SEC and CFTC Finalize Key Swap Product Definitions
under Dodd-Frank, Triggering the Effectiveness or PhaseIn of Many Dodd-Frank Derivatives Regulatory
Provisions
July 12, 2012
On July 6, 2012, and July 10, 2012, the U.S. Securities and Exchange Commission (“SEC”) andU.S. Commodity Futures Trading Commission (“CFTC” and, collectively with the SEC, the“Commissions”), respectively, approved joint final rules further defining the terms “swap,”“security-based swap,” “mixed swap,” and “security-based swap agreement” pursuant to theDodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). These
rules determine which derivative products will be subject to SEC and CFTC regulation under
the Dodd-Frank Act, and their publication in the Federal Register—expected to occur shortly inthe near future—will trigger the effective dates of many of the Dodd-Frank Act’s derivatives
regulatory provisions whose effectiveness has so far been tolled pending the adoption of these
final product definitions.
Although the SEC and CFTC have not yet made public the text of the final rules, this client alert
provides a preliminary overview based on the Commissions’ fact sheets, the CFTC’s Q&Arelease, and discussion during the CFTC’s open meeting approving the rules, with a focus on
certain commonly used derivative products that will likely be covered as “swaps” or “securitybased swaps.”1 We will provide a more detailed analysis of the final rules and theirinterpretations upon their release.
The publication of the final product definition rules in the Federal Register will trigger theimplementation of other final derivatives-related rules promulgated under the Dodd-Frank Act,
subject to any applicable phase-in provisions or forthcoming exemptive relief. Users ofderivative products that are “swaps” or “security-based swaps” will need to consider theimpact of swap data recordkeeping and reporting requirements2 on their compliance policies as
1 See CFTC Fact Sheet available at:

http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/fd_factsheet_final.pdf; CFTC
Q&A Release available at:
http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/fd_qa_final.pdf; and SEC Fact
Sheet available at: http://sec.gov/news/press/2012/2012-130.htm. The webcast of the CFTC’s OpenMeeting on the 28th Series of Rulemakings under the Dodd-Frank Act is available online at:
http://onlinevideoservice.com/clients/cftc/archive.htm. The SEC approved the rules during a closed
meeting.
2 See Swap Data Recordkeeping and Reporting Requirements, 77 F.R. 2136 (Jan. 13, 2012), Swap Data
Recordkeeping and Reporting Requirements: Pre-Enactment and Transition Swaps, 77 F.R. 35200 (June12, 2012), and Real-Time Public Reporting of Swap Transaction Data, 77 F.R. 1182 (Jan. 9, 2012). See also
Overview of Final Rules on Recordkeeping and Reporting of Swaps, available atMemorandum – July 12, 2012

well as their swap documentation and execution process. Some products may also be subject toa requirement that trades be entered into via a clearinghouse and/or executed on a swap
execution facility, or be subject to margin requirements. Persons who may be considered aswap dealer, security-based swap dealer, major swap participant, or major security-based swap
participant must register with the CFTC or SEC3 and will be subject to regulation on matters
including business conduct, capital and margin requirements, heightened reporting andrecordkeeping requirements, and position limits monitoring, among other provisions.4
The joint final rules also affect other U.S. law requirements that may take into accountderivative transactions or activities, including whether a private fund—such as a hedge fund or
private equity fund—may become subject to regulation by the CFTC as a “commodity pool”
under the U.S. Commodity Exchange Act based on its swap activities.5 If a private fund isdeemed to be a commodity pool in light of the “swap” definition, the manager to this type ofprivate fund should assess the fund’s status in order to determine whether the manager will be
required to either claim an exemption from registration as “commodity pool operator” (“CPO”)(and if necessary, as a “commodity trading advisor” (“CTA”)) or register with the CFTC as a
CPO or as a CTA.6 Furthermore, private funds that currently meet the de minimis exemption
http://stblaw.com/siteContent.cfm?contentID=4&itemID=75&focusID=1374, and The CFTC Adopts
Final Rules on the Recordkeeping and Reporting of Historical Swaps, available at
http://www.stblaw.com/siteContent.cfm?contentID=4&itemID=75&focusID=1431.
3 The CFTC has currently proposed an exemptive order that would delay the compliance date withrespect to certain requirements for swap dealers and major swap participants. See CFTC Notice ofProposed Exemptive Order and Request for Comment Regarding Compliance with Certain SwapRegulations (2012). The SEC has not yet proposed comparable exemptive relief relating to security-based
swap dealers or major security-based swap participants.
4 See, e.g., Further Definition of “Swap Dealer,” Security-Based Swap Dealer,” “Major Swap Participant,”“Major Security-Based Swap Participant,” and “Eligible Contract Participant,” 77 FR 30596 (May 23,2012); Registration of Swap Dealers and Major Swap Participants, 77 F.R. 2613 (Jan. 19, 2012); BusinessConduct Standards for Swap Dealers and Major Swap Participants With Counterparties, 77 F.R. 9734(Feb. 17, 2012); and Swap Dealer and Major Swap Participant Recordkeeping, Reporting, and Duties
Rules; Futures Commission Merchant and Introducing Broker Conflicts of Interest Rules; and Chief
Compliance Officer Rules for Swap Dealers, Major Swap Participants, and Futures CommissionMerchants, 77 F.R. 20128 (Apr. 3, 2012). See also our May 2, 2012 memorandum, CFTC and SEC Adopt New
Rules Further Defining “Swap Dealer” and “Security-based Swap Dealer,” available at:
http://www.stblaw.com/siteContent.cfm?contentID=4&itemID=75&focusID=1413, and our May 3, 2012
memorandum, CFTC and SEC Adopt New Rules Further Defining “Major Swap Participant” and “Major
Security-Based Swap Participant”, available at:
http://www.stblaw.com/siteContent.cfm?contentID=4&itemID=75&focusID=1414.
5 A “commodity pool” is a collective investment vehicle that invests in futures, options on futures, andswaps. The managers and advisers of commodity pools are regulated by the CFTC unless otherwise
exempt or excluded pursuant to the U.S. Commodity Exchange Act or CFTC regulations. For further
explanation, see our April 16, 2012 memorandum, Fund Managers Alert: CFTC Rescinds Exemptions andExpands its Regulations (the “April 16 Memorandum”) available at
http://www.simpsonthacher.com/content/Publications/pub1402.pdf.
6 Managers who have claimed the CFTC Rule 4.13(a)(4) CPO exemption prior to April 24, 2012 may relyon such exemption until December 31, 2012. Similarly, managers who have claimed the CFTC Rule4.14(a)(8) CTA exemption due to their advice to a CPO claiming the CFTC Rule 4.13(a)(4) exemption may
rely on this CTA exemption until December 31, 2012.
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Memorandum – July 12, 2012

under CFTC Rule 4.13(a)(3) will need to reevaluate whether they continue to do so under thenew definition.7
The Commissions’ fact sheets, the CFTC’s Q&A release, and the CFTC’s discussion
during its open meeting state that the final rule will address certain commonly transacted
derivatives as summarized below:
Interest Rate Derivatives. The CFTC states that most interest rate derivatives (such asinterest rate swaps, options, caps, collars, floors, or swaptions) will generally fall within
the definition of “swap,” though the final rule text will provide greater detail.8

Commodity Derivatives. The Dodd-Frank act includes commodity swaps as “swaps,”9but excludes nonfinancial commodity forwards intended to be physically settled.10 The
CFTC indicates that the final rule and accompanying interpretive guidance will provide
further clarification as to the scope of the nonfinancial commodity forward exclusion.11

Foreign Exchange Derivatives. The CFTC states that the final rules will provide that
foreign exchange swaps and foreign exchange forwards will be included as “swaps,”
subject to any final determination by the Treasury Department to exempt them. Even if
the Treasury Department exempts such products, however, the CFTC notes that certain
Dodd-Frank Act requirements will continue to apply, such as recordkeeping, reportingand business conduct standards. The CFTC also notes that the final rule will include as“swaps” other foreign exchange derivatives not subject to the Treasury Department’s
determination, including foreign currency options (other than foreign currency options
traded on a national securities exchange), non-deliverable forwards in foreign exchange,
currency swaps, and cross-currency swaps.12

Credit Default Swaps and Total Return Swaps. The SEC and CFTC both indicate that
the Adopting Release will offer further guidelines for distinguishing which types ofcredit default swaps (“CDS”) and total return swaps (“TRS”) will be subject to SEC
jurisdiction as “security-based swaps,” CFTC jurisdiction as “swaps,” or joint SEC-CFTC
jurisdiction as “mixed swaps.”13 The Dodd-Frank Act generally provides that CDS orTRS based on single securities, single loans, or narrow-based security indexes will be“security-based swaps,” while other CDS and TRS will be “swaps” or “mixed swaps,”
depending on their particular features.14

Equity Options and Equity Forwards. The Dodd-Frank Act expressly excludes from thedefinition of “swap” and “security-based swap” equity options and physically-settled
equity forwards.15 It remains to be seen whether the final rule and interpretive guidance
will clarify whether cash-settled equity forwards will also be excluded.

7 For further explanation, please see the April 16, 2012 Memorandum.
8 See CFTC Fact Sheet, pp. 6-7.
9 See 7 U.S.C. § 1a(47)(A)(iii)(XXII).
10 See 7 U.S.C. § 1a(47)(B)(ii).
11 See CFTC Fact Sheet, p. 5.
12 See CFTC Fact Sheet, pp. 5-6.

See also 7 U.S.C. § 1a(47)(E).

13 See CFTC Fact Sheet, pp. 6-8; SEC Fact Sheet, pp. 5-6.
14 See 7 U.S.C. §§ 1a(47)(A)(iii) and 1a(47)(D); 15 U.S.C. § 78c(a)(68)(A)(i).
15 See 7 U.S.C. §§ 1a(47)(B)(i) and 1a(47)(B)(iii).

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Memorandum – July 12, 2012

As previously noted, the foregoing is based on preliminary information made available by theCommissions, as the Commissions have not yet publicly released the final rule text orinterpretive guidance. We will provide a more detailed analysis of the final rules and theirinterpretations upon their release.
***For more information about any of the foregoing, please contact the following members of theFirm’s Derivatives Group: Joyce Xu (jxu@stblaw.com), Brian Chernoff (bchernoff@stblaw.com),
Lisa Wang (lisa.wang@stblaw.com).
This memorandum is for general information purposes and should not be regarded as legal advice. Pleasecontact your relationship partner if we can be of assistance regarding these important developments. The
names and office locations of all of our partners, as well as our recent memoranda, can be obtained fromour website, www.simpsonthacher.com.
The contents of this publication are for informational purposes only. Neither this publication nor the lawyers who authored it are
rendering legal or other professional advice or opinions on specific facts or matters, nor does the distribution of this publication to
any person constitute the establishment of an attorney-client relationship. Simpson Thacher & Bartlett LLP assumes no liability inconnection with the use of this publication.

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Memorandum – July 12, 2012

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