Exam Alert: SEC and CFTC define “swap,” “security-based swap,” and “mixed swap”

Effective October 12, 2012, the SEC and CFTC will put into effect rules that specify whether a given product counts as a “swap,” “security-based swap,” “mixed swap,” or none of the above. The new rules also require market participants to keep the same books and records for “security-based swap agreements” as would be required for swaps. Continue reading

Effective October 12, 2012, the SEC and CFTC will put into effect rules that specify whether a given product counts as a “swap,” “security-based swap,” “mixed swap,” or none of the above.  The new rules also require market participants to keep the same books and records for “security-based swap agreements” as would be required for swaps.

 

The CFTC regulates swaps, the SEC regulates security-based swaps, and both agencies regulate mixed swaps.  The CFTC regulates security-based swap agreements, but the SEC has antifraud authority over those products.

 

Products that are not swaps or security-based swaps include:

-insurance that falls under 1) the grandfather provision, 2) the product safe harbor, or 3) the enumerated product safe harbor

-security forwards

-consumer transactions

-commercial transactions

 

Products that are considered swaps include:

-Title VII instruments on interest rates and other monetary rates

-Title VII instruments on rates or yields of U.S. Treasuries and certain other exempt securities

-Title VII instruments on futures (other than futures on foreign government debt securities)

-broad-based index credit default swaps that require cash settlement or auction settlement

 

Products that are considered security-based swaps include:

-Title VII instruments on yields of a non-exempt debt security, loan, or narrow-based security index

-Total Return Swaps on a single security, loan, or narrow-based security index

-Title VII instruments on security futures

 

Products that are considered mixed swaps include:

-Total Return Swaps that include interest-rate optionality or a non-securities component

-broad-based index credit default swaps that require mandatory physical settlement

 

Products that may be swaps or security-based swaps:

-Title VII instruments based on futures contracts on certain foreign government debt securities

-index credit default swaps

-foreign exchange forwards

-foreign exchange swaps

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

-non-deliverable forward contracts involving foreign exchange

-currency and cross-currency swaps

-forward rate agreements

-contracts for differences

-certain combinations and permutations of (or options on) swaps and security-based swaps

 

Market participants may request a determination from the SEC and the CFTC of whether a product is a swap, a security-based swap, or a mixed swap.

 

Sources:

SEC Approves Rules and Interpretations on Key Terms for Regulating Derivatives (SEC Release 2012-130)

Further Definition of “Swap,” “Security-Based Swap,” and “Security-Based Swap Agreement”; Mixed Swaps; Security-Based Swap Agreement Recordkeeping (Federal Register publication)

 

This alert applies to the Series 62, Series 79, Series 99, Series 7, Series 66, and Series 65.

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