC, but including securities. (The CFTC confuses these swaps as “equity swaps”).

The CFTC has regulatory and enforcement powers for security-based swap agreements, but the SEC has anti-fraud, manipulation and other powers. Interpretations indicate that instruments such as large-scale security index swaps and risk-risk swaps based on a large-scale security index are security-based trading agreements. Despite the SEC`s regulatory and enforcement authority, swap definitions state that security-based swap agreements are not necessary to meet the additional accounting and registration requirements that have not been adopted by the CFTC for swaps. The definitions of the swap contract establish a procedure by which any person can require commissions to establish a common interpretation of whether a contract, agreement or transaction is a swap, a security-based swap or a mixed swap. The concept of common interpretation is useful, but the procedure for obtaining such an interpretation has not been applied in a market-sensitive or market-friendly manner. Commissions have discretion over the requests for interpretation that they assess and, even if they decide to accede to a request for interpretation of an instrument, they have 120 days to reach a decision. Although swap definitions do not explicitly mention, commodity swaps and commodity options are swaps. Commodity swaps and options for these products are expressly included in the definition of a swap in accordance with Title VII. In addition, the CFTC rule on commodity options states that all commodity options must be treated as a swap within the meaning of Title VII.2.

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