Swaps Regulation in Focus: What’s In, What’s Out and What’s Next

The Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) published their joint final rules release further defining the terms “swap,” “security-based swap,” “security-based swap agreement” and “mixed swap” (the “Definitions Release”) in the Federal Register on August 13, 2012. The Definitions Release provides granular detail on the products that are within the scope of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and also triggers the countdown to the effectiveness of several important requirements in the Dodd-Frank Act. 

The Dodd-Frank Act mandates the regulation of swaps and the operators of pooled investment vehicles that invest in them. The Definitions Release provides granular detail on the products that are within the scope of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and also triggers the countdown to the effectiveness of several important requirements in the Dodd-Frank Act. Authority to administer that regulation has largely been delegated to the CFTC, and pools investing in swaps will be regulated, in many respects, in the same way as pools investing in commodity futures. Identifying whether a transaction is a swap is sometimes difficult because a transaction that may not sound like a commodity transaction to a casual observer may be deemed to be a swap and thereby require the investment manager to the fund engaging in such transaction to register as a commodity pool operator (CPO) or find an exemption. In addition, a transaction that may be referred to as a swap in the parlance of the relevant industry may still be outside of the term “swap” as used in the Dodd-Frank Act.