29818 Federal Register / Vol. 76, No. 99 / Monday, May 23, 2011 / Proposed Rules 

1 17 CFR 145.9. 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Part 1 

RIN 3038–AD46 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Part 240 

[Release No. 33–9204; 34–64372; File No. 

S7–16–11] 

RIN 3235–AL14 

Further Definition of ‘‘Swap,’’ ‘‘SecurityBased Swap,’’ and ‘‘Security-Based 

Swap Agreement’’; Mixed Swaps; 

Security-Based Swap Agreement 

Recordkeeping 

AGENCIES: Commodity Futures Trading 

Commission; Securities and Exchange 

Commission. 

ACTION: Joint proposed rules; proposed 

interpretations. 

SUMMARY: In accordance with section 

712(a)(8), section 712(d)(1), sections 

712(d)(2)(B) and (C), sections 721(b) and 

(c), and section 761(b) of the DoddFrank Wall Street Reform and Consumer 

Protection Act (‘‘Dodd-Frank Act’’), the 

Commodity Futures Trading 

Commission (‘‘CFTC’’) and the Securities 

and Exchange Commission (‘‘SEC’’) 

(collectively, ‘‘Commissions’’), in 

consultation with the Board of 

Governors of the Federal Reserve 

System (‘‘Board’’), are jointly issuing 

proposed rules and proposed 

interpretive guidance under the 

Commodity Exchange Act (‘‘CEA’’) and 

the Securities Exchange Act of 1934 

(‘‘Exchange Act’’) to further define the 

terms ‘‘swap,’’ ‘‘security-based swap,’’ 

and ‘‘security-based swap agreement’’ 

(collectively, ‘‘Product Definitions’’), 

regarding ‘‘mixed swaps,’’ and governing 

books and records with respect to 

‘‘security-based swap agreements.’’ 

DATES: Comments should be received on 

or before July 22, 2011. 

ADDRESSES: Comments may be 

submitted, identified by File No. S7–16– 

11, by any of the following methods: 

CFTC: 

• Agency Web site, via its Comments 

Online process: http:// 

comments.cftc.gov. Follow the 

instructions for submitting comments 

through the Web site. 

• Mail: David A. Stawick, Secretary, 

Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1155 21st Street, NW., Washington, DC 

20581. 

• Hand Delivery/Courier: Same as 

mail above. 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

Please submit your comments using 

only one method. ‘‘Product Definitions’’ 

must be in the subject field of responses 

submitted via e-mail, and clearly 

indicated on written submissions. All 

comments must be submitted in 

English, or if not, accompanied by an 

English translation. Comments will be 

posted as received to http:// 

www.cftc.gov. You should submit only 

information that you wish to make 

available publicly. If you wish the CFTC 

to consider information that you believe 

is exempt from disclosure under the 

Freedom of Information Act, a petition 

for confidential treatment of the exempt 

information may be submitted according 

to the procedures established in section 

145.9 of the CFTC’s regulations.1

The CFTC reserves the right, but shall 

have no obligation, to review, prescreen, filter, redact, refuse or remove 

any or all of your submission from 

www.cftc.gov that it may deem to be 

inappropriate for publication, including 

obscene language. All submissions that 

have been redacted or removed that 

contain comments on the merits of the 

rulemaking will be retained in the 

public comment file and will be 

considered as required under the 

Administrative Procedure Act and other 

applicable laws, and may be accessible 

under the Freedom of Information Act. 

SEC 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/

rules/proposed.shtml); 

• Send an e-mail to rulecomments@sec.gov. Please include File 

Number S7–16–11 on the subject line; 

or 

• Use the Federal eRulemaking Portal 

(http://www.regulations.gov). Follow the 

instructions for submitting comments. 

Paper Comments 

• Send paper comments in triplicate 

to Elizabeth M. Murphy, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549–1090. All submissions should 

refer to File Number S7–16–11. This file 

number should be included on the 

subject line if e-mail is used. To help us 

process and review your comments 

more efficiently, please use only one 

method. The SEC will post all 

comments on the SEC’s Internet Web 

site (http://www.sec.gov/rules/

proposed.shtml). Comments are also 

available for Web site viewing and 

printing in the SEC’s Public Reference 

Room, 100 F Street, NE., Washington, 

DC 20549, on official business days 

between the hours of 10 a.m. and 3 p.m. 

All comments received will be posted 

without change; the SEC does not edit 

personal identifying information from 

submissions. You should submit only 

information that you wish to make 

available publicly. 

FOR FURTHER INFORMATION CONTACT: 

CFTC: Julian E. Hammar, Assistant 

General Counsel, at 202–418–5118, 

jhammar@cftc.gov, Mark Fajfar, 

Assistant General Counsel, at 202–418– 

6636, mfajfar@cftc.gov, or David E. 

Aron, Counsel, at 202–418–6621, 

daron@cftc.gov, Office of General 

Counsel, Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1155 21st Street, NW., Washington, DC 

20581; SEC: Matthew A. Daigler, Senior 

Special Counsel, at 202–551–5578, 

Cristie L. March, Attorney-Adviser, at 

202–551–5574, or Leah M. Drennan, 

Attorney-Adviser, at 202–551–5507, 

Division of Trading and Markets, or 

Michael J. Reedich, Special Counsel, or 

Tamara Brightwell, Senior Special 

Counsel to the Director, at 202–551– 

3500, Division of Corporation Finance, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549–7010. 

SUPPLEMENTARY INFORMATION: The 

Commissions jointly are proposing new 

rules and interpretive guidance under 

the CEA and the Exchange Act relating 

to the Product Definitions, mixed 

swaps, and security-based swap 

agreements. 

Table of Contents 

I. Background 

II. Scope of Definitions of Swap and SecurityBased Swap 

A. Introduction 

B. Proposed Rules and Interpretive 

Guidance Regarding Certain 

Transactions Outside the Scope of the 

Definitions of the Terms ‘‘Swap’’ and 

‘‘Security-Based Swap’’ 

1. Insurance Products 

(a) Types of Insurance Products 

(b) Providers of Insurance Products 

2. The Forward Contract Exclusion 

(a) Forward Contracts in Nonfinancial 

Commodities 

(b) Commodity Options and Commodity 

Options Embedded in Forward Contracts 

(c) Security Forwards 

3. Consumer and Commercial Agreements, 

Contracts, and Transactions 

4. Loan Participations 

C. Proposed Rules and Interpretive 

Guidance Regarding Certain 

Transactions Within the Scope of the 

Definitions of the Terms ‘‘Swap’’ and 

‘‘Security-Based Swap’’ 

1. In General 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
Federal Register / Vol. 76, No. 99 / Monday, May 23, 2011 / Proposed Rules 29819 

2See Dodd-Frank Wall Street Reform and 

Consumer Protection Act, Public Law 111–203, 124 

Stat. 1376 (2010). The text of the Dodd-Frank Act 

is available at http://www.cftc.gov/LawRegulation/

OTCDERIVATIVES/index.htm. 

3Pursuant to section 701 of the Dodd-Frank Act, 

Title VII may be cited as the ‘‘Wall Street 

Transparency and Accountability Act of 2010.’’ 

4 In addition, section 719(d)(1)(A) of the DoddFrank Act requires the Commissions to conduct a 

joint study, within 15 months of enactment, to 

determine whether stable value contracts, as 

defined in section 719(d)(2) of the Dodd-Frank Act, 

are encompassed by the swap definition. If the 

Commissions determine that stable value contracts 

are encompassed by the swap definition, section 

719(d)(1)(B) of the Dodd-Frank Act requires the 

Commissions jointly to determine whether an 

exemption for those contracts from the swap 

definition is appropriate and in the public interest. 

Section 719(d)(1)(B) also requires the Commissions 

to issue regulations implementing the 

determinations made under the required study. 

Until the effective date of such regulations, the 

requirements under Title VII do not apply to stable 

value contracts, and stable value contracts in effect 

prior to the effective date of such regulations are not 

considered swaps. See section 719(d) of the DoddFrank Act. The Commissions currently are 

conducting the required joint study and will 

consider whether to propose any implementing 

regulations (including, if appropriate, regulations 

determining that stable value contracts: (i) are not 

encompassed within the swap definition; or (ii) are 

encompassed within the definition but are exempt 

from the swap definition) at the conclusion of that 

study. 

5 7 U.S.C. 1 et seq. 

6The CFTC has issued proposed rules regarding 

SDRs and, separately, swap data recordkeeping and 

reporting. See Regulations Establishing and 

Continued 

2. Foreign Exchange Products 

(a) Foreign Exchange Products Subject to 

the Secretary’s Swap Determination: 

Foreign Exchange Forwards and Foreign 

Exchange Swaps 

(b) Foreign Exchange Products Not Subject 

to the Secretary’s Swap Determination 

(i) Foreign Currency Options 

(ii) Non-Deliverable Forward Contracts 

Involving Foreign Exchange 

(iii) Currency Swaps and Cross-Currency 

Swaps 

3. Forward Rate Agreements 

4. Combinations and Permutations of, or 

Options on, Swaps and Security-Based 

Swaps 

5. Contracts for Differences 

D. Certain Interpretive Issues 

1. Agreements, Contracts, or Transactions 

That May Be Called, or Documented 

Using Form Contracts Typically Used 

for, Swaps or Security-Based Swaps 

2. Transactions in Regional Transmission 

Organizations and Independent System 

Operators 

III. The Relationship Between the Swap 

Definition and the Security-Based Swap 

Definition 

A. Introduction 

B. Title VII Instruments Based on Interest 

Rates, Other Monetary Rates, and Yields 

1. Title VII Instruments Based on Interest 

Rates or Other Monetary Rates That Are 

Swaps 

2. Title VII Instruments Based on Yields 

3. Title VII Instruments Based on 

Government Debt Obligations 

C. Total Return Swaps 

D. Security-Based Swaps Based on a Single 

Security or Loan and Single-Name Credit 

Default Swaps 

E. Title VII Instruments Based on Futures 

Contracts 

F. Use of Certain Terms and Conditions in 

Title VII Instruments 

G. The Term ‘‘Narrow-Based Security 

Index’’ in the Security-Based Swap 

Definition 

1. Introduction 

2. Applicability of the Statutory NarrowBased Security Index Definition and Past 

Guidance of the Commissions to Title VII 

Instruments 

3. Narrow-Based Security Index Criteria for 

Index Credit Default Swaps 

(a) In General 

(b) Proposed Rules Regarding the 

Definitions of ‘‘Issuers of Securities in a 

Narrow-Based Security Index’’ and 

‘‘Narrow-Based Security Index’’ for Index 

Credit Default Swaps 

(i) Number and Concentration Percentages 

of Reference Entities or Securities 

(ii) Public Information Availability 

Regarding Reference Entities and 

Securities 

(iii) Treatment of Indexes Including 

Reference Entities That Are Issuers of 

Exempted Securities or Including 

Exempted Securities 

4. Security Indexes 

5. Evaluation of Title VII Instruments on 

Security Indexes That Move From BroadBased to Narrow-Based or Narrow-Based 

to Broad-Based 

(a) In General 

(b) Title VII Instruments on Security 

Indexes Traded on Designated Contract 

Markets, Swap Execution Facilities, 

Foreign Boards of Trade, Security-Based 

Swap Execution Facilities, and National 

Securities Exchanges 

H. Method of Settlement of Index CDS 

I. Security-Based Swaps as Securities 

Under the Exchange Act and Securities 

Act 

IV. Mixed Swaps 

A. Scope of the Category of Mixed Swap 

B. Regulation of Mixed Swaps 

1. Introduction 

2. Bilateral Uncleared Mixed Swaps 

Entered Into by Dually-Registered 

Dealers or Major Participants 

3. Regulatory Treatment for Other Mixed 

Swaps 

V. Security-Based Swap Agreements 

A. Introduction 

B. Swaps That Are Security-Based Swap 

Agreements 

C. Books and Records Requirements for 

Security-Based Swap Agreements 

VI. Process for Requesting Interpretations of 

the Characterization of a Title VII 

Instrument 

VII. Anti-Evasion 

A. CFTC Proposed Anti-Evasion Rules 

B. SEC Request for Comment Regarding 

Anti-Evasion 

VIII. Administrative Law Matters—CEA 

Revisions 

IX. Administrative Law Matters—Exchange 

Act Revisions 

X. Statutory Basis and Rule Text 

I. Background 

On July 21, 2010, President Obama 

signed the Dodd-Frank Act into law.2

Title VII of the Dodd-Frank Act 3 (‘‘Title 

VII’’) established a comprehensive new 

regulatory framework for swaps and 

security-based swaps. The legislation 

was enacted, among other reasons, to 

reduce risk, increase transparency, and 

promote market integrity within the 

financial system, including by: (i) 

Providing for the registration and 

comprehensive regulation of swap 

dealers, security-based swap dealers, 

major swap participants, and major 

security-based swap participants; (ii) 

imposing clearing and trade execution 

requirements on swaps and securitybased swaps, subject to certain 

exceptions; (iii) creating rigorous 

recordkeeping and real-time reporting 

regimes; and (iv) enhancing the 

rulemaking and enforcement authorities 

of the Commissions with respect to, 

among others, all registered entities and 

intermediaries subject to the 

Commissions’ oversight. 

Section 712(d)(1) of the Dodd-Frank 

Act provides that the Commissions, in 

consultation with the Board, shall 

jointly further define the terms ‘‘swap,’’ 

‘‘security-based swap,’’ and ‘‘securitybased swap agreement’’ (‘‘SBSA’’).4

Section 712(a)(8) of the Dodd-Frank Act 

provides further that the Commissions 

shall jointly prescribe such regulations 

regarding ‘‘mixed swaps’’ as may be 

necessary to carry out the purposes of 

Title VII. In addition, sections 721(b) 

and 761(b) of the Dodd-Frank Act 

provide that the Commissions may 

adopt rules to further define terms 

included in subtitles A and B, 

respectively, of Title VII, and sections 

721(c) and 761(b) of the Dodd-Frank Act 

provide the Commissions with authority 

to define the terms ‘‘swap’’ and 

‘‘security-based swap,’’ as well as the 

terms ‘‘swap dealer,’’ ‘‘major swap 

participant,’’ ‘‘security-based swap 

dealer,’’ and ‘‘major security-based swap 

participant,’’ to include transactions and 

entities that have been structured to 

evade the requirements of subtitles A 

and B, respectively, of Title VII. 

Section 712(d)(2)(B) of the DoddFrank Act requires the Commissions, in 

consultation with the Board, to jointly 

adopt rules governing books and records 

requirements for SBSAs by persons 

registered as swap data repositories 

(‘‘SDRs’’) under the CEA,5 including 

uniform rules that specify the data 

elements that shall be collected and 

maintained by each SDR.6 Similarly, 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
29820 Federal Register / Vol. 76, No. 99 / Monday, May 23, 2011 / Proposed Rules 

Governing the Duties of Swap Dealers and Major 

Swap Participants, 75 FR 71397, Nov. 23, 2010; 

Swap Data Recordkeeping and Reporting 

Requirements, 75 FR 76573, Dec. 8, 2010. The SEC 

has also issued proposed rules regarding securitybased swap data repositories (‘‘SBSDRs’’), including 

rules specifying data collection and maintenance 

standards for SBSDRs, as well as rules regarding 

security-based swap data recordkeeping and 

reporting. See Security-Based Swap Data Repository 

Registration, Duties, and Core Principles, 75 FR 

77306, Dec. 10, 2010; Regulation SBSR—Reporting 

and Dissemination of Security-Based Swap 

Information, 75 FR 75208, Dec. 2, 2010. 

7The CFTC has issued proposed rules regarding 

recordkeeping requirements for swap dealers and 

major swap participants. See Reporting, 

Recordkeeping, and Daily Trading Records 

Requirements for Swap Dealers and Major Swap 

Participants, 75 FR 76666, Dec. 9, 2010. 

8Section 721(a) of the Dodd-Frank Act defines 

the term ‘‘swap’’ by adding section 1a(47) to the 

CEA, 7 U.S.C. 1a(47). This new swap definition also 

is cross-referenced in new section 3(a)(69) of the 

Exchange Act, 15 U.S.C. 78c(a)(69). Citations to 

provisions of the CEA and the Exchange Act, 15 

U.S.C. 78a et seq., in this release refer to the 

numbering of those provisions after the effective 

date of Title VII, except as indicated. 

9Section 761(a) of the Dodd-Frank Act defines 

the term ‘‘security-based swap’’ by adding new 

section 3(a)(68) to the Exchange Act, 15 U.S.C. 

78c(a)(68). This new security-based swap definition 

also is cross-referenced in new CEA section 1a(42), 

7 U.S.C. 1a(42). The Dodd-Frank Act also explicitly 

includes security-based swaps in the definition of 

security under the Exchange Act and the Securities 

Act of 1933 (‘‘Securities Act’’), 15 U.S.C. 77a et seq. 

10Section 721(a) of the Dodd-Frank Act describes 

the category of ‘‘mixed swap’’ by adding new section 

1a(47)(D) to the CEA, 7 U.S.C. 1a(47)(D). Section 

761(a) of the Dodd-Frank Act also includes the 

category of ‘‘mixed swap’’ by adding new section 

3(a)(68)(D) to the Exchange Act, 15 U.S.C. 

78c(68)(D). A mixed swap is defined as a subset of 

security-based swaps that also are based on the 

value of 1 or more interest or other rates, currencies, 

commodities, instruments of indebtedness, indices, 

quantitative measures, other financial or economic 

interest or property of any kind (other than a single 

security or a narrow-based security index), or the 

occurrence, non-occurrence, or the extent of the 

occurrence of an event or contingency associated 

with a potential financial, economic, or commercial 

consequence (other than the occurrence, nonoccurrence, or extent of the occurrence of an event 

relating to a single issuer of a security or the issuers 

of securities in a narrow-based security index, 

provided that such event directly affects the 

financial statements, financial condition, or 

financial obligations of the issuer). 

11Section 761(a) of the Dodd-Frank Act defines 

the term ‘‘security-based swap agreement’’ by 

adding new section 3(a)(78) to the Exchange Act, 15 

U.S.C. 78c(a)(78). The CEA includes the definition 

of ‘‘security-based swap agreement’’ in subparagraph 

(A)(v) of the swap definition in CEA section 1a(47), 

7 U.S.C. 1a(47). The only difference between these 

definitions is that the definition of SBSA in the 

Exchange Act specifically excludes security-based 

swaps (see section 3(a)(78)(B) of the Exchange Act, 

15 U.S.C. 78c(a)(78)(B)), whereas the definition of 

SBSA in the CEA does not contain a similar 

exclusion. Instead, under the CEA, the exclusion for 

security-based swaps is placed in the general 

exclusions from the swap definition (see CEA 

section 1a(47)(B)(x), 7 U.S.C. 1a(47)(B)(x)). 

Although the statutes are slightly different 

structurally, the Commissions interpret them to 

have consistent meaning that the category of 

security-based swap agreements excludes securitybased swaps. 

12See Definitions Contained in Title VII of DoddFrank Wall Street Reform and Consumer Protection 

Act, 75 FR 51429, Aug. 20, 2010. The ANPR also 

solicited comment regarding the definitions of the 

terms ‘‘swap dealer,’’ ‘‘security-based swap dealer,’’ 

‘‘major swap participant,’’ ‘‘major security-based 

swap participant,’’ and ‘‘eligible contract 

participant.’’ These definitions are the subject of a 

separate joint proposed rulemaking by the 

Commissions. See Further Definition of ‘‘Swap 

Dealer,’’ ‘‘Security-Based Swap Dealer,’’ ‘‘Major 

Swap Participant,’’ ‘‘Major Security-Based Swap 

Participant’’ and ‘‘Eligible Contract Participant,’’ 75 

FR 80174, Dec. 21, 2010 (‘‘Entity Definitions’’). The 

Commissions also provided the public with the 

ability to present their views more generally on 

implementation of the Dodd-Frank Act through 

their Web sites, dedicated electronic mailboxes, and 

meetings with interested parties. See Public 

Comments on SEC Regulatory Initiatives Under the 

Dodd-Frank Act/Meetings with SEC Officials 

located at http://www.sec.gov/spotlight/regreform

comments.shtml; Public Submissions, located at 

http://comments.cftc.gov/PublicComments/

ReleasesWithComments.aspx; External Meetings, 

located at http://www.cftc.gov/LawRegulation/

DoddFrankAct/ExternalMeetings/index.htm. 

13Copies of all comments received by the SEC on 

the ANPR are available on the SEC’s Internet Web 

site, located at http://www.sec.gov/comments/s7-16- 

10/s71610.shtml. Comments are also available for 

Web site viewing and printing in the SEC’s Public 

Reference Room, 100 F Street, NE., Washington, DC 

20549, on official business days between the hours 

of 10 a.m. and 3 p.m. Copies of all comments 

received by the CFTC on the ANPR are available on 

the CFTC’s Internet Web site, located at http:// 

www.cftc.gov/LawRegulation/DoddFrankAct/

OTC_2_Definitions.html. 

14See supra note 12. 

15 Information about meetings that CFTC staff 

have had with outside organizations regarding the 

implementation of the Dodd-Frank Act is available 

at http://www.cftc.gov/LawRegulation/

DoddFrankAct/ExternalMeetings/index.htm. 

Information about meetings that SEC staff have had 

with outside organizations regarding the product 

definitions is available at http://www.sec.gov/

comments/s7–16–10/s71610.shtml#meetings. The 

views expressed in the comments in response to the 

ANPR, in response to the Commissions’ informal 

solicitations, and at such meetings are collectively 

referred to as the views of ‘‘commenters.’’ 

section 712(d)(2)(C) of the Dodd-Frank 

Act requires the Commissions, in 

consultation with the Board, to jointly 

adopt rules governing books and records 

for SBSAs, including daily trading 

records, for swap dealers, major swap 

participants, security-based swap 

dealers, and security-based swap 

participants.7

Under the comprehensive framework 

for regulating swaps and security-based 

swaps established in Title VII, the CFTC 

is given regulatory authority over 

swaps,8 the SEC is given regulatory 

authority over security-based swaps,9

and the Commissions shall jointly 

prescribe such regulations regarding 

mixed swaps as may be necessary to 

carry out the purposes of Title VII.10 In 

addition, the SEC is given antifraud 

authority over, and access to 

information from, certain CFTCregulated entities regarding SBSAs, 

which are a type of swap related to 

securities over which the CFTC is given 

regulatory authority.11

To assist the Commissions in further 

defining the Product Definitions (as well 

as certain other definitions) and in 

prescribing regulations regarding mixed 

swaps as may be necessary to carry out 

the purposes of Title VII, the 

Commissions published an advance 

notice of proposed rulemaking (‘‘ANPR’’) 

in the Federal Register on August 20, 

2010.12 The comment period for the 

ANPR closed on September 20, 2010.13

The Commissions received comments 

addressing the Product Definitions and/ 

or mixed swaps in response to the 

ANPR, as well as comments in response 

to the Commissions’ informal 

solicitations,14 from a wide range of 

commenters. 

The Commissions have reviewed the 

comments received, and the staffs of the 

Commissions have met with many 

market participants and other interested 

parties to discuss the definitions.15

Moreover, the Commissions’ staffs have 

consulted extensively with each other as 

required by sections 712(a)(1) and (2) of 

the Dodd-Frank Act and have consulted 

with staff of the Board as required by 

section 712(d) of the Dodd-Frank Act. 

Based on this review and 

consultation, the Commissions are 

proposing interpretive guidance, and in 

some instances also proposing rules, 

regarding, among other things: (i) The 

regulatory treatment of insurance 

products; (ii) the exclusion of forward 

contracts from the swap and securitybased swap definitions; (iii) the 

regulatory treatment of certain 

consumer and commercial contracts; 

(iv) the regulatory treatment of certain 

foreign-exchange related and other 

instruments; (v) swaps and securitybased swaps involving interest rates (or 

other rates) and yields; (vi) total return 

swaps (‘‘TRS’’); (vii) the application of 

the definition of ‘‘narrow-based security 

index’’ in distinguishing between certain 

swaps and security-based swaps, 

including credit default swaps (‘‘CDS’’) 

and index CDS; and viii) the 

specification of certain swaps and 

security-based swaps that are, and are 

not, mixed swaps. In addition, the 

Commissions are proposing rules: (i) 

establishing books and records 

requirements applicable to SBSAs; (ii) 

providing a mechanism for requesting 

the Commissions to interpret whether a 

particular type of agreement, contract, 

or transaction (or class of agreements, 

contracts, or transactions) is a swap, 

security-based swap, or both (i.e., a 

mixed swap); and (iii) providing a 

mechanism for evaluating the 

applicability of certain regulatory 

requirements to particular mixed swaps. 

Finally, the CFTC is proposing rules to 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
Federal Register / Vol. 76, No. 99 / Monday, May 23, 2011 / Proposed Rules 29821 

16See CEA section 1a(47)(A), 7 U.S.C. 1a(47)(A). 

This swap definition is also cross-referenced in new 

section 3(a)(69) of the Exchange Act, 15 U.S.C. 

78c(a)(69). 

17See CEA section 1a(47)(B), 7 U.S.C. 1a(47)(B), 

clauses (i)–(x). 

18See CEA sections 1a(47)(C)–(F), 7 U.S.C. 

1a(47)(C)–(F). 

19See CEA section 1a(47)(B)(x), 7 U.S.C. 

1a(47)(B)(x). 

20See section 3(a)(68) of the Exchange Act, 15 

U.S.C. 78c(a)(68). 

21See, e.g., Letter from Edward J. Rosen, Cleary 

Gottlieb Steen & Hamilton LLP, Sept. 21, 2010 

(‘‘Cleary Letter’’); Letter from Robert Pickel, 

Executive Vice President, International Swaps and 

Derivatives Association, Inc., Sept. 20, 2010 (‘‘ISDA 

Letter’’). 

22Some commenters raised concerns regarding 

the treatment of inter-affiliate swaps and securitybased swaps. See, e.g., Cleary Letter; Letter from 

Coalition for Derivatives End Users, Sept. 20, 2010 

(‘‘CDEU Letter’’); ISDA Letter; Letter from Richard A. 

Miller, Vice President and Corporate Counsel, 

Prudential Financial Inc., Sept. 17, 2010; Letter 

from Richard M. Whiting, The Financial Services 

Roundtable, Sept. 20, 2010. A few commenters 

suggested that the Commissions should further 

define the term ‘‘swap’’ or ‘‘security-based swap’’ to 

exclude inter-affiliate transactions. See Cleary 

Letter; CDEU Letter. The Commissions are 

considering whether inter-affiliate swaps or 

security-based swaps should be treated differently 

from other swaps or security-based swaps in the 

context of the Commissions’ other Title VII 

rulemakings. 

23See, e.g., Letter from Ernest C. Goodrich, Jr., 

Managing Director—Legal Department, and Marcelo 

Riffaud, Managing Director—Legal Department, 

Deutsche Bank AG, Sept. 20, 2010 (‘‘Deutsche Bank 

Letter’’); Letter from Sean W. McCarthy, Chairman, 

Association of Financial Guaranty Insurers, Sept. 

20, 2010 (‘‘AFGI Letter’’); Letter from Robert J. Duke, 

The Surety & Fidelity Association of America, Sept. 

20, 2010 (‘‘SFAA Letter’’); Letter from J. Stephen 

Zielezienski, Senior Vice President & General 

Counsel, American Insurance Association, Sept. 20, 

2010; Letter from Franklin W. Nutter, President, 

Reinsurance Association of America, Sept. 20, 2010 

(‘‘RAA Letter’’); Letter from James M. Olsen, Senior 

Director Accounting and Investment Policy, 

Property Casualty Insurers Association of America, 

Sept. 17, 2010; Letter from Jane L. Cline, President, 

and Therese M. Vaughan, Chief Executive Officer, 

National Association of Insurance Commissioners, 

Sept. 20, 2010; Letter from Joseph W. Brown, Chief 

Executive Officer, MBIA Inc., Sept. 20, 2010 (‘‘MBIA 

Letter’’); Cleary Letter; Letter from White & Case LLP 

(‘‘White & Case Letter’’), Sept. 20, 2010; Letter from 

Carl B. Wilkerson, Vice President and Chief 

Counsel, Securities & Litigation, American Council 

of Life Insurers, Nov. 12, 2010 (‘‘ACLI Letter’’); 

Letter from Stephen E. Roth, James M. Cain, and W. 

Thomas Conner, Sutherland Asbill & Brennan LLP, 

for the Committee of Annuity Insurers, Dec. 3, 2010. 

24CEA section 1a(47)(A)(ii), 7 U.S.C. 1a(47)(A)(ii). 

25The Commissions also believe it was not the 

intent of Congress through the swap and securitybased swap definitions to preclude the provision of 

insurance to individual homeowners and small 

businesses that purchase property and casualty 

insurance. See CEA section 2(e), 7 U.S.C. 2(e) and 

section 6(l) of the Exchange Act, 15 U.S.C. 78f(l) 

(prohibiting individuals and small businesses that 

do not meet specified financial thresholds or other 

conditions from entering into swaps or securitybased swaps other than on or subject to the rules 

of regulated futures and securities exchanges). 

26 7 U.S.C. 16(h). Moreover, other provisions of 

the Dodd-Frank Act address the status of insurance 

more directly, and more extensively, than Title VII. 

For example, Title V of the Dodd-Frank Act requires 

the newly established Federal Insurance Office to 

conduct a study and submit a report to Congress, 

within 18 months of enactment of the Dodd-Frank 

Act, on the regulation of insurance, including the 

consideration of Federal insurance regulation. 

Notably, the Federal Insurance Office’s authority 

under Title V extends primarily to monitoring and 

information gathering; its ability to promulgate 

Federal insurance regulation that preempts state 

insurance regulation is significantly restricted. See 

section 502 of the Dodd-Frank Act (codified in 

various sections of 31 U.S.C.). Title X of the DoddFrank Act also specifically excludes the business of 

insurance from regulation by the Bureau of 

Consumer Financial Protection. See section 

1027(m) of the Dodd-Frank Act, 12 U.S.C. 5517(m) 

(‘‘The [Bureau of Consumer Financial Protection] 

Continued 

implement the anti-evasion authority 

provided in the Dodd-Frank Act. 

The Commissions believe that the 

proposed rules and interpretive 

guidance will further the purposes of 

Title VII. While the Commissions 

believe that these proposals, if adopted, 

would appropriately effect the intent of 

the Dodd-Frank Act, the Commissions 

are very interested in commenters’ 

views as to whether those purposes 

have been achieved, and, if not, how to 

improve these proposals. 

II. Scope of Definitions of Swap and 

Security-Based Swap 

A. Introduction 

Title VII of the Dodd-Frank Act 

applies to a wide variety of agreements, 

contracts, and transactions classified as 

swaps or security-based swaps. The 

statute lists these agreements, contracts, 

and transactions in the definition of the 

term ‘‘swap.’’ 16 The statutory definition 

of the term ‘‘swap’’ also has various 

exclusions,17 rules of construction, and 

other provisions for the interpretation of 

the definition.18 One of the exclusions 

to the definition of the term ‘‘swap’’ is 

for security-based swaps.19 The term 

‘‘security-based swap,’’ in turn, is 

defined as an agreement, contract, or 

transaction that is a ‘‘swap’’ (without 

regard to the exclusion from that 

definition for security-based swaps) and 

that also has certain characteristics 

specified in the statute.20 Thus, the 

statutory definition of the term ‘‘swap’’ 

also determines the scope of 

agreements, contracts, and transactions 

that could be security-based swaps. 

The statutory definitions of ‘‘swap’’ 

and ‘‘security-based swap’’ are detailed 

and comprehensive, and the 

Commissions believe that extensive 

‘‘further definition’’ of the terms by rule 

is not necessary. Nevertheless, several 

commenters have stated,21 and the 

Commissions agree, that the definitions 

could be read to include certain types of 

agreements, contracts, and transactions 

that previously have not been 

considered swaps or security-based 

swaps and that nothing in the legislative 

history of the Dodd-Frank Act appears 

to suggest that Congress intended such 

agreements, contracts, and transactions 

to be regulated as swaps or securitybased swaps under Title VII. The 

Commissions thus believe that it is 

important to clarify the treatment under 

the definitions of certain types of 

agreements, contracts, and transactions, 

such as insurance products and certain 

consumer and commercial contracts. 

In addition, commenters also raised 

questions regarding, and the 

Commissions believe that it is important 

to clarify: (i) The exclusion for forward 

contracts from the definitions of the 

terms ‘‘swap’’ and ‘‘security-based swap;’’ 

and (ii) the status of certain commodityrelated products (including various 

foreign exchange products and forward 

rate agreements (‘‘FRAs’’)) under the 

definitions of the terms ‘‘swap’’ and 

‘‘security-based swap.’’ Finally, the 

Commissions are providing guidance 

regarding certain interpretive issues 

related to the definitions.22

B. Proposed Rules and Interpretive 

Guidance Regarding Certain 

Transactions Outside the Scope of the 

Definitions of the Terms ‘‘Swap’’ and 

‘‘Security-Based Swap’’ 

1. Insurance Products 

A number of commenters expressed 

concern that the definitions of the terms 

‘‘swap’’ and ‘‘security-based swap’’ 

potentially could include certain types 

of insurance products 23 because the 

statutory definition of the term ‘‘swap’’ 

includes, in part, any agreement, 

contract, or transaction ‘‘that provides 

for any purchase, sale, payment, or 

delivery (other than a dividend on an 

equity security) that is dependent on the 

occurrence, nonoccurrence, or the 

extent of the occurrence of an event or 

contingency associated with a potential 

financial, economic, or commercial 

consequence.’’ 24 The Commissions do 

not interpret this clause to mean that 

products historically treated as 

insurance products should be included 

within the swap or security-based swap 

definition.25

The Commissions are aware of 

nothing in Title VII to suggest that 

Congress intended for insurance 

products to be regulated as swaps or 

security-based swaps. Moreover, that 

swaps and insurance products are 

subject to different regulatory regimes is 

reflected in section 722(b) of the DoddFrank Act which, in new section 12(h) 

of the CEA, provides that a swap ‘‘shall 

not be considered to be insurance’’ and 

‘‘may not be regulated as an insurance 

contract under the law of any State.’’ 26


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29822 Federal Register / Vol. 76, No. 99 / Monday, May 23, 2011 / Proposed Rules 

may not define as a financial product or service, by 

regulation or otherwise, engaging in the business of 

insurance.’’); section 1027(f) of the Dodd-Frank Act, 

12 U.S.C. 5517(f) (excluding persons regulated by 

a state insurance regulator, except to the extent they 

are engaged in the offering or provision of consumer 

financial products or services or otherwise subject 

to certain consumer laws as set forth in Title X of 

the Dodd-Frank Act). 

27As discussed above, the establishment of the 

Federal Insurance Office under Title V of the DoddFrank Act suggests that Federal insurance law could 

be established in the future. The Commissions 

believe that the proposed rules should, therefore, 

include a specific reference to Federal insurance 

law. 

28To the extent an insurance product does not 

fall within the language of the swap definition by 

its terms, it would not need to satisfy the 

requirements under the proposed rules in order to 

avoid being considered a swap or security-based 

swap. 

29The term ‘‘State’’ is defined in section 3(a)(16) 

of the Exchange Act to mean ‘‘any State of the 

United States, the District of Columbia, Puerto Rico, 

the Virgin Islands, or any other possession of the 

United States.’’ 15 U.S.C. 78c(a)(16). The CFTC is 

proposing to incorporate this definition into 

proposed rule 1.3(xxx)(4) for purposes of ensuring 

consistency between the CFTC and SEC rules 

further defining the term ‘‘swap.’’ 

30The ‘‘cedant’’ is the insurer writing the risk 

being ceded or transferred to such person located 

outside the United States. 

31The Commissions note that certain variable life 

insurance and annuity products are securities and 

would not be swaps or security-based swaps 

regardless of whether they met the requirements 

under the proposed rules. See CEA section 

1a(47)(B)(v), 7 U.S.C. 1a(47)(B)(v) (excluding from 

the definition of ‘‘swap’’ any ‘‘agreement, contract, 

or transaction providing for the purchase or sale of 

1 or more securities on a fixed basis that is subject 

to—(I) the [Securities Act]; and (II) the [Exchange 

Act]’’). See also SEC v. United Benefit Life Ins. Co., 

387 U.S. 202 (1967) (holding that a ‘‘flexible fund’’ 

annuity contract was not entitled to exemption 

under section 3(a)(8) of the Securities Act, 15 U.S.C. 

77c(a)(8), for insurance and annuities); SEC v. 

Variable Annuity Life Ins. Co., 359 U.S. 65 (1959) 

(holding that a variable annuity was not entitled to 

exemption under section 3(a)(8) of the Securities 

Act, 15 U.S.C. 77c(a)(8), for insurance and 

annuities). 

32The Commissions note that Title VII provides 

flexibility to address the facts and circumstances of 

new products that may be marketed or sold as 

insurance, for the purpose of determining whether 

they satisfy the requirements of the proposed rules, 

through joint interpretations pursuant to section 

712(d)(4) of the Dodd-Frank Act. 

33See supra note 23, regarding comments 

received addressing this criterion. 

Accordingly, the Commissions believe 

that state or Federally regulated 

insurance products that are provided by 

state or Federally regulated insurance 

companies 27 that otherwise could fall 

within the definitions should not be 

considered swaps or security-based 

swaps so long as they satisfy the 

proposed rules or comport with the 

related proposed interpretive 

guidance.28 At the same time, however, 

the Commissions are concerned that 

agreements, contracts, or transactions 

that are swaps or security-based swaps 

might be characterized as insurance 

products to evade the regulatory regime 

under Title VII of the Dodd-Frank Act. 

Accordingly, the Commissions are 

proposing rules and interpretive 

guidance that would clarify that 

agreements, contracts, or transactions 

meeting certain requirements would be 

considered insurance and not swaps or 

security-based swaps. 

The proposed rules contain two 

subparts; the first subpart addresses the 

agreement, contract, or transaction and 

the second subpart addresses the entity 

providing that agreement, contract, or 

transaction. More specifically, with 

respect to the former, paragraph (i) of 

proposed rule 1.3(xxx)(4) under the CEA 

and paragraph (a) of proposed rule 

3a69–1 under the Exchange Act would 

clarify, as discussed in more detail 

below, that the terms ‘‘swap’’ and 

‘‘security-based swap’’ would not 

include an agreement, contract, or 

transaction that, by its terms or by law, 

as a condition of performance: 

• Requires the beneficiary of the 

agreement, contract, or transaction to 

have an insurable interest that is the 

subject of the agreement, contract, or 

transaction and thereby carry the risk of 

loss with respect to that interest 

continuously throughout the duration of 

the agreement, contract, or transaction; 

• Requires that loss to occur and to be 

proved, and that any payment or 

indemnification therefor be limited to 

the value of the insurable interest; 

• Is not traded, separately from the 

insured interest, on an organized market 

or over-the-counter; and 

• With respect to financial guaranty 

insurance only, in the event of payment 

default or insolvency of the obligor, any 

acceleration of payments under the 

policy is at the sole discretion of the 

insurer. 

In addition, the second subpart of the 

proposed rules, in paragraph (ii) of 

proposed rule 1.3(xxx)(4) under the CEA 

and paragraph (b) of proposed rule 

3a69–1 under the Exchange Act, would 

require that, in order to be excluded 

from the swap and security-based swap 

definitions as an insurance product, the 

agreement, contract, or transaction must 

be provided: 

• By a company that is organized as 

an insurance company whose primary 

and predominant business activity is the 

writing of insurance or the reinsuring of 

risks underwritten by insurance 

companies and that is subject to 

supervision by the insurance 

commissioner (or similar official or 

agency) of any state 29 or by the United 

States or an agency or instrumentality 

thereof, and such agreement, contract, 

or transaction is regulated as insurance 

under the laws of such state or the 

United States; 

• By the United States or any of its 

agencies or instrumentalities, or 

pursuant to a statutorily authorized 

program thereof; or 

• In the case of reinsurance only, by 

a person located outside the United 

States to an insurance company that is 

eligible under the proposed rules, 

provided that: (i) such person is not 

prohibited by any law of any state or of 

the United States from offering such 

agreement, contract, or transaction to 

such an insurance company; (ii) the 

product to be reinsured meets the 

requirements under the proposed rules 

to be an insurance product; and (iii) the 

total amount reimbursable by all 

reinsurers for such insurance product 

cannot exceed the claims or losses paid 

by the cedant.30

In order for an agreement, contract, or 

transaction to qualify as an insurance 

product that would not be a swap or 

security-based swap: (i) The agreement, 

contract, or transaction would have to 

meet the criteria in the first subpart of 

the proposed rules and (ii) the person or 

entity providing the agreement, 

contract, or transaction would have to 

meet the criteria in the second subpart 

of the proposed rules.31 The fact that an 

agreement, contract, or transaction 

qualifies as an insurance product does 

not exclude it from the swap or securitybased swap definitions if it is not 

provided by a qualifying person or 

entity, nor does the fact that a product 

is regulated by an insurance regulator 

exclude it from the swap or securitybased swap definitions if the agreement, 

contract, or transaction does not satisfy 

the criteria for insurance set forth in the 

proposed rules.32

In addition, the Commissions are 

proposing interpretive guidance to 

clarify that, independent of paragraph 

(i) of proposed rule 1.3(xxx)(4) under 

the CEA and paragraph (a) of proposed 

rule 3a69–1 under the Exchange Act, 

certain insurance products do not fall 

within the swap or security-based swap 

definitions so long as they are provided 

in accordance with paragraph (ii) of 

proposed rule 1.3(xxx)(4) under the CEA 

and paragraph (b) of proposed rule 

3a69–1 under the Exchange Act. 

(a) Types of Insurance Products 33

Paragraph (i) of proposed rule 

1.3(xxx)(4) under the CEA and 

paragraph (a) of proposed rule 3a69–1 

under the Exchange Act would set forth 

four criteria for an agreement, contract, 

or transaction to be considered 

insurance. First, the proposed rules 

would require that the beneficiary have 

an ‘‘insurable interest’’ underlying the 


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Federal Register / Vol. 76, No. 99 / Monday, May 23, 2011 / Proposed Rules 29823 

34Requiring that a beneficiary of an insurance 

policy have a stake in the interest traditionally has 

been justified on public policy grounds. For 

example, a beneficiary that does not have a property 

right in a building might have an incentive to profit 

from arson. 

35Standard CDS documentation stipulates that 

the incurrence or demonstration of a loss may not 

be made a condition to the payment on the CDS or 

the performance of any obligation pursuant to the 

CDS. See, e.g., Int’l Swaps and Derivatives Ass’n, 

‘‘2003 ISDA Credit Derivatives Definitions,’’ art. 

9.1(b)(i) (2003) (‘‘2003 Definitions) (‘‘[T]he parties 

will be obligated to perform * * * irrespective of 

the existence or amount of the parties’ credit 

exposure to a Reference Entity, and Buyer need not 

suffer any loss nor provide evidence of any loss as 

a result of the occurrence of a Credit Event.’’). 

36To the extent an insurance product provides for 

such items as, for example, a rental car for use 

while the car that is the subject of an automobile 

insurance policy is being repaired, the 

Commissions would consider such items as 

constituting part of the value of the insurable 

interest. 

37See, e.g., ‘‘Life Settlements Task Force, Staff 

Report to the United States Securities and Exchange 

Commission’’ (‘‘In an effort to help make the bidding 

process more efficient and to facilitate trading of 

policies after the initial settlement occurs, some 

intermediaries have considered or instituted a 

trading platform for life settlements.’’), available at 

http://www.sec.gov/news/studies/2010/

lifesettlements-report.pdf (July 22, 2010). 

38See, e.g., Int’l Swaps and Derivatives Ass’n, 

‘‘2005 Novation Protocol,’’ available at http:// 

www.isda.org/2005novationprot/docs/

NovationProtocol.pdf (2005); Int’l Swaps and 

Derivatives Ass’n, ‘‘ISDA Novation Protocol II,’’ 

available at http://www.isda.org/isdanovationprotII/ 

docs/NPII.pdf (2005); Int’l Swaps and Derivatives 

Ass’n, 2003 Definitions, supra note 35, Exhibits E 

(Novation Agreement) and F (Novation 

Confirmation). 

39Several commenters expressed concern that the 

swap and security-based swap definitions could 

encompass financial guarantee policies. See, e.g., 

AFGI Letter; Letter from James M. Michener, 

General Counsel, Assured Guaranty, Dec. 14, 2010 

(‘‘Assured Guaranty Letter’’); MBIA Letter; Letter 

from the Committee on Futures and Derivatives 

Regulation of the New York City Bar Association, 

Sept. 20, 2010. Financial guarantee policies are 

used by entities such as municipalities to provide 

greater assurances to potential purchasers of their 

bonds and thus reduce their interest costs. See 

‘‘Report by the United States Securities and 

Exchange Commission on the Financial Guarantee 

Market: The Use of the Exemption in section 3(a)(2) 

of the Securities Act of 1933 for Securities 

Guaranteed by Banks and the Use of Insurance 

Policies to Guarantee Debt Securities’’ (Aug. 28, 

1987). 

40See, e.g., AFGI Letter (explaining the 

differences between financial guaranty policies and 

CDS); Letter from James M. Michener, General 

Counsel, Assured Guaranty, Sept. 13, 2010 (noting 

that the Financial Accounting Standards Board has 

issued separate guidance on accounting for 

financial guaranty insurance and CDS); Deutsche 

Bank Letter (noting that financial guaranty policies 

require the incurrence of loss for payment, whereas 

CDS do not). 

41While a CDS requires payment in full on the 

occurrence of a credit event, the Commissions 

recognize that there are other financial instruments, 

such as corporate guarantees of commercial loans 

and letters of credit supporting payments on loans 

or debt securities, that allow for acceleration of 

payment obligations without such guarantees or 

letters of credit being swaps or security-based 

swaps. 

agreement, contract, or transaction at 

every point in time during the term of 

the agreement, contract, or transaction 

for that agreement, contract, or 

transaction to qualify as insurance. The 

requirement that the beneficiary be at 

risk of loss (which could be an adverse 

financial, economic, or commercial 

consequence) with respect to the 

interest that is the subject of the 

agreement, contract, or transaction at all 

times throughout the term of the 

agreement, contract, or transaction 

would ensure that an insurance contract 

beneficiary has a stake in the interest on 

which the agreement, contract, or 

transaction is written.34 Similarly, the 

provision of the proposed rules that 

would require the beneficiary to have 

the insurable interest continuously 

during the term of the agreement, 

contract, or transaction is designed to 

ensure that payment on the insurance 

product is inextricably connected to 

both the beneficiary and the interest on 

which the insurance product is written. 

In contrast to an insurance product, a 

CDS (which may be a swap or a 

security-based swap) does not require 

the purchaser of protection to hold any 

underlying obligation issued by the 

reference entity on which the CDS is 

written.35

Second, the requirement that an 

actual loss occur and be proved under 

the proposed rules similarly would 

ensure that the beneficiary has a stake 

in the insurable interest that is the 

subject of the agreement, contract, or 

transaction. If the beneficiary can 

demonstrate actual loss, that loss would 

‘‘trigger’’ performance by the insurer on 

the agreement, contract, or transaction 

such that, by making payment, the 

insurer is indemnifying the beneficiary 

for such loss. In addition, limiting any 

payment or indemnification to the value 

of the insurable interest aids in 

distinguishing swaps and security-based 

swaps (where there is no such limit) 

from insurance.36

Third, the proposed rules would 

require that the insurance product not 

be traded, separately from the insured 

interest, on an organized market or overthe-counter. With limited exceptions,37

insurance products traditionally have 

been neither entered into on or subject 

to the rules of an organized exchange 

nor traded in secondary market 

transactions (i.e., they are not traded on 

an organized market or over-thecounter). Whereas swaps and securitybased swaps also generally have not 

been tradable at-will in secondary 

market transactions (i.e., on an 

organized market or over-the-counter) 

without counterparty consent, the 

Commissions understand that swaps 

and security-based swaps are routinely 

novated or assigned to third parties, 

usually pursuant to industry standard 

terms and documents.38 For the 

foregoing reasons, the Commissions 

believe that lack of trading separately 

from the insured interest is a feature of 

insurance that is useful in 

distinguishing insurance from swaps 

and security-based swaps. 

Fourth, the proposed rules would 

address financial guarantee policies, 

also known as bond insurance or bond 

wraps.39 Although such products can be 

economically similar to products such 

as CDS, they have certain key 

characteristics that distinguish them 

from swaps and security-based swaps.40

For example, under a financial 

guarantee policy, the insurer typically is 

required to make timely payment of any 

shortfalls in the payment of scheduled 

interest to the holders of the underlying 

guaranteed obligation. Also, for 

particular bonds that are covered by a 

financial guarantee policy, the 

indenture, related documentation, and/ 

or the financial guarantee policy will 

provide that a default in payment of 

principal or interest on the underlying 

bond will not result in acceleration of 

the obligation of the insurer to make 

payment of the full amount of principal 

on the underlying guaranteed obligation 

unless the insurer, in its sole discretion, 

opts to make payment of principal prior 

to the final scheduled maturity date of 

the underlying guaranteed obligation. 

Conversely, under a CDS, a protection 

seller frequently is required to make 

payment of the relevant settlement 

amount to the protection buyer upon 

demand by the protection buyer after 

any credit event involving the issuer.41

The Commissions do not believe that 

financial guarantee policies, in general, 

should be regulated as swaps or 

security-based swaps. However, because 

of the close economic similarity of 

financial guarantee insurance policies 

guaranteeing payment on debt securities 

to CDS, the Commissions also are 

proposing that, in addition to the 

criteria noted above with respect to 

insurance generally, financial guarantee 

policies also would have to satisfy the 

requirement that they not permit the 

beneficiary of the policy to accelerate 

the payment of any principal due on the 

debt securities. This requirement would 

further distinguish financial guarantee 

policies from CDS because, as discussed 

above, the latter generally requires 

payment of the relevant settlement 

amount on the CDS after demand by the 

protection buyer. 


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42See Cleary Letter. 

43See ACLI Letter. 

44 26 U.S.C. 72. See also supra note 31. 

45 Id. 

46The list of enumerated insurance products is 

generally consistent with the provisions of section 

302(c)(2) of the Gramm-Leach-Bliley Act (‘‘GLBA’’), 

15 U.S.C. 6712(c)(2), which addresses insurance 

underwriting in national banks. 

47See supra note 29, regarding the definition of 

‘‘State’’ contained in the proposed rules. 

48This paragraph of the proposed rules is 

substantially similar to the definition of an 

insurance company under the Federal securities 

laws. See section 2(a)(13) of the Securities Act, 15 

U.S.C. 77b(a)(13); section 2(a)(17) of the Investment 

Company Act of 1940, 15 U.S.C. 80a–2(a)(17). These 

definitions also include reinsurance companies. In 

order to ensure regulatory consistency, the 

Commissions believe that it is appropriate to 

include substantially the same definition of an 

insurance company as currently exists elsewhere in 

the Federal securities laws, but the Commissions 

are requesting comment regarding the role played 

by a receiver or similar official or any liquidating 

agent for such insurance company, in its capacity 

as such, rather than proposing this provision of the 

insurance company definition. 

49See section 722(b) of the Dodd-Frank Act. 

The Commissions believe that 

requiring all of the criteria in paragraph 

(i) of proposed rule 1.3(xxx)(4) under 

the CEA and paragraph (a) of proposed 

rule 3a69–1 under the Exchange Act 

would help limit the application of the 

proposed rules to products 

appropriately regulated as insurance 

and provide that products appropriately 

subject to the regulatory regime under 

Title VII of the Dodd-Frank Act are 

regulated as swaps or security-based 

swaps. As a result, the Commissions 

believe that these requirements would 

help prevent the proposed rules from 

being used to circumvent the 

applicability of the swap and securitybased swap regulatory regimes under 

Title VII. 

However, the Commissions are 

considering an additional criterion as 

well. One ANPR commenter suggested 

that the proposed rules require that, in 

order to qualify as insurance that is 

excluded from the swap definition, 

payment on an agreement, contract, or 

transaction not be based on the price, 

rate, or level of a financial instrument, 

asset, or interest or any commodity.42

Such a requirement could help to 

prevent swaps from being executed in 

the guise of insurance in order to avoid 

the regulatory regime established by 

Title VII. It may ensure that an 

agreement, contract, or transaction is 

not treated as insurance if it is used for 

speculative purposes or to influence 

prices in derivatives markets. Yet, 

another ANPR commenter stated that 

such a requirement for an agreement, 

contract, or transaction to qualify as 

insurance rather than a swap ‘‘is not 

consistent with common variable life 

insurance and variable annuity 

products, which deliver insurance 

guarantees that do vary with the 

performance of specified assets.’’ 43

The Commissions request comment 

on whether, in order for an agreement, 

contract, or transaction to be considered 

insurance pursuant to paragraph (i) of 

proposed rule 1.3(xxx)(4) under the CEA 

and paragraph (a) of proposed rule 

3a69–1 under the Exchange Act, the 

Commissions should require that 

payment not be based on the price, rate, 

or level of a financial instrument, asset, 

or interest or any commodity. If so, the 

Commissions also request comment on 

whether variable annuity contracts 

(where the income is subject to tax 

treatment under section 72 of the 

Internal Revenue Code) and variable 

universal life insurance should be 

excepted from such a requirement.44

Although the proposed criteria should 

appropriately identify agreements, 

contracts, and transactions that should 

be considered to be insurance, the 

Commissions also are proposing 

interpretive guidance that certain 

enumerated types of insurance products 

are outside the scope of the statutory 

definitions of swap and security-based 

swap under the Dodd-Frank Act. These 

products are surety bonds, life 

insurance, health insurance, long-term 

care insurance, title insurance, property 

and casualty insurance, and annuity 

products the income on which is subject 

to tax treatment under section 72 of the 

Internal Revenue Code.45 The 

Commissions believe that these 

enumerated insurance products do not 

bear the characteristics of the 

transactions that Congress subjected to 

the regulatory regime for swaps and 

security-based swaps under the DoddFrank Act.46 As a result, excluding these 

enumerated insurance products should 

appropriately place traditional 

insurance products outside the scope of 

the swap and security-based swap 

definitions. Such insurance products, 

however, would need to be provided in 

accordance with paragraph (ii) of 

proposed rule 1.3(xxx)(4) under the CEA 

and paragraph (b) of proposed rule 

3a69–1 under the Exchange Act, as 

discussed below, and such insurance 

products would need to be regulated as 

insurance. 

(b) Providers of Insurance Products 

The second subpart of the proposed 

rules, in paragraph (ii) of proposed rule 

1.3(xxx)(4) under the CEA and 

paragraph (b) of proposed rule 3a69–1 

under the Exchange Act, would require 

that, in addition to meeting the product 

requirements discussed above (or being 

subject to the interpretive guidance 

regarding enumerated insurance 

products provided above) the 

agreement, contract, or transaction be 

provided by a person or entity that 

meets certain criteria. Generally, the 

product would have to be provided by 

a company that is organized as an 

insurance company whose primary and 

predominant business activity is the 

writing of insurance or the reinsuring of 

risks underwritten by companies whose 

insurance business is subject to 

supervision by the insurance 

commissioner (or similar official or 

agency) of any state 47 or by the United 

States or an agency or instrumentality 

thereof, and such agreement, contract, 

or transaction is regulated as insurance 

under the laws of such state or of the 

United States.48

The requirement that the agreement, 

contract, or transaction be provided by 

a state or Federally regulated insurance 

company would help ensure that 

entities that are not regulated under 

insurance laws are not able to avoid 

regulation under Title VII of the DoddFrank Act as well. The Commissions 

believe that this requirement also 

should help prevent regulatory gaps that 

otherwise might exist between 

insurance regulation and the regulation 

of swaps and security-based swaps. 

The proposed rules also would 

require that the agreement, contract, or 

transaction provided by the insurance 

company be regulated as insurance 

under the laws of the state in which it 

is regulated or the United States. The 

purpose of this proposed requirement is 

that an agreement, contract, or 

transaction that satisfies the other 

conditions of the proposed rules must 

be subject to regulatory oversight as an 

insurance product. As a result of the 

requirement that an insurance regulator 

must have determined that the 

agreement, contract, or transaction being 

sold is insurance (i.e., because state 

insurance regulators are banned from 

regulating swaps as insurance),49 the 

Commissions believe that this condition 

would help prevent products that are 

swaps or security-based swaps from 

being characterized as insurance 

products in order to evade the 

regulatory regime under Title VII of the 

Dodd-Frank Act. 

The Commissions also believe that it 

is appropriate to exclude insurance that 

is issued by the United States or any of 

its agencies or instrumentalities, or 

pursuant to a statutorily authorized 

program thereof, from regulation as 

swaps or security-based swaps. Such 


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50The guarantee agreement, contract, or 

transaction, however, could itself be a security that 

is subject to the Federal securities laws.’’ See, e.g., 

section 2(a)(1) of the Securities Act, 15 U.S.C. 

77b(a)(1) (including in the statutory definition of 

‘‘security’’ a guarantee of a security). 

51See Letter from Bruce E. Stern, Chairman, 

Association of Financial Guaranty Insurers 

Government Affairs Committee, Feb. 18, 2011, at 

11–12 (‘‘[F]inancial guarantors have often 

guaranteed, through the issuance of a financial 

guaranty insurance policy, the obligations of 

unaffiliated parties under swaps with other 

unaffiliated parties. These insurance policies 

typically cover obligations of municipalities under 

interest rate or basis swaps relating to bonds issued 

by municipalities or in connection with asset 

backed securities.’’). 

52See supra note 32. 

53See proposed Entity Definitions, supra note 12. 

insurance would include, for example, 

Federal insurance of savings in banks, 

savings associations, and credit unions; 

catastrophic crop insurance; flood 

insurance; Federal insurance of certain 

pension obligations; and terrorism risk 

insurance. Accordingly, the proposed 

rules would provide that products 

meeting the criteria discussed above 

that are required for an agreement, 

contract, or transaction to qualify as 

insurance are excluded from the swap 

and security-based swap definitions if 

they are provided by the Federal 

government or pursuant to a statutorily 

authorized program thereof. 

Finally, the Commissions believe that 

where an agreement, contract, or 

transaction qualifies as insurance 

excluded from the swap and securitybased swap definitions, the lawful 

reinsurance of that agreement, contract, 

or transaction similarly should be 

excluded. Such reinsurance would be 

excluded from the definitions even if 

the reinsurer is located abroad and is 

not state or Federally regulated. 

Accordingly, the proposed rules would 

provide that an agreement, contract, or 

transaction of reinsurance would be 

excluded from the swap and securitybased swap definitions if it is provided 

by a person located outside the United 

States, if such person is not prohibited 

by any law of any state or the United 

States from offering such reinsurance to 

a state or Federally regulated insurance 

company, so long as the product to be 

reinsured meets the requirements under 

the proposed rules to be an insurance 

product, and the total amount 

reimbursable by all reinsurers for such 

insurance product cannot exceed the 

claims or losses paid by the cedant. 

The proposed rules would cover only 

an agreement, contract, or transaction by 

an insurance company and would not 

affect the characterization of the asset 

that is being insured. For example, if an 

agreement, contract, or transaction 

insures or guarantees the payment on a 

security, the security would remain 

subject to all applicable securities laws. 

The guarantee agreement, contract, or 

transaction, however, would not be 

regulated as a swap or security-based 

swap if it meets all of the requirements 

of the proposed rules.50

One commenter has stated that 

monoline insurance companies (also 

called financial guarantors) continue to 

guarantee payments under interest rate 

swaps related to municipal debt.51 The 

CFTC believes that an insurance ‘‘wrap’’ 

of a swap may not be sufficiently 

different from the underlying swap to 

suggest that Congress intended the 

former to fall outside the definition of 

the term ‘‘swap’’ in Title VII. 

The SEC, however, believes that, 

where an agreement, contract, or 

transaction is a security-based swap, the 

insurance of that security-based swap 

should not be regulated pursuant to 

Title VII, provided that the insurance 

meets the proposed requirements 

discussed above.52

The Commissions request comment 

on this issue generally, and also on the 

particular questions set forth in the 

Request for Comment section below. 

The Commissions also are considering 

whether the issuer of such insurance (or 

guarantee) in respect of swaps or 

security-based swaps entered into by an 

affiliate or third party could be 

considered to be a major swap 

participant or major security-based 

swap participant. The Commissions 

have requested comment in the 

proposing release for the definitions of 

the terms ‘‘major swap participant’’ and 

‘‘major security-based swap 

participant’’.53

Request for Comment 

1. The Commissions request comment 

on all aspects of proposed rule 

1.3(xxx)(4) under the CEA and proposed 

rule 3a69–1 under the Exchange Act and 

the interpretive guidance in this section. 

2. Do the proposed criteria for 

identifying an agreement, contract, or 

transaction that would not fall within 

the swap or security-based swap 

definitions appropriately encompass 

insurance and reinsurance products? If 

not, what types of insurance or 

reinsurance products are not 

encompassed, and why? 

3. Are there certain products that are 

commonly known as swaps or securitybased swaps, or that more appropriately 

should be considered swaps or securitybased swaps, that could satisfy the 

criteria in proposed rule 1.3(xxx)(4) 

under the CEA and proposed rule 3a69– 

1 under the Exchange Act? 

4. Is the proposed requirement that 

the beneficiary of an agreement, 

contract, or transaction have an 

insurable interest that is the subject of 

the agreement, contract, or transaction, 

and thereby carry the risk of loss with 

respect to that interest continuously 

throughout the duration of the 

agreement, contract, or transaction in 

order for the agreement, contract, or 

transaction not to fall within the swap 

or security-based swap definition, an 

effective criterion in determining 

whether a product is insurance? Why or 

why not? 

5. Is the proposed requirement that 

loss occur and be proved, and that any 

payment or indemnification therefor be 

limited to the value of the insurable 

interest, in order for an agreement, 

contract, or transaction not to fall within 

the swap or security-based swap 

definition, an effective criterion in 

determining whether a product is 

insurance? Why or why not? Is the 

requirement that any payment or 

indemnification for proved loss be 

limited to the value of the insurable 

interest consistent with conventional 

insurance analysis across a broad range 

of products (including traditional 

property and casualty products)? Are 

there particular products where such a 

limitation would not be appropriate? If 

so, please provide a detailed description 

of such products and why such a 

limitation would not be appropriate. 

6. Is the proposed requirement that 

the agreement, contract, or transaction is 

not traded, separately from the insured 

interest, on an organized market or overthe-counter, an effective criterion in 

determining whether a product is 

insurance? Why or why not? 

7. Should the Commissions add, as a 

requirement for an insurance agreement, 

contract, or transaction to not be 

characterized as a swap, that the 

agreement, contract, or transaction not 

be based on the price, rate, or level of 

a financial instrument, asset, or interest 

or any commodity? Would such a 

requirement be an effective criterion in 

distinguishing insurance from swaps 

and security-based swaps? Why or why 

not? If so, should the Commissions add 

any carve outs from the requirement, 

such as, for example, variable universal 

life insurance, or annuity contracts 

where the income is subject to tax 

treatment under section 72 of the 

Internal Revenue Code? Why or why 

not? Would such a requirement help 

preclude the use of the proposed rules 

for products that are swaps or securitybased swaps? Why or why not? Would 

such a requirement preclude the use of 

the proposed rules for products that 

currently are insurance? If so, what 


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29826 Federal Register / Vol. 76, No. 99 / Monday, May 23, 2011 / Proposed Rules 

insurance products would be precluded 

by such a requirement, and how? How 

are insurance payments determined 

today? 

8. Is the proposed requirement that, 

with respect to financial guaranty 

insurance, in the event of payment 

default or insolvency of the obligor, any 

acceleration of payments under the 

policy be at the sole discretion of the 

insurer an effective criterion in 

determining whether a financial 

guaranty policy is insurance that does 

not fall within the swap or securitybased swap definition? Why or why 

not? 

9. Does the interpretive guidance 

proposed in this section appropriately 

identify certain enumerated insurance 

products as traditional insurance 

products that would not fall within the 

swap or security-based swap definition 

if the provider of the product satisfies 

the requirements of the proposed rules? 

Why or why not? Is the interpretive 

guidance proposed in this section 

sufficient? Why or why not? Are there 

additional types of traditional insurance 

that should be similarly enumerated? If 

so, which ones and why? Could the 

exclusion of any of the enumerated 

insurance products serve to exclude 

products that should be regulated as 

swaps or security-based swaps? If so, 

which ones and why? Should the 

enumerated insurance products be 

required to be provided in accordance 

with paragraph (ii) of proposed rule 

1.3(xxx)(4) under the CEA and 

paragraph (b) of proposed rule 3a69–1 

under the Exchange Act? Why or why 

not? If not, please provide a detailed 

explanation of the insurance products 

that should not be subject to these 

requirements. Are there insurance 

products currently offered that do not 

meet these criteria? If so, please provide 

details regarding such products and 

their providers. 

10. The Commissions are proposing 

guidance that certain enumerated types 

of insurance products, including 

property and casualty insurance, are 

outside the scope of the statutory 

definitions of the terms ‘‘swap’’ and 

‘‘security-based swap’’ under the DoddFrank Act. The Commissions request 

comment generally as to the proposed 

guidance regarding property and 

casualty insurance. The CFTC also 

requests comment on whether the 

products specified in section 302(c)(2) 

of the GLBA, which names certain 

insurance products, including private 

passenger or commercial automobile, 

homeowners, mortgage, commercial 

multiperil, general liability, professional 

liability, workers’ compensation, fire 

and allied lines, farm owners multiperil, 

aircraft, fidelity, surety, medical 

malpractice, ocean marine, inland 

marine, and boiler and machinery 

insurance, should be considered 

traditional property and casualty 

insurance. Why or why not? If so, please 

provide an explanation of the product 

and how it differs from transactions that 

should be subject to the swap regulatory 

regime of the Dodd-Frank Act. The SEC 

also requests comment on whether the 

products specified in section 302(c)(2) 

of the GLBA should be enumerated in 

the Commissions’ proposed guidance 

regarding property and casualty 

insurance as outside of the scope of the 

swap and security-based swap 

definitions? Are there other categories of 

traditional property and casualty 

insurance that should be specifically 

enumerated? If so, please provide a 

detailed description of such other 

categories of property and casualty 

insurance that should be specifically 

identified, and why. If there are certain 

types of property and casualty insurance 

that fall within the swap definition, will 

that affect the ability of persons, 

including consumers and businesses, to 

protect their properties against losses? If 

so, please provide a detailed 

explanation. 

11. Are there situations in which an 

insurance product may be assigned to 

another party that are not addressed by 

the criteria in proposed rule 1.3(xxx)(4) 

under the CEA and proposed rule 3a69– 

1 under the Exchange Act? Is additional 

clarification necessary to address such 

situations? If so, what clarification? 

12. Is the proposed requirement that 

the agreement, contract, or transaction 

be provided by a company that is 

organized as an insurance company 

whose primary and predominant 

business activity is the writing of 

insurance or the reinsuring of risks 

underwritten by insurance companies 

and that is subject to supervision by the 

insurance commissioner (or similar 

official or agency) of any state, as 

defined in section 3(a)(16) of the 

Exchange Act, or by the United States or 

an agency or instrumentality thereof, 

and that the agreement, contract, or 

transaction be regulated as insurance 

under the laws of such state or of the 

United States, an effective criterion in 

determining whether an agreement, 

contract, or transaction falls within the 

swap or security-based swap definition? 

Does it sufficiently preclude the use of 

the proposed rules by unregulated 

entities? Why or why not? Does it 

sufficiently prevent evasion of the 

requirements of Title VII with respect to 

agreements, contracts, or transactions 

that are swaps or security-based swaps? 

Why or why not? 

13. Are there circumstances under 

which a receiver or similar official or 

any liquidating agency for a state or 

Federally regulated insurance company, 

acting in its capacity as such, would be 

providing insurance rather than 

administering an insurance product that 

is provided by an insurance company? 

Please provide a detailed explanation of 

any such circumstances. If there are 

such circumstances, should the 

proposed rules include a provision that 

an agreement, contract, or transaction 

that satisfies the criteria of insurance 

but that is provided by a receiver or 

similar official or any liquidating agency 

for a state or Federally regulated 

insurance company, in its capacity as 

such, qualify as insurance that is 

excluded from the swap and securitybased swap definition? Why or why 

not? 

14. Do the proposed rules 

appropriately treat an agreement, 

contract, or transaction that satisfies the 

criteria of insurance but that is provided 

by the United States or any of its 

agencies or instrumentalities, or 

pursuant to a statutorily authorized 

program thereof, as insurance that is 

excluded from the swap and securitybased swap definition? Why or why 

not? Are there other types of 

government-issued insurance products 

that are not covered by paragraph (ii) of 

proposed rule 1.3(xxx)(4) under the CEA 

and paragraph (b) of proposed rule 

3a69–1 under the Exchange Act? Do 

states or state agencies or 

instrumentalities provide insurance 

products? Should the proposed 

requirement also include a provision 

that the agreement, contract, or 

transaction can be provided by any state 

or any of its agencies or 

instrumentalities, or pursuant to a 

statutorily authorized program thereof? 

Why or why not? 

15. Do the proposed rules 

appropriately treat reinsurance by a 

person located outside the United States 

of a product meeting the requirements 

for insurance under the proposed rules, 

so long as the total amount reimbursable 

by all of the reinsurers for such 

insurance product cannot exceed the 

claims or losses paid by the cedant, as 

insurance excluded from the swap and 

security-based swap definitions if such 

person is not prohibited by any law of 

any state or of the United States from 

offering such reinsurance to a state or 

Federally regulated insurance company? 

Do these provisions of the proposed 

rules sufficiently prevent evasion of the 

requirements of Title VII with respect to 

agreements, contracts, or transactions 

that are swaps or security-based swaps? 

Why or why not? 


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54 15 U.S.C. 6712(c)(1). 

55CEA section 1a(47)(B)(ii), 7 U.S.C. 1a(47)(B)(ii). 

56The discussion in subsections (a) and (b) of this 

section applies solely to the exclusion of 

nonfinancial commodity forwards from the swap 

definition in the Dodd-Frank Act. 

57CEA section 1a(27), 7 U.S.C. 1a(27). The CEA 

does not define the term ‘‘futures contract.’’ Rather, 

the CEA refers to a futures contract as a ‘‘contract 

of sale of a commodity for future delivery.’’ See, e.g., 

CEA section 2(a)(1)(A), 7 U.S.C. 2(a)(1)(A) 

(providing the CFTC with exclusive jurisdiction 

over ‘‘contracts of sale of a commodity for future 

delivery’’ (other than security futures) traded or 

executed on, among other things, a designated 

contract market (‘‘DCM’’)); CEA section 4(a), 7 

U.S.C. 6(a) (a ‘‘contract for the purchase or sale of 

a commodity for future delivery’’ other than a 

contract made on an exchange located outside the 

United States must be conducted on or subject to 

the rules of, among other things, a DCM). 

Accordingly, by excluding forward contracts from 

the CEA’s definition of the term ‘‘future delivery,’’ 

the CEA provides that a forward contract is not a 

contract of sale of a commodity for future delivery 

and, hence, not a futures contract. 

58Statutory Interpretation Concerning Forward 

Transactions, 55 FR 39188, Sept. 25, 1990 (‘‘Brent 

Interpretation’’). 

59See Letter from Joanne T. Medero, Managing 

Director, BlackRock, Sept. 20, 2010 (‘‘BlackRock 

Letter’’), Letter from Matt Schatzman, Senior Vice 

President, Energy Marketing, BG Americas and 

Global LNC, Sept. 20, 2010 (‘‘BG Letter’’); Cleary 

Letter; Letter from Edward W. Gallagher, President, 

Dairy Risk Management Services, a division of 

Dairy Farmers of America, Inc., Sept. 20, 2010 

(‘‘DFA Letter’’); Letter from Eric Dennison, Sr. Vice 

President and General Counsel, Stephanie Miller, 

Assistant General Counsel—Commodities, and Bill 

Hellinghausen, Director of Regulatory Affairs, EDF 

Trading North America, LLC, Sept. 20, 2010 (‘‘EDF 

Letter’’); Richard F. McMahon, Jr., Executive 

Director, Edison Electric Institute, Sept. 20, 2010 

(‘‘EEI Letter’’); Letter from John M. Damgard, 

President, Futures Industry Association, Sept. 20, 

2010 (‘‘FIA Letter’’); Letter from Richard Ostrander, 

Managing Director and Counsel, Morgan Stanley, 

Sept. 20, 2010 (‘‘Morgan Stanley Letter’’); Letter of 

Michael Greenberger, JD, Law School Professor, 

University of Maryland School of Law, Sept. 20, 

2010 (‘‘University of Maryland Letter’’); R. Michael 

Sweeney, Jr., Mark W. Menezes, and David T. 

McIndoe, Hunton & Williams, LLP, on behalf of the 

Working Group of Commercial Energy Firms, Sept, 

20, 2010 (‘‘WGCEF Letter’’); Letter from Paul H. 

Stebbins, Chairman and Chief Executive Officer, 

World Fuel Services Corporation, Sept. 17, 2010 

(‘‘World Fuel Letter’’). 

60As discussed in part II.D.1 below, the 

terminology and documentation used by the parties 

are not dispositive of whether a particular 

agreement, contract, or transaction is a swap or 

security-based swap under the CEA or Exchange 

Act. Thus, if an agreement, contract, or transaction 

Continued 

16. Are there additional criteria for 

identifying contracts, agreements, or 

transactions that are insurance and not 

swaps or security-based swaps that the 

Commissions should consider? Please 

provide detailed information and 

empirical data, to the extent possible, 

supporting any suggested criteria. 

17. Should the proposed rules relating 

to insurance include a provision related 

to whether a product is recognized at 

fair value on an ongoing basis with 

changes in fair value reflected in 

earnings under U.S. generally accepted 

accounting principles? If so, what 

specific challenges may be encountered 

in light of the proposed Accounting 

Standards Update ‘‘Accounting for 

Financial Instruments and Revisions to 

the Accounting for Derivative 

Instruments and Hedging Activities,’’ 

issued by the Financial Accounting 

Standards Board (‘‘FASB’’) on May 26, 

2010? Is recognizing a product at fair 

value on an ongoing basis (with changes 

in fair value reflected in earnings) 

inconsistent with treating such a 

product as insurance rather than a swap 

or security-based swap? Why or why 

not? Please provide examples of specific 

products and their correct accounting 

treatment under U.S. generally accepted 

accounting principles. 

18. Where an agreement, contract, or 

transaction falls within the swap 

definition, should insurance of that 

agreement, contract, or transaction also 

be included in the swap definition? 

Why or why not? Is the insurance wrap 

of a swap sufficiently different 

(economically or otherwise) from the 

swap that is insured? Why or why not? 

Would the regulation of such swap 

‘‘wraps’’ as swaps impose costs on or 

otherwise impact the underlying cash 

markets (e.g., the ability to issue, and 

cost of issuing, municipal debt)? Please 

quantify to the extent possible. Would 

treating such ‘‘wraps’’ as insurance 

falling outside the swap definition 

frustrate or undermine Title VII’s 

objectives in regulating the swap 

markets in any way? Why or why not? 

Please provide empirical data and 

analysis to the extent possible. 

19. Where an agreement, contract, or 

transaction falls within the securitybased swap definition, should the 

insurance of that agreement, contract, or 

transaction also be included in the 

security-based swap definition? Why or 

why not? Would the regulation of 

insurance on a security-based swap as a 

security-based swap under Title VII 

impose costs or otherwise impact the 

underlying cash markets (e.g., the ability 

to issue, and cost of issuing, municipal 

debt)? Please quantify to the extent 

possible. Would regulating such 

products as insurance rather than as 

security-based swaps frustrate or 

undermine Title VII’s objectives in 

regulating the security-based swap and 

swap markets? Why or why not? Please 

provide a detailed explanation and 

empirical data to the extent possible. 

20. Should the proposed rules include 

a provision similar to section 302(c)(1) 

of the GLBA 54 that would provide that 

any product regulated as insurance 

before July 21, 2010 (the date the DoddFrank Act was signed into law) and 

provided in accordance with paragraph 

(ii) of proposed rule 1.3(xxx)(4) under 

the CEA and paragraph (b) of proposed 

rule 3a69–1 would be considered 

insurance and not fall within the swap 

definition? Why or why not? Should 

different criteria apply to products 

regulated as insurance before July 21, 

2010? Why or why not? If so, please 

provide a detailed description of what 

different criteria should apply. 

21. The Commissions understand that 

swap guarantees may be offered by noninsurance companies. Should the 

Commissions provide guidance as to 

whether swap or security-based swap 

guarantees (that are not guarantees or 

insurance policies offered by insurance 

companies discussed above) should be 

considered swaps or security-based 

swaps? Why or why not? 

2. The Forward Contract Exclusion 

The definitions of the terms ‘‘swap’’ 

and ‘‘security-based swap’’ do not 

include forward contracts. They exclude 

‘‘any sale of a nonfinancial commodity 

or security for deferred shipment or 

delivery, so long as the transaction is 

intended to be physically settled’’.55

Commenters have requested guidance 

from the Commissions regarding the 

scope of this exclusion. The 

Commissions believe it is appropriate to 

provide guidance to market participants 

regarding the applicability of the 

exclusion from the definitions of swap 

and security-based swap for forward 

contracts with respect to nonfinancial 

commodities 56 and securities. 

(a) Forward Contracts in Nonfinancial 

Commodities 

The wording of the forward contract 

exclusion from the swap definition with 

respect to nonfinancial commodities is 

similar, but not identical, to the forward 

contract exclusion from the definition of 

‘‘future delivery’’ in the CEA, which 

excludes ‘‘any sale of any cash 

commodity for deferred shipment or 

delivery’’.57 Several ANPR commenters 

expressed the view that, with respect to 

nonfinancial commodities, the forward 

contract exclusion from the swap 

definition should be interpreted in the 

same manner as the CFTC has 

interpreted the forward contract 

exclusion from the term ‘‘future 

delivery’’ and, in particular, that the 

CFTC’s ‘‘Brent Interpretation’’ 58 should 

apply to ‘‘book out’’ transactions for 

purposes of the forward exclusion from 

the swap definition.59 The CFTC 

believes that clarification of the scope of 

the forward contract exclusion from the 

swap definition with respect to 

nonfinancial commodities is 

appropriate.60


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29828 Federal Register / Vol. 76, No. 99 / Monday, May 23, 2011 / Proposed Rules 

with respect to a nonfinancial commodity qualifies 

for the forward exclusion from the swap definition, 

it would not be a swap even if the parties refer to 

it as a swap or document it using an industry 

standard form agreement that is typically used for 

swaps. Conversely, such an agreement, contract, or 

transaction that does not qualify for the forward 

exclusion from the swap definition would not be 

excluded even if the parties refer to it as a forward 

contract. 

61Brent Interpretation, supra note 58, at 39190. 

The CFTC has reiterated this view in more recent 

adjudicative orders. See, e.g., In re Grain Land 

Coop., [2003–2004 Transfer Binder] Comm. Fut. L. 

Rep. (CCH) ¶ 29,636 (CFTC Nov. 25, 2003); In re 

Competitive Strategies for Agric., Ltd., [2003–2004 

Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 29,635 

(CFTC Nov. 25, 2003). Courts have expressed this 

view as well. See, e.g., Salomon Forex, Inc. v. 

Tauber, 8 F.3d 966, 971 (4th Cir. 1993) (‘‘[C]ash 

forwards are generally individually negotiated sales 

* * * in which actual delivery of the commodity 

is anticipated, but is deferred for reasons of 

commercial convenience or necessity.’’); CFTC v. 

Int’l Fin. Serv. (N.Y.), 323 F. Supp. 2d 482, 495 

(S.D.N.Y. 2004). See also CFTC v. Co Petro Mktg. 

Grp., Inc., 680 F.2d 573, 579–580 (9th Cir. 1982); 

CFTC v. Noble Metals Int’l, Inc., 67 F.3d 766, 772– 

773 (9th Cir. 1995; CFTC v. Am. Metal Exch. Corp., 

693 F. Supp. 168, 192 (D.N.J. 1988); CFTC v. 

Morgan, Harris & Scott, Ltd., 484 F. Supp. 669, 675 

(S.D.N.Y. 1979) (forward contract exclusion does 

not apply to speculative transactions in which 

delivery obligations can be extinguished under the 

terms of the contract or avoided for reasons other 

than commercial convenience or necessity). 

62See, e.g., BG Letter (forward exclusion for 

swaps should be consistent with the forward 

exclusion from futures); BlackRock Letter (the CFTC 

should interpret ‘‘intended to be physically settled’’ 

consistently with existing CFTC principles, 

including book outs); DFA Letter (forward 

exclusion for swaps should be interpreted 

consistently with the CFTC’s prior forward contract 

interpretations and precedent, including forwards 

requiring delivery but including embedded 

options); EDF Letter (forward exclusion from the 

definition of swap should be construed in a 

consistent manner with the forward exclusion 

under the CEA); EEI Letter (forward exclusion from 

swap definition should be interpreted consistently 

with the forward exclusion from futures); FIA Letter 

(the Commissions should, through rulemaking or 

interpretation, provide that the ‘‘intent’’ standard in 

the forward exclusion with respect to swaps will be 

interpreted the same as the existing forward 

exclusion with respect to futures); Morgan Stanley 

Letter (the forward exclusion from the swap 

definition should be interpreted consistently with 

the forward exclusion from futures); University of 

Maryland Letter (forward exclusion from swap 

definition intended to be consistent with the 

forward exclusion from futures); WGCEF Letter 

(physical delivery forwards should be distinguished 

from swaps under standards identical to those used 

in forwards vs. futures); World Fuel Letter (forward 

exclusion for swaps should be interpreted in a 

manner consistent with the forward exclusion from 

futures). 

63As recently as October 25, 2010, the CFTC 

observed in In re Wright that ‘‘it is well-established 

that the intent to make or take delivery is the 

critical factor in determining whether a contract 

qualifies as a forward.’’ In re Wright, CFTC Docket 

No. 97–02, 2010 WL 4388247 at *3 (CFTC Oct. 25, 

2010) (citing In re Stovall, et al., [1977–1980 

Transfer Binder] Comm. Fut. L. Rep. (CCH) 20,941 

(CFTC Dec. 6, 1979); Brent Interpretation, supra 

note 58). In Wright, the CFTC noted that ‘‘[i]n 

distinguishing futures from forwards, the [CFTC] 

and the courts have assessed the transaction as a 

whole with a critical eye toward its underlying 

purpose. Such an assessment entails a review of the 

overall effect of the transaction as well as a 

determination as to what the parties intended.’’ Id. 

at *3 (quoting Policy Statement Concerning Swap 

Transactions, 54 FR 30694, July 21, 1989 (‘‘Swap 

Policy Statement’’) (citations and internal 

quotations omitted). 

64 In its recent decision in In re Wright, the CFTC 

applied its facts and circumstances test in an 

administrative enforcement action involving hedgeto-arrive contracts for corn, and observed that ‘‘[o]ur 

views of the appropriateness of a multi-factor 

analysis remain unchanged.’’ Wright, supra note 63, 

n.13. The CFTC let stand the administrative law 

judge’s conclusion that the hedge-to-arrive contracts 

at issue in the case were forward contracts. Id. at 

**5–6. See also Grain Land, supra note 61; 

Competitive Strategies for Agric., supra note 61. 

65See Brent Interpretation, supra note 58. The 

CFTC issued the Brent Interpretation in response to 

a Federal court decision that held that certain 15- 

day Brent system crude oil contracts were illegal 

off-exchange futures contracts. See Transnor 

(Bermuda) Ltd. v. BP N. Am. Petroleum, 738 F. 

Supp. 1472 (S.D.N.Y. 1990). The Brent 

Interpretation provided clarification that the 15-day 

Brent system crude oil contracts were forward 

contracts that were excluded from the CEA 

definition of ‘‘future delivery,’’ and thus were not 

futures contracts. See Brent Interpretation, supra 

note 58. 

66The Brent Interpretation described these ‘‘bookouts’’ as follows: ‘‘In the course of entering into 15- 

day contracts for delivery of a cargo during a 

particular month, situations often arise in which 

two counterparties have multiple, offsetting 

positions with each other. These situations arise as 

a result of the effectuation of multiple, independent 

commercial transactions. In such circumstances, 

rather than requiring the effectuation of redundant 

deliveries and the assumption of the credit, delivery 

and related risks attendant thereto, the parties may, 

but are not obligated to and may elect not to, 

terminate their contracts and forego such deliveries 

and instead negotiate payment-of-differences 

pursuant to a separate, individually negotiated 

cancellation agreement referred to as a ‘book-out.’ 

Similarly, situations regularly arise when 

participants find themselves selling and purchasing 

oil more than once in the delivery chain for a 

particular cargo. The participants comprising these 

‘circles’ or ‘loops’ will frequently attempt to 

negotiate separate cancellation agreements among 

themselves for the same reasons and with the same 

effect described above.’’ Brent Interpretation, supra 

note 58, at 39190. 

67 Id. at 39192. 

68 Id. at 39189. 

Forward contracts with respect to 

nonfinancial commodities are 

commercial merchandising transactions. 

The primary purpose of the contract is 

to transfer ownership of the commodity 

and not to transfer solely its price risk. 

The CFTC has noted: 

The underlying postulate of the [forward] 

exclusion is that the [CEA’s] regulatory 

scheme for futures trading simply should not 

apply to private commercial merchandising 

transactions which create enforceable 

obligations to deliver but in which delivery 

is deferred for reasons of commercial 

convenience or necessity.61

The CFTC believes that the forward 

contract exclusion in the Dodd-Frank 

Act with respect to nonfinancial 

commodities should be read 

consistently with this established, 

historical understanding that a forward 

contract is a commercial merchandising 

transaction. 

Many commenters discussed the issue 

of whether the requirement in the DoddFrank Act that a transaction be 

‘‘intended to be physically settled’’ in 

order to qualify for the forward 

exclusion from the swap definition with 

respect to nonfinancial commodities 

reflects a change in the standard for 

determining whether a transaction is a 

forward contract.62 Because a forward 

contract is a commercial merchandising 

transaction, intent to deliver historically 

has been an element of the CFTC’s 

analysis of whether a particular contract 

is a forward contract.63 In assessing the 

parties’ expectations or intent regarding 

delivery, the CFTC consistently has 

applied a ‘‘facts and circumstances’’ 

test.64 Therefore, the CFTC reads the 

‘‘intended to be physically settled’’ 

language in the swap definition with 

respect to nonfinancial commodities to 

reflect a directive that intent to deliver 

a physical commodity be a part of the 

analysis of whether a given contract is 

a forward contract or a swap, just as it 

is a part of the CFTC’s analysis of 

whether a given contract is a forward 

contract or a futures contract. 

Commenters also requested 

clarification of the treatment of one type 

of forward contract—‘‘book-out’’ 

transactions—in the context of the 

forward exclusion from the swap 

definition with respect to nonfinancial 

commodities. The issue of book-outs 

first arose in 1990 in the Brent 

Interpretation65 because the parties to 

the crude oil contracts in that case could 

individually negotiate cancellation 

agreements, or ‘‘book-outs,’’ with other 

parties.66 In describing these 

transactions, the CFTC stated: 

It is noteworthy that while such [book-out] 

agreements may extinguish a party’s delivery 

obligation, they are separate, individually 

negotiated, new agreements, there is no 

obligation or arrangement to enter into such 

agreements, they are not provided for by the 

terms of the contracts as initially entered 

into, and any party that is in a position in 

a distribution chain that provides for the 

opportunity to book-out with another party 

or parties in the chain is nevertheless entitled 

to require delivery of the commodity to be 

made through it, as required under the 

contracts.67

Thus, in the scenario at issue in the 

Brent Interpretation, the contracts 

created a binding obligation to make or 

take delivery without providing any 

right to offset, cancel, or settle on a 

payment-of-differences basis. The 

‘‘parties enter[ed] into such contracts 

with the recognition that they may be 

required to make or take delivery.’’ 68

On these facts, the Brent 

Interpretation concluded that the 


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69 Id. at 39192. 

70This interpretive guidance is consistent with 

legislative history. See 156 Cong. Rec. H5247 (June 

30, 2010) (colloquy between U.S. House Committee 

on Agriculture Chairman Collin Peterson and 

Representative Leonard Boswell during the debate 

on the Conference Report for the Dodd-Frank Act, 

in which Chairman Peterson stated: ‘‘Excluding 

physical forward contracts, including book-outs, is 

consistent with the CFTC’s longstanding view that 

physical forward contracts in which the parties 

later agree to book-out their delivery obligations for 

commercial convenience are excluded from its 

jurisdiction. Nothing in this legislation changes that 

result with respect to commercial forward 

contracts.’’). See also 156 Cong. Rec. H5248–49 

(June 30, 2010) (introducing into the record a letter 

authored by Senator Blanche Lincoln, Chairman of 

the U.S. Senate Committee on Agriculture, 

Nutrition and Forestry, and Christopher Dodd, 

Chairman U.S. Senate Committee on Banking, 

Housing, and Urban Affairs, stating that the CFTC 

is encouraged ‘‘to clarify through rulemaking that 

the exclusion from the definition of swap for ‘any 

sale of a nonfinancial commodity or security for 

deferred shipment or delivery, so long as the 

transaction is intended to be physically settled’ is 

intended to be consistent with the forward contract 

exclusion that is currently in the [CEA] and the 

CFTC’s established policy and orders on this 

subject, including situations where commercial 

parties agree to ‘book-out’ their physical delivery 

obligations under a forward contract.’’). 

71See Brent Interpretation, supra note 58, at 

39192. 

72Exemption for Certain Contracts Involving 

Energy Products, 58 FR 21286, Apr. 20, 1993. The 

Energy Exemption generally applies to certain 

energy contracts: (i) Entered into by persons 

reasonably believed to be within a specified class 

of commercial and governmental entities; (ii) that 

are bilateral contracts between two parties acting as 

principals; (iii) the material economic terms of 

which are subject to individual negotiation by the 

parties; and (iv) that impose binding obligations on 

the parties to make and receive delivery of the 

underlying commodity, with no right of either party 

to effect a cash settlement of their obligations 

without the consent of the other party (except 

pursuant to a bona fide termination right such as 

default). Like the Brent Interpretation, the Energy 

Exemption provides that the parties can enter into 

a subsequent book-out settlement of the obligation 

in a manner other than by physical delivery of the 

commodity specified in the contract. Id. at 21294. 

73See, e.g., WGCEF letter. The CFTC issued the 

Energy Exemption shortly after Congress had 

provided the CFTC with exemptive authority 

pursuant to CEA section 4(c), 7 U.S.C. 6(c), in 

section 502 of the Futures Trading Practices Act of 

1992, Public Law 102–546, 106 Stat. 3590 (1993). 74To avoid any uncertainty, the CFTC also notes 

that the Dodd-Frank Act supersedes the Swap 

Policy Statement. The CFTC is aware that some 

commenters have suggested that the Commissions 

should exercise their authority to further define the 

term ‘‘eligible contract participant’’ to encompass 

the ‘‘line of business’’ provision of the Swap Policy 

Statement. See Swap Policy Statement, supra note 

63, at 30696–30697. The Commissions will address 

these comments in their joint final rulemaking with 

respect to the Entity Definitions. See supra note 12. 

75See, e.g., World Fuel Letter (exclusion for 

commercial options set forth in CFTC Regulation 

32.4 should also be an exclusion from the swap 

definition). 

76See, e.g., Letter from Patrick Kelly, Policy 

Advisor, API, Sept. 20, 2010 (‘‘API Letter’’), EEI 

Letter; Letter from Daniel S.M. Dolan, VP, Policy 

Research & Communications, Electric Power Supply 

Association, Sept. 20, 2010 (‘‘EPSA Letter’’) 

(physically settled options should be included in 

the forward exclusion from the swap definition); 

DFA Letter; ISDA Letter. One commenter suggested 

that the CFTC should apply to each contract with 

an enforceable delivery obligation a rebuttable 

presumption of intent to deliver, even if an option 

to cash settle is included in that contract. See 

WGCEF Letter. 

contracts were forward contracts, not 

futures contracts: 

Under these circumstances, the [CFTC] is 

of the view that transactions of this type 

which are entered into between commercial 

participants in connection with their 

business, which create specific delivery 

obligations that impose substantial economic 

risks of a commercial nature to these 

participants, but which may involve, in 

certain circumstances, string or chain 

deliveries of the type described * * * are 

within the scope of the [forward contract] 

exclusion from the [CFTC’s] regulatory 

jurisdiction.69

Although the CFTC did not expressly 

discuss intent to deliver, the Brent 

Interpretation concluded that 

transactions retained their character as 

commercial merchandising transactions, 

notwithstanding the practice of 

terminating commercial parties’ 

delivery obligations through ‘‘book-outs’’ 

as described. At any point in the chain, 

one of the parties could refuse to enter 

into a new contract to book-out the 

transaction and, instead, insist upon 

delivery pursuant to the parties’ 

obligations under their contract. 

The CFTC believes that the principles 

underlying the Brent Interpretation 

similarly should apply to the forward 

exclusion from the swap definition with 

respect to nonfinancial commodities. To 

summarize, then, the CFTC believes 

that: (i) The forward contract exclusion 

from the swap definition with respect to 

nonfinancial commodities should be 

interpreted in a manner that is 

consistent with the CFTC’s historical 

interpretation of the forward contract 

exclusion from the definition of the 

term ‘‘future delivery’’; (ii) intent to 

deliver is an essential element of a 

forward contract excluded from both the 

swap and future delivery definitions, 

and such intent in both instances 

should be evaluated based on the 

CFTC’s established multi-factor 

approach; and (iii) book-out transactions 

in nonfinancial commodities that meet 

the requirements specified in the Brent 

Interpretation, and that are effectuated 

through a subsequent, separatelynegotiated agreement, should qualify for 

the forward exclusion from the swap 

definition.70

As noted above, the Brent 

Interpretation applies to ‘‘commercial 

participants in connection with their 

business.’’ 71 Market participants that 

regularly make or take delivery of the 

referenced commodity (in the case of 

the Brent Interpretation, a tanker full of 

Brent oil) in the ordinary course of their 

business meet that standard. Such 

entities qualify for the forward 

exclusion from both the future delivery 

and swap definitions for their forward 

transactions under the Brent 

Interpretation even if they enter a 

subsequent transaction to ‘‘book out’’ the 

forward contract rather than make or 

take delivery. Intent to make or take 

delivery can be inferred from the 

binding delivery obligation for the 

referenced commodity in the contract 

and the fact that the parties to the 

contract do, in fact, regularly make or 

take delivery of the referenced 

commodity in the contract in the 

ordinary course of their business. 

Some commenters to the ANPR 

requested clarification with regard to 

the application of the CFTC’s 1993 order 

exempting certain energy contracts from 

regulation under the CEA (the ‘‘Energy 

Exemption’’) 72 after enactment of the 

Dodd-Frank Act.73 The Energy 

Exemption extended the Brent 

Interpretation regarding the forward 

contract exclusion from the term ‘‘future 

delivery’’ to energy commodities other 

than oil. The CFTC believes that the 

book-out provisions of the Brent 

Interpretation similarly should apply to 

the forward contract exclusion from the 

swap definition for nonfinancial 

commodities besides oil. Further, the 

CFTC also is proposing interpretive 

guidance herein that the Brent 

Interpretation with respect to the 

application of the forward contract 

exclusion from the term ‘‘future 

delivery’’ in the context of book-out 

transactions applies not just to oil, but 

to all nonfinancial commodities. The 

CFTC, therefore, is proposing to 

withdraw the Energy Exemption, while 

retaining and extending through this 

interpretive guidance the Brent 

Interpretation regarding book-outs 

under the forward contract exclusion 

with respect to nonfinancial 

commodities.74

(b) Commodity Options and Commodity 

Options Embedded in Forward 

Contracts 

Some commenters responding to the 

ANPR requested clarification regarding 

the status of commodity options under 

the swap definition.75 Questions also 

were raised regarding options embedded 

in forward contracts, i.e., whether a 

forward contract with respect to a 

nonfinancial commodity that contains 

an embedded option can still qualify for 

the forward contract exclusion from the 

swap definition.76

The statutory swap definition 

explicitly provides that commodity 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
29830 Federal Register / Vol. 76, No. 99 / Monday, May 23, 2011 / Proposed Rules 

77 7 U.S.C. 1a(47)(A)(i). Options on securities and 

certain options on foreign currency are excluded 

from the swap definition by CEA sections 

1a(47)(B)(iii) and (iv), respectively. 7 U.S.C. 

1a(47)(B)(iii) and (iv). These options are not subject 

to the Commissions’ proposed guidance in this 

section. 

78See Commodity Options and Agricultural 

Swaps, 76 FR 6095, Feb. 3, 2011. 

79See Characteristics Distinguishing Cash and 

Forward Contracts and ‘‘Trade’’ Options, 50 FR 

39656, Sept. 30, 1985. 

80Wright, supra note 63. 

81 Id. at n.5. In Wright, the CFTC affirmed the 

Administrative Law Judge’s holding that an option 

embedded in a hedge-to-arrive contract did not 

violate CFTC rules regarding the sale of agricultural 

trade options. The CFTC first concluded that the 

puts at issue operated to adjust the forward price 

and did not render the farmer’s overall obligation 

to make delivery optional. Then, turning to the next 

step of the analysis, the CFTC explained that ‘‘the 

put and [hedge-to-arrive contract] operated as a 

single contract, and in most cases were issued 

simultaneously * * *. We do not find that any put 

was severed from its forward or that either of [the 

put or the hedge-to-arrive contract] was traded 

separately from the other. We hold that in these 

circumstances, no freestanding option came into 

being. * * *’’ Id. at *7. 

82The CFTC believes that ‘‘options’’ in the plural 

would include, for example, a situation in which 

the embedded optionality involves option 

combinations, such as costless collars, that operate 

on the price term of the agreement, contract, or 

transaction. 

83See Wright, supra note 63, at **6–7. 

84This facts and circumstances approach to 

determining whether a particular embedded option 

takes a transaction out of the forward contract 

exclusion for nonfinancial commodities is 

consistent with the CFTC’s historical approach to 

determining whether a particular embedded option 

takes a transaction out of the forward contract 

exclusion from the CEA definition of the term 

‘‘future delivery.’’ See Wright, supra note 63, at *5 

(‘‘As we have held since Stovall, the nature of a 

contract involves a multi-factor analysis . * * *’’). 

85The discussion above regarding the exclusion 

from the swap definition for forward contracts on 

nonfinancial commodities does not apply to the 

exclusion from the swap and security-based swap 

definitions for security forwards or to the 

distinction between security forwards and security 

futures products. 

86Specifically, commenters requested 

clarification that the swap and security-based swap 

definitions do not include buying and selling 

mortgages and forward trading of agency (i.e., 

Federal Home Loan Mortgage Corporation (‘‘Freddie 

Mac’’), Federal National Mortgage Association 

(‘‘Fannie Mae’’), and Government National Mortgage 

Association (‘‘Ginnie Mae’’) mortgage-backed 

securities (‘‘MBS’’) in the ‘‘To-Be-Announced’’ 

(‘‘TBA’’) market in order to provide the certainty 

needed to avoid unnecessary disruption of the 

securitization market. See Letter from Stephen H. 

McElhennon, Vice President & Deputy General 

Counsel, Fannie Mae, Sept. 20, 2010 (‘‘Fannie Mae 

Letter’’); Letter from Lisa M. Ledbetter, Freddie Mac, 

Sept. 20, 2010. 

87See CEA sections 1a(47)(B)(ii), (v), and (vi), 7 

U.S.C. 1a(47)(B)(ii), (v), and (vi). 

88See CEA section 1a(47)(B)(v), 7 U.S.C. 

1a(47)(B)(v) (excluding from the swap and securitybased swap definitions ‘‘any agreement, contract, or 

transaction providing for the purchase or sale of 1 

or more securities on a fixed basis that is subject 

to [the Securities Act and Exchange Act]’’); CEA 

section 1a(47)(B)(vi), 7 U.S.C. 1a(47)(B)(vi) 

(excluding from the swap and security-based swap 

definitions ‘‘any agreement, contract, or transaction 

providing for the purchase or sale of 1 or more 

securities on a contingent basis that is subject to 

[the Securities Act and Exchange Act], unless the 

agreement, contract, or transaction predicates the 

purchase or sale on the occurrence of a bona fide 

contingency that might reasonably be expected to 

affect or be affected by the creditworthiness of a 

party other than a party to the agreement, contract, 

or transaction’’). 

89See CEA section 1a(47)(B)(ii), 7 U.S.C. 

1a(47)(B)(ii). 

90The Commissions note that calling an 

agreement, contract, or transaction a swap or 

security-based swap does not determine its status. 

See discussion supra part II.D.1. 

options are swaps.77 Accordingly, the 

CFTC recently proposed revisions to its 

existing options rules in parts 32 and 33 

of its regulations with respect to the 

treatment of commodity options under 

the Dodd-Frank Act, and requested 

public comment on those proposed 

revisions.78 The question of the 

application of the forward exclusion 

from the swap definition with respect to 

nonfinancial commodities, where 

commodity options are embedded in 

forward contracts (including embedded 

options to cash settle such contracts), is 

similar to that arising under the CEA’s 

existing forward contract exclusion from 

the definition of the term ‘‘future 

delivery.’’ The CFTC’s Office of General 

Counsel addressed forward contracts 

that contained embedded options in a 

1985 interpretive statement (‘‘1985 

Interpretation’’),79 which the CFTC 

recently adhered to in its adjudicatory 

Order in the Wright case.80 While both 

were issued prior to the effective date of 

the Dodd-Frank Act, the CFTC believes 

that it would be appropriate to apply 

this guidance to the treatment of 

forward contracts in nonfinancial 

commodities that contain embedded 

options under the Dodd-Frank Act. 

In Wright, the CFTC described the 

1985 Interpretation and stated that the 

CFTC traditionally has engaged in a 

two-step analysis of ‘‘embedded 

options’’ in which the first step focuses 

on whether the option operates on the 

price or the delivery term of the forward 

contract and the second step focuses on 

secondary trading.81 The CFTC believes 

that these same principles can be 

applied with respect to the forward 

contract exclusion from the swap 

definition for nonfinancial commodities 

in the Dodd-Frank Act, too. That is, a 

forward contract that contains an 

embedded commodity option or 

options 82 would be considered an 

excluded nonfinancial commodity 

forward contract (and not a swap) if the 

embedded option(s): (i) May be used to 

adjust the forward contract price, but do 

not undermine the overall nature of the 

contract as a forward contract; (ii) do 

not target the delivery term, so that the 

predominant feature of the contract is 

actual delivery; and (iii) cannot be 

severed and marketed separately from 

the overall forward contract in which 

they are embedded.83 Conversely, where 

the embedded commodity option(s) 

render delivery optional, the 

predominant feature of the contract 

cannot be actual delivery and, therefore, 

the embedded option(s) to not deliver 

preclude treatment of the contract as a 

forward contract for a nonfinancial 

commodity. The CFTC would look to 

the specific facts and circumstances of 

the transaction as a whole to evaluate 

whether any embedded optionality 

operates on the price or delivery term of 

the contract, and whether an embedded 

commodity option is marketed or traded 

separately from the underlying contract, 

to determine whether that transaction 

qualifies for the forward contract 

exclusion from the swap definition for 

nonfinancial commodities.84 The CFTC 

believes that such an approach would 

help prevent commodity options that 

should fall within the swap definition 

from qualifying for the forward contract 

exclusion for nonfinancial commodities 

instead. 

(c) Security Forwards 85

No commenters sought clarification of 

the exclusion from the swap and 

security-based swap definitions for the 

‘‘sale of a nonfinancial commodity or 

security for deferred shipment or 

delivery, so long as the transaction is 

intended to be physically settled,’’ in the 

context of most sales of securities for 

deferred shipment or delivery; however, 

some commenters sought clarification of 

this exclusion in the context of mortgage 

securitizations.86 The Commissions 

believe it is appropriate to address how 

the exclusions from the definitions of 

swap and security-based swap apply to 

security forwards and other purchases 

and sales of securities. 

The Dodd-Frank Act excludes 

purchases and sales of securities from 

the definitions of swap and securitybased swap in a number of different 

clauses.87 Under these exclusions, 

purchases and sales of securities on a 

fixed or contingent basis 88 and sales of 

securities for deferred shipment or 

delivery that are intended to be 

physically delivered 89 are explicitly 

excluded from the definitions of swap 

and security-based swap.90 The 

exclusion from the definitions of swap 

and security-based swap of a sale of a 

security for deferred shipment or 

delivery involves an agreement to 

purchase securities, or groups or 

indexes of securities, at a future date at 

a certain price. 


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91See CEA section 1a(47)(B)(ii), 7 U.S.C. 

1a(47)(B)(ii). 

92See CEA sections 1a(47)(B)(v) and (vi), 7 U.S.C. 

1a(47)(B)(v) and (vi). 

93Task Force on Mortgage-Backed Securities 

Disclosure, ‘‘Staff Report: Enhancing Disclosure in 

the Mortgage-Backed Securities Markets,’’ part II.E.2 

(Jan. 2003). 

94 Id. 

95 Id. 

96See CEA section 1a(47)(B)(ii), 7 U.S.C. 

1a(47)(B)(ii). 

97See CEA sections 1a(47)(B)(v) and (vi), 7 U.S.C. 

1a(47)(B)(v) and (vi). 98 7 U.S.C. 1a(17). 

As with other purchases and sales of 

securities, security forwards are 

excluded from the definitions of swap 

and security-based swap. The sale of the 

security in this case occurs at the time 

the forward contract is entered into with 

the performance of the contract deferred 

or delayed. If such agreement, contract, 

or transaction is intended to be 

physically settled, the Commissions 

believe it would be within the security 

forward exclusion and therefore outside 

the swap and security-based swap 

definitions.91 Moreover, as a purchase 

or sale of a security, the Commissions 

believe it also would be within the 

exclusions for the purchase or sale of 

one or more securities on a fixed basis 

(or, depending on its terms, a contingent 

basis) and, therefore, outside the swap 

and security-based swap definitions.92

As noted above, commenters 

requested specific guidance in the 

context of forward sales of MBS that are 

guaranteed or sold by Fannie Mae, 

Freddie Mac, and Ginnie Mae and the 

mortgages underlying such MBS. 

MBS guaranteed or sold by Fannie 

Mae, Freddie Mac and Ginnie Mae are 

eligible to be sold in the TBA market, 

which is essentially a forward or 

delayed delivery market.93 The TBA 

market has been described as one that 

‘‘allows mortgage lenders essentially to 

sell the loans they intend to fund even 

before the loans are closed.’’ 94 In the 

TBA market, the lender enters into a 

forward contract to sell MBS and agrees 

to deliver MBS on the settlement date in 

the future. The specific MBS that will be 

delivered in the future may not yet be 

created at the time the forward contract 

is entered into.95 The Commissions 

believe that such forward sales of MBS 

in the TBA market would fall within the 

exclusion for sales of securities on a 

deferred settlement or delivery basis 

even though the precise MBS are not in 

existence at the time the forward MBS 

sale is entered into.96 Moreover, as the 

purchase or sale of a security, the 

Commissions believe such forward sales 

of MBS in the TBA market would fall 

within the exclusions for the purchase 

or sale of one or more securities on a 

fixed basis (or, depending on its terms, 

a contingent basis) and therefore outside 

the swap and security-based swap 

definitions.97

Request for Comment 

22. The Commissions request 

comment on all aspects of the proposed 

interpretive guidance set forth in this 

section regarding the forward contract 

exclusion from the swap and securitybased swap definitions with respect to 

nonfinancial commodities and 

securities. 

23. Is the proposed interpretive 

guidance set forth in this section 

sufficient with respect to the application 

of the forward contract exclusion from 

the swap definition with respect to 

nonfinancial commodities? If not, what 

changes should be made? Commenters 

also are invited to comment on whether 

the application of the Brent 

Interpretation generally, and its 

conclusions regarding book-outs in 

particular, is appropriate to the forward 

exclusion from the swap definition with 

respect to nonfinancial commodities. 

Would it permit transactions that 

should be subject to the swap regulatory 

regime to fall outside of the Dodd-Frank 

Act? 

24. Is it appropriate, in light of the 

Dodd-Frank Act, for the CFTC to 

withdraw the Energy Exemption while 

concurrently retaining the Brent 

Interpretation, and extending it to the 

forward contract exclusion from the 

definition of ‘‘future delivery’’ and the 

swap definition, for book-out 

transactions in all nonfinancial 

commodities? Why or why not? Is the 

conclusion that the Dodd-Frank Act 

supersedes the Swap Policy Statement 

appropriate? Why or why not? 

25. Are there any provisions of the 

Energy Exemption or Swap Policy 

Statement that the Commissions should 

consider incorporating into the 

definitions rulemakings (other than the 

request already submitted by some 

commenters in response to the proposed 

Entity Definitions that the ‘‘line of 

business’’ provision of the Swap Policy 

Statement be incorporated into the 

definition of the term ‘‘eligible contract 

participant’’ (‘‘ECP’’))? If so, please 

explain in detail how such provisions 

are consistent with the requirements of 

the Dodd-Frank Act and would not 

permit transactions that should be 

subject to the swap regulatory regime to 

fall outside of the Dodd-Frank Act. 

26. How frequently do book-out 

transactions of the type described in the 

Brent Interpretation occur with respect 

to nonfinancial commodities? Please 

provide descriptions of any such 

transactions, and data with respect to 

their frequency. Are there any 

nonfinancial commodities or 

transactions to which the Brent 

Interpretation should not apply, either 

with respect to the forward contract 

exclusion from the definition of ‘‘future 

delivery’’ or the forward contract 

exclusion from the swap definition, or 

both? Why or why not? 

27. Should a minimum contract size 

for a transaction in a nonfinancial 

commodity (e.g., a tanker full of Brent 

oil) be required in order for the 

transaction to qualify as a forward 

contract under the Brent Interpretation 

with respect to the future delivery and 

swap definitions? Why or why not? If 

so, what standards should apply to 

determine such a minimum contract 

size? Should the Brent Interpretation for 

nonfinancial commodities with respect 

to the future delivery and swap 

definitions be limited to market 

participants that meet certain 

requirements? Why or why not? If so, 

does the ‘‘eligible commercial entity’’ 

definition in CEA section 1a(17) 98

provide an appropriate requirement? 

Why or why not? What other 

requirements, if any, should be 

imposed? 

28. How often, and to what extent, do 

entities that do not regularly make or 

take delivery of the commodity in the 

ordinary course of their business engage 

in transactions that should qualify as 

forward contracts? Should such 

contracts qualify for the safe harbor 

provided by the Brent Interpretation? 

Why or why not? If so, how can it be 

demonstrated that the primary purpose 

of such transaction is to acquire or sell 

the physical commodity? Would 

including these transactions in the 

scope of the Brent Interpretation permit 

transactions that should be subject to 

the swap regulatory regime to fall 

outside of the Dodd-Frank Act? If so, 

could this concern be addressed by 

imposing conditions in order to qualify 

for the forward exclusion? What 

conditions, if any, would be 

appropriate? 

29. Are ‘‘ring’’ or ‘‘daisy chain’’ 

markets for forward contracts, such as 

the 15-day Brent market, primarily used 

for commercial merchandising, or do 

they serve other purposes such as price 

discovery or risk management? Please 

explain in detail. 

30. Should contracts in nonfinancial 

commodities that may qualify as 

forward contracts be permitted to trade 

on registered trading platforms such as 

DCMs or swap execution facilities 

(‘‘SEFs’’)? If so, are additional guidance 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
29832 Federal Register / Vol. 76, No. 99 / Monday, May 23, 2011 / Proposed Rules 

99See Cleary Letter; Letter from Kenneth E. Auer, 

President and CEO, The Farm Credit Council, Sept. 

20, 2010 (‘‘Farm Credit Council Letter’’). 

100See Cleary Letter; White & Case Letter. 

101See White & Case Letter; Fannie Mae Letter. 

102See BlackRock Letter. 

103See White & Case Letter; Deutsche Bank Letter. 

104These agreements, contracts, or transactions 

involve physical delivery which is deferred for 

convenience or necessity and thus can be viewed 

as being akin to forward purchase agreements 

(sometimes with embedded options, in the case of 

those with price caps), which were discussed above 

or rules necessary to determine whether 

contracts traded on such platforms are 

excluded from the CEA definition of 

‘‘future delivery’’ and/or the swap 

definition? If so, please describe in 

detail such markets and explain what 

further guidance or rules would be 

appropriate? Should conditions be 

imposed with respect to the nature of 

the market participants or the 

percentage of transactions that must 

result in delivery over a specified 

measurement period, or both? If so, 

what conditions would be appropriate? 

31. Should the Commissions provide 

guidance regarding the scope of the term 

‘‘nonfinancial commodity’’ in the 

forward contract exclusion from the 

swap definition? If so, how and where 

should the Commissions draw the line 

between financial and nonfinancial 

commodities? 

32. Should the forward contract 

exclusion from the swap definition 

apply to environmental commodities 

such as emissions allowances, carbon 

offsets/credits, or renewable energy 

certificates? If so, please describe these 

commodities, and explain how 

transactions can be physically settled 

where the commodity lacks a physical 

existence (or lacks a physical existence 

other than on paper)? Would 

application of the forward contract 

exclusion to such environmental 

commodities permit transactions that 

should be subject to the swap regulatory 

regime to fall outside the Dodd-Frank 

Act? 

33. Are there other factors that should 

be considered in determining how to 

characterize forward contracts with 

embedded options with respect to 

nonfinancial commodities? If so, what 

factors should be considered? Do 

provisions in forward contracts with 

respect to nonfinancial commodities 

other than delivery and price contain 

embedded optionality? How do such 

provisions operate? Please provide a 

detailed analysis regarding how such 

provisions should be analyzed under 

the Dodd-Frank Act. 

34. Is the analysis of forward contracts 

with embedded options in the 1985 

Interpretation and the CFTC’s Wright 

decision appropriately applied to 

transactions entered into after the 

effective date of the Dodd-Frank Act? 

Why or why not? If not, how should the 

analysis be modified? 

35. How would the proposed 

interpretive guidance set forth in this 

section affect full requirements 

contracts, capacity contracts, reserve 

sharing agreements, tolling agreements, 

energy management agreements, and 

ancillary services? Do these agreements, 

contracts, or transactions have 

optionality as to delivery? If so, should 

they—or any other agreement, contract, 

or transaction in a nonfinancial 

commodity that has optionality as to 

delivery—be excluded from the swap 

definition? If so, please provide a 

detailed analysis of such agreements, 

contracts, or transactions and how they 

can be distinguished from options that 

are to be regulated as swaps pursuant to 

the Dodd-Frank Act. To what extent are 

any such agreements, contracts, or 

transactions in the electric industry 

regulated by the Federal Energy 

Regulatory Commission (‘‘FERC’’), State 

regulatory authorities, regional 

transmission organizations (‘‘RTOs’’), 

independent system operators (‘‘ISOs’’) 

or market monitoring units associated 

with RTOs or ISOs? 

36. Is there any issue with respect to 

the treatment of commodity options that 

the Commissions have not addressed 

and that should be addressed as a 

definitional matter in this rulemaking? 

37. Should the Commissions provide 

more detailed guidance regarding what 

constitutes a security forward? For 

instance, should the Commissions 

provide more guidance on what it 

means for a security forward to be 

‘‘intended to be physically settled’’? If 

so, what further guidance would be 

appropriate? 

38. Should the Commissions provide 

more guidance regarding when forward 

sales of MBS in the TBA market would 

fall within the exclusion for sales of 

securities on a deferred settlement or 

delivery basis? Is there any more 

guidance the Commissions should 

provide regarding types of transactions 

that occur in the TBA market? 

3. Consumer and Commercial 

Agreements, Contracts, and 

Transactions 

Commenters on the ANPR pointed out 

a number of areas in which a broad 

reading of the swap and security-based 

swap definitions could cover certain 

consumer and commercial arrangements 

that historically have not been 

considered swaps or security-based 

swaps. Examples of such instruments 

cited by commenters include evidences 

of indebtedness with a variable rate of 

interest; 99 commercial contracts 

containing acceleration, escalation, or 

indexation clauses; 100 agreements to 

acquire personal property or real 

property, or to obtain mortgages; 101

employment, lease, and service 

agreements, including those that contain 

contingent payment arrangements; 102

and consumer mortgage and utility rate 

caps.103

Consumers enter into various types of 

agreements, contracts, and transactions 

as part of their household and personal 

lives that may have attributes that could 

be viewed as falling within the swap or 

security-based swap definition. 

Similarly, businesses and other entities, 

whether or not for profit, also enter into 

agreements, contracts, and transactions 

as part of their operations relating to, 

among other things, acquisitions or sales 

of property (tangible and intangible), 

provisions of services, employment of 

individuals, and other matters that 

could be viewed as falling within the 

definitions. 

The Commissions do not believe that 

Congress intended to include these 

types of customary consumer and 

commercial agreements, contracts, or 

transactions in the swap or securitybased swap definition, to limit the types 

of persons that can enter into or engage 

in them, or to otherwise to subject these 

agreements, contracts, or transactions to 

the regulatory scheme for swaps and 

security-based swaps. The 

Commissions, therefore, are proposing 

the following interpretive guidance to 

assist consumers and businesses in 

understanding whether certain 

agreements, contracts, or transactions 

that they enter into would be regulated 

as swaps or security-based swaps. 

With respect to consumers, the 

Commissions believe that the types of 

agreements, contracts, or transactions 

that should not be considered swaps or 

security-based swaps when entered into 

by consumers (natural persons or their 

agents) as principals primarily for 

personal, family, or household 

purposes, include: 

• Agreements, contracts, or 

transactions to acquire or lease real or 

personal property, to obtain a mortgage, 

to provide personal services, or to sell 

or assign rights owned by such 

consumer (such as intellectual property 

rights); 

• Agreements, contracts, or 

transactions to purchase products or 

services at a fixed price or a capped or 

collared price, at a future date or over 

a certain time period (such as 

agreements to purchase home heating 

fuel);104


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Federal Register / Vol. 76, No. 99 / Monday, May 23, 2011 / Proposed Rules 29833 

in the context of the exclusion from the swap 

definition for forward contracts in nonfinancial 

commodities. While the CFTC traditionally has 

viewed forward contracts in nonfinancial 

commodities as limited to commercial 

merchandising transactions, the Commissions view 

consumer agreements, contracts, and transactions 

involving periodic or future purchases of consumer 

products and services, such as agreements to 

purchase energy commodities to heat or cool 

consumers’ homes, as transactions that are not 

swaps. 

105These business combination transactions 

include, for example, a reclassification, merger, 

consolidation, or transfer of assets as defined under 

the Federal securities laws or any tender offer 

subject to section 13(e) and/or section 14(d) or (e) 

of the Exchange Act, 15 U.S.C. 78m(e) and/or 

78n(d) or (e). These business combination 

agreements, contracts, or transactions can be 

contingent on the continued validity of 

representations and warranties and can contain 

earn-out provisions and contingent value rights. 

106The Commissions believe that such lending 

arrangements included in this category are 

traditional borrower/lender arrangements 

documented using, for example, a loan agreement 

or indenture, as opposed to a synthetic lending 

arrangement documented in the form of, for 

example, a TRS. The Commissions also note that 

securitization transaction agreements also may 

contain contingent obligations if the representations 

and warranties about the underlying assets are not 

satisfied. 

107See infra note 115 regarding identified 

banking products. 

108There also are alternative regulatory regimes 

that have been enacted as part of the Dodd-Frank 

Act specifically to provide enhanced protections to 

consumers relating to various consumer 

transactions. See, e.g., the Consumer Financial 

Protection Act of 2010, Public Law 111–203, title 

X, 124 Stat. 1376 (July 21, 2010) (establishing the 

Bureau of Consumer Financial Protection to 

regulate a broad category of consumer products and 

amending certain laws under the jurisdiction of the 

Federal Trade Commission); the Mortgage Reform 

and Anti-Predatory Lending Act, Public Law 111– 

203, title XIV, 124 Stat. 1376 (July 21, 2010) 

(amending existing laws, and adding new 

provisions, related to certain mortgages). Some of 

these agreements, contracts, or transactions are 

subject to regulation by the Federal Trade 

Commission and other Federal financial regulators 

and state regulators. 

• Agreements, contracts, or 

transactions that provide for an interest 

rate cap or lock on a consumer loan or 

mortgage, where the benefit of the rate 

cap or lock is realized only if the loan 

or mortgage is made to the consumer; 

and 

• Consumer loans or mortgages with 

variable rates of interest or embedded 

interest rate options, including such 

loans with provisions for the rates to 

change upon certain events related to 

the consumer, such as a higher rate of 

interest following a default. 

The types of commercial agreements, 

contracts, or transactions that involve 

customary business arrangements 

(whether or not involving a for-profit 

entity) and would not be considered 

swaps or security-based swaps under 

this proposed interpretive guidance 

include: 

• Employment contracts and 

retirement benefit arrangements; 

• Sales, servicing, or distribution 

arrangements; 

• Agreements, contracts, or 

transactions for the purpose of effecting 

a business combination transaction; 105

• The purchase, sale, lease, or transfer 

of real property, intellectual property, 

equipment, or inventory; 

• Warehouse lending arrangements in 

connection with building an inventory 

of assets in anticipation of a 

securitization of such assets (such as in 

a securitization of mortgages, student 

loans, or receivables); 106

• Mortgage or mortgage purchase 

commitments, or sales of installment 

loan agreements or contracts or 

receivables; 

• Fixed or variable interest rate 

commercial loans entered into by nonbanks 107; and 

• Commercial agreements, contracts, 

and transactions (including, but not 

limited to, leases, service contracts, and 

employment agreements) containing 

escalation clauses linked to an 

underlying commodity such as an 

interest rate or consumer price index. 

The Commissions intend this 

proposed interpretive guidance to allow 

consumers to engage in customary 

transactions relating to their households 

and personal or family activities 

without concern that such arrangements 

would be considered swaps or securitybased swaps. Similarly, applying this 

guidance to customary commercial 

arrangements should allow commercial 

and non-profit entities to continue to 

operate their businesses and operations 

without significant disruption and 

ensure that the swap and security-based 

swap definitions are not read to include 

commercial and non-profit operations 

that historically have not been 

considered to involve swaps or securitybased swaps. 

The types of agreements, contracts, 

and transactions discussed above are 

not intended to be exhaustive of the 

customary consumer or commercial 

arrangements that should not be 

considered to be swaps or securitybased swaps. There may be other, 

similar types of agreements, contracts, 

and transactions that also should not be 

considered to be swaps or securitybased swaps. In determining whether 

similar types of agreements, contracts, 

and transactions entered into by 

consumers or commercial entities are 

swaps or security-based swaps, the 

Commissions intend to consider the 

characteristics and factors that are 

common to the consumer and 

commercial transactions listed above: 

• They do not contain payment 

obligations, whether or not contingent, 

that are severable from the agreement, 

contract, or transaction; 

• They are not traded on an organized 

market or over-the-counter; and 

• In the case of consumer 

arrangements, they: 

—Involve an asset of which the 

consumer is the owner or beneficiary, 

or that the consumer is purchasing, or 

they involve a service provided, or to 

be provided, by or to the consumer, or 

• In the case of commercial 

arrangements, they are entered into: 

—By commercial or non-profit entities 

as principals (or by their agents) to 

serve an independent commercial, 

business, or non-profit purpose, and 

—Other than for speculative, hedging, 

or investment purposes. 

Two of the key components reflected 

in these characteristics that distinguish 

these agreements, contracts, and 

transactions from swaps and securitybased swaps are that: (i) The payment 

provisions of the arrangements are not 

severable; and (ii) the agreement, 

contract, or transaction is not traded on 

an organized market or over-thecounter—so that such arrangements 

would not involve risk-shifting 

arrangements with financial entities, as 

would be the case for swaps and 

security-based swaps.108

This proposed interpretive guidance 

is not intended to be the exclusive 

means for consumers and commercial or 

non-profit entities to determine whether 

their agreements, contracts, or 

transactions fall within the swap or 

security-based swap definition. If there 

is a type of agreement, contract, or 

transaction that is not enumerated 

above, or does not have all the 

characteristics and factors that are listed 

above (including new types of 

arrangements that may be developed in 

the future), but that a party to the 

agreement, contract, or transaction 

believes is not a swap or security-based 

swap, the Commissions invite such 

party to seek an interpretation from the 

Commissions as to whether the 

agreement, contract, or transaction is a 

swap or security-based swap. 

Request for Comment 

39. Is interpretive guidance of the 

type proposed in this section necessary 

with respect to the application of the 

swap and security-based swap 

definitions to certain consumer and 

commercial agreements, contracts, or 

transactions? 

40. Is the interpretive guidance 

proposed in this section useful, 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
29834 Federal Register / Vol. 76, No. 99 / Monday, May 23, 2011 / Proposed Rules 

109See Letter from R. Bram Smith, Executive 

Director, The Loan Syndications and Trading 

Association, Jan. 25, 2011 (‘‘January LSTA Letter’’) 

and letter from Elliot Ganz, General Counsel, The 

Loan Syndications and Trading Association, Mar. 1, 

2011 (‘‘March LSTA Letter, and collectively with 

the January LSTA Letter, ‘‘LSTA Letters’’); Letter 

from Clare Dawson, Managing Director, Loan 

Market Association, Feb. 23, 2011. 

110See Loan Market Association, ‘‘Guide to 

Syndicated Loans,’’ section 6.2.5 (‘‘Risk 

participation may be provided by a new lender as 

an interim measure before it takes full transfer of 

a loan.’’), available at http://www.lma.eu.com/

uploads/files/Introductory_Guides/Guide_to_Par

_Syndicated_Loans.pdf. 

111The LSTA is The Loan Syndications and 

Trading Association. The LMA is the Loan Market 

Association. 

112See January LSTA Letter (citation omitted). 

113See LSTA Letters. But see Jon Kibbe, Julia Lu 

and Carl Winkworth, Richards Kibbe & Orbe, LLP, 

‘‘Dodd-Frank Crosses the Pond: Unintended 

Consequences for LMA–Style Loan Participations?,’’ 

3 (Nov. 12, 2010) (‘‘The grantor of an LMA-style 

participation does not grant an ownership interest 

in the loan to the participant.’’) (‘‘LMA–Style LP 

Memo’’), available at http://www.rkollp.com/assets/ 

attachments/Dodd-Frank%20Crosses%20the%20

Pond%20-%20Unintended%20

Consequences%20for%20LMA–Style%20Loan%

20Participations.pdf. 

114See CEA sections 1a(47)(B)(v) and (vi), 7 

U.S.C. 1a(47)(b)(v) and (vi), as amended by section 

721(a)(21) of the Dodd-Frank Act (excluding 

purchases and sales of a security on a fixed or 

contingent basis, respectively from the swap 

definition). 

115See section 403(a) of the Legal Certainty for 

Bank Products Act of 2000, 7 U.S.C. 27a(a), as 

amended by section 725(g)(2) of the Dodd-Frank 

Act (providing that, under certain circumstances, 

the CEA shall not apply to, and the CFTC shall not 

exercise regulatory authority over, identified 

banking products, and the definitions of the terms 

‘‘security-based swap’’ and ‘‘security-based swap 

agreement’’ shall not include identified banking 

products). 

116See generally Richard M. Gray and Suhrud 

Mehta, Milbank Tweed Hadley & McCloy LLP, ‘‘US 

and UK compared Fundamental differences remain 

between the markets. But is it worth considering 

using a New York participation agreement in an 

English deal?,’’ International Financial Law Review 

(Oct. 1, 2009) (discussing differences between New 

York and English participation markets and features 

distinguishing true participations from financings), 

available at http://www.milbank.com/NR/rdonlyres/ 

B95C06AD–C3CA–44C9–8433–B6021C4455C9/0/

102009_IFLR_USandUKcompared_

RGray_SMehta.pdf; Cleary, Gottlieb, Steen & 

Hamilton, Memorandum for the Financial 

Accounting Standards Board, Re: Participations 

(June 14, 2004) (discussing, among other things, 

what a ‘‘good’’ or ‘‘true’’ participation is under the 

Uniform Commercial Code, the Bankruptcy Code, 

case law, and other authority), available at http:// 

www.fasb.org/cs/BlobServer?blobcol=urldata

&blobtable=MungoBlobs&blobkey=id&blobwhere=

1175817895286&blobheader=application%2Fpdf. 

appropriate, and sufficient for persons 

to consider when evaluating whether 

agreements, contracts, or transactions of 

the types described in this section fall 

within the swap or security-based swap 

definition? 

41. In particular, are the listed 

characteristics and factors for consumer 

transactions and for commercial 

transactions appropriate for purposes of 

evaluating whether agreements, 

contracts, or transactions fall within the 

swap or security-based swap definition? 

If not, what characteristics or factors 

should be included or excluded, and 

why? Are any of the characteristics or 

factors too narrow or too broad? If so, 

how should the listed characteristics 

and factors be modified, and why? 

42. Is a joint interpretation as 

provided for in section 712(d)(4) of the 

Dodd-Frank Act, pursuant to the 

proposed process discussed in part VI 

below, an appropriate means of 

addressing any further interpretive 

questions? 

43. Does the interpretive guidance 

proposed in this section sufficiently 

enumerate the types of consumer and 

commercial agreements, contracts, or 

transactions that should not be 

considered swaps or security-based 

swaps? If not, please provide details of 

other types of such agreements, 

contracts, or transactions and an 

explanation of the reasons why the 

definitions should not apply to them. 

44. Is the treatment of consumer or 

commercial contracts containing 

payment arrangements sufficiently 

clear? For example, should the 

interpretive guidance expressly address 

any other specific types of contracts, 

such as installment sales contracts, 

financings used in normal business 

operations (such as receivables 

financings), pensions and other postretirement benefits, contracts relating to 

the performance of a service, standby 

liquidity agreements, indemnification 

agreements, reimbursement agreements, 

or affiliate guarantees? Why or why not? 

45. Is the treatment of purchases, 

sales, leases, or transfers of equipment 

and inventory sufficiently flexible to not 

interfere with ordinary business 

operations? As an alternative, should 

the guidance expressly cover the 

purchase, sale, lease, or transfer of 

assets (excluding financial assets) that 

are anticipated to be owned, leased, 

licensed, produced, manufactured, 

processed, or merchandized by one of 

the parties or an affiliate? Why or why 

not? 

4. Loan Participations 

Two commenters inquired whether 

loan participations fall within the scope 

of the swap and security-based swap 

definitions.109 According to these 

commenters, loan participations arise 

when a lender transfers the economic 

risks and benefits of all or a portion of 

a loan it has entered into with a 

borrower to another party as an 

alternative or precursor to assigning to 

such person the loan or an interest in 

the loan.110 Two types of loan 

participations are offered in the market 

today according to these commenters: 

LSTA-style participations and LMAstyle participations.111 An LSTA-style 

participation ‘‘specifically provides that 

the participation is intended by the 

parties to be treated as a sale by the 

grantor and a purchase by the 

participant’’ and ‘‘is intended to effect a 

‘true sale’ of the loan from the grantor 

to the participant and put the 

participant’s beneficial ownership 

interest in the loan beyond the reach of 

the grantor’s bankruptcy estate.’’ 112 By 

contrast, an LMA-style participation, 

while not effecting a sale, ‘‘creates a 

current debtor-creditor relationship 

between the grantor and the participant 

under which a future ownership interest 

is conveyed.’’ 113 Neither type of loan 

participation is a ‘‘synthetic’’ transaction 

according to the March LSTA letter 

because ‘‘they are merely transfers of 

cash loan positions’’ and ‘‘[t]he ratio of 

underlying loan to participation is 

always one-to-one.’’ 

Depending on the facts and 

circumstances, a loan participation may 

be a security under the Federal 

securities laws and, as such, the loan 

participation would be excluded from 

the definition of swap as the purchase 

and sale of a security on a fixed or 

contingent basis.114 In addition, 

depending on the facts and 

circumstances, a loan participation may 

be an identified banking product and, as 

such, would be excluded from CFTC 

jurisdiction and from the ‘‘securitybased swap’’ and ‘‘security-based swap 

agreement’’ definitions.115

The Commissions do not interpret the 

swap and security-based swap 

definitions to include loan 

participations in which the purchaser is 

acquiring a current or future direct or 

indirect ownership interest in the 

related loan and the loan participations 

are ‘‘true participations’’ (the participant 

acquires a beneficial ownership interest 

in the underlying loans).116

Request for Comment 

46. Should any of the enumerated 

agreements, contracts, or transactions be 

considered swaps or security-based 

swaps whether in general or in certain 

narrow circumstances? If so, which ones 

and why? In particular, how are loan 

participations similar to and different 

from loan TRS? Does the proposed 

guidance adequately distinguish 

between loan participations similar to 

and different from loan TRS? 

47. Does the Commissions’ proposed 

interpretive guidance regarding loan 

participations exclude from the swap or 

security-based swap definitions 

agreements, contracts, or transactions 


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Federal Register / Vol. 76, No. 99 / Monday, May 23, 2011 / Proposed Rules 29835 

117See CEA section 1a(47)(B), 7 U.S.C. 1a(47)(B). 

118See CEA section 1a(47)(E)(i), 7 U.S.C. 

1a(47)(E)(i). The Secretary has issued a request for 

comment about whether an exclusion from the 

swap definition for foreign exchange swaps, foreign 

exchange forwards, or both, is warranted, and on 

the application of the statutory factors that the 

Secretary must consider in making a determination 

regarding whether to exclude these products. See 

Determinations of Foreign Exchange Swaps and 

Forwards, 75 FR 66829, Oct. 29, 2010. 

119See CEA section 1a(24), 7 U.S.C. 1a(24). 

120See CEA section 1a(25), 7 U.S.C. 1a(25). 

121See, e.g., CEA sections 1a(47)(E)(iii) and (iv), 

7 U.S.C. 1a(47)(E)(iii) and (iv) (reporting and 

business conduct standards, respectively). 122As noted above, the proposed rules provide 

that foreign exchange forwards and forward 

exchange swaps would not be swaps if they fall 

within one of the exclusions set forth in 

subparagraph (B) of the swap definition. 

123The exclusion of foreign exchange forwards 

and foreign exchange swaps would become 

effective upon the Secretary’s submission of the 

determination to the appropriate Congressional 

Committees. See CEA section 1a(47)(E)(ii), 7 U.S.C. 

1a(46)(E)(ii). 

124As discussed above, however, the proposed 

rules provide that none of the products discussed 

in this section (b) would be swaps if they fall within 

one of the exclusions set forth in subparagraph (B) 

of the swap definition. 

125This discussion is not intended to address, 

and has no bearing on, the CFTC’s jurisdiction over 

foreign currency options in other contexts. See, e.g., 

CEA sections 2(c)(2)(A)(iii) and 2(c)(2)(B)–(C), 7 

U.S.C. 2(c)(2)(A)(iii) and 2(c)(2)(B)–(C) (offexchange options in foreign currency offered or 

entered into with retail customers). 

that are swaps or security-based swaps? 

If so, please describe such agreements, 

contracts, or transactions and suggested 

adjustments to the proposed guidance to 

capture such agreements, contracts, or 

transactions as swaps or security-based 

swaps. 

48. Is the Commissions’ proposed 

interpretive guidance regarding loan 

participations as not falling within the 

swap and security-based swap 

definitions appropriate? Why or why 

not? Should the Commissions provide 

further guidance on what constitutes an 

‘‘ownership interest’’ in the loan 

underlying a loan participation? If so, 

what should such guidance provide? 

49. Do all loan participations convey 

a current or future direct or indirect 

ownership interest from the grantor to 

the participant or sub-participant? If so, 

what indicia of ownership are conveyed 

and when, particularly in LMA-style 

loan participations? Do loan 

participations use leverage? If so, how? 

50. Are any swaps or security-based 

swaps partly or fully defeased? 

51. Should the Commissions provide 

further guidance regarding the scope of 

‘‘true participation?’’ If so, how should 

the Commissions delineate the scope 

thereof? 

C. Proposed Rules and Interpretive 

Guidance Regarding Certain 

Transactions Within the Scope of the 

Definitions of the Terms ‘‘Swap’’ and 

‘‘Security-Based Swap’’ 

1. In General 

In light of provisions in the DoddFrank Act that specifically address 

certain foreign exchange products, the 

Commissions are proposing rules to 

clarify the status of products such as 

foreign exchange forwards, foreign 

exchange swaps, foreign exchange 

options, non-deliverable forwards 

involving foreign exchange (‘‘NDFs’’), 

and cross-currency swaps. The 

Commissions also are proposing a rule 

to clarify the status of FRAs and 

providing interpretive guidance 

regarding: (i) Combinations and 

permutations of, or options on, swaps or 

security-based swaps; and (ii) contracts 

for differences (‘‘CFDs’’). 

Proposed rule 1.3(xxx)(2) under the 

CEA and proposed rule 3a69–2 under 

the Exchange Act would explicitly 

define the term ‘‘swap’’ to include 

certain foreign exchange-related 

products and FRAs unless such 

products would be excluded by the list 

of exclusions in subparagraph (B) of the 

swap definition.117 In proposing these 

rules, the Commissions do not mean to 

suggest that any other agreement, 

contract, or transaction not mentioned 

in the proposed rules or specifically 

enumerated in the statutory definition 

would not be covered by the swap or 

security-based swap definitions in the 

Dodd-Frank Act. 

2. Foreign Exchange Products 

(a) Foreign Exchange Products Subject 

to the Secretary’s Swap Determination: 

Foreign Exchange Forwards and Foreign 

Exchange Swaps 

The Dodd-Frank Act provides that 

‘‘foreign exchange forwards’’ and 

‘‘foreign exchange swaps’’ shall be 

considered swaps under the swap 

definition unless the Secretary of the 

Treasury (‘‘Secretary’’) issues a written 

determination that either foreign 

exchange swaps, foreign exchange 

forwards, or both: (i) Should not be 

regulated as swaps; and (ii) are not 

structured to evade the Dodd-Frank Act 

in violation of any rule promulgated by 

the CFTC pursuant to section 721(c) of 

the Dodd-Frank Act.118 A foreign 

exchange forward is defined as ‘‘a 

transaction that solely involves the 

exchange of 2 different currencies on a 

specific future date at a fixed rate agreed 

upon on the inception of the contract 

covering the exchange.’’ 119 A foreign 

exchange swap, in turn, is defined as ‘‘a 

transaction that solely involves—(A) An 

exchange of 2 different currencies on a 

specific date at a fixed rate that is agreed 

upon on the inception of the contract 

covering the exchange; and (B) a reverse 

exchange of the 2 currencies described 

in subparagraph (A) at a later date and 

at a fixed rate that is agreed upon on the 

inception of the contract covering the 

exchange.’’ 120

Under the Dodd-Frank Act, if foreign 

exchange forwards or foreign exchange 

swaps are no longer considered swaps 

due to a determination by the Secretary, 

nevertheless, certain provisions of the 

CEA added by the Dodd-Frank Act 

would continue to apply to such 

transactions. Specifically, those 

transactions still would be subject to 

certain requirements for reporting 

swaps, and swap dealers and major 

swap participants engaging in such 

transactions still would be subject to 

certain business conduct standards.121

The Commissions are proposing to 

provide greater clarity by explicitly 

defining by rule the term ‘‘swap’’ to 

include foreign exchange forwards and 

foreign exchange swaps (as those terms 

are defined in the CEA).122 The 

proposed rules would incorporate the 

provision of the Dodd-Frank Act that, if 

the Secretary issues the written 

determination described above, foreign 

exchange forwards and foreign exchange 

swaps would no longer be considered 

swaps. The proposed rules also would 

reflect the continuing applicability of 

certain reporting requirements and 

business conduct standards in the event 

that the Secretary makes such a 

determination.123

(b) Foreign Exchange Products Not 

Subject to the Secretary’s Swap 

Determination 

The Commissions also are proposing 

rules to provide clarity that a 

determination by the Secretary that 

foreign exchange forwards or foreign 

exchange swaps, or both, should not be 

regulated as swaps would not affect 

other products involving foreign 

currency, such as foreign currency 

options, NDFs, and cross-currency 

swaps. The Commissions are proposing 

rules to explicitly define the term 

‘‘swap’’ to include such products, 

irrespective of whether the Secretary 

makes a determination to exempt 

foreign exchange forwards or foreign 

exchange swaps.124

(i) Foreign Currency Options 125

As discussed above, the statutory 

swap definition includes options, and it 

expressly enumerates foreign currency 

options. It encompasses any agreement, 

contract, or transaction: ’’ (i) that is a 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
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126See CEA section 1a(47)(A)(i), 7 U.S.C. 

1a(47)(A)(i) (emphasis added). 

127See CEA section 1a(47)(B)(iv), 7 U.S.C. 

1a(47)(B)(iv). 

128The proposed rules would treat the terms 

foreign currency options, currency options, foreign 

exchange options, and foreign exchange rate 

options as synonymous. Moreover, for purposes of 

the proposed rules, foreign currency options 

include options to enter into or terminate, or that 

otherwise operate on, a foreign exchange swap or 

foreign exchange forward or on the terms thereof. 

As discussed above, foreign exchange options 

traded on an NSE are securities and therefore not 

addressed in the proposed rules. 

129A deliverable forward foreign exchange 

contract is an obligation to buy or sell a specific 

currency on a future settlement date at a fixed price 

set on the trade date. See Laura Lipscomb, ‘‘Federal 

Reserve Bank of New York, An Overview of NonDeliverable Foreign Exchange Forward Markets,’’ 1 

(May 2005) (citation omitted) (‘‘Fed NDF 

Overview’’). 

130See id. at 1–2 (citation omitted). 

131See id. at 2. Being long the emerging market 

currency means that the holder of the NDF contract 

is the ‘‘buyer’’ of the emerging market currency and 

the ‘‘seller’’ of dollars. Conversely, if the emerging 

market currency appreciates relative to the 

previously agreed forward rate, the holder of the 

contract that is short the emerging market currency 

must pay its counterparty the difference between 

the spot market rate and the contracted forward 

price, multiplied by the notional amount. See id. at 

2, n.4. 

132See CEA section 1a(47)(A)(iii), 7 U.S.C. 

1a(47)(A)(iii) (providing that a swap is an 

agreement, contract, or transaction ‘‘that provides 

on an executory basis for the exchange, on a fixed 

or contingent basis, of 1 or more payments based 

on the value or level of 1 or more interest or other 

rates, currencies, commodities, securities, 

instruments of indebtedness, indices, quantitative 

measures, or other financial or economic interests 

or property of any kind, or any interest therein or 

based on the value thereof, and that transfers, as 

between the parties to the transaction, in whole or 

in part, the financial risk associated with a future 

change in any such value or level without also 

conveying a current or future direct or indirect 

ownership interest in an asset (including any 

enterprise or investment pool) or liability that 

incorporates the financial risk so transferred 

* * *.’’). 

133 It appears that at least some market 

participants view NDFs as swaps today. See, e.g., 

Credit Suisse, ‘‘Non-Deliverable Forwards,’’ at 1 

(characterizing NDFs as ‘‘a derivative instrument for 

hedging * * * exchange-rate risk’’ in the absence of 

a forwards market), available at https://www.creditsuisse.com/ch/unternehmen/

kmugrossunternehmen/doc/nondeliverable_

forward_en.pdf; Association of Corporate 

Treasurers, ‘‘Glossary of Terms’’ (defining an NDF as 

‘‘[a] foreign currency financial derivative contract’’), 

available at http://www.treasurers.org/glossary/

N#Non-deliverableforward. Thus, NDFs also may 

fall within clause (A)(iv) of the swap definition as 

‘‘an agreement, contract, or transaction that is, or in 

the future becomes, commonly known to the trade 

as a swap.’’ See CEA section 1a(47)(A)(iv), 7 U.S.C. 

1a(47)(A)(iv). Cf. CFTC rule 35.1(b)(1)(i), 17 CFR 

35.1(b)(1)(i) (providing that the definition of ‘‘swap 

agreement’’ includes a ‘‘forward foreign exchange 

agreement,’’ without reference to convertibility or 

delivery). 

134See ‘‘Fed NDF Overview,’’ supra note 129, at 

5 (‘‘[E]stimates vary but many major market 

participants estimate as much as 60 to 80 percent 

of NDF volume is generated by speculative interest, 

noting growing participation from international 

hedge funds.’’) and 4 (‘‘[D]ealers note that much of 

the volume in Chinese yuan NDFs is generated by 

speculative positioning based on expectations for 

an alteration in China’s current, basically fixed 

exchange rate.’’) (italics in original). 

135See id. at 4 (noting that ‘‘[much of the] Korean 

won NDF volume[,] * * * estimated to be the 

largest of any currency, * * * is estimated to 

originate with international investment portfolio 

managers hedging the currency risk associated with 

their onshore investments’’). 

136A swap that exchanges a fixed rate against a 

fixed rate is known as a currency swap. See Federal 

Reserve System, ‘‘Trading and Capital-Markets 

Activities Manual,’’ section 4335.1 (Jan. 2009). 

137Cross-currency swaps with a fixed leg based 

on one rate and a floating leg based on another rate, 

where the two rates are denominated in different 

currencies, are generally referred to as crosscurrency coupon swaps, while those with a floating 

leg based on one rate and another floating leg based 

on a different rate are known as cross-currency 

basis swaps. Id. Cross-currency swaps also include 

annuity swaps and amortizing swaps. In crossput, call, cap, floor, collar, or similar 

option of any kind that is for the 

purchase or sale, or based on the value, 

of 1 or more interest or other rates, 

currencies, commodities, securities, 

instruments of indebtedness, indices, 

quantitative measures, or other financial 

or economic interests or property of any 

kind.’’ 126

Foreign exchange options traded on a 

national securities exchange (‘‘NSE’’), 

however, are securities under the 

Federal securities laws and not swaps or 

security-based swaps.127

Any determination by the Secretary, 

discussed above, that foreign exchange 

forwards or foreign exchange swaps 

should not be regulated as swaps would 

not impact foreign currency options 

because a foreign currency option is 

neither a foreign exchange swap nor a 

foreign exchange forward, as those 

terms are defined in the CEA. 

Consequently, the Commissions are 

proposing rules to provide clarity by 

explicitly defining the term ‘‘swap’’ to 

include foreign currency options (other 

than foreign currency options traded on 

an NSE).128 The proposed rules also 

would clarify that foreign currency 

options are not foreign exchange 

forwards or foreign exchange swaps 

under the CEA. 

(ii) Non-Deliverable Forward Contracts 

Involving Foreign Exchange 

An NDF generally is similar to a 

forward foreign exchange contract,129

except that at maturity, the NDF does 

not require physical delivery of 

currencies and is typically settled in 

U.S. dollars. The other currency, usually 

an emerging market currency subject to 

capital controls, is therefore said to be 

‘‘nondeliverable.’’ 130 If the spot market 

exchange rate on the settlement date is 

greater (in foreign currency per dollar 

terms) than the previously agreed 

forward exchange rate, the party to the 

contract that is long the emerging 

market currency must pay its 

counterparty the difference between the 

contracted forward price and the spot 

market rate, multiplied by the notional 

amount.131

NDFs are not expressly enumerated in 

the swap definition, but they satisfy 

clause (A)(iii) of the definition because 

they provide for a future (executory) 

payment based on an exchange rate, 

which is an ‘‘interest or other rate[]’’ 

within the meaning of clause (A)(iii) of 

the swap definition.132 Each party to an 

NDF transfers to its counterparty the 

risk of the exchange rate moving against 

the counterparty, thus satisfying the 

requirement that there be a transfer of 

financial risk associated with a future 

change in rate. This financial risk 

transfer in the context of an NDF is not 

accompanied by a transfer of an 

ownership interest in any asset or 

liability. Thus, an NDF is a swap under 

clause (A)(iii) of the swap definition.133

As discussed above, the Secretary 

may determine that foreign exchange 

swaps or foreign exchange forwards 

should not be regulated as swaps. The 

outcome of the Secretary’s 

determination would not impact NDFs, 

however, because NDFs (like foreign 

currency options) do not meet the 

definitions of the terms foreign 

exchange forward or foreign exchange 

swap set forth in the CEA. NDFs do not 

involve an ‘‘exchange’’ of two different 

currencies (an element of the definition 

of both a foreign exchange forward and 

a foreign exchange swap); instead, they 

are settled by payment in one currency 

(usually U.S. dollars). 

Notwithstanding their ‘‘forward’’ label, 

NDFs do not fall within the forward 

contract exclusion of the swap 

definition. Currency is outside the scope 

of the forward contract exclusion for 

nonfinancial commodities. Nor have 

NDFs traditionally been considered 

commercial merchandising transactions. 

Rather, the NDF markets appear to be 

driven in large part by speculation 134

and hedging,135 which features are more 

characteristic of swap markets than 

forward markets. 

Based on the foregoing 

considerations, the Commissions are 

proposing to provide greater clarity by 

explicitly defining the term ‘‘swap’’ to 

include NDFs. The proposed rules also 

would clarify that NDFs are not foreign 

exchange forwards or foreign exchange 

swaps as those terms are defined in the 

CEA. 

(iii) Currency Swaps and CrossCurrency Swaps 

A currency swap 136 and a crosscurrency swap 137 each generally can be 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
Federal Register / Vol. 76, No. 99 / Monday, May 23, 2011 / Proposed Rules 29837 

currency annuity swaps, level cash flows in 

different currencies are exchanged with no 

exchange of principal; annuity swaps are priced 

such that the level payment cash flows in each 

currency have the same net present value at the 

inception of the transaction. An amortizing crosscurrency swap is structured with a declining 

principal schedule, usually designed to match that 

of an amortizing asset or liability. Id. See also 

Derivatives ONE, ‘‘Cross Currency Swap Valuation’’ 

(‘‘A cross currency swap is swap of an interest rate 

in one currency for an interest rate payment in 

another currency. * * * This could be considered 

an interest rate swap with a currency component.’’), 

available at http://www.derivativesone.com/crosscurrency-swap-valuation/; Financial Accounting 

Standards Board, ‘‘Examples Illustrating 

Application of FASB Statement No. 138,’’ 

Accounting for Certain Derivative Instruments and 

Certain Hedging Activities, section 2, Example 1, at 

3 (‘‘The company designates the cross-currency 

swap as a fair value hedge of the changes in the fair 

value of the loan due to both interest and exchange 

rates.’’), available at http://www.fasb.org/ 

derivatives/examples.pdf. 

138BMO Capital Markets, ‘‘Cross Currency 

Swaps,’’ available at http://www.bmocm.com/

products/marketrisk/intrderiv/cross/default.aspx. 

139See CEA section 1a(47)(A)(iii)(VII), 7 U.S.C. 

1a(47)(A)(iii)(VII). 

140Clause (A)(iii) of the swap definition expressly 

refers to a cross-currency rate swap. See CEA 

section 1a(47)(A)(iii)(V), 7 U.S.C. 1a(47)(A)(iii)(V). 

Although the swap industry appears to use the term 

‘‘cross-currency swap,’’ rather than ‘‘cross-currency 

rate swap’’ (the term used in CEA section 

1a(47)(A)(iii)(V)), the Commissions interpret these 

terms as synonymous. 

141See generally ‘‘Trading and Capital-Markets 

Activities Manual,’’ supra note 136, section 4315.1 

(‘‘For example, in a six-against-nine-month (6x9) 

FRA, the parties agree to a three-month rate that is 

to be netted in six months’ time against the 

prevailing three-month reference rate, typically 

LIBOR. At settlement (after six months), the present 

value of the net interest rate (the difference between 

the spot and the contracted rate) is multiplied by 

the notional principal amount to determine the 

amount of the cash exchanged between the parties 

* * *. If the spot rate is higher than the contracted 

rate, the seller agrees to pay the buyer the 

differences between the prespecified forward rate 

and the spot rate prevailing at maturity, multiplied 

by a notional principal amount. If the spot rate is 

lower than the forward rate, the buyer pays the 

seller.’’). 

142 It appears that at least some in the trade view 

FRAs as swaps today. See, e.g., The Globecon 

Group, Ltd., ‘‘Derivatives Engineering: A Guide to 

Structuring, Pricing and Marketing Derivatives,’’ 45 

(McGraw-Hill 1995) (‘‘An FRA is simply a oneperiod interest-rate swap.’’); DerivActiv, Glossary of 

Financial Derivatives Terms (‘‘A swap is * * * a 

strip of FRAs.’’), available at http://www.derivactiv.

com/definitions.aspx?search=forward+

rate+agreements. Cf. Don M. Chance, et. al, 

‘‘Derivatives in Portfolio Management,’’ 29 (AIMR 

1998) (‘‘[An FRA] involves one specific payment 

and is basically a one-date swap (in the sense that 

a swap is a combination of FRAs[,] with some 

variations).’’). Thus, FRAs also may fall within 

clause (A)(iv) of the swap definition, as ‘‘an 

agreement, contract, or transaction that is, or in the 

future becomes, commonly known to the trade as 

a swap.’’ See CEA section 1a(47)(a)(iv), 7 U.S.C. 

1a(47)(a)(iv). 

143See CEA section 1a(47)(A)(iii); 7 U.S.C. 

1a(47)(A)(iii). CFTC regulations have defined FRAs 

as swap agreements. See CFTC rule 35.1(b)(1)(i), 17 

CFR 35.1(b)(1)(i); Exemption for Certain Swap 

Agreements, 58 FR 5587, Jan. 22, 1993. The CFTC 

recently has proposed to repeal that rule in light of 

the enactment of Title VII of the Dodd-Frank Act. 

See Commodity Options and Agricultural Swaps, 

supra note 78. 

144See Regulation of Hybrid and Related 

Instruments, 52 FR 47022, 47028, Dec. 11, 1987 

Continued 

described as a swap in which the fixed 

legs or floating legs based on various 

interest rates are exchanged in different 

currencies. Such swaps can be used to 

reduce borrowing costs, to hedge 

currency exposure, and to create 

synthetic assets 138 and are viewed as an 

important tool, given that they can be 

used to hedge currency and interest rate 

risk in a single transaction. 

Currency swaps and cross-currency 

swaps are not foreign exchange swaps as 

defined in the CEA because, although 

they may involve an exchange of foreign 

currencies, they also require contingent 

or variable payments in different 

currencies. Because the CEA defines a 

foreign exchange swap as a swap that 

‘‘solely’’ involves an initial exchange of 

currencies and a reversal thereof at a 

later date, subject to certain parameters, 

currency swaps and cross-currency 

swaps would not be foreign exchange 

swaps. Similarly, currency swaps and 

cross-currency swaps are not foreign 

exchange forwards because foreign 

exchange forwards ‘‘solely’’ involve an 

initial exchange of currencies, subject to 

certain parameters, while currency 

swaps and cross-currency swaps contain 

additional elements, as discussed above. 

Currency swaps are expressly 

enumerated in the statutory definition 

of the term ‘‘swap.’’ 139 Cross-currency 

swaps, however, are not.140

Accordingly, based on the foregoing 

considerations, the Commissions are 

proposing rules to provide greater 

clarity by explicitly defining the term 

‘‘swap’’ to include cross-currency swaps. 

The proposed rules also would clarify 

that neither currency swaps nor crosscurrency swaps are foreign exchange 

forwards or foreign exchange swaps as 

those terms are defined in the CEA. 

Request for Comment 

52. Should the proposed rules 

explicitly define the term ‘‘swap’’ to 

include foreign exchange forwards and 

foreign exchange swaps, unless the 

Secretary determines to exempt them? 

Should the proposed rules clarify that, 

if the Secretary determines to exempt 

foreign exchange swaps or foreign 

exchange forwards, those transactions 

remain subject to certain reporting 

requirements, and swap dealers and 

major swap participants entering into 

such transactions remain subject to 

certain business conduct standards, 

imposed by Title VII and CFTC 

regulations promulgated thereunder? 

Why or why not? 

53. Should the proposed rules 

explicitly define the term ‘‘swap’’ to 

include foreign currency options and 

clarify that foreign currency options are 

not foreign exchange forwards or foreign 

exchange swaps? Why or why not? 

Should the terms foreign currency 

options, currency options, foreign 

exchange options, and foreign exchange 

rate options be interpreted as 

synonymous? Why or why not? 

54. Should the proposed rules 

explicitly define the term ‘‘swap’’ to 

include NDFs and clarify that NDFs are 

not foreign exchange forwards or foreign 

exchange swaps? Why or why not? 

55. Should the proposed rules 

explicitly define the term ‘‘swap’’ to 

include cross-currency swaps as swaps 

and clarify that currency swaps and 

cross-currency swaps are not foreign 

exchange forwards or foreign exchange 

swaps? Why or why not? Should the 

terms cross-currency swap and crosscurrency rate swap be interpreted as 

synonymous? Why or why not? 

56. Is additional detail needed within 

the proposed rules regarding foreign 

exchange-related products to provide 

greater clarity regarding the specific 

products listed in the proposed rules? If 

so, what additional detail would be 

necessary? 

3. Forward Rate Agreements 

In general, the Commissions 

understand an FRA to be an over-thecounter contract for a single cash 

payment, due on the settlement date of 

a trade, based on a spot rate (determined 

pursuant to a method agreed upon by 

the parties) and a prespecified forward 

rate. The single cash payment is equal 

to the product of the present value 

(discounted from a specified future date 

to the settlement date of the trade) of the 

difference between the forward rate and 

the spot rate on the settlement date 

multiplied by the notional amount. The 

notional amount itself is not 

exchanged.141

An FRA provides for the future 

(executory) payment based on the 

transfer of interest rate risk between the 

parties as opposed to transferring an 

ownership interest in any asset or 

liability.142 Thus, the Commissions 

believe that an FRA satisfies clause 

(A)(iii) of the swap definition.143

Notwithstanding their ‘‘forward’’ label, 

FRAs do not fall within the forward 

contract exclusion from the swap 

definition. FRAs do not involve 

nonfinancial commodities and thus are 

outside the scope of the forward 

contract exclusion. Nor is an FRA a 

commercial merchandising transaction, 

as there is no physical product to be 

delivered in an FRA.144 Accordingly, 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
29838 Federal Register / Vol. 76, No. 99 / Monday, May 23, 2011 / Proposed Rules 

(stating ‘‘[FRAs] do not possess all of the 

characteristics of forward contracts heretofore 

delineated by the [CFTC]’’). 

145Current European Union law includes FRAs in 

the definition of ‘‘financial instruments.’’ See 

Markets in Financial Instruments Directive (MiFID), 

‘‘Directive 2004/39/EC of the European Parliament 

and of the Council,’’ Annex I(C), 4, 5, 10 (Apr. 21, 

2004), available at http://eur-lex.europa.eu/

LexUriServ/LexUriServ.do?uri=CONSLEG:

2004L0039:20070921:EN:PDF. A European 

Commission legislative proposal on derivatives, 

central clearing, and trade repositories applies to 

FRAs that are traded over-the-counter and, thus, 

would subject such transactions to mandatory 

clearing, reporting and other regulatory 

requirements. See Proposal for a Regulation of the 

European Parliament and of the Council on OTC 

derivatives, central counterparties and trade 

repositories, title I, art. 1(1), COM(2010) 484/5 

(Sept. 15, 2010), available at http://ec.europa.eu/

internal_market/financial-markets/docs/

derivatives/20100915_proposal_en.pdf. 

146See CEA section 1a(47)(vi), 7 U.S.C. 1a(47)(vi). 

147Forward swaps are also commonly known as 

forward start swaps, or deferred or delayed start 

swaps. A forward swap can involve two offsetting 

swaps that both start immediately, but one of which 

ends on the deferred start date of the forward swap 

itself. For example, if a counterparty wants to hedge 

its risk for four years, starting one year from today, 

it could enter into a one-year swap and a five-year 

swap, which would partially offset to create a fouryear swap, starting one year forward. A forward 

swap also can involve a contract to enter into a 

swap or security-based swap at a future date or with 

a deferred start date. A forward swap is not a 

nonfinancial commodity forward contract or 

security forward, both of which are excluded from 

the swap definition and discussed elsewhere in this 

release. 

148See Ontario Securities Commission, Staff 

Notice 91–702, ‘‘Offerings of Contracts for 

Difference and Foreign Exchange Contracts to 

Investors in Ontario,’’ at part IV.1 (defining a CFD 

as ‘‘a derivative product that allows an investor to 

obtain economic exposure (for speculative, 

investment or hedging purposes) to an underlying 

asset * * * such as a share, index, market sector, 

currency or commodity, without acquiring 

ownership of the underlying asset’’), available at 

http://www.osc.gov.on.ca/documents/en/SecuritiesCategory9/sn_20091030_91–702_cdf.pdf (Oct. 30, 

2009); Financial Services Authority, Consultation 

Paper 7/20, ‘‘Disclosure of Contracts for 

Difference—Consultation and draft Handbook text,’’ 

at part 2.2 (defining a CFD on a share as ‘‘a 

derivative product that gives the holder an 

economic exposure, which can be long or short, to 

the change in price of a specific share over the life 

of the contract’’), available at http://www.fsa.gov.uk/ 

pubs/cp/cp07_20.pdf (Nov. 2007). 

149See, e.g., Int’l Swaps and Derivatives Ass’n, 

‘‘2002 ISDA Equity Derivatives Definitions,’’ art. 10 

(Dividends) and 11 (Adjustments and Modifications 

Affecting Indices, Shares and Transactions). 

150 In some cases, depending on the facts and 

circumstances, the SEC may determine that a 

particular CFD on an equity security, for example, 

should be characterized as constituting a purchase 

or sale of the underlying equity security and, 

therefore, be subject to the requirements of the 

Federal securities laws applicable to such 

purchases or sales. 

the Commissions believe that the 

forward contract exclusion from the 

swap definition for nonfinancial 

commodities does not apply to FRAs.145

Based on the foregoing 

considerations, the Commissions are 

proposing rules to provide greater 

clarity by explicitly defining the term 

‘‘swap’’ to include FRAs. As with the 

foreign exchange-related products 

discussed above, the proposed rules 

provide that FRAs would not be swaps 

if they fall within one of the exclusions 

set forth in subparagraph (B) of the swap 

definition. 

Request for Comment 

57. Is the description of FRAs 

accurate? If not, please provide a 

detailed description of FRAs. Are there 

various types of FRAs? If so, please 

provide an explanation of their 

characteristics and how they differ. 

58. What types of market participants 

use FRAs, and for what purposes? What 

market (spot) and fixed rates are used in 

FRAs, and how are those rates 

determined, or on what are those rates 

based? 

59. Should the proposed rules 

explicitly define the term ‘‘swap’’ to 

include FRAs? Why or why not? 

60. Should the proposed rules provide 

a more detailed description of what 

FRAs are? Why or why not? If so, please 

explain what additional language 

regarding FRAs should be included in 

the proposed rules. 

4. Combinations and Permutations of, or 

Options on, Swaps and Security-Based 

Swaps 

Clause (A)(vi) of the swap definition 

provides that ‘‘any combination or 

permutation of, or option on, any 

agreement, contract, or transaction 

described in any of clauses (i) through 

(v)’’ of the definition is a swap or 

security-based swap.146 As a result, 

clause (A)(vi) means, for example, that 

an option on a swap or security-based 

swap (commonly known as a 

‘‘swaption’’) would itself be a swap or 

security-based swap, respectively. The 

Commissions also interpret clause 

(A)(vi) to mean that a ‘‘forward swap’’ 

would itself be a swap or security-based 

swap, respectively.147

Request for Comment 

61. Is additional guidance regarding 

swaptions, necessary? Why or why not? 

If so, please provide a detailed 

explanation of what additional guidance 

would be necessary. 

62. Is the Commissions’ description of 

forward swaps accurate? Why or why 

not? If not, please provide a detailed 

explanation of why the description is 

inaccurate. Is additional guidance 

regarding forward swaps necessary? 

Why or why not? If so, please provide 

a detailed explanation of what 

additional guidance would be 

necessary. 

63. Is additional guidance regarding 

other combinations or permutations of 

swaps or security-based swaps 

necessary? Why or why not? If so, 

please provide a detailed description of 

any particular agreement, contract, or 

transaction, including the purposes for 

which it is used and the market 

participants that use it, and what 

additional guidance would be 

necessary. 

5. Contracts for Differences 

The Commissions have received 

inquiries over the years regarding the 

treatment of CFDs under the CEA and 

the Federal securities laws. A CFD 

generally is an agreement to exchange 

the difference in value of an underlying 

asset between the time at which a CFD 

position is established and the time at 

which it is terminated.148 If the value 

increases, the seller pays the buyer the 

difference; if the value decreases, the 

buyer pays the seller the difference. 

CFDs can be traded on a number of 

products, including treasuries, foreign 

exchange rates, commodities, equities, 

and stock indexes. Equity CFDs closely 

mimic the purchase of actual shares. 

The buyer of an equity CFD receives 

cash dividends and participates in stock 

splits.149 In the case of a long position, 

a dividend adjustment is credited to the 

client’s account. In the case of a short 

position, a dividend adjustment is 

debited from the client’s account. CFDs 

generally are traded over-the-counter 

(though they also are traded on the 

Australian Securities Exchange) in a 

number of countries outside the United 

States. 

CFDs, unless otherwise excluded, 

may fall within the scope of the swap 

and security-based swap definitions.150

Whether a CFD is a swap or securitybased swap will depend on the 

underlying product of that particular 

CFD transaction. Because CFDs are 

highly variable and a CFD can contain 

a variety of elements that would affect 

its characterization, the Commissions 

believe that market participants will 

need to analyze the characteristics of 

any particular CFD in order to 

determine whether it is a swap or a 

security-based swap. Therefore, the 

Commissions are not proposing rules or 

additional interpretive guidance at this 

time regarding CFDs. 

Request for Comment 

64. Should the Commissions provide 

additional guidance regarding CFDs? 

Why or why not? If so, please provide 

a detailed description of any particular 

CFD and what additional guidance 

would be necessary. 


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151See, e.g., Haekel v. Refco, 2000 WL 1460078, 

at * 4 (CFTC Sept. 29, 2000) (‘‘[T]he labels that 

parties apply to their transactions are not 

necessarily controlling’’); Reves v. Ernst & Young, 

494 U.S. 56, 61 (1990) (stating that the purpose of 

the securities laws is ‘‘to regulate investments, in 

whatever form they are made and by whatever 

name they are called’’) (emphasis in original). 

152The CFTC consistently has found that the form 

of a transaction is not dispositive in determining its 

nature. See, e.g., Grain Land, supra note 61, at *16 

(CFTC Nov. 25, 2003) (holding that contract 

substance is entitled to at least as much weight as 

form); In the Matter of First Nat’l Monetary Corp., 

[1984–1986 Transfer Binder] Comm. Fut. L. Rep. 

(CCH) ¶ 22,698 at 30,974 (CFTC Aug. 7, 1985) 

(‘‘When instruments have been determined to 

constitute the functional equivalent of futures 

contracts neither we nor the courts have hesitated 

to look behind whatever self-serving labels the 

instruments might bear.’’); Stovall, supra note 63 

(holding that the CFTC ‘‘will not hesitate to look 

behind whatever label the parties may give to the 

instrument’’). Likewise, the form of a transaction is 

not dispositive in determining whether an 

agreement, contract, or transaction falls within the 

regulatory regime for securities. See SEC v. Merch. 

Capital, LLC, 483 F.3d 747, 755 (11th Cir. 2007) 

(‘‘The Supreme Court has repeatedly emphasized 

that economic reality is to govern over form and 

that the definitions of the various types of securities 

should not hinge on exact and literal tests.’’) 

(quoting Williamson v. Tucker, 645 F.2d 404, 418 

(5th Cir. 1981)); Robinson v. Glynn, 349 F.3d 166, 

170 (4th Cir. 2003) (‘‘What matters more than the 

form of an investment scheme is the ‘economic 

reality’ that it represents * * * .’’) (internal citation 

omitted); Caiola v. Citibank, N.A., New York, 295 

F.3d 312, 325 (2d Cir. 2002) (quoting United 

Housing Foundation v. Foreman, 421 U.S. 837, 848 

(1975) (‘‘In searching for the meaning and scope of 

the word ‘security’ * * * the emphasis should be 

on economic reality’’)). 

153See WGCEF Letter. 

154 7 U.S.C. 6(c). 

155This approach, however, should not be taken 

to suggest any findings by the Commissions as to 

whether or not FTRs or any other FERC-regulated 

products are swaps (or futures contracts). 

156See CEA section 1a(47), 7 U.S.C. 1a(47). 

157See section 3(a)(68) of the Exchange Act, 15 

U.S.C. 78c(a)(68). 

158 In some cases, the Title VII instrument may be 

a mixed swap. Mixed swaps are discussed further 

in part IV below. 

D. Certain Interpretive Issues 

1. Agreements, Contracts, or 

Transactions That May Be Called, or 

Documented Using Form Contracts 

Typically Used for, Swaps or SecurityBased Swaps 

The Commissions are aware that 

individuals and companies may 

generally use the term ‘‘swap’’ to refer to 

certain of their agreements, contracts, or 

transactions. For example, the term 

‘‘swap’’ may be used to refer to an 

agreement to exchange real or personal 

property between the parties. Or, two 

companies that produce fungible 

products may use the term ‘‘swap’’ to 

refer to an agreement to perform each 

other’s delivery obligations—for 

example, if one company must deliver 

the product in California and the other 

must deliver the same product in New 

York, they may use the term ‘‘swap’’ to 

refer to an agreement that each company 

will perform the other’s delivery 

obligation. 

The name or label that the parties use 

to refer to a particular agreement, 

contract, or transaction is not 

determinative of whether it is a swap or 

security-based swap.151 Also, it may not 

be relevant whether the agreement, 

contract, or transaction is documented 

using an industry standard form 

agreement that is typically used for 

swaps and security-based swaps.152

Instead, the relevant question is whether 

the agreement, contract, or transaction 

falls within the definition of the terms 

‘‘swap’’ or ‘‘security-based swap’’ (as 

further interpreted pursuant to the 

guidance proposed herein) based on its 

terms and other characteristics. Even if 

one effect of an agreement is to reduce 

the risk faced by the parties (e.g., the 

‘‘swap’’ of physical delivery obligations 

described above may reduce the risk of 

non-delivery), the agreement is not a 

swap or security-based swap unless it 

otherwise meets one of the statutory 

definitions, as further defined by the 

Commissions. Similarly, the fact that 

the parties use another name to refer to 

a swap or security-based swap would 

not be relevant in determining whether 

the agreement, contract, or transaction is 

a swap or security-based swap as those 

terms are defined in the CEA and the 

Exchange Act and the rules and 

regulations thereunder. 

Request for Comment 

65. What agreements, contracts, or 

transactions that are not swaps or 

security-based swaps are documented 

using industry standard form 

agreements that are typically used for 

swaps and security-based swaps? Please 

provide examples of such agreements, 

contracts, or transactions and details 

regarding their documentation, 

including why industry standard form 

agreements typically used for swaps and 

security-based swaps are used. 

2. Transactions in Regional 

Transmission Organizations and 

Independent System Operators 

The Commissions received a 

comment letter in response to the ANPR 

requesting clarification regarding the 

status of transactions in RTOs and ISOs, 

including financial transmission rights 

(‘‘FTRs’’), under the swap and securitybased swap definitions.153 Section 722 

of the Dodd-Frank Act, though, 

specifically addresses how the CFTC 

should approach products regulated by 

FERC that also may be subject to CFTC 

jurisdiction. Section 722 of the DoddFrank Act amended CEA section 4(c) 154

to provide that, if the CFTC determines 

that an exemption for FERC-regulated 

instruments or other specified 

electricity transactions would be in 

accordance with the public interest, 

then it shall exempt such instruments or 

transactions from the requirements of 

the CEA. Given this specific provision 

regarding these FERC-related products, 

the CFTC believes the treatment of these 

products should be considered under 

the standards and procedures specified 

in section 722 of the Dodd-Frank Act for 

a public interest waiver, rather than 

through this joint rulemaking to further 

define the terms ‘‘swap’’ and ‘‘securitybased swap.’’ 

Consequently, the Commissions are 

not addressing FTRs or other 

transactions in RTOs or ISOs within this 

joint definitional rulemaking. Instead, 

persons with concerns about whether 

FERC-regulated products may be 

considered swaps (or futures) should 

request an exemption pursuant to 

section 722 of the Dodd Frank Act.155

III. The Relationship Between the Swap 

Definition and the Security-Based Swap 

Definition 

A. Introduction 

Title VII of the Dodd-Frank Act 

defines the term ‘‘swap’’ under the 

CEA,156 and also defines the term 

‘‘security-based swap’’ under the 

Exchange Act.157 Pursuant to the 

regulatory framework established in 

Title VII, the CFTC has regulatory 

authority over swaps and the SEC has 

regulatory authority over security-based 

swaps. The Commissions are proposing 

to further define the terms ‘‘swap’’ and 

‘‘security-based swap’’ to clarify whether 

particular agreements, contracts, or 

transactions are swaps or security-based 

swaps based on characteristics 

including the specific terms and 

conditions of the instrument and the 

nature of, among other things, the 

prices, rates, securities, indexes, or 

commodities upon which the 

instrument is based. 

Because the discussion below is 

focused on whether particular 

agreements, contracts, or transactions 

are swaps or security-based swaps, the 

Commissions use the term ‘‘Title VII 

instrument’’ in this release to refer to 

any agreement, contract, or transaction 

that is included in either the definition 

of the term ‘‘swap’’ or the definition of 

the term ‘‘security-based swap.’’ Thus, 

the term ‘‘Title VII instrument’’ is 

synonymous with ‘‘swap or securitybased swap.’’ 158

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159See discussion infra part III.G.3(a) regarding 

Title VII instruments based on indexes. 

160Commenters did not address these 

instruments specifically. A number of commenters 

urged clarification that various transactions or 

obligations, such as commercial loans, are not Title 

VII instruments solely because they reference an 

interest rate. See BlackRock Letter; Cleary Letter; 

Farm Credit Council Letter; White & Case Letter. 

The Commissions have proposed guidance to 

address such customary commercial transactions in 

part II.B.3 above. 

161See discussion supra part III.F regarding the 

use of certain terms and conditions. 

162 Interbank lending rates are measured by 

surveys of the loan rates that banks offer other 

banks, or by other mechanisms. The periods of time 

for such loans may range from overnight to 12 

months or longer. 

The interbank offered rates listed here are 

frequently called either a ‘‘reference rate,’’ the rate 

of ‘‘reference banks,’’ or by a designation that is 

specific to the service that quotes the rate. For some 

of the interbank offered rates listed here, there is a 

similar rate that is stated as an interbank bid rate, 

which is the average rate at which a group of banks 

bid to borrow money from other banks. For 

example, the bid rate similar to LIBOR is called 

LIBID. 

163Today, LIBOR is used as a rate of reference for 

the following currencies: Australian Dollar, 

Canadian Dollar, Danish Krone, Euro, Japanese Yen, 

New Zealand Dollar, Pound Sterling, Swedish 

Krona, Swiss Franc, and U.S. Dollar. 

164Other interbank offered rates include the 

following (with the country or city component of 

the acronym listed in parentheses): AIDIBOR (Abu 

Dhabi); BAIBOR (Buenos Aires); BKIBOR 

(Bangkok); BRAZIBOR (Brazil); BRIBOR/BRIBID 

(Bratislava); BUBOR (Budapest); CHIBOR (China); 

CHILIBOR (Chile); CIBOR (Copenhagen); COLIBOR 

(Colombia); HIBOR (Hong Kong); JIBAR 

(Johannesburg); JIBOR (Jakarta); KAIBOR 

(Kazakhstan); KIBOR (Karachi); KLIBOR (Kuala 

Lumpur); KORIBOR ((South) Korea); MEXIBOR 

(Mexico); MIBOR (Mumbai); MOSIBOR (Moscow); 

NIBOR (Norway); PHIBOR (Philippines); PRIBOR 

(Prague); REIBOR/REIBID (Reykjavik); RIGIBOR/ 

RIGIBID (Riga); SHIBOR (Shanghai); SIBOR 

(Singapore); SOFIBOR (Sofia); STIBOR (Stockholm); 

TAIBOR (Taiwan); TELBOR (Tel Aviv); TRLIBOR 

and TURKIBOR (Turkey); VILIBOR (Vilnius); 

VNIBOR (Vietnam); and WIBOR (Warsaw). 

165A Title VII instrument based solely on the 

level of a constant maturity U.S. Treasury rate 

would be a swap because U.S. Treasuries are 

exempted securities that are excluded from the 

security-based swap definition. Conversely, a Title 

VII instrument based solely on the level of a 

constant maturity rate on a narrow-based index of 

non-exempted securities under the security-based 

swap definition would be a security-based swap. 

based swap should be made based on 

the facts and circumstances relating to 

the Title VII instrument at the time that 

the parties enter into it. If the Title VII 

instrument itself is not amended, 

modified, or otherwise adjusted during 

its term by the parties, its 

characterization as a swap or securitybased swap should not change during 

its duration because of any changes that 

may occur to the factors affecting its 

character as a swap or security-based 

swap.159

Classifying a Title VII instrument as a 

swap or security-based swap is 

straightforward for most instruments. 

The Commissions, however, are 

proposing guidance to clarify the 

classification of swaps and securitybased swaps in certain areas and to 

provide guidance regarding the use of 

certain terms and conditions in Title VII 

instruments. 

B. Title VII Instruments Based on 

Interest Rates, Other Monetary Rates, 

and Yields 

Parties frequently use Title VII 

instruments to manage risks related to, 

or to speculate on, changes in interest 

rates, other monetary rates or amounts, 

or the return on various types of assets. 

Broadly speaking, Title VII instruments 

based on interest or other monetary 

rates would be swaps, whereas Title VII 

instruments based on the yield or value 

of a single security, loan, or narrowbased security index would be securitybased swaps. However, market 

participants and financial professionals 

sometimes use the terms ‘‘rate’’ and 

‘‘yield’’ in different ways. The 

Commissions are proposing guidance 

regarding whether Title VII instruments 

that are based on interest rates, other 

monetary rates, or yields would be 

swaps or security-based swaps and 

requesting comment as to whether 

additional clarification in this area 

would be appropriate.160

1. Title VII Instruments Based on 

Interest Rates or Other Monetary Rates 

That Are Swaps 

The Commissions believe that when 

payments exchanged under a Title VII 

instrument are based solely on the 

levels of certain interest rates or other 

monetary rates that are not themselves 

based on one or more securities, the 

instrument would be a swap and not a 

security-based swap.161 Often swaps on 

interest rates or other monetary rates 

require the parties to make payments 

based on the comparison of a specified 

floating rate (such as the London 

Interbank Offered Rate (‘‘LIBOR’’)) to a 

fixed rate of interest agreed upon by the 

parties. A rate swap also may require 

payments based on the differences 

between two floating rates, or it may 

require that the parties make such 

payments when any agreed-upon events 

with respect to interest rates or other 

monetary rates occur (such as when a 

specified interest rate crosses a 

threshold, or when the spread between 

two such rates reaches a certain point). 

The rates referenced for the parties’ 

obligations are varied, and examples of 

such rates include the following: 

• Interbank Offered Rates: An average 

of rates charged by a group of banks for 

lending money to each other or other 

banks over various periods of time, and 

other similar interbank rates,162

including, but not limited to, LIBOR 

(regardless of currency); 163 the Euro 

Interbank Offered Rate (‘‘Euribor’’); the 

Canadian Dealer Offered Rate (‘‘CDOR’’); 

and the Tokyo Interbank Offered Rate 

(‘‘TIBOR’’); 164

• Money Market Rates: A rate 

established or determined based on 

actual lending or money market 

transactions, including, but not limited 

to, the Federal Funds Effective Rate; the 

Euro Overnight Index Average (‘‘EONIA’’ 

or ‘‘EURONIA’’) (which is the weighted 

average of overnight unsecured lending 

transactions in the Euro-area interbank 

market); the EONIA Swap Index; the 

Australian dollar RBA 30 Interbank 

Overnight Cash Rate; the Canadian 

Overnight Repo Rate Average 

(‘‘CORRA’’); the Mexican interbank 

equilibrium interest rate (‘‘TIIE’’); the 

NZD Official Cash Rate; the Sterling 

Overnight Interbank Average Rate 

(‘‘SONIA’’) (which is the weighted 

average of unsecured overnight cash 

transactions brokered in London by the 

Wholesale Markets Brokers’ 

Association); the Swiss Average Rate 

Overnight (‘‘SARON’’); and the Tokyo 

Overnight Average Rate (‘‘TONAR’’) 

(which is based on uncollateralized 

overnight average call rates for 

interbank lending); 

• Government Target Rates: A rate 

established or determined based on 

guidance established by a central bank 

including, but not limited to, the 

Federal Reserve discount rate, the Bank 

of England base rate and policy rate, the 

Canada Bank rate, and the Bank of Japan 

policy rate (also known as the Mutan 

rate); 

• General Lending Rates: A general 

rate used for lending money, including, 

but not limited to, a prime rate, rate in 

the commercial paper market, or any 

similar rate provided that it is not based 

on any security, loan, or group or index 

of securities; 

• Indexes: A rate derived from an 

index of any of the foregoing or 

following rates, averages, or indexes, 

including but not limited to a constant 

maturity rate (U.S. Treasury and certain 

other rates),165 the interest rate swap 

rates published by the Federal Reserve 

in its ‘‘H.15 Selected Interest Rates’’ 

publication, the ISDAFIX rates, the 

ICAP Fixings, a constant maturity swap, 

or a rate generated as an average 

(geometric, arithmetic, or otherwise) of 

any of the foregoing, such as overnight 

index swaps (‘‘OIS’’)—provided that 

such rates are not based on a specific 


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166The TED spread is the difference between the 

interest rates on interbank loans and short-term U.S. 

government debt (Treasury bills or ‘‘T-bills’’). The 

latter are exempted securities that are excluded 

from the statutory definition of the term ‘‘securitybased swap.’’ Thus, neither any aspect of U.S. 

Treasuries nor interest rates on interbank loans, can 

form the basis of a security-based swap. For this 

reason, a Title VII instrument on a spread between 

interbank loan rates and T-bill rates also would not 

be a security-based swap. 

167See, e.g., Securities Confirmations, 47 FR 

37920, Aug. 27, 1982. 

security, loan, or narrow-based group or 

index of securities; 

• Other Monetary Rates: A monetary 

rate including, but not limited to, the 

Consumer Price Index (‘‘CPI’’), the rate of 

change in the money supply, or an 

economic rate such as a payroll index; 

and 

• Other: The volatility, variance, rate 

of change of (or the spread, correlation 

or difference between), or index based 

on any of the foregoing rates or averages 

of such rates, such as forward spread 

agreements, references used to calculate 

the variable payments in index 

amortizing swaps (whereby the notional 

principal amount of the agreement is 

amortized according to the movement of 

an underlying rate), or correlation swaps 

and basis swaps, including but not 

limited to, the ‘‘TED spread’’ 166 and the 

spread or correlation between LIBOR 

and an OIS. 

As discussed above, the Commissions 

believe that when payments under a 

Title VII instrument are based solely on 

any of the foregoing, such Title VII 

instrument would be a swap. 

Request for Comment 

66. The Commissions request 

comment generally on the foregoing 

proposed guidance regarding Title VII 

instruments where the underlying 

reference is an interest rate or other 

monetary rate. 

67. Does the proposed guidance in 

this section accurately describe the 

types of interest rates and other 

monetary rates that are used as an 

underlying reference of a Title VII 

instrument, and that should cause the 

instrument to be considered a swap? 

Are any of the rates identified in this list 

not used in this manner? Are there any 

significant interest or monetary rates 

that should be added to this list in order 

to provide additional guidance? 

68. As discussed above, a Title VII 

instrument would be considered a 

security-based swap if the instrument is 

based on constant maturity rates that are 

derived from the market prices and 

yields of a non-exempted debt security 

or a narrow-based security index of debt 

securities (depending on the other terms 

of the Title VII instrument, such 

instrument may be a mixed swap). The 

Commissions request comment on this 

guidance. Are there certain constant 

maturity rates that should not be 

considered to be security-based, such 

that a Title VII instrument based on 

those rates would instead be a swap and 

not a security-based swap or mixed 

swap? If so, are there objective criteria 

to distinguish between different types of 

constant maturity rates in the 

determination of whether a Title VII 

instrument is a swap or security-based 

swap? If so, please describe any such 

criteria in detail. 

2. Title VII Instruments Based on Yields 

The Commissions also propose 

guidance to clarify the status of Title VII 

instruments in which one of the 

underlying references of the instrument 

is a ‘‘yield.’’ In cases when a ‘‘yield’’ is 

calculated based on the price or changes 

in price of a debt security, loan, or 

narrow-based security index, it is 

another way of expressing the price or 

value of a debt security, loan, or narrowbased security index. For example, debt 

securities often are quoted and traded 

on a yield basis rather than on a dollar 

price, where the yield relates to a 

specific date, such as the date of 

maturity of the debt security (i.e., yield 

to maturity) or the date upon which the 

debt security may be redeemed or called 

by the issuer (e.g., yield to first whole 

issue call).167

Except in the case of certain exempted 

securities, when one of the underlying 

references of the Title VII instrument is 

the ‘‘yield’’ of a debt security, loan, or 

narrow-based security index in the 

sense where the term ‘‘yield’’ is used as 

a proxy for the price or value of the debt 

security loan, or narrow-based security 

index, the Title VII instrument would be 

a security-based swap. And, as a result, 

in cases where the underlying reference 

is a point on a ‘‘yield curve’’ generated 

from the different ‘‘yields’’ on debt 

securities in a narrow-based security 

index (e.g., a constant maturity yield or 

rate), the Title VII instrument would be 

a security-based swap. In either case, 

however, where certain exempted 

securities, such as U.S. Treasury 

securities, are the only underlying 

reference of a Title VII instrument 

involving securities, the Title VII 

instrument would be a swap. Title VII 

instruments based on exempted 

securities are discussed further below. 

The above interpretation would not 

apply in cases where the ‘‘yield’’ 

referenced in a Title VII instrument is 

not based on a debt security, loan, or 

narrow-based security index of debt 

securities but rather is being used to 

reference an interest rate or monetary 

rate as outlined above in subsection one 

of this section. In these cases, this 

‘‘yield’’ reference would be considered 

equivalent to a reference to an interest 

rate or monetary rate and the Title VII 

instrument would be, under the 

guidance in this section, a swap (or 

mixed swap depending on other 

references in the instrument). 

Request for Comment 

69. The Commissions request 

comment generally on the foregoing 

proposed guidance regarding Title VII 

instruments where the underlying 

reference is a ‘‘yield.’’ Please provide a 

detailed explanation of any uncertainty 

regarding the Commissions’ proposed 

use of the terms ‘‘yield’’ and ‘‘yield 

curve’’ and what additional guidance 

would be necessary. 

70. Does the proposed guidance in 

this section appropriately describe 

instruments based on the ‘‘yield’’ of a 

debt security that should be considered 

security-based swaps? Is additional 

guidance necessary regarding when the 

term ‘‘yield’’ is used as a proxy for price 

or value? If so, please provide a detailed 

explanation of any uncertainty 

regarding how the term ‘‘yield’’ is used 

and what additional guidance would be 

necessary. 

71. Are there instruments where the 

underlying reference is a ‘‘yield’’ of a 

debt security that should be considered 

a swap as opposed to a security-based 

swap? If so, what are they, and how 

often are they traded? How are such 

instruments distinguished from 

instruments based on ‘‘yield’’ that 

should be considered security-based 

swaps? 

3. Title VII Instruments Based on 

Government Debt Obligations 

The Commissions also are providing 

guidance regarding instances in which 

the underlying reference of the Title VII 

instrument is a government debt 

obligation. The security-based swap 

definition specifically excludes any 

agreement, contract, or transaction that 

meets the definition of a security-based 

swap only because it ‘‘references, is 

based upon, or settles through the 

transfer, delivery, or receipt of an 

exempted security under [section 

3(a)(12) of the Exchange Act], as in 

effect on the date of enactment of the 

Futures Trading Act of 1982 (other than 

any municipal security as defined in 

[section 3(a)(29) of the Exchange Act] 

* * *), unless such agreement, contract, 

or transaction is of the character of, or 


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168Section 3(a)(68)(C) of the Exchange Act, 15 

U.S.C. 76c(a)(68)(C). 

169As of January 11, 1983, the date of enactment 

of the Futures Trading Act of 1982, Public Law 97– 

444, 96 Stat. 2294, section 3(a)(12) of the Exchange 

Act, 15 U.S.C. 78c(a)(12), provided that, among 

other securities, ‘‘exempted securities’’ include: (i) 

‘‘securities which are direct obligations of, or 

obligations guaranteed as to principal or interest by, 

the United States;’’ (ii) certain securities issued or 

guaranteed by corporations in which the United 

States has a direct or indirect interest as designated 

by the Secretary of the Treasury; and (iii) certain 

other securities as designated by the SEC in rules 

and regulations. 

170Public Law 97–444, 96 Stat. 2294 (1983). 

171Where the underlying security is an equity, a 

TRS is also known as an ‘‘equity swap.’’ 

172 If the total return is negative, the seller 

receives this amount from the buyer. TRS can be 

used to synthetically reproduce the payoffs of a 

position. For example, two counterparties may 

enter into a 3-year TRS where the buyer of the TRS 

receives the positive total return on XYZ security, 

if any, and the seller of the TRS receives LIBOR 

plus 30 basis points and the absolute value of the 

negative total return on XYZ security, if any. 

173 If the underlying reference of the TRS is a 

broad-based equity security index, however, the 

Commissions believe that it would be a swap (and 

an SBSA) and not a security-based swap. In 

addition, a TRS on an exempted security, such as 

a U.S. Treasury, under section 3(a)(12) of the 

Exchange Act, 15 U.S.C. 78c(a)(12), as in effect on 

the date of enactment of the Futures Trading Act 

of 1982 (other than any municipal security as 

defined in section 3(a)(29) of the Exchange Act, 15 

U.S.C. 78c(a)(29), as in effect on the date of 

enactment of the Futures Trading Act of 1982) 

would be a swap (and an SBSA) and not a securitybased swap. 

174Several commenters noted that such 

instruments should not be characterized as mixed 

swaps. See Cleary Letter (expressing the view that 

such Title VII instruments should not be 

characterized as mixed swaps because ‘‘the floating 

rate payment obligation is not the principal driver 

of the security-based swap and, in that sense, the 

security-based swap is not ‘based on’ the level of 

an interest rate within the meaning of [the DoddFrank Act]’’); Deutsche Bank Letter (explaining that 

such Title VII instruments in which the party that 

is ‘‘synthetically short’’ the underlying security 

makes payments based on the value of the 

underlying security to the party that is 

‘‘synthetically long,’’ and the synthetically long 

party pays the synthetically short party an amount 

that may be based on LIBOR or another interest rate, 

should not be treated as mixed swaps because the 

payments to the synthetically short party are 

generally intended only for financing costs incurred 

in establishing or maintaining the transaction or its 

hedge); ISDA Letter (noting that variable interest 

rate-based payments in connection with a typical 

Title VII instrument of this type are ‘‘incidental to 

what is essentially a security-based transaction and 

should not yield mixed swap status’’); Morgan 

Stanley Letter (noting that the interest rate-based 

payments in such Title VII instruments ‘‘reflect 

compensation for the financing costs associated’’ 

with the instrument and ‘‘are not at the core of what 

is being ‘swapped’ under the contract’’); Letter from 

Timothy W. Cameron, Esq., Managing Director, 

Asset Management Group, Securities Industry and 

Financial Markets Association, Sept. 20, 2010 

(expressing the view that such a financing 

component is incidental to the Title VII instrument 

and should not cause it to be viewed as a mixed 

swap). 

175See, e.g., Moorad Chowdry, ‘‘Total Return 

Swaps: Credit Derivatives and Synthetic Funding 

Instruments,’’ at 3–4 (noting that the spread to the 

TRS financing rate is a function of: the credit rating 

of the counterparty paying the financing rate; the 

amount, value, and credit quality of the reference 

asset; the dealer’s funding costs; a profit margin; 

and the capital charge associated with the TRS), 

available at http://www.yieldcurve.com/ 

Mktresearch/LearningCurve/TRS.pdf. 

176For example, a security-based swap on an 

equity security priced in U.S. dollars in which 

payments are made in Euros based on the U.S. 

dollar/Euro spot rate at the time the payment is 

made would not be a mixed swap. Under these 

circumstances, the currency is merely referenced in 

connection with the method of payment, and the 

counterparties are not hedging the risk of changes 

in currency exchange rates during the term of the 

security-based swap. 

is commonly known in the trade as, a 

put, call, or other option.’’ 168

As a result of this exclusion in the 

security-based swap definition for 

‘‘exempted securities,’’ 169 if the only 

underlying reference of a Title VII 

instrument involving securities is, for 

example, the price of a U.S. Treasury 

security and does not have any other 

underlying reference involving 

securities, then the instrument would be 

a swap. Similarly, if the Title VII 

instrument is based on the ‘‘yield’’ of a 

U.S. Treasury security and does not 

have any other underlying reference 

involving securities, then the 

instrument also would be a swap, 

regardless of whether the term ‘‘yield’’ is 

a proxy for the price of the security. 

Foreign government securities, by 

contrast, were not ‘‘exempted securities’’ 

as of the date of enactment of the 

Futures Trading Act of 1982 170 and thus 

do not explicitly fall within this 

exclusion from the security-based swap 

definition. Therefore, if the underlying 

reference of the Title VII instrument is 

the price, value, or ‘‘yield’’ (where 

‘‘yield’’ is a proxy for price or value) of 

a foreign government security, or a point 

on a yield curve derived from a narrowbased security index composed of 

foreign government securities, then the 

instrument would be a security-based 

swap. 

Request for Comment 

72. The Commissions request 

comment generally on the foregoing 

proposed guidance regarding the 

treatment of Title VII instruments in 

which the underlying reference is a 

government debt obligation. 

General Request for Comment: In 

addition to the particular requests for 

comment set forth on the issues 

discussed above, the Commissions also 

request comment generally on the 

following: 

73. Does the proposed guidance in 

this part III.B accurately describe market 

practices and terminology? Will the 

proposed guidance be useful in 

determining whether Title VII 

instruments are swaps or security-based 

swaps? 

C. Total Return Swaps 

A TRS is a Title VII instrument in 

which one counterparty, the seller of the 

TRS, makes a payment that is based on 

the price appreciation and income from 

an underlying security or security 

index.171 The other counterparty, the 

buyer of the TRS, makes a financing 

payment that is often based on a 

variable interest rate, such as LIBOR (or 

other interbank offered rate or money 

market rate, as described above), as well 

as a payment based on the price 

depreciation of the underlying 

reference. The ‘‘total return’’ consists of 

the price appreciation or depreciation, 

plus any interest or income 

payments.172 Accordingly, where a TRS 

is based on a single security or loan, or 

a narrow-based security index, the TRS 

would be a security-based swap.173

Generally, the use of a variable 

interest rate in the TRS buyer’s payment 

obligations to the seller is incidental to 

the purpose of, and the risk that the 

counterparties assume in, entering into 

the TRS. These payments are a form of 

financing that reflects the security-based 

swap dealer’s cost of financing the 

position or a related hedge, allowing the 

TRS buyer to receive payments based on 

the price appreciation and income of a 

security or security index without 

purchasing the security or security 

index. The Commissions believe that 

when such interest rate payments act 

merely as a financing component in a 

TRS, or in any other security-based 

swap, the inclusion of such interest rate 

terms would not cause the securitybased swap to be characterized as a 

mixed swap.174 Financing terms may 

also involve adding or subtracting a 

spread to or from the financing rate,175

or calculating the financing rate in a 

currency other than that of the 

underlying reference security or security 

index.176 However, the Commissions 

note that where such payments 

incorporate additional elements that 

create additional interest rate or 

currency exposures that are unrelated to 

the financing of the security-based 

swap, or otherwise shift or limit risks 

that are related to the financing of the 

security-based swap, those additional 

elements may cause the security-based 

swap to be a mixed swap. 

For example, where the 

counterparties embed interest-rate 

optionality (e.g., a cap, collar, call, or 

put) into the terms of a security-based 

swap in a manner designed to shift or 

limit interest rate exposure, the 

inclusion of these terms would cause 


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177See Mixed Swaps, infra part IV. 

178Section 3(a)(68)(A)(ii)(II) of the Exchange Act, 

15 U.S.C. 78c(a)(68)(A)(ii)(II). The first prong of the 

security-based swap definition is discussed below. 

179Section 3(a)(68)(A)(ii)(III) of the Exchange Act, 

15 U.S.C. 78c(a)(68)(A)(ii)(III). 

180The Commissions understand that in the 

context of credit derivatives on asset-backed 

securities or MBS, the events include principal 

writedowns, failure to pay principal and interest 

shortfalls. 

181The Commissions understand that some 

single-name CDS now trade with fixed coupon 

payments expressed as a percentage of the notional 

amount of the transaction and payable on a periodic 

basis during the term of the transaction. See Markit, 

‘‘The CDS Big Bang: Understanding the Changes to 

the Global CDS Contract and North American 

Conventions,’’ 3, available at http:// 

www.markit.com/cds/announcements/resource/

cds_big_bang.pdf. The Commissions believe the 

existence of such single-name CDS does not change 

their interpretation. 

182A security future is specifically defined in 

both the CEA and the Exchange Act as a futures 

contract on a single security or a narrow-based 

security index, including any interest therein or 

based on the value thereof, except an exempted 

security under section 3(a)(12) of the Exchange Act, 

15 U.S.C. 78c(a)(12), as in effect on the date of 

enactment of the Futures Trading Act of 1982 (other 

than any municipal security as defined in section 

3(a)(29) of the Exchange Act, 15 U.S.C. 78c(a)(29), 

as in effect on the date of enactment of the Futures 

Trading Act of 1982). 

The term security future does not include any 

agreement, contract, or transaction excluded from 

the CEA under CEA sections 2(c), 2(d), 2(f), or 2(g), 

7 U.S.C. 2(c), 2(d), 2(f), or 2(g), (as in effect on the 

date of enactment of the Commodity Futures 

Modernization Act of 2000 (‘‘CFMA’’) or Title IV of 

the CFMA). See CEA section 1a(44), 7 U.S.C. 1a(44); 

section 3(a)(55) of the Exchange Act, 15 U.S.C. 

78c(a)(55). 

183 Depending on the underlying reference of the 

futures contract, though, such swaps could be 

security-based swap agreements. For example, a 

swap on a future on the S&P 500 index would be 

a security-based swap agreement. 

184Specifically, rule 3a12–8 under the Exchange 

Act requires as a condition to the exemption that 

the foreign government debt securities not be 

registered under the Securities Act (or the subject 

of any American depositary receipt registered under 

the Securities Act) and that futures contracts on 

such foreign government debt securities ‘‘require 

delivery outside the United States, [and] any of its 

possessions or territories, and are traded on or 

through a board of trade, as defined in [CEA section 

2, 7 U.S.C. 2].’’ See rules 3a12–8(b), 3a12–8(a)(2) 

under the Exchange Act, 17 CFR 240.3a12–8(b) and 

240.3a12–8(a)(2).These conditions were ‘‘designed 

to minimize the impact of the exemption on 

securities distribution and trading in the United 

States . . . .’’ See Exemption for Certain Foreign 

Continued 

the TRS to be both be a swap and a 

security-based swap (i.e., a mixed 

swap). Similarly, if a TRS is also based 

on non-security-based components 

(such as the price of oil, or a currency), 

the security-based swap would also be 

a swap.177

Request for Comment 

74. Is the proposed guidance 

regarding TRS and other security-based 

swaps for which the use of a variable 

interest rate in a counterparty’s payment 

obligations is incidental to the risk that 

counterparties assume in entering into a 

TRS or other security-based swap 

appropriate? Why or why not? If not, 

please provide a detailed explanation of 

what guidance would be appropriate. 

75. How often do market participants 

use rates, other than interbank offered 

rates or money market rates, in TRS to 

recoup their financing costs? If so, 

which rates and what portion of the 

market (broken down by product, 

country, counterparty type, and/or 

whatever data are available to 

commenters), in percentage and/or 

dollar terms do TRS with such financing 

rates constitute? What factors influence 

the financing rates that market 

participants incorporate into their 

security-based swaps? 

76. Do market participants embed 

optionality, such a cap, collar, put, or 

call, into the payment component of a 

TRS? If so, how frequently and for what 

purpose? 

77. Do market participants embed 

nonfinancial commodity components 

into the payment component that 

directly affect the payments on a TRS 

rather than operating as a mere 

financing component? If so, how 

frequently and for what purpose? 

78. Do market participants embed 

foreign currency swaps into a foreign 

currency payment component of a TRS? 

If so, how frequently and for what 

purpose? 

79. Are there other circumstances 

under which a TRS should be treated as 

a mixed swap rather than a securitybased swap or swap? If so, please 

provide a detailed description of such 

circumstances and explain why. 

D. Security-Based Swaps Based on a 

Single Security or Loan and SingleName Credit Default Swaps 

The second prong of the securitybased swap definition includes a swap 

that is based on ‘‘a single security or 

loan, including any interest therein or 

on the value thereof.’’ 178 The 

Commissions believe that, under this 

prong of the definition of security-based 

swap, a single-name CDS that is based 

on a single reference obligation would 

be a security-based swap because it 

would be based on a single security or 

loan (or any interest therein or on the 

value thereof). 

In addition, the third prong of the 

security-based swap definition includes 

a swap that is based on the occurrence 

of an event relating to a ‘‘single issuer 

of a security,’’ provided that such event 

‘‘directly affects the financial statements, 

financial condition, or financial 

obligations of the issuer.’’ 179 This 

provision applies generally to eventtriggered swap contracts. With respect 

to a CDS, such events could include the 

bankruptcy of an issuer, a default on 

one of an issuer’s debt securities, or the 

default on a non-security loan of an 

issuer.180 Therefore, the Commissions 

believe that if the payout on a CDS on 

a single issuer of a security is triggered 

by the occurrence of an event relating to 

that issuer, the CDS would be a securitybased swap under the third prong.181

In this regard, the Commissions note 

that each transaction under an ISDA 

Master Agreement would need to be 

analyzed to determine whether it is a 

swap or security-based swap. For 

example, the Commissions believe that 

a number of single-name CDS that are 

executed at the same time and that are 

documented under one ISDA Master 

Agreement, but in which a separate 

confirmation is sent for each CDS, 

should be treated as an aggregation of 

security-based swaps. As a practical and 

economic matter, the Commissions 

believe that each such CDS would be a 

separate and independent transaction. 

Thus, such an aggregation of singlename CDS would not constitute a 

‘‘group or index’’ under the securitybased swap definition but instead 

would constitute multiple single-name 

CDS. 

E. Title VII Instruments Based on 

Futures Contracts 

A Title VII instrument that is based on 

a futures contract will either be a swap 

or a security-based swap, or both (i.e., a 

mixed swap), depending on the nature 

of the futures contract, including the 

underlying reference of the futures 

contract. The Commissions believe that 

a Title VII instrument where the 

underlying reference is a security future 

would be a security-based swap.182 The 

Commissions believe that, except with 

respect to certain futures on foreign 

government debt securities discussed 

below, a Title VII instrument where the 

underlying reference is a futures 

contract that is not a security future 

would be a swap.183

Title VII instruments involving 

futures contracts on foreign government 

debt securities present a unique 

circumstance. Rule 3a12–8 under the 

Exchange Act exempts certain foreign 

government debt securities, for purposes 

only of the offer, sale, or confirmation 

of sale of futures contracts on such 

foreign government debt securities, from 

all provisions of the Exchange Act 

which by their terms do not apply to an 

‘‘exempted security,’’ subject to certain 

conditions.184 To date, the SEC has 


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Government Securities for Purposes of Futures 

Trading, 49 FR 8595, 8596–97, Mar. 8, 1984 (citing 

Futures Trading Act of 1982). 

185See rule 3a12–8(a)(1) under the Exchange Act 

(designating the debt securities of the governments 

of the United Kingdom, Canada, Japan, Australia, 

France, New Zealand, Austria, Denmark, Finland, 

the Netherlands, Switzerland, Germany, Ireland, 

Italy, Spain, Mexico, Brazil, Argentina, Venezuela, 

Belgium, and Sweden). 

186The Commissions note, by contrast, that a 

Title VII instrument that is based on the price or 

value of, or settlement into, a futures contract on 

one of the 21 foreign government debt securities 

designated in rule 3a12–8 and that is also based on 

the price or value of, or had the potential to settle 

directly into, the foreign debt security, would be a 

security-based swap and, depending on other 

features of the Title VII instrument, possibly a 

mixed swap. 

187This is the case today (i.e., different 

treatments) with respect to, for example, options on 

broad-based security indexes and options on futures 

on broad-based security indexes. 

188See section 2(a)(3) of the Securities Act as 

amended by the Dodd-Frank Act, 15 U.S.C. 

77b(a)(3). This provision applies regardless of 

whether the Title VII instrument allows the parties 

to physically settle any such security-based swap. 

189See section 5 of the Securities Act as amended 

by the Dodd-Frank Act. 15 U.S.C. 77e. 

enumerated within rule 3a12–8 debt 

securities of 21 identified foreign 

governments solely for purposes of 

futures trading.185

The Commissions are evaluating the 

appropriate characterization of Title VII 

instruments based on futures on such 

foreign government debt securities that 

are traded in reliance on rule 3a12–8. 

The Commissions recognize that as a 

result of the rule 3a12–8 exemption, 

futures on foreign government debt 

securities of 21 foreign countries trade 

pursuant to the CFTC’s exclusive 

jurisdiction and without the futures 

being considered security futures. 

Because futures contracts on the 21 

foreign government debt securities 

designated in rule 3a12–8 are not 

security futures, applying the above 

interpretive guidance to a Title VII 

instrument on a futures contract on 

these foreign government debt securities 

would mean that such Title VII 

instrument would be a swap.186 The 

Commissions note, however, that the 

conditions in the rule 3a12–8 exemption 

were established specifically for trading 

futures contracts on these foreign 

sovereign debt obligations, not Title VII 

instruments based on futures contracts 

on foreign government debt securities. 

Furthermore, the Commissions note that 

the Dodd-Frank Act did not exclude 

debt securities of foreign governments 

from the definition of security-based 

swap. Therefore, a Title VII instrument 

based on such debt securities would be 

a security-based swap. Relying on rule 

3a12–8 for the treatment of Title VII 

instruments on such futures would 

therefore result in different treatments 

depending on whether the Title VII 

instrument is based on a foreign 

government debt security or on a future 

that is in turn based on a foreign 

government debt security.187 On the 

other hand, to do otherwise would 

create different regulators for a future 

and Title VII instruments based on that 

future. 

The SEC believes that the 

characterization of a Title VII 

instrument involving a foreign 

government debt security may affect 

Federal securities law provisions 

relating to the distribution of the 

underlying foreign debt security. 

Specifically, the Dodd-Frank Act 

included provisions that would not 

permit issuers, affiliates of issuers, or 

underwriters to use security-based 

swaps to offer or sell the issuers’ 

securities underlying a security-based 

swap without complying with the 

requirements of the Securities Act.188 In 

addition, the Dodd-Frank Act provided 

that any offer and sale of security-based 

swaps to non-ECPs would have to be 

registered under the Securities Act.189

Thus, for example, if a Title VII 

instrument on a future on foreign 

government debt security is 

characterized as a swap, and not a 

security-based swap, then the 

provisions of the Dodd-Frank Act 

enacted to ensure that there could not 

be offers and sales of securities made 

without compliance with the Securities 

Act, either by issuers, their affiliates, or 

underwriters or to non-ECPs, would not 

apply to such swap transactions. 

On the other hand, the CFTC believes 

that characterizing Title VII instruments 

based on a future on a foreign 

government debt security designated in 

rule 3a12–8 as security-based swaps 

could undermine the regulatory scheme 

that Congress established in the CEA. As 

noted above, the Commissions generally 

would treat Title VII instruments based 

on futures that are not security futures 

as swaps. Many of the futures on the 21 

foreign government debt securities 

designated in rule 3a12–8 trade with 

substantial volume. Section 753 of the 

Dodd-Frank Act provided the CFTC 

with additional antifraud and antimanipulation authorities patterned on 

those provided to the SEC in the Federal 

securities laws. The CFTC believes that 

treating Title VII instruments based on 

these futures as security-based swaps, 

while the underlying futures come 

under the CEA, may undermine those 

authorities. 

In sum, depending on how a Title VII 

instrument on such a future on a foreign 

government debt security is 

characterized, there is potential for such 

an instrument: (i) to be used to avoid the 

application of the Federal securities 

laws, including the Dodd-Frank Act 

provisions, that otherwise would apply 

if the Title VII instrument was instead 

based on the foreign government debt 

security directly; or (ii) to be used to 

avoid the application of the CEA, 

including the Dodd-Frank Act 

provisions, that otherwise would apply 

if the Title VII instrument was instead 

based on any other futures contract that 

is not a security future. Accordingly, the 

Commissions also are evaluating 

whether a Title VII instrument on such 

a futures contract on a foreign 

government debt security should be 

characterized as a mixed swap. 

Request for Comment 

80. The Commissions request 

comment generally on the foregoing 

discussion regarding Title VII 

instruments based on futures contracts 

and security futures. 

81. What types of such products are 

traded in the market today? How often, 

and where are such products traded? 

82. The Commissions are requesting 

comment on how to characterize a Title 

VII instrument where the underlying 

reference is a futures contract on one of 

the 21 foreign government debt 

securities that have been designated as 

‘‘exempted securities’’ under rule 3a12– 

8 only for the offer, sale, or confirmation 

of sale of futures contracts on such 

securities and only where the 

conditions of such exemption are 

satisfied. When should a Title VII 

instrument on a futures contract on a 

foreign government debt security being 

traded in reliance on the exemption 

under rule 3a12–8 be treated as a swap, 

a security-based swap or a mixed swap? 

Is there any economic reason why the 

treatment of a Title VII instrument on a 

future on a foreign government debt 

security should be different than the 

treatment of a Title VII instrument on 

the foreign government debt security 

directly? Is there any economic reason 

why the treatment of a Title VII 

instrument on a future on a designated 

foreign government debt security should 

be different than the treatment of a Title 

VII instrument on any other futures 

contract that is not a security future? If 

the answer to either of the two 

preceding questions is yes, please 

explain and provide empirical analysis. 

If the Title VII instrument is able to be 

entered into by the issuer, affiliate of the 

issuer, or an underwriter, or if the Title 

VII instrument is being offered and sold 

to non-ECPs, should the Title VII 

instrument be viewed as a securitybased swap or a mixed swap so that 

market participants cannot chose 


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190However, to the extent the fixed term or 

condition is set at a future date or at a future value 

or level of a security, rate, or other commodity 

rather than the value or level of such security, rate, 

or other commodity at the time of execution of the 

Title VII instrument, the discussion above would 

not apply, and the nature of the security, rate, or 

other commodity used in determining the terms or 

conditions would be considered in evaluating 

whether the Title VII instrument is a swap or 

security-based swap. 

191The Commissions note that such Title VII 

instruments would be swaps in any event because 

U.S. Treasury securities are exempted securities 

that are excluded from the security-based swap 

definition in Title VII but understand that such 

swaps use the reference or quoting convention 

described above in setting the terms or conditions 

of the Title VII instrument at the time of execution. 

192Four commenters referred to the definition of 

the term ‘‘narrow-based security index,’’ each in the 

context of CDS. See infra notes 209 and 211. 

193Sections 3(a)(55)(B) and (C) of the Exchange 

Act, 15 U.S.C. 78c(a)(55)(B) and (C), include a 

definition of ‘‘narrow-based security index’’ in the 

same paragraph as the definition of security future. 

See also CEA sections 1a(35)(A) and (B), 7 U.S.C. 

1a(35)(A) and (B). A security future is a contract for 

Continued 

whether to comply with the registration 

requirements of the Securities Act with 

respect to the foreign government debt 

securities? Should such an instrument 

be viewed as a swap or a mixed swap 

so that market participants cannot 

choose whether to comply with the 

requirements of the Dodd-Frank Act 

concerning clearing, trade execution, 

reporting, and standards applicable to 

dealers and major participants that 

apply to Title VII instruments on futures 

contracts that are not security futures? 

Are there other suggested approaches to 

the treatment of Title VII instruments on 

futures on foreign government debt 

securities that would preserve the 

application of the Securities Act as 

contemplated by the Dodd-Frank Act to 

Title VII instruments involving foreign 

government debt securities? Are there 

other suggested approaches to the 

treatment of Title VII instruments on 

futures on foreign government debt 

securities that would preserve the 

application of the CEA as contemplated 

by the Dodd-Frank Act to Title VII 

instruments involving futures contracts 

that are not security futures? If the 

answer to either of the two preceding 

questions is yes, please provide detail 

and analysis. 

F. Use of Certain Terms and Conditions 

in Title VII Instruments 

The Commissions are aware that 

market participants’ setting of certain 

fixed terms or conditions of Title VII 

instruments may be informed by the 

value or level of a security, rate, or other 

commodity at the time of the execution 

of the instrument. The Commissions 

believe that, in evaluating whether such 

a Title VII instrument is a swap or 

security-based swap, the nature of the 

security, rate, or other commodity that 

informed the setting of such fixed term 

or condition should not itself impact the 

determination of whether the Title VII 

instrument is a swap or a security-based 

swap, provided that the fixed term or 

condition is set at the time of execution 

of the Title VII instrument and the value 

or level of that fixed term or condition 

may not vary over the life of the Title 

VII instrument. 

For example, a Title VII instrument, 

such as an interest rate swap, in which 

floating payments based on 3-month 

LIBOR are exchanged for fixed rate 

payments of 5% would be a swap, and 

not a security-based swap, even if the 

5% fixed rate was informed by, or 

quoted based on, the yield of a security, 

provided that the 5% fixed rate was set 

at the time of execution and may not 

vary over the life of the Title VII 

instrument.190 Another example would 

be where a private sector or government 

borrower that issues a 5-year, amortizing 

$100 million debt security with a semiannual coupon of LIBOR plus 250 basis 

points also, at the same time, chooses to 

enter into a 5-year interest rate swap on 

$100 million notional in which this 

same borrower, using the same 

amortization schedule as the debt 

security, receives semi-annual payments 

of LIBOR plus 250 basis points in 

exchange for 5% fixed rate payments. 

The fact that the specific terms of the 

interest rate swap (e.g., 5-year, LIBOR 

plus 250 basis point, $100 million 

notional, fixed amortization schedule) 

were set at the time of execution to 

match related terms of a debt security 

does not cause the interest rate swap to 

become a security-based swap. 

However, if the interest rate swap 

contained additional terms that were in 

fact contingent on a characteristic of the 

debt security that may change in the 

future, such as an adjustment to future 

interest rate swap payments based on 

the future price or yield of the debt 

security, then this Title VII instrument 

would be a security-based swap that 

would be a mixed swap. 

Request for Comment 

83. Is the guidance provided by the 

Commissions regarding the relevance of 

the nature of a security, rate, or other 

commodity that informs the 

determination of a fixed term or 

condition of a Title VII instrument 

appropriate? Why or why not? If not, 

what guidance would be appropriate? 

84. The Commissions are aware that 

quoting conventions are used in the 

context of setting the fixed terms of 

certain Title VII instruments, such as 

interest rate swaps that exchange LIBOR 

for a fixed rate that is set at the time of 

execution by reference to U.S. Treasury 

securities.191 Are there other Title VII 

instruments that use such quoting 

conventions? If so, please provide a 

detailed explanation of such Title VII 

instruments and the references they use. 

G. The Term ‘‘Narrow-Based Security 

Index’’ in the Security-Based Swap 

Definition 

1. Introduction192

As noted above, a Title VII instrument 

in which the underlying reference of the 

instrument is a ‘‘narrow-based security 

index’’ is considered a security-based 

swap subject to regulation by the SEC, 

whereas a Title VII instrument in which 

the underlying reference of the 

instrument is a security index that is not 

a narrow-based security index (i.e., the 

index is broad-based), the instrument is 

considered a swap subject to regulation 

by the CFTC. In this section, the 

Commissions propose rules and 

guidance regarding several issues 

regarding the term ‘‘narrow-based 

security index’’ in the security-based 

swap definition, including: (i) The 

existing criteria for determining whether 

a security index is a narrow-based 

security index and the applicability of 

past guidance of the Commissions 

regarding those criteria to Title VII 

instruments; (ii) new criteria for 

determining whether a CDS where the 

underlying reference is a group or index 

of entities or obligations of entities 

(typically referred to as an ‘‘index CDS’’) 

is based on an index that is a narrowbased security index; (iii) the meaning 

of the term ‘‘index’’; (iv) a rule governing 

the tolerance period for Title VII 

instruments on security indexes traded 

on DCMs, SEFs, foreign boards of trade 

(‘‘FBOTs’’), security-based SEFs, or 

NSEs, where the security index 

temporarily moves from broad-based to 

narrow-based or from narrow-based to 

broad-based; and (v) a rule governing 

the grace period for Title VII 

instruments on security indexes traded 

on DCMs, SEFs, FBOTs, security-based 

SEFs, or NSEs, where the security index 

moves from broad-based to narrowbased or from narrow-based to broadbased and the move is not temporary. 

2. Applicability of the Statutory NarrowBased Security Index Definition and 

Past Guidance of the Commissions to 

Title VII Instruments 

As defined in the CEA and Exchange 

Act,193 an index is a ‘‘narrow-based 


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29846 Federal Register / Vol. 76, No. 99 / Monday, May 23, 2011 / Proposed Rules 

future delivery on a single security or narrow-based 

security index (including any interest therein or 

based on the value thereof). See section 3(a)(55) of 

the Exchange Act, 15 U.S.C. 78c(a)(55), and CEA 

section 1a(44), 7 U.S.C. 1a(44). 

194See section 3(a)(55)(B) of the Exchange Act, 15 

U.S.C. 78c(a)(55)(B). See also CEA sections 

1a(35)(A) and (B), 7 U.S.C. 1a(35)(A) and (B). 

195The narrow-based security index definition in 

the CEA and Exchange Act also excludes from its 

scope security indexes that satisfy certain specified 

criteria. See sections 3(a)(55)(C)(i)—(vi) of the 

Exchange Act, 15 U.S.C. 78c(a)(55)(C)(i)—(vi), and 

CEA sections 1a(35)(B)(i)—(vi), 7 U.S.C. 

1a(35)(B)(i)—(vi). 

196See Joint Order Excluding Indexes Comprised 

of Certain Index Options From the Definition of 

Narrow-Based Security Index, 69 FR 16900, Mar. 

31, 2004 (‘‘March 2004 Joint Order’’). 

197See CEA section 1a(35)(B)(vi), 7 U.S.C. 

1a(35)(B)(vi), and section 3(a)(55)(C)(vi) of the 

Exchange Act, 15 U.S.C. 78c(a)(55)(C)(vi). 198See March 2004 Joint Order, supra note 196. 199See Joint Final Rules: Application of the 

Definition of Narrow-Based Security Index to Debt 

Securities Indexes and Security Futures on Debt 

Securities, 71 FR 39434, July 13, 2006 (‘‘July 2006 

Rules’’). 

200 15 U.S.C. 78f(a). 

201See March 2004 Joint Order, supra note 196. 

In 2009, the Commissions issued a joint order that 

provided that, instead of the index options having 

to be listed on an NSE, the index options must be 

listed on an exchange and pricing information for 

the index options, and the underlying index, must 

be computed and disseminated in real time through 

major market data vendors. See Joint Order To 

Exclude Indexes Composed of Certain Index 

Options From the Definition of Narrow-Based 

Security Index, 74 FR 61116, Nov. 23, 2009 

(expanding the criteria necessary for exclusion 

under the March 2004 Joint Order to apply to 

volatility indexes for which pricing information for 

the underlying broad-based security index, and the 

options that compose such index, is current, 

accurate, and publicly available). 

202Under the rules, debt securities include notes, 

bonds, debentures or evidence of indebtedness. See 

CFTC rule 41.15(a)(1)(i), 17 CFR 41.15(a)(1)(i) and 

rule 3a55–4(a)(1)(i) under the Exchange Act, 17 CFR 

240.3a55–4(a)(1)(i). 

203 15 U.S.C. 78m or 78o(d). 

security index’’ if, among other things, it 

meets any one of the following four 

criteria: 

• It has nine or fewer component 

securities; 

• A component security comprises 

more than 30% of the index’s weighting; 

• The five highest weighted 

component securities in the aggregate 

comprise more than 60% of the index’s 

weighting; or 

• The lowest weighted component 

securities comprising, in aggregate, 25% 

of the index’s weighting have an 

aggregate dollar value of average daily 

trading volume of less than $50,000,000 

(or in the case of an index with more 

than 15 component securities, 

$30,000,000), except that if there are 

two or more securities with equal 

weighting that could be included in the 

calculation of the lowest weighted 

component securities comprising, in the 

aggregate, 25 percent of the index’s 

weighting, such securities shall be 

ranked from lowest to highest dollar 

value of average daily trading volume 

and shall be included in the calculation 

based on their ranking starting with the 

lowest ranked security.194

The first three criteria apply to the 

number and concentration of the 

‘‘component securities’’ in the index; the 

fourth criterion applies to the average 

daily trading volume of an index’s 

‘‘component securities.’’ 195

This statutory narrow-based security 

index definition focuses on indexes 

composed of equity securities and 

certain aspects of the definition, in 

particular the evaluation of average 

daily trading volume, are designed to 

take into account the trading patterns of 

individual stocks.196 However, the 

Commissions, pursuant to authority 

granted in the CEA and the Exchange 

Act, previously have extended the 

definition to other categories of indexes 

but modified the definition to take into 

account the characteristics of those 

other categories.197 Specifically, the 

Commissions have provided guidance 

regarding the application of the narrowbased security index definition to 

futures contracts on volatility 

indexes 198 and debt security indexes.199

Today, then, there exists additional 

guidance for determining what 

constitutes a narrow-based security 

index. 

Volatility indexes are indexes 

composed of index options. The 

Commissions issued a joint order in 

2004 to define when a volatility index 

is not a narrow-based security index. 

Under this joint order, a volatility index 

is not a narrow-based security index if 

the index meets all of the following 

criteria: 

• The index measures the magnitude 

of changes (as calculated in accordance 

with the order) in the level of an 

underlying index that is not a narrowbased security index pursuant to the 

statutory criteria for equity indexes 

discussed above; 

• The index has more than nine 

component securities, all of which are 

options on the underlying index; 

• No component security of the index 

comprises more than 30 percent of the 

index’s weighting; 

• The five highest weighted 

component securities of the index in the 

aggregate do not comprise more than 60 

percent of the index’s weighting; 

• The average daily trading volume of 

the lowest weighted component 

securities in the underlying index (those 

comprising, in the aggregate, 25 percent 

of the underlying index’s weighting) 

have a dollar value of more than 

$50,000,000 (or $30,000,000 in the case 

of an underlying index with 15 or more 

component securities), except if there 

are 2 or more securities with equal 

weighting that could be included in the 

calculation of the lowest weighted 

component securities comprising, in the 

aggregate, 25 percent of the underlying 

index’s weighting, such securities shall 

be ranked from lowest to highest dollar 

value of average daily trading volume 

and shall be included in the calculation 

based on their ranking starting with the 

lowest ranked security; 

• Options on the underlying index 

are listed and traded on an NSE 

registered under section 6(a) of the 

Exchange Act; 200 and 

• The aggregate average daily trading 

volume in options on the underlying 

index is at least 10,000 contracts 

calculated as of the preceding 6 full 

calendar months.201

With regard to debt security indexes, 

the Commissions issued joint rules in 

2006 (‘‘July 2006 Rules’’) to define when 

an index of debt securities 202 is not a 

narrow-based security index. The first 

three criteria of that definition were 

similar to the statutory definition for 

equities and the order regarding 

volatility indexes in that a debt security 

index would not be narrow based if: (i) 

It had more than 9 debt securities issued 

by more than 9 non-affiliated issuers; 

(ii) the securities of any issuer included 

in the index did not comprise more than 

30 percent of the index’s weighting; and 

(iii) the securities of any five nonaffiliated issuers in the index did not 

comprise more than 60 percent of the 

index’s weighting. 

In the July 2006 Rules, instead of the 

statutory average daily trading volume 

test, however, the Commissions adopted 

a public information availability 

requirement. Under this requirement, 

assuming the aforementioned number 

and concentration limits were satisfied, 

a debt security index would not be a 

narrow-based security index if the debt 

securities or the issuers of debt 

securities in the index met any one of 

the following criteria: 

• The issuer of the debt security is 

required to file reports pursuant to 

section 13 or section 15(d) of the 

Securities Exchange Act of 1934; 203

• The issuer of the debt security has 

a worldwide market value of its 

outstanding common equity held by 

non-affiliates of $700 million or more; 

• The issuer of the debt security has 

outstanding securities that are notes, 

bonds, debentures, or evidence of 

indebtedness having a total remaining 

principal amount of at least $1 billion; 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
Federal Register / Vol. 76, No. 99 / Monday, May 23, 2011 / Proposed Rules 29847 

204 15 U.S.C. 78c(a)(12). 

205The July 2006 Rules also provided that debt 

securities in the index must satisfy certain 

minimum outstanding principal balance criteria, 

established certain exceptions to these criteria and 

the public information availability requirement, and 

provided for the treatment of indexes that include 

exempted securities (other than municipal 

securities). 

206 7 U.S.C. 1a(35) and 15 U.S.C. 78c(a)(55). 

207See supra note 180 and accompanying text. 

208See, e.g., Markit, ‘‘Markit CDX’’ (describing the 

Markit CDX indexes and the number of ‘‘names’’ 

included in each index), available at http:// 

www.markit.com/en/products/data/indices/creditand-loan-indices/cdx/cdx.page?; Markit, ‘‘Markit 

iTraxx Indices,’’ (stating that the ‘‘Markit iTraxx 

indices are comprised of the most liquid names in 

the European and Asian markets’’) (emphasis 

added), available at http://www.markit.com/en/ 

products/data/indices/credit-and-loan-indices/ 

itraxx/itraxx.page?]. Examples of indexes based on 

securities include the Markit ABX.HE and CMBX 

indexes. See Markit, ‘‘Markit ABX.HE,’’ (describing 

the Markit ABX.HE index as ‘‘a synthetic tradeable 

index referencing a basket of 20 subprime mortgagebacked securities’’), available at http:// 

www.markit.com/en/products/data/indices/ 

structured-finance-indices/abx/abx.page; Markit, 

‘‘Markit CMBX,’’ (describing the Markit CMBX 

index as ‘‘a synthetic tradeable index referencing a 

basket of 25 commercial mortgage-backed 

securities’’), available at http://www.markit.com/en/ 

products/data/indices/structured-finance-indices/ 

cmbx/cmbx.page. 

209Two commenters made suggestions relating to 

the effect of the jurisdictional consequences of the 

definition of the term ‘‘narrow-based security 

index,’’ but neither commented on the meaning of 

the term itself. One of the two commenters, 

recognizing that a jurisdictional line would exist for 

CDS, stressed the need for ‘‘substantially identical’’ 

regulations applicable to CDS. See Deutsche Bank 

Letter. The other commenter also noted that a line 

for CDS would exist and urged the Commissions to 

adopt a regulation stating that a derivatives clearing 

organization (‘‘DCO’’) may be a clearing agency and 

a clearing agency may be a DCO, in order to 

facilitate portfolio margining and cross-margining. 

See White & Case Letter. The Commissions are 

sensitive to the requirement in section 712(a)(7) of 

the Dodd-Frank Act to treat functionally or 

economically similar products or entities in a 

similar manner. 

210Similarly, an option to enter into a singlename CDS or a CDS referencing a narrow-based 

security index as described above would be a 

security-based swap, while an option to enter into 

a CDS on a broad-based security index or the 

issuers of securities in a broad-based security index 

would be a swap. Index CDS where the underlying 

reference is a broad-based security index would be 

SBSAs. The SEC has enforcement authority with 

respect to swaps that are SBSAs, as discussed 

further in part V below. 

211Two commenters urged clarification of the 

definition of the term ‘‘narrow-based security index’’ 

Continued 

• The security is an exempted 

security as defined in section 3(a)(12) of 

the Securities Exchange Act of 1934 204

and the rules promulgated thereunder; 

or 

• The issuer of the security is a 

government of a foreign country or a 

political subdivision of a foreign 

country.205

The statutory definition of the term 

‘‘narrow-based security index’’ for 

equities, and the Commissions’ 

subsequent guidance as to what 

constitutes a narrow-based security 

index with respect to volatility and debt 

indexes, is applicable in the context of 

distinguishing between futures contracts 

and security futures products. In the 

Dodd-Frank Act, Congress included the 

term ‘‘narrow-based security index’’ in 

the security-based swap definition, and 

thus the statutory definition of the term 

‘‘narrow-based security index’’ also 

applies in distinguishing swaps (on 

security indexes that are not narrowbased, also known as ‘‘broad-based’’) and 

security-based swaps (on narrow-based 

security indexes). Further, the 

Commissions believe that their prior 

guidance with respect to what 

constitutes a narrow-based security 

index in the context of volatility and 

debt security indexes should apply in 

determining whether a Title VII 

instrument is a swap or a security-based 

swap. 

To clarify that the Commissions are 

applying the prior guidance and rules to 

Title VII instruments, the Commissions 

are proposing rules to further define the 

term ‘‘narrow-based security index’’ in 

the security-based swap definition. 

Under paragraph (1) of proposed rule 

1.3(yyy) under the CEA and paragraph 

(a) of proposed rule 3a68–3 under the 

Exchange Act, for purposes of the 

security-based swap definition, the term 

‘‘narrow-based security index’’ would 

have the same meaning as the statutory 

definition set forth in section 1a(35) of 

the CEA and section 3(a)(55) of the 

Exchange Act,206 and the rules, 

regulations, and orders issued by the 

Commissions relating to such definition. 

As a result, except as the new rules the 

Commissions are proposing provide for 

other treatment, market participants 

generally will be able to use the 

Commissions’ past guidance in 

determining whether certain Title VII 

instruments based on a security index 

are swaps or security-based swaps. 

However, the Commissions are 

proposing interpretive guidance and 

additional rules regarding Title VII 

instruments based on a security index. 

The additional rules and interpretive 

guidance set forth new narrow-based 

security index criteria with respect to 

indexes composed of securities, loans, 

or issuers of securities referenced by an 

index CDS. The proposed interpretive 

guidance and rules also address the 

definition of an ‘‘index’’ and the 

treatment of broad-based security 

indexes that become narrow-based and 

narrow-based indexes that become 

broad-based, including rule provisions 

regarding tolerance and grace periods 

for swaps on security indexes that are 

traded on CFTC-regulated trading 

platforms and security-based swaps on 

security indexes that are traded on SECregulated trading platforms. These rules 

and interpretive guidance are discussed 

in turn below. 

3. Narrow-Based Security Index Criteria 

for Index Credit Default Swaps 

(a) In General 

A CDS is a Title VII instrument in 

which the ‘‘protection buyer’’ makes a 

series of payments to the ‘‘protection 

seller’’ and, in return, the ‘‘protection 

seller’’ is obligated to make a payment 

to the ‘‘protection buyer’’ if an obligation 

or obligations (typically bonds, but in 

some cases loans) of an entity or entities 

referenced in the contract, or the entity 

or entities themselves, experience a 

‘‘credit event.’’ 207 While the 

Commissions understand that the 

underlying reference for most cleared 

CDS is a single entity or an index of 

entities rather than a single security or 

an index of securities, the underlying 

reference for CDS also could be a single 

security or an index of securities.208 A 

CDS where the underlying reference is 

a single entity (i.e., a single-name CDS), 

a single obligation of a single entity 

(e.g., a CDS on a specific bond, loan, or 

asset-backed security, or any tranche or 

series of any bond, loan, or asset-backed 

security), or an index CDS where the 

underlying reference is a narrow-based 

security index or the issuers of 

securities in a narrow-based security 

index would be a security-based 

swap.209 An index CDS where the 

underlying reference is not a narrowbased security index or the issuers of 

securities in a narrow-based security 

index (i.e., a broad-based index) would 

be a swap.210

The statutory definition of the term 

‘‘narrow-based security index,’’ as 

explained above, was designed with the 

U.S. equity markets in mind. Thus, the 

statutory definition is not appropriate 

for determining whether an index 

underlying an index CDS is broad or 

narrow-based. Nor is the further 

guidance that the Commissions have 

previously issued with respect to the 

narrow-based security index definition 

discussed above necessarily 

appropriate, because that guidance was 

designed to address and was uniquely 

tailored to the characteristics of 

volatility indexes and debt security 

indexes in the context of futures. 

Accordingly, the Commissions are 

proposing rules that would adopt 

criteria for determining whether an 

index is a narrow-based security index 

within the context of index CDS.211


srobinson on DSK4SPTVN1PROD with PROPOSALS2
29848 Federal Register / Vol. 76, No. 99 / Monday, May 23, 2011 / Proposed Rules 

in the context of CDS to ensure that it reflects ‘‘the 

letter and the spirit’’ of the existing definition. See 

Letter from Thomas W. Jasper, Chief Executive 

Officer, Primus Guaranty Ltd., and Gene Park, Chief 

Executive Officer, Quadrant Structured Investment 

Advisers, LLC, Sept. 20, 2010 (‘‘Primus and 

Quadrant Letter’’). 

212Section 3(a)(68)(A)(ii)(III) of the Exchange Act, 

15 U.S.C. 78c(a)(68)(A)(ii)(III). 

213Section 3(a)(68)(A)(ii)(I) of the Exchange Act, 

15 U.S.C. 78c(a)(68)(A)(ii)(I). 

214Because it applies only with respect to index 

CDS, the proposed definitions of ‘‘issuers of 

securities in a narrow-based security index’’ and 

‘‘narrow-based security index’’ would not apply 

with respect to other types of event contracts, 

whether analyzed under the first or third prong. 

215See discussion of July 2006 Rules, supra note 

199. 

216The Commissions note that the language of the 

proposed rules is intended, in general, to track the 

criteria developed for debt indexes discussed above. 

Certain changes from the criteria developed for debt 

indexes are necessary to address differences 

between futures on debt indexes and index CDS. 

Certain other changes are necessary because the 

rules for debt indexes define under what conditions 

an index is not a narrow-based security index, 

whereas the proposed rules define what is a narrowbased security index. For example, an index is not 

a narrow-based security index under the rule for 

debt indexes if it is not a narrow-based security 

index under either subparagraph (a)(1) or paragraph 

(a)(2) of the rule. Under the proposed rules for 

index CDS, however, an index is a narrow-based 

security index if it meets the requirements of both 

of the counterpart paragraphs in the proposed rules 

regarding index CDS (paragraphs (1)(i) and (1)(ii) of 

proposed rules 1.3(xxx) and 1.3(aaaa) under the 

CEA and paragraphs (a)(1) and paragraph (a)(2) of 

proposed rules 3a68–1a and 3a68–1b under the 

Exchange Act), even though the criteria in the debt 

index rules and the proposed rules for index CDS 

include generally the same criteria and structure. 

217 15 U.S.C. 78c(a)(68)(A)(ii)(III). 

218For purposes of proposed rules 1.3(zzz) and 

3a68–1a: (i) A reference entity would be affiliated 

with another entity if it controls, is controlled by, 

or is under common control with, that entity; (ii) 

control would mean ownership of 20 percent or 

more of an entity’s equity, or the ability to direct 

the voting of 20 percent or more of the entity’s 

voting equity; and (iii) the term ‘‘reference entity’’ 

would include an issuer of securities, an issuing 

entity of asset-backed securities, and a single 

reference entity or group of affiliated entities; 

provided that an issuing entity of an asset-backed 

security shall not be affiliated with any other 

issuing entity or issuer under this proposed 

definition. 

219These proposed rules refer to the ‘‘effective 

notional amount’’ allocated to reference entities or 

securities in order to address potential situations in 

which the means of calculating payout across the 

reference entities or securities is not uniform. Thus, 

if one or more payouts is leveraged or enhanced by 

the structure of the transaction (i.e., 2x recovery 

rate), that amount would be the ‘‘effective notional 

amount’’ for purposes of the 30% and 60% tests in 

The Commissions are further defining 

the term ‘‘security-based swap,’’ and the 

use of the term ‘‘narrow-based security 

index’’ within that definition to modify 

the criteria applied in the context of 

index CDS in assessing whether the 

index is a narrow-based security index. 

The third prong of the security-based 

swap definition includes a Title VII 

instrument based on the occurrence of 

an event relating to the ‘‘issuers of 

securities in a narrow-based security 

index,’’ provided that such event 

directly affects the ‘‘financial statements, 

financial condition, or financial 

obligations of the issuer.’’ 212 The first 

prong of the security-based swap 

definition includes a Title VII 

instrument that is based on a ‘‘narrowbased security-index.’’ 213 Because the 

third prong of the security-based swap 

definition relates to issuers of securities, 

while the first prong of such definition 

relates to securities, the Commissions 

are proposing to further define both the 

term ‘‘narrow-based security index’’ and 

the term ‘‘issuers of securities in a 

narrow-based security index’’ in the 

context of the definition of securitybased swap as applied to index CDS. 

The Commissions believe it is important 

to further define both terms in order to 

ensure consistent analysis of index 

CDS.214 While the wording of the two 

proposed definitions differs slightly, the 

Commissions expect that they would 

yield the same substantive results in 

distinguishing narrow-based and broadbased index CDS. 

(b) Proposed Rules Regarding the 

Definitions of ‘‘Issuers of Securities in a 

Narrow-Based Security Index’’ and 

‘‘Narrow-Based Security Index’’ for 

Index Credit Default Swaps 

The Commissions are considering 

how to further define the terms ‘‘issuers 

of securities in a narrow-based security 

index’’ and ‘‘narrow-based security 

index’’ in order to provide for 

appropriate criteria for determining 

whether an index composed of issuers 

of securities referenced by an index CDS 

and an index composed of securities 

referenced by an index CDS are narrowbased security indexes. In formulating 

these criteria, and consistent with the 

guidance and rules the Commissions 

have previously issued and adopted 

regarding narrow-based security indexes 

in the context of security futures, the 

Commissions believe that there should 

be public information available about a 

predominant percentage of the reference 

entities underlying the index, or, in the 

case of an index CDS, on an index of 

securities, about the issuers of the 

securities or the securities underlying 

the index, in order to reduce the 

likelihood that non-narrow-based 

indexes referenced in index CDS or the 

component securities or issuers of 

securities in that index would be readily 

susceptible to manipulation, as well as 

to help prevent the misuse of material 

non-public information through the use 

of CDS based on such indexes. 

To satisfy these objectives, the 

Commissions intend to use the criteria 

developed for debt indexes discussed 

above 215 but tailor the criteria 

specifically to address index CDS.216

These criteria would be used solely for 

the purpose of defining the terms 

‘‘narrow-based security index’’ and 

‘‘issuers of securities in a narrow-based 

security index’’ in the first and third 

prongs of the security-based swap 

definition with respect to index CDS 

and would not be interpreted to affect 

any other interpretation or use of the 

term ‘‘narrow-based security index’’ or 

any other provision of the Dodd-Frank 

Act, CEA, or Exchange Act. 

(i) Number and Concentration 

Percentages of Reference Entities or 

Securities 

The Commissions believe that the first 

three criteria of the debt security index 

test discussed above (i.e., the number 

and concentration weighting 

requirements) are appropriate to apply 

to index CDS, whether CDS on indexes 

of securities or indexes of issuers of 

securities. 

Accordingly, proposed rules 1.3(zzz) 

under the CEA and proposed rule 3a68– 

1a under the Exchange Act would 

provide that, for purposes of 

determining whether an index CDS is a 

security-based swap under section 

3(a)(68)(A)(ii)(III) of the Exchange 

Act,217 the term ‘‘issuers of securities in 

a narrow-based security index’’ would 

include issuers of securities identified 

in an index in which: 

• Number: There are 9 or fewer nonaffiliated issuers of securities that are 

reference entities 218 in the index, 

provided that an issuer of securities 

shall not be deemed a reference entity 

in the index unless (i) a credit event 

with respect to such reference entity 

would result in a payment by the credit 

protection seller to the credit protection 

buyer under the CDS based on the 

related notional amount allocated to 

such reference entity, or (ii) the fact of 

such credit event or the calculation in 

accordance with clause (i) above of the 

amount owed with respect to such 

credit event is taken into account in 

determining whether to make any future 

payments under the CDS with respect to 

any future credit events; 

• Single Component Concentration: 

The effective notional amount allocated 

to any reference entity included in the 

index comprises more than 30 percent 

of the index’s weighting; or 

• Largest Five Component 

Concentration: The effective notional 

amount allocated to any 5 non-affiliated 

reference entities included in the index 

comprises more than 60 percent of the 

index’s weighting.219


srobinson on DSK4SPTVN1PROD with PROPOSALS2
Federal Register / Vol. 76, No. 99 / Monday, May 23, 2011 / Proposed Rules 29849 

paragraphs (1)(i)(B) and (1)(i)(C) of proposed rules 

1.3(zzz) and 1.3(aaaa) and paragraphs (a)(1)(ii) and 

(a)(1)(iii) of proposed rules 3a68–1a and 3a68–1b. 

Similarly, if the aggregate notional amount under a 

CDS is not uniformly allocated to each reference 

entity or security, then the portion of the notional 

amount allocated to each reference entity or 

security (which may be by reference to the product 

of the aggregate notional amount and an applicable 

percentage) would be the ‘‘effective notional 

amount.’’ 

220 15 U.S.C. 78c(a)(68)(A)(ii)(I). 

221This language is intended to be consistent 

with the language in the rule for debt indexes but 

the specific language is different to deal with the 

differences in structure between the rule for debt 

indexes and proposed rules 1.3(aaaa) and 3a68–1b. 

See discussion supra note 216. 

For purposes of proposed rules 1.3(aaaa) and 

3a68–1b: (i) An issuer would be affiliated with 

another issuer if it controls, is controlled by, or is 

under common control with, that issuer; (ii) control 

would mean ownership of 20 percent or more of an 

issuer’s equity, or the ability to direct the voting of 

20 percent or more of the issuer’s voting equity; and 

(iii) the term ‘‘issuer’’ would include an issuer of 

securities, an issuing entity of asset-backed 

securities, and a single issuer or group of affiliated 

issuers; provided that an issuing entity of an assetbacked security shall not be deemed affiliated with 

any other issuing entity or issuer under this 

proposed definition. 

222This requirement is generally consistent with 

the definition of ‘‘narrow-based security index’’ in 

CEA section 1a(35)(A), 7 U.S.C. 1a(35)(A), and 

section 3(a)(55)(B) of the Exchange Act, 15 U.S.C. 

78c(a)(55)(B), and the July 2006 Rules, supra note 

199. 

223See proposed rule 1.3(zzz)(4) under the CEA 

and proposed rule 3a68–1a(d) under the Exchange 

Act. 

224The affiliate issue under the Federal securities 

laws is generally a facts and circumstances 

determination based on the definition of the term 

‘‘affiliate’’ contained in such laws. See, e.g., rule 405 

under the Securities Act, 17 CFR 230.405; rule 12b– 

2 under the Exchange Act, 17 CFR 240.12b–2. 

Similarly, proposed rules 1.3(aaaa) 

under the CEA and proposed rule 3a68– 

1b under the Exchange Act would 

provide that, for purposes of 

determining whether an index CDS is a 

security-based swap under section 

3(a)(68)(A)(ii)(I) of the Exchange Act,220

the term ‘‘narrow-based security index’’ 

would include an index in which 

essentially the same criteria apply, 

substituting securities for issuers. Under 

these proposed criteria, the term 

‘‘narrow-based security index’’ would 

mean an index in which: 

• Number: There are 9 or fewer 

securities, or securities that are issued 

by 9 or fewer non-affiliated issuers,221

in the index, provided that a security 

shall not be deemed a component of the 

index unless (i) a credit event with 

respect to the issuer of such security or 

a credit event with respect to such 

security would result in a payment by 

the credit protection seller to the credit 

protection buyer under the CDS based 

on the related notional amount allocated 

to such security, or (ii) the fact of such 

credit event or the calculation in 

accordance with clause (i) above of the 

amount owed with respect to such 

credit event is taken into account in 

determining whether to make any future 

payments under the CDS with respect to 

any future credit events; 

• Single Component Concentration: 

The effective notional amount allocated 

to the securities of any issuer included 

in the index comprises more than 30 

percent of the index’s weighting; or 

• Largest Five Component 

Concentration: The effective notional 

amount allocated to the securities of any 

5 non-affiliated issuers included in the 

index comprises more than 60 percent 

of the index’s weighting. 

Thus, the applicability of the 

proposed rules would depend on 

conditions relating to the number of 

non-affiliated reference entities, issuers 

of securities, or securities, as applicable, 

included in an index and the weighting 

of notional amounts allocated to the 

reference entities or securities in the 

index, as applicable. These first three 

criteria of the proposed rules would 

evaluate the number and concentration 

of the issuers or securities in the index, 

as applicable, and ensure that an index 

with a small number of issuers or 

securities or concentrated in only a few 

issuers or securities would be narrowbased, and thus where such index is the 

underlying reference of an index CDS, 

the index CDS would be a securitybased swap. 

Specifically, the proposed rules 

would provide that an index meeting 

any one of certain identified conditions 

would be a narrow-based security index. 

The first condition in paragraph (1)(i)(A) 

of proposed rule 1.3(zzz) under the CEA 

and paragraph (a)(1)(i) of proposed rule 

3a68–1a under the Exchange Act is that 

there are 9 or fewer non-affiliated 

issuers of securities that are reference 

entities in the index. An issuer of 

securities would count toward this total 

only if a credit event with respect to 

such entity would result in a payment 

by the credit protection seller to the 

credit protection buyer under the CDS 

based on the notional amount allocated 

to such entity, or if the fact of such a 

credit event or the calculation of the 

payment with respect to such credit 

event is taken into account when 

determining whether to make any future 

payments under the CDS with respect to 

any future credit events. 

Similarly, the first condition in 

paragraph (1)(i)(A) of proposed rules 

1.3(aaaa) under the CEA and paragraph 

(a)(1)(i) of proposed rule 3a68–1b under 

the Exchange Act would provide that a 

security would count toward the total 

number of securities in the index only 

if a credit event with respect to such 

security, or the issuer of such security, 

would result in a payment by the credit 

protection seller to the credit protection 

buyer under the CDS based on the 

notional amount allocated to such 

security, or if the fact of such a credit 

event or the calculation of the payment 

with respect to such credit event is 

taken into account when determining 

whether to make any future payments 

under the CDS with respect to any 

future credit events. These provisions 

are intended to ensure that an index 

concentrated in a few reference entities 

or securities, or a few reference entities 

that are affiliated or a few securities 

issued by a few issuers that are 

affiliated, are within the ‘‘narrow-based’’ 

definition and that an entity is not 

counted as a reference entity in the 

index, and a security is not counted as 

a security in the index, unless a credit 

event with respect to the entity, issuer, 

or security affects payout under a CDS 

on the index.222

In addition, the proposed rules would 

provide that a reference entity or issuer 

of a security in an index and any of that 

reference entity’s or issuer’s affiliated 

entities are deemed to be a single 

reference entity or issuer in the 

index.223 For purposes of the narrowbased security index definition for 

index CDS under the third prong and 

first prong, a reference entity or issuer 

would be affiliated with another entity 

if it controls, is controlled by, or is 

under common control with, that other 

entity or issuer. The proposed rules 

would define control, solely for 

purposes of this provision, to mean 

ownership of 20% or more of an entity’s 

or issuer’s equity or the ability to direct 

the voting of 20% or more of an entity’s 

or issuer’s voting equity.224 This 

definition of control is designed to 

provide a clear standard for determining 

affiliation for purposes of the narrowbased security index criteria with 

respect to index CDS. Determining 

whether a reference entity or issuer is 

affiliated with another entity or issuer is 

important in assessing whether an index 

meets the criteria in the proposed rules 

because the notional amounts allocated 

to all affiliated reference entities, or all 

securities issued by affiliated issuers, 

included in an index must be aggregated 

in order to prevent a concentration of 

the index in reference entities or 

securities issued by issuers that are 

affiliated and because a reference 

entity’s and issuer’s affiliates must be 

considered when determining whether 

the reference entity or security meets 

the public information availability test 

discussed below. In addition, in order to 

ensure application of the criteria 

regarding index CDS to indexes of 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
29850 Federal Register / Vol. 76, No. 99 / Monday, May 23, 2011 / Proposed Rules 

225 15 U.S.C. 78c(a)(77). The Commissions note 

that section 941 of the Dodd-Frank Act added the 

definition of the term ‘‘asset-backed security’’ as 

section 3(a)(77) of the Exchange Act, 15 U.S.C. 

78c(a)(77). However, section 761(a)(6) of the DoddFrank Act also added the definition of the term 

‘‘security-based swap execution facility’’ as section 

3(a)(77) of the Exchange Act, 15 U.S.C. 78c(a)(77). 

References to the definition of the term ‘‘assetbacked security’’ in this release are to the definition 

added by section 941 of the Dodd-Frank Act. 

226 17 CFR 240.12g3–2(b). 

227See July 2006 Rules, supra note 199, at 39537 

(noting that issuers having worldwide equity 

market capitalization of $700 million are likely to 

have public information available about them). 

228 15 U.S.C. 78c(a)(77). 

229 15 U.S.C. 78c(a)12. 

230 15 U.S.C. 78c(a)(77). 

231See discussion supra part III.G.3(b). Most of 

the thresholds in the public information availability 

test are similar to those the Commissions adopted 

in their joint rules regarding the application of the 

definition of the term ‘‘narrow-based security index’’ 

to debt security indexes and security futures on 

debt securities. See July 2006 Rules, supra note 199. 

The July 2006 Rules also included an additional 

requirement regarding the minimum principal 

amount outstanding for each security in the index. 

The Commissions have not included this 

requirement in proposed rule 1.3(zzz) under the 

CEA and proposed rule 3a68–1a under the 

Exchange Act. The numerical thresholds also are 

similar to those the SEC adopted in its securities 

offering reform rules, which were based on data 

analysis conducted by the SEC’s Office of Economic 

Analysis. See Securities Offering Reform, 70 FR 

44722, Aug. 3, 2005. 

232 17 CFR 240.12g3–2(b). 

reference entities that have issued assetbacked securities as defined in section 

3(a)(77) of the Exchange Act,225 as well 

as indexes of such asset-backed 

securities, the term reference entity and 

the term issuer under the proposed rules 

includes issuing entities of asset-backed 

securities. The proposed rules also 

would provide that each issuing entity 

of an asset-backed security is considered 

a separate reference entity or issuer, as 

applicable. 

The second condition, in paragraphs 

(1)(i)(B) of proposed rules 1.3(zzz) and 

1.3(aaaa) under the CEA and paragraphs 

(a)(1)(ii) of proposed rules 3a68–1a and 

3a68–1b under the Exchange Act, is that 

the effective notional amount allocated 

to any reference entity or security 

included in the index comprises more 

than 30 percent of the index’s 

weighting. 

The third condition, in paragraphs 

(1)(i)(C) of proposed rules 1.3(zzz) and 

1.3(aaaa) under the CEA and paragraphs 

(a)(1)(iii) of proposed rules 3a68–1a and 

3a68–1b under the Exchange Act, is that 

the effective notional amount allocated 

to any 5 non-affiliated reference entities, 

or to the securities of any 5 nonaffiliated issuers, included in the index 

that are the underlying reference entities 

or securities, respectively, comprises 

more than 60 percent of the index’s 

weighting. 

Given that Congress determined that 

these concentration percentages are 

appropriate to characterize an index as 

a narrow-based security index, and the 

Commissions have determined they are 

appropriate for debt security indexes in 

the security futures context, the 

Commissions believe that these 

concentration percentages are 

appropriate to apply to the notional 

amount allocated to reference entities 

and securities in order to apply similar 

standards to indexes that are the 

underlying references of index CDS. 

Moreover, with respect to both the 

numerical and concentration percentage 

criteria, the markets have had 

experience with these criteria with 

respect to futures on equity indexes, 

volatility indexes, and debt security 

indexes. 

(ii) Public Information Availability 

Regarding Reference Entities and 

Securities 

In addition to the numerical and 

concentration percentage criteria, the 

debt security index test also included, 

as discussed above, a public information 

availability test. This test was designed 

to reduce the likelihood that broadbased debt security indexes or the 

component securities or issuers of 

securities in that index would be readily 

susceptible to manipulation. The fourth 

condition in the proposed rules 

includes a similar public information 

availability test that is intended solely 

for purposes of determining whether an 

index underlying a CDS is narrowbased. Except as discussed below, under 

the proposed rules, an index CDS would 

be considered narrow-based if a 

reference entity or security included in 

the index does not meet any one of the 

following criteria: 

• The reference entity or the issuer of 

the security is required to file reports 

pursuant to the Exchange Act or the 

regulations thereunder; 

• The reference entity or the issuer of 

the security is eligible to rely on the 

exemption provided in rule 12g3–2(b) 

under the Exchange Act; 226

• The reference entity or the issuer of 

the security has a worldwide market 

value of its outstanding common equity 

held by non-affiliates of $700 million or 

more; 227

• The reference entity or the issuer of 

the security (other than an issuing entity 

of an asset-backed security as defined in 

section 3(a)(77) of the Exchange Act 228) 

has outstanding securities that are notes, 

bonds, debentures, or evidences of 

indebtedness having a total remaining 

principal amount of at least $1 billion; 

• The reference entity is an issuer of 

an exempted security, or the security is 

an exempted security, each as defined 

in section 3(a)(12) of the Exchange 

Act 229 and the rules promulgated 

thereunder (except a municipal 

security); 

• The reference entity or the issuer of 

the security is a government of a foreign 

country or a political subdivision of a 

foreign country; or 

• If the reference entity or the issuer 

of the security is an issuing entity of 

asset-backed securities as defined in 

section 3(a)(77) of the Exchange Act,230

such asset-backed securities were issued 

in a transaction registered under the 

Securities Act and have publicly 

available distribution reports. 

However, so long as the effective 

notional amounts allocated to reference 

entities or securities that satisfy the 

public information availability test 

comprise at least 80 percent of the 

index’s weighting, failure by a reference 

entity or security included in the index 

to satisfy the public information 

availability test would be disregarded if 

the effective notional amounts allocated 

to that reference entity or security 

comprise less than 5 percent of the 

index’s weighting. 

These issuer eligibility criteria are 

intended to condition the 

characterization of an index as ‘‘narrowbased’’ on the likelihood that 

information about a predominant 

percentage of the reference entities or 

securities included in the index is 

publicly available.231 For example, a 

reference entity or issuer of securities 

that is required to file reports pursuant 

to the Exchange Act or the regulations 

thereunder makes regular and public 

disclosure through those filings. 

Moreover, reference entities and issuers 

of securities that do not file reports with 

the SEC but that are eligible to rely on 

the exemption in rule 12g3–2(b) under 

the Exchange Act (i.e., foreign private 

issuers) are required to make certain 

types of financial information publicly 

available in English on their Web sites 

or through an electronic information 

delivery system generally available to 

the public in their primary trading 

markets.232 The Commissions believe 

that other reference entities or issuers of 

securities that do not file reports with 

the SEC, but that have worldwide equity 

market capitalization of $700 million, 

have $1 billion in outstanding debt 

(other than in the case of issuing entities 

of asset-backed securities), issue 

exempted securities (other than 

municipal securities), or are foreign 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
Federal Register / Vol. 76, No. 99 / Monday, May 23, 2011 / Proposed Rules 29851 

233 It is important to note that the public 

information availability test is designed solely for 

purposes of distinguishing between index CDS that 

are swaps and index CDS that are security-based 

swaps. The proposed criteria are not intended to 

provide any assurance that there is any particular 

level of information actually available regarding a 

particular reference entity or issuer of securities. 

Meeting one or more of the proposed criteria for the 

limited purpose here—defining the terms ‘‘narrowbased security index’’ and ‘‘issuers of securities in 

a narrow-based security index’’ in the first and third 

prongs of the security-based swap definition with 

respect to index CDS—would not substitute for or 

satisfy any other requirement for public disclosure 

of information or public availability of information 

for purposes of the Federal securities laws. 

234See generally Asset-Backed Securities, 75 FR 

23328, May 3, 2010. 

235 17 CFR 230.144A(d)(4). 

236See, e.g., Order Granting Temporary 

Exemptions Under the Securities Exchange Act of 

1934 in Connection With Request of Chicago 

Mercantile Exchange Inc. and Citadel Investment 

Group, L.L.C. Related to Central Clearing of Credit 

Default Swaps, and Request for Comments, 

Exchange Act Release No. 34–59578 (Mar. 13, 

2009). This order has been extended a number of 

times, most recently on November 29, 2010. See 

Order Extending Temporary Conditional 

Exemptions Under the Securities Exchange Act of 

1934 in Connection With Request of Chicago 

Mercantile Exchange Inc. Related to Central 

Clearing of Credit Default Swaps and Request for 

Comment, Exchange Act Release No. 34–63388 

(Nov. 29, 2010). 

sovereign entities either are required to 

or are otherwise sufficiently likely, 

solely for purposes of the proposed 

‘‘narrow-based security-index’’ and 

‘‘issuers of securities in a narrow-based 

security index’’ definitions, to have 

public information available about 

them.233

In the case of indexes including assetbacked securities, or reference entities 

that are issuing entities of asset-backed 

securities, information about the 

reference entity or issuing entity of the 

asset-backed security would not alone 

be sufficient and, consequently, the 

proposed rules provide that the public 

information availability test would be 

satisfied only if certain information also 

is available about the asset-backed 

securities. An issuing entity (whether or 

not a reference entity) of asset-backed 

securities may meet the public 

information availability test if such 

asset-backed securities were issued in a 

transaction registered under the 

Securities Act and distribution reports 

about such asset-backed securities are 

publicly available. In addition, because 

of the lack of public information 

regarding many asset-backed securities, 

despite the size of the outstanding 

amount of securities,234 the proposed 

rules would not permit such reference 

entities and issuers to satisfy the public 

information availability test by having 

$1 billion in outstanding debt. 

Characterizing an index with reference 

entities or securities for which public 

information is not likely to be available 

as ‘‘narrow-based,’’ and thus index CDS 

where the underlying references or 

securities are such indexes as securitybased swaps, should help to ensure the 

transparency of the index components. 

In sum, an index that is not narrowbased under the number and weighting 

requirements would be characterized as 

broad-based (and thus an index CDS, 

where the underlying reference is that 

index, would be characterized as a swap 

and not a security-based swap) unless 

one of the reference entities or securities 

in the index fails to meet one of the 

criteria in the public information 

availability test set forth in the proposed 

rules. Yet, even if one or more of the 

reference entities or securities included 

in the index fail the public information 

availability test, the proposed rules 

would provide that the terms ‘‘issuers of 

securities in a narrow-based security 

index’’ and ‘‘narrow-based security 

index’’ would not include such an 

index, so long as the applicable 

reference entity or security that failed 

the test represents less than 5 percent of 

the index’s weighting, and so long as 

reference entities or securities 

comprising at least 80 percent of the 

index’s weighting do satisfy the public 

information availability test. 

An index that includes a very small 

proportion of reference entities or 

securities that do not satisfy this public 

information availability test should 

nevertheless be treated as a broad-based 

security index. This would be achieved 

where the index satisfies both of the 

requirements at the time the parties 

enter into the index CDS. The 5-percent 

weighting threshold is designed to 

provide that reference entities or 

securities not satisfying the public 

information availability test comprise 

only a very small portion of the index, 

and the 80-percent weighting threshold 

is designed to provide that a 

predominant percentage of the reference 

entities or securities in the index satisfy 

the public information availability test. 

As a result, these thresholds would 

provide market participants with 

flexibility in constructing an index. The 

Commissions believe that this provision 

is appropriate and that providing such 

flexibility is not likely to increase the 

likelihood that an index that satisfies 

these provisions would be readily 

susceptible to manipulation or the 

likelihood that the component securities 

or issuers of securities in that index also 

would be subject to manipulation or 

that there would be misuse of material 

non-public information about them 

through the use of CDS based on such 

indexes. 

The Commissions also are proposing 

that, for index CDS entered into solely 

between ECPs, the public information 

availability test may instead be satisfied 

other than in the manner discussed 

above. Accordingly, solely for index 

CDS entered into between ECPs, an 

index would be considered narrowbased if a reference entity or security 

included in the index does not meet any 

one of the criteria enumerated above or 

any one of the following criteria: 

• The reference entity or the issuer of 

the security (other than issuing entities 

of asset-backed securities) provides to 

the public or to such eligible contract 

participant information about such 

reference entity or issuer pursuant to 

rule 144A(d)(4) under the Securities 

Act; 235

• Financial information about the 

reference entity (other than an issuing 

entity of asset-backed securities) is 

otherwise publicly available; or 

• In the case of an asset-backed 

security, or a reference entity that is an 

issuing entity of asset-backed securities, 

information of the type and level 

included in public distribution reports 

for similar asset-backed securities is 

publicly available about both the 

reference entity or issuing entity as well 

as such asset-backed securities. 

Reference entities or reference 

securities that meet alternative public 

information criteria currently may 

underlie CDS that are entered into by 

ECPs and that are cleared by central 

counterparties operating pursuant to 

exemptive orders granted by the SEC.236

In addition, solely with respect to index 

CDS entered into by ECPs, so long as the 

effective notional amounts allocated to 

reference entities or securities that 

satisfy this expanded public information 

availability test comprise at least 80 

percent of the index’s weighting, a 

reference entity or security included in 

the index that fails to satisfy this 

expanded public information 

availability test would be disregarded if 

the effective notional amounts allocated 

to that reference entity or security 

comprise less than 5 percent of the 

index’s weighting. 

The Commissions are also seeking 

comment as to whether the public 

information availability test should 

apply to the extent that an index is 

compiled by an index provider that is 

not a party to an index CDS (‘‘third-party 

index provider’’) and makes publicly 

available general information about the 

construction of the index, index rules, 

identity of components, and 

predetermined adjustments, and which 

index is referenced by an index CDS 

that is offered on or subject to the rules 

of a DCM or SEF, or by direct access in 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
29852 Federal Register / Vol. 76, No. 99 / Monday, May 23, 2011 / Proposed Rules 

237See CEA sections 5(d)(3), 7 U.S.C. 7(d)(3) (a 

DCM ‘‘shall list on the contract market only 

contracts that are not readily susceptible to 

manipulation.’’); 5h(f)(3), 7 U.S.C. 7b–3(f)(3) (same 

requirement for SEFs). 

238See Registration of Foreign Boards of Trade, 75 

FR 70973, Nov. 19, 2010. 

239CFTC oversight in evaluating compliance with 

the requirement that a swap not be readily 

susceptible to manipulation for cash settled 

contracts includes consideration of whether cash 

settlement is at a price reflecting the underlying 

cash market, will not be subject to manipulation or 

distortion, and is based on a cash price series that 

is reliable, acceptable, publicly available, and 

timely. See 17 CFR Part 40, Appendix A—Guideline 

No. 1. 

240Such indexes also would be SBSAs, providing 

the SEC with antifraud and anti-manipulation 

authority. 

241See proposed rules 1.3(zzz)(1)(i) and 

1.3(aaaa)(1)(i) under the CEA and proposed rules 

3a68–1a(a)(2) and 3a68–1b(a)(2) under the 

Exchange Act; July 2006 Rules, supra note 199. 242See section 3(a)(68)(C) of the Exchange Act, 15 

U.S.C. 78c(a)(68)(C) (providing that ‘‘[t]he term 

‘security-based swap’ does not include any 

agreement, contract, or transaction that meets the 

definition of a security-based swap only because 

such agreement, contract, or transaction references, 

is based upon, or settles through the transfer, 

delivery, or receipt of an exempted security under 

paragraph (12) [of the Exchange Act], as in effect on 

the date of enactment of the Futures Trading Act 

of 1982 (other than any municipal security as 

defined in paragraph (29) [of the Exchange Act] as 

in effect on the date of enactment of the Futures 

Trading Act of 1982), unless such agreement, 

contract, or transaction is of the character of, or is 

commonly known in the trade as, a put, call, or 

other option’’). 

the U.S. from an FBOT that is registered 

with the CFTC. 

The CFTC believes that the 

requirement that the index be compiled 

by a third-party index provider may 

help to ensure that information is 

publicly available because such index 

providers generally employ a variety of 

selection criteria for inclusion of 

reference entities or securities in the 

indexes for index CDS, including 

liquidity thresholds. The CFTC believes 

that requiring that such index providers 

make publicly available general 

information about the construction of 

the index, index rules, components, and 

predetermined adjustments may help 

ensure transparency regarding the index 

and its components. In addition, the 

CFTC believes that the requirement that 

the index be the underlying reference of 

an index CDS that is offered for trading 

on or subject to the rules of a DCM or 

SEF, or by direct access in the U.S. from 

a registered FBOT, helps to ensure that 

information about the index is publicly 

available and that the index is not 

readily susceptible to manipulation. The 

CEA prohibits DCMs and SEFs from 

offering for trading contracts that are 

readily susceptible to manipulation.237

Similarly, under rules recently proposed 

by the CFTC, FBOTs only may offer 

contracts by direct access from the U.S. 

that are not readily susceptible to 

manipulation.238 The CFTC believes 

that CFTC oversight of DCMs, SEFs and 

registered FBOTs for compliance with 

these requirements 239 will help ensure 

that information about an index that is 

the underlying reference of an index 

CDS traded on these platforms is 

publicly available and is not readily 

susceptible to manipulation.240

The SEC believes that a third-party 

index provider that simply provides 

general information about the 

construction of an index, index rules, 

components, and predetermined 

adjustments is not a substitute for the 

public availability of information about 

the issuers of the securities or the 

securities in the index; nor does such a 

third-party index provider indicate a 

likelihood that such public information 

is available, which the SEC believes, for 

purposes of index CDS, is important to 

market integrity and to investors in 

engaging in transactions based on such 

indexes. If a third-party index provider 

does not require, as a condition of 

inclusion in an index it compiles, that 

information likely is publicly available 

regarding the component issuers or 

securities in the index, the SEC does not 

believe investors will have adequate 

information regarding such component 

issuers or securities. In addition, the 

SEC notes that, absent specified 

standards regarding what persons 

constitute a third-party index provider 

for purposes of the proposed rules, any 

person that compiles an index at the 

behest of another person could 

constitute a ‘‘third-party index 

provider.’’ Moreover, the SEC does not 

believe that requiring an index CDS to 

be offered on or subject to the rules of 

a DCM or SEF, or by an FBOT, 

addresses whether public information 

likely is available about the issuers of 

securities or securities in an index 

compiled by a third-party index 

provider. As a result, the SEC does not 

believe that an index compiled by a 

third-party index provider that makes 

publicly available general information 

about the construction of the index, 

index rules, components, and index 

adjustments, and that is referenced by 

an index CDS that is offered for trading 

on or subject to the rules of a DCM or 

SEF, or by direct access in the U.S. from 

a registered FBOT, should substitute for 

the public information availability test 

under the proposed rules for index CDS. 

Accordingly, the Commissions seek 

comment as to whether the public 

information availability test should 

apply to indexes compiled by a thirdparty index provider that makes 

publicly available general information 

about the construction of the index, 

index rules, identity of components, and 

predetermined adjustments, and which 

index is referenced by an index CDS 

that is offered on or subject to the rules 

of a DCM or SEF, or by direct access in 

the U.S. from an FBOT that is registered 

with the CFTC. 

(iii) Treatment of Indexes Including 

Reference Entities That Are Issuers of 

Exempted Securities or Including 

Exempted Securities 

In addition, the proposed rules 

provide for alternative treatment of 

indexes that include exempted 

securities or reference entities that are 

issuers of exempted securities.241 The 

Commissions believe such treatment is 

consistent with the objective and intent 

of the definition of the term ‘‘securitybased swap,’’ as well as the approach 

taken in the context of security 

futures.242 Accordingly, paragraph 

(1)(ii) of proposed rules 1.3(zzz) and 

1.3(aaaa) under the CEA and paragraph 

(a)(2) of proposed rules 3a68–1a and 

3a68–1b under the Exchange Act would 

provide that, in the case of an index that 

includes exempted securities, or 

reference entities that are issuers of 

exempted securities, in each case as 

defined as of the date of enactment of 

the Futures Trading Act of 1982 (other 

than municipal securities), such 

securities or reference entities are 

excluded from the index when 

determining whether the securities or 

reference entities in the index constitute 

a ‘‘narrow-based security index’’ or 

‘‘issuers of securities in a narrow-based 

security index’’ under the proposed 

rules. 

Under paragraph (1)(ii) of proposed 

rules 1.3(zzz) and 1.3(aaaa) under the 

CEA and paragraph (a)(2) of proposed 

rules 3a68–1a and 3a68–1b under the 

Exchange Act, an index composed 

solely of securities that are, or reference 

entities that are issuers of, exempted 

securities (other than municipal 

securities) would not be a ‘‘narrowbased security index’’ or an index 

composed of ‘‘issuers of securities in a 

narrow-based security index.’’ In the 

case of an index where some, but not 

all, of the securities or reference entities 

are exempted securities (other than 

municipal securities) or issuers of 

exempted securities (other than 

municipal securities), the index would 

be a ‘‘narrow-based security index’’ or an 

index composed of ‘‘issuers of securities 

in a narrow-based security index’’ only 

if the index is narrow-based when the 

securities that are, or reference entities 

that are issuers of, exempted securities 

(other than municipal securities) are 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
Federal Register / Vol. 76, No. 99 / Monday, May 23, 2011 / Proposed Rules 29853 

243See supra note 231. 

disregarded. The Commissions believe 

this approach would result in consistent 

treatment for indexes regardless of 

whether they include securities that are, 

or issuers of securities that are, 

exempted securities (other than 

municipal securities) while ensuring 

that exempted securities (other than 

municipal securities) and issuers of 

exempted securities (other than 

municipal securities) are not included 

in an index merely to make the index 

either broad-based or narrow-based 

under the proposed rules. 

Request for Comment 

The Commissions request comment 

on all aspects of proposed rules 1.3(zzz) 

and 1.3(aaaa) under the CEA and 

proposed rules 3a68–1a and 3a68–1b 

under the Exchange Act, as applied to 

CDS, including the following: 

85. Do the proposed criteria for 

identifying when an index of reference 

entities constitutes ‘‘issuers of securities 

in a narrow-based security index’’ and 

when an index of securities constitutes 

a ‘‘narrow-based security index’’ 

effectively encompass the key elements 

of a narrow-based security index as it 

pertains to paragraph (A)(ii)(III) (i.e., the 

third prong) and paragraph (A)(ii)(I) 

(i.e., the first prong) of the securitybased swap definition? Why or why 

not? 

86. Should an index with 9 or fewer 

non-affiliated issuers of securities or 9 

or fewer securities be ‘‘narrow-based?’’ 

Why or why not? 

87. Should an index in which the 

effective notional amounts allocated to 

any reference entity or security included 

in the index comprise more than 30 

percent of the index’s weighting be 

‘‘narrow-based’’? Why or why not? 

88. Should an index in which the 

effective notional amounts allocated to 

any 5 non-affiliated reference entities or 

securities included in the index 

comprise more than 60 percent of the 

index’s weighting be ‘‘narrow-based’’? 

Why or why not? 

89. Should an index in which 

publicly available information is not 

available for a predominant percentage 

of reference entities or securities 

included in the index be ‘‘narrow-based’’ 

for purposes of index CDS? Why or why 

not? The Commissions note that the 

criteria for the public information 

availability test do not necessarily 

ensure that there is in fact public 

information available regarding the 

relevant entities or securities, or that the 

criteria act in any way as a substitute for 

the actual availability of public 

information; instead, the criteria, taken 

as a whole, are intended to capture, for 

purposes of the definition of the term 

‘‘narrow-based security index’’ for index 

CDS, those entities or securities, that on 

average, are likely to have public 

information available, and that the 

relevant index would therefore not be 

treated as ‘‘narrow-based.’’ Do the 

proposed criteria appropriately achieve 

this objective? Are the criteria for the 

public information availability test 

under the proposed rules appropriate to 

result in a sufficient likelihood that 

public information about the component 

securities or issuers of securities in an 

index CDS would be available to 

properly address the regulatory interests 

of the Federal securities laws? Are the 

$700 million and $1 billion thresholds 

discussed above appropriate tests for the 

likelihood of publicly available 

information in this context? These 

thresholds are similar to those in the 

SEC securities offering reform rules 

used to determine, in part, whether a 

particular issuer was a ‘‘well-known 

seasoned issuer,’’ in order to streamline 

registration requirements under the 

Securities Act.243 Are there companies 

that have less than $700 million in 

worldwide equity capitalization, or less 

than $1 billion in outstanding debt 

(other than asset-backed securities), and 

that do not otherwise satisfy the public 

information availability test, that have 

public information available about them 

for purposes of determining whether an 

index CDS that includes such a 

company as a reference entity or such a 

security is broad or narrow-based? The 

Commissions request comment on the 

appropriate thresholds for determining 

whether there likely is public 

information available for purposes of 

the proposed definition of narrow-based 

security index and issuers of securities 

in a narrow-based security index for 

purposes of index CDS, in particular 

whether these thresholds should be 

modified higher or lower, and request 

empirical data to support the response. 

90. Is it appropriate to treat an issuer 

eligible to rely on rule 12g3–2(b) under 

the Exchange Act as meeting the public 

information availability test under the 

proposed rules? Why or why not? 

Would such a provision include issuers 

that otherwise would not satisfy the 

information condition in the proposed 

rules? Why or why not? Please provide 

a detailed explanation and include 

empirical data to support any suggested 

modification. 

91. With respect to asset-backed 

securities, is the proposed criterion for 

meeting the public information 

availability test, that the asset-backed 

securities were issued in a transaction 

registered under the Securities Act and 

have publicly available distribution 

reports, the correct approach? Why or 

why not? Should such a provision 

explicitly also apply to include assetbacked securities issued by Fannie Mae 

and Freddie Mac? Why or why not? 

Please provide a detailed explanation of 

whether and why such a condition is 

necessary and include empirical data to 

support any suggested modification. 

92. Should the proposed rules 

exclude a reference entity or security in 

the index from the public information 

availability test, so long as the reference 

entity or security included in the index 

represents less than five percent of the 

index’s weighting? Why or why not? 

93. Should the proposed rules 

exclude a reference entity or security in 

the index from the public information 

availability test, so long as the reference 

entities or securities comprising at least 

80 percent of the index’s weighting 

satisfy the provisions of those 

paragraphs? Why or why not? 

94. The Commissions are considering 

whether the public information 

availability test in proposed rules 

1.3(zzz) and 1.3(aaaa) under the CEA 

and proposed rules 3a68–1a and 3a68– 

1b under the Exchange Act should 

apply to an index of issuers of securities 

or securities that is created and 

published by a third-party index 

provider that is not a party to an index 

CDS and makes publicly available 

general information about the 

construction of the index, index rules, 

components, and predetermined 

adjustments, and which index is 

referenced by an index CDS that is 

offered on or subject to the rules of a 

DCM or SEF, or by direct access in the 

U.S. from an FBOT that is registered 

with the CFTC. How are indexes created 

by such a third-party index provider 

and what type of compensation do they 

receive? What role do parties to a swap 

or security-based swap play in 

determining the constituents or index 

criteria? What type of information does 

a third-party index provider ensure is 

publicly available on an ongoing basis 

about each of the constituent issuers of 

securities or securities identified in the 

index and what actions does the thirdparty index provider take to ensure the 

accuracy of information about the 

issuers of securities or securities in any 

index compiled by such third-party 

index provider? How would a thirdparty index provider take steps to 

ensure that the indexes it creates are 

composed of issuers of securities or 

securities for which there likely is 

public information available? Please 

provide detailed examples. 

95. If the Commissions determine to 

use, as an alternative to the public 


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244See section 3(a)(68)(E) of the Exchange Act, 15 

U.S.C. 78c(a)(68)(E). 

245A ‘‘portfolio’’ of securities could be a group of 

securities and therefore an ‘‘index’’ for purposes of 

the Dodd-Frank Act. To the extent that changes are 

made to the securities underlying the Title VII 

instrument and each such change is individually 

confirmed, then those substituted securities would 

not be part of a security index as defined in the 

Dodd-Frank Act, and therefore a Title VII 

instrument on each of those substituted securities 

would be a security-based swap. 

246Solely for purposes of the discussion in this 

section, the terms ‘‘security index’’ and ‘‘security 

portfolio’’ are intended to include either securities 

or the issuers of securities. 

247For instance, the S&P 500® is an index that 

gauges the large cap U.S. equities market. 

248Alternatively, counterparties may enter into 

Title VII instruments where a third-party 

investment manager selects an initial portfolio of 

securities and has discretionary authority to change 

the composition of the security portfolio in 

accordance with guidelines agreed upon with the 

counterparties. Such security portfolios would be 

treated as narrow-based security indexes with Title 

VII instruments on those security portfolios being 

security-based swaps. 

information availability test in the 

proposed rules relating to index CDS, 

the existence of a third-party index 

provider that is not a party to an index 

CDS and makes publicly available 

general information about the 

construction of the index, index rules, 

components, and predetermined 

adjustments, and which index is 

referenced by an index CDS that is 

offered on or subject to the rules of a 

DCM or SEF, or by direct access in the 

U.S. from an FBOT that is registered 

with the CFTC, what requirements, if 

any, should the Commissions impose on 

the DCM, SEF, or FBOT to ensure that 

public information likely will be 

available in this context regarding the 

issuers of securities or securities in the 

index? What specified standards, if any, 

should the Commissions require the 

DCM, SEF, or FBOT to meet for 

purposes of the proposed rules? 

96. Should index CDS based on an 

index compiled by a third-party index 

provider as described in this section be 

considered a ‘‘mixed swap’’ rather than 

a swap in order to ensure that the 

protections of the Federal securities 

laws apply with respect to index 

constituents about which public 

information about the constituent 

issuers of securities or securities in the 

index (subject to the de minimis 

provisions of the proposed rules) may 

not be available? 

97. Are there other criteria that the 

Commissions should adopt as 

alternative means of satisfying the 

public information availability test in 

the proposed rules? If so, please explain 

what they are and what requirements 

the Commissions should impose to 

ensure the public availability of 

information regarding issuers of 

securities or securities in index CDS. 

98. Should the proposed rules 

provide, solely with respect to CDS that 

may be entered into only between 

eligible contract participants, that the 

information availability test could be 

satisfied if the reference entity or the 

issuer of the security (i) except in the 

case of issuing entities of asset-backed 

securities, provides information to the 

public or to such eligible contract 

participant pursuant to rule 144A(d)(4) 

of the Securities Act; (ii) except in the 

case of issuing entities of asset-backed 

securities, financial information is 

otherwise publicly available about the 

reference entity or the issuer of the 

security; or (iii) in the case of assetbacked securities and issuing entities of 

asset-backed securities, financial 

information of the type and level 

included in public distribution reports 

for similar asset-backed securities about 

both the issuing entity and such assetbacked securities is publicly available? 

Why or why not? Please provide a 

detailed explanation and empirical data, 

to the extent feasible. 

99. Should the proposed rules include 

additional or other criteria to determine 

whether an index is ‘‘narrow-based’’ 

with respect to index CDS? If so, what 

criteria should be included, and why? 

100. Does the proposed treatment of 

index CDS whereby a payment is 

contemplated based on the default of a 

particular entity in the index rather than 

solely on the value of the index 

adequately address the Federal 

regulatory interests under the Federal 

securities laws and the Commodity 

Exchange Act? 

101. Does the definition of ‘‘control’’ 

for purposes of identifying whether a 

reference entity or issuer is affiliated 

with another entity (ownership of 20 

percent or more of an entity’s or issuer’s 

equity, or the ability to direct the voting 

of 20 percent or more of the entity’s or 

issuer’s voting equity) appropriately 

identify when affiliates are in a control 

relationship for these purposes? Why or 

why not? Should these thresholds be 

higher or lower? Please provide 

supporting data and/or analysis. Should 

issuing entities of asset-backed 

securities be considered separate 

reference entities or issuers for purposes 

of the proposed criteria? If not, why not? 

Are there circumstances under which 

issuing entities of asset-backed 

securities should not be considered 

separate reference entities or issuers for 

purposes of the proposed criteria? Why 

or why not? 

102. Are there other categories or 

types of CDS that proposed rules 

1.3(zzz) and (aaaa) and proposed rules 

3a68–1a and 3a68–1b do not address or 

that require additional clarification 

regarding their treatment under the 

Dodd-Frank Act? If so, please provide a 

detailed description of any such 

categories or types of CDS, as well as 

any analysis, supported by empirical 

data to the extent feasible, of what 

clarification is necessary. 

103. Are there other categories of 

event-type contracts relating to issuers 

of securities that require additional 

clarification regarding their treatment 

under the Dodd-Frank Act? If so, please 

provide a detailed explanation of the 

types of contracts and why the proposed 

rules should apply to such other eventtype contracts. 

4. Security Indexes 

The Dodd-Frank Act defines the term 

‘‘index’’ as ‘‘an index or group of 

securities, including any interest therein 

or based on the value thereof.’’ 244 The 

Commissions are proposing guidance as 

to how to determine when a portfolio of 

securities is a narrow-based or broadbased security index and the 

circumstances in which changes to the 

composition of a security index 

(including a portfolio of securities) 245

underlying a Title VII instrument would 

affect the characterization of such Title 

VII instrument.246

In most cases, a security index is 

designed to reflect the performance of a 

market or sector by reference to 

representative securities or interests in 

securities. There are a number of wellknown security indexes established and 

maintained by recognized index 

providers currently in the market.247

The Commissions understand, however, 

that instead of using these established 

indexes, market participants may enter 

into a Title VII instrument where the 

underlying reference of the Title VII 

instrument is a portfolio of securities 

selected by the counterparties or created 

by a third-party index provider at the 

behest of one or both counterparties. In 

some cases, the Title VII instrument 

may give one or both of the 

counterparties, either directly or 

indirectly (e.g., through an investment 

adviser or through the third-party index 

provider), discretionary authority to 

change the composition of the security 

portfolio, including, for example, by 

adding or removing securities in the 

security portfolio on an ‘‘at-will’’ basis 

during the term of the Title VII 

instrument.248 The Commissions believe 

that where the counterparties, either 

directly or indirectly (e.g., through an 

investment adviser or through the thirdparty index provider), have this 

discretionary authority to change the 


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249The Commissions understand that a security 

portfolio could be labeled as such or could just be 

an aggregate of individual Title VII instruments 

documented, for example, under a master 

agreement or by amending an annex of securities 

attached to a master trade confirmation. If the 

security portfolio were created by aggregating 

individual Title VII instruments, each Title VII 

instrument would need to be evaluated in 

accordance with the proposed guidance to 

determine whether it is a swap or a security-based 

swap. For the avoidance of doubt, if the 

counterparties to a Title VII instrument exchanged 

payments under that Title VII instrument based on 

a security index that was itself created by 

aggregating individual security-based swaps, such 

Title VII instrument would be a security-based 

swap. See discussion supra part III.D. 

250See, e.g., NASDAQ, ‘‘NASDAQ–100 Index’’ 

(‘‘The NASDAQ–100 Index is calculated under a 

modified capitalization-weighted methodology. The 

methodology is expected to retain in general the 

economic attributes of capitalization-weighting 

while providing enhanced diversification. To 

accomplish this, NASDAQ will review the 

composition of the NASDAQ–100 Index on a 

quarterly basis and adjust the weightings of Index 

components using a proprietary algorithm, if certain 

pre-established weight distribution requirements 

are not met.’’), available at http:// 

dynamic.nasdaq.com/dynamic/ 

nasdaq100_activity.stm 

251 Information regarding security indexes and 

their related methodologies may be widely available 

to the general public or restricted to licensees in the 

case of proprietary or ‘‘private label’’ security 

indexes. Both public and private label security 

indexes are frequently subject to intellectual 

property protection. 

252As discussed further below, the Commissions 

are concerned about the potential use of security 

indexes to game the narrow-based security index 

definition. 

253See supra note 249 regarding the aggregation 

of separate trades. 

composition or weighting of securities 

in a security portfolio, that security 

portfolio should be treated as a narrowbased security index, and that therefore 

a Title VII instrument on that security 

portfolio would be a security-based 

swap.249

The Commissions believe, however, 

that not all changes that occur to the 

composition or weighting of a security 

index underlying a Title VII instrument 

will always result in that security index 

being treated as a narrow-based security 

index. Many security indexes are 

constructed and maintained by an index 

provider pursuant to a published 

methodology.250 For instance, the 

various Standard & Poor’s security 

indexes are reconstituted and 

rebalanced as needed and on a periodic 

basis pursuant to published index 

criteria.251

In addition, counterparties to a Title 

VII instrument frequently agree to use as 

the underlying reference of a Title VII 

instrument a security index based on 

predetermined criteria where the 

security index composition or weighting 

may change as a result of the occurrence 

of certain events specified in the Title 

VII instrument at execution, such as 

‘‘succession events.’’ Counterparties to a 

Title VII instrument also may use a 

predetermined self-executing formula to 

make other changes to the composition 

or weighting of a security index 

underlying a Title VII instrument. In 

either of these situations, the 

composition of a security index may 

change pursuant to predetermined 

criteria or predetermined self-executing 

formulas without the Title VII 

instrument counterparties, their agents, 

or third-party index providers having 

any direct or indirect discretionary 

authority to change the security index. 

In general, and by contrast to Title VII 

instruments in which the 

counterparties, either directly or 

indirectly (e.g., through an investment 

adviser or through the third-party index 

provider), have the discretion to change 

the composition or weighting of the 

referenced security index, where there 

is an underlying security index for 

which there are predetermined criteria 

or a predetermined self-executing 

formula for adjusting the security index 

that are not subject to change or 

modification through the life of the Title 

VII instrument and that are set forth in 

the Title VII instrument at execution 

(regardless of who establishes the 

criteria or formula), a Title VII 

instrument on such underlying security 

index would be on a broad-based or 

narrow-based security index, depending 

on the composition and weighting of the 

underlying security index. Subject to 

the interpretation discussed below 

regarding security indexes that may 

shift from being a narrow-based security 

index or broad-based security index 

during the life of an existing Title VII 

instrument,252 the characterization of a 

Title VII instrument based on a security 

index as either a swap or a securitybased swap would depend on the 

characterization of the security index 

using the above interpretation.253

Request for Comment 

104. The Commissions request 

comment on whether there are 

additional or other criteria that would 

be appropriate in determining whether 

a security index or security portfolio 

would constitute a narrow-based 

security index for purposes of the 

definitions of the terms ‘‘swap’’ and 

‘‘security-based swap.’’ Please discuss 

any criteria in detail and provide any 

supporting data where relevant. 

105. What are the ways in which Title 

VII instruments involving security 

portfolios are structured, including 

changes in security portfolio 

composition? 

106. Should ‘‘discretionary authority 

to change’’ by the counterparties, either 

directly or indirectly (e.g., through an 

investment adviser or through the thirdparty index provider), be a 

determinative factor for whether a 

security portfolio should be treated as a 

narrow-based security index? Why or 

why not? Are there Title VII instruments 

where the underlying reference is a 

security portfolio where counterparties 

may directly or indirectly (e.g., through 

an investment manager or the thirdparty provider) exercise discretionary 

authority to change the composition of 

the security portfolio that should not be 

considered security-based swaps? Why 

or why not? Please provide a detailed 

explanation of such Title VII 

instruments, the means by which, and 

why, the composition of the underlying 

security portfolio are established and 

subsequently changed, and for what 

purpose such Title VII instruments are 

used. 

107. Should a security index, where 

changes to the composition are not 

subject to discretionary authority but 

instead may be made pursuant to 

predetermined criteria or a 

predetermined self-executing formula 

set forth in the Title VII instrument at 

execution, be considered either a broadbased security index or a narrow-based 

security index, depending on its 

constitution? Why or why not? Are 

changes pursuant to such 

predetermined criteria or formulas 

common? How frequently do such 

changes occur? What sorts of events 

trigger such changes? Please provide a 

detailed explanation and empirical data, 

to the extent feasible. 

108. Are the terms ‘‘predetermined 

criteria’’ and ‘‘predetermined selfexecuting formula’’ clear? Why or why 

not? If not, what alternative or 

additional guidance should be provided 

to clarify under what circumstances 

changes to the composition of a security 

index underlying a Title VII instrument 

may be made without being considered 

‘‘at will’’ or discretionary changes by the 

counterparties, either directly or 

indirectly (e.g., through an investment 

adviser or through the third-party index 

provider), that would result in the 

security index being treated as a narrowbased security index and the Title VII 

instrument being a security-based swap? 

Are there specific additional criteria, 

restrictions, or parameters that should 

be considered? If so, please provide a 

detailed explanation regarding such 

criteria, restrictions, or parameters, 

including the types of changes that 

should or should not be permitted. 

109. Are there specific methodologies 

or criteria, agreed to at or prior to the 


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29856 Federal Register / Vol. 76, No. 99 / Monday, May 23, 2011 / Proposed Rules 

254See discussion supra part III.A. 

255For example, if, on its effective date, a Title 

VII instrument tracks the performance of an index 

of 12 securities but is amended during its term to 

track the performance of only 8 of those 12 

securities, the Commissions would view the 

amended or modified Title VII instrument as a new 

Title VII instrument. Conversely, if, on its effective 

date, a Title VII instrument tracks the performance 

of an index of 12 securities but is amended during 

its term to reflect the replacement of a departing 

‘‘key person’’ of a hedge fund that is a counterparty 

to the Title VII instrument with a new ‘‘key person,’’ 

the Commissions would not view the amended or 

modified Title VII instrument as a new Title VII 

instrument because the amendment or modification 

is not to a material term of the Title VII instrument. 

Because it would be a new Title VII instrument, any 

regulatory requirements regarding new Title VII 

instruments would apply. 

256Thus, for example, if a predetermined selfexecuting formula agreed to by the counterparties 

of a Title VII instrument at or prior to the execution 

of the Title VII instrument provided that the 

security index underlying the Title VII instrument 

would decrease from 20 to 5 securities after six 

months, such that the security index would become 

narrow-based as a result of the reduced number of 

securities, then the Title VII instrument would be 

a mixed swap at its execution. The characterization 

of the Title VII instrument as a mixed swap would 

not change during the life of the Title VII 

instrument. 

257As discussed above in part III.G.4, to the 

extent a Title VII instrument permits ‘‘at will’’ 

substitution of an underlying security index, 

however, as opposed to the use of predetermined 

criteria or a predetermined self-executing formula, 

the Title VII instrument would be a security-based 

swap at its execution and throughout its life 

regardless of whether the underlying security index 

was narrow-based at the execution of the Title VII 

instrument. 

execution of a Title VII instrument, for 

changing the composition of an 

underlying security index, that should 

be explicitly addressed by the 

Commissions in providing the proposed 

guidance regarding security indexes? If 

so, please provide a detailed 

explanation of those methodologies or 

criteria and what additional guidance is 

necessary. 

110. Would restrictions on the 

frequency of changes to the composition 

of a security index underlying a Title 

VII instrument be useful in determining 

whether the underlying security index 

should be treated as a narrow-based 

security index? If so, please provide a 

detailed explanation of what restrictions 

should apply and why, as well as 

empirical data to the extent feasible. 

5. Evaluation of Title VII Instruments on 

Security Indexes That Move From 

Broad-Based to Narrow-Based or 

Narrow-Based to Broad-Based 

(a) In General 

As discussed above, the 

determination of whether a Title VII 

instrument is a swap, a security-based 

swap, or both (i.e., a mixed swap), is 

made at the execution of the Title VII 

instrument.254 If the security index 

underlying a Title VII instrument 

migrates from being broad-based to 

being narrow-based, or vice versa, 

during the life of a Title VII instrument, 

the characterization of that Title VII 

instrument would not change from its 

initial characterization regardless of 

whether the Title VII instrument was 

entered into bilaterally or was executed 

through a trade on or subject to the rules 

of a DCM, SEF, FBOT, security-based 

SEF, or NSE. For example, if two 

counterparties enter into a swap based 

on a broad-based security index, and 

three months into the life of the swap 

the security index underlying that Title 

VII instrument migrates from being 

broad-based to being narrow-based, the 

Title VII instrument would remain a 

swap for the duration of its life and 

would not be recharacterized as a 

security-based swap. 

If the material terms of a Title VII 

instrument are amended or modified 

during its life, the Commissions would 

view the amended or modified Title VII 

instrument as a new Title VII 

instrument.255 As a result, the 

characteristics of the underlying 

security index must be reassessed at the 

time of such an amendment or 

modification to determine whether the 

security index has migrated from broadbased to narrow-based or vice versa. If 

the security index has migrated, then 

the characterization of the amended or 

modified Title VII instrument would be 

determined by evaluating the 

characterization of the underlying 

security index at the time the Title VII 

instrument is amended or modified. 

Similarly, if a security index has 

migrated from broad-based to narrowbased or vice versa, any new Title VII 

instrument based on that security index 

would be characterized pursuant to an 

evaluation of the underlying security 

index at the execution of that new Title 

VII instrument. 

The Commissions are proposing 

guidance regarding circumstances in 

which the character of a security index 

on which a Title VII instrument is based 

changes according to predetermined 

criteria or a predetermined selfexecuting formula set forth in the Title 

VII instrument (or in a related or other 

agreement entered into by the 

counterparties or a third-party index 

provider to the Title VII instrument) at 

execution. Where at the time of 

execution such criteria or such formula 

would cause the underlying broad-based 

security index to become or assume the 

characteristics of a narrow-based 

security index or vice versa during the 

duration of the instrument,256 then the 

characterization of the Title VII 

instrument based on such security index 

would be a mixed swap during the 

entire life of the Title VII instrument.257

Although at certain points during the 

life of the Title VII instrument the 

underlying security index would be 

broad-based and at other points the 

underlying security index would be 

narrow-based, the Commissions believe 

that regulating such a Title VII 

instrument as a mixed swap from the 

execution of the Title VII instrument 

and throughout its life reflects the 

appropriate characterization of a Title 

VII instrument based on a security index 

that migrates pursuant to predetermined 

criteria or a predetermined selfexecuting formula. 

The Commissions believe that this 

guidance regarding the use of 

predetermined criteria or a 

predetermined self-executing formula 

would prevent potential gaming of the 

Commissions’ guidance regarding 

security indexes and prevent potential 

regulatory arbitrage based on the 

migration of a security index from 

broad-based to narrow-based or vice 

versa. In particular, the Commissions 

note that predetermined criteria and 

predetermined self-executing formulas 

can be constructed in ways that take 

into account the characteristics of a 

narrow-based security index and 

prevent a narrow-based security index 

from becoming broad-based and vice 

versa. 

(b) Title VII Instruments on Security 

Indexes Traded on Designated Contract 

Markets, Swap Execution Facilities, 

Foreign Boards of Trade, Security-Based 

Swap Execution Facilities, and National 

Securities Exchanges 

The Commissions recognize that 

security indexes underlying Title VII 

instruments that are traded on DCMs, 

SEFs, FBOTs, security-based SEFs, or 

NSEs raise particular issues if an 

underlying security index migrates from 

broad-based to narrow-based or vice 

versa. The characterization of an 

exchange-traded Title VII instrument at 

its execution, as explained above, would 

not change through the life of the Title 

VII instrument, regardless of whether 

the underlying security index migrates 

from broad-based to narrow-based or 

vice versa. Accordingly, a market 

participant who enters into a swap on 

a broad-based security index traded on 

or subject to the rules of a DCM, SEF or 

FBOT that migrates from broad-based to 

narrow-based may hold that position 

until the swap’s expiration without any 

change in regulatory responsibilities, 

requirements, or obligations, and 


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258 If a swap were based on a security index that 

migrated from broad-based to narrow-based, a DCM, 

SEF, or FBOT could no longer offer the Title VII 

instrument because it would be a security-based 

swap. Similarly, if a security-based swap were 

based on a security index that migrated from 

narrow-based to broad-based, a security-based SEF 

or NSE could no longer offer the Title VII 

instrument because it would be a swap. 

259The proposed rules apply only to the 

particular Title VII instrument that is traded on or 

subject to the rules of a DCM, SEF, FBOT, securitybased SEF, or NSE. To the extent that a particular 

Title VII instrument is not traded on such a trading 

platform (even if another Title VII instrument of the 

same class or type is traded on such a trading 

platform) the proposed rules would not apply to 

that particular Title VII instrument. 

260CEA section 1a(35)(B)(iii), 7 U.S.C. 

1a(35)(B)(iii); section 3(a)(55)(C)(iii) of the Exchange 

Act, 15 U.S.C. 78c(a)(55)(C)(iii). 

261By joint rules, the Commissions have provided 

that ‘‘[w]hen a contract of sale for future delivery 

on a security index is traded on or subject to the 

rules of a foreign board of trade, such index shall 

not be a narrow-based security index if it would not 

be a narrow-based security index if a futures 

contract on such index were traded on a designated 

contract market * * * .’’ See CFTC rule 41.13, 17 

CFR 41.13, and rule 3a55–3 under the Exchange 

Act, 17 CFR 240.3a55–3. Accordingly, the statutory 

tolerance period rules applicable to futures on 

security indexes traded on DCMs apply to futures 

traded on FBOTs as well. 

262For purposes of the proposed rules, the term 

‘‘narrow-based security index’’ shall also mean 

‘‘issuers of securities in a narrow-based security 

index.’’ See supra part III.G.3(b) (discussing the 

proposed rules defining ‘‘issuers of securities in a 

narrow-based security index’’). 

263This provision is consistent with the 

provisions of the CEA and the Exchange Act 

applicable to futures contracts on security indexes. 

CEA section 1a(35)(B)(iii)(I), 7 U.S.C. 

1a(35)(B)(iii)(I); section 3(a)(55)(C)(iii)(I) of the 

Exchange Act, 15 U.S.C. 78c(a)(55)(C)(iii)(I). 

264This alternative test is the same as the 

alternative test applicable to futures contracts in 

CEA rule 41.12, 17 CFR 41.12 and rule 3a55–2 

under the Exchange Act, 17 CFR 240.3a55–2. 

similarly a market participant who 

enters into a security-based swap on a 

narrow-based security index traded on a 

security-based SEF or NSE may hold 

that position until the security-based 

swap’s expiration without any change in 

regulatory responsibilities, 

requirements, or obligations. 

However, in the absence of any action 

by the Commissions, if the market 

participant wants to offset the swap or 

enter into a new swap on the DCM, SEF 

or FBOT where the underlying security 

index has migrated from broad-based to 

narrow-based, or to offset the securitybased swap or enter into a new securitybased swap on a security-based SEF or 

NSE where the underlying security 

index has migrated from narrow-based 

to broad-based, the participant would be 

prohibited from doing so. That is 

because swaps may trade only on DCMs, 

SEFs, and FBOTs, and security-based 

swaps may trade only on registered 

NSEs and security-based SEFs.258 The 

Commissions believe it is important to 

address how to treat Title VII 

instruments traded on trading platforms 

where the underlying security index 

migrates from broad-based to narrowbased or narrow-based to broad-based so 

that market participants will know 

where such Title VII instruments may 

be traded and can avoid potential 

disruption of their ability to offset or 

enter into new Title VII instruments on 

trading platforms when such migration 

occurs. The Commissions are proposing 

rules accordingly.259

Congress and the Commissions 

addressed a similar issue in the context 

of security futures, where the security 

index on which a future is based may 

migrate from broad-based to narrowbased or vice versa. Congress provided 

in the definition of ‘‘narrow-based 

security index’’ in both the CEA and the 

Exchange Act 260 for a tolerance period 

ensuring that, under certain conditions, 

a futures contract on a broad-based 

security index traded on a DCM may 

continue to trade, even when the index 

temporarily assumes characteristics that 

would render it a narrow-based security 

index under the statutory definition.261

In general, an index is subject to this 

tolerance period, and therefore is not a 

narrow-based security index, if: (i) a 

futures contract on the index traded on 

a DCM for at least 30 days as a futures 

contract on a broad-based security index 

before the index assumed the 

characteristics of a narrow-based 

security index and (ii) the index does 

not retain the characteristics of a 

narrow-based security index for more 

than 45 business days over 3 

consecutive calendar months. Pursuant 

to these statutory provisions, if the 

index becomes narrow-based for more 

than 45 business days over 3 

consecutive calendar months, the index 

is excluded from the definition of the 

term ‘‘narrow-based security index’’ for 

the following 3 calendar months as a 

grace period. 

The Commissions believe a similar 

tolerance period should apply to swaps 

traded on DCMs, SEFs, and FBOTs and 

security-based swaps traded on securitybased SEFs and NSEs. Accordingly, the 

Commissions are proposing rules 

providing for tolerance periods for 

swaps that are traded on DCMs, SEFs, 

or FBOTs and for security-based swaps 

traded on security-based SEFs and 

NSEs. 

Under paragraph (2)(i)(A) of proposed 

rule 1.3(yyy) under the CEA and 

paragraph (b)(1)(i) of proposed rule 

3a68–3 under the Exchange Act, to be 

subject to the tolerance period, a 

security index underlying a swap 

executed on or subject to the rules of a 

DCM, SEF, or FBOT must not have been 

a narrow-based security index 262 during 

the first 30 days of trading.263 If the 

index becomes narrow-based during the 

first 30 days of trading, paragraph 

(2)(i)(B) of proposed rule 1.3(yyy) under 

the CEA and paragraph (b)(1)(ii) of 

proposed rule 3a68–3 under the 

Exchange Act provide that the index 

must not have been a narrow-based 

security index during every trading day 

of the 6 full calendar months preceding 

a date no earlier than 30 days prior to 

the commencement of trading of a swap 

on such index.264 If either of these 

alternatives are met, paragraph (2)(ii) of 

proposed rule 1.3(yyy) under the CEA 

and paragraph (b)(2) of proposed rule 

3a68–3 under the Exchange Act provide 

that the index will not be a narrowbased security index if it has been a 

narrow-based security index for no more 

than 45 business days over 3 

consecutive calendar months. Paragraph 

(2) of proposed rule 1.3(yyy) under the 

CEA and paragraph (b) of proposed rule 

3a68–3 under the Exchange Act apply 

solely for purposes of swaps traded on 

or subject to the rules of a DCM, SEF, 

or FBOT. 

Similarly, paragraph (3) of proposed 

rule 1.3(yyy) under the CEA and 

paragraph (c) of proposed rule 3a68–3 

under the Exchange Act provide a 

tolerance period for security-based 

swaps traded on security-based SEFs or 

NSEs. Under paragraph (3)(i)(A) of 

proposed rule 1.3(yyy) under the CEA 

and paragraph (c)(1)(i) of proposed rule 

3a68–3 under the Exchange Act, to be 

subject to the tolerance period, a 

security index underlying a securitybased swap executed on a securitybased SEF or NSE must have been a 

narrow-based security index during the 

first 30 days of trading. If the index 

becomes broad-based during the first 30 

days of trading, paragraph (3)(i)(B) of 

proposed rule 1.3(yyy) under the CEA 

and paragraph (c)(1)(ii) of proposed rule 

3a68–3 under the Exchange Act provide 

that the index must have been a nonnarrow-based security index during 

every trading day of the 6 full calendar 

months preceding a date no earlier than 

30 days prior to the commencement of 

trading of a security-based swap on such 

index. If either of these alternatives are 

met, paragraph (3)(ii) of proposed rule 

1.3(yyy) under the CEA and paragraph 

(c)(2) of proposed rule 3a68–3 under the 

Exchange Act provide that the index 

will be a narrow-based security index if 

it has been a security index that is not 

narrow-based for no more than 45 

business days over 3 consecutive 


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29858 Federal Register / Vol. 76, No. 99 / Monday, May 23, 2011 / Proposed Rules 

265These provisions are consistent with the 

parallel provisions in the CEA and the Exchange 

Act applicable to futures contracts on security 

indexes traded on DCMs. CEA section 

1a(35)(B)(iii)(II), 7 U.S.C. 1a(35)(B)(iii)(II); section 

3(a)(55)(C)(iii)(II) of the Exchange Act, 15 U.S.C. 

78c(a)(55)(C)(iii)(II). 

266These provisions are consistent with the 

parallel provisions in the CEA and the Exchange 

Act applicable to futures contracts on security 

indexes traded on DCMs. See CEA section 

1a(35)(D), 7 U.S.C. 1a(35)(D); section 3(a)(55)(E) of 

the Exchange Act, 15 U.S.C. 78c(a)(55)(E). 

267CEA sections 1a(35)(A) and (B), 7 U.S.C. 

1a(35)(A) and (B); section 3(a)(55)(B) and (C) of the 

Exchange Act, 15 U.S.C. 78c(a)(55)(B) and (C). 

calendar months.265 Paragraph (3) of 

proposed rule 1.3(yyy) under the CEA 

and paragraph (c) of proposed rule 

3a68–3 under the Exchange Act apply 

solely for purposes of security-based 

swaps traded on security-based SEFs or 

NSEs. 

The Commissions are proposing that, 

once the tolerance period under the 

proposed rules has ended, there would 

be a grace period during which a Title 

VII instrument based on a security index 

that has migrated from broad-based to 

narrow-based or vice versa would be 

able to trade on the platform on which 

Title VII instruments based on such 

security index were trading before the 

security index migrated and can also, 

during such period, be cleared. 

Paragraph (4)(i) of proposed rule 

1.3(yyy) under the CEA and paragraph 

(d)(1) of proposed rule3a68–3 under the 

Exchange Act would provide for an 

additional 3-month grace period 

applicable to a security index that 

becomes narrow-based for more than 45 

business days over 3 consecutive 

calendar months, solely with respect to 

swaps that are traded on or subject to 

the rules of DCMs, SEFs, or FBOTs. 

During the grace period, such an index 

would not be considered a narrow-based 

security index. Paragraph (4)(ii) of 

proposed rule 1.3(yyy) under the CEA 

and paragraph (d)(2) of proposed 

rule3a68–3 under the Exchange Act 

would apply the same grace period to a 

security-based swap on a security index 

that becomes broad-based for more than 

45 business days over 3 consecutive 

calendar months, solely with respect to 

security-based swaps that are traded on 

a security-based SEF or NSE. During the 

grace period, such an index would not 

be considered a broad-based security 

index.266 As a result, this proposed rule 

would provide sufficient time for the 

migrated Title VII instrument to satisfy 

listing and clearing requirements 

applicable to swaps or security-based 

swaps, as appropriate. 

There would be no overlap between 

the tolerance and the grace periods 

under the proposed rules and no ‘‘retriggering’’ of the tolerance period. For 

example, if a security index becomes 

narrow-based for more than 45 business 

days over 3 consecutive calendar 

months, solely with respect to swaps 

that are traded on or subject to the rules 

of DCMs, SEFs, or FBOTs, but as a result 

of the proposed rules is not considered 

a narrow-based security index during 

the grace period, the tolerance period 

provisions would not apply, even if the 

security-index migrated temporarily 

during the grace period. After the grace 

period has ended, a security index 

would need to satisfy anew the 

requirements under the proposed rules 

regarding the tolerance period in order 

to trigger a new tolerance period. 

The Commissions note that the 

proposed rules would not result in the 

recharacterization of any outstanding 

Title VII instruments. In addition, the 

proposed tolerance and grace periods 

would apply only to Title VII 

instruments that are traded on or subject 

to the rules of DCMs, SEFs, FBOTs, 

security-based SEFs, and NSEs. 

Request for Comment 

The Commissions request comment 

on all aspects of proposed rules 1.3(yyy) 

under the CEA and proposed rule 3a68– 

3 under the Exchange Act, including the 

following: 

111. The Commissions request 

comment regarding whether the term 

‘‘narrow-based security index’’ as 

defined in the CEA and the Exchange 

Act 267 requires further definition solely 

in the context of Title VII instruments. 

112. Are there particular types of Title 

VII instruments that require additional 

guidance as to how the narrow-based 

security index definition applies? If so, 

which types of Title VII instruments? 

How should the definition apply to 

them? Please provide a detailed 

explanation of such Title VII 

instruments and the additional guidance 

that would be appropriate. 

113. Does the proposed guidance 

effectively address security indexes that 

migrate from broad-based to narrowbased and vice versa? Why or why not? 

If not, what additional or alternative 

requirements would be appropriate, and 

why? 

114. Will the proposed limitations 

regarding the use of predetermined 

criteria or predetermined self-executing 

formulas for Title VII instruments 

effectively prevent gaming of the 

proposed rules and potential regulatory 

arbitrage based on the migration of a 

security index or security portfolio from 

broad-based to narrow-based or vice 

versa? Why or why not? If not, please 

provide a detailed explanation of why 

not, and what additional or alternative 

limitations would do so. 

115. Should the standard pursuant to 

which a Title VII instrument would be 

a mixed swap during the entire life of 

the Title VII instrument require instead 

that the predetermined criteria or 

predetermined self-executing formula be 

constructed in such a manner that a 

broad-based security index or security 

portfolio would be reasonably likely to 

become or assume the characteristics of 

a narrow-based security index or 

security portfolio, or vice versa? Why or 

why not? Are there additional or 

alternative standards that should be 

used in determining when a Title VII 

instrument would be a mixed swap 

during the entire life of the Title VII 

instrument? If so, please provide a 

detailed explanation of such standards 

and why they would be effective. 

116. Do the proposed tolerance period 

rules appropriately address security 

indexes that temporarily change from 

broad-based to narrow-based, and from 

narrow-based to broad-based, in the 

context of Title VII instruments that are 

executed on or subject to the rules of a 

DCM, SEF, FBOT, security-based SEF, 

or NSE? Why or why not? If not, how 

should the proposed tolerance period 

rules be modified? 

117. Should the ‘‘grace period’’ 

applicable to Title VII instruments 

executed on or subject to the rules of a 

DCM, SEF, FBOT, security-based SEF, 

or NSE regarding a security index that 

becomes narrow-based or broad-based, 

respectively, for more than 45 business 

days over 3 consecutive calendar 

months be modified? Why or why not? 

If so, what modifications should be 

made? 

118. What would be the impact of the 

proposed rules on market participants 

with open swap or security-based swap 

positions if the security index 

underlying a swap were to become 

narrow-based or if the security index 

underlying a security-based swap were 

to become broad-based? Should market 

participants be allowed to liquidate 

their swaps or security-based swaps 

prior to expiration but after the grace 

period? If so, how would the listing 

market restrict trading for liquidation 

only? 

H. Method of Settlement of Index CDS 

The method that the parties have 

chosen or use to settle an index CDS 

following the occurrence of a credit 

event under such index CDS also can 

affect whether such index CDS would 

be a swap, a security-based swap, or 

both (i.e., a mixed swap). The 

Commissions believe that if an index 

CDS that is not based on a narrow-based 


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268The Commissions note that section 3(a)(68)(C) 

of the Exchange Act, 15 U.S.C. 78c(a)(68)(C), 

provides that ‘‘[t]he term ‘‘security-based swap’’ does 

not include any agreement, contract, or transaction 

that meets the definition of a security-based swap 

only because such agreement, contract, or 

transaction references, is based upon, or settles 

through the transfer, delivery, or receipt of an 

exempted security under paragraph (12) [of the 

Exchange Act], as in effect on the date of enactment 

of the Futures Trading Act of 1982 (other than any 

municipal security as defined in paragraph (29) [of 

the Exchange Act] as in effect on the date of 

enactment of the Futures Trading Act of 1982), 

unless such agreement, contract, or transaction is of 

the character of, or is commonly known in the trade 

as, a put, call, or other option.’’ 

269The Commissions’ views as to the legal basis 

for such a conclusion differ. The SEC also notes that 

there must either be an effective registration 

statement covering the transaction or an exemption 

under the Securities Act would need to be available 

for such physical delivery of securities and 

compliance issues under the Exchange Act would 

also need to be considered. 

270The Commissions are aware that the 2003 

Definitions supra note 35, include ‘‘Cash 

Settlement’’ as a defined term and that such 

‘‘Settlement Method’’ (also a defined term in the 

2003 Definitions) works differently than auction 

settlement pursuant to the ‘‘Big Bang Protocol’’ or 

‘‘Auction Supplement’’ (each as defined below). The 

Commissions’ use of the term ‘‘cash settlement’’ in 

this section includes ‘‘Cash Settlement,’’ as defined 

in the 2003 Definitions, and auction settlement, as 

described in the ‘‘Big Bang Protocol’’ or ‘‘Auction 

Supplement.’’ 

271See Int’l Swaps and Derivatives Ass’n, Inc., 

‘‘2009 ISDA Credit Derivatives Determinations 

Committees and Auction Settlement CDS Protocol,’’ 

available at http://www.isda.org/bigbangprot/docs/ 

Big-Bang-Protocol.pdf. 

272The possibility that such index CDS may, in 

fact, be physically settled if an auction is not held 

or if the auction fails would not affect the 

characterization of the index CDS. 

273The Commissions understand that the Big 

Bang Protocol is followed for index CDS involving 

corporate debt obligations but is not followed for 

index CDS based on asset-backed securities, loanonly CDS, and certain other types of CDS contracts. 

To the extent that such other index CDS contain 

auction procedures similar to the auction 

procedures for corporate debt to establish the cash 

price to be paid, the Commissions also would not 

consider such other index CDS that are not based 

on narrow-based security indexes under the 

Commissions’ proposed rules to be mixed swaps. 

274The Commissions understand that other 

conditions may need to be satisfied as well for an 

auction to be held. 

275See supra note 35. 

276The second part of the credit event auction 

process involves offers and sales of securities that 

must be made in compliance with the provisions of 

the Securities Act and the Exchange Act. First, the 

submission of a physical settlement request 

constitutes an offer by the counterparty to either 

buy or sell any one of the deliverable obligations 

in the auction. Second, the submission of the 

irrevocable limit orders by dealers or investors are 

sales or purchases by such persons at the time of 

submission of the irrevocable limit order. Through 

the auction mechanism, where the open interest 

(which represents physical settlement requests) is 

matched with limit orders, buyers and sellers are 

matched. Finally, following the auction and 

determination of the final price, the counterparty 

who has submitted the physical delivery request 

decides which of the deliverable obligations will be 

delivered to satisfy the limit order in exchange for 

the final price. The sale of the securities in the 

auction occurs at the time the limit order is 

submitted, even though the identification of the 

specific deliverable obligation does not occur until 

the auction is completed. 

277See section 761(a)(2) of the Dodd-Frank Act 

(inserting the term ‘‘security-based swap’’ into the 

definition of ‘‘security’’ in section 3a(10) of the 

Exchange Act, 15 U.S.C. 78c(a)(10)). 

278See section 768(a)(1) of the Dodd-Frank Act 

(inserting the term ‘‘security-based swap’’ into the 

definition of ‘‘security’’ in section 2(a)(1) of the 

Securities Act, 15 U.S.C. 77b(a)(1)). 

279Sections 761(a)(3) and (4) of the Dodd-Frank 

Act amend sections 3(a)(13) and (14) of the 

Exchange Act, 15 U.S.C. 78c(a)(13) and (14), and 

section 768(a)(3) of the Dodd-Frank Act adds 

section 2(a)(18) to the Securities Act, 15 U.S.C. 

77b(a)(18), to provide that the terms ‘‘purchase’’ and 

‘‘sale’’ of a security-based swap shall mean the ‘‘the 

execution, termination (prior to its scheduled 

maturity date), assignment, exchange, or similar 

transfer or conveyance of, or extinguishing of rights 

or obligations under, a security-based swap, as the 

context may require.’’ 

security index under the Commissions’ 

proposed rules includes a mandatory 

physical settlement provision that 

would require the delivery of, and 

therefore the purchase and sale of, a 

non-exempted security 268 or a loan in 

the event of a credit event, such an 

index CDS would be a mixed swap.269

Conversely, the Commissions believe 

that if an index CDS that is not based 

on a narrow-based security index under 

the Commissions’ proposed rules 

includes a mandatory cash 

settlement 270 provision, such index 

CDS would be a swap, and not a 

security-based swap or a mixed swap, 

even if the cash settlement were based 

on the value of a non-exempted security 

or a loan. 

The Commissions believe that an 

index CDS that is not based on a 

narrow-based security index under the 

Commissions’ proposed rules and that 

provides for cash settlement in 

accordance with the 2009 ISDA Credit 

Derivatives Determinations Committees 

and Auction Settlement Supplement to 

the 2003 Definitions (the ‘‘Auction 

Supplement’’) or with the 2009 ISDA 

Credit Derivatives Determinations 

Committees and Auction Settlement 

CDS Protocol (‘‘Big Bang Protocol’’) 271

would be a swap, and would not be 

considered a security-based swap or a 

mixed swap solely because the 

determination of the cash price to be 

paid is established through a securities 

or loan auction.272 In 2009, auction 

settlement, rather than physical 

settlement, became the default method 

of settlement for, among other types of 

CDS, index CDS on corporate issuers of 

securities.273 The amount of the cash 

settlement is determined through an 

auction triggered by the occurrence of a 

credit event.274 The Auction 

Supplement ‘‘hard wired’’ the mechanics 

of credit event auctions into the 2003 

Definitions.275 The Commissions 

understand that the credit event auction 

process that is part of the ISDA terms 

works as follows: 

Following the occurrence of a credit 

event under a CDS, a determinations 

committee (‘‘DC’’) established by ISDA, 

following a request by any party to a 

credit derivatives transaction that is 

subject to the Big Bang Protocol or 

Auction Supplement, will determine, 

among other matters: (i) Whether and 

when a credit event occurred; (ii) 

whether or not to hold an auction to 

enable market participants to settle 

those of their credit derivatives 

transactions covered by the auction; (iii) 

the list of deliverable obligations of the 

relevant reference entity; and (iv) the 

necessary auction specific terms. The 

credit event auction takes place in two 

parts. In the first part of the auction, 

dealers submit physical settlement 

requests, which are requests to buy or 

sell any of the deliverable obligations 

(based on the dealer’s needs and those 

of its counterparties), and an initial 

market midpoint price is created based 

on dealers’ initial bids and offers. 

Following the establishment of the 

initial market midpoint, the physical 

settlement requests are then calculated 

to determine the amount of open 

interest. 

The aggregate amount of open interest 

is the basis for the second part of the 

auction. In the second part of the 

auction, dealers and investors can 

determine whether to submit limit 

orders and the levels of such limit 

orders. The limit orders, which are 

irrevocable, have a firm price in 

addition to size and whether it is a buy 

or sell order. The auction is conducted 

as a ‘‘dutch’’ auction, in which the open 

buy interests and open sell interests are 

matched.276 The final price of the 

auction is the last limit order used to 

match against the open interest. The 

final price in the auction is the cash 

price used for purposes of calculating 

the settlement payments in respect of 

the orders to buy and sell the 

deliverable obligations and it is also 

used to determine the cash settlement 

payment under the CDS. 

I. Security-Based Swaps as Securities 

Under the Exchange Act and Securities 

Act 

Pursuant to the Dodd-Frank Act, a 

security-based swap is defined as a 

‘‘security’’ under the Exchange Act 277

and Securities Act.278 As a result, 

security-based swaps are subject to the 

Exchange Act and the Securities Act 

and the rules and regulations 

promulgated thereunder.279 To the 


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280Section 3(a)(68)(D) of the Exchange Act, 15 

U.S.C. 78c(a)(68)(D); CEA section 1a(47)(D), 7 

U.S.C. 1a(47)(D). 

281 Id. The exclusion from the definition of the 

term ‘‘swap’’ for security-based swaps does not 

include security-based swaps that are mixed swaps. 

See CEA section 1a(47)(B)(x), 7 U.S.C. 1a(47)(B)(x). 

282See section 712(a)(8) of the Dodd-Frank Act. 283See Morgan Stanley Letter (expressing the 

view that ‘‘the universe of mixed swaps should be 

relatively small’’); Letter from Timothy W. Cameron, 

Esq., Managing Director, Asset Management Group, 

Securities Industry and Financial Markets 

Association (‘‘SIFMA Letter’’) (suggesting that the 

scope of products included in the mixed swap 

category should be limited to ‘‘avoid unnecessary 

and duplicative regulation’’). 

284See Cleary Letter (providing as examples of 

mixed swaps, ‘‘a swap based on the outperformance of gold, oil or another commodity 

relative to a security or narrow-based security 

index,’’ ‘‘a security-based swap with knock-out/ 

knock-in events tied to the value of gold, oil or 

another commodity,’’ and ‘‘[s]waps on indices or 

baskets that include narrow-based security index 

and physical commodity components’’); Deutsche 

Bank Letter (indicating that ‘‘best-of’’ swaps should 

be treated as mixed swaps); Morgan Stanley Letter 

(‘‘An example of a mixed swap might be a contract 

under which one party takes long exposure to the 

common stock of a U.S. corporation while 

simultaneously taking short exposure to the price 

of gold.’’). 

285Those standard events include inter alia 

bankruptcy, breach of agreement, cross default to 

other indebtedness, and misrepresentations. 

286See section 3(a)(68)(A)(ii)(III) of the Exchange 

Act, 15 U.S.C. 78c(a)(68)(A)(ii)(III). 

extent that security-based swaps differ 

from more traditional securities 

products, however, the SEC is soliciting 

comment on whether additional 

guidance may be necessary regarding 

the application of certain provisions of 

the Exchange Act and the Securities 

Act, and the rules and regulations 

promulgated thereunder, to securitybased swaps. 

Request for Comment 

119. Are there Exchange Act or 

Securities Act provisions, or rules and 

regulations promulgated thereunder, 

that contemplate application to cash 

market securities products or other 

securities products for which additional 

guidance may be necessary when 

applied to security-based swaps? If so, 

which provisions, and why? Please 

provide detailed analysis and empirical 

data, to the extent feasible. 

120. What additional guidance or 

modifications would be necessary to 

any such provisions in order to address 

the application of these provisions to 

security-based swaps while still 

achieving the regulatory purposes of 

those provisions? 

IV. Mixed Swaps 

A. Scope of the Category of Mixed Swap 

The category of mixed swap is 

described, in both the definition of the 

term ‘‘security-based swap’’ in the 

Exchange Act and the definition of the 

term ‘‘swap’’ in the CEA, as a securitybased swap that is also: based on the 

value of 1 or more interest or other rates, 

currencies, commodities, instruments of 

indebtedness, indices, quantitative 

measures, other financial or economic 

interest or property of any kind (other 

than a single security or a narrow-based 

security index), or the occurrence, nonoccurrence, or the extent of the 

occurrence of an event or contingency 

associated with a potential financial, 

economic, or commercial consequence 

(other than an event described in 

subparagraph (A)(ii)(III) [of section 

3(a)(68) of the Exchange Act]).280

A mixed swap, therefore, is both a 

security-based swap and a swap.281

The Commissions believe that the 

scope of mixed swaps is, and is 

intended to be, narrow. Title VII 

establishes robust and largely parallel 

regulatory regimes for both swaps and 

security-based swaps and directs the 

Commissions to jointly prescribe such 

regulations regarding mixed swaps as 

may be necessary to carry out the 

purposes of the Dodd-Frank Act.282

More generally, the Commissions 

believe the category of mixed swap was 

designed so that there would be no gaps 

in the regulation of swaps and securitybased swaps. Therefore, in light of the 

statutory scheme created by the DoddFrank Act for swaps and security-based 

swaps, the Commissions believe the 

category of mixed swap covers only a 

small subset of Title VII instruments.283

For example, a Title VII instrument in 

which the underlying references are the 

value of an oil corporation stock and the 

price of oil would be a mixed swap. 

Similarly, a Title VII instrument in 

which the underlying reference is a 

portfolio of both securities (assuming 

the portfolio is not an index or, if it is 

an index, that the index is narrowbased) and commodities would be a 

mixed swap. Mixed swaps also would 

include certain Title VII instruments 

called ‘‘best of’’ or ‘‘out performance’’ 

swaps that require a payment based on 

the higher of the performance of a 

security and a commodity (other than a 

security).284 As discussed elsewhere in 

this release, the Commissions also 

believe that certain Title VII instruments 

may be mixed swaps if they meet 

specified conditions. 

The Commissions also believe that the 

use of certain market standard 

agreements in the documentation of 

Title VII instruments should not in and 

of itself transform a Title VII instrument 

into a mixed swap. For example, many 

instruments are documented by 

incorporating by reference market 

standard agreements. Such agreements 

typically set out the basis of establishing 

a trading relationship with another 

party but are not, taken separately, a 

swap or security-based swap. These 

agreements also include termination 

and default events relating to one or 

both of the counterparties; such 

counterparties may or may not be 

entities that issue securities.285 The 

Commissions believe that the term ‘‘any 

agreement * * * based on * * * the 

occurrence of an event relating to a 

single issuer of a security,’’ as provided 

in the definition of the term ‘‘securitybased swap,’’ was not intended to 

include such termination and default 

events relating to counterparties 

included in standard agreements that 

are incorporated by reference into a 

Title VII instrument.286 Therefore, an 

instrument would not be 

simultaneously a swap and a securitybased swap (and thus not a mixed swap) 

simply by virtue of having incorporated 

by reference a standard agreement, 

including default and termination 

events relating to counterparties to the 

Title VII instrument. 

Request for Comment 

The Commissions request comment 

on the following: 

121. Are there other examples of Title 

VII instruments that should, or should 

not, be included within the mixed swap 

category? 

122. How frequently, and for what 

purposes, do market participants use 

mixed swaps? 

123. Can, and should, the economic 

goals of mixed swaps be accomplished 

using a combination of separate Title VII 

instruments, none of which would need 

to constitute a mixed swap? What 

problems, if any, would arise from the 

‘‘disaggregation’’ of mixed swaps? 

B. Regulation of Mixed Swaps 

1. Introduction 

Paragraph (a) of proposed rule 1.9 

under the CEA and proposed rule 3a68– 

4 under the Exchange Act would define 

a ‘‘mixed swap’’ in the same manner as 

the term is defined in both the CEA and 

the Exchange Act. The Commissions are 

proposing two rules to address the 

regulation of mixed swaps. First, 

paragraph (b) of proposed rule 1.9 under 

the CEA and proposed rule 3a68–4 

under the Exchange Act would provide 

a regulatory framework with which 

parties to bilateral uncleared mixed 

swaps (i.e., mixed swaps that are neither 

executed on or subject to the rules of a 

DCM, NSE, SEF, security-based SEF, or 

FBOT nor cleared through a DCO or 

clearing agency), as to which at least 


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287All references to Title VII instruments in this 

part IV and in part VI shall include a class of such 

Title VII instruments as well. For example, a ‘‘class’’ 

of Title VII instrument would include instruments 

that are of similar character and provide 

substantially similar rights and privileges. 

288For purposes of paragraph (c) of proposed rule 

1.9 under the CEA and rule 3a68–4 under the 

Exchange Act, ‘‘parallel provisions’’ means 

comparable provisions of the CEA and the 

Exchange Act that were added or amended by Title 

VII with respect to security-based swaps and swaps, 

and the rules and regulations thereunder. 

289Section 712(a)(7)(A) of the Dodd-Frank Act 

requires the Commissions to treat functionally or 

economically similar entities in a similar manner. 

290For purposes of the proposed rules, a ‘‘bilateral 

uncleared mixed swap’’ would be a mixed swap 

that: (i) Is neither executed on nor subject to the 

rules of a DCM, NSE, SEF, security-based SEF, or 

FBOT; and (ii) will not be submitted to a DCO or 

registered or exempt clearing agency to be cleared. 

To the extent that a mixed swap is subject to the 

mandatory clearing requirement (see CEA section 

2(h)(1)(A), 7 U.S.C. 2(h)(1)(A), and section 3C(a)(1) 

of the Exchange Act) (and where a counterparty is 

not eligible to rely on the end-user exclusion from 

mandatory clearing requirement (see CEA section 

2(h)(7), 7 U.S.C. 2(h)(7), and section 3C(g) of the 

Exchange Act)), this alternative regulatory treatment 

would not be available. 

291 7 U.S.C. 6s(f) and 12, respectively. 

292 7 U.S.C. 2(a)(1)(B), 6(b), 6b, 6c, 9 and 15, 13b, 

13a–1, 13a–2, 13, 13c(a), 13c(b), and 26, 

respectively. 

293 7 U.S.C. 6r. 

294 7 U.S.C. 2(a)(13). 

295 7 U.S.C. 6s(e). 

296 7 U.S.C. 6a. 

297See supra note 10. 

298Because security-based swaps are also 

securities, compliance with the Federal securities 

laws and rules and regulations thereunder (in 

addition to the provisions of the Dodd-Frank Act 

and the rules and regulations thereunder) would 

also be required. To the extent one of the 

Commissions has exemptive authority with respect 

to other provisions of the CEA or the Federal 

securities laws and the rules and regulations 

thereunder, persons may submit separate exemptive 

requests or rulemaking petitions regarding those 

provisions to the relevant Commission. 

one of the parties is dually registered 

with both Commissions, would need to 

comply. Second, paragraph (c) of the 

proposed rules would establish a 

process for persons to request that the 

Commissions issue a joint order 

permitting such persons (and any other 

person or persons that subsequently 

lists, trades, or clears that class of mixed 

swap) 287 to comply, as to parallel 

provisions 288 only, with specified 

parallel provisions of either the CEA or 

the Exchange Act, and related rules and 

regulations (collectively ‘‘specified 

parallel provisions’’), instead of being 

required to comply with parallel 

provisions of both the CEA and the 

Exchange Act. 

2. Bilateral Uncleared Mixed Swaps 

Entered Into by Dually-Registered 

Dealers or Major Participants 

Swap dealers and major swap 

participants will be comprehensively 

regulated by the CFTC and securitybased swap dealers and major securitybased swap participants will be 

comprehensively regulated by the 

SEC.289 The Commissions recognize that 

there may be differences in the 

requirements applicable to swap dealers 

and security-based swap dealers, or 

major swap participants and major 

security-based swap participants, such 

that dually-registered market 

participants may be subject to 

potentially conflicting or duplicative 

regulatory requirements when they 

engage in mixed swap transactions. In 

order to assist market participants in 

addressing such potentially conflicting 

or duplicative requirements, the 

Commissions are proposing rules that 

would permit dually-registered swap 

dealers and security-based swap dealers 

and dually-registered major swap 

participants and major security-based 

swap participants to comply with an 

alternative regulatory regime when they 

enter into certain mixed swaps under 

specified circumstances. 

Accordingly, paragraph (b) of 

proposed rule 1.9 under the CEA and 

rule 3a68–4 under the Exchange Act 

would provide that a bilateral uncleared 

mixed swap,290 where at least one party 

is dually-registered with the CFTC as a 

swap dealer or major swap participant 

and with the SEC as a security-based 

swap dealer or major security-based 

swap participant, would be subject to all 

applicable provisions of the Federal 

securities laws (and SEC rules and 

regulations promulgated thereunder). 

The proposed rules also would provide 

that such mixed swaps would be subject 

to only the following provisions of the 

CEA (and CFTC rules and regulations 

promulgated thereunder): 

• Examinations and information 

sharing: CEA sections 4s(f) and 8; 291

• Enforcement: CEA sections 

2(a)(1)(B), 4(b), 4b, 4c, 6(c), 6(d), 6c, 6d, 

9, 13(a), 13(b) and 23; 292

• Reporting to an SDR: CEA section 

4r; 293

• Real-time reporting: CEA section 

2(a)(13); 294

• Capital: CEA section 4s(e); 295 and 

• Position Limits: CEA section 4a.296

The Commissions believe that 

paragraph (b) of the proposed rules 

would address potentially conflicting or 

duplicative regulatory requirements for 

dually-registered dealers and major 

participants that are subject to 

regulation by both the CFTC and the 

SEC, while requiring dual registrants to 

comply with the regulatory 

requirements the Commissions believe 

are necessary to provide sufficient 

regulatory oversight for mixed swaps 

transactions entered into by such dual 

registrants. The CFTC also believes that 

paragraph (b) of the proposed rules 

would provide clarity to duallyregistered dealers and major 

participants, who are subject to 

regulation by both the CFTC and the 

SEC, as to the requirements of each 

Commission that will apply to their 

bilateral uncleared mixed swaps. 

Request for Comment 

124. The Commissions request 

comment generally on the foregoing 

proposed rules regarding the regulation 

of mixed swaps entered into by duallyregistered swap or security-based swap 

dealers and major swap or securitybased swap participants. 

125. Does paragraph (b) of proposed 

rule 1.9 under the CEA and proposed 

rule 3a68–4 under the Exchange Act 

provide effective regulatory treatment 

for bilateral uncleared mixed swaps 

entered into by persons that are dually 

registered both as swap dealers or major 

swap participants with the CFTC and 

security-based swap dealers or major 

security-based swap participants with 

the SEC? If not, how should the 

proposed regulatory treatment be 

modified? 

126. Are the enumerated sections of 

the CEA (and the regulations 

promulgated thereunder) that are 

reserved in paragraph (b) appropriate? 

Are there sections that should be 

withdrawn? Why or why not? Are there 

sections that should be added? Why or 

why not? 

3. Regulatory Treatment for Other 

Mixed Swaps 

Because mixed swaps are both 

security-based swaps and swaps,297

absent a joint rule or order by the 

Commissions permitting an alternative 

regulatory approach, persons who desire 

or intend to list, trade, or clear a mixed 

swap (or class thereof) would be 

required to comply with all the statutory 

provisions in the CEA and the Exchange 

Act (including all the rules and 

regulations thereunder) that were added 

or amended by Title VII with respect to 

swaps or security-based swaps.298 Such 

dual regulation may not be appropriate 

in every instance and may result in 

potentially conflicting or duplicative 

regulatory requirements. However, 

before the Commissions can determine 

the appropriate regulatory treatment for 

mixed swaps (other than the treatment 

discussed above), the Commissions 

would need to understand better the 

nature of the mixed swaps that parties 

want to trade. Paragraph (c) of proposed 

rule 1.9 under the CEA and proposed 


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299Other than with respect to the specified 

parallel provisions with which such persons may be 

permitted to comply instead of complying with 

parallel provisions of both the CEA and the 

Exchange Act, any other provision of either the CEA 

or the Federal securities laws that applies to swaps 

or security-based swaps will continue to apply. 

300See section 3(a)(78) of the Exchange Act, 15 

U.S.C. 78c(a)(78); CEA section 1a(47)(A)(v), 7 U.S.C. 

1a(47)(A)(v). The Dodd-Frank Act provides that 

certain CFTC registrants, such as DCOs and SEFs, 

will keep records regarding SBSAs open to 

inspection and examination by the SEC upon 

request. See, e.g., sections 725(e) and 733 of the 

Dodd-Frank Act. The Commissions are committed 

rule 3a68–4 under the Exchange Act 

would establish a process pursuant to 

which any person who desires or 

intends to list, trade, or clear a mixed 

swap (or class thereof) that is not subject 

to the provisions of paragraph (b) (i.e., 

bilateral uncleared mixed swaps entered 

into by at least one dual registrant) may 

request the Commissions to publicly 

issue a joint order permitting such 

person (and any other person or persons 

that subsequently lists, trades, or clears 

that class of mixed swap) to comply, as 

to parallel provisions only, with the 

specified parallel provisions, instead of 

being required to comply with parallel 

provisions of both the CEA and the 

Exchange Act.299

Paragraph (c) of the proposed rules 

would further provide that a person 

submitting such a request to the 

Commissions must provide the 

Commissions with: 

(i) All material information regarding 

the terms of the specified, or specified 

class of, mixed swap; 

(ii) the economic characteristics and 

purpose of the specified, or specified 

class of, mixed swap; 

(iii) the specified parallel provisions, 

and the reasons the person believes 

such specified parallel provisions 

would be appropriate for the mixed 

swap (or class thereof); 

(iv) an analysis of (1) the nature and 

purposes of the parallel provisions that 

are the subject of the request; (2) the 

comparability of such parallel 

provisions; and (3) the extent of any 

conflicts or differences between such 

parallel provisions; and 

(v) such other information as may be 

requested by either of the Commissions. 

This provision is intended to provide 

the Commissions with sufficient 

information regarding the mixed swap 

(or class thereof) and the proposed 

regulatory approach to make an 

informed determination regarding the 

appropriate regulatory treatment of the 

mixed swap (or class thereof). 

Paragraph (c) of the proposed rules 

also would allow a person to withdraw 

a request regarding the regulation of a 

mixed swap at any time prior to the 

issuance of a joint order by the 

Commissions. This provision is 

intended to permit persons to withdraw 

requests that they no longer need. This, 

in turn, would save the Commissions 

time and staff resources. 

Paragraph (c) would further provide 

that in response to a request pursuant to 

the proposed rules, the Commissions 

may jointly issue an order, after public 

notice and opportunity for comment, 

permitting the requesting person (and 

any other person or persons that 

subsequently lists, trades, or clears that 

class of mixed swap) to comply, as to 

parallel provisions only, with the 

specified parallel provisions (or another 

subset of the parallel provisions that are 

the subject of the request, as the 

Commissions determine is appropriate), 

instead of being required to comply 

with parallel provisions of both the CEA 

and the Exchange Act. In determining 

the contents of such a joint order, the 

Commissions could consider, among 

other things, (i) the nature and purposes 

of the parallel provisions that are the 

subject of the request; (ii) the 

comparability of such parallel 

provisions; and (iii) the extent of any 

conflicts or differences between such 

parallel provisions. 

Finally, paragraph (c) of the proposed 

rules would require the Commissions, if 

they determine to issue a joint order 

pursuant to these rules, to do so within 

120 days of receipt of a complete 

request (with such 120-day period being 

tolled during the pendency of a request 

for public comment on the proposed 

interpretation). If the Commissions do 

not issue a joint order within the 

prescribed time period, the proposed 

rules require that each Commission 

publicly provide the reasons for not 

having done so. Paragraph (c) makes 

clear that nothing in the proposed rules 

requires either Commission to issue a 

requested joint order regarding the 

regulation of a particular mixed swap 

(or class thereof). 

These provisions are intended to 

provide market participants with a 

prompt review of requests for a joint 

order regarding the regulation of a 

particular mixed swap (or class thereof). 

The proposed rules also would provide 

transparency and accountability by 

requiring that at the end of the review 

period, the Commissions issue the 

requested order or publicly state the 

reasons for not doing so. 

Request for Comment 

127. Is the proposed procedure set 

forth in paragraph (c) appropriate? 

Should paragraph (c) of the proposed 

rules include a more detailed process 

for persons to request that the 

Commissions issue a joint order 

permitting such persons to comply, as to 

parallel provisions only, with specified 

parallel provisions, instead of being 

required to comply with parallel 

provisions of both the CEA and the 

Exchange Act? If so, please provide a 

detailed explanation of what that 

process should include. 

128. Is the information required by 

paragraph (c) in support of a request for 

a joint order appropriate? Are there 

specific economic characteristics that 

should be required? In particular, 

should requesting persons be required 

to provide the specified parallel 

provisions, and the reasons the person 

believes it would be appropriate to 

request that regulatory treatment, as 

well as an analysis of (i) the nature and 

purposes of the parallel provisions that 

are the subject of the request; (ii) the 

comparability of such parallel 

provisions; and (iii) the extent of any 

conflicts or differences between such 

parallel provisions? Why or why not? If 

not, please provide a detailed 

explanation, including what 

information requesting persons should 

be required to provide. 

129. Is there additional or alternative 

information that the Commissions 

should require persons to submit in 

connection with a request regarding the 

regulation of particular mixed swaps (or 

class thereof)? If so, what additional or 

alternative information should be 

required? 

130. Should persons be able to 

withdraw a request for a joint order 

regarding the regulation of a particular 

mixed swap (or class thereof)? Why or 

why not? Should there be additional 

requirements regarding such 

withdrawals? If so, what should they 

be? 

131. Is the 120-day timeframe for 

issuance of a requested joint order 

provided for in paragraph (c) of 

proposed rule 1.9 under the CEA and 

proposed rule 3a68–4 under the 

Exchange Act appropriate? Is it too short 

or too long? Are the provisions for 

tolling this timeframe during a public 

comment period appropriate? Why or 

why not? Where the Commissions do 

not issue a joint order, is it appropriate 

that they each publicly provide the 

reasons for not doing so within the 

applicable timeframe? Why or why not? 

V. Security-Based Swap Agreements 

A. Introduction 

SBSAs are swaps over which the 

CFTC has regulatory and enforcement 

authority but for which the SEC also has 

antifraud and certain other authority.300


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to working cooperatively together regarding their 

dual enforcement authority over SBSAs. 301 15 U.S.C. 78c note. 302See section 3(a)(78) of the Exchange Act, 15 

U.S.C. 78c(a)(78). The CFMA amended the 

Exchange Act and the Securities Act to exclude 

swap agreements from the definitions of security in 

those Acts but subjected ‘‘security-based swap 

agreements,’’ as defined in section 206B of the 

GLBA, 15 U.S.C. 78c note, to the antifraud, antimanipulation, and anti-insider trading provisions of 

the Exchange Act and Securities Act. See CFMA, 

supra note 182, title III. 

The CEA does not contain a stand-alone 

definition of ‘‘security-based swap agreement’’ but 

includes the definition instead in subparagraph 

(A)(v) of the swap definition in CEA section 1a(47), 

7 U.S.C. 1a(47). The only difference between these 

definitions is that the definition of SBSA in the 

Exchange Act specifically excludes security-based 

swaps (see section 3(a)(78)(B) of the Exchange Act, 

15 U.S.C. 78c(a)(78)(B)), while the definition of 

SBSA in the CEA does not contain a similar 

exclusion. Instead, the exclusion for security-based 

swaps is placed in the general exclusions from the 

definition of swap in the CEA (see CEA section 

1a(47)(B)(x), 7 U.S.C. 1a(47)(B)(x)). 

303 15 U.S.C. 78c note. 304 7 U.S.C. 1a(12)(C). 305See section 762(b) of the Dodd-Frank Act. 

Sections 762(c) and (d) of the Dodd-Frank Act also 

made conforming amendments to the Exchange Act 

and the Securities Act to reflect the changes to the 

regulation of ‘‘swap agreements’’ that are either 

‘‘security-based swaps’’ or ‘‘security-based swap 

agreements’’ under the Dodd-Frank Act. 

306Swaps based on indexes that are not narrowbased security indexes are not included within the 

definition of the term security-based swap under 

the Dodd-Frank Act. See section 3(a)(68)(A)(ii)(I) of 

the Exchange Act, 15 U.S.C. 78c(a)(68)(A)(ii)(I), and 

discussion supra part III.G. However, such swaps 

have a material term that is ‘‘based on the price, 

yield, value, or volatility of any security or any 

group or index of securities, or any interest therein,’’ 

and therefore such swaps fall within the SBSA 

definition. 

307Swaps on U.S. Treasury securities that do not 

have any other underlying references involving 

securities are expressly excluded from the 

definition of the term ‘‘security-based swap’’ under 

the Dodd-Frank Act. See section 3(a)(68)(C) of the 

Exchange Act, 15 U.S.C. 78c(a)(68)(C) (providing 

that an agreement, contract, or transaction that 

would be a security-based swap solely because it 

references, is based on, or settles through the 

delivery of one or more U.S. Treasury securities (or 

certain other exempted securities) is excluded from 

the security-based swap definition). However, 

swaps on U.S. Treasury securities or on other 

exempted securities covered by subparagraph (C) of 

the security-based swap definition have a material 

term that is ‘‘based on the price, yield, value, or 

volatility of any security or any group or index of 

securities, or any interest therein,’’ and therefore 

they fall within the SBSA definition. 

308The Commissions note that certain 

transactions that were not ‘‘security-based swap 

agreements’’ under the CFMA are nevertheless 

included in the definition of security-based swap 

under the Dodd-Frank Act—including, for example, 

a CDS on a single loan. Accordingly, although such 

transactions were not subject to insider trading 

restrictions under the CFMA, under the Dodd-Frank 

Act they are subject to the Federal securities laws, 

including insider trading restrictions. 

309See Swap Data Recordkeeping and Reporting 

Requirements, supra note 6 (proposed rules 

regarding swap data recordkeeping and reporting 

requirements for SDRs, DCOs, DCMs, SEFs, swap 

dealers, major swap participants, and swap 

counterparties who are neither swap dealers nor 

major swap participants); Reporting, 

Recordkeeping, and Daily Trading Records 

Requirements for Swap Dealers and Major Swap 

Participants, supra note 7 (proposed rules regarding 

reporting and recordkeeping requirements and daily 

trading records requirements for swap dealers and 

major swap participants). 

The term ‘‘security-based swap 

agreement’’ is defined as a ‘‘swap 

agreement’’ (as defined in section 206A 

of the GLBA 301) of which ‘‘a material 

term is based on the price, yield, value, 

or volatility of any security or any group 

or index of securities, including any 

interest therein’’ but does not include a 

security-based swap.302 The Dodd-Frank 

Act amended the definition of ‘‘swap 

agreement’’ in section 206A of the 

GLBA 303 to eliminate the requirements 

that a swap agreement be between ECPs, 

as defined in 1a(12)(C) of the CEA,304

and subject to individual negotiation.305

B. Swaps That Are Security-Based Swap 

Agreements 

Although the Commissions believe it 

is not possible to provide a bright line 

test to define an SBSA, the 

Commissions believe that it is possible 

to clarify that certain types of swaps 

clearly fall within the definition of 

SBSA. For example, a swap based on an 

index of securities that is not a narrowbased security index (i.e., a broad-based 

security index) would fall within the 

definition of an SBSA under the DoddFrank Act.306 Similarly, an index CDS 

that is not based on a narrow-based 

security index or on the ‘‘issuers of 

securities in a narrow-based security 

index,’’ as defined in proposed rule 

1.3(zzz) under the CEA and proposed 

rule 3a68–1a under the Exchange Act, 

would be an SBSA. In addition, a swap 

based on a U.S. Treasury security or on 

certain other exempted securities other 

than municipal securities would fall 

within the definition of an SBSA under 

the Dodd-Frank Act.307 The 

Commissions have received no 

comments regarding the definition of 

SBSA in the Dodd-Frank Act in 

response to the ANPR, and have not 

been made aware of any significant 

market confusion regarding what 

constitutes an SBSA since the definition 

of SBSA was enacted as part of the 

CFMA in 2000. Accordingly, the 

Commissions are not proposing to 

further define SBSA at this time beyond 

providing the examples above.308

Request for Comment 

132. The Commissions request 

comment on whether further 

clarification of the definition of SBSA is 

necessary or appropriate. Commenters 

should provide a detailed analysis 

regarding what further guidance should 

be provided and how that guidance 

would affect what constitutes an SBSA. 

133. The Commissions also request 

comment on whether there are other 

examples of swap transactions that the 

Commissions should clarify meet the 

definition of SBSA. 

C. Books and Records Requirements for 

Security-Based Swap Agreements 

The Dodd-Frank Act requires the 

Commissions to adopt rules regarding 

the books and records required to be 

kept for SBSAs. Specifically, section 

712(d)(2)(B) of the Dodd-Frank Act 

requires the Commissions, in 

consultation with the Board, to jointly 

adopt rules governing books and records 

requirements for SBSAs by persons 

registered as SDRs under the CEA, 

including uniform rules that specify the 

data elements that shall be collected and 

maintained by each SDR. Similarly, 

section 712(d)(2)(C) of the Dodd-Frank 

Act requires the Commissions, in 

consultation with the Board, to jointly 

adopt rules governing books and records 

for SBSAs, including daily trading 

records, for swap dealers, major swap 

participants, security-based swap 

dealers, and major security-based swap 

participants. 

As discussed above, SBSAs are swaps 

over which the CFTC has primary 

regulatory authority, but for which the 

SEC has antifraud, anti-manipulation, 

and certain other authority. The CFTC 

has proposed rules governing books and 

records for swaps, which would apply 

to swaps that also are SBSAs.309 The 

Commissions believe that the proposed 

rules would provide sufficient books 

and records regarding SBSAs and do not 

believe that additional books and 

records requirements are necessary for 

SBSAs. The Commissions therefore are 

proposing rules to clarify that there 

would not be additional books and 

records requirements regarding SBSAs 

other than those proposed for swaps. 

Specifically, proposed rule 1.7 under 

the CEA and proposed rule 3a69–3 

under the Exchange Act would not 

require persons registered as SDRs 

under the CEA and the rules and 

regulations thereunder to (i) keep and 

maintain additional books and records 

regarding SBSAs other than the books 

and records regarding swaps that SDRs 

would be required to keep and maintain 

pursuant to the CEA and rules and 

regulations thereunder; and (ii) collect 

and maintain additional data regarding 

SBSAs other than the data regarding 

swaps that SDRs would be required to 

collect and maintain pursuant to the 

CEA and rules and regulations 

thereunder. 


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310Proposed rule 1.7 under the CEA and 

proposed rule 3a69–3 under the Exchange Act 

would provide that the term ‘‘security-based swap 

agreement’’ has the meaning set forth in CEA 

section 1a(47)(A)(v), 7 U.S.C. 1a(47)(A)(v), and 

section 3(a)(78) of the Exchange Act, 15 U.S.C. 

78c(a)(78), respectively. 

311The Commissions note that section 718 of the 

Dodd-Frank Act is a separate process from the 

process the Commissions are proposing, and that 

any future interpretation involving the process 

under section 718 would not affect the process 

being proposed here, nor would any future 

interpretation involving the process proposed here 

affect the process under section 718. 

In addition, the proposed rules would 

not require persons registered as swap 

dealers or major swap participants 

under the CEA and rules and 

regulations thereunder, or registered as 

security-based swap dealers or major 

security-based swap participants under 

the Exchange Act and rules and 

regulations thereunder, to keep and 

maintain additional books and records, 

including daily trading records, 

regarding SBSAs other than the books 

and records regarding swaps those 

persons would be required to keep and 

maintain pursuant to the CEA and the 

rules and regulations thereunder.310

Request for Comment 

134. The Commissions request 

comment on the proposed rules 

regarding books and records 

requirements for SBSAs. Will requiring 

the same recordkeeping information for 

SBSAs that will be required for swaps 

under the CFTC’s recordkeeping rules 

be sufficient? Should the Commissions 

impose additional recordkeeping 

requirements for SBSAs? If so, why, and 

what additional recordkeeping should 

be required? 

VI. Process for Requesting 

Interpretations of the Characterization 

of a Title VII Instrument 

As discussed above, there may be 

Title VII instruments (or classes of Title 

VII instruments) that may be difficult to 

categorize definitively as swaps or 

security-based swaps. Further, because 

mixed swaps are both swaps and 

security-based swaps, identifying a 

mixed swap may not always be 

straightforward. 

Section 712(d)(4) of the Dodd-Frank 

Act provides that any interpretation of, 

or guidance by, either the CFTC or SEC 

regarding a provision of Title VII shall 

be effective only if issued jointly by the 

Commissions (after consultation with 

the Board) on issues where Title VII 

requires the CFTC and SEC to issue joint 

regulations to implement the provision. 

The Commissions believe that any 

interpretation or guidance regarding 

whether a Title VII instrument is a 

swap, a security-based swap, or both 

(i.e., a mixed swap), must be issued 

jointly pursuant to this requirement. 

Consequently, the Commissions are 

proposing a process for interested 

persons to request a joint interpretation 

by the Commissions regarding whether 

a particular Title VII instrument (or 

class of Title VII instruments) is a swap, 

a security-based swap, or both (i.e., a 

mixed swap). 

Section 718 of the Dodd-Frank Act 

establishes a process for determining the 

status of ‘‘novel derivative products’’ 

that may have elements of both 

securities and futures contracts. Section 

718 of the Dodd-Frank Act provides a 

useful model for a joint Commission 

review process to appropriately 

categorize Title VII instruments. As a 

result, the Commissions’ proposed 

process rules regarding swaps, securitybased swaps, and mixed swaps include 

various attributes of the process 

established in section 718 of the DoddFrank Act. In particular, to permit an 

appropriate review period that provides 

sufficient time to ensure Federal 

regulatory interests are satisfied that 

also does not unduly delay the 

introduction of new financial products, 

the proposed process, like the process 

established in section 718, would 

include a deadline for responding to a 

request for a joint interpretation.311

Proposed rule 1.8 under the CEA and 

proposed rule 3a68–2 under the 

Exchange Act would establish a process 

for parties to request a joint 

interpretation regarding the 

characterization of a particular Title VII 

instrument (or class thereof). 

Specifically, paragraph (a) of the 

proposed rules would provide that any 

person may submit a request to the 

Commissions to provide a public joint 

interpretation of whether a particular 

Title VII instrument is a swap, a 

security-based swap, or both (i.e., a 

mixed swap). 

Paragraph (a) of the proposed rules is 

intended to afford market participants 

with the opportunity to obtain greater 

certainty from the Commissions 

regarding the regulatory status of 

particular Title VII instruments under 

the Dodd-Frank Act. This provision 

should decrease the possibility that 

market participants inadvertently might 

violate the regulatory requirements 

applicable to a particular Title VII 

instrument. 

Paragraph (b) of proposed rules 1.8 

under the CEA and proposed rule 3a68– 

2 under the Exchange Act would 

provide that a person requesting an 

interpretation as to the characterization 

of a Title VII instrument as a swap, a 

security-based swap, or both (i.e., a 

mixed swap), must provide the 

Commissions with the person’s 

determination of the characterization of 

the instrument and supporting analysis, 

along with certain other documentation. 

Specifically, the person must provide 

the Commissions with the following 

information: 

• All material information regarding 

the terms of the Title VII instrument; 

• A statement of the economic 

characteristics and purpose of the Title 

VII instrument; 

• The requesting person’s 

determination as to whether the Title 

VII instrument should be characterized 

as a swap, a security-based swap, or 

both (i.e., a mixed swap), including the 

basis for such determination; and 

• Such other information as may be 

requested by either Commission. 

This provision is intended to provide 

the Commissions with sufficient 

information regarding the Title VII 

instrument at issue so that the 

Commissions can appropriately evaluate 

whether it is a swap, a security-based 

swap, or both (i.e., a mixed swap). By 

requiring that requesting persons 

furnish a determination regarding 

whether they believe the Title VII 

instrument is a swap, a security-based 

swap, or both (i.e., a mixed swap), 

including the basis for such 

determination, this provision also 

would assist the Commissions in more 

quickly identifying and addressing the 

relevant issues involved in arriving at a 

joint interpretation of the 

characterization of the instrument. 

Paragraph (c) of proposed rule 1.8 

under the CEA and proposed rule 3a68– 

2 under the Exchange Act would 

provide that a person may withdraw a 

request made pursuant to paragraph (a) 

at any time prior to the issuance of a 

joint interpretation or joint notice of 

proposed rulemaking by the 

Commissions. Notwithstanding any 

such withdrawal, the Commissions may 

provide an interpretation regarding the 

characterization of the Title VII 

instrument that was the subject of a 

withdrawn request. 

This provision is intended to permit 

parties to withdraw requests for which 

the party no longer needs an 

interpretation. This, in turn, would save 

the Commissions time and staff 

resources. If the Commissions believe 

such an interpretation is necessary 

regardless of a particular request for 

interpretation, however, the 

Commissions may provide such a joint 

interpretation of their own accord. 

Paragraph (d) of proposed rule 1.8 

under the CEA and proposed rule 3a68– 

2 under the Exchange Act would 


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312This 120-day period is based on the timeframe 

set forth in section 718(a)(3) of the Dodd-Frank Act. 

313See section 712(d)(4) of the Dodd-Frank Act. 

provide that if either Commission 

receives a proposal to list, trade, or clear 

an agreement, contract, or transaction 

(or class thereof) that raises questions as 

to the appropriate characterization of 

such agreement, contract, or transaction 

(or class thereof) as a swap, securitybased swap, or both (i.e., a mixed swap), 

the receiving Commission promptly 

shall notify the other. This provision of 

the proposed rules would further 

provide that either Commission, or their 

Chairmen jointly, may submit a request 

for a joint interpretation as to the 

characterization of the Title VII 

instrument where no external request 

has been received. 

This provision is intended to ensure 

that Title VII instruments do not fall 

into regulatory gaps and will help the 

Commissions to fulfill their 

responsibility to oversee the regulatory 

regime established by Title VII of the 

Dodd-Frank Act by making sure that 

Title VII instruments are appropriately 

characterized, and thus appropriately 

regulated. An agency, or their Chairmen 

jointly, submitting a request for an 

interpretation as to the characterization 

of a Title VII instrument under this 

paragraph would be required to submit 

the same information as, and could 

withdraw a request in the same manner 

as, a person submitting a request to the 

Commissions. The bases for these 

provisions are set forth above with 

respect to paragraphs (b) and (c) of these 

proposed rules. 

Paragraph (e) of proposed rule 1.8 

under the CEA and proposed rule 3a68– 

2 under the Exchange Act would require 

the Commissions, if they determine to 

issue a joint interpretation as to the 

characterization of a Title VII 

instrument, to do so within 120 days of 

receipt of the complete external or 

agency submission (unless such 120-day 

period is tolled during the pendency of 

a request for public comment on the 

proposed interpretation).312 If the 

Commissions do not issue a joint 

interpretation within the prescribed 

time period, the proposed rules require 

that each Commission publicly provide 

the reasons for not having done so. This 

provision of the proposed rules also 

incorporates the mandate of the DoddFrank Act that any joint interpretation 

by the Commissions be issued only after 

consultation with the Board of 

Governors of the Federal Reserve 

System.313 Finally, paragraph (e) makes 

clear that nothing in the proposed rules 

requires either Commission to issue a 

requested joint interpretation regarding 

the characterization of a particular 

instrument. 

These provisions are intended to 

guarantee market participants a prompt 

review of submissions requesting a joint 

interpretation of whether a Title VII 

instrument is a swap, a security-based 

swap, or both (i.e., a mixed swap). The 

proposed rules also would provide 

transparency and accountability by 

requiring that at the end of the review 

period, the Commissions issue the 

requested interpretation or publicly 

state the reasons for not doing so. 

Paragraph (f) of proposed rule 1.8 

under the CEA and proposed rule 3a68– 

2 under the Exchange Act would permit 

the Commissions, in lieu of issuing a 

requested interpretation, to issue 

(within the timeframe for issuing a joint 

interpretation) a joint notice of proposed 

rulemaking to further define one or 

more of the terms ‘‘swap,’’ ‘‘securitybased swap,’’ or ‘‘mixed swap.’’ Such a 

rulemaking, as required by Title VII, 

would be required to be done in 

consultation with the Board of 

Governors of the Federal Reserve 

System. This paragraph is intended to 

provide the Commissions with needed 

flexibility to address issues that may be 

of broader applicability than the 

particular Title VII instrument that is 

the subject of a request for a joint 

interpretation. 

Request for Comment 

135. The Commissions request 

comment generally on all aspects of 

proposed rule 1.8 under the CEA and 

proposed rule 3a68–2 under the 

Exchange Act. 

136. Should proposed rule 1.8(a) 

under the CEA and proposed rule 3a68– 

2(a) under the Exchange Act include a 

more specific process for persons to 

request a joint interpretation of whether 

a Title VII instrument is a swap, a 

security-based swap, or both (i.e., a 

mixed swap)? If so, what additional 

specificity would be appropriate? 

137. Would the information required 

by paragraph (b) of the proposed rules 

be sufficient for the Commissions to 

consider a request? Should requesting 

persons have to provide a statement 

regarding the economic characteristics 

and purpose of the Title VII instrument? 

Should requesting persons have to 

provide a determination regarding 

whether such instrument should be 

characterized as a swap, a securitybased swap, or both (i.e., a mixed swap), 

along with reasons therefor? 

138. Is there additional or alternative 

information that the Commissions 

should require persons to submit in 

connection with a request for an 

interpretation regarding whether a Title 

VII instrument is a swap, a securitybased swap, or both (i.e., a mixed 

swap)? If so, what additional or 

alternative information should be 

required? 

139. Should persons be able to 

withdraw a request for an interpretation 

pursuant to paragraph (c) of proposed 

rule 1.8 under the CEA and proposed 

rule 3a68–2 under the Exchange Act? 

Why or why not? Should there be 

additional parameters around or 

requirements regarding such 

withdrawals? If so, what should they 

be? 

140. Is the 120-day timeframe for 

issuance of a requested joint 

interpretation provided for in paragraph 

(e) of proposed rule 1.8 under the CEA 

and proposed rule 3a68–2 under the 

Exchange Act appropriate? Is it too short 

or too long? Are the provisions for 

tolling this timeframe during a public 

comment period, and for permitting the 

Commissions to proceed with a joint 

notice of proposed rulemaking instead 

of issuing a joint interpretation, 

appropriate? Why or why not? Where 

the Commissions do not issue a joint 

interpretation, is it helpful that they 

each publicly provide the reasons for 

not doing so within the applicable 

timeframe? Why or why not? 

141. Title VII requires that certain 

persons that are registered with the 

CFTC keep books and records relating to 

SBSAs open to inspection and 

examination by the SEC. As discussed 

in part V above, the Commissions are 

not proposing additional recordkeeping 

or other regulatory requirements for 

SBSAs that would require pretransaction identification of a swap as 

an SBSA by market participants. Under 

these circumstances, is it appropriate to 

include SBSAs in the interpretation 

process set forth in proposed rule 1.8 

under the CEA and proposed rule 3a68– 

2 under the Exchange Act? Why or why 

not? 

142. Would it be appropriate to 

include SBSAs in the interpretation 

process, if their inclusion required the 

Commissions to extend the 120-day 

timeframe for issuance of a requested 

joint interpretation to, for example, 180 

days for all products in order to address 

a potential increase in requests? Why or 

why not? 

VII. Anti-Evasion 

A. CFTC Proposed Anti-Evasion Rules 

Section 721(c) of the Dodd-Frank Act 

requires the CFTC to adopt a rule to 

further define the terms ‘‘swap,’’ ‘‘swap 

dealer,’’ ‘‘major swap participant,’’ and 

‘‘eligible contract participant,’’ in order 

‘‘[t]o include transactions and entities 


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314CEA section 1a(47)(E), 7 U.S.C. 1a(47)(E). 

315CEA section 2(i), 7 U.S.C. 2(i). New CEA 

section 2(i), as added by section 722(d) of the DoddFrank Act, also provides that the provisions of Title 

VII relating to swaps shall not apply to activities 

outside the United State unless those activities 

‘‘have a direct and significant connection with 

activities in, or effect on, commerce of the United 

States.’’ 

316The term ‘‘identified banking product’’ is 

defined in section 402 of the Legal Certainty for 

Bank Products Act of 2000, 7 U.S.C. 27. The term 

‘‘appropriate Federal banking agency’’ is defined in 

CEA section 1a(2), 7 U.S.C. 1a(2), and section 

3(a)(72) of the Exchange Act, 15 U.S.C. 78c(a)(72), 

which were added by sections 721(a) and 761(a) of 

the Dodd-Frank Act, respectively. 

317Section 741(b) of the Dodd-Frank Act amends 

section 6(e) of the CEA, 7 U.S.C. 9a, to provide that 

any DCO, swap dealer, or major swap participant 

‘‘that knowingly or recklessly evades or participates 

in or facilitates an evasion of the requirements of 

section 2(h) [of the CEA] shall be liable for a civil 

monetary penalty in twice the amount otherwise 

available for a violation of section 2(h) [of the 

CEA].’’ This anti-evasion provision is not dependent 

upon the promulgation of a rule under section 

721(c) of the Dodd-Frank Act, and hence this 

release does not apply to the anti-evasion authority 

regarding CEA section 2(h), 7 U.S.C. 2(h). 

318No comments were received in response to the 

ANPR that specifically addressed anti-evasion 

authority. One commenter, however, noted that 

evasion is a concern. See Letter from David A. Berg, 

Esq., Vice President & General Counsel, Air 

Transport Association (Sept. 20, 1010). 

319Cargill v. Hardin, 452 F.2d 1154, 1163 (8th 

Cir. 1971). 

320See, e.g., Grain Land, supra note 61, at 55748 

(holding that contract substance is entitled to at 

that have been structured to evade’’ 

subtitle A of Title VII (or an amendment 

made by subtitle A). Section 761(b)(3) of 

the Dodd-Frank Act, in turn, grants 

discretionary authority to the SEC to 

define the terms ‘‘security-based swap,’’ 

‘‘security-based swap dealer,’’ ‘‘securitybased major swap participant,’’ and 

‘‘eligible contract participant,’’ with 

regard to security-based swaps, ‘‘for the 

purpose of including transactions and 

entities that have been structured to 

evade subtitle B of Title VII (or 

amendments made by subtitle B). The 

CFTC notes that several provisions of 

Title VII reference the promulgation of 

anti-evasion rules: 

• Subparagraph (E) of the definition 

of ‘‘swap’’ provides that foreign 

exchange swaps and foreign exchange 

forwards shall be considered swaps 

unless the Secretary of the Treasury 

makes a written determination that 

either foreign exchange swaps or foreign 

exchange forwards, or both, among 

other things, ‘‘are not structured to 

evade the [Dodd-Frank Act] in violation 

of any rule promulgated by the [CFTC] 

pursuant to section 721(c) of that 

Act;’’ 314

• Section 722(d) of the Dodd-Frank 

Act provides that the provisions of the 

CEA relating to swaps shall not apply to 

activities outside the United States 

unless those activities, among other 

things, ‘‘contravene such rules or 

regulations as the [CFTC] may prescribe 

or promulgate as are necessary or 

appropriate to prevent the evasion of 

any provision of [the CEA] that was 

enacted by the [Title VII];’’ 315 and 

• Section 725(g) of the Dodd-Frank 

Act amends the Legal Certainty for Bank 

Products Act of 2000 to provide that, 

although identified banking products 

generally are excluded from the CEA, 

that exclusion shall not apply to an 

identified banking product that is a 

product of a bank that is not under the 

regulatory jurisdiction of an appropriate 

Federal banking agency,316 meets the 

definition of ‘‘swap’’ or ‘‘security-based 

swap,’’ and ‘‘has been structured as an 

identified banking product for the 

purpose of evading the provisions of the 

[CEA], the [Securities Act], or the 

[Exchange Act].’’ 317

The CFTC has determined to exercise 

its anti-evasion rulemaking authority 

under the Dodd-Frank Act.318

Structuring transactions and entities 

to evade the requirements of the DoddFrank Act could take any number of 

forms. As with the law of manipulation, 

the ‘‘methods and techniques’’ of 

evasion are ‘‘limited only by the 

ingenuity of man.’’ 319 In light of the 

myriad methods of potential evasion, 

any attempt to comprehensively 

determine what constitutes evasion, or 

to provide a bright-line test of evasion 

by rule, would likely not be effective as 

would-be evaders could simply 

restructure their transactions or entities 

to fall outside any rigid boundary. 

Accordingly, proposed rule 1.3(xxx)(6) 

under the CEA generally would define 

as swaps those transactions that are 

willfully structured to evade the 

provisions of Title VII governing the 

regulation of swaps. Specific provisions 

would apply in similar fashion to 

currency and interest rate swaps that are 

willfully structured as foreign exchange 

forwards or foreign exchange swaps, 

and to transactions of a bank that is not 

under the regulatory jurisdiction of an 

appropriate Federal banking agency 

where the transactions are willfully 

structured as identified banking 

products to evade the new regulatory 

regime for swaps that was enacted in 

Title VII. These proposed rules would 

not apply to any agreement, contract, or 

transaction structured as a security 

(including a security-based swap) under 

the securities laws (as defined in section 

3(a)(47) of the Exchange Act). 

The Dodd-Frank Act also gives the 

CFTC general authority to prevent 

evasion of Title VII that occurs outside 

of the United States. Specifically, as 

noted above, section 722(d) of the DoddFrank Act states that the provisions of 

the CEA relating to swaps that were 

enacted by Title VII (including any rule 

prescribed or regulation promulgated 

thereunder) shall not apply to activities 

outside the United States unless, among 

other things, those activities ‘‘contravene 

such rules or regulations as the [CFTC] 

may prescribe or promulgate as are 

necessary or appropriate to prevent the 

evasion of any provision of [the CEA] 

that was enacted by [Title VII].’’ The 

CFTC is proposing rules to address 

potential evasion of Title VII under this 

provision of the Dodd-Frank Act. 

Proposed rule 1.6 under the CEA 

would prohibit activities conducted 

outside the United States, including 

entering into transactions and 

structuring entities, to willfully evade or 

attempt to evade any provision of the 

CEA as enacted under Title VII or the 

rules and regulations promulgated 

thereunder. No activity, however, 

conducted outside of the United States 

with respect to a security (including a 

security-based swap) under the 

securities laws (as defined in section 

3(a)(47) of the Exchange Act) and that is 

subject to the jurisdiction of the SEC 

would be prohibited pursuant to 

proposed rule 1.6. 

The CFTC’s proposed rule 1.3(xxx)(6) 

further defining the term ‘‘swap’’ would 

further provide that transactions, other 

than transactions structured as 

securities, willfully structured to evade 

shall be considered in determining 

whether a person is a swap dealer or 

major swap participant. Proposed rule 

1.6 would further provide that an 

activity conducted outside the United 

States, other than an activity with 

respect to a security (including a 

security-based swap), to willfully evade 

or attempt to evade, shall be subject to 

the swap provisions of the CEA enacted 

under Title VII of the Dodd-Frank Act. 

The CFTC believes that these provisions 

are necessary to fully prevent those who 

seek to willfully evade the regulatory 

requirements established by Congress in 

Title VII relating to swaps from enjoying 

any benefits from their efforts to evade. 

Finally, the CFTC’s proposed rules 

would provide that in determining 

whether a transaction has been willfully 

structured to evade, neither the form, 

label, nor written documentation of the 

transaction shall be dispositive. The 

CFTC believes that looking beyond the 

form of the transaction to examine its 

actual substance is necessary to prevent 

evasion through clever draftsmanship. 

Such an approach is consistent with the 

CFTC’s case law in the context of 

determining whether a contract is a 

futures contract.320


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least as much weight as form); First Nat’l Monetary 

Corp., supra note 152, at 30974; Stovall, supra note 

152, at 23779 (holding that the CFTC ‘‘will not 

hesitate to look behind whatever label the parties 

may give to the instrument’’). 321 15 U.S.C. 1604(a) provides, in relevant part, 

that the Federal Reserve Board: 

Shall prescribe regulations to carry out the 

purposes of this subchapter * * *. [T]hese 

regulations may contain such classifications, 

differentiations, or other provisions, and may 

provide for such adjustments and exceptions for 

any class of transactions, as in the judgment of the 

Board are necessary or proper to effectuate the 

purposes of this subchapter, to prevent 

circumvention or evasion thereof, or to facilitate 

compliance therewith. 

In affirming the Board’s promulgation of 

Regulation Z, the Supreme Court noted that antievasion provisions such as section 1604(a) evince 

Congress’s intent to ‘‘stress[] the agency’s power to 

counteract attempts to evade the purposes of a 

statute.’’ Mourning v. Family Publ’ns Serv., Inc., 411 

U.S. 356, 370 (1973) (citing Gemsco v. Walling, 324 

U.S. 244 (1945) (giving great deference to a 

regulation promulgated under similar preventionof-evasion rulemaking authority in the Fair Labor 

Standards Act)). 

322 31 U.S.C. 5324 (stating, in pertinent part, that 

‘‘[n]o person shall, for the purpose of evading the 

reporting requirements of [the Bank Secrecy Act 

(BSA) or any regulation prescribed 

thereunder].* * * structure or assist in structuring, 

or attempt to structure or assist in structuring, any 

transaction with one or more domestic financial 

institutions’’). The Federal Deposit Insurance 

Corporation regulations implementing the BSA 

require banks to report transactions that ‘‘’’the bank 

knows, suspects, or has reason to suspect’’ are 

‘‘designed to evade any regulations promulgated 

under the Bank Secrecy Act.’’ 12 CFR 353.3 (2010). 

323The Internal Revenue Code makes it unlawful 

for any person willfully to attempt ‘‘in any manner 

to evade or defeat any tax * * *.’’ 26 U.S.C. 7201. 

While a considerable body of case law has 

developed under the tax evasion provision, the 

statute itself does not define the term, but generally 

prohibits willful attempts to evade tax. 

324A similar concept applies with respect to tax 

evasion. A transaction that is structured to avoid 

the payment of taxes but that lacks a valid business 

purpose may be found to constitute tax evasion. 

See, e.g., Gregory v. Helvering, 293 U.S. 465, 469 

(1935) (favorable tax treatment disallowed because 

transaction lacked any business or corporate 

purpose). Under the ‘‘sham-transaction’’ doctrine, ‘‘a 

transaction is not entitled to tax respect if it lacks 

economic effects or substance other than the 

generation of tax benefits, or if the transaction 

serves no business purpose.’’ Winn-Dixie Stores, 

Inc. v. Comm’r, 254 F.3d 1313, 1316 (11th Cir. 

2001) (citing Knetsch v. United States, 364 U.S. 361 

(1960)). ‘‘The doctrine has few bright lines, but ‘it 

is clear that transactions whose sole function is to 

produce tax deductions are substantive shams.’’’ Id. 

(quoting United Parcel Serv. of Am., Inc. v. Comm’r, 

254 F.3d 1014, 1018 (11th Cir 2001)). 

325The Internal Revenue Service explains: 

Avoidance of taxes is not a criminal offense. Any 

attempt to reduce, avoid, minimize, or alleviate 

taxes by legitimate means is permissible. The 

distinction between avoidance and evasion is fine, 

yet definite. One who avoids tax does not conceal 

or misrepresent. He/she shapes events to reduce or 

eliminate tax liability and, upon the happening of 

the events, makes a complete disclosure. Evasion, 

on the other hand, involves deceit, subterfuge, 

camouflage, concealment, some attempt to color or 

obscure events or to make things seem other than 

they are. For example, the creation of a bona fide 

partnership to reduce the tax liability of a business 

by dividing the income among several individual 

partners is tax avoidance. However, the facts of a 

particular investigation may show that an alleged 

partnership was not, in fact, established and that 

one or more of the alleged partners secretly 

returned his/her share of the profits to the real 

owner of the business, who, in turn, did not report 

this income. This would be an instance of 

attempted evasion. 

Internal Revenue Service, Internal Revenue 

Manual, part 9.1.3.3.2.1, available at http:// 

www.irs.gov/irm/part9/irm_09–001– 

003.html#d0e169. 

326Although deceitful, deceptive, or illegitimate 

conduct may be sufficient to find that evasion has 

occurred, such conduct is not a prerequisite for a 

finding of evasion, particularly when other indicia 

of evasion are present, such as, for example, when 

the transaction lacks any business purpose. 

In order to provide clarity concerning 

the anti-evasion rules, the CFTC also 

proposes to provide interpretive 

guidance as to certain types of 

circumstances that may constitute an 

evasion of the requirements of Title VII, 

while at the same time preserving the 

CFTC’s ability to determine, on a caseby-case basis, that particular or other 

types of transactions or actions 

constitute an evasion of the 

requirements of the statute or the 

regulations promulgate thereunder. In 

developing this guidance, the CFTC has 

considered legislative, administrative, 

and judicial precedent with respect to 

the anti-evasion provisions in other 

Federal statutes. For example, the CFTC 

has examined the anti-evasion 

provisions in the Truth in Lending 

Act,321 the Bank Secrecy Act,322 and the 

Internal Revenue Code.323 Based on 

these other statutory anti-evasion 

provisions, as well as the CFTC’s 

authority under the Dodd-Frank Act to 

define terms and promulgate rules and 

regulations to prevent evasion, the 

CFTC is proposing this interpretive 

guidance as to what may constitute 

evasion of the requirements of the 

Dodd-Frank Act with respect to swaps. 

The CFTC emphasizes, however, that it 

would examine each individual case on 

a case-by-case basis, and additional 

practices or circumstances may warrant 

a finding that particular conduct or 

transactions constitute an evasion of the 

requirements of the Dodd-Frank Act 

with respect to swaps. 

Business Purpose. The CFTC 

recognizes that transactions may be 

structured, and entities may be formed, 

in particular ways for legitimate 

business purposes, without any 

intention of circumventing the 

requirements of the Dodd-Frank Act 

with respect to swaps. In evaluating 

whether a person is evading or 

attempting to evade the requirements 

with respect to a particular instrument, 

entity, or transaction, the CFTC would 

consider the extent to which a person 

has a legitimate business purpose for 

structuring the instrument or entity or 

entering into the transaction in that 

particular manner. Although different 

means of structuring a transaction or 

entity may have differing regulatory 

implications and attendant 

requirements, absent other indicia of 

evasion, the CFTC would not consider 

transactions, entities, or instruments 

structured in a manner solely motivated 

by a legitimate business purpose to 

constitute evasion. However, to the 

extent a purpose in structuring an entity 

or instrument or entering into a 

transaction is to evade the requirements 

of Title VII with respect to swaps, the 

structuring of such instrument, entity, 

or transaction may be found to 

constitute evasion.324

Fraud, deceit, or unlawful activity. 

The CFTC believes that the Internal 

Revenue Service’s delineation of what 

constitutes tax evasion, as elaborated 

upon by the courts, provides a useful 

guidepost for determining which types 

of activities should be considered to 

constitute an evasion of the Dodd-Frank 

Act. The Internal Revenue Service 

distinguished between tax evasion and 

legitimate means for citizens to 

minimize, reduce, avoid or alleviate the 

tax that they pay under the Internal 

Revenue Code. Whereas permissible 

means of reducing tax (or ‘‘tax 

avoidance,’’ as the Internal Revenue 

Service refers to the practice) is 

associated with full disclosure and 

explanation of why the tax should be 

reduced under law, tax evasion consists 

of the willful attempt to evade tax 

liability, and generally involves ‘‘deceit, 

subterfuge, camouflage, concealment, or 

some attempt to color or obscure events 

or to make things seem other than they 

are.’’ 325 Similarly, persons that craft 

derivative transactions, structure 

entities, or conduct themselves in a 

deceptive or other illegitimate manner 

in order to avoid regulatory 

requirements should not be permitted to 

enjoy the fruits of their deceptive or 

illegitimate conduct. In determining 

whether particular conduct is an 

evasion of the Dodd-Frank Act, the 

CFTC will consider the extent to which 

the conduct involves deceit, deception, 

or other unlawful or illegitimate 

activity.326

Request for Comment 

The CFTC requests comment on all 

aspects of the proposed anti-evasion 

rules, including the following: 

143. Are the CFTC’s proposed rules 

and interpretive guidance set forth in 

this section sufficient to address the 

evasion concerns in Title VII? Is further 

guidance necessary? If so, what further 

guidance would be appropriate? 


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327See section 30(c) of the Exchange Act, 15 

U.S.C. 78dd(c). 328 5 U.S.C. 601 et seq. 

329Energy Exemption, supra note 72. 

330See respectively, Registration of Swap Dealers 

and Major Swap Participants, 75 FR 71379, 71385, 

Nov. 23, 2010 (swap dealers and major swap 

participants); Requirements for Derivatives Clearing 

Organizations, Designated Contract Markets, and 

Swap Execution Facilities Regarding the Mitigation 

of Conflicts of Interest, 75 FR 63732, 63745, Oct. 18, 

2010 (SEFs); Swap Data Repositories, 75 FR 80898, 

80926, Dec. 23, 2010 (SDRs); Registration of Foreign 

Boards of Trade, 75 FR 70974, 70987, Nov. 19, 2010 

(FBOTs). 

144. Is further definition of the term 

‘‘swap’’ necessary to address 

transactions that have been structured to 

evade subtitle A of Title VII? If so, what 

further definition is appropriate, and 

why? Please provide specific examples 

or scenarios, and a detailed analysis of 

any such transactions and the guidance 

that would be appropriate. 

145. In addition to defining the term 

‘‘swap’’ to address evasion generally, 

and with respect to certain foreign 

exchange products and identified 

banking products in particular, are 

CFTC rules prohibiting transactions 

from being willfully structured to evade 

or attempt to evade (similar to the 

proposed rules regarding activities 

conducted outside the United States) 

subtitle A of Title VII appropriate? 

B. SEC Request for Comment Regarding 

Anti-Evasion 

Section 761(b)(3) of the Dodd-Frank 

Act grants discretionary authority to the 

SEC to define the terms ‘‘security-based 

swap,’’ ‘‘security-based swap dealer,’’ 

‘‘security-based major swap participant,’’ 

and ‘‘eligible contract participant,’’ with 

regard to security-based swaps, ‘‘for the 

purpose of including transactions and 

entities that have been structured to 

evade subtitle B of Title VII (or 

amendments made by subtitle B). 

Section 772(b) of the Dodd-Frank Act 

states that the provisions of the 

Exchange Act that were added by Title 

VII (including any rule or regulation 

thereunder) shall not apply to any 

person insofar as that person transacts a 

business in security-based swaps 

outside the jurisdiction of the United 

States, unless such person transacts 

such business ‘‘in contravention of such 

rules and regulations as the [SEC] may 

prescribe as necessary or appropriate to 

prevent evasion of any provision of [the 

Exchange Act] that was added by [Title 

VII].’’ 327

The SEC is not proposing specific 

rules regarding anti-evasion at this time. 

The SEC may consider whether to 

propose anti-evasion rules based on 

comments received or after having 

experience with the new regulatory 

regime under subtitle B of Title VII. 

Request for Comment 

146. The SEC requests comment on 

whether SEC rules or interpretive 

guidance addressing anti-evasion 

regarding security-based swaps, 

security-based swap dealers, major 

security-based swap participants, or 

ECPs are necessary. Why or why not? 

Should the SEC adopt rules and 

interpretive guidance modeled on the 

CFTC’s proposals? If other rules or 

interpretive guidance are necessary, 

please provide a detailed description of 

what rules or interpretative guidance 

would be necessary. 

147. Are SEC rules or interpretive 

guidance addressing evasion in the 

context of activities conducted outside 

the United States necessary? Why or 

why not? Should the SEC adopt rules 

and interpretive guidance modeled on 

the CFTC’s proposals? If other rules or 

interpretive guidance are necessary, 

please provide a detailed description of 

what rules or interpretative guidance 

would be necessary. 

VIII. Administrative Law Matters—CEA 

Revisions 

A. Regulatory Flexibility Act 

The Regulatory Flexibility Act 

(‘‘RFA’’) requires that agencies consider 

whether the rules they propose will 

have a significant economic impact on 

a substantial number of small entities 

and, if so, provide a regulatory 

flexibility analysis respecting the 

impact.328 Most of the entities that will 

be impacted by this proposed 

rulemaking have previously been 

determined to not be small entities. In 

addition, this proposed rulemaking, 

which provides interpretive guidance, 

general rules of construction and 

definitions that will largely be used in 

other rulemakings will, by itself, not 

impose a significant economic impact 

on market participants or entities. 

1. Effect of the Proposed Rulemaking 

The proposed rulemaking in this 

release further defines, and clarifies, the 

statutory terms ‘‘swap,’’ ‘‘security-based 

swap,’’ ‘‘security-based swap 

agreement,’’ and ‘‘mixed swap.’’ It also 

provides a process for requesting joint 

interpretations from the Commissions as 

to whether agreements, contracts, and 

transactions are swaps, security-based 

swaps, or mixed swaps, as well as a 

process for requesting alternative 

regulatory treatment for certain mixed 

swaps. This proposed rulemaking also 

includes books and records, and data, 

requirements for SDRs, swap dealers, 

and major swap participants with 

respect to SBSAs, and implements the 

anti-evasion rulemaking authority 

granted to the CFTC under several 

provisions of the Dodd-Frank Act. 

Additionally, this release proposes 

interpretive guidance that the forward 

contract exclusion from the swap 

definition in the Dodd-Frank Act with 

respect to nonfinancial commodities 

should be read consistently with the 

forward contract exclusion from the 

CEA definition of the term ‘‘future 

delivery.’’ In that regard, the CFTC is 

proposing to retain the Brent 

Interpretation and extend it to apply to 

all nonfinancial commodities, and as a 

result, to withdraw the Energy 

Exemption,329 which had extended the 

Brent Interpretation regarding the 

forward contract exclusion from the 

term ‘‘future delivery’’ to energy 

commodities other than oil. The Energy 

Exemption listed certain ‘‘appropriate 

persons’’ that could rely on the 

exemption. 

The CFTC anticipates that this 

proposed rulemaking will affect 

primarily the following entities: DCMs, 

DCOs, ECPs, swap dealers, major swap 

participants, SEFs, SDRs, FBOTs, and 

those ‘‘appropriate persons’’ who 

previously relied on the Energy 

Exemption. 

2. Specific Entities That Are Not Small 

Entities 

The vast majority of entities impacted 

by this proposed rulemaking previously 

have been determined to not be small 

entities by the CFTC. Prior to the 

enactment of the Dodd-Frank Act, the 

following entities had been determined 

by the CFTC to not be small entities for 

purposes of the RFA: DCMs, DCOs, and 

ECPs. Other entities that will be affected 

by this rulemaking, including swap 

dealers, major swap participants, SEFs, 

SDRs, and FBOTs, have been certified 

by the CFTC not to be small entities in 

other proposed recent CFTC rulemaking 

implementing requirements of the 

Dodd-Frank Act. Specifically: 

i. Swap Dealers, Major Swap 

Participants, SEFs, SDRs, and FBOTs. 

The CFTC previously has certified that 

swap dealers, major swap participants, 

SEFs, SDRs, and FBOTs are not small 

entities for purposes of the RFA.330

Nevertheless, because these are new 

categories of registrants under the DoddFrank Act, the CFTC is, again, hereby 

determining that these entities are not 

small entities. 

a. Swap Dealers: As noted above, the 

CFTC previously has determined that 

FCMs are not small entities for the 

purpose of the RFA based upon, among 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
Federal Register / Vol. 76, No. 99 / Monday, May 23, 2011 / Proposed Rules 29869 

331Policy Statement and Establishment of 

Definitions of ‘‘Small Entities’’ for Purposes of the 

Regulatory Flexibility Act, 47 FR 18618, Apr. 30, 

1982. 

332See CEA section 4(a), 7 U.S.C. 6(a); CFTC rule 

1.33(ss), 17 C.F.R. 1.33(ss). 

333CEA section 1a(2), 7 U.S.C. 1a(2). 

334CEA section 1a(27), 7 U.S.C. 1a(27). 

335See respectively, Policy Statement and 

Establishment of Definitions of ‘‘Small Entities’’ for 

Purposes of the Regulatory Flexibility Act, supra 

note 331, at 18619 (DCMs); A New Regulatory 

Framework for Clearing Organizations, 66 FR 

45604, 45609, Aug. 29, 2001 (DCOs); Opting Out of 

Segregation. 66 FR 20740, 20743, Apr. 25, 2001 

(ECPs). 

336Energy Exemption, supra note 72. 

other things, the requirements that 

FCMs must meet, including certain 

minimum financial requirements that 

enhance the protection of customers’ 

segregated funds and protect the 

financial condition of FCMs generally. 

Swap dealers similarly will be subject to 

minimum capital and margin 

requirements, and are expected to 

comprise the largest global financial 

firms. Entities that engage in a de 

minimis quantity of swap dealing in 

connection with transactions with or on 

behalf of customers will be exempt from 

designation as a swap dealer. For 

purposes of the RFA, the CFTC is 

hereby determining that swap dealers 

not be considered to be ‘‘small entities’’ 

for essentially the same reasons that 

FCMs previously have been determined 

not to be small entities. 

b. Major Swap Participants: The CFTC 

also previously has determined that 

large traders are not small entities for 

the purpose of the RFA. Major swap 

participants, among other things, 

maintain substantial positions in swaps, 

creating substantial counterparty 

exposure that could have serious 

adverse effects on the financial stability 

of the U.S. banking system or financial 

markets. For purposes of the RFA, the 

CFTC is hereby determining that major 

swap participants not be considered to 

be ‘‘small entities’’ for essentially the 

same reasons that large traders 

previously have been determined not to 

be small entities. 

c. SEFs: The Dodd-Frank Act defines 

a SEF to mean a trading system or 

platform in which multiple participants 

have the ability to accept bids and offers 

made by multiple participants in the 

facility or system, through any means of 

interstate commerce, including any 

trading facility that facilitates the 

execution of swaps between persons 

and is not a DCM. The CFTC previously 

has determined that DCMs are not small 

entities because, among other things, 

they may be designated only when they 

meet specific criteria, including 

expenditure of sufficient resources to 

establish and maintain adequate selfregulatory programs. Likewise, the 

CFTC will register an entity as a SEF 

only after it has met specific criteria, 

including the expenditure of sufficient 

resources to establish and maintain an 

adequate self-regulatory program. For 

purposes of the RFA, the CFTC is 

hereby determining that SEFs not be 

considered to be ‘‘small entities’’ for 

essentially the same reasons that DCMs 

previously have been determined to be 

small entities. 

d. SDRs: The CFTC previously has 

determined that DCMs and DCOs are 

not small entities because, among other 

things, of ‘‘the central role’’ they play in 

‘‘the regulatory scheme concerning 

futures trading.’’ 331 Because of the 

‘‘importance of futures trading in the 

national economy,’’ to be designated as 

a contract market or registered as a DCO, 

the respective entity must meet 

stringent requirements set forth in the 

CEA. Similarly, swap positions that are 

recorded, reported and disseminated by 

SDRs will be an important part of the 

national economy. SDRs will receive 

data from market participants and will 

be obligated to facilitate swap execution 

by reporting real-time data. Similar to 

DCMs and DCOs, SDRs will play a 

central role both in the regulatory 

scheme concerning swap trading. 

Additionally, the Dodd-Frank Act 

permits DCOs to register as SDRs. For 

purposes of the RFA, the CFTC is 

hereby determining that SDRs not be 

considered to be ‘‘small entities’’ for 

essentially the same reasons that DCMs 

and DCOs previously have been 

determined not to be small entities. 

e. FBOTs. The term ‘‘foreign board of 

trade’’ has been used in the CEA and in 

the CFTC’s Regulations to refer to a 

board of trade ‘‘located outside the 

U.S.’’ 332 The term ‘‘board of trade’’ is 

defined in the CEA as ‘‘any organized 

exchange or trading facility.’’ 333 An 

‘‘organized exchange,’’ in turn, includes 

designated or registered exchanges, such 

as DCMs.334 The CFTC previously has 

determined that DCMs are not ‘‘small 

entities.’’ As noted above, because of 

DCMs’ importance to the economy, they 

must meet stringent requirements set 

forth in the CEA. Similarly, the CFTC 

will register an FBOT only after it has 

met criteria similar to those required of 

a DCM. Critically, an FBOT will be 

registered only after demonstrating, 

among other things, that it possesses the 

attributes of an organized exchange, 

adheres to appropriate rules prohibiting 

abusive trading practices, and enforces 

appropriate rules to maintain market 

and financial integrity. Because FBOTs 

and DCMs are functionally equivalent 

entities, for purposes of the RFA, the 

CFTC hereby is determining that FBOTs 

not be considered to be small entities for 

essentially the same reasons that DCMs 

previously have been determined not to 

be small entities. 

ii. DCMs, DCOs, and ECPs. The CFTC 

previously has determined that DCMs, 

DCOs, and ECPs, are not small entities 

for purposes of the Regulatory 

Flexibility Act.335 The Dodd-Frank Act 

requires that counterparties to swaps 

that are traded on a bilateral basis not 

on or subject to the rules of a DCM be 

ECPs. Prior to the enactment of the 

Dodd-Frank Act, ECPs trading swaps 

were generally outside the scope of 

CFTC oversight under the CEA. The 

CFTC cannot estimate with precision 

the number of non-ECPs that will, as 

permitted by the Dodd-Frank Act, trade 

swaps on DCMs. Nevertheless, this 

proposed rulemaking by the CFTC 

provides proposed further definitions of 

the terms ‘‘swap,’’ ‘‘security-based swap,’’ 

‘‘mixed swap’’ and ‘‘security-based swap 

agreement,’’ and proposes rules of 

construction and interpretive guidance 

(including guidance as to agreements, 

contracts, and transactions that are not 

included within the scope of the swap 

definition), that will largely be used in 

other rulemakings and which, by 

themselves, do not impose significant 

new regulatory requirements on market 

participants. 

iii. ‘‘Appropriate Persons’’ who relied 

on the Energy Exemption. The Energy 

Exemption listed certain ‘‘appropriate 

persons’’ that could rely on the 

exemption and also required that, to be 

eligible for this exemption, an 

‘‘appropriate person’’ must have a 

demonstrable capacity or ability to make 

or take delivery. The Energy Exemption 

stated: ‘‘in light of the general nature of 

the current participants in the market, 

the CFTC believes that smaller 

commercial firms, which cannot meet 

[certain] financial criteria, should not be 

included.’’ 336 Therefore, the CFTC does 

not believe that the ‘‘appropriate 

persons’’ eligible for the Energy 

Exemption, and who may be affected by 

its withdrawal, are ‘‘small entities’’ for 

purposes of RFA. 

Accordingly, the Chairman, on behalf 

of the CFTC, hereby certifies pursuant to 

5 U.S.C. 605(b) that the proposed rules 

will not have a significant impact on a 

substantial number of small entities. 

Nonetheless, the CFTC specifically 

requests comment on the impact that 

this proposed rulemaking may have on 

small entities. 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
29870 Federal Register / Vol. 76, No. 99 / Monday, May 23, 2011 / Proposed Rules 

337 44 U.S.C. 3501–3521. See also 44 U.S.C. 3509 

and 3510. 338 7 U.S.C. 19(a). 

B. Paperwork Reduction Act 

1. Introduction 

Proposed CFTC rules 1.8 and 1.9 

would result in new ‘‘collection of 

information’’ requirements within the 

meaning of the Paperwork Reduction 

Act of 1995 (‘‘PRA’’). An agency may not 

conduct or sponsor, and a person is not 

required to respond to, a collection of 

information unless it displays a 

currently valid Office of Management 

and Budget (OMB) control number. 

2. Summary of the Proposed 

Requirements 

Proposed rule 1.8 of the CEA would 

allow persons to submit a request for a 

joint interpretation from the 

Commissions regarding whether an 

agreement, contract or transaction (or a 

class thereof) is a swap, security-based 

swap, or mixed swap. Proposed rule 1.8 

provides that a person requesting an 

interpretation as to the nature of an 

agreement, contract, or transaction as a 

swap, security-based swap, or mixed 

swap must provide the Commissions 

with the person’s determination of the 

nature of the instrument and supporting 

analysis, along with certain other 

documentation, including a statement of 

the economic purpose for, and a copy of 

all material information regarding the 

terms of, each relevant agreement, 

contract, or transaction (or class 

thereof). The Commissions also may 

request the submitting person to provide 

additional information. In response to 

the submission, the Commissions may 

issue a joint interpretation regarding the 

status of that agreement, contract, or 

transaction (or class of agreements, 

contracts, or transactions) as a swap, 

security-based swap, or mixed swap. 

Proposed rule 1.9 enables persons to 

submit requests to the Commissions for 

joint orders providing an alternative 

regulatory treatment for particular 

mixed swaps. Under proposed rule 1.9, 

a person would provide to the 

Commissions a statement of the 

economic purpose for, and a copy of all 

material information regarding, the 

relevant mixed swap. In addition, the 

person would provide the specific 

alternative provisions that the person 

believes should apply to the mixed 

swap, the reasons the person believes it 

would be appropriate to request an 

alternative regulatory treatment, and an 

analysis of: (i) The nature and purposes 

of the specified provisions; (ii) the 

comparability of the specified 

provisions to other statutory provisions 

of Title VII of the Dodd-Frank Act and 

the rules and regulations thereunder; 

and (iii) the extent of any conflicting or 

incompatible requirements of the 

specified provisions and other statutory 

provisions of Title VII and the rules and 

regulations thereunder. The 

Commissions also may request the 

submitting person to provide additional 

information. 

3. Information Provided by Reporting 

Entities 

The burdens imposed by proposed 

CFTC rules 1.8 and 1.9 are the same as 

the burdens imposed by the SEC’s 

proposed rules 3a68–2 and 3a68–4. 

Therefore, the burdens that would be 

imposed on market participants under 

CFTC rules 1.8 and 1.9 already have 

been accounted for within the SEC’s 

calculations regarding the impact of this 

collection of information under the PRA 

and the request for a control number 

that will be submitted by the SEC to 

OMB.337

4. Information Collection Comments 

The CFTC invites public comment on 

any aspect of the reporting and 

recordkeeping burdens discussed above. 

Pursuant to 44 U.S.C. 3506(c)(2)(B), the 

CFTC solicits comments in order to: (i) 

Evaluate whether the proposed 

collections of information are necessary 

for the proper performance of the 

functions of the CFTC, including 

whether the information will have 

practical utility; (ii) evaluate the 

accuracy of the CFTC’s estimate of the 

burden of the proposed collections of 

information; (iii) determine whether 

there are ways to enhance the quality, 

utility, and clarity of the information to 

be collected; and (iv) minimize the 

burden of the collections of information 

on those who are to respond, including 

through the use of automated collection 

techniques or other forms of information 

technology. 

Comments may be submitted directly 

to the OMB’s Office of Information and 

Regulatory Affairs, by fax at (202) 395– 

6566 or by e-mail at 

OIRAsubmissions@omb.eop.gov. Please 

provide the CFTC with a copy of 

submitted comments so that all 

comments can be summarized and 

addressed in the preamble to the final 

rulemaking. Please refer to the 

Addresses section of this notice of 

proposed rulemaking for comment 

submission instructions to the CFTC. A 

copy of the supporting statements for 

the collections of information discussed 

above may be obtained by visiting 

RegInfo.gov. OMB is required to make a 

decision concerning the collections of 

information between 30 and 60 days 

after publication of this release in the 

Federal Register. Consequently, a 

comment to OMB is most ensured of 

being fully effective if received by OMB 

(and the CFTC) within 30 days after 

publication of this release. Nothing in 

the foregoing affects the deadline 

enumerated above for public comment 

to the CFTC on the rules and 

interpretive guidance proposed herein. 

C. Cost-Benefit Analysis 

CEA section 15(a) 338 requires the 

CFTC to consider the costs and benefits 

of its actions before issuing a 

rulemaking under the CEA. By its terms, 

section 15(a) does not require the CFTC 

to quantify the costs and benefits of a 

rule or to determine whether the 

benefits of the rulemaking outweigh its 

costs; rather, it requires that the CFTC 

‘‘consider’’ the costs and benefits of its 

actions. Section 15(a) further specifies 

that the costs and benefits shall be 

evaluated in light of five broad areas of 

market and public concern: (i) 

Protection of market participants and 

the public; (ii) efficiency, 

competitiveness, and financial integrity 

of futures markets; (iii) price discovery; 

(iv) sound risk management practices; 

and (v) other public interest 

considerations. The CFTC may in its 

discretion give greater weight to any one 

of the five enumerated areas and could 

in its discretion determine that, 

notwithstanding its costs, a particular 

rule is necessary or appropriate to 

protect the public interest or to 

effectuate any of the provisions or 

accomplish any of the purposes of the 

CEA. 

1. Costs and Benefits of the Proposed 

Definitions 

The proposed rulemaking and 

interpretive guidance would further 

define the terms ‘‘swap,’’ ‘‘security-based 

swap,’’ ‘‘security-based swap 

agreement,’’ and ‘‘mixed swap.’’ The 

scope of the definitions of the terms 

‘‘swap,’’ ‘‘security-based swap,’’ 

‘‘security-based swap agreement,’’ and 

‘‘mixed swap’’ will be an important 

factor in determining the scope of 

activities and entities that will be 

subject to various requirements set forth 

in the Dodd-Frank Act, such as 

reporting, registration, business 

conduct, and capital requirements. 

Those requirements, which will be 

implemented in rules proposed or to be 

proposed by the CFTC, will likely lead 

to compliance costs, capital holding 

costs, and other costs, which have been 

or will be addressed in the CFTC’s 

proposals to implement those 

requirements. 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
Federal Register / Vol. 76, No. 99 / Monday, May 23, 2011 / Proposed Rules 29871 

339 15 U.S.C. 78c(a)(16). 

Yet, the CFTC believes that the 

proposal to further define the terms 

‘‘swap,’’ ‘‘security-based swap,’’ 

‘‘security-based swap agreement,’’ and 

‘‘mixed swap’’ is, for the most part, in 

line with the expectations of market 

participants and does not depart 

significantly from how market 

participants would interpret the 

statutory definitions of these terms set 

forth in Title VII of the Dodd-Frank Act. 

Thus, the CFTC does not believe that 

the proposed rules and interpretive 

guidance further defining these terms 

impose any significant incremental 

costs beyond the costs associated with 

the statutory definitions. 

The CFTC also believes that the 

proposed rules and guidance regarding 

the definitions will lead to benefits in 

the form of increased market 

transparency, reduced systemic risk, 

and a lower incidence of market-wide 

crises and other market failures. 

Further, the proposed rules and 

guidance can be consistently applied by 

substantially all market participants to 

determine which agreements, contracts, 

or transactions are, and which are not, 

swaps, security-based swaps, securitybased swap agreements, or mixed 

swaps. Thus, the proposed rules and 

interpretive guidance will help to create 

a level playing field. Market participants 

will be able to use Title VII instruments 

more efficiently and the swap markets 

will operate more effectively because all 

market participants will be relying on 

consistent and clear definitions. The 

clarity provided by the proposed rules 

and interpretive guidance relating to the 

definitions is in the public interest 

because this clarity will permit the 

public to better evaluate information 

about Title VII instruments made 

available under the Dodd-Frank Act. In 

particular, they will allow market 

participants to better understand 

publicly-available price data. The clarity 

of the definitions also has the potential 

to ease the negotiation of Title VII 

instruments and reduce other 

transaction costs. These factors are 

expected to permit the public to make 

a more extensive use of Title VII 

instruments for risk management and 

other purposes. 

The CFTC requests comment as to the 

costs and benefits of the proposed rules 

and interpretive guidance regarding the 

definitions for market participants, 

markets, and the public. In particular, 

comment is requested as to whether 

there are any aspects of the proposed 

rules and interpretive guidance 

regarding the definitions that are both 

burdensome to apply and not helpful to 

achieving clarity as to the scope of the 

defined terms. In addition, are there less 

burdensome means of providing clarity 

as to the scope of the defined terms? 

2. Costs and Benefits of Proposed Rules 

and Interpretive Guidance Regarding 

Insurance 

Proposed CFTC rule 1.3(xxx)(4) under 

the CEA would clarify that insurance 

products that meet certain requirements, 

that are provided by state or Federally 

regulated insurance companies, and that 

are regulated as insurance products, 

would not be swaps. Specifically, 

proposed rule 1.3(xxx)(4) would define 

the term ‘‘swap’’ so that it would not 

include an agreement, contract, or 

transaction that, by its terms or by law, 

as a condition of performance on the 

agreement, contract, or transaction: (i) 

Requires the beneficiary to have an 

insurable interest that is the subject of 

the agreement, contract, or transaction 

and thereby carry the risk of loss with 

respect to that interest continuously 

throughout the duration of the 

agreement, contract, or transaction; (ii) 

requires that loss to occur and to be 

proved, and that any payment or 

indemnification therefore be limited to 

the value of the insurable interest, 

separately from the insured interest; (iii) 

is not traded, separately from the 

insured interest, on an organized market 

or over-the-counter; and (iv) with 

respect to financial guarantee insurance 

only, in the event of payment default or 

insolvency of the obligor, any 

acceleration of payments under the 

policy is at the sole discretion of the 

insurer. 

Proposed rule 1.3(xxx)(4) also would 

require that the agreement, contract, or 

transaction: (i) Be provided by a person 

or entity that is organized as an 

insurance company whose primary and 

predominant business activity is the 

writing of insurance or the reinsuring of 

risks underwritten by insurance 

companies and that is subject to 

supervision by the insurance 

commissioner, or similar official or 

agency, of a state (as defined under 

section 3(a)(16) of the Exchange Act 339) 

or by the United States or an agency or 

instrumentality thereof, and be 

regulated as insurance under the laws of 

such state or the United States; (ii) be 

provided by the United States or any of 

its agents or instrumentalities, or 

pursuant to a statutorily authorized 

program thereof; or (iii) in the case of 

reinsurance only, be provided by a 

person located outside the United States 

to an insurance company that meets the 

above requirements, provided that such 

person is not prohibited by the law of 

any state or the United States from 

offering such agreement, contract, or 

transaction to such insurance company, 

the product to be reinsured meets the 

requirements above for insurance 

products, and the total amount 

reimbursable by all reinsurers for such 

insurance product cannot exceed the 

claims or losses paid by the cedant. 

An agreement, contract, or transaction 

would have to meet all of these criteria 

in order to qualify as an insurance 

product that falls outside of the swap 

and security-based swap definitions 

pursuant to the proposed rules. The 

Commissions also are proposing 

interpretative guidance to clarify that 

certain enumerated types of traditional 

insurance products, such as life 

insurance, health insurance, and 

property and casualty insurance, are 

outside the scope of the statutory swap 

and security-based swap definitions. 

(a) Costs 

In complying with proposed rule 

1.3(xxx)(4), a market participant will 

need to ascertain whether an agreement, 

contract, or transaction is an insurance 

product according to the criteria set 

forth in the definition. This analysis 

will have to be performed upon entering 

into the agreement, contract, or 

transaction to ensure compliance with 

the proposed rule. Absent this analysis, 

however, the cost associated with the 

uncertainty cited by commenters as to 

whether an agreement, contract, or 

transaction that the participants 

consider to be insurance could instead 

be regulated as a swap is expected to be 

greater than the cost of the analysis 

proposed herein. 

To the extent that the criteria under 

proposed rule 1.3(xxx)(4) inadvertently 

fail to exclude certain types of insurance 

products from the proposed definitions, 

these failures could lead to costs for 

market participants entering into 

agreements, contracts, or transactions 

that might be improperly regulated as 

swaps and not as insurance products. 

Similarly, to the extent that the criteria 

under the proposed rule lead to the 

inadvertent treatment of certain types of 

swaps as insurance, costs for market 

participants entering into agreements, 

contracts, or transactions that are 

improperly regulated as insurance 

products and not as swaps may 

increase. 

(b) Benefits 

The proposed rule and interpretative 

guidance regarding insurance will help 

to assure that traditional insurance 

products remain subject to the current 

regulatory scheme for insurance and not 

to the regulatory regime established by 

the Dodd-Frank Act for swaps. Market 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
29872 Federal Register / Vol. 76, No. 99 / Monday, May 23, 2011 / Proposed Rules 

340CEA section 1a(24), 7 U.S.C. 1a(24)(definition 

of a ‘‘foreign exchange forward’’); CEA section 

1a(25), 7 U.S.C. 1a(25)(definition of a ‘‘foreign 

exchange swap’’). 

participants, therefore, will be able to 

continue to rely on their previous 

understanding of insurance regulations 

without any additional burden that may 

have resulted if they had to instead 

comply with regulations under the 

Dodd-Frank Act. 

Without the proposed rule and 

interpretative guidance herein, market 

participants may be uncertain about 

whether an agreement, contract, or 

transaction is an insurance product that 

is subject to regulation as a swap. 

Proposed rule 1.3(xxx)(4) is intended to 

eliminate the potential uncertainty of 

what constitutes an insurance product 

by setting forth clear and objective 

criteria for determining that an 

agreement, contract, or transaction is an 

insurance product that is not subject to 

regulation as a swap. Providing such an 

objective rule and guidance alleviates 

additional costs of inquiring with the 

Commissions, or obtaining an opinion 

of counsel, about whether an agreement, 

contract, or transaction is an insurance 

product or a swap. The added clarity 

provided by the rule and guidance 

proposed herein will enhance the 

efficiency of the swaps market and also 

allow market participants to engage in 

sound risk management practices 

because they will be readily able to 

consider whether a particular 

agreement, contract, or transaction is 

insurance or a swap at the outset. 

The CFTC requests comment as to the 

costs and benefits of proposed rule 

1.3(xxx)(4) and interpretive guidance 

contained herein to distinguish between 

insurance products and swaps for 

market participants, markets, and the 

public. 

3. Costs and Benefits of Proposed Rule 

Regarding Foreign Exchange Products 

and Forward Rate Agreements 

Proposed CFTC rule 1.3(xxx)(2) under 

the CEA would explicitly define the 

term ‘‘swap’’ to include an agreement, 

contract, or transaction that is a crosscurrency swap, currency option, foreign 

currency option, foreign exchange 

option, foreign exchange rate option, 

foreign exchange forward, foreign 

exchange swap, forward rate agreement, 

and non-deliverable forward involving 

foreign exchange, unless such 

agreement, contract, or transaction is 

otherwise excluded by section 1a(47)(B) 

of the CEA. Proposed rule 1.3(xxx)(2) 

also provides that: (i) A foreign 

exchange forward or a foreign exchange 

swap shall not be considered a swap if 

the Secretary of the Treasury makes the 

determination described in CEA section 

1a(47)(E)(i); and (ii) notwithstanding 

any such determination, certain 

provisions of the CEA will apply to such 

foreign exchange forward or foreign 

exchange swap (specifically, the 

reporting requirements in section 4r of 

the CEA and regulations thereunder 

and, in the case of a swap dealer or 

major swap participant that is a party to 

a foreign exchange swap or foreign 

exchange forward, the business conduct 

standards in section 4s of the CEA and 

regulations thereunder). Proposed rule 

1.3(xxx)(2) further clarifies that a 

currency swap, cross-currency swap, 

currency option, foreign currency 

option, foreign exchange option, foreign 

exchange rate option, or non-deliverable 

forward involving foreign exchange is 

not a foreign exchange forward or 

foreign exchange swap subject to a 

determination by the Secretary of the 

Treasury as described above. 

(a) Costs 

In complying with proposed rule 

1.3(xxx)(2), a market participant will 

need to ascertain whether an agreement, 

contract, or transaction is a swap under 

the definition. This analysis will have to 

be performed upon entering into the 

agreement, contract, or transaction to 

ensure compliance with the proposed 

rule. However, any costs associated with 

this analysis are expected to be less than 

the costs of doing the same analysis 

absent the proposed rule, particularly 

given potential confusion in the event of 

a determination by the Secretary of the 

Treasury that foreign exchange forwards 

and/or foreign exchange swaps not be 

considered swaps. To the extent that 

proposed rule 1.3(xxx)(2) leads to the 

improper inclusion of certain types of 

agreements, contracts, and transactions 

in the swap definition, and therefore the 

imposition of additional requirements 

and obligations, these requirements and 

obligations could lead to costs for 

market participants entering into such 

agreements, contracts, or transactions. 

(b) Benefits 

Because the statutory definition of the 

term ‘‘swap’’ includes a process by 

which the Secretary of the Treasury may 

determine that certain agreements, 

contracts, and transactions that meet the 

statutory definition of a ‘‘foreign 

exchange forward’’ or ‘‘foreign exchange 

swap,’’ respectively,340 shall not be 

considered a swap, the CFTC is 

concerned that application of the 

definition, without further clarification, 

may cause uncertainty about whether, if 

the Secretary of the Treasury makes 

such a determination, certain 

agreements, contracts, or transactions 

would be swaps. Proposed rule 

1.3(xxx)(2) would clarify that a currency 

swap, cross-currency swap, currency 

option, foreign currency option, foreign 

exchange option, foreign exchange rate 

option, or non-deliverable forward 

involving foreign exchange is a swap 

(unless it is otherwise excluded by the 

statutory definition of the term ‘‘swap’’). 

The proposed rule also would clarify 

that reporting requirements, and 

business conduct requirements for swap 

dealers and major swap participants, are 

applicable to foreign exchange forwards 

and foreign exchange swaps even if the 

Secretary of the Treasury determines 

that they should not be considered 

swaps. The CFTC also is concerned that 

confusion could be generated by the 

‘‘forward’’ label of non-deliverable 

forwards involving foreign exchange, 

and forward rate agreements. Proposed 

rule 1.3(xxx)(2) would clarify that these 

types of agreements, contracts, and 

transactions are swaps. 

Providing a clarifying rule to market 

participants to determine whether 

certain types of agreements, contracts, 

or transactions are swaps alleviates 

additional costs to persons of inquiring 

with the Commissions, or obtaining an 

opinion of counsel, about whether such 

agreements, contracts, or transactions 

are swaps. In addition, a clarifying rule 

regarding the requirements that apply to 

foreign exchange forwards and foreign 

exchange swaps that are subject to a 

determination by the Secretary of the 

Treasury similarly alleviates additional 

costs to persons of inquiring with the 

Commissions, or obtaining an opinion 

of counsel, to determine the 

requirements that are applicable to such 

foreign exchange forwards and foreign 

exchange swaps. As with the other rules 

related to product definitions, added 

clarity will increase the efficiency of the 

swaps market and also will enable 

market participants to engage in sound 

risk management practices, which will 

benefit both market participants and the 

public. 

The CFTC requests comment as to the 

costs and benefits of proposed rule 

1.3(xxx)(2) for market participants, 

markets, and the public. 

4. Costs and Benefits of Proposed Rules 

and Interpretive Guidance Regarding 

Title VII Instruments Where the 

Underlying Reference Is a Security 

Index 

Proposed CFTC rule 1.3(yyy)(1) 

provides that, for purposes of the 

security-based swap definition, the term 

‘‘narrow-based security index’’ would 

have the same meaning as the statutory 

definition set forth in CEA section 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
Federal Register / Vol. 76, No. 99 / Monday, May 23, 2011 / Proposed Rules 29873 

1a(35), and the rules, regulations, and 

orders issued by the Commissions 

relating to such definition. As a result, 

except as the new rules the 

Commissions are proposing provide for 

other treatment, market participants 

generally will be able to use the 

Commissions’ past guidance in 

determining whether certain Title VII 

instruments based on a security index 

are swaps or security-based swaps. 

The Commissions also are proposing 

interpretive guidance and additional 

rules regarding Title VII instruments 

based on a security index. The 

interpretive guidance and additional 

rules set forth new narrow-based 

security index criteria with respect to 

indexes composed of securities, loans, 

or issuers of securities referenced by an 

index CDS. The proposed interpretive 

guidance and rules also address the 

definition of an ‘‘index’’ and the 

treatment of broad-based security 

indexes that become narrow-based and 

narrow-based indexes that become 

broad-based, including rule provisions 

regarding tolerance and grace periods 

for swaps on security indexes that are 

traded on CFTC-regulated trading 

platforms. 

(a) Costs 

In complying with the proposed rules, 

a market participant will need to 

ascertain whether an index CDS is a 

swap or a security-based swap 

according to the criteria set forth in the 

definitions of the terms ‘‘issuers of 

securities in a narrow-based security 

index’’ and ‘‘narrow-based security 

index’’ as used in the security-based 

swap definition. This analysis will have 

to be performed upon entering into an 

index CDS, and when the material terms 

of an index CDS are amended or 

modified, to ensure compliance with 

proposed rules 1.3(zzz) or 1.3(aaaa). 

However, any such costs are expected to 

be less than the costs of doing the same 

analysis absent the proposed rules, 

which the CFTC believes would be more 

difficult and lead to greater uncertainty. 

Proposed rules 1.3(zzz) and 1.3(aaaa) 

allow market participants to minimize 

the costs of determining whether an 

index CDS is a swap or a security-based 

swap by providing a test with objective 

criteria that is similar to a test with 

which they already are familiar in the 

security futures context, yet tailored to 

index CDS in particular. 

Additionally, absent proposed rule 

1.3(yyy), which applies the tolerance 

period rules, if a security index 

underlying a Title VII instrument traded 

on a trading platform migrated from 

being broad-based to being narrowbased, market participants may suffer 

disruption of their ability to offset or 

enter into new Title VII instruments, 

and incur additional costs as a result. 

(b) Benefits 

Proposed rules 1.3(zzz) and 1.3(aaaa) 

would clarify the treatment of an index 

CDS as either a swap or a security-based 

swap by setting forth objective criteria 

for meeting the definition of the terms 

‘‘issuers of securities in a narrow-based 

security index’’ and ‘‘narrow-based 

security index,’’ respectively. These 

objective rules will alleviate additional 

costs to persons trading index CDS of 

inquiring with the Commissions, or 

obtaining an opinion of counsel, to 

make complex determinations regarding 

whether an index is broad- or narrowbased, and whether an index CDS based 

on such an underlying index is a swap 

or security-based swap. 

Also, proposed rules 1.3(zzz) and 

1.3(aaaa) should reduce the potential for 

market participants to use an index CDS 

to evade regulations, because they set 

objective requirements relating to the 

concentration of the notional amount 

allocated to each reference entity or 

security included in the index, as well 

as the eligibility conditions for reference 

entities and securities. Finally, these 

proposed rules benefit the public by 

requiring that the providers of index 

CDS make publicly available sufficient 

information regarding the reference 

entities in an index underlying the 

index CDS. By requiring that such 

information be made publicly available, 

proposed rules 1.3(zzz) and 1.3(aaaa) 

seek to assure the transparency of the 

index components that will be 

beneficial to market participants who 

trade such instruments and to the 

public. 

Separately, proposed rule 1.3(yyy) 

addresses exchange-traded swaps based 

on security indexes where the 

underlying index migrates from broadbased to narrow-based. The proposed 

rule includes provisions that many 

market participants are familiar with 

from security futures trading. The CFTC 

believes that by using a familiar 

regulatory scheme, market participants 

will be able to more readily understand 

the proposed rule as compared to a 

wholly new regulatory scheme. Also, 

the proposal of a ‘‘tolerance period’’ for 

swaps on security indexes that migrate 

from broad-based to narrow-based also 

creates greater clarity by establishing a 

45-day timeframe (and subsequent grace 

period) on which market participants 

may rely. This tolerance period results 

in cost savings when compared to the 

alternative scenario where no tolerance 

period is provided and a migration of an 

index from broad-based to narrow-based 

would result in potential impediments 

to the ability of market participants to 

offset their swap positions. 

Finally, the Commissions are 

proposing interpretive guidance that the 

determination of whether a Title VII 

instrument is a swap, a security-based 

swap, or both (i.e., a mixed swap), is 

made at the execution of the Title VII 

instrument. If the security index 

underlying a Title VII instrument 

migrates from being broad-based to 

being narrow-based, or vice versa, 

during the life of a Title VII instrument, 

the characterization of that Title VII 

instrument would not change from its 

initial characterization regardless of 

whether the Title VII instrument was 

entered into bilaterally or was executed 

through a trade on or subject to the rules 

of a DCM, SEF, FBOT, security-based 

SEF, or NSE. Absent this guidance, 

market participants may need to expend 

additional resources to continually 

monitor their swaps to see if the indexes 

on which they are based have migrated 

from broad-based to narrow-based. 

Since the proposal provides that the 

initial determination prevails regardless 

of whether the underlying index 

migrates from broad-based to narrowbased, market participants do not need 

to expend these monitoring costs. 

The CFTC requests comment as to the 

costs and benefits of proposed rules 

1.3(yyy), 1.3(zzz), and 1.3(aaaa), and the 

proposed guidance contained herein, 

regarding Title VII instruments where 

the underlying reference is a security 

index, and regarding index CDS, for 

market participants, markets, and the 

public. 

5. Costs and Benefits of Processes To 

Determine Whether a Title VII 

Instrument Is a Swap, Security-Based 

Swap, or Mixed Swap, and To 

Determine Regulatory Treatment for 

Mixed Swaps 

(a) Costs 

Proposed rule 1.8 under the CEA 

would allow persons to submit a request 

for a joint interpretation from the 

Commissions regarding whether an 

agreement, contract or transaction (or a 

class of agreements, contracts, or 

transactions) is a swap, security-based 

swap, or mixed swap. The CFTC 

estimates the cost of submitting a 

request for a joint interpretation 

pursuant to rule 1.8 would be 

approximately 20 hours of internal 

company or individual time and a cost 

of $9,480 for the services of outside 

professionals. Once such a joint 

interpretation is made, however, other 

market participants that seek to transact 

in the same agreement, contract, or 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
29874 Federal Register / Vol. 76, No. 99 / Monday, May 23, 2011 / Proposed Rules 

341See EEI Letter (‘‘Without legal certainty as to 

the regulatory treatment of their forward contracts, 

EEI’s members and other end users who rely on the 

forward contract exclusion likely will face higher 

transaction costs due to greater uncertainty. These 

increased transaction costs may include: (i) More 

volatile or higher commodity prices; and (ii) 

increased credit costs, in each case caused by 

changes in market liquidity as end users change the 

way they transact in the commodity markets. A 

single regulatory approach that uses the same 

criteria to confirm that a forward contract is 

excluded from the Commission’s jurisdiction over 

swaps and futures will reduce this uncertainty and 

the associated costs to end users.’’ (footnote 

omitted)). 

transaction (or class thereof) would have 

regulatory clarity about whether it is a 

swap, security-based swap, or mixed 

swap. 

Separately, proposed CFTC rule 1.9 

under the CEA allows persons to submit 

a request for a joint order from the 

Commissions regarding an alternative 

regulatory treatment for particular 

mixed swaps. This process applies 

except with respect to bilateral, 

uncleared mixed swaps where one of 

the parties to the mixed swap is dually 

registered with the CFTC as a swap 

dealer or major swap participant and 

with the SEC as a security-based swap 

dealer or major security-based swap 

participant. With respect to bilateral 

uncleared mixed swaps where one of 

the parties is a dual registrant, the 

proposed rule provides that such mixed 

swaps would be subject to a regulatory 

scheme set forth in rule 1.9 in order to 

provide clarity as to the regulatory 

treatment of such mixed swaps. 

The CFTC estimates that the cost of 

submitting a request for a joint order 

seeking an alternative regulatory 

treatment for a particular mixed swap 

would be approximately 30 hours of 

internal company or individual time 

and a cost of approximately $15,800 for 

the services of outside professionals. 

Absent such a process, though, market 

participants that desire or intend to 

enter into such a mixed swap (or class 

thereof) would be required pursuant to 

Title VII of the Dodd-Frank Act to 

comply with all regulatory requirements 

applicable to both swaps and securitybased swaps. The CFTC believes that 

the cost of such dual regulation would 

likely be at least as great, if not greater, 

than the costs of the process set forth in 

proposed rule 1.9 to request an 

alternative regulatory treatment for such 

the mixed swap. The proposed rule 

regarding bilateral uncleared mixed 

swaps where at least one party is a dual 

registrant does not entail any additional 

costs, and may reduce costs for dual 

registrants that enter into such mixed 

swaps by eliminating potentially 

duplicative or inconsistent regulation. 

(b) Benefits 

The CFTC believes that the proposed 

rules that enable market participants to 

submit requests for joint interpretations 

regarding the nature of various 

agreements, contracts, or transactions, 

and requests for joint orders regarding 

the regulatory treatment of mixed 

swaps, will help to create a level 

playing field (since the joint 

interpretations and joint orders will be 

available to all market participants) 

regarding which agreements, contracts, 

or transactions constitute swaps, 

security-based swaps, or mixed swaps, 

and the regulatory treatment applicable 

to particular mixed swaps. The 

availability of such joint interpretations 

and joint orders regarding the scope of 

the definitions and the regulatory 

treatment of mixed swaps will reduce 

transaction costs and thereby promote 

the use of Title VII instruments and the 

efficient operation of the swap markets. 

This, in turn, is expected to encourage 

the use of Title VII instruments for risk 

management and other purposes. The 

separate proposed rule for bilateral 

uncleared mixed swaps where at least 

one party is dually registered should 

eliminate potentially duplicative and 

inconsistent regulation. 

The CFTC requests comment as to the 

costs and benefits of the processes for 

seeking joint interpretations and joint 

orders in proposed rules 1.8 and 1.9, 

respectively, for market participants, 

markets, and the public. 

6. Costs and Benefits of SBSA Books 

and Records, and Data, Requirements 

Proposed CFTC rule 1.7 under the 

CEA would clarify that there would not 

be books and records, or data, 

requirements regarding SBSAs other 

than those that would exist for swaps. 

The proposed rule alleviates any 

additional books and records or 

information costs to persons who are 

required to keep and maintain books 

and records regarding, or collect and 

maintain data regarding, SBSAs because 

the proposed rule does not require such 

persons to keep or maintain any books 

and records, or collect and maintain any 

data, regarding, SBSAs that differs from 

the books, records, and data required 

regarding swaps. 

Specifically, proposed rule 1.7 would 

require persons registered as SDRs to: (i) 

keep and maintain books and records 

regarding SBSAs only to the extent that 

SDRs are required to keep and maintain 

books and records regarding swaps; and 

(ii) collect and maintain data regarding 

SBSAs only to the extent that SDRs are 

required to collect and maintain data 

regarding swaps. In addition, proposed 

rule 1.7 would require persons 

registered as swap dealers or major 

swap participants to keep and maintain 

books and records, including daily 

trading records, regarding SBSAs only 

to the extent that those persons would 

be required to keep and maintain books 

and records regarding swaps. 

Because proposed rule 1.7 imposes no 

requirements with respect to SBSAs 

other than those that exist for swaps, 

proposed rule 1.7 would impose no 

costs other than those that are required 

with respect to swaps in the absence of 

proposed rule 1.7. Proposed rule 1.7 

provides clarity by establishing uniform 

requirements regarding books and 

records, and data collection, 

requirements for swaps and for SBSAs. 

The CFTC requests comment as to the 

costs and benefits of proposed rule 1.7 

for market participants, markets, and the 

public. 

7. Costs and Benefits of the Proposed 

Interpretive Guidance Regarding the 

Forward Contract Exclusion From the 

Swap Definition 

The CFTC is proposing interpretive 

guidance that the forward contract 

exclusion from the swap definition for 

nonfinancial commodities should be 

read consistently with the forward 

contract exclusion from the CEA 

definition of the term ‘‘future delivery.’’ 

In that regard, the CFTC is proposing to 

retain the Brent Interpretation and 

extend it to apply to all nonfinancial 

commodities, and to withdraw the 

Energy Exemption which had extended 

the Brent Interpretation regarding the 

forward contract exclusion from the 

term ‘‘future delivery’’ to energy 

commodities other than oil. The CFTC 

also is proposing that its prior guidance 

regarding commodity options embedded 

in forward contracts should be applied 

as well to the treatment of forward 

contracts in nonfinancial commodities 

that contain embedded options under 

the Dodd-Frank Act. 

The CFTC anticipates that its 

proposed interpretive guidance 

construing the forward contract 

exclusion consistently with respect to 

the definitions of the terms ‘‘swap’’ and 

‘‘future delivery’’ in this manner will not 

impose any material costs on market 

participants. It also will establish a 

uniform interpretation of the forward 

contract exclusion for the definitions of 

both statutory terms, which will avoid 

the significant costs that some 

commenters stated would result if the 

forward contract exclusion were 

construed differently in these two 

contexts.341

The CFTC requests comment as to the 

costs and benefits of the proposed 

interpretative guidance regarding the 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
Federal Register / Vol. 76, No. 99 / Monday, May 23, 2011 / Proposed Rules 29875 

342Public Law 104–121, Title II, 110 Stat. 857 

(1996) (codified in various sections of 5 U.S.C., 15 

U.S.C. and as a note to 5 U.S.C. 601). 

343 44 U.S.C. 3501 et seq. 344 44 U.S.C. 3507(d) and 5 CFR 1320.11. 

forward contract exclusion from the 

swap definition, including the retention 

of the Brent Interpretation and its 

extension to all nonfinancial 

commodities and the withdrawal of the 

Energy Exemption, for market 

participant, markets, and the public. 

8. Costs and Benefits of the Proposed 

Anti-Evasion Rules and Interpretive 

Guidance 

The CFTC is proposing to exercise the 

anti-evasion rulemaking authority 

granted to it by the Dodd-Frank Act. 

Generally, proposed CFTC rule 

1.3(xxx)(6) under the CEA would define 

as a swap any agreement, contract, or 

transaction that is willfully structured to 

evade (or as an attempt to evade) the 

provisions of Title VII governing the 

regulation of swaps. Further, proposed 

CFTC rule 1.6 under the CEA would 

prohibit activities conducted outside the 

United States, including entering into 

agreements, contracts, and transactions 

and structuring entities, to willfully 

evade any provision of the CEA as 

enacted by Title VII or the rules and 

regulations promulgated thereunder. 

As opposed to providing a bright-line 

test, proposed rule 1.3(xxx)(6) would 

apply to agreements, contracts, and 

transactions, and proposed rule 1.6 

would apply to agreements, contracts, 

transactions and entities, that are 

willfully structured to evade (or as an 

attempt to evade) the provisions of Title 

VII governing the regulation of swaps. 

Although this test does not provide a 

bright line, it helps ensure that wouldbe evaders cannot intentionally 

structure their transactions or entities 

for the sole purpose of evading the 

requirements of Title VII. The CFTC also 

is proposing interpretive guidance as to 

certain types of circumstances that may 

constitute an evasion of the 

requirements of Title VII, while at the 

same time preserving the CFTC’s ability 

to determine, on a case-by-case basis, 

that other types of transactions or 

actions constitute an evasion of the 

requirements of the statute or the 

regulations promulgated thereunder. 

This will promote the enforcement of 

the anti-evasion rules in a manner that 

does not inappropriately interfere with 

activities undertaken for legitimate 

business purposes. 

Absent the proposed anti-evasion 

rules and interpretive guidance, price 

discovery would be impaired because 

markets would not be informed about 

those transactions. Additionally, 

systemic risk could increase in a 

manner that the CFTC would not be able 

to measure accurately. The proposed 

anti-evasion rules and interpretive 

guidance will bring the appropriate 

scope of transactions and entities within 

the regulatory framework established by 

the Dodd-Frank Act, which will better 

allow the CFTC to assure transparency 

and address systemic risk. 

Request for Comment 

148. After considering the costs and 

benefits of the proposed rules and 

interpretive guidance as discussed in 

this section, the CFTC has determined 

to issue the proposal. The CFTC invites 

public comment on all of its cost-benefit 

considerations. Commenters are 

requested to submit empirical data or 

other factual information quantifying or 

qualifying the costs and benefits of the 

proposed rules and interpretive 

guidance with their comments, to the 

extent possible. 

D. Consideration of Impact on the 

Economy 

For purposes of the Small Business 

Regulatory Enforcement Fairness Act of 

1996 (‘‘SBREFA’’) 342 the CFTC must 

advise the Office of Management and 

Budget as to whether the proposed rules 

constitute a ‘‘major’’ rule. Under 

SBREFA, a rule is considered ‘‘major’’ 

where, if adopted, it results or is likely 

to result in: (i) An annual effect on the 

economy of $100 million or more (either 

in the form of an increase or a decrease); 

(ii) a major increase in costs or prices for 

consumers or individual industries; or 

(iii) significant adverse effect on 

competition, investment or innovation. 

If a rule is ‘‘major,’’ its effectiveness will 

generally be delayed for 60 days 

pending Congressional review. The 

CFTC does not believe that any of the 

proposed rules in this release, in their 

current form, would constitute a major 

rule. 

The CFTC requests comment on the 

potential impact of the proposed rules 

on the economy on an annual basis, on 

the costs or prices for consumers or 

individual industries, and on 

competition, investment or innovation. 

Commenters are requested to provide 

empirical data and other factual support 

for their views to the extent possible. 

IX. Administrative Law Matters— 

Exchange Act Revisions 

A. Paperwork Reduction Act 

1. Background 

Proposed rules 3a68–2 and 3a68–4(c) 

would contain new ‘‘collection of 

information’’ requirements within the 

meaning of the Paperwork Reduction 

Act of 1995.343 The SEC is submitting 

them to the Office of Management and 

Budget (‘‘OMB’’) for review in 

accordance with the PRA.344 An agency 

may not conduct or sponsor, and a 

person is not required to respond to, a 

collection of information unless it 

displays a currently valid OMB control 

number. OMB has not yet assigned a 

control number to the new collection of 

information. 

These proposed rules contain 

collections and are being proposed 

pursuant to the Exchange Act. The 

proposed rules would establish a 

process through which a person could 

submit a request to the Commissions 

that the Commissions provide a joint 

interpretation of whether an agreement, 

contract, or transaction (or class thereof) 

is a swap, security-based swap, or both 

(i.e., a mixed swap). The rules also 

would establish a process with respect 

to mixed swaps through which a person 

could submit a request to the 

Commissions that the Commissions 

issue a joint order permitting the 

requesting person (and any other person 

or persons that subsequently lists, 

trades, or clears that class of mixed 

swap) to comply, as to parallel 

provisions only, with the specified 

parallel provisions, instead of being 

required to comply with parallel 

provisions of both the CEA and the 

Exchange Act. The hours and costs 

associated with preparing and sending 

these requests would constitute 

reporting and cost burdens imposed by 

each collection of information. 

2. Summary of Collection of Information 

Under Proposed Rules 3a68–2 and 

3a68–4(c) 

The SEC is proposing new rules that 

would allow persons to submit requests 

to the Commissions for joint 

interpretations regarding whether a 

particular agreement, contract, or 

transaction (or class thereof) is a swap, 

security-based swap, or both (i.e., a 

mixed swap), and for joint orders 

permitting alternative regulatory 

treatment for particular mixed swaps. 

First, the SEC is proposing new rule 

3a68–2, which would allow persons to 

submit a request for a joint 

interpretation from the Commissions 

regarding whether an agreement, 

contract, or transaction (or a class 

thereof) is a swap, security-based swap, 

or both (i.e., a mixed swap). Under 

proposed rule 3a68–2, a person would 

provide to the Commissions a copy of 

all material information regarding the 

terms of, and a statement of the 

economic characteristics and purpose 

of, each relevant agreement, contract, or 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
29876 Federal Register / Vol. 76, No. 99 / Monday, May 23, 2011 / Proposed Rules 

345For convenience, the estimated PRA hour 

burdens have been rounded to the nearest whole 

dollar. Data from SIFMA’s ‘‘Management & 

Professional Earnings in the Securities Industry 

2009,’’ modified by SEC staff to account for an 1800- 

hour work-year and multiplied by 5.35 to account 

for bonuses, firm size, employee benefits, and 

overhead, suggest that that the cost of an attorney 

is $316 per hour. 

346See supra note 345. 

347This total number includes an estimated 250 

swap dealers, 50 major swap participants, 50 

security-based swap dealers, 10 major securitybased swap participants, 35 SEFs, 20 security-based 

SEFs, 12 DCOs, 17 DCMs, 15 SDRs, 10 SBSDRs, and 

6 clearing agencies, as set forth by the CFTC and 

SEC, respectively, in their other Dodd-Frank Act 

transaction (or class thereof), along with 

that person’s determination as to 

whether each such agreement, contract, 

or transaction (or class thereof) should 

be characterized as a swap, securitybased swap, or both (i.e., a mixed swap). 

The Commissions also may request the 

submitting person to provide additional 

information. 

The Commissions may issue in 

response a joint interpretation or joint 

notice of proposed rulemaking regarding 

the status of that agreement, contract, or 

transaction (or class thereof) as a swap, 

security-based swap, or both (i.e., a 

mixed swap). Any joint interpretation, 

like any joint notice of proposed 

rulemaking, will be public and may 

discuss the material information 

regarding the terms of the relevant 

agreement, contract, or transaction (or 

class thereof), as well as any other 

information the Commissions deem 

material to the interpretation. 

Requesting persons also would be 

permitted to withdraw a request made 

pursuant to proposed rule 3a68–2 at any 

time before the Commissions have 

issued a joint interpretation or joint 

notice of proposed rulemaking in 

response to the request. Regardless of a 

particular request for interpretation, 

however, the Commissions could 

provide such a joint interpretation or 

joint notice of proposed rulemaking of 

their own accord. 

Persons would submit requests 

pursuant to proposed rule 3a68–2 on a 

voluntary basis. However, if a person 

submits a request, all of the information 

required under the proposed rule, 

including any additional information 

requested by the Commissions, must be 

submitted to the Commission, except to 

the extent a person withdraws the 

request pursuant to the proposed rule. 

For purposes of the PRA, the SEC 

estimates that the total annual 

paperwork burden resulting from 

proposed rule 3a68–2 would be 

approximately 20 hours of internal 

company or individual time and a cost 

of approximately $9,480 for the services 

of outside professionals that the SEC 

believes would consist of services 

provided by attorneys.345 As discussed 

further below, these total costs include 

all collection burdens associated with 

the proposed rules, including burdens 

related to the initial determination 

requirements. 

Second, the SEC is proposing new 

rule 3a68–4(c), which would allow 

persons to submit requests to the 

Commissions for joint orders regarding 

the regulation of a particular mixed 

swap (or class thereof). Under proposed 

rule 3a68–4(c), a person would provide 

to the Commissions a copy of all 

material information regarding the terms 

of, and the economic characteristics and 

purpose of, the specified (or specified 

class of) mixed swap. In addition, a 

person would provide the specified 

parallel provisions, and the reasons the 

person believes such specified parallel 

provisions would be appropriate for 

relevant mixed swap (or class thereof), 

and an analysis of: (i) The nature and 

purposes of the parallel provisions that 

are the subject of the request; (ii) the 

comparability of such parallel 

provision; and (iii) the extent of any 

conflicts or differences between such 

parallel provisions. The Commissions 

also may request the submitting person 

to provide additional information. 

The Commissions may issue in 

response a joint order, after public 

notice and opportunity for comment, 

providing that the requesting person 

(and any other person or persons that 

subsequently lists, trades, or clears that 

mixed swap (or class thereof)) is 

permitted to comply, as to parallel 

provisions only, with the specified 

parallel provisions (or another subset of 

the parallel provisions that are the 

subject of the request, as the 

Commissions determine is appropriate), 

instead of being required to comply 

with parallel provisions of both the CEA 

and the Exchange Act. Any joint order 

will be public and may discuss the 

material information regarding the terms 

of the mixed swap (or class thereof), as 

well as any other information the 

Commissions deem material to the 

order. Requesting persons also would be 

permitted to withdraw a request made 

pursuant to proposed rule 3a68–4(c) at 

any time before the Commissions have 

issued a joint order in response to the 

request. 

Persons would submit requests 

pursuant to proposed rule 3a68–4(c) on 

a voluntary basis. However, if a person 

submits a request, all of the information 

required under the proposed rule, 

including any additional information 

requested by the Commissions, must be 

submitted to the Commission, except to 

the extent a person withdraws the 

request pursuant to the proposed rule. 

For purposes of the PRA, the SEC 

estimates that the total annual 

incremental paperwork burden resulting 

from proposed rule 3a68–4(c) would be 

approximately 30 hours of internal 

company or individual time and a cost 

of approximately $15,800 for the 

services of outside professionals, which 

the SEC believes would consist of 

services provided by attorneys.346 As 

discussed further below, these total 

costs include all collection burdens 

associated with the proposed rules, 

including burdens related to the initial 

determination requirements. 

3. Proposed Use of Information 

The SEC would use the information 

collected pursuant to proposed rule 

3a68–2 to evaluate an agreement, 

contract, or transaction (or class thereof) 

in order to provide joint interpretations 

or joint notices of proposed rulemaking 

with the CFTC regarding whether these 

agreements, contracts, or transactions 

(or classes thereof) are swaps, securitybased swaps, or both (i.e., mixed swaps) 

as defined in the Dodd-Frank Act. The 

SEC would use the information 

collected pursuant to proposed rule 

3a68–4(c) to evaluate a specified, or a 

specified class of, mixed swaps in order 

to provide joint orders or joint notices 

of proposed rulemaking with the CFTC 

regarding the regulation of that 

particular mixed swap or class of mixed 

swap. The information provided to the 

SEC pursuant to proposed rules 3a68–2 

and 3a68–4(c) also would allow the SEC 

to monitor the development of new OTC 

derivatives products in the marketplace 

and determine whether additional 

rulemaking or interpretive guidance is 

necessary or appropriate. 

4. Respondents 

It is difficult to calculate the precise 

number of requests that would be 

submitted to the Commissions under 

proposed rules 3a68–2 and 3a68–4(c), 

given the historical unregulated state of 

the OTC derivatives market. Although 

any person could submit a request 

under proposed rule 3a68–2, the SEC 

believes as a practical matter that the 

relevant categories of such persons 

would be swap dealers and securitybased swap dealers, major swap 

participants and major security-based 

swap participants, SEFs, security-based 

SEFs, DCOs clearing swaps, DCMs 

trading swaps, SDRs, SBSDRs, and 

clearing agencies clearing security-based 

swaps, and the total number of persons 

could be 475.347 Similarly, although any 


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rulemaking proposals. See Entity Definitions, supra 

note 12 (regarding security-based swap dealers and 

major security-based swap participants); 

Registration of Swap Dealers and Major Swap 

Participants, supra note 330 (regarding swap 

dealers and major security-based swap 

participants); Security-Based Swap Data Repository 

Registration, Duties, and Core Principles, supra 

note 6 (regarding SBSDRs); Swap Data Repositories, 

supra note 330 (regarding SDRs); Core Principles 

and Other Requirements for Swap Execution 

Facilities, 76 FR 1214, Jan. 7, 2011 (regarding SEFs); 

Registration and Regulation of Security-Based Swap 

Execution Facilities, 76 FR 10948, Feb. 28, 2011 

(regarding security-based SEFs); Financial 

Resources Requirements for Derivatives Clearing 

Organizations, 75 FR 63113, Oct. 14, 2010 

(regarding DCOs); Information Management 

Requirements for Derivatives Clearing 

Organizations, 75 FR 78185, Dec. 15, 2010 

(regarding DCOs); Risk Management Requirements 

for Derivatives Clearing Organizations, 76 FR 3698, 

Jan. 20, 2011 (regarding DCOs); Core Principles and 

Other Requirements for Designated Contract 

Markets, 75 FR 80572, Dec. 22, 2010 (regarding 

DCMs); Clearing Agency Standards for Operation 

and Governance, 76 FR 14472, Mar. 16, 2011 

(regarding clearing agencies). 

348 Id. 

349See supra note 283 and accompanying text. 

350See discussion supra part IV.A. 

351The SEC believes that there would be 

approximately 50 requests in the first year. See 

discussion infra part IX.A.5. The SEC recognizes 

that one person might submit more than one 

request, but for purposes of the PRA is considering 

each such request as one person in order to provide 

a more conservative estimate of the number of 

persons that would be subject to paperwork 

burdens. 

352See id. 

353This estimate is based on comments from and 

discussions with market participants regarding 

uncertainty concerning whether certain contracts 

might be considered swaps, security-based swaps, 

or both, i.e., mixed swaps, and the size of the mixed 

swaps category, although the SEC has not received 

data regarding the specific number of potential 

transaction types for which there is uncertainty or 

that are mixed swaps. 

person could submit a request under 

proposed rule 3a68–4(c), the SEC 

believes as a practical matter that the 

relevant categories of such persons 

would be SEFs, security-based SEFs, 

and DCMs trading swaps, and the total 

number of persons could be 72.348

However, based on the SEC’s 

experience and information received 

from commenters to the ANPR349 and 

during meetings with the public to 

discuss the Product Definitions 

generally, including the interpretation 

of whether a transaction is a swap, 

security-based swap, or both (i.e., a 

mixed swap), and taking into 

consideration the certainty provided by 

the proposed rules and interpretive 

guidance in this release, the SEC 

believes that the number of requests that 

would be submitted by such persons to 

the Commissions to provide joint 

interpretations as to whether a given 

agreement, contract, or transaction is a 

swap, security-based swap, or both (i.e., 

a mixed swap), would be small, and 

therefore expects that only a small 

number of requests would be submitted 

pursuant to proposed rule 3a68–2. With 

respect to proposed rule 3a68–4(c), the 

SEC also estimates the number of 

requests for joint orders would be 

small.350 Pursuant to the Commissions’ 

proposed rules and interpretive 

guidance, a number of persons that 

engage in agreements, contracts, or 

transactions that are swaps, securitybased swaps, or both (i.e., a mixed 

swap) would be certain that their 

transactions are, indeed, swaps, 

security-based swaps, or both, (i.e., a 

mixed swap) and would not request an 

interpretation pursuant to proposed rule 

3a68–2. Also, as the Commissions 

provide joint interpretations regarding 

whether agreements, contracts, or 

transactions (or classes thereof) are or 

are not swaps, security-based swaps, or 

both (i.e., mixed swaps), the SEC 

expects that the number of requests for 

interpretation will decrease over time. 

The SEC believes that the rules and 

interpretive regarding swaps, securitybased swaps, and mixed swaps the 

Commissions are proposing, as well as 

the additional guidance issues pursuant 

to joint interpretations and orders under 

proposed rules 3a68–2 and 3a68–4 will 

result in a narrow pool of potential 

respondents, approximately 50,351 to the 

collection of information requirements 

of proposed rule 3a68–2. 

Similarly, because the SEC believes 

that both the category of mixed swap 

transactions and the number of market 

participants that engage in mixed swap 

transactions are small, the SEC believes 

that the pool of potential persons 

requesting a joint order regarding the 

regulation of a specified, or specified 

class of, mixed swap pursuant to 

proposed rule 3a68–4(c) would be small 

(approximately 10 352). Also, those 

requests submitted pursuant to 

proposed rule 3a68–2 that result in an 

interpretation that the agreement, 

contract, or transaction (or class thereof) 

is not a mixed swap would reduce the 

pool of possible persons submitting a 

request regarding the regulation of 

particular mixed swaps (or class thereof) 

pursuant to proposed rule 3a68–4(c). In 

addition, not only the requesting party, 

but also any other person or persons 

that subsequently lists, trades, or clears 

that mixed swap, would be subject to, 

and must comply with, the joint order 

regarding the regulation of the specified, 

or specified class of, mixed swap, as 

issued by the Commissions. Therefore, 

the SEC believes that the number of 

requests for a joint order regarding the 

regulation of mixed swaps, particularly 

involving specified classes of mixed 

would decrease over time. 

The SEC seeks comment on the 

number of persons that potentially 

would submit requests pursuant to rules 

3a68–2 and 3a68–4(c). 

5. Paperwork Reduction Act Burden 

Estimates 

Proposed rules 3a68–2 and 3a68–4(c) 

would, if adopted, require submission of 

certain information to the Commissions 

to the extent persons elect to request an 

interpretation and/or alternative 

regulatory treatment. Proposed rules 

3a68–2 and 3a68–4(c) each require the 

information that a requesting party must 

include in its request to the 

Commissions in order to receive a joint 

interpretation or order, as applicable. 

(a) Proposed Rule 3a68–2 

Proposed rule 3a68–2 would require 

any party requesting a joint 

interpretation under the rule to include 

disclosures about the agreement, 

contract, or transaction (or class thereof) 

in question as well as a statement of 

economic purpose and the requesting 

party’s initial determination regarding 

whether the agreement, contract, or 

transaction (or class thereof) is a swap, 

security-based swap, or both (i.e., a 

mixed swap). The proposed rule would 

apply only to requests made by persons 

that desire an interpretation from the 

Commissions. For each agreement, 

contract, or transaction (or class thereof) 

for which a person requests the 

Commissions’ joint interpretation, the 

requesting person would be required to 

provide a copy of all material 

information regarding the applicable 

terms; a statement of the economic 

characteristics and purpose; and the 

requesting person’s determination as to 

whether such agreement, contract, or 

transaction (or class thereof) is a swap, 

security-based swap, or both (i.e., a 

mixed swap), including the basis for the 

requesting person’s determination. The 

requesting person also would be 

required to provide such other 

information as the Commissions may 

request. 

As discussed above, the SEC believes 

the number of persons that would 

submit requests pursuant to proposed 

rule 3a68–2 is quite small given the 

proposed rules and interpretive 

guidance regarding swaps, securitybased swaps, and mixed swaps the 

Commissions are providing.353

Although the SEC does not have precise 

figures for the number of requests that 

persons would submit, the SEC believes 

it is reasonable to estimate that it likely 


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354This estimate is based on information 

indicating that the average burden associated with 

preparing and submitting a no-action request to the 

SEC staff in connection with the identification of 

whether certain products were securities, which the 

SEC believes is a process similar to the process 

under proposed rule 3a68–2, was approximately 20 

hours and associated costs of $9,480. Assuming 

these costs correspond to legal fees, which we 

estimate at an hourly cost of $316, we estimate that 

this cost is equivalent to approximately 30 hours 

($9,480/$316). 

355See supra note 283 and accompanying text. 

356This estimate is based on information 

indicating that the average burden associated with 

preparing and submitting a no-action request to the 

SEC staff in connection with the regulatory 

treatment of certain securities products which the 

SEC believes is a process similar to the process 

under proposed rule 3a68–4(c), was approximately 

30 hours and associated costs of $15,800. Assuming 

these costs correspond to legal fees, which we 

estimate at an hourly cost of $316, we estimate that 

this cost is equivalent to approximately 50 hours 

($15,800/$316). 

357This estimate takes into account that certain 

information regarding the mixed swap (or class 

thereof), namely the material terms and the 

economic purpose, will have already been gathered 

and prepared as part of the request submitted 

pursuant to proposed rule 3a68–2. The SEC 

estimates that these items constitute approximately 

10 hours fewer and a reduction in associated costs 

of $4,740. Assuming these costs correspond to legal 

fees, which we estimate at an hourly cost of $316, 

we estimate that this cost is equivalent to 

approximately 15 hours ($4,740/$316). 

would be fewer than 50 requests in the 

first year. For purposes of the PRA, the 

SEC estimates the total paperwork 

burden associated with preparing and 

submitting a person’s request to the 

Commissions pursuant to proposed rule 

3a68–2 would be 20 hours per request 

and associated costs of $9,480.354

Assuming 50 requests in the first year, 

the SEC estimates that this would result 

in an aggregate burden for the first year 

of 1000 hours of company time (50 

requests × 20 hours/request) and 

$474,000 for the services of outside 

professionals (e.g., attorneys) (50 

requests × 30 hours/request × $316). 

As discussed above, the SEC believes 

that as the Commissions provide joint 

interpretations or joint notices of 

proposed rulemaking, the number of 

requests received will decrease over 

time. Although the SEC does not have 

precise figures for the number of 

requests that persons would submit after 

the first year, the SEC believes it is 

reasonable to estimate that it likely 

would be fewer than 10 requests on 

average in ensuing years. Assuming 10 

requests in ensuing years, the SEC 

estimates that this would result in an 

aggregate burden in each ensuing year of 

200 hours of company time (10 requests 

× 20 hours/request) and $94,800 for the 

services of outside professionals (e.g., 

attorneys) (10 requests × 30 hours/ 

request × $316). 

(b) Proposed Rule 3a68–4(c) 

Proposed rule 3a68–4(c) would 

require any party requesting a joint 

order regarding the regulation of a 

specified, or specified class of, mixed 

swap under the rule to include 

disclosure about the agreement, 

contract, or transaction (or class thereof) 

that is a mixed swap as well as a 

statement of economic purpose for the 

mixed swap (class thereof). In addition, 

a person would provide the specified 

parallel provisions that the person 

believes should apply to the mixed 

swap (or class thereof), the reasons the 

person believes the specified parallel 

provisions would be appropriate for the 

mixed swap, and an analysis of: (i) The 

nature and purposes of the parallel 

provisions that are the subject of the 

request; (ii) the comparability of such 

parallel provisions; and (iii) the extent 

of any conflicts or differences between 

such parallel provisions. The requesting 

person also would be required to 

provide such other information as the 

Commissions may request. 

As discussed above, the SEC believes 

the number of requests that persons 

would submit pursuant to proposed rule 

3a68–4(c) is quite small given the 

limited types of agreements, contracts, 

or transactions (or class thereof) the 

Commissions believe would constitute 

mixed swaps.355 In addition, depending 

on the characteristics of a mixed swap 

(or class thereof), a person may choose 

not to submit a request pursuant to 

proposed rule 3a68–4(c). The SEC also 

notes that any joint order issued by the 

Commissions would apply to any 

person that subsequently lists, trades, or 

clears that specified, or specified class 

of, mixed swap, so that requests for joint 

orders could diminish over time. Also, 

persons may submit requests for an 

interpretation under proposed rule 

3a68–4(c) that do not result in an 

interpretation that the agreement, 

contract, or transaction (or class thereof) 

is a mixed swap. Therefore, although 

the SEC does not have precise figures 

for the number of requests that persons 

would submit, the SEC believes it is 

reasonable to estimate that it likely 

would be fewer than 20 requests in the 

first year. For purposes of the PRA, the 

SEC estimates the total paperwork 

burden associated with preparing and 

submitting a party’s request to the 

Commissions pursuant to proposed rule 

3a68–4(c) would be 30 hours and 

associated costs of $15,800 per request 

for mixed swaps for which a request for 

a joint interpretation pursuant to 

proposed rule 3a68–4(c) was not 

previously made.356 Assuming 20 

requests in the first year, the SEC 

estimates that this would result in an 

aggregate burden for the first year of 600 

hours of company time (20 requests × 30 

hours/request) and $316,000 for the 

services of outside professionals (20 

requests × 50 hours/request × $316). 

For mixed swaps for which a request 

for a joint interpretation pursuant to 

proposed rule 3a68–2 was previously 

made, the SEC estimates the total 

paperwork burden under the PRA 

associated with preparing and 

submitting a party’s request to the 

Commissions pursuant to proposed rule 

3a68–4(c) would be 10 hours fewer and 

$4,740 less per request than for mixed 

swaps for which a request for a joint 

interpretation pursuant to proposed rule 

3a68–2 was not previously made 

because certain, although not all, of the 

information required to be submitted 

and necessary to prepare pursuant to 

proposed rule 3a68–4(c) would have 

been required to be submitted and 

necessary to prepare pursuant to 

proposed rule 3a68–2.357 Although 

certain requests made pursuant to 

proposed rule 3a68–4(c) may be made 

without a previous request for a joint 

interpretation pursuant to proposed rule 

3a68–2, the SEC believes that most 

requests under proposed rule 3a68–2 

that result in the interpretation that an 

agreement, contract, or transaction (or 

class thereof) is a mixed swap will 

result in a subsequent request for 

alternative regulatory treatment 

pursuant to proposed rule 3a68–4(c). 

Assuming, therefore, that 90 percent, or 

18 of the estimated 20 requests pursuant 

to proposed rule 3a68–4(c) in the first 

year, as discussed above, would be such 

‘‘follow-on’’ requests, the SEC estimates 

that this would result in an aggregate 

burden in the first year of 360 hours of 

company time (18 requests × 20 hours/ 

request) and $199,080 for the services of 

outside professionals (18 requests × 35 

hours/request × $316). 

As discussed above, the SEC believes 

that as the Commissions provide joint 

orders regarding alternative regulatory 

treatment, the number of requests 

received will decrease over time. The 

SEC believes it is reasonable to estimate 

that it likely would be fewer than 5 

requests on average in ensuing years. 

Assuming 5 requests in ensuing years, 

the SEC estimates that this would result 

in an aggregate burden in each ensuing 

year of 150 hours of company time (5 

requests × 30 hours/request) and 

$79,000 for the services of outside 

professionals (5 requests × 50 hours/ 

request × $316). As discussed above, 

assuming that approximately 90 

percent, or 4 of the estimated 5 requests 

pursuant to proposed rule 3a68–4(c) in 


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358See CEA section 1a(47), 7 U.S.C. 1a(47) (crossreferenced in section 3(a)(69) of the Exchange Act, 

15 U.S.C. 78c(a)(69)). 

359See section 3(a)(68) of the Exchange Act, 15 

U.S.C. 78c(a)(68) (cross-referenced in CEA section 

1a(42), 7 U.S.C. 1a(42)). 

360See CEA section 1a(47)(D), 7 U.S.C. 1a(47)(D); 

section 3(a)(68)(D) of the Exchange Act, 15 U.S.C. 

78c(68)(D). 

361See section 3(a)(78) of the Exchange Act, 15 

U.S.C. 78c(a)(78); CEA section 1a(47)(A)(v), 7 U.S.C. 

1a(47)(A)(v). 

362Section 3(a)(68)(A)(ii)(III) of the Exchange Act, 

15 U.S.C. 78c(a)(68)(A)(ii)(III). 

ensuing years would be ‘‘follow-on’’ 

requests to requests for joint 

interpretation from the Commissions 

under proposed rule 3a68–4(c), the SEC 

estimates that this would result in an 

aggregate burden in each ensuing year of 

80 hours of company time (4 requests × 

20 hours/request) and $44,240 for the 

services of outside professionals (4 

requests × 35 hours/request × $316). 

Request for Comment 

Pursuant to 44 U.S.C. 3506(c)(2)(B), 

the SEC solicits comments to: (i) 

Evaluate whether the proposed 

collection of information is necessary 

for the proper performance of the 

functions of the agency, including 

whether the information will have 

practical utility; (ii) evaluate the 

accuracy of the SEC’s estimate of burden 

of the proposed collection of 

information; (iii) determine whether 

there are ways to enhance the quality, 

utility, and clarity of the information to 

be collected; and (iv) evaluate whether 

there are ways to minimize the burden 

of the collection of information on those 

that are to respond, including through 

the use of automated collection 

techniques or other forms of information 

technology. In addition, the SEC 

requests comment on the accuracy of 

the estimates regarding the total 

paperwork burden. 

In particular, the SEC requests 

comment for purposes of the PRA on the 

following: 

149. How many requests for a joint 

interpretation from the Commissions 

would be submitted pursuant to rule 

3a68–2? 

150. How many requests for a joint 

order from the Commissions would be 

submitted pursuant to rule 3a68–4(c)? 

151. How many requests for a joint 

order from the Commissions would be 

submitted pursuant to rule 3a68–4(c) 

regarding the same agreement, contract, 

or transaction (or class thereof) that was 

the subject of a request for a joint 

interpretation from the Commissions 

submitted pursuant to rule 3a68–2? 

152. Are the paperwork burden 

estimates, for both company time and 

outside services, as discussed above 

accurate? Do these estimates reflect the 

paperwork burdens and costs associated 

with requests made pursuant to 

proposed rules 3a68–2 and 3a68–4(c)? 

Commenters should, when possible, 

provide empirical data to support their 

views. 

Any member of the public may direct 

to us or to OMB any comments 

concerning the accuracy of these burden 

estimates and any suggestions for 

reducing these burdens. Persons 

submitting comments on the collection 

of information requirements should 

direct the comments to the Office of 

Management and Budget, Attention 

Desk Officer for the Securities and 

Exchange Commission, Office of 

Information and Regulatory Affairs, 

Washington, DC 20503, and should send 

a copy to Secretary, Securities and 

Exchange Commission, 100 F Street NE., 

Washington, DC 20549–1090, with 

reference to File No. S7–16–11. 

Requests for materials submitted to 

OMB by the SEC with regard to these 

collections of information should be in 

writing, refer to File No. S7–16–11, and 

be submitted to the Securities and 

Exchange Commission, Office of 

Investor Education and Advocacy, 100 F 

Street NE., Washington, DC 20549– 

0213. OMB is required to make a 

decision concerning the collection of 

information between 30 and 60 days 

after publication of this release. 

Consequently, a comment to OMB is 

best ensured of having its full effect if 

OMB receives it within 30 days of 

publication. 

B. Cost-Benefit Analysis 

1. Background 

Title VII establishes a regulatory 

framework for OTC derivatives. As part 

of that framework, Title VII amends the 

CEA and the Exchange Act to broadly 

categorize covered derivative products 

as swaps, security-based swaps, SBSAs, 

and/or mixed swaps. In particular, 

section 712(d)(1) of the Dodd-Frank Act 

provides that the Commissions, in 

consultation with the Board, shall 

jointly further define, among other 

things, the terms ‘‘swap,’’ ‘‘securitybased swap,’’ and ‘‘security-based swap 

agreement.’’ Section 712(a)(8) of the 

Dodd-Frank Act provides further that 

the Commissions shall jointly prescribe 

such regulations regarding ‘‘mixed 

swaps’’ as may be necessary to carry out 

the purposes of Title VII. In addition, 

sections 712(d)(2)(B) and (C) of the 

Dodd-Frank Act require the 

Commissions, in consultation with the 

Board, to jointly adopt rules governing 

books and records for SBSAs for SDRs 

that are registered under the CEA, swap 

dealers, major swap participants, 

security-based swap dealers, and major 

security-based swap participants. 

The Product Definitions and the 

regulation of mixed swaps are part of 

the Dodd-Frank Act’s comprehensive 

framework for regulating the swaps 

markets whereby the CFTC is given 

regulatory authority over ‘‘swaps,’’ 358

the SEC is given regulatory authority 

over ‘‘security-based swaps,’’ 359 and the 

Commissions shall jointly prescribe 

such regulations regarding mixed swaps 

as may be necessary to carry out the 

purposes of Title VII.360 In addition, the 

SEC is given antifraud authority over, 

and access to information from certain 

CFTC-regulated entities (e.g., DCOs, 

SEFs, and swap dealers) regarding, 

SBSAs.361

In most instances, the Commissions’ 

proposed rules and guidance merely 

clarify the application of the Product 

Definitions to specific products as is 

required by the relevant provisions of 

the CEA and Exchange Act, as modified 

by the Dodd-Frank Act and the 

regulation of mixed swaps. However, for 

some of the rules the Commissions are 

proposing, the Commissions are 

exercising their discretion to further 

define the Product Definitions and to 

regulate mixed swaps, which would 

generate costs and benefits to market 

participants. The Commissions also are 

fulfilling the requirement in Dodd-Frank 

that they establish requirements 

regarding books and records with 

respect to SBSAs, which also would 

generate costs and benefits to market 

participants. The costs and benefits 

regarding these rules are discussed 

below. 

2. Proposed Rule 3a68–1a 

(a) Benefits 

A security-based swap includes a 

swap that is based on the ‘‘occurrence, 

nonoccurrence, or extent of the 

occurrence of an event relating to a 

single issuer of a security or the issuers 

of securities in a narrow-based security 

index, provided that such event directly 

affects the financial statements, 

financial condition, or financial 

obligations of the issuer’’ (the ‘‘Event 

Provision’’).362 Proposed rule 3a68–1a 

would provide that, solely for purposes 

of determining whether a CDS is a 

security-based swap under the Event 

Provision, the term ‘‘issuers of securities 

in a narrow-based security index’’ would 

have the meaning as set forth in 

proposed rule 3a68–1a. 

Because index CDS typically are 

written on indexes of entity names, not 

on indexes of the specific securities of 

those entities, the Commissions are 


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363 15 U.S.C. 78c(a)(68)(A)(ii)(III). 

364See July 2006 Rules, supra note 199. 

365Section 3(a)(68)(A)(ii)(I) of the Exchange Act, 

15 U.S.C. 78c(a)(68)(A)(ii)(I). 

366 15 U.S.C. 78c(a)(68)(A)(ii)(I). 

367 15 U.S.C. 78c(a)(68)(A)(ii)(I). 

368 15 U.S.C. 78c(a)(68)(A)(ii)(I). 

369See July 2006 Rules, supra note 199. 

concerned that the application of the 

Event Provision, without further 

clarification, may cause uncertainty 

about whether certain index CDS would 

be security-based swaps or swaps. 

Therefore, proposed rule 3a68–1a would 

eliminate the potential uncertainty of 

the treatment of index CDS as either 

security-based swaps or swaps by 

setting forth clear and objective criteria 

for meeting the definition of ‘‘issuers of 

securities in a narrow-based security 

index’’ and therefore being a securitybased swap. 

The SEC requests comments, data, 

and estimates regarding the benefits 

associated with proposed rule 3a68–1a. 

The SEC also requests comments, data, 

and estimates regarding any additional 

benefits that could be realized with 

proposed rule 3a68–1a. 

(b) Costs 

In complying with proposed rule 

3a68–1a, a market participant will need 

to ascertain whether an index CDS is a 

security-based swap or swap according 

to the criteria set forth for meeting the 

definition of ‘‘issuers of securities in a 

narrow-based security index.’’ This 

analysis will have to be performed by 

market participants upon entering into 

an index CDS to determine whether the 

index CDS is subject to the SEC’s 

regulatory regime for security-based 

swaps or the CFTC’s regulatory regime 

for swaps. The SEC notes, however, that 

any such costs would be in lieu of the 

costs of doing the same analysis under 

the statutory security-based swap 

definition. Because the statutory 

security-based swap definition lacks the 

specificity provided by proposed rule 

3a68–1a, the SEC believes analysis of an 

index CDS would under proposed rule 

3a68–1a would lead to less uncertainty 

than would the same analysis under the 

statutory security-based swap 

definition. Providing a clear rule to 

persons to determine whether an index 

CDS is a security-based swap under 

section 3(a)(68)(A)(ii)(III) of the 

Exchange Act 363 could alleviate 

additional costs to persons of inquiring 

with the Commissions about whether an 

index CDS is a swap or security-based 

swap under that provision, as well as 

costs of obtaining an opinion of counsel 

regarding the applicability of that 

provision to a particular index CDS. 

In addition, proposed rule 3a68–1a is 

generally consistent with the definition 

of ‘‘narrow-based security index’’ that 

exists in section 3(a)(55)(B) of the 

Exchange Act, as modified to address 

debt securities in the context of security 

futures.364 Because some market 

participants are familiar with this 

definition, as well as with performing 

analyses of products in the security 

futures context based on this definition, 

the SEC believes that the proposed 

definition of ‘‘issuers of securities in a 

narrow-based security index’’ will 

mitigate uncertainty for those market 

participants regarding the treatment of 

index CDS. In addition, because such 

market participants would be familiar 

with many of the criteria in proposed 

rule 3a68–1a, such market participants 

would require less time and effort, and 

thus incur less cost, in determining the 

scope and applicability of such criteria 

to the determination of whether an 

index CDS is a swap or security-based 

swap. 

The SEC requests comment as to the 

costs that determinations under 

proposed rule 3a68–1a would impose 

on market participants, as well as 

estimates and empirical data to support 

these costs. In addition, the SEC 

requests comment on any other costs 

associated with proposed rule 3a68–1a 

that have not been considered and what 

the extent of those costs would be. 

3. Proposed Rule 3a68–1b 

(a) Benefits 

A security-based swap includes a 

swap that is based on ‘‘an index that is 

a narrow-based security index, 

including any interest therein or on the 

value thereof.’’ 365 Proposed rule 3a68– 

1b would provide that, solely for 

purposes of determining whether a CDS 

is a security-based swap under section 

3(a)(68)(A)(ii)(I) of the Exchange Act,366

the term ‘‘narrow-based security index’’ 

would have the meaning as set forth in 

proposed rule 3a68–1b. 

Because index CDS may be written in 

indexes of the specific securities of 

entities as well as on indexes of entity 

names, the Commissions are concerned 

that the application of section 

3(a)(68)(A)(ii)(I) of the Exchange Act,367

without further clarification, may cause 

uncertainty about whether certain index 

CDS would be security-based swaps or 

swaps. Therefore, proposed rule 3a68– 

1b would eliminate the potential 

uncertainty of the treatment of index 

CDS as either security-based swaps or 

swaps by setting forth clear and 

objective criteria for meeting the 

definition of ‘‘narrow-based security 

index’’ and therefore being a securitybased swap. 

The SEC requests comments, data, 

and estimates regarding the benefits 

associated with proposed rule 3a68–1b. 

The SEC also requests comments, data, 

and estimates regarding any additional 

benefits that could be realized with 

proposed rule 3a68–1b. 

(b) Costs 

In complying with proposed rule 

3a68–1b, a market participant will need 

to ascertain whether an index CDS is a 

security-based swap or swap according 

to the criteria set forth for meeting the 

definition of ‘‘narrow-based security 

index.’’ This analysis will have to be 

performed by market participants upon 

entering into an index CDS to determine 

whether the index CDS is subject to the 

SEC’s regulatory regime for securitybased swaps or the CFTC’s regulatory 

regime for swaps. The SEC notes, 

however, that any such costs would be 

in lieu of the costs of doing the same 

analysis under the statutory securitybased swap definition. Because the 

statutory security-based swap definition 

lacks the specificity provided by 

proposed rule 3a68–1b, the SEC believes 

analysis of an index CDS would under 

proposed rule 3a68–1b lead to less 

uncertainty than would the same 

analysis under the statutory securitybased swap definition. Providing a clear 

rule to persons to determine whether an 

index CDS is a security-based swap 

under section 3(a)(68)(A)(ii)(I) of the 

Exchange Act 368 could alleviate 

additional costs to persons of inquiring 

with the Commissions about whether an 

index CDS is a swap or security-based 

swap under that provision, as well as 

costs of obtaining an opinion of counsel 

regarding the applicability of that 

provision to a particular index CDS. 

In addition, proposed rule 3a68–1b is 

generally consistent with the definition 

of ‘‘narrow-based security index’’ that 

exists in section 3(a)(55)(B) of the 

Exchange Act, as modified to address 

debt securities in the context of security 

futures.369 Because some market 

participants are familiar with this 

definition, as well as with performing 

analyses of products in the security 

futures context based on this definition, 

the SEC believes that the proposed 

definition of ‘‘narrow-based security 

index’’ will mitigate uncertainty for 

those market participants regarding the 

treatment of index CDS. In addition, 

because such market participants would 

be familiar with many of the criteria in 

proposed rule 3a68–1b, such market 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
Federal Register / Vol. 76, No. 99 / Monday, May 23, 2011 / Proposed Rules 29881 

370See discussion supra part VIII. 

371 15 U.S.C. 78c(a)(68). 

372 15 U.S.C. 78c(a)(55). 

373 15 U.S.C. 78c(a)(55). 

participants would require less time and 

effort, and thus incur less cost, in 

determining the scope and applicability 

of such criteria to the determination of 

whether an index CDS is a swap or 

security-based swap. 

The SEC requests comment as to the 

costs that determinations under 

proposed rule 3a68–1a would impose 

on market participants, as well as 

estimates and empirical data to support 

these costs. In addition, the SEC 

requests comment on any other costs 

associated with proposed rule 3a68–1a 

that have not been considered and what 

the extent of those costs would be. 

4. Proposed Rule 3a68–2 

(a) Benefits 

Proposed rule 3a68–2 would establish 

a process for persons to request an 

interpretation of whether an agreement, 

contract, or transaction (or class of 

agreements, contracts, or transactions) is 

a swap, security-based swap, or both 

(i.e., a mixed swap). 

Proposed rule 3a68–2 would afford 

persons with the opportunity to obtain 

greater certainty from the Commissions 

regarding whether certain products are 

swaps, security-based swaps, or both, 

i.e., mixed swaps. The SEC believes that 

this provision would decrease the 

possibility that market participants 

inadvertently might violate regulatory 

requirements regarding products that 

may constitute swaps, security-based 

swaps, or mixed swaps, which could 

lead to enforcement action. It also 

would decrease the likelihood that 

products might fall into regulatory gaps 

by providing a method for market 

participants to seek interpretations 

regarding the status of products for 

which the applicable regulatory regime 

might otherwise remain uncertain. In 

addition, the SEC believes the proposed 

rule will provide the opportunity for 

financial innovation by providing a 

flexible structure that will allow for the 

development of new products that 

otherwise might be hindered by the lack 

of regulatory certainty. 

(b) Costs 

Under proposed rule 3a68–2, a person 

could request the Commissions to 

provide an interpretation of whether an 

agreement, contract, or transaction (or 

class thereof) is a swap, security-based 

swap, or mixed swap. The SEC 

estimates that the cost of requesting this 

interpretation for a particular 

agreement, contract, or transaction (or 

class thereof) would be approximately 

20 hours of internal company or 

individual time and a cost of 

approximately $9,480 for the services of 

outside professionals.370 The SEC notes, 

however, that any such costs are in lieu 

of the costs of doing the same analysis 

without requesting the Commissions to 

provide an interpretation. In addition, 

as noted above, if the Commissions 

provide an interpretation pursuant to a 

request under proposed rule 3a68–2, a 

market participant, and other market 

participants that desire to transact in the 

same (or same class of) agreement, 

contract, or transaction, would have 

regulatory certainty about whether that 

agreement, contract, or transaction (or 

class thereof) is a swap, security-based 

swap, or both (i.e., a mixed swap). 

Also, the SEC believes that as persons 

make requests for interpretations about 

whether agreements, contracts, or 

transactions (or classes thereof 

agreements) are swaps, security-based 

swaps, or both, i.e., mixed swaps, 

pursuant to proposed rule 3a68–2, the 

subsequent costs for persons transacting 

in those products for which the 

Commissions have provided 

interpretations should be reduced. 

The SEC requests comment as to the 

costs that proposed rule 3a68–2 would 

impose on market participants, as well 

as estimates and empirical data to 

support these costs. In addition, the SEC 

requests comment on any other costs 

associated with proposed rule 3a68–2 

that have not been considered herein 

and what the extent of those costs 

would be. 

5. Proposed Rule 3a68–3 

(a) Benefits 

Proposed rule 3a68–3 would provide 

that, except as otherwise provided in 

proposed rule 3a68–3, for purposes of 

section 3(a)(68) of the Exchange Act,371

the term ‘‘narrow-based security index’’ 

has the meaning set forth in section 

3(a)(55) of the Exchange Act,372 and the 

rules, regulations, and orders of the SEC 

thereunder. This definition would 

eliminate potential uncertainty 

regarding the treatment of a narrowbased security index to which section 

3(a)(55) of the Exchange Act also 

applies.373

Proposed rule 3a68–3 also would 

provide a tolerance period for the 

definition of ‘‘narrow-based security 

index’’ to ensure that, under certain 

conditions, a security index underlying 

a swap will not be considered a narrowbased security index and a security 

index underlying a security-based swap 

will be considered a narrow-based 

security index, even when the security 

index underlying the swap or securitybased swap temporarily assumes 

characteristics that would render it a 

narrow-based security index or not a 

narrow-based security index, 

respectively. In addition, proposed rule 

3a68–3 would provide for an additional 

3-month grace period applicable to a 

security index that becomes narrowbased, or broad-based, as applicable, for 

more than 45 business days over 3 

consecutive calendar months. 

Because security indexes underlying 

Title VII instruments may migrate from 

narrow-based to broad-based, or vice 

versa, the Commissions are concerned 

that application of the narrow-based 

security index definition, without 

further clarification, may cause 

uncertainty regarding treatment of Title 

VII instruments traded on trading 

platforms when such migration has 

occurred. Therefore, proposed rule 

3a68–3 would eliminate the potential 

uncertainty of the treatment of such 

Title VII instruments by setting forth 

clear and objective criteria regarding the 

application of the narrow-based security 

index definition to security indexes that 

have migrated from narrow-based to 

broad-based or from broad-based to 

narrow-based. 

The SEC requests comments, data, 

and estimates regarding the benefits 

associated with proposed rule 3a68–3. 

The SEC also requests comments, data, 

and estimates regarding any additional 

benefits that could be realized with 

proposed rule 3a68–3. 

(b) Costs 

In complying with proposed rule 

3a68–3, a market participant will need 

to ascertain whether a security index 

underlying a Title VII instrument is 

narrow-based or broad-based according 

to the criteria set forth for the tolerance 

periods and grace periods in the 

proposed rule. This analysis would be 

performed upon entering into Title VII 

instrument on a security index to ensure 

compliance with proposed rule 3a68–3. 

The SEC notes, however, that any such 

costs would be in lieu of the costs of 

doing the same analysis under the 

narrow-based security index definition, 

which the SEC believes would be more 

difficult and lead to greater uncertainty, 

rather than the clarity provided under 

proposed rule 3a68–3. Providing a clear 

rule to market participants to determine 

whether a Title VII instrument traded on 

a trading platform where the underlying 

security index has so migrated could 

alleviate additional costs to persons of 

inquiring with the Commissions about 

whether a Title VII instrument is a swap 

or a security-based swap, as well as 

costs of obtaining an opinion of counsel 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
29882 Federal Register / Vol. 76, No. 99 / Monday, May 23, 2011 / Proposed Rules 

374See supra note 261 and accompanying text. 

375Section 3(a)(68)(D) of the Exchange Act, 15 

U.S.C. 78c(a)(68)(D); CEA section 1(a)(47)(D), 7 

U.S.C. 1(a)(47)(D). 

376See discussion supra part IV. 

377See discussion supra part VIII. 

regarding a particular Title VII 

instrument. 

In addition, proposed rule 3a68–3 is 

generally consistent with the tolerance 

period and grace period that exist in 

section 3(a)(55) of the Exchange Act for 

futures contracts.374 Because market 

participants are familiar with such 

tolerance period and grace period as 

well as with performing analyses of 

products in the futures context based on 

these provisions, the SEC believes that 

the proposed tolerance period and grace 

period in proposed rule 3a68–3 will 

mitigate uncertainty for market 

participants regarding the treatment of 

these Title VII instruments. Proposed 

rule 3a68–3 also would allow market 

participants to minimize the costs of 

determining whether a security index 

underlying a Title VII instrument is 

considered narrow-based or not by 

providing a test that is substantially 

similar to a test with which they are 

familiar in the futures context. In 

addition, the tolerance period under 

proposed rule 3a68–3 mitigates 

uncertainty for market participants 

trading Title VII instruments on trading 

platforms by allowing temporary 

migration of an underlying security 

index within certain specifications 

without disrupting the status of Title VII 

instruments based on that security 

index. Similarly, the grace period under 

proposed rule 3a68–3 mitigates 

uncertainty for market participants 

trading Title VII instruments on trading 

platforms by allowing time for any 

necessary actions to be made to 

accommodate the non-temporary 

migration of a security index underlying 

Title VII instruments. 

The SEC requests comment as to the 

costs that determinations under 

proposed rule 3a68–3 would impose on 

market participants, as well as estimates 

and empirical data to support these 

costs. In addition, the SEC requests 

comment on any other costs associated 

with proposed rule 3a68–3 that have not 

been considered, and what the extent of 

those costs would be. 

6. Proposed Rule 3a68–4 

(a) Benefits 

A mixed swap is both a security-based 

swap and a swap, subject to dual 

regulation by the Commissions, and 

proposed rule 3a68–4 would define the 

term ‘‘mixed swap’’ in the same manner 

as the term is defined in both the 

Exchange Act.375 Proposed rule 3a68–4 

would also provide that a mixed swap 

that is not executed on or subject to the 

rules of a DCM, SEF, FBOT, NSE, or 

security-based SEF and that will not be 

submitted to a DCO or registered or 

exempt clearing agency to be cleared 

(‘‘bilateral uncleared mixed swap’’), and 

where at least one party to the mixed 

swap is registered with the SEC as a 

security-based swap dealer or major 

security-based swap participant and 

also with the CFTC as a swap dealer or 

major swap participant, shall be subject 

to the provisions of the Securities Act 

and the rules and regulations 

promulgated thereunder and only to 

certain provisions of the CEA and the 

rules and regulations promulgated 

thereunder. In addition, proposed rule 

3a68–4 would establish a process for 

persons to request that such persons be 

permitted to comply, as to parallel 

provisions only, with the specified 

parallel provisions, instead of being 

required to comply with parallel 

provisions of both the CEA and the 

Exchange Act. 

Because, as noted above, mixed swaps 

are both swaps and security-based 

swaps, and thus are subject to regulation 

as both swaps and security-based swaps, 

the Commissions are concerned that, 

without further clarification, there may 

be uncertainty as to the scope of, and 

the requirements applicable to, 

transactions that fall within the 

definition of the term ‘‘mixed swap.’’ 

Proposed rule 3a68–4(a) would define 

the term ‘‘mixed swap’’ in the same 

manner as the term is defined in the 

Exchange Act. This rule, coupled with 

guidance regarding mixed swaps 

provided by the Commissions, further 

clarifies whether a security-based swap 

is a mixed swap and could eliminate the 

need to obtain an opinion of counsel 

regarding a particular security-based 

swap. 

The Commissions are proposing rule 

3a68–4(b) to eliminate potentially 

duplicative and conflicting regulation in 

the context of mixed swaps by 

providing that a bilateral uncleared 

mixed swap, where at least one party to 

the mixed swap is dually-registered 

with the SEC as a security-based swap 

dealer or major security-based swap 

participant and also with the CFTC as 

a swap dealer or major swap participant, 

would be subject to all applicable 

provisions of the securities laws (and 

SEC rules and regulations promulgated 

thereunder) but would be subject only 

to certain CEA provisions (and CFTC 

rules and regulations promulgated 

thereunder). Therefore, proposed rule 

3a68–4(a) would reduce both the 

number of and potential uncertainty 

regarding which requirements of each 

Commission will apply to bilateral 

uncleared mixed swaps entered into by 

dually-registered dealers and major 

participants. 

Proposed rule 3a68–4(c) also would 

afford persons with an opportunity to 

seek alternative regulatory treatment of 

a specified, or specified class of, mixed 

swap. Absent such alternative 

regulatory treatment, a person that 

desires or intends to list, trade, or clear 

a mixed swap would be required to 

comply with all the statutory provisions 

of Title VII, including all the rules and 

regulations thereunder, that are 

applicable to both security-based swaps 

and swaps. The SEC believes that such 

a requirement could pose practical 

difficulties for mixed swap 

transactions 376 and that permitting 

persons to request alternative regulatory 

treatment of a specified, or specified 

class of, mixed swaps would allow the 

Commissions to address the potential 

for duplicative or contradictory 

regulatory requirements regarding a 

particular mixed swap. 

The information submitted by persons 

pursuant to proposed rule 3a68–4(c) 

would assist the Commissions in more 

quickly identifying and addressing the 

relevant issues involved in providing 

alternative regulatory treatment. 

The SEC requests comments, data, 

and estimates regarding the benefits 

associated with proposed rule 3a68–4. 

The SEC also requests comments, data, 

and estimates regarding any additional 

benefits that could be realized with 

proposed rule 3a68–4. 

(b) Costs 

Providing a clear rule for persons who 

engage in bilateral uncleared mixed 

swaps would reduce the potential for 

duplicative or contradictory regulatory 

requirements that apply to such bilateral 

uncleared mixed swaps. 

Under proposed rule 3a68–4(c), a 

person also could request the 

Commissions to provide alternative 

regulatory treatment of a specified, or 

specified class of, mixed swap. The SEC 

estimates that the cost of requesting 

alternative regulatory treatment for a 

particular mixed swap (or class thereof) 

would be approximately 30 hours of 

internal company or individual time 

and a cost of approximately $15,800 for 

the services of outside professionals.377

The SEC notes, however, that any such 

costs are in lieu of the costs of 

complying with all the statutory 

provisions in Title VII, including all the 

rules and regulations thereunder, that 

are applicable to both security-based 

swaps and swaps, which the SEC 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
Federal Register / Vol. 76, No. 99 / Monday, May 23, 2011 / Proposed Rules 29883 

378See discussion supra part IV.B. 379 15 U.S.C. 78c(a)(16). 

believes would be more costly than 

requesting alternative regulatory 

treatment, and which potentially could 

pose practical difficulties.378

Also, the SEC believes that as persons 

make requests for alternative regulatory 

treatment of specified, or specified 

classes of, mixed swaps pursuant to 

proposed rule 3a68–4, the subsequent 

costs for persons transacting in those 

products for which the Commissions 

have provided for alternative regulatory 

treatment should be reduced. 

The SEC requests comment as to the 

costs that proposed rule 3a68–4 would 

impose on market participants, as well 

as estimates and empirical data to 

support these costs. In addition, the SEC 

requests comment on any other costs 

associated with proposed rule 3a68–4 

that have not been considered herein, 

and what the extent of those costs 

would be. 

7. Proposed Rule 3a69–1 

(a) Benefits 

Proposed rule 3a69–1 would clarify 

that state or Federally regulated 

insurance products provided by state or 

Federally regulated insurance 

companies, or by certain reinsurers, 

provided such insurance products meet 

certain other requirements, would not 

be swaps. Specifically, proposed rule 

3a69–1 would define the term ‘‘swap’’ so 

that it would not include an agreement, 

contract, or transaction that, by its terms 

or by law, as a condition of performance 

on the agreement, contract, or 

transaction: (i) Requires the beneficiary 

of the agreement, contract, or 

transaction to have an insurable interest 

that is the subject of the agreement, 

contract, or transaction and thereby 

carry the risk of loss with respect to that 

interest continuously throughout the 

duration of the agreement, contract, or 

transaction; (ii) requires that loss to 

occur and to be proved, and that any 

payment or indemnification therefor be 

limited to the value of the insurable 

interest; (iii) is not traded, separately 

from the insured interest, on an 

organized market or over-the-counter; 

and (iv) with respect to financial 

guarantee insurance only, in the event 

of payment default or insolvency of the 

obligor, any acceleration of payments 

under the policy is at the sole discretion 

of the insurer. Proposed rule 3a69–1 

also would require that the agreement, 

contract, or transaction: (i) Be provided 

by a company that is organized as an 

insurance company whose primary and 

predominant business activity is the 

writing of insurance or the reinsuring of 

risks underwritten by insurance 

companies and that is subject to 

supervision by the insurance 

commissioner, or similar official or 

agency, of a state, as defined under 

section 3(a)(16) of the Exchange Act,379

or by the United States or an agency or 

instrumentality thereof, and be 

regulated as insurance under the laws of 

such state or the United States; (ii) be 

provided by the United States or any of 

its agents or instrumentalities, or 

pursuant to a statutorily authorized 

program thereof; or (iii) in the case of 

reinsurance only, be provided by a 

person located outside the United States 

to an insurance company that meets the 

above requirements, provided that such 

person is not prohibited by the law of 

any state or the United States from 

offering such agreement, contract, or 

transaction to such insurance company, 

the product to be reinsured meets the 

requirements above for insurance 

products, and the total amount 

reimbursable by all reinsurers for such 

insurance product cannot exceed the 

claims or losses paid by the cedant. An 

agreement, contract, or transaction 

would have to meet all of these criteria 

in order to qualify as an insurance 

product that falls outside of the swap 

and security-based swap definitions 

pursuant to the proposed rules. 

The SEC is concerned that, without 

further clarification, market participants 

may be uncertain about whether an 

agreement, contract, or transaction is an 

insurance product that is not subject to 

regulation as a swap or security-based 

swap. Therefore, proposed rule 3a69–1 

would eliminate the potential 

uncertainty of what constitutes an 

insurance product by setting forth clear 

and objective criteria for meeting the 

definition of an insurance product that 

is not subject to regulation as a swap or 

security-based swap. 

The SEC requests comments, data, 

and estimates regarding the benefits 

associated with proposed rule 3a69–1. 

The SEC also requests comments, data, 

and estimates regarding any additional 

benefits that could be realized with 

proposed rule 3a69–1. 

(b) Costs 

In complying with proposed rule 

3a69–1, a market participant will need 

to analyze its agreements, contracts, and 

transactions that are insurance products 

under the provisions of the proposed 

rule to determine whether such 

insurance products fall outside the 

definitions of the terms ‘‘swaps’’ and 

‘‘security-based swap.’’ This analysis 

will have to be performed upon entering 

into the agreement, contract, or 

transaction to ensure compliance with 

proposed rule 3a69–1. The SEC notes, 

however, that any such costs would be 

in lieu of the costs of doing the same 

analysis absent proposed rule 3a69–1, 

which the SEC believes would be more 

difficult and lead to greater uncertainty 

than if the analysis were done under 

proposed rule 3a69–1. Providing an 

objective rule to determine whether an 

agreement, contract, or transaction is an 

insurance product could alleviate 

additional costs of inquiring with the 

Commissions about whether an 

agreement, contract, or transaction is an 

insurance product or a swap, or costs of 

obtaining an opinion of counsel 

regarding a particular agreement, 

contract, or transaction. 

To the extent that the criteria under 

proposed rule 3a69–1 lead to the 

inadvertent omission of certain types of 

insurance products, these omissions 

could lead to costs for market 

participants entering into agreements, 

contracts, or transactions that might be 

omitted because these agreements, 

contracts, or transactions would be 

regulated as swaps and not as insurance 

products. Similarly, to the extent that 

the criteria under proposed rule 3a69– 

1 lead to the inadvertent inclusion of 

certain types of swaps or security-based 

swaps, these inclusions could lead to 

costs for market participants entering 

into agreements, contracts, or 

transactions that are regulated as 

insurance products and not as swaps or 

security-based swaps. The SEC has 

requested comment on whether the 

criteria under proposed rule 3a69–1 

inadvertently omits certain types of 

insurance products or includes certain 

types of swaps in order to minimize 

these potential costs. The SEC believes 

that, pursuant to comments on the 

proposed criteria, any subsequent 

modifications the Commissions make to 

proposed rule 3a69–1 would 

significantly curtail the potential for 

inadvertent omissions or inclusions. 

The SEC requests comment as to the 

costs that determinations under 

proposed rule 3a69–1 would impose on 

market participants, as well as estimates 

and empirical data to support these 

costs. In addition, the SEC requests 

comment on any other costs associated 

with proposed rule 3a69–1 that have not 

been considered, and what the extent of 

those costs would be. 

8. Proposed Rule 3a69–2 

(a) Benefits 

Proposed rule 3a69–2 provides that 

the term ‘‘swap’’ has the meaning set 

forth in section 3(a)(69) of the Exchange 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
29884 Federal Register / Vol. 76, No. 99 / Monday, May 23, 2011 / Proposed Rules 

380 15 U.S.C. 78c(a)(69); 7 U.S.C. 1a(47)(B). 

381 7 U.S.C. 1a(47)(E)(i). 

382 7 U.S.C. 6r. 

383 7 U.S.C. 6s. 

384 7 U.S.C. 1a(24) and 1a(25). 385 15 U.S.C. 78c(a)(78). 

Act and that, without limiting the 

definition of ‘‘swap’’ in section 3(a)(69) 

of the Exchange Act, an agreement, 

contract, or transaction that is a crosscurrency swap, currency option, foreign 

currency option, foreign exchange 

option, foreign exchange rate option, 

foreign exchange forward, foreign 

exchange swap, FRA, or NDF would fall 

within the meaning of the term ‘‘swap’’, 

unless such agreement, contract, or 

transaction is otherwise excluded by 

section 1a(47)(B) of the CEA.380

Proposed rule 3a69–2 also provides that 

a foreign exchange forward or a foreign 

exchange swap shall not be considered 

a swap if the Secretary of the Treasury 

makes a determination described in 

section 1a(47)(E)(i) of the CEA381 and 

that, notwithstanding such provision, 

certain provisions of the CEA will apply 

to such foreign exchange forward or 

foreign exchange swap, namely the 

reporting requirements in section 4r of 

the CEA,382 and regulations thereunder, 

and, in the case of a swap dealer or 

major swap participant that is a party to 

a foreign exchange swap or foreign 

exchange forward, the business conduct 

standards in section 4s of the CEA,383

and regulations thereunder. In addition, 

proposed rule 3a69–2 provides that the 

terms ‘‘foreign exchange forward’’ and 

‘‘foreign exchange swap’’ have the 

meanings set forth in the CEA and that 

a currency swap, cross-currency swap, 

currency option, foreign currency 

option, foreign exchange option, foreign 

exchange rate option, and NDF is not a 

foreign exchange forward or foreign 

exchange swap for purposes of sections 

1a(24) and 1a(25) of the CEA.384

Proposed rule 3a69–2 would restate 

portions of the statutory definition of 

‘‘swap’’ and enumerate certain types of 

agreements, contracts, and transactions 

that are swaps in order to consolidate 

parts of the definition and related 

interpretations for ease of reference. 

Proposed rule 3a69–2 would also 

specify certain reporting and business 

conduct requirements that are 

applicable to foreign exchange forwards 

and foreign exchange swaps, and 

provide definitions for such terms. 

Because the statutory definition of the 

term ‘‘swap,’’ though broadly worded 

and specific regarding the status of 

certain agreements, contracts, and 

transactions, does not explicitly 

mention every agreement, contract, or 

transaction that would fall within the 

definition, the Commissions are 

concerned that application of the 

definition, without further clarification, 

may cause uncertainty about whether 

certain agreements, contracts, or 

transactions would be swaps. Proposed 

rule 3a69–2 would eliminate the 

potential uncertainty of the treatment of 

such agreements, contracts, and 

transactions as swaps by setting forth 

clear and objective criteria for certain 

agreements, contracts, and transactions 

without limiting the scope of the 

statutory definition of the term ‘‘swap.’’ 

Proposed rule 3a69–2 also would 

eliminate the potential uncertainty 

regarding the reporting and business 

conduct requirements applicable to 

foreign exchange forwards and foreign 

exchange swaps by specifying the 

provisions for which compliance is 

required. 

(b) Costs 

In complying with proposed rule 

3a69–2, a market participant will need 

to analyze its agreements, contracts, and 

transactions under the provisions of the 

proposed rule to determine whether 

such agreements, contracts, and 

transactions are swaps according to the 

criteria set forth in the proposed rule. 

This analysis will have to be performed 

upon entering into the agreement, 

contract, or transaction to ensure 

compliance with proposed rule 3a69–2. 

The SEC notes, however, that any such 

costs would be in lieu of the costs of 

doing the same analysis absent 

proposed rule 3a69–2, which the SEC 

believes would be more difficult and 

lead to greater uncertainty than if the 

analysis were done under proposed rule 

3a69–2. 

Providing an objective rule to market 

participants to determine whether 

certain types of agreements, contracts, 

or transactions are swaps could alleviate 

additional costs to persons of inquiring 

with the Commissions about whether 

such agreements, contracts, or 

transactions are swaps, as well as costs 

of obtaining an opinion of counsel 

regarding a particular agreement, 

contract, or transaction. In addition, an 

objective rule regarding reporting and 

business conduct requirements could 

alleviate additional costs to persons of 

inquiring with the Commissions about 

which reporting and business conduct 

requirements are applicable to foreign 

exchange forwards and foreign exchange 

swaps, and could reduce the costs of 

obtaining an opinion of counsel 

regarding a particular foreign exchange 

forward or foreign exchange swap. 

To the extent that the criteria under 

proposed rule 3a69–2 lead to the 

inadvertent inclusion of certain types of 

agreements, contracts, and transactions 

or additional reporting or business 

conduct obligations for certain swaps, 

these inclusions and additional 

requirements could lead to costs for 

market participants entering into 

agreements, contracts, or transactions to 

which proposed rule 3a69–2 applies. 

The SEC has requested comment on 

whether the criteria under proposed 

rule 3a69–2 provide sufficient clarity 

regarding the specific products included 

in the rule and whether the criteria 

should clarify the applicability of 

reporting and business conduct 

requirements in order to minimize these 

potential costs. The SEC believes that, 

pursuant to comments on the proposed 

criteria, any subsequent modifications 

the Commissions make to proposed rule 

3a69–2 would significantly curtail the 

potential for inadvertent inclusions or 

additional reporting or business conduct 

requirements. 

The SEC requests comment as to the 

costs that determinations under and 

compliance with proposed rule 3a69–2 

would impose on market participants, 

as well as estimates and empirical data 

to support these costs. In addition, the 

SEC requests comment on any other 

costs associated with proposed rule 

3a69–2 that have not been considered, 

and what the extent of those costs 

would be. 

9. Proposed Rule 3a69–3 

(a) Benefits 

Proposed rule 3a69–3 would provide 

that the term ‘‘security-based swap 

agreement’’ has the meaning set forth in 

section 3(a)(78) of the Exchange Act.385

Proposed rule 3a69–3 also would 

provide that registered SDRs, swap 

dealers, major swap participants, 

security-based swap dealers, and major 

security-based swap participants are not 

required to maintain additional books 

and records, or, in the case of registered 

SDRs, collect and maintain additional 

information regarding, SBSAs other 

than the books and records (and, in the 

case of registered SDRs, information) 

required to be kept (or collected) and 

maintained regarding swaps pursuant to 

the CEA and the CFTC rules and 

regulations promulgated thereunder. 

Because, as noted above, securitybased swap agreements are subject the 

CFTC’s regulatory and enforcement 

authority and the SEC’s antifraud and 

certain other authority, the 

Commissions are concerned that, 

without further clarification, there may 

be uncertainty as to the scope of 

transactions that fall within the 

definition of the term ‘‘security-based 


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386 15 U.S.C. 78c(f). 

387 15 U.S.C. 78w(a)(2). 388 Id. 

swap agreement.’’ Proposed rule 3a69– 

3(c) would define the term ‘‘securitybased swap agreement’’ in the same 

manner as the term is defined in the 

Exchange Act. This rule, coupled with 

guidance regarding security-based swap 

agreements provided by the 

Commissions, further clarifies whether a 

swap is a security-based swap 

agreement and could eliminate the need 

to obtain an opinion of counsel 

regarding a particular security-based 

swap agreement. 

Section 712(d)(2)(B) and (C) of the 

Dodd-Frank Act requires the 

Commissions to engage in joint 

rulemaking regarding books and records 

requirements for SBSAs. Providing that 

persons required to keep and maintain 

books and records regarding, or collect 

and maintain data regarding, swaps are 

not required to keep or maintain 

additional books and records regarding, 

or collect and maintain additional data 

regarding, SBSAs alleviates any 

additional books and records or 

information costs to such persons. 

(b) Costs 

The SEC believes that, because 

proposed rule 3a69–3 includes within 

the definition of SBSA no agreements, 

contracts, or transactions that would not 

be an SBSA in the absence of the 

proposed rule, proposed rule 3a69–3 

would impose no costs other than those 

that are required with respect to swaps 

in the absence of proposed rule 3a69– 

3. In addition, the SEC believes that, 

because proposed rule 3a69–3 imposes 

no requirements with respect to SBSAs 

other than those that exist for swaps, 

proposed rule 3a69–3 would impose no 

costs other than those that are required 

with respect to swaps in the absence of 

proposed rule 3a69–3. 

To the extent that the criteria under 

proposed rule 3a69–3 inadvertently lead 

to additional requirements with respect 

to SBSAs, these additional requirements 

could lead to costs for market 

participants entering into the SBSAs to 

which proposed rule 3a69–3 applies. 

The SEC has requested comment 

regarding whether the requirements 

under proposed rule 3a69–3 are 

sufficient. The SEC believes that, 

pursuant to comments on the proposed 

rule, any subsequent modifications the 

Commissions make to proposed rule 

3a69–3 would significantly curtail the 

potential for inadvertent additional 

requirements. 

The SEC requests comment as to the 

costs that compliance with proposed 

rule 3a69–3 would impose on market 

participants, as well as estimates and 

empirical data to support these costs. In 

addition, the SEC requests comment on 

any other costs associated with 

proposed rule 3a69–3 that have not been 

considered, and what the extent of those 

costs would be. 

Request for Comment 

153. The SEC has considered the costs 

and benefits of the proposed rules and 

clarifications regarding the Product 

Definitions, the regulation of mixed 

swaps, and the books and records 

requirements for SBSAs. The SEC is 

sensitive to these costs and benefits, and 

encourages commenters to discuss any 

additional costs or benefits beyond 

those discussed here, as well as any 

reductions in costs. In particular, the 

SEC requests comment on the potential 

costs, as well as any potential benefits, 

resulting from the proposed rules and 

clarifications regarding the Product 

Definitions, the regulation of mixed 

swaps, and the books and records 

requirements for SBSAs for issuers, 

investors, broker-dealers, security-based 

swap dealers, major security-based swap 

participants, persons associated with a 

security-based swap dealer or a major 

security-based swap participant, other 

security-based swap industry 

professionals, regulators, and other 

market participants. The SEC also seeks 

comment on the accuracy of any of the 

benefits identified and also welcomes 

comment on any of the costs identified 

here. In addition, the SEC encourages 

commenters to identify, discuss, 

analyze, and supply relevant data, 

information, or statistics regarding any 

such costs or benefits, including 

estimates and views regarding these 

costs and benefits for particular types of 

market participants, as well as any other 

costs or benefits that may result from 

the adoption of the proposed rules, as 

well as the clarifications provided. 

C. Consideration of Burden on 

Competition, and Promotion of 

Efficiency, Competition, and Capital 

Formation 

Section 3(f) of the Exchange Act 386

requires the SEC, whenever it engages in 

rulemaking and is required to consider 

or determine whether an action is 

necessary or appropriate in the public 

interest, to consider whether the action 

would promote efficiency, competition, 

and capital formation. In addition, 

section 23(a)(2) of the Exchange Act 387

requires the SEC, when adopting rules 

under the Exchange Act, to consider the 

impact such rules would have on 

competition. Section 23(a)(2) of the 

Exchange Act also prohibits the SEC 

from adopting any rule that would 

impose a burden on competition not 

necessary or appropriate in furtherance 

of the purposes of the Exchange Act.388

1. Proposed Rule 3a68–1a 

The SEC believes that proposed rule 

3a68–1a would create an efficient 

process for a market participant to 

determine whether an index CDS is a 

swap or a security-based swap by setting 

forth clear methods and guidelines, 

thereby reducing potential uncertainty. 

Because swaps and security-based 

swaps both are regulated pursuant to the 

Dodd-Frank Act by either the CFTC or 

the SEC, and an index CDS would be 

either a swap or a security-based swap, 

regardless of whether the SEC proposed 

rule 3a68–1a, the SEC believes that the 

proposed rule would not have an 

adverse effect on capital formation. 

Similarly, the SEC believes that 

proposed rule 3a68–1a would not 

impose any significant burdens on 

competition because an index CDS 

would be regulated as a swap or 

security-based swap regardless of 

whether the SEC proposed rule 3a68–1a. 

The proposed rule is a means of 

providing greater clarity for market 

participants on whether a specific index 

CDS is a swap or a security-based swap. 

2. Proposed Rule 3a68–1b 

The SEC believes that proposed rule 

3a68–1b would create an efficient 

process for a market participant to 

determine whether an index CDS is a 

swap or a security-based swap by setting 

forth clear methods and guidelines, 

thereby reducing potential uncertainty. 

Because swaps and security-based 

swaps both are regulated pursuant to the 

Dodd-Frank Act by either the CFTC or 

the SEC, and an index CDS would be 

either a swap or a security-based swap, 

regardless of whether the SEC proposed 

rule 3a68–1b, the SEC believes that the 

proposed rule would not have an 

adverse effect on capital formation. 

Similarly, the SEC believes that 

proposed rule 3a68–1b would not 

impose any significant burdens on 

competition because an index CDS 

would be regulated as a swap or 

security-based swap regardless of 

whether the SEC proposed rule 3a68– 

1b. The proposed rule is a means of 

providing greater clarity for market 

participants on whether a specific index 

CDS is a swap or a security-based swap. 

3. Proposed Rule 3a68–2 

The SEC believes that proposed rule 

3a68–2 would create an efficient process 

for a market participant to request the 

Commissions to determine whether an 


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29886 Federal Register / Vol. 76, No. 99 / Monday, May 23, 2011 / Proposed Rules 

agreement, contract, or transaction (or 

class thereof) is a swap, security-based 

swap, or both (i.e., a mixed swap) by 

setting forth clear methods and 

guidelines, thereby reducing potential 

uncertainty. Because swaps, securitybased swaps, and mixed swaps all are 

regulated pursuant to the Dodd-Frank 

Act by either the CFTC, the SEC, or both 

the CFTC and SEC, and because market 

participants still would need to 

determine whether an agreement, 

contract, or transaction (or class thereof) 

is a swap, security-based swap, or 

mixed swap regardless of whether the 

SEC proposed rule 3a68–2, the SEC 

believes that the proposed rule would 

not have an adverse effect on capital 

formation. 

In addition, the SEC believes the 

proposed rule will provide the 

opportunity for financial innovation by 

providing a flexible structure that will 

allow for the development of new 

products, which may promote capital 

formation. 

Similarly, the SEC believes that 

proposed rule 3a68–2 would not impose 

any significant burdens on competition 

because, to the extent an agreement, 

contract, or transaction (or class thereof) 

is a swap, security-based swap, or both 

(i.e., a mixed swap), that agreement, 

contract, or transaction (or class thereof) 

would be regulated as a swap, securitybased swap, or mixed swap regardless of 

whether the SEC proposed rule 3a68–2. 

The proposed rule is a means of 

providing a process for market 

participants to request clarity regarding 

whether a specific agreement, contract, 

or transaction (or class thereof) is a 

swap, security-based swap, or mixed 

swap. 

4. Proposed Rule 3a68–3 

The SEC believes that proposed rule 

3a68–3 would create an efficient process 

for a market participant to determine 

whether a security index underlying a 

Title VII instrument is narrow-based or 

broad-based, and therefore whether the 

Title VII instrument is a swap or a 

security-based swap, by setting forth 

clear methods and guidelines, thereby 

reducing potential uncertainty. Because 

swaps and security-based swaps both 

are regulated pursuant to the DoddFrank Act by either the CFTC or the 

SEC, and a Title VII instrument on a 

security index would be either a swap 

or a security-based swap regardless of 

whether the SEC proposed rule 3a68–3, 

the SEC believes that the proposed rule 

would not have an adverse effect on 

capital formation. 

Similarly, the SEC believes that 

proposed rule 3a68–3 would not impose 

any significant burdens on competition 

because a Title VII instrument on a 

security index would be regulated as a 

swap or security-based swap regardless 

of whether the SEC proposed rule 3a68– 

3. The proposed rule is a means of 

providing greater clarity for market 

participants regarding whether a 

specific Title VII instrument on a 

security index is a swap or a securitybased swap. 

5. Proposed Rule 3a68–4 

The SEC believes that proposed rule 

3a68–4 would create an efficient process 

for a market participant to request 

alternative regulatory treatment 

regarding a specified, or specified class 

of, mixed swap by setting forth clear 

methods and guidelines, thereby 

reducing potential uncertainty and dual 

regulatory requirements. Because a 

mixed swap is regulated pursuant to the 

Dodd-Frank Act, and, absent proposed 

rule 3a68–4, persons that desire or 

intend to list, trade, or clear a mixed 

swap would be required to comply with 

all the statutory provisions in Title VII, 

including all the rules and regulations 

thereunder, that are applicable to both 

swaps and security-based swaps, the 

SEC believes that the proposed rule 

would not have an adverse effect on 

capital formation. Proposed rule 3a68– 

4 would permit such persons to request 

a joint order permitting themto comply 

with an alternative regulatory regime 

that would address the potential dual 

regulatory requirements applicable to 

transactions in mixed swaps under Title 

VII. 

Similarly, the SEC believes that 

proposed rule 3a68–4 would not impose 

any significant burdens on competition 

because to the extent an agreement, 

contract, or transaction (or class thereof) 

is a mixed swap, transactions in that 

mixed swap would be subject to all of 

the statutory provisions of Title VII, 

including all the rules and regulations 

thereunder, that are applicable to both 

swaps and security-based swaps, if the 

Commissions were not to provide 

alternative regulatory treatment 

pursuant to proposed rule 3a68–4. 

6. Proposed Rule 3a69–1 

The SEC believes that proposed rule 

3a69–1 would create an efficient process 

for a market participant to determine 

whether an agreement, contract, or 

transaction is an insurance product and 

is not a swap by setting forth clear 

methods and guidelines, thereby 

reducing potential uncertainty. Because 

insurance products and insurance 

companies currently are regulated 

pursuant to state insurance law, and 

would continue to be so regardless of 

whether the SEC proposed rule 3a69–1, 

the SEC believes that the proposed rule 

would not have an adverse effect on 

capital formation. 

Similarly, the SEC believes that 

proposed rule 3a69–1 would not impose 

any significant burdens on competition 

because insurance products and 

insurance companies currently are 

regulated pursuant to state insurance 

law and would continue to be so 

regardless of whether the SEC proposed 

rule 3a69–1. The proposed rule is a 

means of providing greater clarity for 

market participants on whether a 

specific agreement, contract, or 

transaction is an insurance product and 

is not a swap. 

7. Proposed Rule 3a69–2 

The SEC believes that proposed rule 

3a69–2 would create an efficient process 

for a market participant to determine 

whether an agreement, contract, or 

transaction is a swap, a foreign 

exchange forward, or a foreign exchange 

swap or is subject to certain reporting 

and business conduct requirements, by 

setting forth clear methods and 

guidelines, thereby reducing potential 

uncertainty. Because agreements, 

contracts, and transactions that are 

swaps, foreign exchange forwards, or 

foreign exchange swaps under proposed 

rule 3a69–2 would be swaps, foreign 

exchange forwards, or foreign exchange 

swaps and, in the case of foreign 

exchange forwards and foreign exchange 

swaps, would be subject to reporting 

and business conduct requirements 

under the CEA, in the absence of 

proposed rule 3a69–2, the SEC believes 

that the proposed rule would not have 

an adverse effect on capital formation. 

Similarly, the SEC believes that 

proposed rule 3a69–2 would not impose 

any significant burdens on competition 

because swaps, foreign exchange swaps, 

and foreign exchange forwards continue 

to be regulated as such regardless of 

whether the SEC proposed rule 3a69–2. 

The proposed rule is a means of 

providing greater clarity for market 

participants on whether a specific 

agreement, contract, or transaction is a 

swap, foreign exchange forward, or 

foreign exchange swap and whether 

certain reporting and business conduct 

requirements apply in the case of 

foreign exchange forwards and foreign 

exchange swaps. 

8. Proposed Rule 3a69–3 

The SEC believes that proposed rule 

3a69–3 would create an efficient process 

for registered SDRs, SDs, MSPs, 

security-based swap dealers, and major 

security-based swap participants to 

determine the books and records 

requirements for SBSAs by setting forth 


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389 5 U.S.C. 603(a). 

390 5 U.S.C. 551 et seq. 

391Although section 601(b) of the RFA defines 

the term ‘‘small entity,’’ the statute permits agencies 

to formulate their own definitions. The SEC has 

adopted definitions for the term small entity for the 

purposes of SEC rulemaking in accordance with the 

RFA. Those definitions, as relevant to this proposed 

rulemaking, are set forth in rule 0–10, 17 CFR 

240.0–10. See Statement of Management on Internal 

Accounting Control, 47 FR 5215, Feb. 4, 1982. 

392See 5 U.S.C. 605(b). 

393See 17 CFR 240.0–10(a). 

394See 17 CFR 240.17a–5(d). 

395See 17 CFR 240.0–10(c). 

396See 13 CFR 121.201. 

397See, e.g., CEA section 1a(49), 7 U.S.C. 1a(49) 

(defining ‘‘swap dealer’’); section 3(a)(71)(A) of the 

Exchange Act, 15 U.S.C. 78c(a)(71)(A) (defining 

‘‘security-based swap dealer’’); CEA section 1a(33), 

7 U.S.C. 1a(33) (defining ‘‘major swap participant’’); 

section 3(a)(67)(A) of the Exchange Act, 15 U.S.C. 

78c(a)(67)(A) (defining ‘‘major security-based swap 

participant’’). Such entities also would include 

commercial entities that may use swaps to hedge or 

mitigate commercial risk. 

398See 17 CFR 240.0–10(a). 

clear guidelines, thereby reducing 

potential uncertainty. Proposed rule 

3a69–3(c) also would define the term 

‘‘security-based swap agreement’’ in the 

same manner as the term is defined in 

the Exchange Act. Because SBSAs are 

swaps, they are subject to certain books 

and records requirements under the 

CEA (and CFTC rules and regulations 

promulgated thereunder) that are 

applicable to swaps and would continue 

to be so regardless of whether the SEC 

proposed rule 3a69–3. The SEC believes 

that the proposed rule would thus not 

have an adverse effect on capital 

formation. 

Similarly, the SEC believes that 

proposed rule 3a69–3 would not impose 

any significant burdens on competition 

because SBSAs would be regulated as 

swaps regardless of whether the SEC 

proposed rule 3a69–3. The proposed 

rule is a means of providing greater 

clarity for market participants regarding 

SBSAs, including the books and records 

requirements for SBSAs. 

Request for Comment 

154. The SEC requests comment on 

the possible effects of the proposed 

rules under the Exchange Act regarding 

efficiency, competition, and capital 

formation. The SEC requests that 

commenters provide views and 

supporting information regarding any 

such effects. The SEC notes that such 

effects are difficult to quantify. The SEC 

seeks comment on possible anticompetitive effects of the proposed rules 

under the Exchange Act not already 

identified. The SEC also requests 

comment regarding the competitive 

effects of pursuing alternative regulatory 

approaches that are consistent with 

section 712(a) and 712(d) of the DoddFrank Act. In addition, the SEC requests 

comment on how the other provisions of 

the Dodd-Frank Act for which SEC 

rulemaking is required will interact 

with and influence the competitive 

effects of the proposed rules and 

clarifications under the Exchange Act. 

D. Consideration of Impact on the 

Economy 

For purposes of SBREFA the SEC 

must advise the OMB as to whether the 

proposed rules and interpretive 

guidance under the Exchange Act 

constitute ‘‘major’’ rules. Under 

SBREFA, a rule is considered ‘‘major’’ 

where, if adopted, it results or is likely 

to result in: (1) An annual effect on the 

economy of $100 million or more (either 

in the form of an increase or a decrease); 

(2) a major increase in costs or prices for 

consumers or individual industries; or 

(3) significant adverse effect on 

competition, investment or innovation. 

If a rule is ‘‘major,’’ its effectiveness will 

generally be delayed for 60 days 

pending Congressional review. 

The SEC requests comment on the 

potential impact of the proposed rules 

and interpretive guidance under the 

Exchange Act on the economy on an 

annual basis, on the costs or prices for 

consumers or individual industries, and 

on competition, investment, or 

innovation. Commenters are requested 

to provide empirical data and other 

factual support for their view to the 

extent possible. 

E. Initial Regulatory Flexibility Act 

Certification 

The RFA requires Federal agencies, in 

promulgating rules, to consider the 

impact of those rules on small entities. 

Section 603(a) 389 of the Administrative 

Procedure Act,390 as amended by the 

RFA, generally requires the SEC to 

undertake a regulatory flexibility 

analysis of all proposed rules, or 

proposed rule amendments, to 

determine the impact of such 

rulemaking on ‘‘small entities.’’ 391

Section 605(b) of the RFA states that 

this requirement shall not apply to any 

proposed rule or proposed rule 

amendment, that, if adopted, would not 

have a significant economic impact on 

a substantial number of small 

entities.392

For purposes of SEC rulemaking in 

connection with the RFA, a small entity 

includes: (i) When used with reference 

to an ‘‘issuer’’ or a ‘‘person,’’ other than 

an investment company, an ‘‘issuer’’ or 

‘‘person’’ that, on the last day of its most 

recent fiscal year, had total assets of $5 

million or less,393 or (ii) a broker-dealer 

with total capital (net worth plus 

subordinated liabilities) of less than 

$500,000 on the date in the prior fiscal 

year as of which its audited financial 

statements were prepared pursuant to 

rule 17a–5(d) under the Exchange 

Act,394 or, if not required to file such 

statements, a broker-dealer with total 

capital (net worth plus subordinated 

liabilities) of less than $500,000 on the 

last day of the preceding fiscal year (or 

in the time that it has been in business, 

if shorter); and is not affiliated with any 

person (other than a natural person) that 

is not a small business or small 

organization.395 Under the standards 

adopted by the Small Business 

Administration, small entities in the 

finance and insurance industry include 

the following: (i) For entities in credit 

intermediation and related activities, 

entities with $175 million or less in 

assets or, for non-depository credit 

intermediation and certain other 

activities, $7 million or less in annual 

receipts; (ii) for entities in financial 

investments and related activities, 

entities with $7 million or less in 

annual receipts; (iii) for insurance 

carriers and entities in related activities, 

entities with $7 million or less in 

annual receipts; and (iv) for funds, 

trusts, and other financial vehicles, 

entities with $7 million or less in 

annual receipts.396

Based on the SEC’s existing 

information about the swap markets, the 

SEC believes that the swap markets, 

while broad in scope, are largely 

dominated by entities such as those that 

would be covered by the ‘‘swap dealer,’’ 

‘‘security-based swap dealer,’’ ‘‘major 

swap participant,’’ and ‘‘major securitybased swap participant’’ definitions.397

The SEC believes that such entities 

exceed the thresholds defining ‘‘small 

entities’’ set out above. Moreover, 

although it is possible that other persons 

may engage in swap and security-based 

swap transactions, the SEC does not 

believe that any of these entities would 

be ‘‘small entities’’ as defined in rule 0– 

10 under the Exchange Act.398 Feedback 

from industry participants about the 

swap markets indicates that only 

persons or entities with assets 

significantly in excess of $5 million (or 

with annual receipts significantly in 

excess of $7 million) participate in the 

swap markets. 

To the extent that a small number of 

transactions did have a counterparty 

that was defined as a ‘‘small entity’’ 

under SEC rule 0–10, the SEC believes 

it is unlikely that the proposed rules 

and clarifications regarding the Product 

Definitions, the regulation of mixed 

swaps, and the books and records 

requirements for SBSAs would have a 

significant economic impact on that 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
29888 Federal Register / Vol. 76, No. 99 / Monday, May 23, 2011 / Proposed Rules 

entity. The proposed rules and 

clarifications simply would address 

whether certain products fall within the 

swap definition, address whether 

certain products are swaps, securitybased swaps, SBSAs, or mixed swaps, 

provide a process for requesting 

interpretations of whether agreements, 

contracts, and transactions are swaps, 

security-based swaps, and mixed swaps, 

provide a process for requesting 

alternative regulatory treatment for 

mixed swaps, and establish books and 

records requirements for SBSAs, which 

are applicable to all entities. 

For the foregoing reasons, the SEC 

certifies that the proposed rules and 

clarifications regarding the Product 

Definitions, the regulation of mixed 

swaps, and the books and records 

requirements for SBSAs would not have 

a significant economic impact on a 

substantial number of small entities for 

purposes of the RFA. The SEC 

encourages written comments regarding 

this certification. The SEC requests that 

commenters describe the nature of any 

impact on small entities and provide 

empirical data to support the extent of 

the impact. 

X. Statutory Basis and Rule Text 

List of Subjects 

17 CFR Part 1 

Definitions, General swap provisions. 

17 CFR Part 240 

Reporting and recordkeeping 

requirements, Securities. 

Commodity Futures Trading 

Commission 

Pursuant to the Commodity Exchange 

Act, 7 U.S.C. 1 et seq., as amended by 

Title VII of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act, 

Public Law 111–203, 124 Stat. 1376 

(2010) (‘‘Dodd-Frank Act’’), and sections 

712(a)(8), 712(d), 721(a), 721(b), 721(c), 

722(d), and 725(g) of the Dodd-Frank 

Act, the CFTC is proposing to adopt 

rules 1.3(xxx) through 1.3(aaaa) and 1.6 

through 1.9 under the Commodity 

Exchange Act. 

Text of Proposed Rules 

For the reasons stated in the 

preamble, the CFTC is proposing to 

further amend Title 17, Chapter I, of the 

Code of Federal Regulations, as 

amended at 75 FR 63732, October 18, 

2010, 75 FR 65586, Oct. 26, 2010, 75 FR 

77576, Dec. 13, 2010, 75 FR 80174, Dec. 

21, 2010, and 76 FR 722, Jan. 6, 2011, 

as follows: 

PART 1—GENERAL REGULATIONS 

UNDER THE COMMODITY EXCHANGE 

ACT 

1. The authority citation for part 1 is 

revised to read as follows: 

Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 

6c, 6e, 6f, 6g, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 

6p, 6r, 7, 7a, 7b, 8, 9, 10, 12, 12a, 12c, 13a, 

13a–1, 16, 16a, 21, 23, and 24. 

2. Amend § 1.3 by adding paragraphs 

(xxx), (yyy), (zzz), and (aaaa) to read as 

follows: 

§ 1.3 Definitions. 

* * * * * 

(xxx) Swap. (1) In general. The term 

swap has the meaning set forth in 

section 1a(47) of the Commodity 

Exchange Act. 

(2) Inclusion of particular products. 

(i) The term swap includes, without 

limiting the meaning set forth in section 

1a(47) of the Commodity Exchange Act, 

the following agreements, contracts, and 

transactions: 

(A) A cross-currency swap; 

(B) A currency option, foreign 

currency option, foreign exchange 

option and foreign exchange rate option; 

(C) A foreign exchange forward; 

(D) A foreign exchange swap; 

(E) A forward rate agreement; and 

(F) A non-deliverable forward 

involving foreign exchange. 

(ii) The term swap does not include 

an agreement, contract, or transaction 

described in paragraph (xxx)(2)(i) of this 

section that is otherwise excluded by 

section 1a(47)(B) of the Commodity 

Exchange Act. 

(3) Foreign exchange forwards and 

foreign exchange swaps. 

Notwithstanding paragraph (xxx)(2) of 

this section: 

(i) A foreign exchange forward or a 

foreign exchange swap shall not be 

considered a swap if the Secretary of the 

Treasury makes a determination 

described in section 1a(47)(E)(i) of the 

Commodity Exchange Act. 

(ii) Notwithstanding paragraph 

(xxx)(3)(i) of this section: 

(A) The reporting requirements set 

forth in section 4r of the Commodity 

Exchange Act and regulations 

promulgated thereunder shall apply to a 

foreign exchange forward or foreign 

exchange swap; and 

(B) The business conduct standards 

set forth in section 4s of the Commodity 

Exchange Act and regulations 

promulgated thereunder shall apply to a 

swap dealer or major swap participant 

that is a party to a foreign exchange 

forward or foreign exchange swap. 

(iii) For purposes of section 1a(47)(E) 

of the Commodity Exchange Act and 

this § 1.3(xxx), the term foreign 

exchange forward has the meaning set 

forth in section 1a(24) of the Commodity 

Exchange Act. 

(iv) For purposes of section 1a(47)(E) 

of the Commodity Exchange Act and 

this § 1.3(xxx), the term foreign 

exchange swap has the meaning set 

forth in section 1a(25) of the Commodity 

Exchange Act. 

(v) For purposes of sections 1a(24) 

and 1a(25) of the Commodity Exchange 

Act and this § 1.3(xxx), the following 

transactions are not foreign exchange 

forwards or foreign exchange swaps: 

(A) A currency swap or a crosscurrency swap; 

(B) A currency option, foreign 

currency option, foreign exchange 

option, or foreign exchange rate option; 

and 

(C) A non-deliverable forward 

involving foreign exchange. 

(4) Insurance. The term swap as used 

in section 1a(47) of the Commodity 

Exchange Act does not include an 

agreement, contract, or transaction that: 

(i) By its terms or by law, as a 

condition of performance on the 

agreement, contract, or transaction: 

(A) Requires the beneficiary of the 

agreement, contract, or transaction to 

have an insurable interest that is the 

subject of the agreement, contract, or 

transaction and thereby carry the risk of 

loss with respect to that interest 

continuously throughout the duration of 

the agreement, contract, or transaction; 

(B) Requires that loss to occur and to 

be proved, and that any payment or 

indemnification therefor be limited to 

the value of the insurable interest; 

(C) Is not traded, separately from the 

insured interest, on an organized market 

or over-the-counter; and 

(D) With respect to financial guaranty 

insurance only, in the event of payment 

default or insolvency of the obligor, any 

acceleration of payments under the 

policy is at the sole discretion of the 

insurer; and 

(ii) Is provided: 

(A) By a company that is organized as 

an insurance company whose primary 

and predominant business activity is the 

writing of insurance or the reinsuring of 

risks underwritten by insurance 

companies and that is subject to 

supervision by the insurance 

commissioner (or similar official or 

agency) of any State or by the United 

States or an agency or instrumentality 

thereof, and such agreement, contract, 

or transaction is regulated as insurance 

under the laws of such State or of the 

United States; 

(B) By the United States or any of its 

agencies or instrumentalities, or 

pursuant to a statutorily authorized 

program thereof; or 


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(C) In the case of reinsurance only, by 

a person located outside the United 

States to an insurance company that is 

eligible under paragraph (xxx)(4)(ii) of 

this section, provided that: 

(1) Such person is not prohibited by 

any law of any State or of the United 

States from offering such agreement, 

contract, or transaction to such an 

insurance company; 

(2) The product to be reinsured meets 

the requirements under paragraph 

(xxx)(4)(i) of this section to be 

insurance; and 

(3) The total amount reimbursable by 

all reinsurers for such insurance 

product cannot exceed the claims or 

losses paid by the cedant. 

(5) State. For purposes of paragraph 

(xxx)(4) of this section, the term State 

means any state of the United States, the 

District of Columbia, Puerto Rico, the 

U.S. Virgin Islands, or any other 

possession of the United States. 

(6) Anti-evasion. (i) An agreement, 

contract, or transaction that is willfully 

structured to evade any provision of 

Subtitle A of the Wall Street 

Transparency and Accountability Act of 

2010, including any amendments made 

to the Commodity Exchange Act thereby 

(Subtitle A), shall be deemed a swap for 

purposes of Subtitle A and the rules, 

regulations, and orders of the 

Commission promulgated thereunder. 

(ii) An interest rate swap or currency 

swap, including but not limited to a 

transaction identified in paragraph 

(xxx)(3)(v) of this section, that is 

willfully structured as a foreign 

exchange forward or foreign exchange 

swap to evade any provision of Subtitle 

A shall be deemed a swap for purposes 

of Subtitle A and the rules, regulations, 

and orders of the Commission 

promulgated thereunder. 

(iii) An agreement, contract, or 

transaction of a bank that is not under 

the regulatory jurisdiction of an 

appropriate Federal banking agency (as 

defined in section 1a(2) of the 

Commodity Exchange Act), where the 

agreement, contract, or transaction is 

willfully structured as an identified 

banking product (as defined in section 

402 of the Legal Certainty for Bank 

Products Act of 2000) to evade the 

provisions of the Commodity Exchange 

Act, shall be deemed a swap for 

purposes of the Commodity Exchange 

Act and the rules, regulations, and 

orders of the Commission promulgated 

thereunder. 

(iv) The form, label, and written 

documentation of an agreement, 

contract, or transaction shall not be 

dispositive in determining whether the 

agreement, contract, or transaction has 

been willfully structured to evade as 

provided in paragraphs (xxx)(6)(i) 

through (xxx)(6)(iii) of this section. 

(v) An agreement, contract, or 

transaction that has been willfully 

structured to evade as provided in 

paragraphs (xxx)(6)(i) through 

(xxx)(6)(iii) of this section shall be 

considered in determining whether a 

person is a swap dealer or major swap 

participant. 

(vi) Notwithstanding the foregoing, no 

agreement, contract, or transaction 

structured as a security (including a 

security-based swap) under the 

securities laws (as defined in section 

3(a)(47) of the Securities Exchange Act 

of 1934 (15 U.S.C. 78c(a)(47))) shall be 

deemed a swap pursuant to this 

§ 1.3(xxx)(6) or shall be considered for 

purposes of paragraph (xxx)(6)(v) of this 

section. 

(yyy) Narrow-based security index as 

used in the definition of ‘‘security-based 

swap.’’ 

(1) In general. Except as otherwise 

provided in paragraphs (zzz) and (aaaa) 

of this section, for purposes of section 

1a(42) of the Commodity Exchange Act, 

the term narrow-based security index 

has the meaning set forth in section 

1a(35) of the Commodity Exchange Act, 

and the rules, regulations and orders of 

the Commission thereunder. 

(2) Tolerance period for swaps traded 

on designated contract markets, swap 

execution facilities, and foreign boards 

of trade. Notwithstanding paragraph 

(yyy)(1) of this section, solely for 

purposes of swaps traded on or subject 

to the rules of a designated contract 

market, swap execution facility, or 

foreign board of trade, a security index 

underlying such swaps shall not be 

considered a narrow-based security 

index if: 

(i)(A) A swap on the index is traded 

on or subject to the rules of a designated 

contract market, swap execution facility, 

or foreign board of trade for at least 30 

days as a swap on an index that was not 

a narrow-based security index; or 

(B) Such index was not a narrowbased security index during every 

trading day of the six full calendar 

months preceding a date no earlier than 

30 days prior to the commencement of 

trading of a swap on such index on a 

market described in paragraph 

(yyy)(2)(i)(A) of this section; and 

(ii) The index has been a narrowbased security index for no more than 

45 business days over three consecutive 

calendar months. 

(3) Tolerance period for securitybased swaps traded on national 

securities exchanges or security-based 

swap execution facilities. 

Notwithstanding paragraph (yyy)(1) of 

this section, solely for purposes of 

security-based swaps traded on a 

national securities exchange or securitybased swap execution facility, a security 

index underlying such security-based 

swaps shall be considered a narrowbased security index if: 

(i)(A) A security-based swap on the 

index is traded on a national securities 

exchange or security-based swap 

execution facility for at least 30 days as 

a security-based swap on a narrowbased security index; or 

(B) Such index was a narrow-based 

security index during every trading day 

of the six full calendar months 

preceding a date no earlier than 30 days 

prior to the commencement of trading of 

a security-based swap on such index on 

a market described in paragraph 

(yyy)(3)(i)(A) of this section; and 

(ii) The index has been a security 

index that is not a narrow-based 

security index for no more than 45 

business days over three consecutive 

calendar months. 

(4) Grace period. (i) Solely with 

respect to a swap that is traded on or 

subject to the rules of a designated 

contract market, swap execution facility, 

or foreign board of trade, an index that 

becomes a narrow-based security index 

under paragraph (yyy)(2) of this section 

solely because it was a narrow-based 

security index for more than 45 business 

days over three consecutive calendar 

months shall not be a narrow-based 

security index for the following three 

calendar months. 

(ii) Solely with respect to a securitybased swap that is traded on a national 

securities exchange or security-based 

swap execution facility, an index that 

becomes a security index that is not a 

narrow-based security index under 

paragraph (yyy)(3) of this section solely 

because it was not a narrow-based 

security index for more than 45 business 

days over three consecutive calendar 

months shall be a narrow-based security 

index for the following three calendar 

months. 

(zzz) Meaning of ‘‘issuers of securities 

in a narrow-based security index’’ as 

used in the definition of ‘‘security-based 

swap’’ as applied to index credit default 

swaps. 

(1) Notwithstanding paragraph 

(yyy)(1) of this section, and solely for 

purposes of determining whether a 

credit default swap is a security-based 

swap under the definition of ‘‘securitybased swap’’ in section 3(a)(68)(A)(ii)(III) 

of the Securities Exchange Act of 1934 

(15 U.S.C. 78c(a)(68)(A)(ii)(III), as 

incorporated in section 1a(42) of the 

Commodity Exchange Act, the term 

issuers of securities in a narrow-based 

security index means issuers of 


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securities identified in an index in 

which: 

(i)(A) There are 9 or fewer nonaffiliated issuers of securities that are 

reference entities in the index, provided 

that an issuer of securities shall not be 

deemed a reference entity for purposes 

of this section unless: 

(1) A credit event with respect to such 

reference entity would result in a 

payment by the credit protection seller 

to the credit protection buyer under the 

credit default swap based on the related 

notional amount allocated to such 

reference entity; or 

(2) The fact of such credit event or the 

calculation in accordance with 

paragraph (zzz)(1)(i)(A)(1) of this section 

of the amount owed with respect to 

such credit event is taken into account 

in determining whether to make any 

future payments under the credit default 

swap with respect to any future credit 

events; 

(B) The effective notional amount 

allocated to any reference entity 

included in the index comprises more 

than 30 percent of the index’s 

weighting; 

(C) The effective notional amount 

allocated to any five non-affiliated 

reference entities included in the index 

comprises more than 60 percent of the 

index’s weighting; or 

(D) Except as provided in paragraph 

(zzz)(2) of this section, for each 

reference entity included in the index, 

none of the following criteria is 

satisfied: 

(1) The reference entity is required to 

file reports pursuant to section 13 or 

section 15(d) of the Securities Exchange 

Act of 1934 (15 U.S.C. 78m or 78o(d)); 

(2) The reference entity is eligible to 

rely on the exemption provided in rule 

12g3–2(b) under the Securities 

Exchange Act of 1934 (17 CFR 

240.12g3–2(b)); 

(3) The reference entity has a 

worldwide market value of its 

outstanding common equity held by 

non-affiliates of $700 million or more; 

(4) The reference entity (other than an 

issuing entity of an asset-backed 

security as defined in section 3(a)(77) of 

the Securities Exchange Act of 1934 (15 

U.S.C. 78c(a)(77)) has outstanding 

securities that are notes, bonds, 

debentures, or evidences of 

indebtedness having a total remaining 

principal amount of at least $1 billion; 

(5) The reference entity is the issuer 

of an exempted security as defined in 

section 3(a)(12) of the Securities 

Exchange Act of 1934 (15 U.S.C. 

78c(a)(12)) (other than any municipal 

security as defined in section 3(a)(29) of 

the Securities Exchange Act of 1934 (15 

U.S.C. 78c(a)(29))); 

(6) The reference entity is a 

government of a foreign country or a 

political subdivision of a foreign 

country; 

(7) If the reference entity is an issuer 

of asset-backed securities as defined in 

section 3(a)(77) of the Securities 

Exchange Act of 1934 (15 U.S.C. 

78c(a)(77)), such asset-based securities 

were issued in a transaction registered 

under the Securities Act of 1933 (15 

U.S.C. 77a et seq.) and have publicly 

available distribution reports; and 

(8) For a credit default swap entered 

into solely between eligible contract 

participants as defined in section 1a(18) 

of the Commodity Exchange Act: 

(i) The reference entity (other than a 

reference entity that is an issuing entity 

of an asset-backed security as defined in 

section 3(a)(77) of the Securities 

Exchange Act of 1934 (15 U.S.C. 

78c(a)(77))) provides to the public or to 

such eligible contract participant 

information about the reference entity 

pursuant to rule 144A(d)(4) under the 

Securities Act of 1933 (17 CFR 

230.144A(d)(4)); 

(ii) Financial information about the 

reference entity (other than a reference 

entity that is an issuing entity of an 

asset-backed security as defined in 

section 3(a)(77) of the Securities 

Exchange Act of 1934 (15 U.S.C. 

78c(a)(77))) is otherwise publicly 

available; or 

(iii) In the case of a reference entity 

that is an issuing entity of asset-backed 

securities as defined in section 3(a)(77) 

of the Securities Exchange Act of 1934 

(15 U.S.C. 78c(a)(77)), information of the 

type and level included in public 

distribution reports for similar assetbacked securities is publicly available 

about both the reference entity and such 

asset-backed securities; and 

(ii)(A) The index is not composed 

solely of reference entities that are 

issuers of exempted securities as 

defined in section 3(a)(12) of the 

Securities Exchange Act of 1934 (15 

U.S.C. 78c(a)(12)), as in effect on the 

date of enactment of the Futures 

Trading Act of 1982 (other than any 

municipal security as defined in section 

3(a)(29) of the Securities Exchange Act 

of 1934 (15 U.S.C. 78c(a)(29))), as in 

effect on the date of enactment of the 

Futures Trading Act of 1982); and 

(B) Without taking into account any 

portion of the index composed of 

reference entities that are issuers of 

exempted securities as defined in 

section 3(a)(12) of the Securities 

Exchange Act of 1934 (15 U.S.C. 

78c(a)(12)), as in effect on the date of 

enactment of the Futures Trading Act of 

1982 (other than any municipal security 

as defined in section 3(a)(29) of the 

Securities Exchange Act of 1934 (15 

U.S.C. 78c(a)(29))), the remaining 

portion of the index would be a narrowbased security index under paragraph 

(zzz)(1)(i) of this section. 

(2) Paragraph (zzz)(1)(i)(D) of this 

section will not apply with respect to a 

reference entity included in the index if: 

(i) The effective notional amounts 

allocated to such reference entity 

comprise less than five percent of the 

index’s weighting; and 

(ii) The effective notional amounts 

allocated to reference entities that 

satisfy paragraph (zzz)(1)(i)(D) of this 

section comprise at least 80 percent of 

the index’s weighting. 

(3) For purposes of this paragraph 

(zzz): 

(i) A reference entity is affiliated with 

another entity if it controls, is controlled 

by, or is under common control with, 

that entity; provided that each reference 

entity that is an issuing entity of an 

asset-backed security as defined in 

section 3(a)(77) of the Securities 

Exchange Act of 1934 (15 U.S.C. 

78c(a)(77)) will not be considered 

affiliated with any other issuing entity 

of an asset-backed security. 

(ii) Control means ownership of 20 

percent or more of an entity’s equity, or 

the ability to direct the voting of 20 

percent or more of the entity’s voting 

equity. 

(iii) The term reference entity 

includes: 

(A) An issuer of securities; 

(B) An issuing entity of an asset-based 

security as defined in section 3(a)(77) of 

the Securities Exchange Act of 1934 (15 

U.S.C. 78c(a)(77)); and 

(C) A single reference entity or a 

group of affiliated entities; provided that 

each issuing entity of an asset-backed 

security as defined in section 3(a)(77) of 

the Securities Exchange Act of 1934 (15 

U.S.C. 78c(a)(77)) is a separate reference 

entity. 

(aaaa) Meaning of ‘‘narrow-based 

security index’’ as used in the definition 

of ‘‘security-based swap’’ as applied to 

index credit default swaps. 

(1) Notwithstanding paragraph 

(yyy)(1) of this section, and solely for 

purposes of determining whether a 

credit default swap is a security-based 

swap under the definition of ‘‘securitybased swap’’ in section 3(a)(68)(A)(ii)(I) 

of the Securities Exchange Act of 1934 

(15 U.S.C. 78c(a)(68)(A)(ii)(I), as 

incorporated in section 1a(42) of the 

Commodity Exchange Act, the term 

narrow-based security index means an 

index in which: 

(i)(A) The index is composed of 9 or 

fewer securities or securities that are 

issued by 9 or fewer non-affiliated 

issuers, provided that a security shall 


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not be deemed a component of the 

index for purposes of this section 

unless: 

(1) A credit event with respect to the 

issuer of such security or a credit event 

with respect to such security would 

result in a payment by the credit 

protection seller to the credit protection 

buyer under the credit default swap 

based on the related notional amount 

allocated to such security; or 

(2) The fact of such credit event or the 

calculation in accordance with 

paragraph (aaaa)(1)(i)(A)(1) of this 

section of the amount owed with respect 

to such credit event is taken into 

account in determining whether to make 

any future payments under the credit 

default swap with respect to any future 

credit events; 

(B) The effective notional amount 

allocated to the securities of any issuer 

included in the index comprises more 

than 30 percent of the index’s 

weighting; 

(C) The effective notional amount 

allocated to the securities of any five 

non-affiliated issuers included in the 

index comprises more than 60 percent 

of the index’s weighting; or 

(D) Except as provided in paragraph 

(aaaa)(2) of this section, for each 

security included in the index, none of 

the following criteria is satisfied: 

(1) The issuer of the security is 

required to file reports pursuant to 

section 13 or section 15(d) of the 

Securities Exchange Act of 1934 (15 

U.S.C. 78m or 78o(d)); 

(2) The issuer of the security is 

eligible to rely on the exemption 

provided in rule 12g3–2(b) under the 

Securities Exchange Act of 1934 (17 

CFR 240.12g3–2(b)); 

(3) The issuer of the security has a 

worldwide market value of its 

outstanding common equity held by 

non-affiliates of $700 million or more; 

(4) The issuer of the security (other 

than an issuing entity of an asset-backed 

security as defined in section 3(a)(77) of 

the Securities Exchange Act of 1934 (15 

U.S.C. 78c(a)(77))) has outstanding 

securities that are notes, bonds, 

debentures, or evidences of 

indebtedness having a total remaining 

principal amount of at least $1 billion; 

(5) The security is an exempted 

security as defined in section 3(a)(12) of 

the Securities Exchange Act of 1934 (15 

U.S.C. 78c(a)(12)) (other than any 

municipal security as defined in section 

3(a)(29) of the Securities Exchange Act 

of 1934 (15 U.S.C. 78c(a)(29))); 

(6) The issuer of the security is a 

government of a foreign country or a 

political subdivision of a foreign 

country; 

(7) If the security is an asset-backed 

security as defined in section 3(a)(77) of 

the Securities Exchange Act of 1934 (15 

U.S.C. 78c(a)(77)), the security was 

issued in a transaction registered under 

the Securities Act of 1933 (15 U.S.C. 77a 

et seq.) and has publicly available 

distribution reports; and 

(8) For a credit default swap entered 

into solely between eligible contract 

participants as defined in section 1a(18) 

of the Commodity Exchange Act: 

(i) The issuer of the security (other 

than an issuing entity of an asset-backed 

security as defined in section 3(a)(77) of 

the Securities Exchange Act of 1934 (15 

U.S.C. 78c(a)(77))) provides to the 

public or to such eligible contract 

participant information about such 

issuer pursuant to rule 144A(d)(4) of the 

Securities Act of 1933 (17 CFR 

230.144A(d)(4)); 

(ii) Financial information about the 

issuer of the security (other than an 

asset-backed security as defined in 

section 3(a)(77) of the Securities 

Exchange Act of 1934 (15 U.S.C. 

78c(a)(77))) is otherwise publicly 

available; or 

(iii) In the case of an asset-backed 

security as defined in section 3(a)(77) of 

the Securities Exchange Act of 1934 (15 

U.S.C. 78c(a)(77)), information of the 

type and level included in public 

distribution reports for similar assetbacked securities is publicly available 

about both the issuing entity and such 

asset-backed security; and 

(ii)(A) The index is not composed 

solely of exempted securities as defined 

in section 3(a)(12) of the Securities 

Exchange Act of 1934 (15 U.S.C. 

78c(a)(12)), as in effect on the date of 

enactment of the Futures Trading Act of 

1982 (other than any municipal security 

as defined in section 3(a)(29) of the 

Securities Exchange Act of 1934 (15 

U.S.C. 78c(a)(29))), as in effect on the 

date of enactment of the Futures 

Trading Act of 1982); and 

(B) Without taking into account any 

portion of the index composed of 

exempted securities as defined in 

section 3(a)(12) of the Securities 

Exchange Act of 1934 (15 U.S.C. 

78c(a)(12)), as in effect on the date of 

enactment of the Futures Trading Act of 

1982 (other than any municipal security 

as defined in section 3(a)(29) of the 

Securities Exchange Act of 1934 (15 

U.S.C. 78c(a)(29))), the remaining 

portion of the index would be a narrowbased security index under paragraph 

(aaaa)(1)(i) of this section. 

(2) Paragraph (aaaa)(1)(i)(D) of this 

section will not apply with respect to 

securities of an issuer included in the 

index if: 

(i) The effective notional amounts 

allocated to all securities of such issuer 

included in the index comprise less 

than five percent of the index’s 

weighting; and 

(ii) The securities that satisfy 

paragraph (aaaa)(1)(i)(D) of this section 

comprise at least 80 percent of the 

index’s weighting. 

(3) For purposes of this paragraph 

(aaaa): 

(i) An issuer is affiliated with another 

issuer if it controls, is controlled by, or 

is under common control with, that 

issuer; provided that each issuing entity 

of an asset-backed security as defined in 

section 3(a)(77) of the Securities 

Exchange Act of 1934 (15 U.S.C. 

78c(a)(77)) will not be considered 

affiliated with any other issuing entity 

of an asset-backed security. 

(ii) Control means ownership of 20 

percent or more of an issuer’s equity, or 

the ability to direct the voting of 20 

percent or more of the issuer’s voting 

equity. 

(iii) The term issuer includes: 

(A) An issuer of securities; 

(B) An issuing entity of an asset-based 

security as defined in section 3(a)(77) of 

the Securities Exchange Act of 1934 (15 

U.S.C. 78c(a)(77)); and 

(C) A single issuer or a group of 

affiliated issuers; provided that each 

issuing entity of an asset-backed 

security as defined in section 3(a)(77) of 

the Securities Exchange Act of 1934 (15 

U.S.C. 78c(a)(77)) is a separate issuer. 

3. Add §§ 1.6 through 1.9 to read as 

follows: 

Sec. 

1.6 Anti-evasion. 

1.7 Books and records requirements for 

security-based swap agreements. 

1.8 Interpretation of swaps, security-based 

swaps, and mixed swaps. 

1.9 Regulation of mixed swaps. 

* * * * * 

§ 1.6 Anti-evasion. 

(a) It shall be unlawful to conduct 

activities outside the United States, 

including entering into agreements, 

contracts, and transactions and 

structuring entities, to willfully evade or 

attempt to evade any provision of the 

Commodity Exchange Act as enacted by 

Subtitle A of the Wall Street 

Transparency and Accountability Act of 

2010 or the rules, regulations, and 

orders of the Commission promulgated 

thereunder (Subtitle A). 

(b) The form, label, and written 

documentation of an agreement, 

contract, or transaction, or an entity, 

shall not be dispositive in determining 

whether the agreement, contract, or 

transaction, or entity, has been entered 

into or structured to willfully evade as 


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29892 Federal Register / Vol. 76, No. 99 / Monday, May 23, 2011 / Proposed Rules 

provided in paragraph (a) of this 

section. 

(c) An activity conducted outside the 

United States to evade as provided in 

paragraph (a) of this section shall be 

subject to the provisions of Subtitle A. 

(d) Notwithstanding the foregoing, no 

agreement, contract, or transaction 

structured as a security (including a 

security-based swap) under the 

securities laws (as defined in section 

3(a)(47) of the Securities Exchange Act 

of 1934 (15 U.S.C. 78c(a)(47))) shall be 

deemed a swap pursuant to this § 1.6. 

5. Add § 1.7 to read as follows: 

§ 1.7 Books and records requirements for 

security-based swap agreements. 

(a) A person registered as a swap data 

repository under section 21 of the 

Commodity Exchange Act and the rules 

and regulations thereunder: 

(1) Shall not be required to keep and 

maintain additional books and records 

regarding security-based swap 

agreements other than the books and 

records regarding swaps required to be 

kept and maintained pursuant to section 

21 of the Commodity Exchange Act and 

the rules and regulations thereunder; 

and 

(2) Shall not be required to collect and 

maintain additional data regarding 

security-based swap agreements other 

than the data regarding swaps required 

to be collected and maintained by such 

persons pursuant to section 21 of the 

Commodity Exchange Act and the rules 

and regulations thereunder. 

(b) A person shall not be required to 

keep and maintain additional books and 

records, including daily trading records, 

regarding security-based swap 

agreements other than the books and 

records regarding swaps required to be 

kept and maintained by such persons 

pursuant to section 4s of the Commodity 

Exchange Act and the rules and 

regulations thereunder if such person is 

registered as: 

(1) A swap dealer under section 

4s(a)(1) of the Commodity Exchange Act 

and the rules and regulations 

thereunder; 

(2) A major swap participant under 

section 4s(a)(2) of the Commodity 

Exchange Act and the rules and 

regulations thereunder; 

(3) A security-based swap dealer 

under section 15F(a)(1) of the Securities 

Exchange Act of 1934 (15 U.S.C. 78o10(a)(1)) and the rules and regulations 

thereunder; or 

(4) A major security-based swap 

participant under section 15F(a)(2) of 

the Securities Exchange Act of 1934 (15 

U.S.C. 78o-10(a)(2)) and the rules and 

regulations thereunder. 

(c) The term security-based swap 

agreement has the meaning set forth in 

section 1a(47)(A)(v) of the Commodity 

Exchange Act. 

6. Add § 1.8 to read as follows: 

§ 1.8 Interpretation of swaps, securitybased swaps, and mixed swaps. 

(a) In general. Any person may submit 

a request to the Commission and the 

Securities and Exchange Commission to 

provide a joint interpretation of whether 

a particular agreement, contract, or 

transaction (or class thereof) is: 

(1) A swap, as that term is defined in 

section 1a(47) of the Commodity 

Exchange Act and the rules and 

regulations promulgated thereunder; 

(2) A security-based swap, as that 

term is defined in section 1a(42) of the 

Commodity Exchange Act and the rules 

and regulations promulgated 

thereunder; or 

(3) A mixed swap, as that term is 

defined in section 1a(47)(D) of the 

Commodity Exchange Act and the rules 

and regulations promulgated 

thereunder. 

(b) Request process. In making a 

request pursuant to paragraph (a) of this 

section, the requesting person must 

provide the Commission and the 

Securities and Exchange Commission 

with the following: 

(1) All material information regarding 

the terms of the agreement, contract, or 

transaction (or class thereof); 

(2) A statement of the economic 

characteristics and purpose of the 

agreement, contract, or transaction (or 

class thereof); 

(3) The requesting person’s 

determination as to whether the 

agreement, contract, or transaction (or 

class thereof) should be characterized as 

a swap, a security-based swap, or both, 

(i.e., a mixed swap), including the basis 

for such determination; and 

(4) Such other information as may be 

requested by the Commission or the 

Securities and Exchange Commission. 

(c) Request withdrawal. A person may 

withdraw a request made pursuant to 

paragraph (a) of this section at any time 

prior to the issuance of a joint 

interpretation or joint notice of 

proposed rulemaking by the 

Commission and the Securities and 

Exchange Commission in response to 

the request; provided, however, that 

notwithstanding such withdrawal, the 

Commission and the Securities and 

Exchange Commission may provide a 

joint interpretation of whether the 

agreement, contract, or transaction (or 

class thereof) is a swap, a security-based 

swap, or both (i.e., a mixed swap). 

(d) Request by the Commission or the 

Securities and Exchange Commission. 

In the absence of a request for a joint 

interpretation under paragraph (a) of 

this section: 

(1) If the Commission or the Securities 

and Exchange Commission receives a 

proposal to list, trade, or clear an 

agreement, contract, or transaction (or 

class thereof) that raises questions as to 

the appropriate characterization of such 

agreement, contract, or transaction (or 

class thereof) as a swap, a security-based 

swap, or both (i.e., a mixed swap), the 

Commission or the Securities and 

Exchange Commission, as applicable, 

promptly shall notify the other of the 

agreement, contract, or transaction (or 

class thereof); and 

(2) The Commission or the Securities 

and Exchange Commission, or their 

Chairmen jointly, may submit a request 

for a joint interpretation as described in 

paragraph (a) of this section; such 

submission shall be made pursuant to 

paragraph (b) of this section, and may be 

withdrawn pursuant to paragraph (c) of 

this section. 

(e) Timeframe for joint interpretation. 

(1) If the Commission and the Securities 

and Exchange Commission determine to 

issue a joint interpretation as described 

in paragraph (a) of this section, such 

joint interpretation shall be issued 

within 120 days after receipt of a 

complete submission requesting a joint 

interpretation under paragraph (a) or (d) 

of this section. 

(2) The Commission and the 

Securities and Exchange Commission 

shall consult with the Board of 

Governors of the Federal Reserve 

System prior to issuing any joint 

interpretation as described in paragraph 

(a) of this section. 

(3) If the Commission and the 

Securities and Exchange Commission 

seek public comment with respect to a 

joint interpretation regarding an 

agreement, contract, or transaction (or 

class thereof), the 120-day period 

described in paragraph (e)(1) of this 

section shall be stayed during the 

pendency of the comment period, but 

shall recommence with the business day 

after the public comment period ends. 

(4) Nothing in this section shall 

require the Commission and the 

Securities and Exchange Commission to 

issue any joint interpretation. 

(5) If the Commission and the 

Securities and Exchange Commission do 

not issue a joint interpretation within 

the time period described in paragraph 

(e)(1) or (e)(3) of this section, each of the 

Commission and the Securities and 

Exchange Commission shall publicly 

provide the reasons for not issuing such 

a joint interpretation within the 

applicable timeframes. 

(f) Joint notice of proposed 

rulemaking. (1) Rather than issue a joint 

interpretation pursuant to paragraph (a) 

of this section, the Commission and the 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
Federal Register / Vol. 76, No. 99 / Monday, May 23, 2011 / Proposed Rules 29893 

Securities and Exchange Commission 

may issue a joint notice of proposed 

rulemaking, in consultation with the 

Board of Governors of the Federal 

Reserve System, to further define one or 

more of the terms swap, security-based 

swap, or mixed swap. 

(2) A joint notice of proposed 

rulemaking described in paragraph (f)(1) 

of this section shall be issued within the 

timeframe for issuing a joint 

interpretation set forth in paragraph (e) 

of this section. 

7. Add § 1.9 to read as follows: 

§ 1.9 Regulation of mixed swaps. 

(a) In general. The term mixed swap 

has the meaning set forth in section 

1a(47)(D) of the Commodity Exchange 

Act. 

(b) Regulation of bilateral uncleared 

mixed swaps entered into by duallyregistered dealers or major participants. 

A mixed swap: 

(1) That is neither executed on nor 

subject to the rules of a designated 

contract market, national securities 

exchange, swap execution facility, 

security-based swap execution facility, 

or foreign board of trade; 

(2) That will not be submitted to a 

derivatives clearing organization or 

registered or exempt clearing agency to 

be cleared; and 

(3) Where at least one party is 

registered with the Commission as a 

swap dealer or major swap participant 

and also with the Securities and 

Exchange Commission as a securitybased swap dealer or major securitybased swap participant, shall be subject 

to: 

(i) The following provisions of the 

Commodity Exchange Act, and the rules 

and regulations promulgated 

thereunder: 

(A) Examinations and information 

sharing: sections 4s(f) and 8 of the 

Commodity Exchange Act; 

(B) Enforcement: sections 2(a)(1)(B), 

4(b), 4b, 4c, 6(c), 6(d), 6c, 6d, 9, 13(a), 

13(b), and 23 of the Commodity 

Exchange Act; 

(C) Reporting to a swap data 

repository: section 4r of the Commodity 

Exchange Act; 

(D) Real-time reporting: section 

2(a)(13) of the Commodity Exchange 

Act; 

(E) Capital: section 4s(e) of the 

Commodity Exchange Act; and 

(F) Position Limits: section 4a of the 

Commodity Exchange Act; and 

(ii) The provisions of the Federal 

securities laws, as defined in section 

3(a)(47) of the Securities Exchange Act 

of 1934 (15 U.S.C. 78c(a)(47)), and the 

rules and regulations promulgated 

thereunder. 

(c) Process for determining regulatory 

treatment for other mixed swaps—(1) In 

general. Any person who desires or 

intends to list, trade, or clear a mixed 

swap (or class thereof) that is not subject 

to paragraph (b) of this section may 

request the Commission and the 

Securities and Exchange Commission to 

issue a joint order permitting the 

requesting person (and any other person 

or persons that subsequently lists, 

trades, or clears that mixed swap) to 

comply, as to parallel provisions only, 

with specified parallel provisions of 

either the Commodity Exchange Act or 

the Securities Exchange Act of 1934 (15 

U.S.C. 78a et seq.), and the rules and 

regulations thereunder (collectively, 

specified parallel provisions), instead of 

being required to comply with parallel 

provisions of both the Commodity 

Exchange Act and the Securities 

Exchange Act of 1934. For purposes of 

this paragraph (c), parallel provisions 

means comparable provisions of the 

Commodity Exchange Act and the 

Securities Exchange Act of 1934 that 

were added or amended by the Wall 

Street Transparency and Accountability 

Act of 2010 with respect to swaps and 

security-based swaps, and the rules and 

regulations thereunder. 

(2) Request process. A person 

submitting a request pursuant to 

paragraph (c)(1) of this section must 

provide the Commission and the 

Securities and Exchange Commission 

with the following: 

(i) All material information regarding 

the terms of the specified, or specified 

class of, mixed swap; 

(ii) The economic characteristics and 

purpose of the specified, or specified 

class of, mixed swap; 

(iii) The specified parallel provisions, 

and the reasons the person believes 

such specified parallel provisions 

would be appropriate for the mixed 

swap (or class thereof); and 

(iv) An analysis of: 

(A) The nature and purposes of the 

parallel provisions that are the subject 

of the request; 

(B) The comparability of such parallel 

provisions; 

(C) The extent of any conflicts or 

differences between such parallel 

provisions; and 

(D) Such other information as may be 

requested by the Commission or the 

Securities and Exchange Commission. 

(3) Request withdrawal. A person may 

withdraw a request made pursuant to 

paragraph (c)(1) of this section at any 

time prior to the issuance of a joint 

order under paragraph (c)(4) of this 

section by the Commission and the 

Securities and Exchange Commission in 

response to the request. 

(4) Issuance of orders. In response to 

a request under paragraph (c)(1) of this 

section, the Commission and the 

Securities and Exchange Commission, 

as necessary to carry out the purposes 

of the Wall Street Transparency and 

Accountability Act of 2010, may issue a 

joint order, after notice and opportunity 

for comment, permitting the requesting 

person (and any other person or persons 

that subsequently lists, trades, or clears 

that mixed swap) to comply, as to 

parallel provisions only, with the 

specified parallel provisions (or another 

subset of the parallel provisions that are 

the subject of the request, as the 

Commissions determine is appropriate), 

instead of being required to comply 

with parallel provisions of both the 

Commodity Exchange Act and the 

Securities Exchange Act of 1934. In 

determining the contents of such joint 

order, the Commission and the 

Securities and Exchange Commission 

may consider, among other things: 

(i) The nature and purposes of the 

parallel provisions that are the subject 

of the request; 

(ii) The comparability of such parallel 

provisions; and 

(iii) The extent of any conflicts or 

differences between such parallel 

provisions. 

(5) Timeframe. (i) If the Commission 

and the Securities and Exchange 

Commission determine to issue a joint 

order as described in paragraph (c)(4) of 

this section, such joint order shall be 

issued within 120 days after receipt of 

a complete request for a joint order 

under paragraph (c)(1) of this section, 

which time period shall be stayed 

during the pendency of the public 

comment period provided for in 

paragraph (c)(4) of this section and shall 

recommence with the business day after 

the public comment period ends. 

(ii) Nothing in this section shall 

require the Commission and the 

Securities and Exchange Commission to 

issue any joint order. 

(iii) If the Commission and the 

Securities and Exchange Commission do 

not issue a joint order within the time 

period described in paragraph (c)(5)(i) of 

this section, each of the Commission 

and the Securities and Exchange 

Commission shall publicly provide the 

reasons for not issuing such a joint order 

within that timeframe. 

Securities and Exchange Commission 

Pursuant to the Exchange Act, 15 

U.S.C. 78a et seq., and particularly, 

sections 3 and 23 thereof, and sections 

712(a)(8), 712(d), 721(a), 761(a) of the 

Dodd-Frank Act, the SEC is proposing to 

adopt rules 3a68–1a through 3a68–4 and 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
29894 Federal Register / Vol. 76, No. 99 / Monday, May 23, 2011 / Proposed Rules 

3a69–1 through 3a69–3 under the 

Exchange Act. 

Text of Proposed Rules 

For the reasons stated in the 

preamble, the SEC is proposing to 

amend Title 17, Chapter II of the Code 

of the Federal Regulations as follows: 

PART 240—GENERAL RULES AND 

REGULATIONS, SECURITIES 

EXCHANGE ACT OF 1934 

1. The general authority citation for 

Part 240 is revised to read as follows: 

Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 

77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn, 

77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 78j, 

78j–1, 78k, 78k–1, 78l, 78m, 78n, 78n–1, 78o, 

78o–4, 78o–8, 78p, 78q, 78s, 78u–5, 78w, 

78x, 78dd(b), 78dd(c), 78ll, 78mm, 80a–20, 

80a–23, 80a–29, 80a–37, 80b–3, 80b–4, 80b– 

11, and 7201 et seq.; 18 U.S.C. 1350; and 12 

U.S.C. 5221(e)(3), unless otherwise noted. 

* * * * * 

2. Add §§ 240.3a68–1a through 

240.3a68–4 and §§ 240.3a69–1 through 

240.3a69–3 to read as follows: 

240.3a68–1a Meaning of ‘‘issuers of 

securities in a narrow-based security 

index’’ as used in section 

3(a)(68)(A)(ii)(III) of the Act. 

240.3a68–1b Meaning of ‘‘narrow-based 

security index’’ as used in section 

3(a)(68)(A)(ii)(I) of the Act. 

240.3a68–2 Interpretation of swaps, 

security-based swaps, and mixed swaps. 

240.3a68–3 Meaning of ‘‘narrow-based 

security index’’ as used in the definition 

of ‘‘security-based swap’’. 

240.3a68–4 Regulation of mixed swaps. 

240.3a69–1 Definition of ‘‘swap’’ as used in 

section 3(a)(69) of the Act—insurance. 

240.3a69–2 Definition of ‘‘swap’’ as used in 

section 3(a)(69) of the Act—additional 

products. 

240.3a69–3 Books and records requirements 

for security-based swap agreements. 

* * * * * 

§ 240.3a68–1a Meaning of ‘‘issuers of 

securities in a narrow-based security index’’ 

as used in section 3(a)(68)(A)(ii)(III) of the 

Act. 

(a) Notwithstanding § 240.3a68–3(a) 

of this chapter, and solely for purposes 

of determining whether a credit default 

swap is a security-based swap under 

section 3(a)(68)(A)(ii)(III) of the Act (15 

U.S.C. 78c(a)(68)(A)(ii)(III)), the term 

issuers of securities in a narrow-based 

security index as used in section 

3(a)(68)(A)(ii)(III) of the Act means 

issuers of securities identified in an 

index in which: 

(1)(i) There are 9 or fewer nonaffiliated issuers of securities that are 

reference entities in the index, provided 

that an issuer of securities shall not be 

deemed a reference entity for purposes 

of this section unless: 

(A) A credit event with respect to 

such reference entity would result in a 

payment by the credit protection seller 

to the credit protection buyer under the 

credit default swap based on the related 

notional amount allocated to such 

reference entity; or 

(B) The fact of such credit event or the 

calculation in accordance with 

paragraph (a)(1)(i)(A) of this section of 

the amount owed with respect to such 

credit event is taken into account in 

determining whether to make any future 

payments under the credit default swap 

with respect to any future credit events; 

(ii) The effective notional amount 

allocated to any reference entity 

included in the index comprises more 

than 30 percent of the index’s 

weighting; 

(iii) The effective notional amount 

allocated to any five non-affiliated 

reference entities included in the index 

comprises more than 60 percent of the 

index’s weighting; or 

(iv) Except as provided in paragraph 

(b) of this section, for each reference 

entity included in the index, none of the 

following criteria is satisfied: 

(A) The reference entity is required to 

file reports pursuant to section 13 or 

section 15(d) of the Act (15 U.S.C. 78m 

or 78o(d)); 

(B) The reference entity is eligible to 

rely on the exemption provided in 

§ 240.12g3–2(b) of this chapter; 

(C) The reference entity has a 

worldwide market value of its 

outstanding common equity held by 

non-affiliates of $700 million or more; 

(D) The reference entity (other than an 

issuing entity of an asset-backed 

security as defined in section 3(a)(77) of 

the Act (15 U.S.C. 78c(a)(77))) has 

outstanding securities that are notes, 

bonds, debentures, or evidences of 

indebtedness having a total remaining 

principal amount of at least $1 billion; 

(E) The reference entity is the issuer 

of an exempted security as defined in 

section 3(a)(12) of the Act (15 U.S.C. 

78c(a)(12)) (other than any municipal 

security as defined in section 3(a)(29) of 

the Act (15 U.S.C. 78c(a)(29))); 

(F) The reference entity is a 

government of a foreign country or a 

political subdivision of a foreign 

country; 

(G) If the reference entity is an issuer 

of asset-backed securities as defined in 

section 3(a)(77) of the Act (15 U.S.C. 

78c(a)(77)), such asset-based securities 

were issued in a transaction registered 

under the Securities Act of 1933 (15 

U.S.C. 77a et seq.) and have publicly 

available distribution reports; and 

(H) For a credit default swap entered 

into solely between eligible contract 

participants as defined in section 

3(a)(65) of the Act (15 U.S.C. 78c(a)(65)): 

(1) The reference entity (other than a 

reference entity that is an issuing entity 

of an asset-backed security as defined in 

section 3(a)(77) of the Act (15 U.S.C. 

78c(a)(77))) provides to the public or to 

such eligible contract participant 

information about the reference entity 

pursuant to § 230.144A(d)(4)) of this 

chapter; 

(2) Financial information about the 

reference entity (other than a reference 

entity that is an issuing entity of an 

asset-backed security as defined in 

section 3(a)(77) of the Act (15 U.S.C. 

78c(a)(77))) is otherwise publicly 

available; or 

(3) In the case of a reference entity 

that is an issuing entity of asset-backed 

securities as defined in section 3(a)(77) 

of the Act (15 U.S.C. 78c(a)(77)), 

information of the type and level 

included in public distribution reports 

for similar asset-backed securities is 

publicly available about both the 

reference entity and such asset-backed 

securities; and 

(2)(i) The index is not composed 

solely of reference entities that are 

issuers of exempted securities as 

defined in section 3(a)(12) of the Act (15 

U.S.C. 78c(a)(12)), as in effect on the 

date of enactment of the Futures 

Trading Act of 1982 (other than any 

municipal security as defined in section 

3(a)(29) of the Act (15 U.S.C. 

78c(a)(29))), as in effect on the date of 

enactment of the Futures Trading Act of 

1982); and 

(ii) Without taking into account any 

portion of the index composed of 

reference entities that are issuers of 

exempted securities as defined in 

section 3(a)(12) of the Act (15 U.S.C. 

78c(a)(12)), as in effect on the date of 

enactment of the Futures Trading Act of 

1982 (other than any municipal security 

as defined in section 3(a)(29) of the Act 

(15 U.S.C. 78c(a)(29))), the remaining 

portion of the index would be a narrowbased security index under paragraph 

(a)(1) of this section. 

(b) Paragraph (a)(1)(iv) of this section 

will not apply with respect to a 

reference entity included in the index if: 

(1) The effective notional amounts 

allocated to such reference entity 

comprise less than five percent of the 

index’s weighting; and 

(2) The effective notional amounts 

allocated to reference entities that 

satisfy paragraph (a)(1)(iv) of this 

section comprise at least 80 percent of 

the index’s weighting. 

(c) For purposes of this § 3a68–1a: 

(1) A reference entity is affiliated with 

another entity if it controls, is controlled 

by, or is under common control with, 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
Federal Register / Vol. 76, No. 99 / Monday, May 23, 2011 / Proposed Rules 29895 

that entity; provided that each reference 

entity that is an issuing entity of an 

asset-backed security as defined in 

section 3(a)(77) of the Act (15 U.S.C. 

78c(a)(77)) will not be considered 

affiliated with any other issuing entity 

of an asset-backed security. 

(2) Control means ownership of 20 

percent or more of an entity’s equity, or 

the ability to direct the voting of 20 

percent or more of the entity’s voting 

equity. 

(3) The term reference entity includes: 

(i) An issuer of securities; 

(ii) An issuing entity of an asset-based 

security as defined in section 3(a)(77) of 

the Act (15 U.S.C. 78c(a)(77)); and 

(iii) A single reference entity or a 

group of affiliated entities; provided that 

each issuing entity of an asset-backed 

security as defined in section 3(a)(77) of 

the Act (15 U.S.C. 78c(a)(77)) is a 

separate reference entity. 

§ 240.3a68–1b Meaning of ‘‘narrow-based 

security index’’ as used in section 

3(a)(68)(A)(ii)(I) of the Act. 

(a) Notwithstanding § 240.3a68–3(a) 

of this chapter, and solely for purposes 

of determining whether a credit default 

swap is a security-based swap under 

section 3(a)(68)(A)(ii)(I) of the Act (15 

U.S.C. 78c(a)(68)(A)(ii)(I)), the term 

narrow-based security index as used in 

section 3(a)(68)(A)(ii)(I) of the Act 

means an index in which: 

(1)(i) The index is composed of 9 or 

fewer securities or securities that are 

issued by 9 or fewer non-affiliated 

issuers, provided that a security shall 

not be deemed a component of the 

index for purposes of this section 

unless: 

(A) A credit event with respect to the 

issuer of such security or a credit event 

with respect to such security would 

result in a payment by the credit 

protection seller to the credit protection 

buyer under the credit default swap 

based on the related notional amount 

allocated to such security; or 

(B) The fact of such credit event or the 

calculation in accordance with 

paragraph (a)(1)(i)(A) of this section of 

the amount owed with respect to such 

credit event is taken into account in 

determining whether to make any future 

payments under the credit default swap 

with respect to any future credit events; 

(ii) The effective notional amount 

allocated to the securities of any issuer 

included in the index comprises more 

than 30 percent of the index’s 

weighting; 

(iii) The effective notional amount 

allocated to the securities of any five 

non-affiliated issuers included in the 

index comprises more than 60 percent 

of the index’s weighting; or 

(iv) Except as provided in paragraph 

(b) of this section, for each security 

included in the index none of the 

following criteria is satisfied: 

(A) The issuer of the security is 

required to file reports pursuant to 

section 13 or section 15(d) of the Act (15 

U.S.C. 78m or 78o(d)); 

(B) The issuer of the security is 

eligible to rely on the exemption 

provided in § 40.12g3–2(b) of this 

chapter; 

(C) The issuer of the security has a 

worldwide market value of its 

outstanding common equity held by 

non-affiliates of $700 million or more; 

(D) The issuer of the security (other 

than an issuing entity of an asset-backed 

security as defined in section 3(a)(77) of 

the Act (15 U.S.C. 78c(a)(77))) has 

outstanding securities that are notes, 

bonds, debentures, or evidences of 

indebtedness having a total remaining 

principal amount of at least $1 billion; 

(E) The security is an exempted 

security as defined in section 3(a)(12) of 

the Act (15 U.S.C. 78c(a)(12)) (other 

than any municipal security as defined 

in section 3(a)(29) of the Act (15 U.S.C. 

78c(a)(29))); 

(F) The issuer of the security is a 

government of a foreign country or a 

political subdivision of a foreign 

country; 

(G) If the security is an asset-backed 

security as defined in section 3(a)(77) of 

the Act (15 U.S.C. 78c(a)(77)), the 

security was issued in a transaction 

registered under the Securities Act of 

1933 (15 U.S.C. 77a et seq.) and has 

publicly available distribution reports; 

and 

(H) For a credit default swap entered 

into solely between eligible contract 

participants as defined in section 

3(a)(65) of the Act (15 U.S.C. 78c(a)(65)): 

(1) The issuer of the security (other 

than an issuing entity of an asset-backed 

security as defined in section 3(a)(77) of 

the Act (15 U.S.C. 78c(a)(77))) provides 

to the public or to such eligible contract 

participant information about such 

issuer pursuant to § 230.144A(d)(4)) of 

this chapter; 

(2) Financial information about the 

issuer of the security (other than an 

asset-backed security as defined in 

section 3(a)(77) of the Act (15 U.S.C. 

78c(a)(77))) is otherwise publicly 

available; or 

(3) In the case of an asset-backed 

security as defined in section 3(a)(77) of 

the Act (15 U.S.C. 78c(a)(77)), 

information of the type and level 

included in public distribution reports 

for similar asset-backed securities is 

publicly available about both the issuing 

entity and such asset-backed security; 

and 

(2)(i) The index is not composed 

solely of exempted securities as defined 

in section 3(a)(12) of the Act (15 U.S.C. 

78c(a)(12)), as in effect on the date of 

enactment of the Futures Trading Act of 

1982 (other than any municipal security 

as defined in section 3(a)(29) of the Act 

(15 U.S.C. 78c(a)(29))), as in effect on 

the date of enactment of the Futures 

Trading Act of 1982); and 

(ii) Without taking into account any 

portion of the index composed of 

exempted securities as defined in 

section 3(a)(12) of the Act (15 U.S.C. 

78c(a)(12)), as in effect on the date of 

enactment of the Futures Trading Act of 

1982 (other than any municipal security 

as defined in section 3(a)(29) of the Act 

(15 U.S.C. 78c(a)(29))), the remaining 

portion of the index would be a narrowbased security index under paragraph 

(a)(1) of this section. 

(b) Paragraph (a)(1)(iv) of this section 

will not apply with respect to securities 

of an issuer included in the index if: 

(1) The effective notional amounts 

allocated to all securities of such issuer 

included in the index comprise less 

than five percent of the index’s 

weighting; and 

(2) The securities that satisfy 

paragraph (a)(1)(iv) of this section 

comprise at least 80 percent of the 

index’s weighting. 

(c) For purposes of this § 240.3a68–1b: 

(1) An issuer is affiliated with another 

issuer if it controls, is controlled by, or 

is under common control with, that 

issuer; provided that each issuing entity 

of an asset-backed security as defined in 

section 3(a)(77) of the Act (15 U.S.C. 

78c(a)(77)) will not be considered 

affiliated with any other issuing entity 

of an asset-backed security. 

(2) Control means ownership of 20 

percent or more of an issuer’s equity, or 

the ability to direct the voting of 20 

percent or more of the issuer’s voting 

equity. 

(3) The term issuer includes: 

(i) An issuer of securities; 

(ii) An issuing entity of an asset-based 

security as defined in section 3(a)(77) of 

the Act (15 U.S.C. 78c(a)(77)); and 

(iii) A single issuer or a group of 

affiliated issuers; provided that each 

issuing entity of an asset-backed 

security as defined in section 3(a)(77) of 

the Act (15 U.S.C. 78c(a)(77)) is a 

separate issuer. 

§ 240.3a68–2 Interpretation of swaps, 

security-based swaps, and mixed swaps. 

(a) In general. Any person may submit 

a request to the Commission and the 

Commodity Futures Trading 

Commission to provide a joint 

interpretation of whether a particular 

agreement, contract, or transaction (or 


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29896 Federal Register / Vol. 76, No. 99 / Monday, May 23, 2011 / Proposed Rules 

class thereof) is a swap, as that term is 

defined in section 3(a)(69) of the Act (15 

U.S.C. 78c(a)(69)) and the rules and 

regulations promulgated thereunder, a 

security-based swap, as that term is 

defined in section 3(a)(68) of the Act (15 

U.S.C. 78c(a)(68)) and the rules and 

regulations promulgated thereunder, or 

a mixed swap, as that term is defined in 

section 3(a)(68)(D) of the Act and the 

rules and regulations promulgated 

thereunder. 

(b) Request process. In making a 

request pursuant to paragraph (a) of this 

section, the requesting person must 

provide the Commission and the 

Commodity Futures Trading 

Commission with the following: 

(1) All material information regarding 

the terms of the agreement, contract, or 

transaction (or class thereof); 

(2) A statement of the economic 

characteristics and purpose of the 

agreement, contract, or transaction (or 

class thereof); 

(3) The requesting person’s 

determination as to whether the 

agreement, contract, or transaction (or 

class thereof) should be characterized as 

a swap, a security-based swap, or both 

(i.e., a mixed swap), including the basis 

for such determination; and 

(4) Such other information as may be 

requested by the Commission or the 

Commodity Futures Trading 

Commission. 

(c) Request withdrawal. A person may 

withdraw a request made pursuant to 

paragraph (a) of this section at any time 

prior to the issuance of a joint 

interpretation or joint notice of 

proposed rulemaking by the 

Commission and the Commodity 

Futures Trading Commission in 

response to the request; provided, 

however, that notwithstanding such 

withdrawal, the Commission and the 

Commodity Futures Trading 

Commission may provide a joint 

interpretation of whether the agreement, 

contract, or transaction (or class thereof) 

is a swap, a security-based swap, or both 

(i.e., a mixed swap). 

(d) Request by the Commission or the 

Commodity Futures Trading 

Commission. In the absence of a request 

for a joint interpretation under 

paragraph (a) of this section: 

(1) If the Commission or the 

Commodity Futures Trading 

Commission receives a proposal to list, 

trade, or clear an agreement, contract, or 

transaction (or class thereof) that raises 

questions as to the appropriate 

characterization of such agreement, 

contract, or transaction (or class thereof) 

as a swap, a security-based swap, or 

both (i.e., a mixed swap), the 

Commission or the Commodity Futures 

Trading Commission, as applicable, 

promptly shall notify the other of the 

agreement, contract, or transaction (or 

class thereof); and 

(2) The Commission or the 

Commodity Futures Trading 

Commission, or their Chairmen jointly, 

may submit a request for a joint 

interpretation as described in paragraph 

(a) of this section; such submission shall 

be made pursuant to paragraph (b) of 

this section, and may be withdrawn 

pursuant to paragraph (c) of this section. 

(e) Timeframe for joint interpretation. 

(1) If the Commission and the 

Commodity Futures Trading 

Commission determine to issue a joint 

interpretation as described in paragraph 

(a) of this section, such joint 

interpretation shall be issued within 120 

days after receipt of a complete 

submission requesting a joint 

interpretation under paragraph (a) or (d) 

of this section. 

(2) The Commission and the 

Commodity Futures Trading 

Commission shall consult with the 

Board of Governors of the Federal 

Reserve System prior to issuing any 

joint interpretation as described in 

paragraph (a) of this section. 

(3) If the Commission and the 

Commodity Futures Trading 

Commission seek public comment with 

respect to a joint interpretation 

regarding an agreement, contract, or 

transaction (or class thereof), the 120- 

day period described in paragraph (e)(1) 

of this section shall be stayed during the 

pendency of the comment period, but 

shall recommence with the business day 

after the public comment period ends. 

(4) Nothing in this section shall 

require the Commission and the 

Commodity Futures Trading 

Commission to issue any joint 

interpretation. 

(5) If the Commission and the 

Commodity Futures Trading 

Commission do not issue a joint 

interpretation within the time period 

described in paragraph (e)(1) or (e)(3) of 

this section, each of the Commission 

and the Commodity Futures Trading 

Commission shall publicly provide the 

reasons for not issuing such a joint 

interpretation within the applicable 

timeframes. 

(f) Joint notice of proposed 

rulemaking. 

(1) Rather than issue a joint 

interpretation pursuant to paragraph (a) 

of this section, the Commission and the 

Commodity Futures Trading 

Commission may issue a joint notice of 

proposed rulemaking, in consultation 

with the Board of Governors of the 

Federal Reserve System, to further 

define one or more of the terms swap, 

security-based swap, or mixed swap. 

(2) A joint notice of proposed 

rulemaking described in paragraph (f)(1) 

of this section shall be issued within the 

timeframe for issuing a joint 

interpretation set forth in paragraph (e) 

of this section. 

§ 240.3a68–3 Meaning of ‘‘narrow-based 

security index’’ as used in the definition of 

‘‘security-based swap.’’ 

(a) In general. Except as otherwise 

provided in § 240.3a68–1a and 

§ 240.3a68–1b of this chapter, for 

purposes of section 3(a)(68) of the Act 

(15 U.S.C. 78c(a)(68)), the term narrowbased security index has the meaning 

set forth in section 3(a)(55) of the Act 

(15 U.S.C. 78c(a)(55)), and the rules, 

regulations, and orders of the 

Commission thereunder. 

(b) Tolerance period for swaps traded 

on designated contract markets, swap 

execution facilities and foreign boards 

of trade. Notwithstanding paragraph (a) 

of this section, solely for purposes of 

swaps traded on or subject to the rules 

of a designated contract market, swap 

execution facility, or foreign board of 

trade pursuant to the Commodity 

Exchange Act (7 U.S.C. 1 et seq.), a 

security index underlying such swaps 

shall not be considered a narrow-based 

security index if: 

(1)(i) A swap on the index is traded 

on or subject to the rules of a designated 

contract market, swap execution facility, 

or foreign board of trade pursuant to the 

Commodity Exchange Act (7 U.S.C. 1 et 

seq.) for at least 30 days as a swap on 

an index that was not a narrow-based 

security index; or 

(ii) Such index was not a narrowbased security index during every 

trading day of the six full calendar 

months preceding a date no earlier than 

30 days prior to the commencement of 

trading of a swap on such index on a 

market described in paragraph (b)(1)(i) 

of this section; and 

(2) The index has been a narrowbased security index for no more than 

45 business days over three consecutive 

calendar months. 

(c) Tolerance period for securitybased swaps traded on national 

securities exchanges or security-based 

swap execution facilities. 

Notwithstanding paragraph (a) of this 

section, solely for purposes of securitybased swaps traded on a national 

securities exchange or security-based 

swap execution facility, a security index 

underlying such security-based swaps 

shall be considered a narrow-based 

security index if: 

(1)(i) A security-based swap on the 

index is traded on a national securities 


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exchange or security-based swap 

execution facility for at least 30 days as 

a security-based swap on a narrowbased security index; or 

(ii) Such index was a narrow-based 

security index during every trading day 

of the six full calendar months 

preceding a date no earlier than 30 days 

prior to the commencement of trading of 

a security-based swap on such index on 

a market described in paragraph (c)(1)(i) 

of this section; and 

(2) The index has been a security 

index that is not a narrow-based 

security index for no more than 45 

business days over three consecutive 

calendar months. 

(d) Grace period. 

(1) Solely with respect to a swap that 

is traded on or subject to the rules of a 

designated contract market, swap 

execution facility or foreign board of 

trade pursuant to the Commodity 

Exchange Act (7 U.S.C. 1 et seq.), an 

index that becomes a narrow-based 

security index under paragraph (b) of 

this section solely because it was a 

narrow-based security index for more 

than 45 business days over three 

consecutive calendar months shall not 

be a narrow-based security index for the 

following three calendar months. 

(2) Solely with respect to a securitybased swap that is traded on a national 

securities exchange or security-based 

swap execution facility, an index that 

becomes a security index that is not a 

narrow-based security index under 

paragraph (c) of this section solely 

because it was not a narrow-based 

security index for more than 45 business 

days over three consecutive calendar 

months shall be a narrow-based security 

index for the following three calendar 

months. 

§ 240.3a68–4 Regulation of mixed swaps. 

(a) In general. The term mixed swap 

has the meaning set forth in section 

3(a)(68)(D) of the Act (15 U.S.C. 

78c(a)(68)(D)). 

(b) Regulation of mixed swaps entered 

into by dually-registered dealers or 

major participants. A mixed swap: 

(1) That is neither executed on nor 

subject to the rules of a designated 

contract market, national securities 

exchange, swap execution facility, 

security-based swap execution facility, 

or foreign board of trade; 

(2) That will not be submitted to a 

derivatives clearing organization or 

registered or exempt clearing agency to 

be cleared; and 

(3) Where at least one party is 

registered with the Commission as a 

security-based swap dealer or major 

security-based swap participant and 

also with the Commodity Futures 

Trading Commission as a swap dealer or 

major swap participant, shall be subject 

to: 

(i) The following provisions of the 

Commodity Exchange Act (7 U.S.C. 1 et 

seq.), and the rules and regulations 

promulgated thereunder, set forth in the 

rules and regulations of the Commodity 

Futures Trading Commission: 

(A) Examinations and information 

sharing: 7 U.S.C. 6s(f) and 12; 

(B) Enforcement: 7 U.S.C. 2(a)(1)(B), 

6(b), 6b, 6c, 9, 13b, 13a–1, 13a–2, 13, 

13c(a), 13c(b), 15 and 26; 

(C) Reporting to a swap data 

repository: 7 U.S.C. 6r; 

(D) Real-time reporting: 7 U.S.C. 

2(a)(13); 

(E) Capital: 7 U.S.C. 6s(e); and 

(F) Position Limits: 7 U.S.C. 6a; and 

(ii) The provisions of the Federal 

securities laws, as defined in section 

3(a)(47) of the Act (15 U.S.C. 78c(a)(47)), 

and the rules and regulations 

promulgated thereunder. 

(c) Process for determining regulatory 

treatment for mixed swaps. 

(1) In general. Any person who 

desires or intends to list, trade, or clear 

a mixed swap (or class thereof) that is 

not subject to paragraph (b) of this 

section may request the Commission 

and the Commodity Futures Trading 

Commission to issue a joint order 

permitting the requesting person (and 

any other person or persons that 

subsequently lists, trades, or clears that 

mixed swap) to comply, as to parallel 

provisions only, with specified parallel 

provisions of either the Act (15 U.S.C. 

78a et seq.) or the Commodity Exchange 

Act (7 U.S.C. 1 et seq.), and the rules 

and regulations thereunder (collectively, 

specified parallel provisions), instead of 

being required to comply with parallel 

provisions of both the Act and the 

Commodity Exchange Act. For purposes 

of this paragraph (c), parallel provisions 

means comparable provisions of the Act 

and the Commodity Exchange Act that 

were added or amended by the Wall 

Street Transparency and Accountability 

Act of 2010 with respect to securitybased swaps and swaps, and the rules 

and regulations thereunder. 

(2) Request process. A person 

submitting a request pursuant to 

paragraph (c)(1) of this section must 

provide the Commission and the 

Commodity Futures Trading 

Commission with the following: 

(i) All material information regarding 

the terms of the specified, or specified 

class of, mixed swap; 

(ii) The economic characteristics and 

purpose of the specified, or specified 

class of, mixed swap; 

(iii) The specified parallel provisions, 

and the reasons the person believes 

such specified parallel provisions 

would be appropriate for the mixed 

swap (or class thereof); and 

(iv) An analysis of: 

(A) The nature and purposes of the 

parallel provisions that are the subject 

of the request; 

(B) The comparability of such parallel 

provisions; 

(C) The extent of any conflicts or 

differences between such parallel 

provisions; and 

(D) Such other information as may be 

requested by the Commission or the 

Commodity Futures Trading 

Commission. 

(3) Request withdrawal. A person may 

withdraw a request made pursuant to 

paragraph (c)(1) of this section at any 

time prior to the issuance of a joint 

order under paragraph (c)(4) of this 

section by the Commission and the 

Commodity Futures Trading 

Commission in response to the request. 

(4) Issuance of orders. In response to 

a request under paragraph (c)(1) of this 

section, the Commission and the 

Commodity Futures Trading 

Commission, as necessary to carry out 

the purposes of the Wall Street 

Transparency and Accountability Act of 

2010, may issue a joint order, after 

notice and opportunity for comment, 

permitting the requesting person (and 

any other person or persons that 

subsequently lists, trades, or clears that 

mixed swap) to comply, as to parallel 

provisions only, with the specified 

parallel provisions (or another subset of 

the parallel provisions that are the 

subject of the request, as the 

Commissions determine is appropriate), 

instead of being required to comply 

with parallel provisions of both the Act 

(15 U.S.C. 78a et seq.) and the 

Commodity Exchange Act (7 U.S.C. 1 et 

seq.). In determining the contents of 

such joint order, the Commission and 

the Commodity Futures Trading 

Commission may consider, among other 

things: 

(i) The nature and purposes of the 

parallel provisions that are the subject 

of the request; 

(ii) The comparability of such parallel 

provisions; and 

(iii) The extent of any conflicts or 

differences between such parallel 

provisions. 

(5) Timeframe. 

(i) If the Commission and the 

Commodity Futures Trading 

Commission determine to issue a joint 

order as described in paragraph (c)(4) of 

this section, such joint order shall be 

issued within 120 days after receipt of 

a complete request for a joint order 

under paragraph (c)(1) of this section, 

which time period shall be stayed 


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during the pendency of the public 

comment period provided for in 

paragraph (c)(4) of this section and shall 

recommence with the business day after 

the public comment period ends. 

(ii) Nothing in this section shall 

require the Commission and the 

Commodity Futures Trading 

Commission to issue any joint order. 

(iii) If the Commission and the 

Commodity Futures Trading 

Commission do not issue a joint order 

within the time period described in 

paragraph (c)(5)(i) of this section, each 

of the Commission and the Commodity 

Futures Trading Commission shall 

publicly provide the reasons for not 

issuing such a joint order within that 

timeframe. 

§ 240.3a69–1 Definition of ‘‘swap’’ as used 

in section 3(a)(69) of the Act—Insurance 

The term swap as used in section 

3(a)(69) of the Act (15 U.S.C. 78c(a)(69)) 

does not include an agreement, contract, 

or transaction that: 

(a) By its terms or by law, as a 

condition of performance on the 

agreement, contract, or transaction: 

(1) Requires the beneficiary of the 

agreement, contract, or transaction to 

have an insurable interest that is the 

subject of the agreement, contract, or 

transaction and thereby carry the risk of 

loss with respect to that interest 

continuously throughout the duration of 

the agreement, contract, or transaction; 

(2) Requires that loss to occur and to 

be proved, and that any payment or 

indemnification therefor be limited to 

the value of the insurable interest; 

(3) Is not traded, separately from the 

insured interest, on an organized market 

or over-the-counter; and 

(4) With respect to financial guaranty 

insurance only, in the event of payment 

default or insolvency of the obligor, any 

acceleration of payments under the 

policy is at the sole discretion of the 

insurer; and 

(b) Is provided: 

(1) By a company that is organized as 

an insurance company whose primary 

and predominant business activity is the 

writing of insurance or the reinsuring of 

risks underwritten by insurance 

companies and that is subject to 

supervision by the insurance 

commissioner (or similar official or 

agency) of any State, as defined in 

section 3(a)(16) of the Act (15 U.S.C. 

78c(a)(16)), or by the United States or an 

agency or instrumentality thereof, and 

such agreement, contract, or transaction 

is regulated as insurance under the laws 

of such State or of the United States; 

(2) By the United States or any of its 

agencies or instrumentalities, or 

pursuant to a statutorily authorized 

program thereof; or 

(3) In the case of reinsurance only, by 

a person located outside the United 

States to an insurance company that is 

eligible under paragraph (b) of this 

section, provided that: 

(i) Such person is not prohibited by 

any law of any State or of the United 

States from offering such agreement, 

contract, or transaction to such an 

insurance company; 

(ii) The product to be reinsured meets 

the requirements under paragraph (a) of 

this section to be insurance; and 

(iii) The total amount reimbursable by 

all reinsurers for such insurance 

product cannot exceed the claims or 

losses paid by the cedant. 

§ 240.3a69–2 Definition of ‘‘swap’’ as used 

in section 3(a)(69) of the Act—Additional 

Products. 

(a) In general. The term swap has the 

meaning set forth in section 3(a)(69) of 

the Act (15 U.S.C. 78c(a)(69)). 

(b) Inclusion of particular products. 

(1) The term swap includes, without 

limiting the meaning set forth in section 

3(a)(69) of the Act (15 U.S.C. 78c(a)(69), 

the following agreements, contracts, and 

transactions: 

(i) A cross-currency swap; 

(ii) A currency option, foreign 

currency option, foreign exchange 

option and foreign exchange rate option; 

(iii) A foreign exchange forward; 

(iv) A foreign exchange swap; 

(v) A forward rate agreement; and 

(vi) A non-deliverable forward 

involving foreign exchange. 

(2) The term swap does not include an 

agreement, contract, or transaction 

described in paragraph (b)(1) of this 

section that is otherwise excluded by 

section 1a(47)(B) of the Commodity 

Exchange Act (7 U.S.C. 1a(47)(B)). 

(c) Foreign exchange forwards and 

foreign exchange swaps. 

Notwithstanding paragraph (b)(2) of this 

section: 

(1) A foreign exchange forward or a 

foreign exchange swap shall not be 

considered a swap if the Secretary of the 

Treasury makes a determination 

described in section 1a(47)(E)(i) of the 

Commodity Exchange Act (7 U.S.C. 

1a(47)(E)(i)). 

(2) Notwithstanding paragraph (c)(1) 

of this section: 

(i) The reporting requirements set 

forth in section 4r of the Commodity 

Exchange Act (7 U.S.C. 6r) and 

regulations promulgated thereunder 

shall apply to a foreign exchange 

forward or foreign exchange swap; and 

(ii) The business conduct standards 

set forth in section 4s of the Commodity 

Exchange Act (7 U.S.C. 6s) and 

regulations promulgated thereunder 

shall apply to a swap dealer or major 

swap participant that is a party to a 

foreign exchange forward or foreign 

exchange swap. 

(3) For purposes of section 1a(47)(E) 

of the Commodity Exchange Act (7 

U.S.C. 1a(47)(E)) and this § 240.3a69–2, 

the term foreign exchange forward has 

the meaning set forth in section 1a(24) 

of the Commodity Exchange Act (7 

U.S.C. 1a(24)). 

(4) For purposes of section 1a(47)(E) 

of the Commodity Exchange Act (7 

U.S.C. 1a(47)(E)) and this § 240.3a69–2, 

the term foreign exchange swap has the 

meaning set forth in section 1a(25) of 

the Commodity Exchange Act (7 U.S.C. 

1a(25)). 

(5) For purposes of sections 1a(24) 

and 1a(25) of the Commodity Exchange 

Act (7 U.S.C. 1a(24) and (25)) and this 

§ 240.3a69–2, the following transactions 

are not foreign exchange forwards or 

foreign exchange swaps: 

(i) A currency swap or a crosscurrency swap; 

(ii) A currency option, foreign 

currency option, foreign exchange 

option, or foreign exchange rate option; 

and 

(iii) A non-deliverable forward 

involving foreign exchange. 

§ 240.3a69–3 Books and records 

requirements for security-based swap 

agreements. 

(a) A person registered as a swap data 

repository under section 21 of the 

Commodity Exchange Act (7 U.S.C. 24a) 

and the rules and regulations 

thereunder: 

(1) Shall not be required to keep and 

maintain additional books and records 

regarding security-based swap 

agreements other than the books and 

records regarding swaps required to be 

kept and maintained pursuant to section 

21 of the Commodity Exchange Act (7 

U.S.C. 24a) and the rules and 

regulations thereunder; and 

(2) Shall not be required to collect and 

maintain additional data regarding 

security-based swap agreements other 

than the data regarding swaps required 

to be collected and maintained by such 

persons pursuant to section 21 of the 

Commodity Exchange Act (7 U.S.C. 24a) 

and the rules and regulations 

thereunder. 

(b) A person shall not be required to 

keep and maintain additional books and 

records, including daily trading records, 

regarding security-based swap 

agreements other than the books and 

records regarding swaps required to be 

kept and maintained by such persons 

pursuant to section 4s of the Commodity 

Exchange Act (7 U.S.C. 6s) and the rules 


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Federal Register / Vol. 76, No. 99 / Monday, May 23, 2011 / Proposed Rules 29899 

399 7 U.S.C. 1a(47)(B)(ix). 

400See, e.g., letter from Gunter Pleines, Head of 

Banking Department, and Diego Devos, General 

Continued 

and regulations thereunder if such 

person is registered as: 

(1) A swap dealer under section 

4s(a)(1) of the Commodity Exchange Act 

(7 U.S.C. 6s(a)(1)) and the rules and 

regulations thereunder; 

(2) A major swap participant under 

section 4s(a)(2) of the Commodity 

Exchange Act (7 U.S.C. 6s(a)(2)) and the 

rules and regulations thereunder; 

(3) A security-based swap dealer 

under section 15F(a)(1) of the Act (15 

U.S.C. 78o–10(a)(1)) and the rules and 

regulations thereunder; or 

(4) A major security-based swap 

participant under section 15F(a)(2) of 

the Act (15 U.S.C. 78o–10(a)(2)) and the 

rules and regulations thereunder. 

(c) The term security-based swap 

agreement has the meaning set forth in 

section 3(a)(78) of the Act (15 U.S.C. 

78c(a)(78)). 

Dated: April 29, 2011. 

By the Commodity Futures Trading 

Commission. 

David A. Stawick, 

Secretary. 

Dated: April 29, 2011. 

By the Securities and Exchange 

Commission. 

Cathy H. Ahn, 

Deputy Secretary. 

Product Definitions Contained in Title 

VII of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act— 

CFTC Voting Summary and Statements 

of CFTC Commissioners 

Note: The following will not appear in the 

Code of Federal Regulations. 

CFTC Voting Summary 

On this matter, Chairman Gensler and 

Commissioners Dunn, Chilton and 

O’Malia voted in the affirmative; 

Commissioner Sommers voted in the 

negative. 

Statement of CFTC Chairman Gary 

Gensler 

I support the proposed rulemaking to 

implement the Dodd-Frank Act’s 

requirement to further define 

derivatives products that come under 

Title VII of the Act. 

The CFTC worked closely with the 

SEC, in consultation with the Federal 

Reserve, on this proposed rule to further 

define swaps, security-based swaps, 

mixed swaps and security-based swap 

agreements. The statutory definition of 

swap is very detailed. This rule is 

consistent with that detailed definition 

and Congressional intent. For example, 

interest rate swaps, currency swaps, 

commodity swaps, including energy, 

metals and agricultural swaps, and 

broad-based index swaps, such as index 

credit default swaps, are all swaps. 

Consistent with Congress’s definition of 

swaps, the rule also defines options as 

swaps. 

In preparing the proposed rule, staff 

worked to address the more than 80 

comments that were submitted by the 

public in response to the joint advance 

notice of proposed rulemaking on 

product definitions. Many of the 

commenters asked that the 

Commissions specifically provide 

guidance on what is not a swap or 

security-based swap. 

For example, under the Commodity 

Exchange Act, the CFTC does not 

regulate forward contracts. Over the 

decades, there has been a series of 

orders, interpretations and cases that 

market participants have come to rely 

upon regarding the exception from 

futures regulation for forwards and 

forwards with embedded options. 

Consistent with that history, the DoddFrank Act excluded from the definition 

of swaps ‘‘any sale of a nonfinancial 

commodity or security for deferred 

shipment or delivery, so long as the 

transaction is intended to be physically 

settled.’’ The proposed rule interprets 

that exclusion in a manner that is 

consistent with the Commission’s 

previous history of the forward 

exclusion from futures regulation. 

Further, consistent with the DoddFrank Act, the proposed rule clarifies 

that state or Federally regulated 

insurance products that are provided by 

regulated insurance companies will not 

be regulated under Title VII of the Act. 

Similarly, the proposal clarifies that 

certain consumer and commercial 

arrangements that historically have not 

been considered swaps, such as 

consumer mortgage rate locks, contracts 

to lock in the price of home heating oil 

and contracts relating to inventory or 

equipment, also will not be regulated 

under Title VII of the Act. 

Statement of CFTC Commissioner Jill 

Sommers 

I respectfully dissent from the action 

taken today by the Commission to issue 

proposed regulations relating to 

‘‘Product Definitions Contained in Title 

VII of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act.’’ 

I disagree with the approach taken by 

the Commission with regard to the 

proposed ‘‘Anti-Evasion’’ provisions. I 

agree that Dodd-Frank Section 721(c) 

directs the Commission to further define 

certain terms to include transactions or 

entities that have been structured to 

evade Dodd-Frank. I do not agree that 

Congress directed the Commission to 

promulgate broad ‘‘Anti-Evasion’’ 

provisions, and I point out that the 

Securities and Exchange Commission 

today has declined to promulgate such 

provisions in this joint rulemaking. 

By promulgating a broad regulation 

today that essentially says that any 

transaction that does not fall within the 

definition of ‘‘swap’’ because it has been 

structured to evade Dodd-Frank 

nonetheless is a swap, the Commission 

is over-reading its Congressional 

mandate. The statutory definition of 

‘‘swap’’ includes a laundry-list of 

transactions that Congress intended to 

include within the definition. If 

Congress intended the definition of 

‘‘swap’’ also to include a broad statement 

that any transaction structured to evade 

Dodd-Frank is a ‘‘swap,’’ Congress 

would have incorporated such a 

provision within the statutory 

definition. By directing the Commission 

to ‘‘further define’’ the term ‘‘swap’’ by 

rule, Congress is directing the 

Commission not to make the broad 

statement it declined to make, but to 

think through whether the definition of 

‘‘swap’’ needs to be modified by rule to 

include specific transactions within the 

definition. 

In addition to my concern about the 

‘‘Anti-Evasion’’ provisions included 

within this proposal, I am concerned 

about an important issue that is not 

raised within this proposal. 

Multinational organizations whose 

statutory mission is to combat poverty 

and foster economic development have 

raised concerns about the application of 

Dodd-Frank to their activities. This 

proposal omits any discussion of their 

issues. In my view the following 

language should be included within the 

proposal, and I urge the public to 

comment upon the issues raised: 

Transactions Involving Certain Foreign 

or Multinational Entities 

The swap definition expressly 

excludes ‘‘any agreement, contract, or 

transaction a counterparty of which is a 

Federal Reserve bank, the Federal 

Government, or a Federal agency that is 

expressly backed by the full faith and 

credit of the United States.’’ 399 Some 

commenters have suggested that the 

Commissions should exercise their 

authority to further define the terms 

‘‘swap’’ and ‘‘security-based swap’’ to 

similarly exclude transactions in which 

a counterparty is an international public 

organization, a foreign central bank, a 

foreign sovereign, or a multi-or supranational organization.400 Commenters 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
29900 Federal Register / Vol. 76, No. 99 / Monday, May 23, 2011 / Proposed Rules 

Counsel, Bank for International Settlements (‘‘BIS 

Letter’’); Cleary Letter. The Commissions note that 

various other terms may be used to refer to 

organizations that generally: (i) Limit their 

membership to sovereign nations; (ii) are 

established by treaty; (iii) have a separate legal 

identity from their members; and (iv) ‘‘are usually 

specialized and of international or regional scope’’ 

and ‘‘formed between three or more nations to work 

on issues that relate to all of the countries in the 

organization. See, e.g., http://portal.unesco.org/en/ 

ev.php-URL_ID=32408&URL_DO=DO_TOPIC&

URL_SECCTION=201.html; http://www.geni.org/

globalenergy/library/organizations/index.shtml. For 

convenience, the Commissions use the term 

‘‘supranational organization’’ herein to refer to 

organizations having such characteristics. 

401See, e.g., BIS Letter (citing Article 1, paragraph 

4, of the proposed EU Regulation on Central 

Clearing of OTC Derivatives, available at http:// 

register.consilium.europa.eu/pdf/en/11/st05/ 

st05059.en11.pdf, which excludes from its coverage 

the BIS, multilateral development banks, European 

central banks and similarly situated ‘‘other national 

bodies performing similar functions and other 

public bodies charged with or intervening in the 

management of the public debt’’). 

have advanced international comity, 

national treatment, limited regulatory 

resources, limits on the Commissions’ 

respective extraterritorial jurisdiction, 

and international harmonization as 

rationales for such an approach.401

Request for Comment 

• The Commissions request comment 

generally on the appropriate application 

of the Dodd-Frank Act to international 

public organizations, foreign central 

banks, foreign sovereigns (or foreign 

sovereign wealth funds), supranational 

organizations, and any other foreign or 

multinational entity that may be 

analogous to the entities excluded from 

the swap definition in CEA Section 

1a(47)(B)(ix). 

• Should the Commissions further 

define the terms ‘‘swap’’ and ‘‘securitybased swap’’ to exclude transactions in 

which a counterparty is an international 

public organization, foreign central 

bank, foreign sovereign (or foreign 

sovereign wealth fund), supranational 

organization, or any other foreign or 

multinational entity that may be 

analogous to an entity excluded from 

the swap definition in CEA Section 

1a(47)(B)(ix)? Why or why not? If so, 

how should the Commissions delineate 

the scope of entities whose transactions 

would be excluded? Please describe in 

detail the nature of the entity whose 

transactions would be excluded and 

explain the reasons for such an 

exclusion. Would such an exclusion 

inappropriately cause transactions that 

should be regulated as swaps or 

security-based swaps to fall outside of 

the regulatory regime established by the 

Dodd-Frank Act? Why or why not? 

• If the Commissions further define 

the terms ‘‘swap’’ and ‘‘security-based 

swap’’ to exclude any such entity, 

should the exclusion be subject to any 

conditions, or should the exclusion be 

limited to particular requirements of 

Title VII? Why or why not? If so, what 

conditions would be appropriate, and/or 

what requirements of Title VII should 

the exclusion apply to, and why? 

• If the Commissions further define 

the terms ‘‘swap’’ and ‘‘security-based 

swap’’ to exclude any such entity, to 

what extent should counterparties to 

such transactions be subject to the 

requirements of Title VII? What would 

be the appropriate regulatory treatment 

of such counterparties in these 

circumstances? 

[FR Doc. 2011–11008 Filed 5–20–11; 8:45 am] 

BILLING CODE 6351–01–P; 8011–01–P 


srobinson on DSK4SPTVN1PROD with PROPOSALS2