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COMMODITY FUTURES TRADING • Federal eRulemaking Portal: http:// available for Web site viewing and COMMISSION www.regulations.gov. Follow the printing in the SEC’s Public Reference instructions for submitting comments. Room, 100 F Street, NE., Washington, 17 CFR Part 1 Please submit your comments using DC 20549, on official business days RIN 3038–AD46 only one method. ‘‘Product Definitions’’ between the hours of 10 a.m. and 3 p.m. must be in the subject field of responses All comments received will be posted SECURITIES AND EXCHANGE submitted via e-mail, and clearly without change; the SEC does not edit COMMISSION indicated on written submissions. All personal identifying information from comments must be submitted in submissions. You should submit only 17 CFR Part 240 English, or if not, accompanied by an information that you wish to make English translation. Comments will be available publicly. [Release No. 33–9204; 34–64372; File No. posted as received to http:// S7–16–11] FOR FURTHER INFORMATION CONTACT: www.cftc.gov. You should submit only CFTC: Julian E. Hammar, Assistant RIN 3235–AL14 information that you wish to make General Counsel, at 202–418–5118, available publicly. If you wish the CFTC [email protected], Mark Fajfar, Further Definition of ‘‘Swap,’’ ‘‘Security- to consider information that you believe Assistant General Counsel, at 202–418– Based Swap,’’ and ‘‘Security-Based is exempt from disclosure under the 6636, [email protected], or David E. Swap Agreement’’; Mixed Swaps; Freedom of Information Act, a petition Aron, Counsel, at 202–418–6621, Security-Based Swap Agreement for confidential treatment of the exempt [email protected], Office of General Recordkeeping information may be submitted according Counsel, Commodity Futures Trading AGENCIES: Commodity Futures Trading to the procedures established in section Commission, Three Lafayette Centre, Commission; Securities and Exchange 145.9 of the CFTC’s regulations.1 1155 21st Street, NW., Washington, DC Commission. The CFTC reserves the right, but shall 20581; SEC: Matthew A. Daigler, Senior ACTION: Joint proposed rules; proposed have no obligation, to review, pre- Special Counsel, at 202–551–5578, interpretations. screen, filter, redact, refuse or remove Cristie L. March, Attorney-Adviser, at any or all of your submission from 202–551–5574, or Leah M. Drennan, SUMMARY: In accordance with section www.cftc.gov that it may deem to be Attorney-Adviser, at 202–551–5507, 712(a)(8), section 712(d)(1), sections inappropriate for publication, including Division of Trading and Markets, or 712(d)(2)(B) and (C), sections 721(b) and obscene language. All submissions that Michael J. Reedich, Special Counsel, or (c), and section 761(b) of the Dodd- have been redacted or removed that Tamara Brightwell, Senior Special Frank Wall Street Reform and Consumer contain comments on the merits of the Counsel to the Director, at 202–551– Protection Act (‘‘Dodd-Frank Act’’), the rulemaking will be retained in the 3500, Division of Corporation Finance, Commodity Futures Trading public comment file and will be Securities and Exchange Commission, Commission (‘‘CFTC’’) and the Securities considered as required under the 100 F Street, NE., Washington, DC and Exchange Commission (‘‘SEC’’) Administrative Procedure Act and other 20549–7010. (collectively, ‘‘Commissions’’), in applicable laws, and may be accessible SUPPLEMENTARY INFORMATION: The consultation with the Board of under the Freedom of Information Act. Commissions jointly are proposing new Governors of the Federal Reserve SEC rules and interpretive guidance under System (‘‘Board’’), are jointly issuing the CEA and the Exchange Act relating proposed rules and proposed Electronic Comments to the Product Definitions, mixed interpretive guidance under the • Use the Commission’s Internet swaps, and security-based swap Commodity Exchange Act (‘‘CEA’’) and comment form (http://www.sec.gov/ agreements. the Securities Exchange Act of 1934 rules/proposed.shtml); Table of Contents (‘‘Exchange Act’’) to further define the • Send an e-mail to rule- terms ‘‘swap,’’ ‘‘security-based swap,’’ [email protected]. Please include File I. Background and ‘‘security-based swap agreement’’ Number S7–16–11 on the subject line; II. Scope of Definitions of Swap and Security- Based Swap (collectively, ‘‘Product Definitions’’), or regarding ‘‘mixed swaps,’’ and governing • A. Introduction Use the Federal eRulemaking Portal B. Proposed Rules and Interpretive books and records with respect to (http://www.regulations.gov). Follow the ‘‘ ’’ Guidance Regarding Certain security-based swap agreements. instructions for submitting comments. Transactions Outside the Scope of the DATES: Comments should be received on Definitions of the Terms ‘‘Swap’’ and or before July 22, 2011. Paper Comments ‘‘Security-Based Swap’’ ADDRESSES: Comments may be • Send paper comments in triplicate 1. Insurance Products submitted, identified by File No. S7–16– to Elizabeth M. Murphy, Secretary, (a) Types of Insurance Products 11, by any of the following methods: Securities and Exchange Commission, (b) Providers of Insurance Products 2. The Forward Contract Exclusion CFTC: 100 F Street, NE., Washington, DC (a) Forward Contracts in Nonfinancial • Agency Web site, via its Comments 20549–1090. All submissions should Commodities Online process: http:// refer to File Number S7–16–11. This file (b) Commodity Options and Commodity comments.cftc.gov. Follow the number should be included on the Options Embedded in Forward Contracts instructions for submitting comments subject line if e-mail is used. To help us (c) Security Forwards through the Web site. process and review your comments 3. Consumer and Commercial Agreements, • Mail: David A. Stawick, Secretary, more efficiently, please use only one Contracts, and Transactions Commodity Futures Trading method. The SEC will post all 4. Loan Participations C. Proposed Rules and Interpretive Commission, Three Lafayette Centre, comments on the SEC’s Internet Web Guidance Regarding Certain 1155 21st Street, NW., Washington, DC site (http://www.sec.gov/rules/ Transactions Within the Scope of the 20581. proposed.shtml). Comments are also Definitions of the Terms ‘‘Swap’’ and • Hand Delivery/Courier: Same as ‘‘Security-Based Swap’’ mail above. 1 17 CFR 145.9. 1. In General

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2. Foreign Exchange Products (b) Title VII Instruments on Security intermediaries subject to the (a) Foreign Exchange Products Subject to Indexes Traded on Designated Contract Commissions’ oversight. the Secretary’s Swap Determination: Markets, Swap Execution Facilities, Section 712(d)(1) of the Dodd-Frank Foreign Exchange Forwards and Foreign Foreign Boards of Trade, Security-Based Act provides that the Commissions, in Exchange Swaps Swap Execution Facilities, and National consultation with the Board, shall (b) Foreign Exchange Products Not Subject Securities Exchanges jointly further define the terms ‘‘swap,’’ to the Secretary’s Swap Determination H. Method of Settlement of Index CDS (i) Foreign Currency Options ‘‘security-based swap,’’ and ‘‘security- I. Security-Based Swaps as Securities based swap agreement’’ (‘‘SBSA’’).4 (ii) Non-Deliverable Forward Contracts Under the Exchange Act and Securities Involving Foreign Exchange Act Section 712(a)(8) of the Dodd-Frank Act (iii) Currency Swaps and Cross-Currency IV. Mixed Swaps provides further that the Commissions Swaps A. Scope of the Category of Mixed Swap shall jointly prescribe such regulations 3. Forward Rate Agreements B. Regulation of Mixed Swaps regarding ‘‘mixed swaps’’ as may be 4. Combinations and Permutations of, or 1. Introduction necessary to carry out the purposes of Options on, Swaps and Security-Based Title VII. In addition, sections 721(b) Swaps 2. Bilateral Uncleared Mixed Swaps 5. Contracts for Differences Entered Into by Dually-Registered and 761(b) of the Dodd-Frank Act D. Certain Interpretive Issues Dealers or Major Participants provide that the Commissions may 1. Agreements, Contracts, or Transactions 3. Regulatory Treatment for Other Mixed adopt rules to further define terms That May Be Called, or Documented Swaps included in subtitles A and B, Using Form Contracts Typically Used V. Security-Based Swap Agreements respectively, of Title VII, and sections for, Swaps or Security-Based Swaps A. Introduction 721(c) and 761(b) of the Dodd-Frank Act 2. Transactions in Regional Transmission B. Swaps That Are Security-Based Swap provide the Commissions with authority Organizations and Independent System Agreements ‘‘ ’’ C. Books and Records Requirements for to define the terms swap and Operators ‘‘ ’’ III. The Relationship Between the Swap Security-Based Swap Agreements security-based swap, as well as the Definition and the Security-Based Swap VI. Process for Requesting Interpretations of terms ‘‘swap dealer,’’ ‘‘major swap Definition the Characterization of a Title VII participant,’’ ‘‘security-based swap A. Introduction Instrument dealer,’’ and ‘‘major security-based swap B. Title VII Instruments Based on Interest VII. Anti-Evasion participant,’’ to include transactions and Rates, Other Monetary Rates, and Yields A. CFTC Proposed Anti-Evasion Rules entities that have been structured to 1. Title VII Instruments Based on Interest B. SEC Request for Comment Regarding evade the requirements of subtitles A Rates or Other Monetary Rates That Are Anti-Evasion and B, respectively, of Title VII. Swaps VIII. Administrative Law Matters—CEA Section 712(d)(2)(B) of the Dodd- 2. Title VII Instruments Based on Yields Revisions Frank Act requires the Commissions, in 3. Title VII Instruments Based on IX. Administrative Law Matters—Exchange Government Debt Obligations consultation with the Board, to jointly Act Revisions adopt rules governing books and records C. Total Return Swaps X. Statutory Basis and Rule Text D. Security-Based Swaps Based on a Single requirements for SBSAs by persons Security or Loan and Single-Name Credit I. Background registered as swap data repositories Default Swaps (‘‘SDRs’’) under the CEA,5 including E. Title VII Instruments Based on Futures On July 21, 2010, President Obama uniform rules that specify the data 2 Contracts signed the Dodd-Frank Act into law. elements that shall be collected and 3 F. Use of Certain Terms and Conditions in Title VII of the Dodd-Frank Act (‘‘Title maintained by each SDR.6 Similarly, Title VII Instruments VII’’) established a comprehensive new G. The Term ‘‘Narrow-Based Security regulatory framework for swaps and 4 In addition, section 719(d)(1)(A) of the Dodd- Index’’ in the Security-Based Swap security-based swaps. The legislation Frank Act requires the Commissions to conduct a Definition was enacted, among other reasons, to joint study, within 15 months of enactment, to 1. Introduction reduce risk, increase transparency, and determine whether stable value contracts, as 2. Applicability of the Statutory Narrow- defined in section 719(d)(2) of the Dodd-Frank Act, Based Security Index Definition and Past promote market integrity within the are encompassed by the swap definition. If the Guidance of the Commissions to Title VII financial system, including by: (i) Commissions determine that stable value contracts Instruments Providing for the registration and are encompassed by the swap definition, section 3. Narrow-Based Security Index Criteria for 719(d)(1)(B) of the Dodd-Frank Act requires the comprehensive regulation of swap Commissions jointly to determine whether an Index Credit Default Swaps dealers, security-based swap dealers, exemption for those contracts from the swap (a) In General major swap participants, and major definition is appropriate and in the public interest. (b) Proposed Rules Regarding the security-based swap participants; (ii) Section 719(d)(1)(B) also requires the Commissions Definitions of ‘‘Issuers of Securities in a imposing clearing and trade execution to issue regulations implementing the Narrow-Based Security Index’’ and determinations made under the required study. ‘‘Narrow-Based Security Index’’ for Index requirements on swaps and security- Until the effective date of such regulations, the Credit Default Swaps based swaps, subject to certain requirements under Title VII do not apply to stable (i) Number and Concentration Percentages exceptions; (iii) creating rigorous value contracts, and stable value contracts in effect prior to the effective date of such regulations are not of Reference Entities or Securities recordkeeping and real-time reporting considered swaps. See section 719(d) of the Dodd- (ii) Public Information Availability regimes; and (iv) enhancing the Frank Act. The Commissions currently are Regarding Reference Entities and rulemaking and enforcement authorities conducting the required joint study and will Securities of the Commissions with respect to, consider whether to propose any implementing (iii) Treatment of Indexes Including among others, all registered entities and regulations (including, if appropriate, regulations Reference Entities That Are Issuers of determining that stable value contracts: (i) are not Exempted Securities or Including encompassed within the swap definition; or (ii) are Exempted Securities 2 See Dodd-Frank Wall Street Reform and encompassed within the definition but are exempt from the swap definition) at the conclusion of that 4. Security Indexes Consumer Protection Act, Public Law 111–203, 124 Stat. 1376 (2010). The text of the Dodd-Frank Act study. 5. Evaluation of Title VII Instruments on is available at http://www.cftc.gov/LawRegulation/ 5 7 U.S.C. 1 et seq. Security Indexes That Move From Broad- OTCDERIVATIVES/index.htm. 6 The CFTC has issued proposed rules regarding Based to Narrow-Based or Narrow-Based 3 Pursuant to section 701 of the Dodd-Frank Act, SDRs and, separately, swap data recordkeeping and to Broad-Based Title VII may be cited as the ‘‘Wall Street reporting. See Regulations Establishing and (a) In General Transparency and Accountability Act of 2010.’’ Continued

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section 712(d)(2)(C) of the Dodd-Frank addition, the SEC is given antifraud addressing the Product Definitions and/ Act requires the Commissions, in authority over, and access to or mixed swaps in response to the consultation with the Board, to jointly information from, certain CFTC- ANPR, as well as comments in response adopt rules governing books and records regulated entities regarding SBSAs, to the Commissions’ informal for SBSAs, including daily trading which are a type of swap related to solicitations,14 from a wide range of records, for swap dealers, major swap securities over which the CFTC is given commenters. participants, security-based swap regulatory authority.11 The Commissions have reviewed the dealers, and security-based swap To assist the Commissions in further comments received, and the staffs of the participants.7 defining the Product Definitions (as well Commissions have met with many Under the comprehensive framework as certain other definitions) and in market participants and other interested for regulating swaps and security-based prescribing regulations regarding mixed parties to discuss the definitions.15 swaps established in Title VII, the CFTC swaps as may be necessary to carry out Moreover, the Commissions’ staffs have is given regulatory authority over the purposes of Title VII, the consulted extensively with each other as swaps,8 the SEC is given regulatory Commissions published an advance required by sections 712(a)(1) and (2) of authority over security-based swaps,9 notice of proposed rulemaking (‘‘ANPR’’) the Dodd-Frank Act and have consulted and the Commissions shall jointly in the Federal Register on August 20, with staff of the Board as required by prescribe such regulations regarding 2010.12 The comment period for the section 712(d) of the Dodd-Frank Act. mixed swaps as may be necessary to ANPR closed on September 20, 2010.13 Based on this review and carry out the purposes of Title VII.10 In The Commissions received comments consultation, the Commissions are proposing interpretive guidance, and in Governing the Duties of Swap Dealers and Major 11 Section 761(a) of the Dodd-Frank Act defines some instances also proposing rules, Swap Participants, 75 FR 71397, Nov. 23, 2010; the term ‘‘security-based swap agreement’’ by regarding, among other things: (i) The Swap Data Recordkeeping and Reporting adding new section 3(a)(78) to the Exchange Act, 15 regulatory treatment of insurance Requirements, 75 FR 76573, Dec. 8, 2010. The SEC U.S.C. 78c(a)(78). The CEA includes the definition has also issued proposed rules regarding security- of ‘‘security-based swap agreement’’ in subparagraph products; (ii) the exclusion of forward based swap data repositories (‘‘SBSDRs’’), including (A)(v) of the swap definition in CEA section 1a(47), contracts from the swap and security- rules specifying data collection and maintenance 7 U.S.C. 1a(47). The only difference between these standards for SBSDRs, as well as rules regarding based swap definitions; (iii) the definitions is that the definition of SBSA in the regulatory treatment of certain security-based swap data recordkeeping and Exchange Act specifically excludes security-based reporting. See Security-Based Swap Data Repository swaps (see section 3(a)(78)(B) of the Exchange Act, consumer and commercial contracts; Registration, Duties, and Core Principles, 75 FR 15 U.S.C. 78c(a)(78)(B)), whereas the definition of (iv) the regulatory treatment of certain 77306, Dec. 10, 2010; Regulation SBSR—Reporting SBSA in the CEA does not contain a similar foreign-exchange related and other and Dissemination of Security-Based Swap exclusion. Instead, under the CEA, the exclusion for Information, 75 FR 75208, Dec. 2, 2010. instruments; (v) swaps and security- security-based swaps is placed in the general 7 The CFTC has issued proposed rules regarding exclusions from the swap definition (see CEA based swaps involving interest rates (or recordkeeping requirements for swap dealers and section 1a(47)(B)(x), 7 U.S.C. 1a(47)(B)(x)). other rates) and yields; (vi) total return major swap participants. See Reporting, Although the statutes are slightly different swaps (‘‘TRS’’); (vii) the application of Recordkeeping, and Daily Trading Records structurally, the Commissions interpret them to Requirements for Swap Dealers and Major Swap the definition of ‘‘narrow-based security have consistent meaning that the category of Participants, 75 FR 76666, Dec. 9, 2010. security-based swap agreements excludes security- index’’ in distinguishing between certain 8 Section 721(a) of the Dodd-Frank Act defines based swaps. swaps and security-based swaps, the term ‘‘swap’’ by adding section 1a(47) to the 12 See Definitions Contained in Title VII of Dodd- CEA, 7 U.S.C. 1a(47). This new swap definition also including credit default swaps (‘‘CDS’’) is cross-referenced in new section 3(a)(69) of the Frank Wall Street Reform and Consumer Protection and index CDS; and viii) the Exchange Act, 15 U.S.C. 78c(a)(69). Citations to Act, 75 FR 51429, Aug. 20, 2010. The ANPR also solicited comment regarding the definitions of the specification of certain swaps and provisions of the CEA and the Exchange Act, 15 security-based swaps that are, and are U.S.C. 78a et seq., in this release refer to the terms ‘‘swap dealer,’’ ‘‘security-based swap dealer,’’ numbering of those provisions after the effective ‘‘major swap participant,’’ ‘‘major security-based not, mixed swaps. In addition, the date of Title VII, except as indicated. swap participant,’’ and ‘‘eligible contract Commissions are proposing rules: (i) ’’ 9 Section 761(a) of the Dodd-Frank Act defines participant. These definitions are the subject of a separate joint proposed rulemaking by the establishing books and records the term ‘‘security-based swap’’ by adding new requirements applicable to SBSAs; (ii) section 3(a)(68) to the Exchange Act, 15 U.S.C. Commissions. See Further Definition of ‘‘Swap 78c(a)(68). This new security-based swap definition Dealer,’’ ‘‘Security-Based Swap Dealer,’’ ‘‘Major providing a mechanism for requesting also is cross-referenced in new CEA section 1a(42), Swap Participant,’’ ‘‘Major Security-Based Swap the Commissions to interpret whether a 7 U.S.C. 1a(42). The Dodd-Frank Act also explicitly Participant’’ and ‘‘Eligible Contract Participant,’’ 75 particular type of agreement, contract, includes security-based swaps in the definition of FR 80174, Dec. 21, 2010 (‘‘Entity Definitions’’). The security under the Exchange Act and the Securities Commissions also provided the public with the or transaction (or class of agreements, Act of 1933 (‘‘Securities Act’’), 15 U.S.C. 77a et seq. ability to present their views more generally on contracts, or transactions) is a swap, 10 Section 721(a) of the Dodd-Frank Act describes implementation of the Dodd-Frank Act through security-based swap, or both (i.e., a the category of ‘‘mixed swap’’ by adding new section their Web sites, dedicated electronic mailboxes, and meetings with interested parties. See Public mixed swap); and (iii) providing a 1a(47)(D) to the CEA, 7 U.S.C. 1a(47)(D). Section mechanism for evaluating the 761(a) of the Dodd-Frank Act also includes the Comments on SEC Regulatory Initiatives Under the category of ‘‘mixed swap’’ by adding new section Dodd-Frank Act/Meetings with SEC Officials applicability of certain regulatory 3(a)(68)(D) to the Exchange Act, 15 U.S.C. located at http://www.sec.gov/spotlight/regreform requirements to particular mixed swaps. 78c(68)(D). A mixed swap is defined as a subset of comments.shtml; Public Submissions, located at Finally, the CFTC is proposing rules to security-based swaps that also are based on the http://comments.cftc.gov/PublicComments/ value of 1 or more interest or other rates, currencies, ReleasesWithComments.aspx; External Meetings, 14 commodities, instruments of indebtedness, indices, located at http://www.cftc.gov/LawRegulation/ See supra note 12. quantitative measures, other financial or economic DoddFrankAct/ExternalMeetings/index.htm. 15 Information about meetings that CFTC staff interest or property of any kind (other than a single 13 Copies of all comments received by the SEC on have had with outside organizations regarding the security or a narrow-based security index), or the the ANPR are available on the SEC’s Internet Web implementation of the Dodd-Frank Act is available occurrence, non-occurrence, or the extent of the site, located at http://www.sec.gov/comments/s7-16- at http://www.cftc.gov/LawRegulation/ occurrence of an event or contingency associated 10/s71610.shtml. Comments are also available for DoddFrankAct/ExternalMeetings/index.htm. with a potential financial, economic, or commercial Web site viewing and printing in the SEC’s Public Information about meetings that SEC staff have had consequence (other than the occurrence, non- Reference Room, 100 F Street, NE., Washington, DC with outside organizations regarding the product occurrence, or extent of the occurrence of an event 20549, on official business days between the hours definitions is available at http://www.sec.gov/ relating to a single issuer of a security or the issuers of 10 a.m. and 3 p.m. Copies of all comments comments/s7–16–10/s71610.shtml#meetings. The of securities in a narrow-based security index, received by the CFTC on the ANPR are available on views expressed in the comments in response to the provided that such event directly affects the the CFTC’s Internet Web site, located at http:// ANPR, in response to the Commissions’ informal financial statements, financial condition, or www.cftc.gov/LawRegulation/DoddFrankAct/ solicitations, and at such meetings are collectively financial obligations of the issuer). OTC_2_Definitions.html. referred to as the views of ‘‘commenters.’’

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implement the anti-evasion authority considered swaps or security-based statutory definition of the term ‘‘swap’’ provided in the Dodd-Frank Act. swaps and that nothing in the legislative includes, in part, any agreement, The Commissions believe that the history of the Dodd-Frank Act appears contract, or transaction ‘‘that provides proposed rules and interpretive to suggest that Congress intended such for any purchase, sale, payment, or guidance will further the purposes of agreements, contracts, and transactions delivery (other than a dividend on an Title VII. While the Commissions to be regulated as swaps or security- equity security) that is dependent on the believe that these proposals, if adopted, based swaps under Title VII. The occurrence, nonoccurrence, or the would appropriately effect the intent of Commissions thus believe that it is extent of the occurrence of an event or the Dodd-Frank Act, the Commissions important to clarify the treatment under contingency associated with a potential are very interested in commenters’ the definitions of certain types of financial, economic, or commercial views as to whether those purposes agreements, contracts, and transactions, consequence.’’ 24 The Commissions do have been achieved, and, if not, how to such as insurance products and certain not interpret this clause to mean that improve these proposals. consumer and commercial contracts. products historically treated as In addition, commenters also raised insurance products should be included II. Scope of Definitions of Swap and questions regarding, and the within the swap or security-based swap Security-Based Swap Commissions believe that it is important definition.25 A. Introduction to clarify: (i) The exclusion for forward The Commissions are aware of contracts from the definitions of the nothing in Title VII to suggest that Title VII of the Dodd-Frank Act terms ‘‘swap’’ and ‘‘security-based swap;’’ Congress intended for insurance applies to a wide variety of agreements, and (ii) the status of certain commodity- products to be regulated as swaps or contracts, and transactions classified as related products (including various security-based swaps. Moreover, that swaps or security-based swaps. The foreign exchange products and forward swaps and insurance products are statute lists these agreements, contracts, rate agreements (‘‘FRAs’’)) under the subject to different regulatory regimes is and transactions in the definition of the definitions of the terms ‘‘swap’’ and reflected in section 722(b) of the Dodd- term ‘‘swap.’’ 16 The statutory definition ‘‘security-based swap.’’ Finally, the Frank Act which, in new section 12(h) of the term ‘‘swap’’ also has various 17 Commissions are providing guidance of the CEA, provides that a swap ‘‘shall exclusions, rules of construction, and regarding certain interpretive issues not be considered to be insurance’’ and other provisions for the interpretation of 22 ‘‘ 18 related to the definitions. may not be regulated as an insurance the definition. One of the exclusions contract under the law of any State.’’ 26 to the definition of the term ‘‘swap’’ is B. Proposed Rules and Interpretive 19 Guidance Regarding Certain for security-based swaps. The term Sept. 17, 2010; Letter from Jane L. Cline, President, ‘‘security-based swap,’’ in turn, is Transactions Outside the Scope of the and Therese M. Vaughan, Chief Executive Officer, defined as an agreement, contract, or Definitions of the Terms ‘‘Swap’’ and National Association of Insurance Commissioners, transaction that is a ‘‘swap’’ (without ‘‘Security-Based Swap’’ Sept. 20, 2010; Letter from Joseph W. Brown, Chief Executive Officer, MBIA Inc., Sept. 20, 2010 (‘‘MBIA regard to the exclusion from that 1. Insurance Products Letter’’); Cleary Letter; Letter from White & Case LLP definition for security-based swaps) and (‘‘White & Case Letter’’), Sept. 20, 2010; Letter from that also has certain characteristics A number of commenters expressed Carl B. Wilkerson, Vice President and Chief specified in the statute.20 Thus, the concern that the definitions of the terms Counsel, Securities & Litigation, American Council of Life Insurers, Nov. 12, 2010 (‘‘ACLI Letter’’); statutory definition of the term ‘‘swap’’ ‘‘swap’’ and ‘‘security-based swap’’ potentially could include certain types Letter from Stephen E. Roth, James M. Cain, and W. also determines the scope of Thomas Conner, Sutherland Asbill & Brennan LLP, 23 agreements, contracts, and transactions of insurance products because the for the Committee of Annuity Insurers, Dec. 3, 2010. that could be security-based swaps. 24 CEA section 1a(47)(A)(ii), 7 U.S.C. 1a(47)(A)(ii). The statutory definitions of ‘‘swap’’ 22 Some commenters raised concerns regarding 25 The Commissions also believe it was not the the treatment of inter-affiliate swaps and security- intent of Congress through the swap and security- and ‘‘security-based swap’’ are detailed based swaps. See, e.g., Cleary Letter; Letter from based swap definitions to preclude the provision of and comprehensive, and the Coalition for Derivatives End Users, Sept. 20, 2010 insurance to individual homeowners and small Commissions believe that extensive (‘‘CDEU Letter’’); ISDA Letter; Letter from Richard A. businesses that purchase property and casualty ‘‘further definition’’ of the terms by rule Miller, Vice President and Corporate Counsel, insurance. See CEA section 2(e), 7 U.S.C. 2(e) and Prudential Financial Inc., Sept. 17, 2010; Letter section 6(l) of the Exchange Act, 15 U.S.C. 78f(l) is not necessary. Nevertheless, several from Richard M. Whiting, The Financial Services (prohibiting individuals and small businesses that commenters have stated,21 and the Roundtable, Sept. 20, 2010. A few commenters do not meet specified financial thresholds or other Commissions agree, that the definitions suggested that the Commissions should further conditions from entering into swaps or security- define the term ‘‘swap’’ or ‘‘security-based swap’’ to based swaps other than on or subject to the rules could be read to include certain types of exclude inter-affiliate transactions. See Cleary of regulated futures and securities exchanges). agreements, contracts, and transactions Letter; CDEU Letter. The Commissions are 26 7 U.S.C. 16(h). Moreover, other provisions of that previously have not been considering whether inter-affiliate swaps or the Dodd-Frank Act address the status of insurance security-based swaps should be treated differently more directly, and more extensively, than Title VII. from other swaps or security-based swaps in the 16 See CEA section 1a(47)(A), 7 U.S.C. 1a(47)(A). For example, Title V of the Dodd-Frank Act requires context of the Commissions’ other Title VII This swap definition is also cross-referenced in new the newly established Federal Insurance Office to rulemakings. section 3(a)(69) of the Exchange Act, 15 U.S.C. conduct a study and submit a report to Congress, 23 78c(a)(69). See, e.g., Letter from Ernest C. Goodrich, Jr., within 18 months of enactment of the Dodd-Frank Managing Director—Legal Department, and Marcelo Act, on the regulation of insurance, including the 17 See CEA section 1a(47)(B), 7 U.S.C. 1a(47)(B), Riffaud, Managing Director—Legal Department, consideration of Federal insurance regulation. clauses (i)–(x). Deutsche Bank AG, Sept. 20, 2010 (‘‘Deutsche Bank Notably, the Federal Insurance Office’s authority 18 See CEA sections 1a(47)(C)–(F), 7 U.S.C. Letter’’); Letter from Sean W. McCarthy, Chairman, under Title V extends primarily to monitoring and 1a(47)(C)–(F). Association of Financial Guaranty Insurers, Sept. information gathering; its ability to promulgate 19 See CEA section 1a(47)(B)(x), 7 U.S.C. 20, 2010 (‘‘AFGI Letter’’); Letter from Robert J. Duke, Federal insurance regulation that preempts state 1a(47)(B)(x). The Surety & Fidelity Association of America, Sept. insurance regulation is significantly restricted. See 20 See section 3(a)(68) of the Exchange Act, 15 20, 2010 (‘‘SFAA Letter’’); Letter from J. Stephen section 502 of the Dodd-Frank Act (codified in U.S.C. 78c(a)(68). Zielezienski, Senior Vice President & General various sections of 31 U.S.C.). Title X of the Dodd- 21 See, e.g., Letter from Edward J. Rosen, Cleary Counsel, American Insurance Association, Sept. 20, Frank Act also specifically excludes the business of Gottlieb Steen & Hamilton LLP, Sept. 21, 2010 2010; Letter from Franklin W. Nutter, President, insurance from regulation by the Bureau of (‘‘Cleary Letter’’); Letter from Robert Pickel, Reinsurance Association of America, Sept. 20, 2010 Consumer Financial Protection. See section Executive Vice President, International Swaps and (‘‘RAA Letter’’); Letter from James M. Olsen, Senior 1027(m) of the Dodd-Frank Act, 12 U.S.C. 5517(m) Derivatives Association, Inc., Sept. 20, 2010 (‘‘ISDA Director Accounting and Investment Policy, (‘‘The [Bureau of Consumer Financial Protection] Letter’’). Property Casualty Insurers Association of America, Continued

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Accordingly, the Commissions believe indemnification therefor be limited to security-based swap: (i) The agreement, that state or Federally regulated the value of the insurable interest; contract, or transaction would have to insurance products that are provided by • Is not traded, separately from the meet the criteria in the first subpart of state or Federally regulated insurance insured interest, on an organized market the proposed rules and (ii) the person or companies 27 that otherwise could fall or over-the-counter; and entity providing the agreement, within the definitions should not be • With respect to financial guaranty contract, or transaction would have to considered swaps or security-based insurance only, in the event of payment meet the criteria in the second subpart swaps so long as they satisfy the default or insolvency of the obligor, any of the proposed rules.31 The fact that an proposed rules or comport with the acceleration of payments under the agreement, contract, or transaction related proposed interpretive policy is at the sole discretion of the qualifies as an insurance product does guidance.28 At the same time, however, insurer. not exclude it from the swap or security- the Commissions are concerned that In addition, the second subpart of the based swap definitions if it is not agreements, contracts, or transactions proposed rules, in paragraph (ii) of provided by a qualifying person or that are swaps or security-based swaps proposed rule 1.3(xxx)(4) under the CEA entity, nor does the fact that a product might be characterized as insurance and paragraph (b) of proposed rule is regulated by an insurance regulator products to evade the regulatory regime 3a69–1 under the Exchange Act, would exclude it from the swap or security- under Title VII of the Dodd-Frank Act. require that, in order to be excluded based swap definitions if the agreement, Accordingly, the Commissions are from the swap and security-based swap contract, or transaction does not satisfy proposing rules and interpretive definitions as an insurance product, the the criteria for insurance set forth in the guidance that would clarify that agreement, contract, or transaction must proposed rules.32 agreements, contracts, or transactions be provided: In addition, the Commissions are • meeting certain requirements would be By a company that is organized as proposing interpretive guidance to considered insurance and not swaps or an insurance company whose primary clarify that, independent of paragraph security-based swaps. and predominant business activity is the (i) of proposed rule 1.3(xxx)(4) under The proposed rules contain two writing of insurance or the reinsuring of the CEA and paragraph (a) of proposed subparts; the first subpart addresses the risks underwritten by insurance rule 3a69–1 under the Exchange Act, agreement, contract, or transaction and companies and that is subject to certain insurance products do not fall the second subpart addresses the entity supervision by the insurance within the swap or security-based swap providing that agreement, contract, or commissioner (or similar official or definitions so long as they are provided transaction. More specifically, with agency) of any state 29 or by the United in accordance with paragraph (ii) of respect to the former, paragraph (i) of States or an agency or instrumentality proposed rule 1.3(xxx)(4) under the CEA proposed rule 1.3(xxx)(4) under the CEA thereof, and such agreement, contract, and paragraph (b) of proposed rule and paragraph (a) of proposed rule or transaction is regulated as insurance 3a69–1 under the Exchange Act. 3a69–1 under the Exchange Act would under the laws of such state or the clarify, as discussed in more detail United States; (a) Types of Insurance Products 33 below, that the terms ‘‘swap’’ and • By the United States or any of its Paragraph (i) of proposed rule ‘‘security-based swap’’ would not agencies or instrumentalities, or 1.3(xxx)(4) under the CEA and include an agreement, contract, or pursuant to a statutorily authorized paragraph (a) of proposed rule 3a69–1 transaction that, by its terms or by law, program thereof; or under the Exchange Act would set forth as a condition of performance: • In the case of reinsurance only, by four criteria for an agreement, contract, • Requires the beneficiary of the a person located outside the United or transaction to be considered agreement, contract, or transaction to States to an insurance company that is insurance. First, the proposed rules have an insurable interest that is the eligible under the proposed rules, would require that the beneficiary have subject of the agreement, contract, or provided that: (i) such person is not an ‘‘insurable interest’’ underlying the transaction and thereby carry the risk of prohibited by any law of any state or of loss with respect to that interest the United States from offering such 31 The Commissions note that certain variable life continuously throughout the duration of agreement, contract, or transaction to insurance and annuity products are securities and the agreement, contract, or transaction; such an insurance company; (ii) the would not be swaps or security-based swaps • Requires that loss to occur and to be regardless of whether they met the requirements product to be reinsured meets the under the proposed rules. See CEA section proved, and that any payment or requirements under the proposed rules 1a(47)(B)(v), 7 U.S.C. 1a(47)(B)(v) (excluding from to be an insurance product; and (iii) the the definition of ‘‘swap’’ any ‘‘agreement, contract, may not define as a financial product or service, by total amount reimbursable by all or transaction providing for the purchase or sale of regulation or otherwise, engaging in the business of 1 or more securities on a fixed basis that is subject insurance.’’); section 1027(f) of the Dodd-Frank Act, reinsurers for such insurance product to—(I) the [Securities Act]; and (II) the [Exchange 12 U.S.C. 5517(f) (excluding persons regulated by cannot exceed the claims or losses paid Act]’’). See also SEC v. United Benefit Life Ins. Co., a state insurance regulator, except to the extent they by the cedant.30 387 U.S. 202 (1967) (holding that a ‘‘flexible fund’’ are engaged in the offering or provision of consumer In order for an agreement, contract, or annuity contract was not entitled to exemption financial products or services or otherwise subject transaction to qualify as an insurance under section 3(a)(8) of the Securities Act, 15 U.S.C. to certain consumer laws as set forth in Title X of 77c(a)(8), for insurance and annuities); SEC v. the Dodd-Frank Act). product that would not be a swap or Variable Annuity Life Ins. Co., 359 U.S. 65 (1959) 27 As discussed above, the establishment of the (holding that a variable annuity was not entitled to Federal Insurance Office under Title V of the Dodd- 29 The term ‘‘State’’ is defined in section 3(a)(16) exemption under section 3(a)(8) of the Securities Frank Act suggests that Federal insurance law could of the Exchange Act to mean ‘‘any State of the Act, 15 U.S.C. 77c(a)(8), for insurance and be established in the future. The Commissions United States, the District of Columbia, Puerto Rico, annuities). believe that the proposed rules should, therefore, the Virgin Islands, or any other possession of the 32 The Commissions note that Title VII provides include a specific reference to Federal insurance United States.’’ 15 U.S.C. 78c(a)(16). The CFTC is flexibility to address the facts and circumstances of law. proposing to incorporate this definition into new products that may be marketed or sold as 28 To the extent an insurance product does not proposed rule 1.3(xxx)(4) for purposes of ensuring insurance, for the purpose of determining whether fall within the language of the swap definition by consistency between the CFTC and SEC rules they satisfy the requirements of the proposed rules, its terms, it would not need to satisfy the further defining the term ‘‘swap.’’ through joint interpretations pursuant to section requirements under the proposed rules in order to 30 The ‘‘cedant’’ is the insurer writing the risk 712(d)(4) of the Dodd-Frank Act. avoid being considered a swap or security-based being ceded or transferred to such person located 33 See supra note 23, regarding comments swap. outside the United States. received addressing this criterion.

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agreement, contract, or transaction at Third, the proposed rules would as CDS, they have certain key every point in time during the term of require that the insurance product not characteristics that distinguish them the agreement, contract, or transaction be traded, separately from the insured from swaps and security-based swaps.40 for that agreement, contract, or interest, on an organized market or over- For example, under a financial transaction to qualify as insurance. The the-counter. With limited exceptions,37 guarantee policy, the insurer typically is requirement that the beneficiary be at insurance products traditionally have required to make timely payment of any risk of loss (which could be an adverse been neither entered into on or subject shortfalls in the payment of scheduled financial, economic, or commercial to the rules of an organized exchange interest to the holders of the underlying consequence) with respect to the nor traded in secondary market guaranteed obligation. Also, for interest that is the subject of the transactions (i.e., they are not traded on particular bonds that are covered by a agreement, contract, or transaction at all an organized market or over-the- financial guarantee policy, the times throughout the term of the counter). Whereas swaps and security- indenture, related documentation, and/ agreement, contract, or transaction based swaps also generally have not or the financial guarantee policy will would ensure that an insurance contract been tradable at-will in secondary provide that a default in payment of beneficiary has a stake in the interest on market transactions (i.e., on an principal or interest on the underlying which the agreement, contract, or organized market or over-the-counter) bond will not result in acceleration of transaction is written.34 Similarly, the without counterparty consent, the the obligation of the insurer to make provision of the proposed rules that Commissions understand that swaps payment of the full amount of principal would require the beneficiary to have and security-based swaps are routinely on the underlying guaranteed obligation the insurable interest continuously novated or assigned to third parties, unless the insurer, in its sole discretion, during the term of the agreement, usually pursuant to industry standard 38 opts to make payment of principal prior contract, or transaction is designed to terms and documents. For the to the final scheduled maturity date of ensure that payment on the insurance foregoing reasons, the Commissions the underlying guaranteed obligation. believe that lack of trading separately product is inextricably connected to Conversely, under a CDS, a protection from the insured interest is a feature of both the beneficiary and the interest on seller frequently is required to make insurance that is useful in which the insurance product is written. payment of the relevant settlement distinguishing insurance from swaps In contrast to an insurance product, a amount to the protection buyer upon CDS (which may be a swap or a and security-based swaps. Fourth, the proposed rules would demand by the protection buyer after security-based swap) does not require any credit event involving the issuer.41 the purchaser of protection to hold any address financial guarantee policies, underlying obligation issued by the also known as bond insurance or bond The Commissions do not believe that 39 reference entity on which the CDS is wraps. Although such products can be financial guarantee policies, in general, written.35 economically similar to products such should be regulated as swaps or Second, the requirement that an security-based swaps. However, because actual loss occur and be proved under while the car that is the subject of an automobile of the close economic similarity of insurance policy is being repaired, the financial guarantee insurance policies the proposed rules similarly would Commissions would consider such items as ensure that the beneficiary has a stake constituting part of the value of the insurable guaranteeing payment on debt securities in the insurable interest that is the interest. to CDS, the Commissions also are subject of the agreement, contract, or 37 See, e.g., ‘‘Life Settlements Task Force, Staff proposing that, in addition to the Report to the United States Securities and Exchange criteria noted above with respect to transaction. If the beneficiary can Commission’’ (‘‘In an effort to help make the bidding demonstrate actual loss, that loss would process more efficient and to facilitate trading of insurance generally, financial guarantee ‘‘trigger’’ performance by the insurer on policies after the initial settlement occurs, some policies also would have to satisfy the the agreement, contract, or transaction intermediaries have considered or instituted a requirement that they not permit the trading platform for life settlements.’’), available at beneficiary of the policy to accelerate such that, by making payment, the http://www.sec.gov/news/studies/2010/ insurer is indemnifying the beneficiary lifesettlements-report.pdf (July 22, 2010). the payment of any principal due on the for such loss. In addition, limiting any 38 See, e.g., Int’l Swaps and Derivatives Ass’n, debt securities. This requirement would payment or indemnification to the value ‘‘2005 Novation Protocol,’’ available at http:// further distinguish financial guarantee www.isda.org/2005novationprot/docs/ policies from CDS because, as discussed of the insurable interest aids in NovationProtocol.pdf (2005); Int’l Swaps and distinguishing swaps and security-based Derivatives Ass’n, ‘‘ISDA Novation Protocol II,’’ above, the latter generally requires swaps (where there is no such limit) available at http://www.isda.org/isdanovationprotII/ payment of the relevant settlement from insurance.36 docs/NPII.pdf (2005); Int’l Swaps and Derivatives amount on the CDS after demand by the Ass’n, 2003 Definitions, supra note 35, Exhibits E protection buyer. (Novation Agreement) and F (Novation 34 Requiring that a beneficiary of an insurance Confirmation). policy have a stake in the interest traditionally has 39 Several commenters expressed concern that the 40 See, e.g., AFGI Letter (explaining the been justified on public policy grounds. For swap and security-based swap definitions could differences between financial guaranty policies and example, a beneficiary that does not have a property encompass financial guarantee policies. See, e.g., CDS); Letter from James M. Michener, General right in a building might have an incentive to profit AFGI Letter; Letter from James M. Michener, Counsel, Assured Guaranty, Sept. 13, 2010 (noting from arson. General Counsel, Assured Guaranty, Dec. 14, 2010 that the Financial Accounting Standards Board has 35 Standard CDS documentation stipulates that (‘‘Assured Guaranty Letter’’); MBIA Letter; Letter issued separate guidance on accounting for the incurrence or demonstration of a loss may not from the Committee on Futures and Derivatives financial guaranty insurance and CDS); Deutsche be made a condition to the payment on the CDS or Regulation of the New York City Bar Association, Bank Letter (noting that financial guaranty policies the performance of any obligation pursuant to the Sept. 20, 2010. Financial guarantee policies are require the incurrence of loss for payment, whereas CDS. See, e.g., Int’l Swaps and Derivatives Ass’n, used by entities such as municipalities to provide CDS do not). ‘‘2003 ISDA Credit Derivatives Definitions,’’ art. greater assurances to potential purchasers of their 41 While a CDS requires payment in full on the 9.1(b)(i) (2003) (‘‘2003 Definitions) (‘‘[T]he parties bonds and thus reduce their interest costs. See occurrence of a credit event, the Commissions will be obligated to perform * * * irrespective of ‘‘Report by the United States Securities and recognize that there are other financial instruments, the existence or amount of the parties’ credit Exchange Commission on the Financial Guarantee such as corporate guarantees of commercial loans exposure to a Reference Entity, and Buyer need not Market: The Use of the Exemption in section 3(a)(2) and letters of credit supporting payments on loans suffer any loss nor provide evidence of any loss as of the Securities Act of 1933 for Securities or debt securities, that allow for acceleration of a result of the occurrence of a Credit Event.’’). Guaranteed by Banks and the Use of Insurance payment obligations without such guarantees or 36 To the extent an insurance product provides for Policies to Guarantee Debt Securities’’ (Aug. 28, letters of credit being swaps or security-based such items as, for example, a rental car for use 1987). swaps.

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The Commissions believe that Although the proposed criteria should agency) of any state 47 or by the United requiring all of the criteria in paragraph appropriately identify agreements, States or an agency or instrumentality (i) of proposed rule 1.3(xxx)(4) under contracts, and transactions that should thereof, and such agreement, contract, the CEA and paragraph (a) of proposed be considered to be insurance, the or transaction is regulated as insurance rule 3a69–1 under the Exchange Act Commissions also are proposing under the laws of such state or of the would help limit the application of the interpretive guidance that certain United States.48 proposed rules to products enumerated types of insurance products The requirement that the agreement, appropriately regulated as insurance are outside the scope of the statutory contract, or transaction be provided by and provide that products appropriately definitions of swap and security-based a state or Federally regulated insurance subject to the regulatory regime under swap under the Dodd-Frank Act. These company would help ensure that Title VII of the Dodd-Frank Act are products are surety bonds, life entities that are not regulated under regulated as swaps or security-based insurance, health insurance, long-term insurance laws are not able to avoid swaps. As a result, the Commissions care insurance, title insurance, property regulation under Title VII of the Dodd- believe that these requirements would and casualty insurance, and annuity Frank Act as well. The Commissions help prevent the proposed rules from products the income on which is subject believe that this requirement also being used to circumvent the to tax treatment under section 72 of the should help prevent regulatory gaps that applicability of the swap and security- Internal Revenue Code.45 The otherwise might exist between based swap regulatory regimes under Commissions believe that these insurance regulation and the regulation Title VII. enumerated insurance products do not of swaps and security-based swaps. However, the Commissions are The proposed rules also would considering an additional criterion as bear the characteristics of the transactions that Congress subjected to require that the agreement, contract, or well. One ANPR commenter suggested transaction provided by the insurance that the proposed rules require that, in the regulatory regime for swaps and security-based swaps under the Dodd- company be regulated as insurance order to qualify as insurance that is under the laws of the state in which it Frank Act.46 As a result, excluding these excluded from the swap definition, is regulated or the United States. The enumerated insurance products should payment on an agreement, contract, or purpose of this proposed requirement is appropriately place traditional transaction not be based on the price, that an agreement, contract, or insurance products outside the scope of rate, or level of a financial instrument, transaction that satisfies the other 42 the swap and security-based swap asset, or interest or any commodity. conditions of the proposed rules must definitions. Such insurance products, Such a requirement could help to be subject to regulatory oversight as an however, would need to be provided in prevent swaps from being executed in insurance product. As a result of the accordance with paragraph (ii) of the guise of insurance in order to avoid requirement that an insurance regulator proposed rule 1.3(xxx)(4) under the CEA the regulatory regime established by must have determined that the and paragraph (b) of proposed rule Title VII. It may ensure that an agreement, contract, or transaction being agreement, contract, or transaction is 3a69–1 under the Exchange Act, as sold is insurance (i.e., because state not treated as insurance if it is used for discussed below, and such insurance insurance regulators are banned from speculative purposes or to influence products would need to be regulated as regulating swaps as insurance),49 the prices in derivatives markets. Yet, insurance. Commissions believe that this condition another ANPR commenter stated that (b) Providers of Insurance Products would help prevent products that are such a requirement for an agreement, swaps or security-based swaps from contract, or transaction to qualify as The second subpart of the proposed being characterized as insurance insurance rather than a swap ‘‘is not rules, in paragraph (ii) of proposed rule products in order to evade the consistent with common variable life 1.3(xxx)(4) under the CEA and regulatory regime under Title VII of the insurance and variable annuity paragraph (b) of proposed rule 3a69–1 Dodd-Frank Act. products, which deliver insurance under the Exchange Act, would require The Commissions also believe that it guarantees that do vary with the that, in addition to meeting the product is appropriate to exclude insurance that 43 performance of specified assets.’’ requirements discussed above (or being is issued by the United States or any of The Commissions request comment subject to the interpretive guidance its agencies or instrumentalities, or on whether, in order for an agreement, regarding enumerated insurance pursuant to a statutorily authorized contract, or transaction to be considered products provided above) the program thereof, from regulation as insurance pursuant to paragraph (i) of agreement, contract, or transaction be swaps or security-based swaps. Such proposed rule 1.3(xxx)(4) under the CEA provided by a person or entity that and paragraph (a) of proposed rule meets certain criteria. Generally, the 47 See supra note 29, regarding the definition of 3a69–1 under the Exchange Act, the product would have to be provided by ‘‘State’’ contained in the proposed rules. Commissions should require that 48 This paragraph of the proposed rules is a company that is organized as an payment not be based on the price, rate, substantially similar to the definition of an insurance company whose primary and or level of a financial instrument, asset, insurance company under the Federal securities predominant business activity is the laws. See section 2(a)(13) of the Securities Act, 15 or interest or any commodity. If so, the writing of insurance or the reinsuring of U.S.C. 77b(a)(13); section 2(a)(17) of the Investment Commissions also request comment on Company Act of 1940, 15 U.S.C. 80a–2(a)(17). These risks underwritten by companies whose whether variable annuity contracts definitions also include reinsurance companies. In insurance business is subject to (where the income is subject to tax order to ensure regulatory consistency, the supervision by the insurance Commissions believe that it is appropriate to treatment under section 72 of the commissioner (or similar official or include substantially the same definition of an Internal Revenue Code) and variable insurance company as currently exists elsewhere in universal life insurance should be the Federal securities laws, but the Commissions excepted from such a requirement.44 45 Id. are requesting comment regarding the role played 46 The list of enumerated insurance products is by a receiver or similar official or any liquidating generally consistent with the provisions of section agent for such insurance company, in its capacity 42 See Cleary Letter. 302(c)(2) of the Gramm-Leach-Bliley Act (‘‘GLBA’’), as such, rather than proposing this provision of the 43 See ACLI Letter. 15 U.S.C. 6712(c)(2), which addresses insurance insurance company definition. 44 26 U.S.C. 72. See also supra note 31. underwriting in national banks. 49 See section 722(b) of the Dodd-Frank Act.

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insurance would include, for example, swaps related to municipal debt.51 The 4. Is the proposed requirement that Federal insurance of savings in banks, CFTC believes that an insurance ‘‘wrap’’ the beneficiary of an agreement, savings associations, and credit unions; of a swap may not be sufficiently contract, or transaction have an catastrophic crop insurance; flood different from the underlying swap to insurable interest that is the subject of insurance; Federal insurance of certain suggest that Congress intended the the agreement, contract, or transaction, pension obligations; and terrorism risk former to fall outside the definition of and thereby carry the risk of loss with insurance. Accordingly, the proposed the term ‘‘swap’’ in Title VII. respect to that interest continuously rules would provide that products The SEC, however, believes that, throughout the duration of the meeting the criteria discussed above where an agreement, contract, or agreement, contract, or transaction in that are required for an agreement, transaction is a security-based swap, the order for the agreement, contract, or contract, or transaction to qualify as insurance of that security-based swap transaction not to fall within the swap insurance are excluded from the swap should not be regulated pursuant to or security-based swap definition, an and security-based swap definitions if Title VII, provided that the insurance effective criterion in determining they are provided by the Federal meets the proposed requirements whether a product is insurance? Why or government or pursuant to a statutorily discussed above.52 why not? authorized program thereof. The Commissions request comment 5. Is the proposed requirement that Finally, the Commissions believe that on this issue generally, and also on the loss occur and be proved, and that any where an agreement, contract, or particular questions set forth in the payment or indemnification therefor be transaction qualifies as insurance Request for Comment section below. limited to the value of the insurable excluded from the swap and security- The Commissions also are considering interest, in order for an agreement, based swap definitions, the lawful whether the issuer of such insurance (or contract, or transaction not to fall within reinsurance of that agreement, contract, guarantee) in respect of swaps or the swap or security-based swap or transaction similarly should be security-based swaps entered into by an definition, an effective criterion in excluded. Such reinsurance would be affiliate or third party could be determining whether a product is excluded from the definitions even if considered to be a major swap insurance? Why or why not? Is the the reinsurer is located abroad and is participant or major security-based requirement that any payment or not state or Federally regulated. swap participant. The Commissions indemnification for proved loss be Accordingly, the proposed rules would have requested comment in the limited to the value of the insurable provide that an agreement, contract, or proposing release for the definitions of interest consistent with conventional transaction of reinsurance would be the terms ‘‘major swap participant’’ and insurance analysis across a broad range excluded from the swap and security- ‘‘major security-based swap of products (including traditional based swap definitions if it is provided participant’’.53 property and casualty products)? Are there particular products where such a by a person located outside the United Request for Comment States, if such person is not prohibited limitation would not be appropriate? If by any law of any state or the United 1. The Commissions request comment so, please provide a detailed description of such products and why such a States from offering such reinsurance to on all aspects of proposed rule limitation would not be appropriate. a state or Federally regulated insurance 1.3(xxx)(4) under the CEA and proposed rule 3a69–1 under the Exchange Act and 6. Is the proposed requirement that company, so long as the product to be the agreement, contract, or transaction is reinsured meets the requirements under the interpretive guidance in this section. 2. Do the proposed criteria for not traded, separately from the insured the proposed rules to be an insurance interest, on an organized market or over- product, and the total amount identifying an agreement, contract, or transaction that would not fall within the-counter, an effective criterion in reimbursable by all reinsurers for such determining whether a product is insurance product cannot exceed the the swap or security-based swap definitions appropriately encompass insurance? Why or why not? claims or losses paid by the cedant. 7. Should the Commissions add, as a The proposed rules would cover only insurance and reinsurance products? If not, what types of insurance or requirement for an insurance agreement, an agreement, contract, or transaction by contract, or transaction to not be an insurance company and would not reinsurance products are not encompassed, and why? characterized as a swap, that the affect the characterization of the asset agreement, contract, or transaction not that is being insured. For example, if an 3. Are there certain products that are commonly known as swaps or security- be based on the price, rate, or level of agreement, contract, or transaction a financial instrument, asset, or interest insures or guarantees the payment on a based swaps, or that more appropriately should be considered swaps or security- or any commodity? Would such a security, the security would remain requirement be an effective criterion in subject to all applicable securities laws. based swaps, that could satisfy the criteria in proposed rule 1.3(xxx)(4) distinguishing insurance from swaps The guarantee agreement, contract, or and security-based swaps? Why or why transaction, however, would not be under the CEA and proposed rule 3a69– 1 under the Exchange Act? not? If so, should the Commissions add regulated as a swap or security-based any carve outs from the requirement, swap if it meets all of the requirements 51 such as, for example, variable universal 50 See Letter from Bruce E. Stern, Chairman, of the proposed rules. Association of Financial Guaranty Insurers life insurance, or annuity contracts One commenter has stated that Government Affairs Committee, Feb. 18, 2011, at where the income is subject to tax monoline insurance companies (also 11–12 (‘‘[F]inancial guarantors have often treatment under section 72 of the called financial guarantors) continue to guaranteed, through the issuance of a financial guaranty insurance policy, the obligations of Internal Revenue Code? Why or why guarantee payments under interest rate unaffiliated parties under swaps with other not? Would such a requirement help unaffiliated parties. These insurance policies preclude the use of the proposed rules 50 The guarantee agreement, contract, or typically cover obligations of municipalities under for products that are swaps or security- transaction, however, could itself be a security that interest rate or basis swaps relating to bonds issued based swaps? Why or why not? Would is subject to the Federal securities laws.’’ See, e.g., by municipalities or in connection with asset section 2(a)(1) of the Securities Act, 15 U.S.C. backed securities.’’). such a requirement preclude the use of 77b(a)(1) (including in the statutory definition of 52 See supra note 32. the proposed rules for products that ‘‘security’’ a guarantee of a security). 53 See proposed Entity Definitions, supra note 12. currently are insurance? If so, what

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insurance products would be precluded aircraft, fidelity, surety, medical 13. Are there circumstances under by such a requirement, and how? How malpractice, ocean marine, inland which a receiver or similar official or are insurance payments determined marine, and boiler and machinery any liquidating agency for a state or today? insurance, should be considered Federally regulated insurance company, 8. Is the proposed requirement that, traditional property and casualty acting in its capacity as such, would be with respect to financial guaranty insurance. Why or why not? If so, please providing insurance rather than insurance, in the event of payment provide an explanation of the product administering an insurance product that default or insolvency of the obligor, any and how it differs from transactions that is provided by an insurance company? acceleration of payments under the should be subject to the swap regulatory Please provide a detailed explanation of policy be at the sole discretion of the regime of the Dodd-Frank Act. The SEC any such circumstances. If there are insurer an effective criterion in also requests comment on whether the such circumstances, should the determining whether a financial products specified in section 302(c)(2) proposed rules include a provision that guaranty policy is insurance that does of the GLBA should be enumerated in an agreement, contract, or transaction not fall within the swap or security- the Commissions’ proposed guidance that satisfies the criteria of insurance based swap definition? Why or why regarding property and casualty but that is provided by a receiver or not? insurance as outside of the scope of the similar official or any liquidating agency 9. Does the interpretive guidance swap and security-based swap for a state or Federally regulated proposed in this section appropriately definitions? Are there other categories of insurance company, in its capacity as identify certain enumerated insurance traditional property and casualty such, qualify as insurance that is products as traditional insurance insurance that should be specifically excluded from the swap and security- products that would not fall within the enumerated? If so, please provide a based swap definition? Why or why swap or security-based swap definition detailed description of such other not? if the provider of the product satisfies categories of property and casualty 14. Do the proposed rules the requirements of the proposed rules? insurance that should be specifically appropriately treat an agreement, Why or why not? Is the interpretive identified, and why. If there are certain contract, or transaction that satisfies the guidance proposed in this section types of property and casualty insurance criteria of insurance but that is provided sufficient? Why or why not? Are there that fall within the swap definition, will by the United States or any of its additional types of traditional insurance that affect the ability of persons, agencies or instrumentalities, or that should be similarly enumerated? If including consumers and businesses, to pursuant to a statutorily authorized so, which ones and why? Could the protect their properties against losses? If program thereof, as insurance that is exclusion of any of the enumerated so, please provide a detailed excluded from the swap and security- insurance products serve to exclude explanation. based swap definition? Why or why products that should be regulated as 11. Are there situations in which an not? Are there other types of swaps or security-based swaps? If so, insurance product may be assigned to government-issued insurance products which ones and why? Should the another party that are not addressed by that are not covered by paragraph (ii) of enumerated insurance products be the criteria in proposed rule 1.3(xxx)(4) proposed rule 1.3(xxx)(4) under the CEA required to be provided in accordance under the CEA and proposed rule 3a69– and paragraph (b) of proposed rule with paragraph (ii) of proposed rule 1 under the Exchange Act? Is additional 3a69–1 under the Exchange Act? Do 1.3(xxx)(4) under the CEA and clarification necessary to address such states or state agencies or paragraph (b) of proposed rule 3a69–1 situations? If so, what clarification? instrumentalities provide insurance under the Exchange Act? Why or why 12. Is the proposed requirement that products? Should the proposed not? If not, please provide a detailed the agreement, contract, or transaction requirement also include a provision explanation of the insurance products be provided by a company that is that the agreement, contract, or that should not be subject to these organized as an insurance company transaction can be provided by any state requirements. Are there insurance whose primary and predominant or any of its agencies or products currently offered that do not business activity is the writing of instrumentalities, or pursuant to a meet these criteria? If so, please provide insurance or the reinsuring of risks statutorily authorized program thereof? details regarding such products and underwritten by insurance companies Why or why not? their providers. and that is subject to supervision by the 15. Do the proposed rules 10. The Commissions are proposing insurance commissioner (or similar appropriately treat reinsurance by a guidance that certain enumerated types official or agency) of any state, as person located outside the United States of insurance products, including defined in section 3(a)(16) of the of a product meeting the requirements property and casualty insurance, are Exchange Act, or by the United States or for insurance under the proposed rules, outside the scope of the statutory an agency or instrumentality thereof, so long as the total amount reimbursable definitions of the terms ‘‘swap’’ and and that the agreement, contract, or by all of the reinsurers for such ‘‘security-based swap’’ under the Dodd- transaction be regulated as insurance insurance product cannot exceed the Frank Act. The Commissions request under the laws of such state or of the claims or losses paid by the cedant, as comment generally as to the proposed United States, an effective criterion in insurance excluded from the swap and guidance regarding property and determining whether an agreement, security-based swap definitions if such casualty insurance. The CFTC also contract, or transaction falls within the person is not prohibited by any law of requests comment on whether the swap or security-based swap definition? any state or of the United States from products specified in section 302(c)(2) Does it sufficiently preclude the use of offering such reinsurance to a state or of the GLBA, which names certain the proposed rules by unregulated Federally regulated insurance company? insurance products, including private entities? Why or why not? Does it Do these provisions of the proposed passenger or commercial automobile, sufficiently prevent evasion of the rules sufficiently prevent evasion of the homeowners, mortgage, commercial requirements of Title VII with respect to requirements of Title VII with respect to multiperil, general liability, professional agreements, contracts, or transactions agreements, contracts, or transactions liability, workers’ compensation, fire that are swaps or security-based swaps? that are swaps or security-based swaps? and allied lines, farm owners multiperil, Why or why not? Why or why not?

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16. Are there additional criteria for products as insurance rather than as commodity for deferred shipment or identifying contracts, agreements, or security-based swaps frustrate or delivery’’.57 Several ANPR commenters transactions that are insurance and not undermine Title VII’s objectives in expressed the view that, with respect to swaps or security-based swaps that the regulating the security-based swap and nonfinancial commodities, the forward Commissions should consider? Please swap markets? Why or why not? Please contract exclusion from the swap provide detailed information and provide a detailed explanation and definition should be interpreted in the empirical data, to the extent possible, empirical data to the extent possible. same manner as the CFTC has supporting any suggested criteria. 20. Should the proposed rules include interpreted the forward contract 17. Should the proposed rules relating a provision similar to section 302(c)(1) exclusion from the term ‘‘future to insurance include a provision related of the GLBA 54 that would provide that delivery’’ and, in particular, that the to whether a product is recognized at any product regulated as insurance CFTC’s ‘‘Brent Interpretation’’ 58 should fair value on an ongoing basis with before July 21, 2010 (the date the Dodd- apply to ‘‘book out’’ transactions for changes in fair value reflected in Frank Act was signed into law) and purposes of the forward exclusion from earnings under U.S. generally accepted provided in accordance with paragraph the swap definition.59 The CFTC accounting principles? If so, what (ii) of proposed rule 1.3(xxx)(4) under believes that clarification of the scope of specific challenges may be encountered the CEA and paragraph (b) of proposed the forward contract exclusion from the in light of the proposed Accounting rule 3a69–1 would be considered swap definition with respect to Standards Update ‘‘Accounting for insurance and not fall within the swap nonfinancial commodities is Financial Instruments and Revisions to definition? Why or why not? Should appropriate.60 the Accounting for Derivative different criteria apply to products Instruments and Hedging Activities,’’ regulated as insurance before July 21, 57 CEA section 1a(27), 7 U.S.C. 1a(27). The CEA issued by the Financial Accounting 2010? Why or why not? If so, please does not define the term ‘‘futures contract.’’ Rather, Standards Board (‘‘FASB’’) on May 26, provide a detailed description of what the CEA refers to a futures contract as a ‘‘contract of sale of a commodity for future delivery.’’ See, e.g., 2010? Is recognizing a product at fair different criteria should apply. CEA section 2(a)(1)(A), 7 U.S.C. 2(a)(1)(A) value on an ongoing basis (with changes 21. The Commissions understand that (providing the CFTC with exclusive jurisdiction in fair value reflected in earnings) swap guarantees may be offered by non- over ‘‘contracts of sale of a commodity for future inconsistent with treating such a insurance companies. Should the delivery’’ (other than security futures) traded or executed on, among other things, a designated product as insurance rather than a swap Commissions provide guidance as to contract market (‘‘DCM’’)); CEA section 4(a), 7 or security-based swap? Why or why whether swap or security-based swap U.S.C. 6(a) (a ‘‘contract for the purchase or sale of not? Please provide examples of specific guarantees (that are not guarantees or a commodity for future delivery’’ other than a products and their correct accounting insurance policies offered by insurance contract made on an exchange located outside the United States must be conducted on or subject to treatment under U.S. generally accepted companies discussed above) should be the rules of, among other things, a DCM). accounting principles. considered swaps or security-based Accordingly, by excluding forward contracts from 18. Where an agreement, contract, or swaps? Why or why not? the CEA’s definition of the term ‘‘future delivery,’’ transaction falls within the swap the CEA provides that a forward contract is not a 2. The Forward Contract Exclusion definition, should insurance of that contract of sale of a commodity for future delivery The definitions of the terms ‘‘swap’’ and, hence, not a futures contract. agreement, contract, or transaction also 58 Statutory Interpretation Concerning Forward be included in the swap definition? and ‘‘security-based swap’’ do not Transactions, 55 FR 39188, Sept. 25, 1990 (‘‘Brent Why or why not? Is the insurance wrap include forward contracts. They exclude Interpretation’’). of a swap sufficiently different ‘‘any sale of a nonfinancial commodity 59 See Letter from Joanne T. Medero, Managing (economically or otherwise) from the or security for deferred shipment or Director, BlackRock, Sept. 20, 2010 (‘‘BlackRock delivery, so long as the transaction is Letter’’), Letter from Matt Schatzman, Senior Vice swap that is insured? Why or why not? President, Energy Marketing, BG Americas and 55 Would the regulation of such swap intended to be physically settled’’. Global LNC, Sept. 20, 2010 (‘‘BG Letter’’); Cleary ‘‘wraps’’ as swaps impose costs on or Commenters have requested guidance Letter; Letter from Edward W. Gallagher, President, otherwise impact the underlying cash from the Commissions regarding the Dairy Risk Management Services, a division of scope of this exclusion. The Dairy Farmers of America, Inc., Sept. 20, 2010 markets (e.g., the ability to issue, and (‘‘DFA Letter’’); Letter from Eric Dennison, Sr. Vice cost of issuing, municipal debt)? Please Commissions believe it is appropriate to President and General Counsel, Stephanie Miller, quantify to the extent possible. Would provide guidance to market participants Assistant General Counsel—Commodities, and Bill treating such ‘‘wraps’’ as insurance regarding the applicability of the Hellinghausen, Director of Regulatory Affairs, EDF exclusion from the definitions of swap Trading North America, LLC, Sept. 20, 2010 (‘‘EDF falling outside the swap definition Letter’’); Richard F. McMahon, Jr., Executive frustrate or undermine Title VII’s and security-based swap for forward Director, Edison Electric Institute, Sept. 20, 2010 objectives in regulating the swap contracts with respect to nonfinancial (‘‘EEI Letter’’); Letter from John M. Damgard, markets in any way? Why or why not? commodities 56 and securities. President, Futures Industry Association, Sept. 20, Please provide empirical data and 2010 (‘‘FIA Letter’’); Letter from Richard Ostrander, (a) Forward Contracts in Nonfinancial Managing Director and Counsel, Morgan Stanley, analysis to the extent possible. Commodities Sept. 20, 2010 (‘‘Morgan Stanley Letter’’); Letter of 19. Where an agreement, contract, or Michael Greenberger, JD, Law School Professor, transaction falls within the security- The wording of the forward contract University of Maryland School of Law, Sept. 20, based swap definition, should the exclusion from the swap definition with 2010 (‘‘University of Maryland Letter’’); R. Michael respect to nonfinancial commodities is Sweeney, Jr., Mark W. Menezes, and David T. insurance of that agreement, contract, or McIndoe, Hunton & Williams, LLP, on behalf of the transaction also be included in the similar, but not identical, to the forward Working Group of Commercial Energy Firms, Sept, security-based swap definition? Why or contract exclusion from the definition of 20, 2010 (‘‘WGCEF Letter’’); Letter from Paul H. why not? Would the regulation of ‘‘future delivery’’ in the CEA, which Stebbins, Chairman and Chief Executive Officer, excludes ‘‘any sale of any cash World Fuel Services Corporation, Sept. 17, 2010 insurance on a security-based swap as a (‘‘World Fuel Letter’’). security-based swap under Title VII 60 As discussed in part II.D.1 below, the impose costs or otherwise impact the 54 15 U.S.C. 6712(c)(1). terminology and documentation used by the parties underlying cash markets (e.g., the ability 55 CEA section 1a(47)(B)(ii), 7 U.S.C. 1a(47)(B)(ii). are not dispositive of whether a particular 56 The discussion in subsections (a) and (b) of this agreement, contract, or transaction is a swap or to issue, and cost of issuing, municipal section applies solely to the exclusion of security-based swap under the CEA or Exchange debt)? Please quantify to the extent nonfinancial commodity forwards from the swap Act. Thus, if an agreement, contract, or transaction possible. Would regulating such definition in the Dodd-Frank Act. Continued

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Forward contracts with respect to contract is a commercial merchandising transactions—in the context of the nonfinancial commodities are transaction, intent to deliver historically forward exclusion from the swap commercial merchandising transactions. has been an element of the CFTC’s definition with respect to nonfinancial The primary purpose of the contract is analysis of whether a particular contract commodities. The issue of book-outs to transfer ownership of the commodity is a forward contract.63 In assessing the first arose in 1990 in the Brent and not to transfer solely its price risk. parties’ expectations or intent regarding Interpretation65 because the parties to The CFTC has noted: delivery, the CFTC consistently has the crude oil contracts in that case could The underlying postulate of the [forward] applied a ‘‘facts and circumstances’’ individually negotiate cancellation exclusion is that the [CEA’s] regulatory test.64 Therefore, the CFTC reads the agreements, or ‘‘book-outs,’’ with other scheme for futures trading simply should not ‘‘intended to be physically settled’’ parties.66 In describing these apply to private commercial merchandising language in the swap definition with transactions, the CFTC stated: transactions which create enforceable respect to nonfinancial commodities to It is noteworthy that while such [book-out] obligations to deliver but in which delivery reflect a directive that intent to deliver agreements may extinguish a party’s delivery is deferred for reasons of commercial a physical commodity be a part of the obligation, they are separate, individually convenience or necessity.61 analysis of whether a given contract is negotiated, new agreements, there is no The CFTC believes that the forward a forward contract or a swap, just as it obligation or arrangement to enter into such contract exclusion in the Dodd-Frank is a part of the CFTC’s analysis of agreements, they are not provided for by the Act with respect to nonfinancial whether a given contract is a forward terms of the contracts as initially entered into, and any party that is in a position in commodities should be read contract or a futures contract. consistently with this established, a distribution chain that provides for the Commenters also requested opportunity to book-out with another party historical understanding that a forward clarification of the treatment of one type or parties in the chain is nevertheless entitled contract is a commercial merchandising of forward contract—‘‘book-out’’ to require delivery of the commodity to be transaction. made through it, as required under the Many commenters discussed the issue consistently with the CFTC’s prior forward contract contracts.67 of whether the requirement in the Dodd- interpretations and precedent, including forwards requiring delivery but including embedded Thus, in the scenario at issue in the Frank Act that a transaction be Brent Interpretation, the contracts ‘‘ ’’ options); EDF Letter (forward exclusion from the intended to be physically settled in definition of swap should be construed in a created a binding obligation to make or order to qualify for the forward consistent manner with the forward exclusion take delivery without providing any exclusion from the swap definition with under the CEA); EEI Letter (forward exclusion from right to offset, cancel, or settle on a respect to nonfinancial commodities swap definition should be interpreted consistently with the forward exclusion from futures); FIA Letter payment-of-differences basis. The reflects a change in the standard for (the Commissions should, through rulemaking or ‘‘parties enter[ed] into such contracts determining whether a transaction is a interpretation, provide that the ‘‘intent’’ standard in with the recognition that they may be 62 forward contract. Because a forward the forward exclusion with respect to swaps will be 68 interpreted the same as the existing forward required to make or take delivery.’’ exclusion with respect to futures); Morgan Stanley On these facts, the Brent with respect to a nonfinancial commodity qualifies Letter (the forward exclusion from the swap Interpretation concluded that the for the forward exclusion from the swap definition, definition should be interpreted consistently with it would not be a swap even if the parties refer to the forward exclusion from futures); University of 65 See Brent Interpretation, supra note 58. The it as a swap or document it using an industry Maryland Letter (forward exclusion from swap CFTC issued the Brent Interpretation in response to standard form agreement that is typically used for definition intended to be consistent with the a Federal court decision that held that certain 15- swaps. Conversely, such an agreement, contract, or forward exclusion from futures); WGCEF Letter day Brent system crude oil contracts were illegal transaction that does not qualify for the forward (physical delivery forwards should be distinguished off-exchange futures contracts. See Transnor exclusion from the swap definition would not be from swaps under standards identical to those used (Bermuda) Ltd. v. BP N. Am. Petroleum, 738 F. excluded even if the parties refer to it as a forward in forwards vs. futures); World Fuel Letter (forward contract. exclusion for swaps should be interpreted in a Supp. 1472 (S.D.N.Y. 1990). The Brent 61 Brent Interpretation, supra note 58, at 39190. manner consistent with the forward exclusion from Interpretation provided clarification that the 15-day The CFTC has reiterated this view in more recent futures). Brent system crude oil contracts were forward contracts that were excluded from the CEA adjudicative orders. See, e.g., In re Grain Land 63 As recently as October 25, 2010, the CFTC definition of ‘‘future delivery,’’ and thus were not Coop., [2003–2004 Transfer Binder] Comm. Fut. L. observed in In re Wright that ‘‘it is well-established futures contracts. See Brent Interpretation, supra Rep. (CCH) ¶ 29,636 (CFTC Nov. 25, 2003); In re that the intent to make or take delivery is the note 58. Competitive Strategies for Agric., Ltd., [2003–2004 critical factor in determining whether a contract 66 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 29,635 qualifies as a forward.’’ In re Wright, CFTC Docket The Brent Interpretation described these ‘‘book- (CFTC Nov. 25, 2003). Courts have expressed this No. 97–02, 2010 WL 4388247 at *3 (CFTC Oct. 25, outs’’ as follows: ‘‘In the course of entering into 15- view as well. See, e.g., Salomon Forex, Inc. v. 2010) (citing In re Stovall, et al., [1977–1980 day contracts for delivery of a cargo during a Tauber, 8 F.3d 966, 971 (4th Cir. 1993) (‘‘[C]ash Transfer Binder] Comm. Fut. L. Rep. (CCH) 20,941 particular month, situations often arise in which forwards are generally individually negotiated sales (CFTC Dec. 6, 1979); Brent Interpretation, supra two counterparties have multiple, offsetting * * * in which actual delivery of the commodity note 58). In Wright, the CFTC noted that ‘‘[i]n positions with each other. These situations arise as is anticipated, but is deferred for reasons of distinguishing futures from forwards, the [CFTC] a result of the effectuation of multiple, independent commercial convenience or necessity.’’); CFTC v. and the courts have assessed the transaction as a commercial transactions. In such circumstances, Int’l Fin. Serv. (N.Y.), 323 F. Supp. 2d 482, 495 whole with a critical eye toward its underlying rather than requiring the effectuation of redundant (S.D.N.Y. 2004). See also CFTC v. Co Petro Mktg. purpose. Such an assessment entails a review of the deliveries and the assumption of the credit, delivery Grp., Inc., 680 F.2d 573, 579–580 (9th Cir. 1982); overall effect of the transaction as well as a and related risks attendant thereto, the parties may, CFTC v. Noble Metals Int’l, Inc., 67 F.3d 766, 772– determination as to what the parties intended.’’ Id. but are not obligated to and may elect not to, 773 (9th Cir. 1995; CFTC v. Am. Metal Exch. Corp., at *3 (quoting Policy Statement Concerning Swap terminate their contracts and forego such deliveries 693 F. Supp. 168, 192 (D.N.J. 1988); CFTC v. Transactions, 54 FR 30694, July 21, 1989 (‘‘Swap and instead negotiate payment-of-differences Morgan, Harris & Scott, Ltd., 484 F. Supp. 669, 675 Policy Statement’’) (citations and internal pursuant to a separate, individually negotiated (S.D.N.Y. 1979) (forward contract exclusion does quotations omitted). cancellation agreement referred to as a ‘book-out.’ not apply to speculative transactions in which 64 In its recent decision in In re Wright, the CFTC Similarly, situations regularly arise when delivery obligations can be extinguished under the applied its facts and circumstances test in an participants find themselves selling and purchasing terms of the contract or avoided for reasons other administrative enforcement action involving hedge- oil more than once in the delivery chain for a than commercial convenience or necessity). to-arrive contracts for corn, and observed that ‘‘[o]ur particular cargo. The participants comprising these 62 See, e.g., BG Letter (forward exclusion for views of the appropriateness of a multi-factor ‘circles’ or ‘loops’ will frequently attempt to swaps should be consistent with the forward analysis remain unchanged.’’ Wright, supra note 63, negotiate separate cancellation agreements among exclusion from futures); BlackRock Letter (the CFTC n.13. The CFTC let stand the administrative law themselves for the same reasons and with the same should interpret ‘‘intended to be physically settled’’ judge’s conclusion that the hedge-to-arrive contracts effect described above.’’ Brent Interpretation, supra consistently with existing CFTC principles, at issue in the case were forward contracts. Id. at note 58, at 39190. including book outs); DFA Letter (forward **5–6. See also Grain Land, supra note 61; 67 Id. at 39192. exclusion for swaps should be interpreted Competitive Strategies for Agric., supra note 61. 68 Id. at 39189.

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contracts were forward contracts, not As noted above, the Brent Exemption extended the Brent futures contracts: Interpretation applies to ‘‘commercial Interpretation regarding the forward Under these circumstances, the [CFTC] is participants in connection with their contract exclusion from the term ‘‘future of the view that transactions of this type business.’’ 71 Market participants that delivery’’ to energy commodities other which are entered into between commercial regularly make or take delivery of the than oil. The CFTC believes that the participants in connection with their referenced commodity (in the case of book-out provisions of the Brent business, which create specific delivery the Brent Interpretation, a tanker full of Interpretation similarly should apply to obligations that impose substantial economic Brent oil) in the ordinary course of their the forward contract exclusion from the risks of a commercial nature to these business meet that standard. Such swap definition for nonfinancial participants, but which may involve, in certain circumstances, string or chain entities qualify for the forward commodities besides oil. Further, the deliveries of the type described * * * are exclusion from both the future delivery CFTC also is proposing interpretive within the scope of the [forward contract] and swap definitions for their forward guidance herein that the Brent exclusion from the [CFTC’s] regulatory transactions under the Brent Interpretation with respect to the jurisdiction.69 Interpretation even if they enter a application of the forward contract Although the CFTC did not expressly subsequent transaction to ‘‘book out’’ the exclusion from the term ‘‘future discuss intent to deliver, the Brent forward contract rather than make or delivery’’ in the context of book-out Interpretation concluded that take delivery. Intent to make or take transactions applies not just to oil, but transactions retained their character as delivery can be inferred from the to all nonfinancial commodities. The commercial merchandising transactions, binding delivery obligation for the CFTC, therefore, is proposing to notwithstanding the practice of referenced commodity in the contract withdraw the Energy Exemption, while terminating commercial parties’ and the fact that the parties to the retaining and extending through this delivery obligations through ‘‘book-outs’’ contract do, in fact, regularly make or interpretive guidance the Brent as described. At any point in the chain, take delivery of the referenced Interpretation regarding book-outs one of the parties could refuse to enter commodity in the contract in the under the forward contract exclusion into a new contract to book-out the ordinary course of their business. with respect to nonfinancial transaction and, instead, insist upon Some commenters to the ANPR commodities.74 requested clarification with regard to delivery pursuant to the parties’ (b) Commodity Options and Commodity obligations under their contract. the application of the CFTC’s 1993 order exempting certain energy contracts from Options Embedded in Forward The CFTC believes that the principles Contracts underlying the Brent Interpretation regulation under the CEA (the ‘‘Energy similarly should apply to the forward Exemption’’) 72 after enactment of the Some commenters responding to the exclusion from the swap definition with Dodd-Frank Act.73 The Energy ANPR requested clarification regarding the status of commodity options under respect to nonfinancial commodities. To 75 summarize, then, the CFTC believes result with respect to commercial forward the swap definition. Questions also contracts.’’). See also 156 Cong. Rec. H5248–49 that: (i) The forward contract exclusion were raised regarding options embedded (June 30, 2010) (introducing into the record a letter in forward contracts, i.e., whether a from the swap definition with respect to authored by Senator Blanche Lincoln, Chairman of nonfinancial commodities should be the U.S. Senate Committee on Agriculture, forward contract with respect to a interpreted in a manner that is Nutrition and Forestry, and Christopher Dodd, nonfinancial commodity that contains Chairman U.S. Senate Committee on Banking, consistent with the CFTC’s historical an embedded option can still qualify for Housing, and Urban Affairs, stating that the CFTC the forward contract exclusion from the ‘‘ interpretation of the forward contract is encouraged to clarify through rulemaking that 76 exclusion from the definition of the the exclusion from the definition of swap for ‘any swap definition. The statutory swap definition term ‘‘future delivery’’; (ii) intent to sale of a nonfinancial commodity or security for deferred shipment or delivery, so long as the explicitly provides that commodity deliver is an essential element of a transaction is intended to be physically settled’ is forward contract excluded from both the intended to be consistent with the forward contract pursuant to CEA section 4(c), 7 U.S.C. 6(c), in exclusion that is currently in the [CEA] and the swap and future delivery definitions, section 502 of the Futures Trading Practices Act of and such intent in both instances CFTC’s established policy and orders on this 1992, Public Law 102–546, 106 Stat. 3590 (1993). subject, including situations where commercial 74 To avoid any uncertainty, the CFTC also notes should be evaluated based on the parties agree to ‘book-out’ their physical delivery that the Dodd-Frank Act supersedes the Swap CFTC’s established multi-factor obligations under a forward contract.’’). Policy Statement. The CFTC is aware that some 71 approach; and (iii) book-out transactions See Brent Interpretation, supra note 58, at commenters have suggested that the Commissions in nonfinancial commodities that meet 39192. should exercise their authority to further define the the requirements specified in the Brent 72 Exemption for Certain Contracts Involving term ‘‘eligible contract participant’’ to encompass Energy Products, 58 FR 21286, Apr. 20, 1993. The the ‘‘line of business’’ provision of the Swap Policy Interpretation, and that are effectuated Energy Exemption generally applies to certain Statement. See Swap Policy Statement, supra note through a subsequent, separately- energy contracts: (i) Entered into by persons 63, at 30696–30697. The Commissions will address negotiated agreement, should qualify for reasonably believed to be within a specified class these comments in their joint final rulemaking with the forward exclusion from the swap of commercial and governmental entities; (ii) that respect to the Entity Definitions. See supra note 12. are bilateral contracts between two parties acting as 75 definition.70 See, e.g., World Fuel Letter (exclusion for principals; (iii) the material economic terms of commercial options set forth in CFTC Regulation which are subject to individual negotiation by the 32.4 should also be an exclusion from the swap 69 Id. at 39192. parties; and (iv) that impose binding obligations on definition). 70 This interpretive guidance is consistent with the parties to make and receive delivery of the 76 See, e.g., Letter from Patrick Kelly, Policy legislative history. See 156 Cong. Rec. H5247 (June underlying commodity, with no right of either party Advisor, API, Sept. 20, 2010 (‘‘API Letter’’), EEI 30, 2010) (colloquy between U.S. House Committee to effect a cash settlement of their obligations Letter; Letter from Daniel S.M. Dolan, VP, Policy on Agriculture Chairman Collin Peterson and without the consent of the other party (except Research & Communications, Electric Power Supply Representative Leonard Boswell during the debate pursuant to a bona fide termination right such as Association, Sept. 20, 2010 (‘‘EPSA Letter’’) on the Conference Report for the Dodd-Frank Act, default). Like the Brent Interpretation, the Energy (physically settled options should be included in in which Chairman Peterson stated: ‘‘Excluding Exemption provides that the parties can enter into the forward exclusion from the swap definition); physical forward contracts, including book-outs, is a subsequent book-out settlement of the obligation DFA Letter; ISDA Letter. One commenter suggested consistent with the CFTC’s longstanding view that in a manner other than by physical delivery of the that the CFTC should apply to each contract with physical forward contracts in which the parties commodity specified in the contract. Id. at 21294. an enforceable delivery obligation a rebuttable later agree to book-out their delivery obligations for 73 See, e.g., WGCEF letter. The CFTC issued the presumption of intent to deliver, even if an option commercial convenience are excluded from its Energy Exemption shortly after Congress had to cash settle is included in that contract. See jurisdiction. Nothing in this legislation changes that provided the CFTC with exemptive authority WGCEF Letter.

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options are swaps.77 Accordingly, the definition for nonfinancial commodities ‘‘sale of a nonfinancial commodity or CFTC recently proposed revisions to its in the Dodd-Frank Act, too. That is, a security for deferred shipment or existing options rules in parts 32 and 33 forward contract that contains an delivery, so long as the transaction is of its regulations with respect to the embedded commodity option or intended to be physically settled,’’ in the treatment of commodity options under options 82 would be considered an context of most sales of securities for the Dodd-Frank Act, and requested excluded nonfinancial commodity deferred shipment or delivery; however, public comment on those proposed forward contract (and not a swap) if the some commenters sought clarification of revisions.78 The question of the embedded option(s): (i) May be used to this exclusion in the context of mortgage application of the forward exclusion adjust the forward contract price, but do securitizations.86 The Commissions from the swap definition with respect to not undermine the overall nature of the believe it is appropriate to address how nonfinancial commodities, where contract as a forward contract; (ii) do the exclusions from the definitions of commodity options are embedded in not target the delivery term, so that the swap and security-based swap apply to forward contracts (including embedded predominant feature of the contract is security forwards and other purchases options to cash settle such contracts), is actual delivery; and (iii) cannot be and sales of securities. similar to that arising under the CEA’s severed and marketed separately from The Dodd-Frank Act excludes existing forward contract exclusion from the overall forward contract in which purchases and sales of securities from the definition of the term ‘‘future they are embedded.83 Conversely, where the definitions of swap and security- delivery.’’ The CFTC’s Office of General the embedded commodity option(s) based swap in a number of different Counsel addressed forward contracts render delivery optional, the clauses.87 Under these exclusions, that contained embedded options in a predominant feature of the contract purchases and sales of securities on a 1985 interpretive statement (‘‘1985 cannot be actual delivery and, therefore, fixed or contingent basis 88 and sales of Interpretation’’),79 which the CFTC the embedded option(s) to not deliver securities for deferred shipment or recently adhered to in its adjudicatory preclude treatment of the contract as a delivery that are intended to be Order in the Wright case.80 While both forward contract for a nonfinancial physically delivered 89 are explicitly were issued prior to the effective date of commodity. The CFTC would look to excluded from the definitions of swap the Dodd-Frank Act, the CFTC believes the specific facts and circumstances of and security-based swap.90 The that it would be appropriate to apply the transaction as a whole to evaluate exclusion from the definitions of swap this guidance to the treatment of whether any embedded optionality and security-based swap of a sale of a forward contracts in nonfinancial operates on the price or delivery term of security for deferred shipment or commodities that contain embedded the contract, and whether an embedded delivery involves an agreement to options under the Dodd-Frank Act. commodity option is marketed or traded purchase securities, or groups or In Wright, the CFTC described the separately from the underlying contract, indexes of securities, at a future date at 1985 Interpretation and stated that the to determine whether that transaction a certain price. CFTC traditionally has engaged in a qualifies for the forward contract two-step analysis of ‘‘embedded exclusion from the swap definition for 86 Specifically, commenters requested options’’ in which the first step focuses nonfinancial commodities.84 The CFTC clarification that the swap and security-based swap on whether the option operates on the believes that such an approach would definitions do not include buying and selling price or the delivery term of the forward mortgages and forward trading of agency (i.e., help prevent commodity options that Federal Home Loan Mortgage Corporation (‘‘Freddie contract and the second step focuses on should fall within the swap definition Mac’’), Federal National Mortgage Association 81 secondary trading. The CFTC believes from qualifying for the forward contract (‘‘Fannie Mae’’), and Government National Mortgage that these same principles can be exclusion for nonfinancial commodities Association (‘‘Ginnie Mae’’) mortgage-backed securities (‘‘MBS’’) in the ‘‘To-Be-Announced’’ applied with respect to the forward instead. contract exclusion from the swap (‘‘TBA’’) market in order to provide the certainty 85 needed to avoid unnecessary disruption of the (c) Security Forwards securitization market. See Letter from Stephen H. 77 7 U.S.C. 1a(47)(A)(i). Options on securities and No commenters sought clarification of McElhennon, Vice President & Deputy General certain options on foreign currency are excluded the exclusion from the swap and Counsel, Fannie Mae, Sept. 20, 2010 (‘‘Fannie Mae from the swap definition by CEA sections Letter’’); Letter from Lisa M. Ledbetter, Freddie Mac, 1a(47)(B)(iii) and (iv), respectively. 7 U.S.C. security-based swap definitions for the Sept. 20, 2010. 1a(47)(B)(iii) and (iv). These options are not subject 87 See CEA sections 1a(47)(B)(ii), (v), and (vi), 7 to the Commissions’ proposed guidance in this 82 The CFTC believes that ‘‘options’’ in the plural U.S.C. 1a(47)(B)(ii), (v), and (vi). section. would include, for example, a situation in which 88 See CEA section 1a(47)(B)(v), 7 U.S.C. 78 See Commodity Options and Agricultural the embedded optionality involves option 1a(47)(B)(v) (excluding from the swap and security- Swaps, 76 FR 6095, Feb. 3, 2011. combinations, such as costless collars, that operate based swap definitions ‘‘any agreement, contract, or 79 See Characteristics Distinguishing Cash and on the price term of the agreement, contract, or transaction providing for the purchase or sale of 1 Forward Contracts and ‘‘Trade’’ Options, 50 FR transaction. or more securities on a fixed basis that is subject 39656, Sept. 30, 1985. 83 See Wright, supra note 63, at **6–7. to [the Securities Act and Exchange Act]’’); CEA 80 Wright, supra note 63. 84 This facts and circumstances approach to section 1a(47)(B)(vi), 7 U.S.C. 1a(47)(B)(vi) 81 Id. at n.5. In Wright, the CFTC affirmed the determining whether a particular embedded option (excluding from the swap and security-based swap Administrative Law Judge’s holding that an option takes a transaction out of the forward contract definitions ‘‘any agreement, contract, or transaction embedded in a hedge-to-arrive contract did not exclusion for nonfinancial commodities is providing for the purchase or sale of 1 or more violate CFTC rules regarding the sale of agricultural consistent with the CFTC’s historical approach to securities on a contingent basis that is subject to trade options. The CFTC first concluded that the determining whether a particular embedded option [the Securities Act and Exchange Act], unless the puts at issue operated to adjust the forward price takes a transaction out of the forward contract agreement, contract, or transaction predicates the and did not render the farmer’s overall obligation exclusion from the CEA definition of the term purchase or sale on the occurrence of a bona fide to make delivery optional. Then, turning to the next ‘‘future delivery.’’ See Wright, supra note 63, at *5 contingency that might reasonably be expected to step of the analysis, the CFTC explained that ‘‘the (‘‘As we have held since Stovall, the nature of a affect or be affected by the creditworthiness of a put and [hedge-to-arrive contract] operated as a contract involves a multi-factor analysis . * * *’’). party other than a party to the agreement, contract, single contract, and in most cases were issued 85 The discussion above regarding the exclusion or transaction’’). simultaneously * * *. We do not find that any put from the swap definition for forward contracts on 89 See CEA section 1a(47)(B)(ii), 7 U.S.C. was severed from its forward or that either of [the nonfinancial commodities does not apply to the 1a(47)(B)(ii). put or the hedge-to-arrive contract] was traded exclusion from the swap and security-based swap 90 The Commissions note that calling an separately from the other. We hold that in these definitions for security forwards or to the agreement, contract, or transaction a swap or circumstances, no freestanding option came into distinction between security forwards and security security-based swap does not determine its status. being. * * *’’ Id. at *7. futures products. See discussion supra part II.D.1.

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As with other purchases and sales of the swap and security-based swap transactions, and data with respect to securities, security forwards are definitions.97 their frequency. Are there any excluded from the definitions of swap nonfinancial commodities or Request for Comment and security-based swap. The sale of the transactions to which the Brent security in this case occurs at the time 22. The Commissions request Interpretation should not apply, either the forward contract is entered into with comment on all aspects of the proposed with respect to the forward contract the performance of the contract deferred interpretive guidance set forth in this exclusion from the definition of ‘‘future or delayed. If such agreement, contract, section regarding the forward contract delivery’’ or the forward contract or transaction is intended to be exclusion from the swap and security- exclusion from the swap definition, or physically settled, the Commissions based swap definitions with respect to both? Why or why not? believe it would be within the security nonfinancial commodities and 27. Should a minimum contract size forward exclusion and therefore outside securities. for a transaction in a nonfinancial the swap and security-based swap 23. Is the proposed interpretive commodity (e.g., a tanker full of Brent definitions.91 Moreover, as a purchase guidance set forth in this section oil) be required in order for the or sale of a security, the Commissions sufficient with respect to the application transaction to qualify as a forward believe it also would be within the of the forward contract exclusion from contract under the Brent Interpretation exclusions for the purchase or sale of the swap definition with respect to with respect to the future delivery and one or more securities on a fixed basis nonfinancial commodities? If not, what swap definitions? Why or why not? If (or, depending on its terms, a contingent changes should be made? Commenters so, what standards should apply to basis) and, therefore, outside the swap also are invited to comment on whether determine such a minimum contract and security-based swap definitions.92 the application of the Brent size? Should the Brent Interpretation for As noted above, commenters Interpretation generally, and its nonfinancial commodities with respect requested specific guidance in the conclusions regarding book-outs in to the future delivery and swap context of forward sales of MBS that are particular, is appropriate to the forward definitions be limited to market guaranteed or sold by Fannie Mae, exclusion from the swap definition with participants that meet certain Freddie Mac, and Ginnie Mae and the respect to nonfinancial commodities. requirements? Why or why not? If so, mortgages underlying such MBS. Would it permit transactions that does the ‘‘eligible commercial entity’’ 98 MBS guaranteed or sold by Fannie should be subject to the swap regulatory definition in CEA section 1a(17) Mae, Freddie Mac and Ginnie Mae are regime to fall outside of the Dodd-Frank provide an appropriate requirement? eligible to be sold in the TBA market, Act? Why or why not? What other which is essentially a forward or 24. Is it appropriate, in light of the requirements, if any, should be delayed delivery market.93 The TBA Dodd-Frank Act, for the CFTC to imposed? 28. How often, and to what extent, do market has been described as one that withdraw the Energy Exemption while entities that do not regularly make or ‘‘allows mortgage lenders essentially to concurrently retaining the Brent take delivery of the commodity in the sell the loans they intend to fund even Interpretation, and extending it to the ordinary course of their business engage before the loans are closed.’’ 94 In the forward contract exclusion from the in transactions that should qualify as TBA market, the lender enters into a definition of ‘‘future delivery’’ and the forward contracts? Should such forward contract to sell MBS and agrees swap definition, for book-out contracts qualify for the safe harbor to deliver MBS on the settlement date in transactions in all nonfinancial provided by the Brent Interpretation? the future. The specific MBS that will be commodities? Why or why not? Is the Why or why not? If so, how can it be delivered in the future may not yet be conclusion that the Dodd-Frank Act supersedes the Swap Policy Statement demonstrated that the primary purpose created at the time the forward contract of such transaction is to acquire or sell is entered into.95 The Commissions appropriate? Why or why not? 25. Are there any provisions of the the physical commodity? Would believe that such forward sales of MBS Energy Exemption or Swap Policy including these transactions in the in the TBA market would fall within the Statement that the Commissions should scope of the Brent Interpretation permit exclusion for sales of securities on a consider incorporating into the transactions that should be subject to deferred settlement or delivery basis definitions rulemakings (other than the the swap regulatory regime to fall even though the precise MBS are not in request already submitted by some outside of the Dodd-Frank Act? If so, existence at the time the forward MBS commenters in response to the proposed could this concern be addressed by sale is entered into.96 Moreover, as the Entity Definitions that the ‘‘line of imposing conditions in order to qualify purchase or sale of a security, the business’’ provision of the Swap Policy for the forward exclusion? What Commissions believe such forward sales Statement be incorporated into the conditions, if any, would be of MBS in the TBA market would fall definition of the term ‘‘eligible contract appropriate? within the exclusions for the purchase participant’’ (‘‘ECP’’))? If so, please 29. Are ‘‘ring’’ or ‘‘daisy chain’’ or sale of one or more securities on a explain in detail how such provisions markets for forward contracts, such as fixed basis (or, depending on its terms, are consistent with the requirements of the 15-day Brent market, primarily used a contingent basis) and therefore outside the Dodd-Frank Act and would not for commercial merchandising, or do they serve other purposes such as price 91 See CEA section 1a(47)(B)(ii), 7 U.S.C. permit transactions that should be 1a(47)(B)(ii). subject to the swap regulatory regime to discovery or risk management? Please 92 See CEA sections 1a(47)(B)(v) and (vi), 7 U.S.C. fall outside of the Dodd-Frank Act. explain in detail. 1a(47)(B)(v) and (vi). 26. How frequently do book-out 30. Should contracts in nonfinancial 93 Task Force on Mortgage-Backed Securities transactions of the type described in the commodities that may qualify as Disclosure, ‘‘Staff Report: Enhancing Disclosure in Brent Interpretation occur with respect forward contracts be permitted to trade the Mortgage-Backed Securities Markets,’’ part II.E.2 on registered trading platforms such as (Jan. 2003). to nonfinancial commodities? Please 94 Id. provide descriptions of any such DCMs or swap execution facilities 95 Id. (‘‘SEFs’’)? If so, are additional guidance 96 See CEA section 1a(47)(B)(ii), 7 U.S.C. 97 See CEA sections 1a(47)(B)(v) and (vi), 7 U.S.C. 1a(47)(B)(ii). 1a(47)(B)(v) and (vi). 98 7 U.S.C. 1a(17).

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or rules necessary to determine whether optionality as to delivery? If so, should agreements, including those that contain contracts traded on such platforms are they—or any other agreement, contract, contingent payment arrangements; 102 excluded from the CEA definition of or transaction in a nonfinancial and consumer mortgage and utility rate ‘‘future delivery’’ and/or the swap commodity that has optionality as to caps.103 definition? If so, please describe in delivery—be excluded from the swap Consumers enter into various types of detail such markets and explain what definition? If so, please provide a agreements, contracts, and transactions further guidance or rules would be detailed analysis of such agreements, as part of their household and personal appropriate? Should conditions be contracts, or transactions and how they lives that may have attributes that could imposed with respect to the nature of can be distinguished from options that be viewed as falling within the swap or the market participants or the are to be regulated as swaps pursuant to security-based swap definition. percentage of transactions that must the Dodd-Frank Act. To what extent are Similarly, businesses and other entities, result in delivery over a specified any such agreements, contracts, or whether or not for profit, also enter into measurement period, or both? If so, transactions in the electric industry agreements, contracts, and transactions what conditions would be appropriate? regulated by the Federal Energy as part of their operations relating to, 31. Should the Commissions provide Regulatory Commission (‘‘FERC’’), State among other things, acquisitions or sales guidance regarding the scope of the term regulatory authorities, regional of property (tangible and intangible), ‘‘nonfinancial commodity’’ in the transmission organizations (‘‘RTOs’’), provisions of services, employment of forward contract exclusion from the independent system operators (‘‘ISOs’’) individuals, and other matters that swap definition? If so, how and where or market monitoring units associated could be viewed as falling within the should the Commissions draw the line with RTOs or ISOs? definitions. between financial and nonfinancial 36. Is there any issue with respect to The Commissions do not believe that commodities? the treatment of commodity options that Congress intended to include these 32. Should the forward contract the Commissions have not addressed types of customary consumer and exclusion from the swap definition and that should be addressed as a commercial agreements, contracts, or apply to environmental commodities definitional matter in this rulemaking? transactions in the swap or security- such as emissions allowances, carbon 37. Should the Commissions provide based swap definition, to limit the types offsets/credits, or renewable energy more detailed guidance regarding what of persons that can enter into or engage certificates? If so, please describe these constitutes a security forward? For in them, or to otherwise to subject these commodities, and explain how instance, should the Commissions agreements, contracts, or transactions to transactions can be physically settled provide more guidance on what it the regulatory scheme for swaps and where the commodity lacks a physical means for a security forward to be security-based swaps. The existence (or lacks a physical existence ‘‘intended to be physically settled’’? If Commissions, therefore, are proposing other than on paper)? Would so, what further guidance would be the following interpretive guidance to application of the forward contract appropriate? assist consumers and businesses in exclusion to such environmental 38. Should the Commissions provide understanding whether certain commodities permit transactions that more guidance regarding when forward agreements, contracts, or transactions should be subject to the swap regulatory sales of MBS in the TBA market would that they enter into would be regulated regime to fall outside the Dodd-Frank fall within the exclusion for sales of as swaps or security-based swaps. Act? securities on a deferred settlement or With respect to consumers, the 33. Are there other factors that should Commissions believe that the types of be considered in determining how to delivery basis? Is there any more guidance the Commissions should agreements, contracts, or transactions characterize forward contracts with that should not be considered swaps or embedded options with respect to provide regarding types of transactions that occur in the TBA market? security-based swaps when entered into nonfinancial commodities? If so, what by consumers (natural persons or their factors should be considered? Do 3. Consumer and Commercial agents) as principals primarily for provisions in forward contracts with Agreements, Contracts, and personal, family, or household respect to nonfinancial commodities Transactions purposes, include: other than delivery and price contain • Commenters on the ANPR pointed out Agreements, contracts, or embedded optionality? How do such a number of areas in which a broad transactions to acquire or lease real or provisions operate? Please provide a reading of the swap and security-based personal property, to obtain a mortgage, detailed analysis regarding how such swap definitions could cover certain to provide personal services, or to sell provisions should be analyzed under consumer and commercial arrangements or assign rights owned by such the Dodd-Frank Act. consumer (such as intellectual property 34. Is the analysis of forward contracts that historically have not been considered swaps or security-based rights); with embedded options in the 1985 • Agreements, contracts, or Interpretation and the CFTC’s Wright swaps. Examples of such instruments cited by commenters include evidences transactions to purchase products or decision appropriately applied to services at a fixed price or a capped or transactions entered into after the of indebtedness with a variable rate of interest; 99 commercial contracts collared price, at a future date or over effective date of the Dodd-Frank Act? a certain time period (such as Why or why not? If not, how should the containing acceleration, escalation, or indexation clauses; 100 agreements to agreements to purchase home heating analysis be modified? fuel);104 35. How would the proposed acquire personal property or real property, or to obtain mortgages; 101 interpretive guidance set forth in this 102 See BlackRock Letter. section affect full requirements employment, lease, and service 103 See White & Case Letter; Deutsche Bank Letter. contracts, capacity contracts, reserve 104 These agreements, contracts, or transactions 99 sharing agreements, tolling agreements, See Cleary Letter; Letter from Kenneth E. Auer, involve physical delivery which is deferred for President and CEO, The Farm Credit Council, Sept. convenience or necessity and thus can be viewed energy management agreements, and 20, 2010 (‘‘Farm Credit Council Letter’’). as being akin to forward purchase agreements ancillary services? Do these agreements, 100 See Cleary Letter; White & Case Letter. (sometimes with embedded options, in the case of contracts, or transactions have 101 See White & Case Letter; Fannie Mae Letter. those with price caps), which were discussed above

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• Agreements, contracts, or loan agreements or contracts or —By commercial or non-profit entities transactions that provide for an interest receivables; as principals (or by their agents) to rate cap or lock on a consumer loan or • Fixed or variable interest rate serve an independent commercial, mortgage, where the benefit of the rate commercial loans entered into by non- business, or non-profit purpose, and cap or lock is realized only if the loan banks 107; and —Other than for speculative, hedging, or mortgage is made to the consumer; • Commercial agreements, contracts, or investment purposes. and and transactions (including, but not Two of the key components reflected • Consumer loans or mortgages with limited to, leases, service contracts, and in these characteristics that distinguish variable rates of interest or embedded employment agreements) containing these agreements, contracts, and interest rate options, including such escalation clauses linked to an transactions from swaps and security- loans with provisions for the rates to underlying commodity such as an based swaps are that: (i) The payment change upon certain events related to interest rate or consumer price index. provisions of the arrangements are not the consumer, such as a higher rate of The Commissions intend this severable; and (ii) the agreement, interest following a default. proposed interpretive guidance to allow contract, or transaction is not traded on The types of commercial agreements, consumers to engage in customary an organized market or over-the- contracts, or transactions that involve transactions relating to their households counter—so that such arrangements customary business arrangements and personal or family activities would not involve risk-shifting (whether or not involving a for-profit without concern that such arrangements arrangements with financial entities, as entity) and would not be considered would be considered swaps or security- would be the case for swaps and swaps or security-based swaps under based swaps. Similarly, applying this security-based swaps.108 this proposed interpretive guidance guidance to customary commercial This proposed interpretive guidance include: arrangements should allow commercial is not intended to be the exclusive • Employment contracts and and non-profit entities to continue to means for consumers and commercial or retirement benefit arrangements; operate their businesses and operations non-profit entities to determine whether • Sales, servicing, or distribution without significant disruption and their agreements, contracts, or arrangements; ensure that the swap and security-based transactions fall within the swap or • Agreements, contracts, or swap definitions are not read to include security-based swap definition. If there transactions for the purpose of effecting commercial and non-profit operations is a type of agreement, contract, or a business combination transaction; 105 that historically have not been transaction that is not enumerated • The purchase, sale, lease, or transfer considered to involve swaps or security- above, or does not have all the of real property, intellectual property, based swaps. characteristics and factors that are listed equipment, or inventory; The types of agreements, contracts, • above (including new types of Warehouse lending arrangements in and transactions discussed above are arrangements that may be developed in connection with building an inventory not intended to be exhaustive of the the future), but that a party to the of assets in anticipation of a customary consumer or commercial agreement, contract, or transaction securitization of such assets (such as in arrangements that should not be believes is not a swap or security-based a securitization of mortgages, student considered to be swaps or security- swap, the Commissions invite such loans, or receivables); 106 • based swaps. There may be other, party to seek an interpretation from the Mortgage or mortgage purchase similar types of agreements, contracts, Commissions as to whether the commitments, or sales of installment and transactions that also should not be agreement, contract, or transaction is a considered to be swaps or security- swap or security-based swap. in the context of the exclusion from the swap based swaps. In determining whether definition for forward contracts in nonfinancial Request for Comment commodities. While the CFTC traditionally has similar types of agreements, contracts, viewed forward contracts in nonfinancial and transactions entered into by 39. Is interpretive guidance of the commodities as limited to commercial consumers or commercial entities are type proposed in this section necessary merchandising transactions, the Commissions view with respect to the application of the consumer agreements, contracts, and transactions swaps or security-based swaps, the involving periodic or future purchases of consumer Commissions intend to consider the swap and security-based swap products and services, such as agreements to characteristics and factors that are definitions to certain consumer and purchase energy commodities to heat or cool common to the consumer and commercial agreements, contracts, or consumers’ homes, as transactions that are not commercial transactions listed above: transactions? swaps. • 40. Is the interpretive guidance 105 These business combination transactions They do not contain payment include, for example, a reclassification, merger, obligations, whether or not contingent, proposed in this section useful, consolidation, or transfer of assets as defined under that are severable from the agreement, the Federal securities laws or any tender offer contract, or transaction; 108 There also are alternative regulatory regimes subject to section 13(e) and/or section 14(d) or (e) • that have been enacted as part of the Dodd-Frank of the Exchange Act, 15 U.S.C. 78m(e) and/or They are not traded on an organized Act specifically to provide enhanced protections to 78n(d) or (e). These business combination market or over-the-counter; and consumers relating to various consumer agreements, contracts, or transactions can be • In the case of consumer transactions. See, e.g., the Consumer Financial contingent on the continued validity of arrangements, they: Protection Act of 2010, Public Law 111–203, title representations and warranties and can contain X, 124 Stat. 1376 (July 21, 2010) (establishing the earn-out provisions and contingent value rights. —Involve an asset of which the Bureau of Consumer Financial Protection to 106 The Commissions believe that such lending consumer is the owner or beneficiary, regulate a broad category of consumer products and arrangements included in this category are or that the consumer is purchasing, or amending certain laws under the jurisdiction of the traditional borrower/lender arrangements Federal Trade Commission); the Mortgage Reform documented using, for example, a loan agreement they involve a service provided, or to and Anti-Predatory Lending Act, Public Law 111– or indenture, as opposed to a synthetic lending be provided, by or to the consumer, or 203, title XIV, 124 Stat. 1376 (July 21, 2010) arrangement documented in the form of, for • In the case of commercial (amending existing laws, and adding new example, a TRS. The Commissions also note that provisions, related to certain mortgages). Some of securitization transaction agreements also may arrangements, they are entered into: these agreements, contracts, or transactions are contain contingent obligations if the representations subject to regulation by the Federal Trade and warranties about the underlying assets are not 107 See infra note 115 regarding identified Commission and other Federal financial regulators satisfied. banking products. and state regulators.

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appropriate, and sufficient for persons of the swap and security-based swap and sale of a security on a fixed or to consider when evaluating whether definitions.109 According to these contingent basis.114 In addition, agreements, contracts, or transactions of commenters, loan participations arise depending on the facts and the types described in this section fall when a lender transfers the economic circumstances, a loan participation may within the swap or security-based swap risks and benefits of all or a portion of be an identified banking product and, as definition? a loan it has entered into with a such, would be excluded from CFTC 41. In particular, are the listed borrower to another party as an jurisdiction and from the ‘‘security- characteristics and factors for consumer alternative or precursor to assigning to based swap’’ and ‘‘security-based swap transactions and for commercial such person the loan or an interest in agreement’’ definitions.115 transactions appropriate for purposes of the loan.110 Two types of loan The Commissions do not interpret the evaluating whether agreements, participations are offered in the market swap and security-based swap contracts, or transactions fall within the today according to these commenters: definitions to include loan swap or security-based swap definition? LSTA-style participations and LMA- participations in which the purchaser is If not, what characteristics or factors style participations.111 An LSTA-style acquiring a current or future direct or should be included or excluded, and participation ‘‘specifically provides that indirect ownership interest in the why? Are any of the characteristics or the participation is intended by the related loan and the loan participations factors too narrow or too broad? If so, parties to be treated as a sale by the are ‘‘true participations’’ (the participant how should the listed characteristics grantor and a purchase by the acquires a beneficial ownership interest and factors be modified, and why? participant’’ and ‘‘is intended to effect a in the underlying loans).116 42. Is a joint interpretation as ‘true sale’ of the loan from the grantor Request for Comment provided for in section 712(d)(4) of the to the participant and put the Dodd-Frank Act, pursuant to the participant’s beneficial ownership 46. Should any of the enumerated proposed process discussed in part VI interest in the loan beyond the reach of agreements, contracts, or transactions be below, an appropriate means of the grantor’s bankruptcy estate.’’ 112 By considered swaps or security-based addressing any further interpretive contrast, an LMA-style participation, swaps whether in general or in certain questions? while not effecting a sale, ‘‘creates a narrow circumstances? If so, which ones 43. Does the interpretive guidance current debtor-creditor relationship and why? In particular, how are loan proposed in this section sufficiently between the grantor and the participant participations similar to and different enumerate the types of consumer and under which a future ownership interest from loan TRS? Does the proposed commercial agreements, contracts, or is conveyed.’’ 113 Neither type of loan guidance adequately distinguish transactions that should not be participation is a ‘‘synthetic’’ transaction between loan participations similar to considered swaps or security-based according to the March LSTA letter and different from loan TRS? swaps? If not, please provide details of because ‘‘they are merely transfers of 47. Does the Commissions’ proposed other types of such agreements, cash loan positions’’ and ‘‘[t]he ratio of interpretive guidance regarding loan contracts, or transactions and an underlying loan to participation is participations exclude from the swap or explanation of the reasons why the always one-to-one.’’ security-based swap definitions definitions should not apply to them. Depending on the facts and agreements, contracts, or transactions 44. Is the treatment of consumer or circumstances, a loan participation may commercial contracts containing be a security under the Federal 114 See CEA sections 1a(47)(B)(v) and (vi), 7 payment arrangements sufficiently securities laws and, as such, the loan U.S.C. 1a(47)(b)(v) and (vi), as amended by section 721(a)(21) of the Dodd-Frank Act (excluding clear? For example, should the participation would be excluded from purchases and sales of a security on a fixed or interpretive guidance expressly address the definition of swap as the purchase contingent basis, respectively from the swap any other specific types of contracts, definition). such as installment sales contracts, 109 See Letter from R. Bram Smith, Executive 115 See section 403(a) of the Legal Certainty for financings used in normal business Director, The Loan Syndications and Trading Bank Products Act of 2000, 7 U.S.C. 27a(a), as Association, Jan. 25, 2011 (‘‘January LSTA Letter’’) amended by section 725(g)(2) of the Dodd-Frank operations (such as receivables and letter from Elliot Ganz, General Counsel, The Act (providing that, under certain circumstances, financings), pensions and other post- Loan Syndications and Trading Association, Mar. 1, the CEA shall not apply to, and the CFTC shall not retirement benefits, contracts relating to 2011 (‘‘March LSTA Letter, and collectively with exercise regulatory authority over, identified the performance of a service, standby the January LSTA Letter, ‘‘LSTA Letters’’); Letter banking products, and the definitions of the terms from Clare Dawson, Managing Director, Loan ‘‘security-based swap’’ and ‘‘security-based swap liquidity agreements, indemnification Market Association, Feb. 23, 2011. agreement’’ shall not include identified banking agreements, reimbursement agreements, 110 See Loan Market Association, ‘‘Guide to products). or affiliate guarantees? Why or why not? Syndicated Loans,’’ section 6.2.5 (‘‘Risk 116 See generally Richard M. Gray and Suhrud 45. Is the treatment of purchases, participation may be provided by a new lender as Mehta, Milbank Tweed Hadley & McCloy LLP, ‘‘US an interim measure before it takes full transfer of and UK compared Fundamental differences remain sales, leases, or transfers of equipment a loan.’’), available at http://www.lma.eu.com/ between the markets. But is it worth considering and inventory sufficiently flexible to not uploads/files/Introductory_Guides/Guide_to_Par using a New York participation agreement in an interfere with ordinary business _Syndicated_Loans.pdf. English deal?,’’ International Financial Law Review operations? As an alternative, should 111 The LSTA is The Loan Syndications and (Oct. 1, 2009) (discussing differences between New Trading Association. The LMA is the Loan Market York and English participation markets and features the guidance expressly cover the Association. distinguishing true participations from financings), purchase, sale, lease, or transfer of 112 See January LSTA Letter (citation omitted). available at http://www.milbank.com/NR/rdonlyres/ assets (excluding financial assets) that 113 See LSTA Letters. But see Jon Kibbe, Julia Lu B95C06AD–C3CA–44C9–8433–B6021C4455C9/0/ are anticipated to be owned, leased, and Carl Winkworth, Richards Kibbe & Orbe, LLP, 102009_IFLR_USandUKcompared_ _ licensed, produced, manufactured, ‘‘Dodd-Frank Crosses the Pond: Unintended RGray SMehta.pdf; Cleary, Gottlieb, Steen & Consequences for LMA–Style Loan Participations?,’’ Hamilton, Memorandum for the Financial processed, or merchandized by one of 3 (Nov. 12, 2010) (‘‘The grantor of an LMA-style Accounting Standards Board, Re: Participations the parties or an affiliate? Why or why participation does not grant an ownership interest (June 14, 2004) (discussing, among other things, not? in the loan to the participant.’’) (‘‘LMA–Style LP what a ‘‘good’’ or ‘‘true’’ participation is under the Memo’’), available at http://www.rkollp.com/assets/ Uniform Commercial Code, the Bankruptcy Code, 4. Loan Participations attachments/Dodd-Frank%20Crosses%20the%20 case law, and other authority), available at http:// Pond%20-%20Unintended%20 www.fasb.org/cs/BlobServer?blobcol=urldata Two commenters inquired whether Consequences%20for%20LMA–Style%20Loan% &blobtable=MungoBlobs&blobkey=id&blobwhere= loan participations fall within the scope 20Participations.pdf. 1175817895286&blobheader=application%2Fpdf.

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that are swaps or security-based swaps? suggest that any other agreement, transactions still would be subject to If so, please describe such agreements, contract, or transaction not mentioned certain business conduct standards.121 contracts, or transactions and suggested in the proposed rules or specifically The Commissions are proposing to adjustments to the proposed guidance to enumerated in the statutory definition provide greater clarity by explicitly capture such agreements, contracts, or would not be covered by the swap or defining by rule the term ‘‘swap’’ to transactions as swaps or security-based security-based swap definitions in the include foreign exchange forwards and swaps. Dodd-Frank Act. foreign exchange swaps (as those terms 48. Is the Commissions’ proposed are defined in the CEA).122 The interpretive guidance regarding loan 2. Foreign Exchange Products proposed rules would incorporate the participations as not falling within the (a) Foreign Exchange Products Subject provision of the Dodd-Frank Act that, if swap and security-based swap to the Secretary’s Swap Determination: the Secretary issues the written definitions appropriate? Why or why Foreign Exchange Forwards and Foreign determination described above, foreign not? Should the Commissions provide Exchange Swaps exchange forwards and foreign exchange further guidance on what constitutes an swaps would no longer be considered ‘‘ownership interest’’ in the loan The Dodd-Frank Act provides that swaps. The proposed rules also would underlying a loan participation? If so, ‘‘foreign exchange forwards’’ and reflect the continuing applicability of what should such guidance provide? ‘‘foreign exchange swaps’’ shall be certain reporting requirements and 49. Do all loan participations convey considered swaps under the swap business conduct standards in the event a current or future direct or indirect definition unless the Secretary of the that the Secretary makes such a ownership interest from the grantor to Treasury (‘‘Secretary’’) issues a written determination.123 the participant or sub-participant? If so, determination that either foreign (b) Foreign Exchange Products Not what indicia of ownership are conveyed exchange swaps, foreign exchange Subject to the Secretary’s Swap and when, particularly in LMA-style forwards, or both: (i) Should not be Determination loan participations? Do loan regulated as swaps; and (ii) are not participations use leverage? If so, how? structured to evade the Dodd-Frank Act The Commissions also are proposing 50. Are any swaps or security-based in violation of any rule promulgated by rules to provide clarity that a swaps partly or fully defeased? the CFTC pursuant to section 721(c) of determination by the Secretary that 51. Should the Commissions provide the Dodd-Frank Act.118 A foreign foreign exchange forwards or foreign further guidance regarding the scope of exchange forward is defined as ‘‘a exchange swaps, or both, should not be ‘‘true participation?’’ If so, how should transaction that solely involves the regulated as swaps would not affect the Commissions delineate the scope exchange of 2 different currencies on a other products involving foreign thereof? specific future date at a fixed rate agreed currency, such as foreign currency upon on the inception of the contract options, NDFs, and cross-currency C. Proposed Rules and Interpretive covering the exchange.’’ 119 A foreign swaps. The Commissions are proposing Guidance Regarding Certain exchange swap, in turn, is defined as ‘‘a rules to explicitly define the term Transactions Within the Scope of the transaction that solely involves—(A) An ‘‘swap’’ to include such products, Definitions of the Terms ‘‘Swap’’ and exchange of 2 different currencies on a irrespective of whether the Secretary ‘‘Security-Based Swap’’ specific date at a fixed rate that is agreed makes a determination to exempt foreign exchange forwards or foreign 1. In General upon on the inception of the contract 124 covering the exchange; and (B) a reverse exchange swaps. In light of provisions in the Dodd- exchange of the 2 currencies described 125 Frank Act that specifically address (i) Foreign Currency Options in subparagraph (A) at a later date and certain foreign exchange products, the As discussed above, the statutory at a fixed rate that is agreed upon on the Commissions are proposing rules to swap definition includes options, and it inception of the contract covering the clarify the status of products such as expressly enumerates foreign currency exchange.’’ 120 foreign exchange forwards, foreign options. It encompasses any agreement, exchange swaps, foreign exchange Under the Dodd-Frank Act, if foreign contract, or transaction: ’’ (i) that is a options, non-deliverable forwards exchange forwards or foreign exchange involving foreign exchange (‘‘NDFs’’), swaps are no longer considered swaps 121 See, e.g., CEA sections 1a(47)(E)(iii) and (iv), and cross-currency swaps. The due to a determination by the Secretary, 7 U.S.C. 1a(47)(E)(iii) and (iv) (reporting and nevertheless, certain provisions of the business conduct standards, respectively). Commissions also are proposing a rule 122 As noted above, the proposed rules provide to clarify the status of FRAs and CEA added by the Dodd-Frank Act that foreign exchange forwards and forward providing interpretive guidance would continue to apply to such exchange swaps would not be swaps if they fall regarding: (i) Combinations and transactions. Specifically, those within one of the exclusions set forth in transactions still would be subject to subparagraph (B) of the swap definition. permutations of, or options on, swaps or 123 The exclusion of foreign exchange forwards security-based swaps; and (ii) contracts certain requirements for reporting and foreign exchange swaps would become for differences (‘‘CFDs’’). swaps, and swap dealers and major effective upon the Secretary’s submission of the Proposed rule 1.3(xxx)(2) under the swap participants engaging in such determination to the appropriate Congressional Committees. See CEA section 1a(47)(E)(ii), 7 U.S.C. CEA and proposed rule 3a69–2 under 1a(46)(E)(ii). the Exchange Act would explicitly 118 See CEA section 1a(47)(E)(i), 7 U.S.C. 124 As discussed above, however, the proposed define the term ‘‘swap’’ to include 1a(47)(E)(i). The Secretary has issued a request for rules provide that none of the products discussed certain foreign exchange-related comment about whether an exclusion from the in this section (b) would be swaps if they fall within swap definition for foreign exchange swaps, foreign one of the exclusions set forth in subparagraph (B) products and FRAs unless such exchange forwards, or both, is warranted, and on of the swap definition. products would be excluded by the list the application of the statutory factors that the 125 This discussion is not intended to address, of exclusions in subparagraph (B) of the Secretary must consider in making a determination and has no bearing on, the CFTC’s jurisdiction over swap definition.117 In proposing these regarding whether to exclude these products. See foreign currency options in other contexts. See, e.g., Determinations of Foreign Exchange Swaps and CEA sections 2(c)(2)(A)(iii) and 2(c)(2)(B)–(C), 7 rules, the Commissions do not mean to Forwards, 75 FR 66829, Oct. 29, 2010. U.S.C. 2(c)(2)(A)(iii) and 2(c)(2)(B)–(C) (off- 119 See CEA section 1a(24), 7 U.S.C. 1a(24). exchange options in foreign currency offered or 117 See CEA section 1a(47)(B), 7 U.S.C. 1a(47)(B). 120 See CEA section 1a(25), 7 U.S.C. 1a(25). entered into with retail customers).

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put, call, cap, floor, collar, or similar forward exchange rate, the party to the As discussed above, the Secretary option of any kind that is for the contract that is long the emerging may determine that foreign exchange purchase or sale, or based on the value, market currency must pay its swaps or foreign exchange forwards of 1 or more interest or other rates, counterparty the difference between the should not be regulated as swaps. The currencies, commodities, securities, contracted forward price and the spot outcome of the Secretary’s instruments of indebtedness, indices, market rate, multiplied by the notional determination would not impact NDFs, quantitative measures, or other financial amount.131 however, because NDFs (like foreign or economic interests or property of any NDFs are not expressly enumerated in currency options) do not meet the kind.’’ 126 the swap definition, but they satisfy definitions of the terms foreign Foreign exchange options traded on a clause (A)(iii) of the definition because exchange forward or foreign exchange national securities exchange (‘‘NSE’’), they provide for a future (executory) swap set forth in the CEA. NDFs do not however, are securities under the payment based on an exchange rate, involve an ‘‘exchange’’ of two different Federal securities laws and not swaps or which is an ‘‘interest or other rate[]’’ currencies (an element of the definition security-based swaps.127 within the meaning of clause (A)(iii) of of both a foreign exchange forward and Any determination by the Secretary, the swap definition.132 Each party to an a foreign exchange swap); instead, they discussed above, that foreign exchange NDF transfers to its counterparty the are settled by payment in one currency forwards or foreign exchange swaps risk of the exchange rate moving against (usually U.S. dollars). should not be regulated as swaps would the counterparty, thus satisfying the Notwithstanding their ‘‘forward’’ label, not impact foreign currency options requirement that there be a transfer of NDFs do not fall within the forward because a foreign currency option is financial risk associated with a future contract exclusion of the swap neither a foreign exchange swap nor a change in rate. This financial risk definition. Currency is outside the scope foreign exchange forward, as those transfer in the context of an NDF is not of the forward contract exclusion for terms are defined in the CEA. accompanied by a transfer of an nonfinancial commodities. Nor have Consequently, the Commissions are ownership interest in any asset or NDFs traditionally been considered proposing rules to provide clarity by liability. Thus, an NDF is a swap under commercial merchandising transactions. explicitly defining the term ‘‘swap’’ to clause (A)(iii) of the swap definition.133 Rather, the NDF markets appear to be include foreign currency options (other driven in large part by speculation 134 than foreign currency options traded on 131 See id. at 2. Being long the emerging market and hedging,135 which features are more an NSE).128 The proposed rules also currency means that the holder of the NDF contract is the ‘‘buyer’’ of the emerging market currency and characteristic of swap markets than would clarify that foreign currency the ‘‘seller’’ of dollars. Conversely, if the emerging forward markets. options are not foreign exchange market currency appreciates relative to the Based on the foregoing forwards or foreign exchange swaps previously agreed forward rate, the holder of the considerations, the Commissions are under the CEA. contract that is short the emerging market currency must pay its counterparty the difference between proposing to provide greater clarity by (ii) Non-Deliverable Forward Contracts the spot market rate and the contracted forward explicitly defining the term ‘‘swap’’ to Involving Foreign Exchange price, multiplied by the notional amount. See id. at include NDFs. The proposed rules also 2, n.4. would clarify that NDFs are not foreign 132 An NDF generally is similar to a See CEA section 1a(47)(A)(iii), 7 U.S.C. exchange forwards or foreign exchange forward foreign exchange contract,129 1a(47)(A)(iii) (providing that a swap is an agreement, contract, or transaction ‘‘that provides swaps as those terms are defined in the except that at maturity, the NDF does on an executory basis for the exchange, on a fixed CEA. not require physical delivery of or contingent basis, of 1 or more payments based currencies and is typically settled in on the value or level of 1 or more interest or other (iii) Currency Swaps and Cross- U.S. dollars. The other currency, usually rates, currencies, commodities, securities, Currency Swaps instruments of indebtedness, indices, quantitative an emerging market currency subject to measures, or other financial or economic interests A currency swap 136 and a cross- capital controls, is therefore said to be or property of any kind, or any interest therein or currency swap 137 each generally can be ‘‘nondeliverable.’’ 130 If the spot market based on the value thereof, and that transfers, as between the parties to the transaction, in whole or exchange rate on the settlement date is 134 See ‘‘Fed NDF Overview,’’ supra note 129, at in part, the financial risk associated with a future 5 (‘‘[E]stimates vary but many major market greater (in foreign currency per dollar change in any such value or level without also participants estimate as much as 60 to 80 percent terms) than the previously agreed conveying a current or future direct or indirect of NDF volume is generated by speculative interest, ownership interest in an asset (including any noting growing participation from international enterprise or investment pool) or liability that 126 See CEA section 1a(47)(A)(i), 7 U.S.C. hedge funds.’’) and 4 (‘‘[D]ealers note that much of 1a(47)(A)(i) (emphasis added). incorporates the financial risk so transferred ***.’’). the volume in Chinese yuan NDFs is generated by 127 See CEA section 1a(47)(B)(iv), 7 U.S.C. speculative positioning based on expectations for 133 It appears that at least some market 1a(47)(B)(iv). an alteration in China’s current, basically fixed participants view NDFs as swaps today. See, e.g., 128 exchange rate.’’) (italics in original). The proposed rules would treat the terms Credit Suisse, ‘‘Non-Deliverable Forwards,’’ at 1 135 foreign currency options, currency options, foreign (characterizing NDFs as ‘‘a derivative instrument for See id. at 4 (noting that ‘‘[much of the] Korean exchange options, and foreign exchange rate hedging * * * exchange-rate risk’’ in the absence of won NDF volume[,] * * * estimated to be the options as synonymous. Moreover, for purposes of a forwards market), available at https://www.credit- largest of any currency, * * * is estimated to the proposed rules, foreign currency options suisse.com/ch/unternehmen/ originate with international investment portfolio include options to enter into or terminate, or that kmugrossunternehmen/doc/nondeliverable_ managers hedging the currency risk associated with otherwise operate on, a foreign exchange swap or forward_en.pdf; Association of Corporate their onshore investments’’). foreign exchange forward or on the terms thereof. Treasurers, ‘‘Glossary of Terms’’ (defining an NDF as 136 A swap that exchanges a fixed rate against a As discussed above, foreign exchange options ‘‘[a] foreign currency financial derivative contract’’), fixed rate is known as a currency swap. See Federal traded on an NSE are securities and therefore not available at http://www.treasurers.org/glossary/ Reserve System, ‘‘Trading and Capital-Markets addressed in the proposed rules. N#Non-deliverableforward. Thus, NDFs also may Activities Manual,’’ section 4335.1 (Jan. 2009). 129 A deliverable forward foreign exchange fall within clause (A)(iv) of the swap definition as 137 Cross-currency swaps with a fixed leg based contract is an obligation to buy or sell a specific ‘‘an agreement, contract, or transaction that is, or in on one rate and a floating leg based on another rate, currency on a future settlement date at a fixed price the future becomes, commonly known to the trade where the two rates are denominated in different set on the trade date. See Laura Lipscomb, ‘‘Federal as a swap.’’ See CEA section 1a(47)(A)(iv), 7 U.S.C. currencies, are generally referred to as cross- Reserve Bank of New York, An Overview of Non- 1a(47)(A)(iv). Cf. CFTC rule 35.1(b)(1)(i), 17 CFR currency coupon swaps, while those with a floating Deliverable Foreign Exchange Forward Markets,’’ 1 35.1(b)(1)(i) (providing that the definition of ‘‘swap leg based on one rate and another floating leg based (May 2005) (citation omitted) (‘‘Fed NDF agreement’’ includes a ‘‘forward foreign exchange on a different rate are known as cross-currency Overview’’). agreement,’’ without reference to convertibility or basis swaps. Id. Cross-currency swaps also include 130 See id. at 1–2 (citation omitted). delivery). annuity swaps and amortizing swaps. In cross-

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described as a swap in which the fixed proposing rules to provide greater rate. The single cash payment is equal legs or floating legs based on various clarity by explicitly defining the term to the product of the present value interest rates are exchanged in different ‘‘swap’’ to include cross-currency swaps. (discounted from a specified future date currencies. Such swaps can be used to The proposed rules also would clarify to the settlement date of the trade) of the reduce borrowing costs, to hedge that neither currency swaps nor cross- difference between the forward rate and currency exposure, and to create currency swaps are foreign exchange the spot rate on the settlement date synthetic assets 138 and are viewed as an forwards or foreign exchange swaps as multiplied by the notional amount. The important tool, given that they can be those terms are defined in the CEA. notional amount itself is not used to hedge currency and interest rate exchanged.141 Request for Comment risk in a single transaction. An FRA provides for the future Currency swaps and cross-currency 52. Should the proposed rules (executory) payment based on the swaps are not foreign exchange swaps as explicitly define the term ‘‘swap’’ to transfer of interest rate risk between the defined in the CEA because, although include foreign exchange forwards and parties as opposed to transferring an they may involve an exchange of foreign foreign exchange swaps, unless the ownership interest in any asset or currencies, they also require contingent Secretary determines to exempt them? liability.142 Thus, the Commissions or variable payments in different Should the proposed rules clarify that, believe that an FRA satisfies clause currencies. Because the CEA defines a if the Secretary determines to exempt (A)(iii) of the swap definition.143 foreign exchange swap as a swap that foreign exchange swaps or foreign Notwithstanding their ‘‘forward’’ label, ‘‘solely’’ involves an initial exchange of exchange forwards, those transactions FRAs do not fall within the forward currencies and a reversal thereof at a remain subject to certain reporting contract exclusion from the swap later date, subject to certain parameters, requirements, and swap dealers and definition. FRAs do not involve currency swaps and cross-currency major swap participants entering into nonfinancial commodities and thus are swaps would not be foreign exchange such transactions remain subject to outside the scope of the forward swaps. Similarly, currency swaps and certain business conduct standards, contract exclusion. Nor is an FRA a cross-currency swaps are not foreign imposed by Title VII and CFTC commercial merchandising transaction, exchange forwards because foreign regulations promulgated thereunder? as there is no physical product to be exchange forwards ‘‘solely’’ involve an Why or why not? delivered in an FRA.144 Accordingly, initial exchange of currencies, subject to 53. Should the proposed rules certain parameters, while currency explicitly define the term ‘‘swap’’ to 141 See generally ‘‘Trading and Capital-Markets swaps and cross-currency swaps contain include foreign currency options and Activities Manual,’’ supra note 136, section 4315.1 additional elements, as discussed above. clarify that foreign currency options are (‘‘For example, in a six-against-nine-month (6x9) FRA, the parties agree to a three-month rate that is Currency swaps are expressly not foreign exchange forwards or foreign to be netted in six months’ time against the enumerated in the statutory definition exchange swaps? Why or why not? prevailing three-month reference rate, typically of the term ‘‘swap.’’ 139 Cross-currency Should the terms foreign currency LIBOR. At settlement (after six months), the present swaps, however, are not.140 options, currency options, foreign value of the net interest rate (the difference between the spot and the contracted rate) is multiplied by Accordingly, based on the foregoing exchange options, and foreign exchange the notional principal amount to determine the considerations, the Commissions are rate options be interpreted as amount of the cash exchanged between the parties synonymous? Why or why not? * * *. If the spot rate is higher than the contracted currency annuity swaps, level cash flows in 54. Should the proposed rules rate, the seller agrees to pay the buyer the different currencies are exchanged with no explicitly define the term ‘‘swap’’ to differences between the prespecified forward rate exchange of principal; annuity swaps are priced and the spot rate prevailing at maturity, multiplied such that the level payment cash flows in each include NDFs and clarify that NDFs are by a notional principal amount. If the spot rate is currency have the same net present value at the not foreign exchange forwards or foreign lower than the forward rate, the buyer pays the inception of the transaction. An amortizing cross- exchange swaps? Why or why not? seller.’’). currency swap is structured with a declining 55. Should the proposed rules 142 It appears that at least some in the trade view principal schedule, usually designed to match that FRAs as swaps today. See, e.g., The Globecon of an amortizing asset or liability. Id. See also explicitly define the term ‘‘swap’’ to Group, Ltd., ‘‘Derivatives Engineering: A Guide to Derivatives ONE, ‘‘Cross Currency Swap Valuation’’ include cross-currency swaps as swaps Structuring, Pricing and Marketing Derivatives,’’ 45 (‘‘A cross currency swap is swap of an interest rate and clarify that currency swaps and (McGraw-Hill 1995) (‘‘An FRA is simply a one- in one currency for an interest rate payment in cross-currency swaps are not foreign period interest-rate swap.’’); DerivActiv, Glossary of another currency. * * * This could be considered Financial Derivatives Terms (‘‘A swap is * * * a an interest rate swap with a currency component.’’), exchange forwards or foreign exchange strip of FRAs.’’), available at http://www.derivactiv. available at http://www.derivativesone.com/cross- swaps? Why or why not? Should the com/definitions.aspx?search=forward+ currency-swap-valuation/; Financial Accounting terms cross-currency swap and cross- rate+agreements. Cf. Don M. Chance, et. al, Standards Board, ‘‘Examples Illustrating currency rate swap be interpreted as ‘‘Derivatives in Portfolio Management,’’ 29 (AIMR Application of FASB Statement No. 138,’’ 1998) (‘‘[An FRA] involves one specific payment Accounting for Certain Derivative Instruments and synonymous? Why or why not? and is basically a one-date swap (in the sense that Certain Hedging Activities, section 2, Example 1, at 56. Is additional detail needed within a swap is a combination of FRAs[,] with some 3 (‘‘The company designates the cross-currency the proposed rules regarding foreign variations).’’). Thus, FRAs also may fall within swap as a fair value hedge of the changes in the fair exchange-related products to provide clause (A)(iv) of the swap definition, as ‘‘an value of the loan due to both interest and exchange agreement, contract, or transaction that is, or in the rates.’’), available at http://www.fasb.org/ greater clarity regarding the specific future becomes, commonly known to the trade as derivatives/examples.pdf. products listed in the proposed rules? If a swap.’’ See CEA section 1a(47)(a)(iv), 7 U.S.C. 138 BMO Capital Markets, ‘‘Cross Currency so, what additional detail would be 1a(47)(a)(iv). Swaps,’’ available at http://www.bmocm.com/ necessary? 143 See CEA section 1a(47)(A)(iii); 7 U.S.C. products/marketrisk/intrderiv/cross/default.aspx. 1a(47)(A)(iii). CFTC regulations have defined FRAs 139 See CEA section 1a(47)(A)(iii)(VII), 7 U.S.C. 3. Forward Rate Agreements as swap agreements. See CFTC rule 35.1(b)(1)(i), 17 1a(47)(A)(iii)(VII). CFR 35.1(b)(1)(i); Exemption for Certain Swap 140 Clause (A)(iii) of the swap definition expressly In general, the Commissions Agreements, 58 FR 5587, Jan. 22, 1993. The CFTC refers to a cross-currency rate swap. See CEA understand an FRA to be an over-the- recently has proposed to repeal that rule in light of section 1a(47)(A)(iii)(V), 7 U.S.C. 1a(47)(A)(iii)(V). counter contract for a single cash the enactment of Title VII of the Dodd-Frank Act. Although the swap industry appears to use the term payment, due on the settlement date of See Commodity Options and Agricultural Swaps, ‘‘cross-currency swap,’’ rather than ‘‘cross-currency supra note 78. rate swap’’ (the term used in CEA section a trade, based on a spot rate (determined 144 See Regulation of Hybrid and Related 1a(47)(A)(iii)(V)), the Commissions interpret these pursuant to a method agreed upon by Instruments, 52 FR 47022, 47028, Dec. 11, 1987 terms as synonymous. the parties) and a prespecified forward Continued

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the Commissions believe that the clause (A)(vi) means, for example, that increases, the seller pays the buyer the forward contract exclusion from the an option on a swap or security-based difference; if the value decreases, the swap definition for nonfinancial swap (commonly known as a buyer pays the seller the difference. commodities does not apply to FRAs.145 ‘‘swaption’’) would itself be a swap or CFDs can be traded on a number of Based on the foregoing security-based swap, respectively. The products, including treasuries, foreign considerations, the Commissions are Commissions also interpret clause exchange rates, commodities, equities, proposing rules to provide greater (A)(vi) to mean that a ‘‘forward swap’’ and stock indexes. Equity CFDs closely clarity by explicitly defining the term would itself be a swap or security-based mimic the purchase of actual shares. ‘‘swap’’ to include FRAs. As with the swap, respectively.147 The buyer of an equity CFD receives foreign exchange-related products cash dividends and participates in stock Request for Comment discussed above, the proposed rules splits.149 In the case of a long position, provide that FRAs would not be swaps 61. Is additional guidance regarding a dividend adjustment is credited to the if they fall within one of the exclusions swaptions, necessary? Why or why not? client’s account. In the case of a short set forth in subparagraph (B) of the swap If so, please provide a detailed position, a dividend adjustment is definition. explanation of what additional guidance debited from the client’s account. CFDs Request for Comment would be necessary. generally are traded over-the-counter 62. Is the Commissions’ description of (though they also are traded on the 57. Is the description of FRAs forward swaps accurate? Why or why Australian Securities Exchange) in a accurate? If not, please provide a not? If not, please provide a detailed number of countries outside the United detailed description of FRAs. Are there explanation of why the description is States. various types of FRAs? If so, please inaccurate. Is additional guidance CFDs, unless otherwise excluded, provide an explanation of their regarding forward swaps necessary? may fall within the scope of the swap characteristics and how they differ. Why or why not? If so, please provide and security-based swap definitions.150 58. What types of market participants a detailed explanation of what Whether a CFD is a swap or security- use FRAs, and for what purposes? What additional guidance would be market (spot) and fixed rates are used in based swap will depend on the necessary. FRAs, and how are those rates underlying product of that particular 63. Is additional guidance regarding determined, or on what are those rates CFD transaction. Because CFDs are other combinations or permutations of based? highly variable and a CFD can contain 59. Should the proposed rules swaps or security-based swaps a variety of elements that would affect explicitly define the term ‘‘swap’’ to necessary? Why or why not? If so, its characterization, the Commissions include FRAs? Why or why not? please provide a detailed description of believe that market participants will 60. Should the proposed rules provide any particular agreement, contract, or need to analyze the characteristics of a more detailed description of what transaction, including the purposes for any particular CFD in order to FRAs are? Why or why not? If so, please which it is used and the market determine whether it is a swap or a explain what additional language participants that use it, and what security-based swap. Therefore, the regarding FRAs should be included in additional guidance would be Commissions are not proposing rules or the proposed rules. necessary. additional interpretive guidance at this time regarding CFDs. 4. Combinations and Permutations of, or 5. Contracts for Differences Options on, Swaps and Security-Based The Commissions have received Request for Comment Swaps inquiries over the years regarding the 64. Should the Commissions provide Clause (A)(vi) of the swap definition treatment of CFDs under the CEA and additional guidance regarding CFDs? provides that ‘‘any combination or the Federal securities laws. A CFD Why or why not? If so, please provide permutation of, or option on, any generally is an agreement to exchange a detailed description of any particular agreement, contract, or transaction the difference in value of an underlying CFD and what additional guidance described in any of clauses (i) through asset between the time at which a CFD would be necessary. (v)’’ of the definition is a swap or position is established and the time at 148 security-based swap.146 As a result, which it is terminated. If the value asset * * * such as a share, index, market sector, currency or commodity, without acquiring (stating ‘‘[FRAs] do not possess all of the 147 Forward swaps are also commonly known as ownership of the underlying asset’’), available at characteristics of forward contracts heretofore forward start swaps, or deferred or delayed start http://www.osc.gov.on.ca/documents/en/Securities- _ _ _ delineated by the [CFTC]’’). swaps. A forward swap can involve two offsetting Category9/sn 20091030 91–702 cdf.pdf (Oct. 30, 145 Current European Union law includes FRAs in swaps that both start immediately, but one of which 2009); Financial Services Authority, Consultation the definition of ‘‘financial instruments.’’ See ends on the deferred start date of the forward swap Paper 7/20, ‘‘Disclosure of Contracts for Markets in Financial Instruments Directive (MiFID), itself. For example, if a counterparty wants to hedge Difference—Consultation and draft Handbook text,’’ ‘‘Directive 2004/39/EC of the European Parliament its risk for four years, starting one year from today, at part 2.2 (defining a CFD on a share as ‘‘a and of the Council,’’ Annex I(C), 4, 5, 10 (Apr. 21, it could enter into a one-year swap and a five-year derivative product that gives the holder an 2004), available at http://eur-lex.europa.eu/ swap, which would partially offset to create a four- economic exposure, which can be long or short, to LexUriServ/LexUriServ.do?uri=CONSLEG: year swap, starting one year forward. A forward the change in price of a specific share over the life 2004L0039:20070921:EN:PDF. A European swap also can involve a contract to enter into a of the contract’’), available at http://www.fsa.gov.uk/ _ Commission legislative proposal on derivatives, swap or security-based swap at a future date or with pubs/cp/cp07 20.pdf (Nov. 2007). central clearing, and trade repositories applies to a deferred start date. A forward swap is not a 149 See, e.g., Int’l Swaps and Derivatives Ass’n, FRAs that are traded over-the-counter and, thus, nonfinancial commodity forward contract or ‘‘2002 ISDA Equity Derivatives Definitions,’’ art. 10 would subject such transactions to mandatory security forward, both of which are excluded from (Dividends) and 11 (Adjustments and Modifications clearing, reporting and other regulatory the swap definition and discussed elsewhere in this Affecting Indices, Shares and Transactions). requirements. See Proposal for a Regulation of the release. 150 In some cases, depending on the facts and European Parliament and of the Council on OTC 148 See Ontario Securities Commission, Staff circumstances, the SEC may determine that a derivatives, central counterparties and trade Notice 91–702, ‘‘Offerings of Contracts for particular CFD on an equity security, for example, repositories, title I, art. 1(1), COM(2010) 484/5 Difference and Foreign Exchange Contracts to should be characterized as constituting a purchase (Sept. 15, 2010), available at http://ec.europa.eu/ Investors in Ontario,’’ at part IV.1 (defining a CFD or sale of the underlying equity security and, internal_market/financial-markets/docs/ as ‘‘a derivative product that allows an investor to therefore, be subject to the requirements of the derivatives/20100915_proposal_en.pdf. obtain economic exposure (for speculative, Federal securities laws applicable to such 146 See CEA section 1a(47)(vi), 7 U.S.C. 1a(47)(vi). investment or hedging purposes) to an underlying purchases or sales.

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D. Certain Interpretive Issues Instead, the relevant question is whether regarding these FERC-related products, the agreement, contract, or transaction the CFTC believes the treatment of these 1. Agreements, Contracts, or falls within the definition of the terms products should be considered under Transactions That May Be Called, or ‘‘swap’’ or ‘‘security-based swap’’ (as the standards and procedures specified Documented Using Form Contracts further interpreted pursuant to the in section 722 of the Dodd-Frank Act for Typically Used for, Swaps or Security- guidance proposed herein) based on its a public interest waiver, rather than Based Swaps terms and other characteristics. Even if through this joint rulemaking to further The Commissions are aware that one effect of an agreement is to reduce define the terms ‘‘swap’’ and ‘‘security- individuals and companies may the risk faced by the parties (e.g., the based swap.’’ generally use the term ‘‘swap’’ to refer to ‘‘swap’’ of physical delivery obligations Consequently, the Commissions are certain of their agreements, contracts, or described above may reduce the risk of not addressing FTRs or other transactions. For example, the term non-delivery), the agreement is not a transactions in RTOs or ISOs within this ‘‘swap’’ may be used to refer to an swap or security-based swap unless it joint definitional rulemaking. Instead, agreement to exchange real or personal otherwise meets one of the statutory persons with concerns about whether property between the parties. Or, two definitions, as further defined by the FERC-regulated products may be companies that produce fungible Commissions. Similarly, the fact that considered swaps (or futures) should products may use the term ‘‘swap’’ to the parties use another name to refer to request an exemption pursuant to refer to an agreement to perform each a swap or security-based swap would section 722 of the Dodd Frank Act.155 other’s delivery obligations—for not be relevant in determining whether III. The Relationship Between the Swap example, if one company must deliver the agreement, contract, or transaction is Definition and the Security-Based Swap the product in California and the other a swap or security-based swap as those Definition must deliver the same product in New terms are defined in the CEA and the York, they may use the term ‘‘swap’’ to Exchange Act and the rules and A. Introduction refer to an agreement that each company regulations thereunder. Title VII of the Dodd-Frank Act will perform the other’s delivery Request for Comment defines the term ‘‘swap’’ under the obligation. CEA,156 and also defines the term The name or label that the parties use 65. What agreements, contracts, or ‘‘security-based swap’’ under the to refer to a particular agreement, transactions that are not swaps or Exchange Act.157 Pursuant to the contract, or transaction is not security-based swaps are documented regulatory framework established in determinative of whether it is a swap or using industry standard form Title VII, the CFTC has regulatory security-based swap.151 Also, it may not agreements that are typically used for authority over swaps and the SEC has be relevant whether the agreement, swaps and security-based swaps? Please regulatory authority over security-based contract, or transaction is documented provide examples of such agreements, swaps. The Commissions are proposing using an industry standard form contracts, or transactions and details to further define the terms ‘‘swap’’ and agreement that is typically used for regarding their documentation, ‘‘security-based swap’’ to clarify whether swaps and security-based swaps.152 including why industry standard form particular agreements, contracts, or agreements typically used for swaps and transactions are swaps or security-based 151 security-based swaps are used. See, e.g., Haekel v. Refco, 2000 WL 1460078, swaps based on characteristics at * 4 (CFTC Sept. 29, 2000) (‘‘[T]he labels that parties apply to their transactions are not 2. Transactions in Regional including the specific terms and necessarily controlling’’); Reves v. Ernst & Young, Transmission Organizations and conditions of the instrument and the 494 U.S. 56, 61 (1990) (stating that the purpose of Independent System Operators nature of, among other things, the the securities laws is ‘‘to regulate investments, in prices, rates, securities, indexes, or whatever form they are made and by whatever The Commissions received a name they are called’’) (emphasis in original). comment letter in response to the ANPR commodities upon which the 152 The CFTC consistently has found that the form requesting clarification regarding the instrument is based. of a transaction is not dispositive in determining its status of transactions in RTOs and ISOs, Because the discussion below is nature. See, e.g., Grain Land, supra note 61, at *16 including financial transmission rights focused on whether particular (CFTC Nov. 25, 2003) (holding that contract agreements, contracts, or transactions substance is entitled to at least as much weight as (‘‘FTRs’’), under the swap and security- form); In the Matter of First Nat’l Monetary Corp., based swap definitions.153 Section 722 are swaps or security-based swaps, the [1984–1986 Transfer Binder] Comm. Fut. L. Rep. of the Dodd-Frank Act, though, Commissions use the term ‘‘Title VII (CCH) ¶ 22,698 at 30,974 (CFTC Aug. 7, 1985) specifically addresses how the CFTC instrument’’ in this release to refer to (‘‘When instruments have been determined to any agreement, contract, or transaction constitute the functional equivalent of futures should approach products regulated by contracts neither we nor the courts have hesitated FERC that also may be subject to CFTC that is included in either the definition to look behind whatever self-serving labels the jurisdiction. Section 722 of the Dodd- of the term ‘‘swap’’ or the definition of instruments might bear.’’); Stovall, supra note 63 Frank Act amended CEA section 4(c) 154 the term ‘‘security-based swap.’’ Thus, (holding that the CFTC ‘‘will not hesitate to look to provide that, if the CFTC determines the term ‘‘Title VII instrument’’ is behind whatever label the parties may give to the ‘‘ instrument’’). Likewise, the form of a transaction is that an exemption for FERC-regulated synonymous with swap or security- 158 not dispositive in determining whether an instruments or other specified based swap.’’ agreement, contract, or transaction falls within the electricity transactions would be in The determination of whether a Title regulatory regime for securities. See SEC v. Merch. VII instrument is a swap or security- Capital, LLC, 483 F.3d 747, 755 (11th Cir. 2007) accordance with the public interest, (‘‘The Supreme Court has repeatedly emphasized then it shall exempt such instruments or 155 that economic reality is to govern over form and transactions from the requirements of This approach, however, should not be taken to suggest any findings by the Commissions as to that the definitions of the various types of securities the CEA. Given this specific provision should not hinge on exact and literal tests.’’) whether or not FTRs or any other FERC-regulated (quoting Williamson v. Tucker, 645 F.2d 404, 418 products are swaps (or futures contracts). (5th Cir. 1981)); Robinson v. Glynn, 349 F.3d 166, Housing Foundation v. Foreman, 421 U.S. 837, 848 156 See CEA section 1a(47), 7 U.S.C. 1a(47). 170 (4th Cir. 2003) (‘‘What matters more than the (1975) (‘‘In searching for the meaning and scope of 157 See section 3(a)(68) of the Exchange Act, 15 form of an investment scheme is the ‘economic the word ‘security’ * * * the emphasis should be U.S.C. 78c(a)(68). reality’ that it represents * * * .’’) (internal citation on economic reality’’)). 158 In some cases, the Title VII instrument may be omitted); Caiola v. Citibank, N.A., New York, 295 153 See WGCEF Letter. a mixed swap. Mixed swaps are discussed further F.3d 312, 325 (2d Cir. 2002) (quoting United 154 7 U.S.C. 6(c). in part IV below.

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based swap should be made based on monetary rates that are not themselves • Money Market Rates: A rate the facts and circumstances relating to based on one or more securities, the established or determined based on the Title VII instrument at the time that instrument would be a swap and not a actual lending or money market the parties enter into it. If the Title VII security-based swap.161 Often swaps on transactions, including, but not limited instrument itself is not amended, interest rates or other monetary rates to, the Federal Funds Effective Rate; the modified, or otherwise adjusted during require the parties to make payments Euro Overnight Index Average (‘‘EONIA’’ its term by the parties, its based on the comparison of a specified or ‘‘EURONIA’’) (which is the weighted characterization as a swap or security- floating rate (such as the London average of overnight unsecured lending based swap should not change during Interbank Offered Rate (‘‘LIBOR’’)) to a transactions in the Euro-area interbank its duration because of any changes that fixed rate of interest agreed upon by the market); the EONIA Swap Index; the may occur to the factors affecting its parties. A rate swap also may require Australian dollar RBA 30 Interbank character as a swap or security-based payments based on the differences Overnight Cash Rate; the Canadian 159 swap. between two floating rates, or it may Overnight Repo Rate Average Classifying a Title VII instrument as a require that the parties make such (‘‘CORRA’’); the Mexican interbank swap or security-based swap is payments when any agreed-upon events equilibrium interest rate (‘‘TIIE’’); the straightforward for most instruments. with respect to interest rates or other NZD Official Cash Rate; the Sterling The Commissions, however, are monetary rates occur (such as when a proposing guidance to clarify the Overnight Interbank Average Rate specified interest rate crosses a (‘‘SONIA’’) (which is the weighted classification of swaps and security- threshold, or when the spread between based swaps in certain areas and to average of unsecured overnight cash two such rates reaches a certain point). transactions brokered in London by the provide guidance regarding the use of The rates referenced for the parties’ Wholesale Markets Brokers’ certain terms and conditions in Title VII obligations are varied, and examples of instruments. Association); the Swiss Average Rate such rates include the following: ‘‘ ’’ • Interbank Offered Rates: An average Overnight ( SARON ); and the Tokyo B. Title VII Instruments Based on ‘‘ ’’ of rates charged by a group of banks for Overnight Average Rate ( TONAR ) Interest Rates, Other Monetary Rates, (which is based on uncollateralized and Yields lending money to each other or other banks over various periods of time, and overnight average call rates for Parties frequently use Title VII other similar interbank rates,162 interbank lending); instruments to manage risks related to, including, but not limited to, LIBOR • Government Target Rates: A rate or to speculate on, changes in interest (regardless of currency); 163 the Euro established or determined based on rates, other monetary rates or amounts, Interbank Offered Rate (‘‘Euribor’’); the guidance established by a central bank or the return on various types of assets. Canadian Dealer Offered Rate (‘‘CDOR’’); including, but not limited to, the Broadly speaking, Title VII instruments and the Tokyo Interbank Offered Rate Federal Reserve discount rate, the Bank based on interest or other monetary (‘‘TIBOR’’); 164 of England base rate and policy rate, the rates would be swaps, whereas Title VII Canada Bank rate, and the Bank of Japan instruments based on the yield or value 161 See discussion supra part III.F regarding the policy rate (also known as the Mutan of a single security, loan, or narrow- use of certain terms and conditions. rate); 162 based security index would be security- Interbank lending rates are measured by • based swaps. However, market surveys of the loan rates that banks offer other General Lending Rates: A general participants and financial professionals banks, or by other mechanisms. The periods of time rate used for lending money, including, for such loans may range from overnight to 12 but not limited to, a prime rate, rate in sometimes use the terms ‘‘rate’’ and months or longer. ‘‘yield’’ in different ways. The The interbank offered rates listed here are the commercial paper market, or any Commissions are proposing guidance frequently called either a ‘‘reference rate,’’ the rate similar rate provided that it is not based regarding whether Title VII instruments of ‘‘reference banks,’’ or by a designation that is on any security, loan, or group or index specific to the service that quotes the rate. For some of securities; that are based on interest rates, other of the interbank offered rates listed here, there is a monetary rates, or yields would be similar rate that is stated as an interbank bid rate, • Indexes: A rate derived from an swaps or security-based swaps and which is the average rate at which a group of banks index of any of the foregoing or requesting comment as to whether bid to borrow money from other banks. For following rates, averages, or indexes, example, the bid rate similar to LIBOR is called additional clarification in this area LIBID. including but not limited to a constant would be appropriate.160 163 Today, LIBOR is used as a rate of reference for maturity rate (U.S. Treasury and certain the following currencies: Australian Dollar, 165 1. Title VII Instruments Based on other rates), the interest rate swap Canadian Dollar, Danish Krone, Euro, Japanese Yen, rates published by the Federal Reserve Interest Rates or Other Monetary Rates New Zealand Dollar, Pound Sterling, Swedish That Are Swaps Krona, Swiss Franc, and U.S. Dollar. in its ‘‘H.15 Selected Interest Rates’’ 164 Other interbank offered rates include the publication, the ISDAFIX rates, the The Commissions believe that when following (with the country or city component of ICAP Fixings, a constant maturity swap, payments exchanged under a Title VII the acronym listed in parentheses): AIDIBOR (Abu or a rate generated as an average instrument are based solely on the Dhabi); BAIBOR (Buenos Aires); BKIBOR (geometric, arithmetic, or otherwise) of levels of certain interest rates or other (Bangkok); BRAZIBOR (Brazil); BRIBOR/BRIBID (Bratislava); BUBOR (Budapest); CHIBOR (China); any of the foregoing, such as overnight CHILIBOR (Chile); CIBOR (Copenhagen); COLIBOR index swaps (‘‘OIS’’)—provided that 159 See discussion infra part III.G.3(a) regarding (Colombia); HIBOR (Hong Kong); JIBAR such rates are not based on a specific Title VII instruments based on indexes. (Johannesburg); JIBOR (Jakarta); KAIBOR 160 Commenters did not address these (Kazakhstan); KIBOR (Karachi); KLIBOR (Kuala instruments specifically. A number of commenters Lumpur); KORIBOR ((South) Korea); MEXIBOR 165 A Title VII instrument based solely on the urged clarification that various transactions or (Mexico); MIBOR (Mumbai); MOSIBOR (Moscow); level of a constant maturity U.S. Treasury rate obligations, such as commercial loans, are not Title NIBOR (Norway); PHIBOR (Philippines); PRIBOR would be a swap because U.S. Treasuries are VII instruments solely because they reference an (Prague); REIBOR/REIBID (Reykjavik); RIGIBOR/ exempted securities that are excluded from the interest rate. See BlackRock Letter; Cleary Letter; RIGIBID (Riga); SHIBOR (Shanghai); SIBOR security-based swap definition. Conversely, a Title Farm Credit Council Letter; White & Case Letter. (Singapore); SOFIBOR (Sofia); STIBOR (Stockholm); VII instrument based solely on the level of a The Commissions have proposed guidance to TAIBOR (Taiwan); TELBOR (Tel Aviv); TRLIBOR constant maturity rate on a narrow-based index of address such customary commercial transactions in and TURKIBOR (Turkey); VILIBOR (Vilnius); non-exempted securities under the security-based part II.B.3 above. VNIBOR (Vietnam); and WIBOR (Warsaw). swap definition would be a security-based swap.

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security, loan, or narrow-based group or guidance. Are there certain constant reference an interest rate or monetary index of securities; maturity rates that should not be rate as outlined above in subsection one • Other Monetary Rates: A monetary considered to be security-based, such of this section. In these cases, this rate including, but not limited to, the that a Title VII instrument based on ‘‘yield’’ reference would be considered Consumer Price Index (‘‘CPI’’), the rate of those rates would instead be a swap and equivalent to a reference to an interest change in the money supply, or an not a security-based swap or mixed rate or monetary rate and the Title VII economic rate such as a payroll index; swap? If so, are there objective criteria instrument would be, under the and to distinguish between different types of • guidance in this section, a swap (or Other: The volatility, variance, rate constant maturity rates in the mixed swap depending on other of change of (or the spread, correlation determination of whether a Title VII references in the instrument). or difference between), or index based instrument is a swap or security-based on any of the foregoing rates or averages swap? If so, please describe any such Request for Comment of such rates, such as forward spread criteria in detail. agreements, references used to calculate 69. The Commissions request the variable payments in index 2. Title VII Instruments Based on Yields comment generally on the foregoing amortizing swaps (whereby the notional The Commissions also propose proposed guidance regarding Title VII principal amount of the agreement is guidance to clarify the status of Title VII instruments where the underlying amortized according to the movement of instruments in which one of the reference is a ‘‘yield.’’ Please provide a an underlying rate), or correlation swaps underlying references of the instrument detailed explanation of any uncertainty and basis swaps, including but not is a ‘‘yield.’’ In cases when a ‘‘yield’’ is regarding the Commissions’ proposed limited to, the ‘‘TED spread’’ 166 and the calculated based on the price or changes use of the terms ‘‘yield’’ and ‘‘yield spread or correlation between LIBOR in price of a debt security, loan, or curve’’ and what additional guidance and an OIS. narrow-based security index, it is would be necessary. As discussed above, the Commissions another way of expressing the price or 70. Does the proposed guidance in believe that when payments under a value of a debt security, loan, or narrow- this section appropriately describe Title VII instrument are based solely on based security index. For example, debt instruments based on the ‘‘yield’’ of a any of the foregoing, such Title VII securities often are quoted and traded debt security that should be considered instrument would be a swap. on a yield basis rather than on a dollar security-based swaps? Is additional price, where the yield relates to a Request for Comment guidance necessary regarding when the specific date, such as the date of 66. The Commissions request term ‘‘yield’’ is used as a proxy for price maturity of the debt security (i.e., yield or value? If so, please provide a detailed comment generally on the foregoing to maturity) or the date upon which the explanation of any uncertainty proposed guidance regarding Title VII debt security may be redeemed or called regarding how the term ‘‘yield’’ is used instruments where the underlying by the issuer (e.g., yield to first whole and what additional guidance would be reference is an interest rate or other issue call).167 monetary rate. Except in the case of certain exempted necessary. 67. Does the proposed guidance in securities, when one of the underlying 71. Are there instruments where the this section accurately describe the references of the Title VII instrument is underlying reference is a ‘‘yield’’ of a types of interest rates and other the ‘‘yield’’ of a debt security, loan, or debt security that should be considered monetary rates that are used as an narrow-based security index in the a swap as opposed to a security-based underlying reference of a Title VII sense where the term ‘‘yield’’ is used as swap? If so, what are they, and how instrument, and that should cause the a proxy for the price or value of the debt often are they traded? How are such instrument to be considered a swap? security loan, or narrow-based security instruments distinguished from Are any of the rates identified in this list index, the Title VII instrument would be instruments based on ‘‘yield’’ that not used in this manner? Are there any a security-based swap. And, as a result, should be considered security-based significant interest or monetary rates in cases where the underlying reference swaps? that should be added to this list in order is a point on a ‘‘yield curve’’ generated 3. Title VII Instruments Based on to provide additional guidance? from the different ‘‘yields’’ on debt 68. As discussed above, a Title VII securities in a narrow-based security Government Debt Obligations instrument would be considered a index (e.g., a constant maturity yield or security-based swap if the instrument is The Commissions also are providing rate), the Title VII instrument would be guidance regarding instances in which based on constant maturity rates that are a security-based swap. In either case, derived from the market prices and the underlying reference of the Title VII however, where certain exempted instrument is a government debt yields of a non-exempted debt security securities, such as U.S. Treasury or a narrow-based security index of debt obligation. The security-based swap securities, are the only underlying definition specifically excludes any securities (depending on the other terms reference of a Title VII instrument of the Title VII instrument, such agreement, contract, or transaction that involving securities, the Title VII meets the definition of a security-based instrument may be a mixed swap). The instrument would be a swap. Title VII Commissions request comment on this swap only because it ‘‘references, is instruments based on exempted based upon, or settles through the securities are discussed further below. 166 transfer, delivery, or receipt of an The TED spread is the difference between the The above interpretation would not exempted security under [section interest rates on interbank loans and short-term U.S. apply in cases where the ‘‘yield’’ government debt (Treasury bills or ‘‘T-bills’’). The 3(a)(12) of the Exchange Act], as in referenced in a Title VII instrument is latter are exempted securities that are excluded effect on the date of enactment of the from the statutory definition of the term ‘‘security- not based on a debt security, loan, or Futures Trading Act of 1982 (other than based swap.’’ Thus, neither any aspect of U.S. narrow-based security index of debt Treasuries nor interest rates on interbank loans, can any municipal security as defined in securities but rather is being used to form the basis of a security-based swap. For this [section 3(a)(29) of the Exchange Act] reason, a Title VII instrument on a spread between * * *), unless such agreement, contract, interbank loan rates and T-bill rates also would not 167 See, e.g., Securities Confirmations, 47 FR be a security-based swap. 37920, Aug. 27, 1982. or transaction is of the character of, or

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is commonly known in the trade as, a instruments are swaps or security-based also involve adding or subtracting a put, call, or other option.’’ 168 swaps? spread to or from the financing rate,175 As a result of this exclusion in the or calculating the financing rate in a C. Total Return Swaps security-based swap definition for currency other than that of the ‘‘exempted securities,’’ 169 if the only A TRS is a Title VII instrument in underlying reference security or security underlying reference of a Title VII which one counterparty, the seller of the index.176 However, the Commissions instrument involving securities is, for TRS, makes a payment that is based on note that where such payments example, the price of a U.S. Treasury the price appreciation and income from incorporate additional elements that security and does not have any other an underlying security or security create additional interest rate or underlying reference involving index.171 The other counterparty, the currency exposures that are unrelated to securities, then the instrument would be buyer of the TRS, makes a financing the financing of the security-based a swap. Similarly, if the Title VII payment that is often based on a swap, or otherwise shift or limit risks instrument is based on the ‘‘yield’’ of a variable interest rate, such as LIBOR (or that are related to the financing of the U.S. Treasury security and does not other interbank offered rate or money security-based swap, those additional have any other underlying reference market rate, as described above), as well elements may cause the security-based involving securities, then the as a payment based on the price swap to be a mixed swap. instrument also would be a swap, depreciation of the underlying For example, where the regardless of whether the term ‘‘yield’’ is reference. The ‘‘total return’’ consists of counterparties embed interest-rate a proxy for the price of the security. the price appreciation or depreciation, optionality (e.g., a cap, collar, call, or Foreign government securities, by plus any interest or income put) into the terms of a security-based 172 contrast, were not ‘‘exempted securities’’ payments. Accordingly, where a TRS swap in a manner designed to shift or as of the date of enactment of the is based on a single security or loan, or limit interest rate exposure, the 170 a narrow-based security index, the TRS inclusion of these terms would cause Futures Trading Act of 1982 and thus 173 do not explicitly fall within this would be a security-based swap. Generally, the use of a variable exclusion from the security-based swap such Title VII instruments should not be interest rate in the TRS buyer’s payment ‘‘ definition. Therefore, if the underlying characterized as mixed swaps because the floating obligations to the seller is incidental to rate payment obligation is not the principal driver reference of the Title VII instrument is the purpose of, and the risk that the of the security-based swap and, in that sense, the the price, value, or ‘‘yield’’ (where security-based swap is not ‘based on’ the level of counterparties assume in, entering into ‘‘yield’’ is a proxy for price or value) of an interest rate within the meaning of [the Dodd- the TRS. These payments are a form of a foreign government security, or a point Frank Act]’’); Deutsche Bank Letter (explaining that financing that reflects the security-based such Title VII instruments in which the party that on a yield curve derived from a narrow- swap dealer’s cost of financing the is ‘‘synthetically short’’ the underlying security based security index composed of makes payments based on the value of the position or a related hedge, allowing the underlying security to the party that is foreign government securities, then the TRS buyer to receive payments based on instrument would be a security-based ‘‘synthetically long,’’ and the synthetically long the price appreciation and income of a party pays the synthetically short party an amount swap. security or security index without that may be based on LIBOR or another interest rate, should not be treated as mixed swaps because the Request for Comment purchasing the security or security payments to the synthetically short party are index. The Commissions believe that 72. The Commissions request generally intended only for financing costs incurred when such interest rate payments act in establishing or maintaining the transaction or its comment generally on the foregoing merely as a financing component in a hedge); ISDA Letter (noting that variable interest proposed guidance regarding the TRS, or in any other security-based rate-based payments in connection with a typical treatment of Title VII instruments in Title VII instrument of this type are ‘‘incidental to swap, the inclusion of such interest rate which the underlying reference is a what is essentially a security-based transaction and terms would not cause the security- should not yield mixed swap status’’); Morgan government debt obligation. based swap to be characterized as a Stanley Letter (noting that the interest rate-based General Request for Comment: In mixed swap.174 Financing terms may payments in such Title VII instruments ‘‘reflect addition to the particular requests for compensation for the financing costs associated’’ comment set forth on the issues with the instrument and ‘‘are not at the core of what 171 Where the underlying security is an equity, a is being ‘swapped’ under the contract’’); Letter from discussed above, the Commissions also TRS is also known as an ‘‘equity swap.’’ Timothy W. Cameron, Esq., Managing Director, request comment generally on the 172 If the total return is negative, the seller Asset Management Group, Securities Industry and following: receives this amount from the buyer. TRS can be Financial Markets Association, Sept. 20, 2010 73. Does the proposed guidance in used to synthetically reproduce the payoffs of a (expressing the view that such a financing position. For example, two counterparties may component is incidental to the Title VII instrument this part III.B accurately describe market enter into a 3-year TRS where the buyer of the TRS and should not cause it to be viewed as a mixed practices and terminology? Will the receives the positive total return on XYZ security, swap). proposed guidance be useful in if any, and the seller of the TRS receives LIBOR 175 See, e.g., Moorad Chowdry, ‘‘Total Return determining whether Title VII plus 30 basis points and the absolute value of the Swaps: Credit Derivatives and Synthetic Funding negative total return on XYZ security, if any. Instruments,’’ at 3–4 (noting that the spread to the 173 If the underlying reference of the TRS is a TRS financing rate is a function of: the credit rating 168 Section 3(a)(68)(C) of the Exchange Act, 15 broad-based equity security index, however, the of the counterparty paying the financing rate; the U.S.C. 76c(a)(68)(C). Commissions believe that it would be a swap (and amount, value, and credit quality of the reference 169 As of January 11, 1983, the date of enactment an SBSA) and not a security-based swap. In asset; the dealer’s funding costs; a profit margin; of the Futures Trading Act of 1982, Public Law 97– addition, a TRS on an exempted security, such as and the capital charge associated with the TRS), 444, 96 Stat. 2294, section 3(a)(12) of the Exchange a U.S. Treasury, under section 3(a)(12) of the available at http://www.yieldcurve.com/ Act, 15 U.S.C. 78c(a)(12), provided that, among Exchange Act, 15 U.S.C. 78c(a)(12), as in effect on Mktresearch/LearningCurve/TRS.pdf. other securities, ‘‘exempted securities’’ include: (i) the date of enactment of the Futures Trading Act 176 For example, a security-based swap on an ‘‘securities which are direct obligations of, or of 1982 (other than any municipal security as equity security priced in U.S. dollars in which obligations guaranteed as to principal or interest by, defined in section 3(a)(29) of the Exchange Act, 15 payments are made in Euros based on the U.S. the United States;’’ (ii) certain securities issued or U.S.C. 78c(a)(29), as in effect on the date of dollar/Euro spot rate at the time the payment is guaranteed by corporations in which the United enactment of the Futures Trading Act of 1982) made would not be a mixed swap. Under these States has a direct or indirect interest as designated would be a swap (and an SBSA) and not a security- circumstances, the currency is merely referenced in by the Secretary of the Treasury; and (iii) certain based swap. connection with the method of payment, and the other securities as designated by the SEC in rules 174 Several commenters noted that such counterparties are not hedging the risk of changes and regulations. instruments should not be characterized as mixed in currency exchange rates during the term of the 170 Public Law 97–444, 96 Stat. 2294 (1983). swaps. See Cleary Letter (expressing the view that security-based swap.

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the TRS to be both be a swap and a Commissions believe that, under this E. Title VII Instruments Based on security-based swap (i.e., a mixed prong of the definition of security-based Futures Contracts swap). Similarly, if a TRS is also based swap, a single-name CDS that is based A Title VII instrument that is based on on non-security-based components on a single reference obligation would a futures contract will either be a swap (such as the price of oil, or a currency), be a security-based swap because it or a security-based swap, or both (i.e., a the security-based swap would also be would be based on a single security or mixed swap), depending on the nature a swap.177 loan (or any interest therein or on the of the futures contract, including the Request for Comment value thereof). underlying reference of the futures 74. Is the proposed guidance In addition, the third prong of the contract. The Commissions believe that regarding TRS and other security-based security-based swap definition includes a Title VII instrument where the swaps for which the use of a variable a swap that is based on the occurrence underlying reference is a security future 182 interest rate in a counterparty’s payment of an event relating to a ‘‘single issuer would be a security-based swap. The obligations is incidental to the risk that of a security,’’ provided that such event Commissions believe that, except with counterparties assume in entering into a ‘‘directly affects the financial statements, respect to certain futures on foreign TRS or other security-based swap financial condition, or financial government debt securities discussed appropriate? Why or why not? If not, obligations of the issuer.’’ 179 This below, a Title VII instrument where the please provide a detailed explanation of provision applies generally to event- underlying reference is a futures what guidance would be appropriate. triggered swap contracts. With respect contract that is not a security future 75. How often do market participants to a CDS, such events could include the would be a swap.183 use rates, other than interbank offered bankruptcy of an issuer, a default on Title VII instruments involving rates or money market rates, in TRS to one of an issuer’s debt securities, or the futures contracts on foreign government recoup their financing costs? If so, default on a non-security loan of an debt securities present a unique which rates and what portion of the issuer.180 Therefore, the Commissions circumstance. Rule 3a12–8 under the market (broken down by product, believe that if the payout on a CDS on Exchange Act exempts certain foreign country, counterparty type, and/or a single issuer of a security is triggered government debt securities, for purposes whatever data are available to by the occurrence of an event relating to only of the offer, sale, or confirmation commenters), in percentage and/or that issuer, the CDS would be a security- of sale of futures contracts on such dollar terms do TRS with such financing based swap under the third prong.181 foreign government debt securities, from rates constitute? What factors influence all provisions of the Exchange Act the financing rates that market In this regard, the Commissions note which by their terms do not apply to an participants incorporate into their that each transaction under an ISDA ‘‘exempted security,’’ subject to certain security-based swaps? Master Agreement would need to be conditions.184 To date, the SEC has 76. Do market participants embed analyzed to determine whether it is a optionality, such a cap, collar, put, or swap or security-based swap. For 182 A security future is specifically defined in call, into the payment component of a example, the Commissions believe that both the CEA and the Exchange Act as a futures a number of single-name CDS that are contract on a single security or a narrow-based TRS? If so, how frequently and for what security index, including any interest therein or purpose? executed at the same time and that are based on the value thereof, except an exempted 77. Do market participants embed documented under one ISDA Master security under section 3(a)(12) of the Exchange Act, nonfinancial commodity components Agreement, but in which a separate 15 U.S.C. 78c(a)(12), as in effect on the date of into the payment component that enactment of the Futures Trading Act of 1982 (other confirmation is sent for each CDS, than any municipal security as defined in section directly affect the payments on a TRS should be treated as an aggregation of 3(a)(29) of the Exchange Act, 15 U.S.C. 78c(a)(29), rather than operating as a mere security-based swaps. As a practical and as in effect on the date of enactment of the Futures financing component? If so, how economic matter, the Commissions Trading Act of 1982). frequently and for what purpose? believe that each such CDS would be a The term security future does not include any 78. Do market participants embed agreement, contract, or transaction excluded from separate and independent transaction. the CEA under CEA sections 2(c), 2(d), 2(f), or 2(g), foreign currency swaps into a foreign Thus, such an aggregation of single- 7 U.S.C. 2(c), 2(d), 2(f), or 2(g), (as in effect on the currency payment component of a TRS? name CDS would not constitute a date of enactment of the Commodity Futures If so, how frequently and for what Modernization Act of 2000 (‘‘CFMA’’) or Title IV of ‘‘group or index’’ under the security- the CFMA). See CEA section 1a(44), 7 U.S.C. 1a(44); purpose? based swap definition but instead 79. Are there other circumstances section 3(a)(55) of the Exchange Act, 15 U.S.C. would constitute multiple single-name 78c(a)(55). under which a TRS should be treated as CDS. 183 Depending on the underlying reference of the a mixed swap rather than a security- futures contract, though, such swaps could be based swap or swap? If so, please security-based swap agreements. For example, a provide a detailed description of such 179 Section 3(a)(68)(A)(ii)(III) of the Exchange Act, swap on a future on the S&P 500 index would be 15 U.S.C. 78c(a)(68)(A)(ii)(III). circumstances and explain why. a security-based swap agreement. 180 The Commissions understand that in the 184 Specifically, rule 3a12–8 under the Exchange D. Security-Based Swaps Based on a context of credit derivatives on asset-backed Act requires as a condition to the exemption that securities or MBS, the events include principal the foreign government debt securities not be Single Security or Loan and Single- writedowns, failure to pay principal and interest registered under the Securities Act (or the subject Name Credit Default Swaps shortfalls. of any American depositary receipt registered under The second prong of the security- 181 The Commissions understand that some the Securities Act) and that futures contracts on single-name CDS now trade with fixed coupon such foreign government debt securities ‘‘require based swap definition includes a swap payments expressed as a percentage of the notional delivery outside the United States, [and] any of its that is based on ‘‘a single security or amount of the transaction and payable on a periodic possessions or territories, and are traded on or loan, including any interest therein or basis during the term of the transaction. See Markit, through a board of trade, as defined in [CEA section on the value thereof.’’ 178 The ‘‘The CDS Big Bang: Understanding the Changes to 2, 7 U.S.C. 2].’’ See rules 3a12–8(b), 3a12–8(a)(2) the Global CDS Contract and North American under the Exchange Act, 17 CFR 240.3a12–8(b) and Conventions,’’ 3, available at http:// 240.3a12–8(a)(2).These conditions were ‘‘designed 177 See Mixed Swaps, infra part IV. www.markit.com/cds/announcements/resource/ to minimize the impact of the exemption on 178 Section 3(a)(68)(A)(ii)(II) of the Exchange Act, cds_big_bang.pdf. The Commissions believe the securities distribution and trading in the United 15 U.S.C. 78c(a)(68)(A)(ii)(II). The first prong of the existence of such single-name CDS does not change States . . . .’’ See Exemption for Certain Foreign security-based swap definition is discussed below. their interpretation. Continued

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enumerated within rule 3a12–8 debt create different regulators for a future an instrument: (i) to be used to avoid the securities of 21 identified foreign and Title VII instruments based on that application of the Federal securities governments solely for purposes of future. laws, including the Dodd-Frank Act futures trading.185 The SEC believes that the provisions, that otherwise would apply The Commissions are evaluating the characterization of a Title VII if the Title VII instrument was instead appropriate characterization of Title VII instrument involving a foreign based on the foreign government debt instruments based on futures on such government debt security may affect security directly; or (ii) to be used to foreign government debt securities that Federal securities law provisions avoid the application of the CEA, are traded in reliance on rule 3a12–8. relating to the distribution of the including the Dodd-Frank Act The Commissions recognize that as a underlying foreign debt security. provisions, that otherwise would apply result of the rule 3a12–8 exemption, Specifically, the Dodd-Frank Act if the Title VII instrument was instead futures on foreign government debt included provisions that would not based on any other futures contract that securities of 21 foreign countries trade permit issuers, affiliates of issuers, or is not a security future. Accordingly, the pursuant to the CFTC’s exclusive underwriters to use security-based Commissions also are evaluating jurisdiction and without the futures swaps to offer or sell the issuers’ whether a Title VII instrument on such being considered security futures. securities underlying a security-based a futures contract on a foreign Because futures contracts on the 21 swap without complying with the government debt security should be foreign government debt securities requirements of the Securities Act.188 In characterized as a mixed swap. designated in rule 3a12–8 are not addition, the Dodd-Frank Act provided security futures, applying the above that any offer and sale of security-based Request for Comment interpretive guidance to a Title VII swaps to non-ECPs would have to be 80. The Commissions request instrument on a futures contract on registered under the Securities Act.189 comment generally on the foregoing these foreign government debt securities Thus, for example, if a Title VII discussion regarding Title VII would mean that such Title VII instrument on a future on foreign instruments based on futures contracts instrument would be a swap.186 The government debt security is and security futures. Commissions note, however, that the characterized as a swap, and not a 81. What types of such products are conditions in the rule 3a12–8 exemption security-based swap, then the traded in the market today? How often, were established specifically for trading provisions of the Dodd-Frank Act and where are such products traded? futures contracts on these foreign enacted to ensure that there could not 82. The Commissions are requesting sovereign debt obligations, not Title VII be offers and sales of securities made comment on how to characterize a Title instruments based on futures contracts without compliance with the Securities VII instrument where the underlying on foreign government debt securities. Act, either by issuers, their affiliates, or reference is a futures contract on one of Furthermore, the Commissions note that underwriters or to non-ECPs, would not the 21 foreign government debt the Dodd-Frank Act did not exclude apply to such swap transactions. securities that have been designated as debt securities of foreign governments On the other hand, the CFTC believes ‘‘exempted securities’’ under rule 3a12– from the definition of security-based that characterizing Title VII instruments 8 only for the offer, sale, or confirmation swap. Therefore, a Title VII instrument based on a future on a foreign of sale of futures contracts on such based on such debt securities would be government debt security designated in securities and only where the a security-based swap. Relying on rule rule 3a12–8 as security-based swaps conditions of such exemption are 3a12–8 for the treatment of Title VII could undermine the regulatory scheme satisfied. When should a Title VII instruments on such futures would that Congress established in the CEA. As instrument on a futures contract on a therefore result in different treatments noted above, the Commissions generally foreign government debt security being depending on whether the Title VII would treat Title VII instruments based traded in reliance on the exemption instrument is based on a foreign on futures that are not security futures under rule 3a12–8 be treated as a swap, government debt security or on a future as swaps. Many of the futures on the 21 a security-based swap or a mixed swap? that is in turn based on a foreign foreign government debt securities Is there any economic reason why the government debt security.187 On the designated in rule 3a12–8 trade with treatment of a Title VII instrument on a other hand, to do otherwise would substantial volume. Section 753 of the future on a foreign government debt Dodd-Frank Act provided the CFTC security should be different than the Government Securities for Purposes of Futures with additional antifraud and anti- treatment of a Title VII instrument on Trading, 49 FR 8595, 8596–97, Mar. 8, 1984 (citing manipulation authorities patterned on the foreign government debt security Futures Trading Act of 1982). those provided to the SEC in the Federal directly? Is there any economic reason 185 See rule 3a12–8(a)(1) under the Exchange Act why the treatment of a Title VII (designating the debt securities of the governments securities laws. The CFTC believes that of the United Kingdom, Canada, Japan, Australia, treating Title VII instruments based on instrument on a future on a designated France, New Zealand, Austria, Denmark, Finland, these futures as security-based swaps, foreign government debt security should the Netherlands, Switzerland, Germany, Ireland, while the underlying futures come be different than the treatment of a Title Italy, Spain, Mexico, Brazil, Argentina, Venezuela, under the CEA, may undermine those VII instrument on any other futures Belgium, and Sweden). contract that is not a security future? If 186 The Commissions note, by contrast, that a authorities. Title VII instrument that is based on the price or In sum, depending on how a Title VII the answer to either of the two value of, or settlement into, a futures contract on instrument on such a future on a foreign preceding questions is yes, please one of the 21 foreign government debt securities government debt security is explain and provide empirical analysis. designated in rule 3a12–8 and that is also based on If the Title VII instrument is able to be the price or value of, or had the potential to settle characterized, there is potential for such directly into, the foreign debt security, would be a entered into by the issuer, affiliate of the security-based swap and, depending on other 188 See section 2(a)(3) of the Securities Act as issuer, or an underwriter, or if the Title features of the Title VII instrument, possibly a amended by the Dodd-Frank Act, 15 U.S.C. VII instrument is being offered and sold mixed swap. 77b(a)(3). This provision applies regardless of to non-ECPs, should the Title VII 187 This is the case today (i.e., different whether the Title VII instrument allows the parties treatments) with respect to, for example, options on to physically settle any such security-based swap. instrument be viewed as a security- broad-based security indexes and options on futures 189 See section 5 of the Securities Act as amended based swap or a mixed swap so that on broad-based security indexes. by the Dodd-Frank Act. 15 U.S.C. 77e. market participants cannot chose

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whether to comply with the registration instrument.190 Another example would detailed explanation of such Title VII requirements of the Securities Act with be where a private sector or government instruments and the references they use. borrower that issues a 5-year, amortizing respect to the foreign government debt G. The Term ‘‘Narrow-Based Security $100 million debt security with a semi- securities? Should such an instrument Index’’ in the Security-Based Swap be viewed as a swap or a mixed swap annual coupon of LIBOR plus 250 basis Definition so that market participants cannot points also, at the same time, chooses to choose whether to comply with the enter into a 5-year interest rate swap on 1. Introduction192 requirements of the Dodd-Frank Act $100 million notional in which this As noted above, a Title VII instrument concerning clearing, trade execution, same borrower, using the same in which the underlying reference of the reporting, and standards applicable to amortization schedule as the debt instrument is a ‘‘narrow-based security dealers and major participants that security, receives semi-annual payments index’’ is considered a security-based apply to Title VII instruments on futures of LIBOR plus 250 basis points in swap subject to regulation by the SEC, contracts that are not security futures? exchange for 5% fixed rate payments. whereas a Title VII instrument in which Are there other suggested approaches to The fact that the specific terms of the the underlying reference of the the treatment of Title VII instruments on interest rate swap (e.g., 5-year, LIBOR instrument is a security index that is not futures on foreign government debt plus 250 basis point, $100 million a narrow-based security index (i.e., the securities that would preserve the notional, fixed amortization schedule) index is broad-based), the instrument is application of the Securities Act as were set at the time of execution to considered a swap subject to regulation contemplated by the Dodd-Frank Act to match related terms of a debt security by the CFTC. In this section, the Title VII instruments involving foreign does not cause the interest rate swap to Commissions propose rules and government debt securities? Are there become a security-based swap. guidance regarding several issues other suggested approaches to the However, if the interest rate swap regarding the term ‘‘narrow-based treatment of Title VII instruments on contained additional terms that were in security index’’ in the security-based futures on foreign government debt fact contingent on a characteristic of the swap definition, including: (i) The securities that would preserve the debt security that may change in the existing criteria for determining whether application of the CEA as contemplated future, such as an adjustment to future a security index is a narrow-based by the Dodd-Frank Act to Title VII interest rate swap payments based on security index and the applicability of instruments involving futures contracts the future price or yield of the debt past guidance of the Commissions that are not security futures? If the security, then this Title VII instrument regarding those criteria to Title VII answer to either of the two preceding would be a security-based swap that instruments; (ii) new criteria for questions is yes, please provide detail would be a mixed swap. determining whether a CDS where the and analysis. Request for Comment underlying reference is a group or index of entities or obligations of entities F. Use of Certain Terms and Conditions 83. Is the guidance provided by the (typically referred to as an ‘‘index CDS’’) in Title VII Instruments Commissions regarding the relevance of is based on an index that is a narrow- The Commissions are aware that the nature of a security, rate, or other based security index; (iii) the meaning ‘‘ ’’ market participants’ setting of certain commodity that informs the of the term index ; (iv) a rule governing fixed terms or conditions of Title VII determination of a fixed term or the tolerance period for Title VII instruments may be informed by the condition of a Title VII instrument instruments on security indexes traded on DCMs, SEFs, foreign boards of trade value or level of a security, rate, or other appropriate? Why or why not? If not, (‘‘FBOTs’’), security-based SEFs, or commodity at the time of the execution what guidance would be appropriate? NSEs, where the security index of the instrument. The Commissions 84. The Commissions are aware that temporarily moves from broad-based to believe that, in evaluating whether such quoting conventions are used in the narrow-based or from narrow-based to a Title VII instrument is a swap or context of setting the fixed terms of broad-based; and (v) a rule governing security-based swap, the nature of the certain Title VII instruments, such as the grace period for Title VII security, rate, or other commodity that interest rate swaps that exchange LIBOR instruments on security indexes traded informed the setting of such fixed term for a fixed rate that is set at the time of on DCMs, SEFs, FBOTs, security-based or condition should not itself impact the execution by reference to U.S. Treasury SEFs, or NSEs, where the security index determination of whether the Title VII securities.191 Are there other Title VII moves from broad-based to narrow- instrument is a swap or a security-based instruments that use such quoting based or from narrow-based to broad- swap, provided that the fixed term or conventions? If so, please provide a based and the move is not temporary. condition is set at the time of execution of the Title VII instrument and the value 190 However, to the extent the fixed term or 2. Applicability of the Statutory Narrow- or level of that fixed term or condition condition is set at a future date or at a future value Based Security Index Definition and may not vary over the life of the Title or level of a security, rate, or other commodity Past Guidance of the Commissions to rather than the value or level of such security, rate, VII instrument. or other commodity at the time of execution of the Title VII Instruments For example, a Title VII instrument, Title VII instrument, the discussion above would As defined in the CEA and Exchange not apply, and the nature of the security, rate, or 193 such as an interest rate swap, in which other commodity used in determining the terms or Act, an index is a ‘‘narrow-based floating payments based on 3-month conditions would be considered in evaluating LIBOR are exchanged for fixed rate whether the Title VII instrument is a swap or 192 Four commenters referred to the definition of payments of 5% would be a swap, and security-based swap. the term ‘‘narrow-based security index,’’ each in the 191 The Commissions note that such Title VII context of CDS. See infra notes 209 and 211. not a security-based swap, even if the instruments would be swaps in any event because 193 Sections 3(a)(55)(B) and (C) of the Exchange 5% fixed rate was informed by, or U.S. Treasury securities are exempted securities Act, 15 U.S.C. 78c(a)(55)(B) and (C), include a quoted based on, the yield of a security, that are excluded from the security-based swap definition of ‘‘narrow-based security index’’ in the provided that the 5% fixed rate was set definition in Title VII but understand that such same paragraph as the definition of security future. swaps use the reference or quoting convention See also CEA sections 1a(35)(A) and (B), 7 U.S.C. at the time of execution and may not described above in setting the terms or conditions 1a(35)(A) and (B). A security future is a contract for vary over the life of the Title VII of the Title VII instrument at the time of execution. Continued

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security index’’ if, among other things, it other categories.197 Specifically, the • The aggregate average daily trading meets any one of the following four Commissions have provided guidance volume in options on the underlying criteria: regarding the application of the narrow- index is at least 10,000 contracts • It has nine or fewer component based security index definition to calculated as of the preceding 6 full securities; futures contracts on volatility calendar months.201 indexes 198 and debt security indexes.199 With regard to debt security indexes, • A component security comprises Today, then, there exists additional the Commissions issued joint rules in more than 30% of the index’s weighting; guidance for determining what 2006 (‘‘July 2006 Rules’’) to define when • The five highest weighted constitutes a narrow-based security an index of debt securities 202 is not a component securities in the aggregate index. narrow-based security index. The first comprise more than 60% of the index’s Volatility indexes are indexes three criteria of that definition were weighting; or composed of index options. The similar to the statutory definition for • The lowest weighted component Commissions issued a joint order in equities and the order regarding securities comprising, in aggregate, 25% 2004 to define when a volatility index volatility indexes in that a debt security of the index’s weighting have an is not a narrow-based security index. index would not be narrow based if: (i) aggregate dollar value of average daily Under this joint order, a volatility index It had more than 9 debt securities issued trading volume of less than $50,000,000 is not a narrow-based security index if by more than 9 non-affiliated issuers; (or in the case of an index with more the index meets all of the following (ii) the securities of any issuer included than 15 component securities, criteria: in the index did not comprise more than • $30,000,000), except that if there are The index measures the magnitude 30 percent of the index’s weighting; and two or more securities with equal of changes (as calculated in accordance (iii) the securities of any five non- weighting that could be included in the with the order) in the level of an affiliated issuers in the index did not calculation of the lowest weighted underlying index that is not a narrow- comprise more than 60 percent of the component securities comprising, in the based security index pursuant to the index’s weighting. aggregate, 25 percent of the index’s statutory criteria for equity indexes In the July 2006 Rules, instead of the discussed above; statutory average daily trading volume weighting, such securities shall be • ranked from lowest to highest dollar The index has more than nine test, however, the Commissions adopted value of average daily trading volume component securities, all of which are a public information availability and shall be included in the calculation options on the underlying index; requirement. Under this requirement, • No component security of the index based on their ranking starting with the assuming the aforementioned number comprises more than 30 percent of the lowest ranked security.194 and concentration limits were satisfied, index’s weighting; a debt security index would not be a The first three criteria apply to the • The five highest weighted narrow-based security index if the debt number and concentration of the component securities of the index in the securities or the issuers of debt ‘‘component securities’’ in the index; the aggregate do not comprise more than 60 securities in the index met any one of fourth criterion applies to the average percent of the index’s weighting; • the following criteria: daily trading volume of an index’s The average daily trading volume of • The issuer of the debt security is ‘‘ ’’ 195 component securities. the lowest weighted component required to file reports pursuant to This statutory narrow-based security securities in the underlying index (those section 13 or section 15(d) of the index definition focuses on indexes comprising, in the aggregate, 25 percent Securities Exchange Act of 1934; 203 composed of equity securities and of the underlying index’s weighting) • The issuer of the debt security has certain aspects of the definition, in have a dollar value of more than a worldwide market value of its particular the evaluation of average $50,000,000 (or $30,000,000 in the case outstanding common equity held by daily trading volume, are designed to of an underlying index with 15 or more non-affiliates of $700 million or more; take into account the trading patterns of component securities), except if there • The issuer of the debt security has individual stocks.196 However, the are 2 or more securities with equal outstanding securities that are notes, Commissions, pursuant to authority weighting that could be included in the bonds, debentures, or evidence of granted in the CEA and the Exchange calculation of the lowest weighted indebtedness having a total remaining Act, previously have extended the component securities comprising, in the principal amount of at least $1 billion; definition to other categories of indexes aggregate, 25 percent of the underlying but modified the definition to take into index’s weighting, such securities shall 201 See March 2004 Joint Order, supra note 196. account the characteristics of those be ranked from lowest to highest dollar In 2009, the Commissions issued a joint order that value of average daily trading volume provided that, instead of the index options having and shall be included in the calculation to be listed on an NSE, the index options must be future delivery on a single security or narrow-based listed on an exchange and pricing information for security index (including any interest therein or based on their ranking starting with the the index options, and the underlying index, must based on the value thereof). See section 3(a)(55) of lowest ranked security; be computed and disseminated in real time through the Exchange Act, 15 U.S.C. 78c(a)(55), and CEA • Options on the underlying index major market data vendors. See Joint Order To section 1a(44), 7 U.S.C. 1a(44). are listed and traded on an NSE Exclude Indexes Composed of Certain Index 194 See section 3(a)(55)(B) of the Exchange Act, 15 registered under section 6(a) of the Options From the Definition of Narrow-Based U.S.C. 78c(a)(55)(B). See also CEA sections 200 Security Index, 74 FR 61116, Nov. 23, 2009 1a(35)(A) and (B), 7 U.S.C. 1a(35)(A) and (B). Exchange Act; and (expanding the criteria necessary for exclusion 195 The narrow-based security index definition in under the March 2004 Joint Order to apply to the CEA and Exchange Act also excludes from its 197 See CEA section 1a(35)(B)(vi), 7 U.S.C. volatility indexes for which pricing information for scope security indexes that satisfy certain specified 1a(35)(B)(vi), and section 3(a)(55)(C)(vi) of the the underlying broad-based security index, and the criteria. See sections 3(a)(55)(C)(i)—(vi) of the Exchange Act, 15 U.S.C. 78c(a)(55)(C)(vi). options that compose such index, is current, Exchange Act, 15 U.S.C. 78c(a)(55)(C)(i)—(vi), and 198 See March 2004 Joint Order, supra note 196. accurate, and publicly available). CEA sections 1a(35)(B)(i)—(vi), 7 U.S.C. 199 See Joint Final Rules: Application of the 202 Under the rules, debt securities include notes, 1a(35)(B)(i)—(vi). Definition of Narrow-Based Security Index to Debt bonds, debentures or evidence of indebtedness. See 196 See Joint Order Excluding Indexes Comprised Securities Indexes and Security Futures on Debt CFTC rule 41.15(a)(1)(i), 17 CFR 41.15(a)(1)(i) and of Certain Index Options From the Definition of Securities, 71 FR 39434, July 13, 2006 (‘‘July 2006 rule 3a55–4(a)(1)(i) under the Exchange Act, 17 CFR Narrow-Based Security Index, 69 FR 16900, Mar. Rules’’). 240.3a55–4(a)(1)(i). 31, 2004 (‘‘March 2004 Joint Order’’). 200 15 U.S.C. 78f(a). 203 15 U.S.C. 78m or 78o(d).

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• The security is an exempted determining whether certain Title VII CDS where the underlying reference is security as defined in section 3(a)(12) of instruments based on a security index a single entity (i.e., a single-name CDS), the Securities Exchange Act of 1934 204 are swaps or security-based swaps. a single obligation of a single entity and the rules promulgated thereunder; However, the Commissions are (e.g., a CDS on a specific bond, loan, or or proposing interpretive guidance and asset-backed security, or any tranche or • The issuer of the security is a additional rules regarding Title VII series of any bond, loan, or asset-backed government of a foreign country or a instruments based on a security index. security), or an index CDS where the political subdivision of a foreign The additional rules and interpretive underlying reference is a narrow-based country.205 guidance set forth new narrow-based security index or the issuers of The statutory definition of the term security index criteria with respect to securities in a narrow-based security ‘‘narrow-based security index’’ for indexes composed of securities, loans, index would be a security-based equities, and the Commissions’ or issuers of securities referenced by an swap.209 An index CDS where the subsequent guidance as to what index CDS. The proposed interpretive underlying reference is not a narrow- constitutes a narrow-based security guidance and rules also address the based security index or the issuers of index with respect to volatility and debt definition of an ‘‘index’’ and the securities in a narrow-based security indexes, is applicable in the context of treatment of broad-based security index (i.e., a broad-based index) would distinguishing between futures contracts indexes that become narrow-based and be a swap.210 and security futures products. In the narrow-based indexes that become The statutory definition of the term Dodd-Frank Act, Congress included the broad-based, including rule provisions ‘‘narrow-based security index,’’ as term ‘‘narrow-based security index’’ in regarding tolerance and grace periods explained above, was designed with the the security-based swap definition, and for swaps on security indexes that are U.S. equity markets in mind. Thus, the thus the statutory definition of the term traded on CFTC-regulated trading statutory definition is not appropriate ‘‘narrow-based security index’’ also platforms and security-based swaps on for determining whether an index applies in distinguishing swaps (on security indexes that are traded on SEC- underlying an index CDS is broad or security indexes that are not narrow- regulated trading platforms. These rules narrow-based. Nor is the further based, also known as ‘‘broad-based’’) and and interpretive guidance are discussed guidance that the Commissions have security-based swaps (on narrow-based in turn below. previously issued with respect to the security indexes). Further, the 3. Narrow-Based Security Index Criteria narrow-based security index definition Commissions believe that their prior for Index Credit Default Swaps discussed above necessarily guidance with respect to what appropriate, because that guidance was constitutes a narrow-based security (a) In General designed to address and was uniquely index in the context of volatility and A CDS is a Title VII instrument in tailored to the characteristics of debt security indexes should apply in which the ‘‘protection buyer’’ makes a volatility indexes and debt security determining whether a Title VII series of payments to the ‘‘protection indexes in the context of futures. instrument is a swap or a security-based seller’’ and, in return, the ‘‘protection Accordingly, the Commissions are swap. seller’’ is obligated to make a payment proposing rules that would adopt To clarify that the Commissions are to the ‘‘protection buyer’’ if an obligation criteria for determining whether an applying the prior guidance and rules to or obligations (typically bonds, but in index is a narrow-based security index Title VII instruments, the Commissions some cases loans) of an entity or entities within the context of index CDS.211 are proposing rules to further define the referenced in the contract, or the entity term ‘‘narrow-based security index’’ in or entities themselves, experience a products/data/indices/structured-finance-indices/ the security-based swap definition. ‘‘credit event.’’ 207 While the cmbx/cmbx.page. Commissions understand that the 209 Two commenters made suggestions relating to Under paragraph (1) of proposed rule the effect of the jurisdictional consequences of the 1.3(yyy) under the CEA and paragraph underlying reference for most cleared definition of the term ‘‘narrow-based security (a) of proposed rule 3a68–3 under the CDS is a single entity or an index of index,’’ but neither commented on the meaning of Exchange Act, for purposes of the entities rather than a single security or the term itself. One of the two commenters, an index of securities, the underlying recognizing that a jurisdictional line would exist for security-based swap definition, the term CDS, stressed the need for ‘‘substantially identical’’ ‘‘narrow-based security index’’ would reference for CDS also could be a single regulations applicable to CDS. See Deutsche Bank have the same meaning as the statutory security or an index of securities.208 A Letter. The other commenter also noted that a line definition set forth in section 1a(35) of for CDS would exist and urged the Commissions to 207 See supra note 180 and accompanying text. adopt a regulation stating that a derivatives clearing the CEA and section 3(a)(55) of the organization (‘‘DCO’’) may be a clearing agency and Exchange Act,206 and the rules, 208 See, e.g., Markit, ‘‘Markit CDX’’ (describing the Markit CDX indexes and the number of ‘‘names’’ a clearing agency may be a DCO, in order to regulations, and orders issued by the included in each index), available at http:// facilitate portfolio margining and cross-margining. Commissions relating to such definition. www.markit.com/en/products/data/indices/credit- See White & Case Letter. The Commissions are As a result, except as the new rules the and-loan-indices/cdx/cdx.page?; Markit, ‘‘Markit sensitive to the requirement in section 712(a)(7) of iTraxx Indices,’’ (stating that the ‘‘Markit iTraxx the Dodd-Frank Act to treat functionally or Commissions are proposing provide for indices are comprised of the most liquid names in economically similar products or entities in a other treatment, market participants the European and Asian markets’’) (emphasis similar manner. generally will be able to use the added), available at http://www.markit.com/en/ 210 Similarly, an option to enter into a single- Commissions’ past guidance in products/data/indices/credit-and-loan-indices/ name CDS or a CDS referencing a narrow-based itraxx/itraxx.page?]. Examples of indexes based on security index as described above would be a securities include the Markit ABX.HE and CMBX security-based swap, while an option to enter into 204 15 U.S.C. 78c(a)(12). indexes. See Markit, ‘‘Markit ABX.HE,’’ (describing a CDS on a broad-based security index or the 205 The July 2006 Rules also provided that debt the Markit ABX.HE index as ‘‘a synthetic tradeable issuers of securities in a broad-based security index securities in the index must satisfy certain index referencing a basket of 20 subprime mortgage- would be a swap. Index CDS where the underlying minimum outstanding principal balance criteria, backed securities’’), available at http:// reference is a broad-based security index would be established certain exceptions to these criteria and www.markit.com/en/products/data/indices/ SBSAs. The SEC has enforcement authority with the public information availability requirement, and structured-finance-indices/abx/abx.page; Markit, respect to swaps that are SBSAs, as discussed provided for the treatment of indexes that include ‘‘Markit CMBX,’’ (describing the Markit CMBX further in part V below. exempted securities (other than municipal index as ‘‘a synthetic tradeable index referencing a 211 Two commenters urged clarification of the securities). basket of 25 commercial mortgage-backed definition of the term ‘‘narrow-based security index’’ 206 7 U.S.C. 1a(35) and 15 U.S.C. 78c(a)(55). securities’’), available at http://www.markit.com/en/ Continued

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The Commissions are further defining referenced by an index CDS are narrow- test discussed above (i.e., the number the term ‘‘security-based swap,’’ and the based security indexes. In formulating and concentration weighting use of the term ‘‘narrow-based security these criteria, and consistent with the requirements) are appropriate to apply index’’ within that definition to modify guidance and rules the Commissions to index CDS, whether CDS on indexes the criteria applied in the context of have previously issued and adopted of securities or indexes of issuers of index CDS in assessing whether the regarding narrow-based security indexes securities. index is a narrow-based security index. in the context of security futures, the Accordingly, proposed rules 1.3(zzz) The third prong of the security-based Commissions believe that there should under the CEA and proposed rule 3a68– swap definition includes a Title VII be public information available about a 1a under the Exchange Act would instrument based on the occurrence of predominant percentage of the reference provide that, for purposes of an event relating to the ‘‘issuers of entities underlying the index, or, in the determining whether an index CDS is a securities in a narrow-based security case of an index CDS, on an index of security-based swap under section index,’’ provided that such event securities, about the issuers of the 3(a)(68)(A)(ii)(III) of the Exchange directly affects the ‘‘financial statements, securities or the securities underlying Act,217 the term ‘‘issuers of securities in financial condition, or financial the index, in order to reduce the a narrow-based security index’’ would obligations of the issuer.’’ 212 The first likelihood that non-narrow-based include issuers of securities identified prong of the security-based swap indexes referenced in index CDS or the in an index in which: definition includes a Title VII component securities or issuers of • Number: There are 9 or fewer non- instrument that is based on a ‘‘narrow- securities in that index would be readily affiliated issuers of securities that are based security-index.’’ 213 Because the susceptible to manipulation, as well as reference entities 218 in the index, third prong of the security-based swap to help prevent the misuse of material provided that an issuer of securities definition relates to issuers of securities, non-public information through the use shall not be deemed a reference entity while the first prong of such definition of CDS based on such indexes. in the index unless (i) a credit event relates to securities, the Commissions To satisfy these objectives, the with respect to such reference entity are proposing to further define both the Commissions intend to use the criteria would result in a payment by the credit term ‘‘narrow-based security index’’ and developed for debt indexes discussed protection seller to the credit protection the term ‘‘issuers of securities in a above 215 but tailor the criteria buyer under the CDS based on the narrow-based security index’’ in the specifically to address index CDS.216 related notional amount allocated to context of the definition of security- These criteria would be used solely for such reference entity, or (ii) the fact of based swap as applied to index CDS. the purpose of defining the terms such credit event or the calculation in The Commissions believe it is important ‘‘narrow-based security index’’ and accordance with clause (i) above of the to further define both terms in order to ‘‘issuers of securities in a narrow-based amount owed with respect to such ensure consistent analysis of index security index’’ in the first and third credit event is taken into account in CDS.214 While the wording of the two prongs of the security-based swap determining whether to make any future proposed definitions differs slightly, the definition with respect to index CDS payments under the CDS with respect to Commissions expect that they would and would not be interpreted to affect any future credit events; yield the same substantive results in any other interpretation or use of the • Single Component Concentration: distinguishing narrow-based and broad- term ‘‘narrow-based security index’’ or The effective notional amount allocated based index CDS. any other provision of the Dodd-Frank to any reference entity included in the Act, CEA, or Exchange Act. (b) Proposed Rules Regarding the index comprises more than 30 percent Definitions of ‘‘Issuers of Securities in a (i) Number and Concentration of the index’s weighting; or Narrow-Based Security Index’’ and Percentages of Reference Entities or • Largest Five Component ‘‘Narrow-Based Security Index’’ for Securities Concentration: The effective notional amount allocated to any 5 non-affiliated Index Credit Default Swaps The Commissions believe that the first reference entities included in the index The Commissions are considering three criteria of the debt security index comprises more than 60 percent of the how to further define the terms ‘‘issuers index’s weighting.219 of securities in a narrow-based security 215 See discussion of July 2006 Rules, supra note index’’ and ‘‘narrow-based security 199. 216 217 15 U.S.C. 78c(a)(68)(A)(ii)(III). index’’ in order to provide for The Commissions note that the language of the proposed rules is intended, in general, to track the 218 For purposes of proposed rules 1.3(zzz) and appropriate criteria for determining criteria developed for debt indexes discussed above. 3a68–1a: (i) A reference entity would be affiliated whether an index composed of issuers Certain changes from the criteria developed for debt with another entity if it controls, is controlled by, of securities referenced by an index CDS indexes are necessary to address differences or is under common control with, that entity; (ii) and an index composed of securities between futures on debt indexes and index CDS. control would mean ownership of 20 percent or Certain other changes are necessary because the more of an entity’s equity, or the ability to direct rules for debt indexes define under what conditions the voting of 20 percent or more of the entity’s in the context of CDS to ensure that it reflects ‘‘the an index is not a narrow-based security index, voting equity; and (iii) the term ‘‘reference entity’’ letter and the spirit’’ of the existing definition. See whereas the proposed rules define what is a narrow- would include an issuer of securities, an issuing Letter from Thomas W. Jasper, Chief Executive based security index. For example, an index is not entity of asset-backed securities, and a single Officer, Primus Guaranty Ltd., and Gene Park, Chief a narrow-based security index under the rule for reference entity or group of affiliated entities; Executive Officer, Quadrant Structured Investment debt indexes if it is not a narrow-based security provided that an issuing entity of an asset-backed Advisers, LLC, Sept. 20, 2010 (‘‘Primus and index under either subparagraph (a)(1) or paragraph security shall not be affiliated with any other Quadrant Letter’’). (a)(2) of the rule. Under the proposed rules for issuing entity or issuer under this proposed 212 Section 3(a)(68)(A)(ii)(III) of the Exchange Act, index CDS, however, an index is a narrow-based definition. 15 U.S.C. 78c(a)(68)(A)(ii)(III). security index if it meets the requirements of both 219 These proposed rules refer to the ‘‘effective 213 Section 3(a)(68)(A)(ii)(I) of the Exchange Act, of the counterpart paragraphs in the proposed rules notional amount’’ allocated to reference entities or 15 U.S.C. 78c(a)(68)(A)(ii)(I). regarding index CDS (paragraphs (1)(i) and (1)(ii) of securities in order to address potential situations in 214 Because it applies only with respect to index proposed rules 1.3(xxx) and 1.3(aaaa) under the which the means of calculating payout across the CDS, the proposed definitions of ‘‘issuers of CEA and paragraphs (a)(1) and paragraph (a)(2) of reference entities or securities is not uniform. Thus, securities in a narrow-based security index’’ and proposed rules 3a68–1a and 3a68–1b under the if one or more payouts is leveraged or enhanced by ‘‘narrow-based security index’’ would not apply Exchange Act), even though the criteria in the debt the structure of the transaction (i.e., 2x recovery with respect to other types of event contracts, index rules and the proposed rules for index CDS rate), that amount would be the ‘‘effective notional whether analyzed under the first or third prong. include generally the same criteria and structure. amount’’ for purposes of the 30% and 60% tests in

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Similarly, proposed rules 1.3(aaaa) 5 non-affiliated issuers included in the or securities, or a few reference entities under the CEA and proposed rule 3a68– index comprises more than 60 percent that are affiliated or a few securities 1b under the Exchange Act would of the index’s weighting. issued by a few issuers that are provide that, for purposes of Thus, the applicability of the affiliated, are within the ‘‘narrow-based’’ determining whether an index CDS is a proposed rules would depend on definition and that an entity is not security-based swap under section conditions relating to the number of counted as a reference entity in the 3(a)(68)(A)(ii)(I) of the Exchange Act,220 non-affiliated reference entities, issuers index, and a security is not counted as the term ‘‘narrow-based security index’’ of securities, or securities, as applicable, a security in the index, unless a credit would include an index in which included in an index and the weighting event with respect to the entity, issuer, essentially the same criteria apply, of notional amounts allocated to the or security affects payout under a CDS substituting securities for issuers. Under reference entities or securities in the on the index.222 these proposed criteria, the term index, as applicable. These first three In addition, the proposed rules would ‘‘narrow-based security index’’ would criteria of the proposed rules would provide that a reference entity or issuer mean an index in which: evaluate the number and concentration of a security in an index and any of that • Number: There are 9 or fewer of the issuers or securities in the index, reference entity’s or issuer’s affiliated securities, or securities that are issued as applicable, and ensure that an index entities are deemed to be a single by 9 or fewer non-affiliated issuers,221 with a small number of issuers or reference entity or issuer in the in the index, provided that a security securities or concentrated in only a few index.223 For purposes of the narrow- shall not be deemed a component of the issuers or securities would be narrow- based security index definition for index unless (i) a credit event with based, and thus where such index is the index CDS under the third prong and respect to the issuer of such security or underlying reference of an index CDS, first prong, a reference entity or issuer a credit event with respect to such the index CDS would be a security- would be affiliated with another entity security would result in a payment by based swap. if it controls, is controlled by, or is the credit protection seller to the credit Specifically, the proposed rules under common control with, that other protection buyer under the CDS based would provide that an index meeting entity or issuer. The proposed rules on the related notional amount allocated any one of certain identified conditions would define control, solely for to such security, or (ii) the fact of such would be a narrow-based security index. purposes of this provision, to mean credit event or the calculation in The first condition in paragraph (1)(i)(A) ownership of 20% or more of an entity’s accordance with clause (i) above of the of proposed rule 1.3(zzz) under the CEA or issuer’s equity or the ability to direct amount owed with respect to such and paragraph (a)(1)(i) of proposed rule the voting of 20% or more of an entity’s credit event is taken into account in 3a68–1a under the Exchange Act is that or issuer’s voting equity.224 This determining whether to make any future there are 9 or fewer non-affiliated definition of control is designed to payments under the CDS with respect to issuers of securities that are reference provide a clear standard for determining any future credit events; entities in the index. An issuer of • affiliation for purposes of the narrow- Single Component Concentration: securities would count toward this total based security index criteria with The effective notional amount allocated only if a credit event with respect to respect to index CDS. Determining to the securities of any issuer included such entity would result in a payment whether a reference entity or issuer is in the index comprises more than 30 by the credit protection seller to the affiliated with another entity or issuer is percent of the index’s weighting; or credit protection buyer under the CDS • important in assessing whether an index Largest Five Component based on the notional amount allocated meets the criteria in the proposed rules Concentration: The effective notional to such entity, or if the fact of such a because the notional amounts allocated amount allocated to the securities of any credit event or the calculation of the to all affiliated reference entities, or all payment with respect to such credit securities issued by affiliated issuers, paragraphs (1)(i)(B) and (1)(i)(C) of proposed rules event is taken into account when included in an index must be aggregated 1.3(zzz) and 1.3(aaaa) and paragraphs (a)(1)(ii) and determining whether to make any future (a)(1)(iii) of proposed rules 3a68–1a and 3a68–1b. in order to prevent a concentration of Similarly, if the aggregate notional amount under a payments under the CDS with respect to the index in reference entities or CDS is not uniformly allocated to each reference any future credit events. securities issued by issuers that are entity or security, then the portion of the notional Similarly, the first condition in affiliated and because a reference amount allocated to each reference entity or paragraph (1)(i)(A) of proposed rules security (which may be by reference to the product entity’s and issuer’s affiliates must be of the aggregate notional amount and an applicable 1.3(aaaa) under the CEA and paragraph (a)(1)(i) of proposed rule 3a68–1b under considered when determining whether percentage) would be the ‘‘effective notional the reference entity or security meets amount.’’ the Exchange Act would provide that a 220 15 U.S.C. 78c(a)(68)(A)(ii)(I). security would count toward the total the public information availability test 221 This language is intended to be consistent number of securities in the index only discussed below. In addition, in order to with the language in the rule for debt indexes but if a credit event with respect to such ensure application of the criteria the specific language is different to deal with the regarding index CDS to indexes of differences in structure between the rule for debt security, or the issuer of such security, indexes and proposed rules 1.3(aaaa) and 3a68–1b. would result in a payment by the credit See discussion supra note 216. 222 This requirement is generally consistent with protection seller to the credit protection the definition of ‘‘narrow-based security index’’ in For purposes of proposed rules 1.3(aaaa) and buyer under the CDS based on the 3a68–1b: (i) An issuer would be affiliated with CEA section 1a(35)(A), 7 U.S.C. 1a(35)(A), and another issuer if it controls, is controlled by, or is notional amount allocated to such section 3(a)(55)(B) of the Exchange Act, 15 U.S.C. under common control with, that issuer; (ii) control security, or if the fact of such a credit 78c(a)(55)(B), and the July 2006 Rules, supra note would mean ownership of 20 percent or more of an event or the calculation of the payment 199. issuer’s equity, or the ability to direct the voting of 223 See proposed rule 1.3(zzz)(4) under the CEA 20 percent or more of the issuer’s voting equity; and with respect to such credit event is and proposed rule 3a68–1a(d) under the Exchange (iii) the term ‘‘issuer’’ would include an issuer of taken into account when determining Act. securities, an issuing entity of asset-backed whether to make any future payments 224 The affiliate issue under the Federal securities securities, and a single issuer or group of affiliated under the CDS with respect to any laws is generally a facts and circumstances issuers; provided that an issuing entity of an asset- determination based on the definition of the term backed security shall not be deemed affiliated with future credit events. These provisions ‘‘affiliate’’ contained in such laws. See, e.g., rule 405 any other issuing entity or issuer under this are intended to ensure that an index under the Securities Act, 17 CFR 230.405; rule 12b– proposed definition. concentrated in a few reference entities 2 under the Exchange Act, 17 CFR 240.12b–2.

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reference entities that have issued asset- (ii) Public Information Availability such asset-backed securities were issued backed securities as defined in section Regarding Reference Entities and in a transaction registered under the 3(a)(77) of the Exchange Act,225 as well Securities Securities Act and have publicly as indexes of such asset-backed In addition to the numerical and available distribution reports. securities, the term reference entity and concentration percentage criteria, the However, so long as the effective the term issuer under the proposed rules debt security index test also included, notional amounts allocated to reference includes issuing entities of asset-backed as discussed above, a public information entities or securities that satisfy the securities. The proposed rules also availability test. This test was designed public information availability test would provide that each issuing entity to reduce the likelihood that broad- comprise at least 80 percent of the of an asset-backed security is considered based debt security indexes or the index’s weighting, failure by a reference a separate reference entity or issuer, as component securities or issuers of entity or security included in the index applicable. securities in that index would be readily to satisfy the public information availability test would be disregarded if The second condition, in paragraphs susceptible to manipulation. The fourth condition in the proposed rules the effective notional amounts allocated (1)(i)(B) of proposed rules 1.3(zzz) and to that reference entity or security 1.3(aaaa) under the CEA and paragraphs includes a similar public information availability test that is intended solely comprise less than 5 percent of the (a)(1)(ii) of proposed rules 3a68–1a and index’s weighting. 3a68–1b under the Exchange Act, is that for purposes of determining whether an index underlying a CDS is narrow- These issuer eligibility criteria are the effective notional amount allocated intended to condition the to any reference entity or security based. Except as discussed below, under the proposed rules, an index CDS would characterization of an index as ‘‘narrow- included in the index comprises more based’’ on the likelihood that than 30 percent of the index’s be considered narrow-based if a reference entity or security included in information about a predominant weighting. the index does not meet any one of the percentage of the reference entities or The third condition, in paragraphs following criteria: securities included in the index is 231 (1)(i)(C) of proposed rules 1.3(zzz) and • The reference entity or the issuer of publicly available. For example, a 1.3(aaaa) under the CEA and paragraphs the security is required to file reports reference entity or issuer of securities (a)(1)(iii) of proposed rules 3a68–1a and pursuant to the Exchange Act or the that is required to file reports pursuant 3a68–1b under the Exchange Act, is that regulations thereunder; to the Exchange Act or the regulations the effective notional amount allocated • The reference entity or the issuer of thereunder makes regular and public to any 5 non-affiliated reference entities, the security is eligible to rely on the disclosure through those filings. or to the securities of any 5 non- exemption provided in rule 12g3–2(b) Moreover, reference entities and issuers affiliated issuers, included in the index under the Exchange Act; 226 of securities that do not file reports with that are the underlying reference entities • The reference entity or the issuer of the SEC but that are eligible to rely on or securities, respectively, comprises the security has a worldwide market the exemption in rule 12g3–2(b) under more than 60 percent of the index’s value of its outstanding common equity the Exchange Act (i.e., foreign private weighting. held by non-affiliates of $700 million or issuers) are required to make certain 227 types of financial information publicly Given that Congress determined that more; • The reference entity or the issuer of available in English on their Web sites these concentration percentages are or through an electronic information appropriate to characterize an index as the security (other than an issuing entity of an asset-backed security as defined in delivery system generally available to a narrow-based security index, and the section 3(a)(77) of the Exchange Act 228) the public in their primary trading Commissions have determined they are 232 has outstanding securities that are notes, markets. The Commissions believe appropriate for debt security indexes in bonds, debentures, or evidences of that other reference entities or issuers of the security futures context, the indebtedness having a total remaining securities that do not file reports with Commissions believe that these principal amount of at least $1 billion; the SEC, but that have worldwide equity concentration percentages are • The reference entity is an issuer of market capitalization of $700 million, appropriate to apply to the notional an exempted security, or the security is have $1 billion in outstanding debt amount allocated to reference entities an exempted security, each as defined (other than in the case of issuing entities and securities in order to apply similar in section 3(a)(12) of the Exchange of asset-backed securities), issue standards to indexes that are the Act 229 and the rules promulgated exempted securities (other than underlying references of index CDS. thereunder (except a municipal municipal securities), or are foreign Moreover, with respect to both the security); numerical and concentration percentage • The reference entity or the issuer of 231 See discussion supra part III.G.3(b). Most of criteria, the markets have had the thresholds in the public information availability the security is a government of a foreign test are similar to those the Commissions adopted experience with these criteria with country or a political subdivision of a in their joint rules regarding the application of the respect to futures on equity indexes, foreign country; or definition of the term ‘‘narrow-based security index’’ volatility indexes, and debt security • If the reference entity or the issuer to debt security indexes and security futures on indexes. debt securities. See July 2006 Rules, supra note 199. of the security is an issuing entity of The July 2006 Rules also included an additional asset-backed securities as defined in requirement regarding the minimum principal 225 15 U.S.C. 78c(a)(77). The Commissions note section 3(a)(77) of the Exchange Act,230 amount outstanding for each security in the index. that section 941 of the Dodd-Frank Act added the The Commissions have not included this definition of the term ‘‘asset-backed security’’ as requirement in proposed rule 1.3(zzz) under the 226 17 CFR 240.12g3–2(b). section 3(a)(77) of the Exchange Act, 15 U.S.C. CEA and proposed rule 3a68–1a under the 227 78c(a)(77). However, section 761(a)(6) of the Dodd- See July 2006 Rules, supra note 199, at 39537 Exchange Act. The numerical thresholds also are Frank Act also added the definition of the term (noting that issuers having worldwide equity similar to those the SEC adopted in its securities ‘‘security-based swap execution facility’’ as section market capitalization of $700 million are likely to offering reform rules, which were based on data 3(a)(77) of the Exchange Act, 15 U.S.C. 78c(a)(77). have public information available about them). analysis conducted by the SEC’s Office of Economic References to the definition of the term ‘‘asset- 228 15 U.S.C. 78c(a)(77). Analysis. See Securities Offering Reform, 70 FR backed security’’ in this release are to the definition 229 15 U.S.C. 78c(a)12. 44722, Aug. 3, 2005. added by section 941 of the Dodd-Frank Act. 230 15 U.S.C. 78c(a)(77). 232 17 CFR 240.12g3–2(b).

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sovereign entities either are required to in the index fails to meet one of the the public or to such eligible contract or are otherwise sufficiently likely, criteria in the public information participant information about such solely for purposes of the proposed availability test set forth in the proposed reference entity or issuer pursuant to ‘‘narrow-based security-index’’ and rules. Yet, even if one or more of the rule 144A(d)(4) under the Securities ‘‘issuers of securities in a narrow-based reference entities or securities included Act; 235 security index’’ definitions, to have in the index fail the public information • Financial information about the public information available about availability test, the proposed rules reference entity (other than an issuing them.233 would provide that the terms ‘‘issuers of entity of asset-backed securities) is In the case of indexes including asset- securities in a narrow-based security otherwise publicly available; or backed securities, or reference entities index’’ and ‘‘narrow-based security • In the case of an asset-backed that are issuing entities of asset-backed index’’ would not include such an security, or a reference entity that is an securities, information about the index, so long as the applicable issuing entity of asset-backed securities, reference entity or issuing entity of the reference entity or security that failed information of the type and level asset-backed security would not alone the test represents less than 5 percent of included in public distribution reports be sufficient and, consequently, the the index’s weighting, and so long as for similar asset-backed securities is proposed rules provide that the public reference entities or securities publicly available about both the information availability test would be comprising at least 80 percent of the reference entity or issuing entity as well satisfied only if certain information also index’s weighting do satisfy the public as such asset-backed securities. is available about the asset-backed information availability test. Reference entities or reference securities. An issuing entity (whether or An index that includes a very small securities that meet alternative public not a reference entity) of asset-backed proportion of reference entities or information criteria currently may securities may meet the public securities that do not satisfy this public underlie CDS that are entered into by information availability test if such information availability test should ECPs and that are cleared by central asset-backed securities were issued in a nevertheless be treated as a broad-based counterparties operating pursuant to transaction registered under the security index. This would be achieved exemptive orders granted by the SEC.236 Securities Act and distribution reports where the index satisfies both of the In addition, solely with respect to index about such asset-backed securities are requirements at the time the parties CDS entered into by ECPs, so long as the publicly available. In addition, because enter into the index CDS. The 5-percent effective notional amounts allocated to of the lack of public information weighting threshold is designed to reference entities or securities that regarding many asset-backed securities, provide that reference entities or satisfy this expanded public information despite the size of the outstanding securities not satisfying the public availability test comprise at least 80 amount of securities,234 the proposed information availability test comprise percent of the index’s weighting, a rules would not permit such reference only a very small portion of the index, reference entity or security included in entities and issuers to satisfy the public and the 80-percent weighting threshold the index that fails to satisfy this information availability test by having is designed to provide that a expanded public information $1 billion in outstanding debt. predominant percentage of the reference availability test would be disregarded if Characterizing an index with reference entities or securities in the index satisfy the effective notional amounts allocated entities or securities for which public the public information availability test. to that reference entity or security information is not likely to be available As a result, these thresholds would comprise less than 5 percent of the as ‘‘narrow-based,’’ and thus index CDS provide market participants with index’s weighting. The Commissions are also seeking where the underlying references or flexibility in constructing an index. The comment as to whether the public securities are such indexes as security- Commissions believe that this provision information availability test should based swaps, should help to ensure the is appropriate and that providing such apply to the extent that an index is transparency of the index components. flexibility is not likely to increase the In sum, an index that is not narrow- likelihood that an index that satisfies compiled by an index provider that is based under the number and weighting these provisions would be readily not a party to an index CDS (‘‘third-party requirements would be characterized as susceptible to manipulation or the index provider’’) and makes publicly broad-based (and thus an index CDS, likelihood that the component securities available general information about the where the underlying reference is that or issuers of securities in that index also construction of the index, index rules, index, would be characterized as a swap would be subject to manipulation or identity of components, and and not a security-based swap) unless that there would be misuse of material predetermined adjustments, and which one of the reference entities or securities non-public information about them index is referenced by an index CDS through the use of CDS based on such that is offered on or subject to the rules 233 It is important to note that the public indexes. of a DCM or SEF, or by direct access in information availability test is designed solely for The Commissions also are proposing purposes of distinguishing between index CDS that that, for index CDS entered into solely 235 17 CFR 230.144A(d)(4). are swaps and index CDS that are security-based between ECPs, the public information 236 See, e.g., Order Granting Temporary swaps. The proposed criteria are not intended to availability test may instead be satisfied Exemptions Under the Securities Exchange Act of provide any assurance that there is any particular 1934 in Connection With Request of Chicago level of information actually available regarding a other than in the manner discussed Mercantile Exchange Inc. and Citadel Investment particular reference entity or issuer of securities. above. Accordingly, solely for index Group, L.L.C. Related to Central Clearing of Credit Meeting one or more of the proposed criteria for the CDS entered into between ECPs, an Default Swaps, and Request for Comments, limited purpose here—defining the terms ‘‘narrow- index would be considered narrow- Exchange Act Release No. 34–59578 (Mar. 13, based security index’’ and ‘‘issuers of securities in 2009). This order has been extended a number of a narrow-based security index’’ in the first and third based if a reference entity or security times, most recently on November 29, 2010. See prongs of the security-based swap definition with included in the index does not meet any Order Extending Temporary Conditional respect to index CDS—would not substitute for or one of the criteria enumerated above or Exemptions Under the Securities Exchange Act of satisfy any other requirement for public disclosure any one of the following criteria: 1934 in Connection With Request of Chicago of information or public availability of information • Mercantile Exchange Inc. Related to Central for purposes of the Federal securities laws. The reference entity or the issuer of Clearing of Credit Default Swaps and Request for 234 See generally Asset-Backed Securities, 75 FR the security (other than issuing entities Comment, Exchange Act Release No. 34–63388 23328, May 3, 2010. of asset-backed securities) provides to (Nov. 29, 2010).

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the U.S. from an FBOT that is registered the issuers of the securities or the issuers of exempted securities.241 The with the CFTC. securities in the index; nor does such a Commissions believe such treatment is The CFTC believes that the third-party index provider indicate a consistent with the objective and intent requirement that the index be compiled likelihood that such public information of the definition of the term ‘‘security- by a third-party index provider may is available, which the SEC believes, for based swap,’’ as well as the approach help to ensure that information is purposes of index CDS, is important to taken in the context of security publicly available because such index market integrity and to investors in futures.242 Accordingly, paragraph providers generally employ a variety of engaging in transactions based on such (1)(ii) of proposed rules 1.3(zzz) and selection criteria for inclusion of indexes. If a third-party index provider 1.3(aaaa) under the CEA and paragraph reference entities or securities in the does not require, as a condition of (a)(2) of proposed rules 3a68–1a and indexes for index CDS, including inclusion in an index it compiles, that 3a68–1b under the Exchange Act would liquidity thresholds. The CFTC believes information likely is publicly available provide that, in the case of an index that that requiring that such index providers regarding the component issuers or includes exempted securities, or make publicly available general securities in the index, the SEC does not reference entities that are issuers of information about the construction of believe investors will have adequate exempted securities, in each case as the index, index rules, components, and information regarding such component defined as of the date of enactment of predetermined adjustments may help issuers or securities. In addition, the the Futures Trading Act of 1982 (other ensure transparency regarding the index SEC notes that, absent specified than municipal securities), such and its components. In addition, the standards regarding what persons securities or reference entities are CFTC believes that the requirement that constitute a third-party index provider excluded from the index when the index be the underlying reference of for purposes of the proposed rules, any determining whether the securities or an index CDS that is offered for trading person that compiles an index at the reference entities in the index constitute on or subject to the rules of a DCM or behest of another person could a ‘‘narrow-based security index’’ or SEF, or by direct access in the U.S. from constitute a ‘‘third-party index ‘‘issuers of securities in a narrow-based a registered FBOT, helps to ensure that provider.’’ Moreover, the SEC does not security index’’ under the proposed information about the index is publicly believe that requiring an index CDS to rules. available and that the index is not be offered on or subject to the rules of Under paragraph (1)(ii) of proposed readily susceptible to manipulation. The a DCM or SEF, or by an FBOT, rules 1.3(zzz) and 1.3(aaaa) under the CEA prohibits DCMs and SEFs from addresses whether public information CEA and paragraph (a)(2) of proposed offering for trading contracts that are likely is available about the issuers of rules 3a68–1a and 3a68–1b under the readily susceptible to manipulation.237 securities or securities in an index Exchange Act, an index composed Similarly, under rules recently proposed compiled by a third-party index solely of securities that are, or reference by the CFTC, FBOTs only may offer provider. As a result, the SEC does not entities that are issuers of, exempted contracts by direct access from the U.S. believe that an index compiled by a securities (other than municipal that are not readily susceptible to third-party index provider that makes securities) would not be a ‘‘narrow- 238 ’’ manipulation. The CFTC believes publicly available general information based security index or an index ‘‘ that CFTC oversight of DCMs, SEFs and about the construction of the index, composed of issuers of securities in a ’’ registered FBOTs for compliance with index rules, components, and index narrow-based security index. In the these requirements 239 will help ensure adjustments, and that is referenced by case of an index where some, but not all, of the securities or reference entities that information about an index that is an index CDS that is offered for trading are exempted securities (other than the underlying reference of an index on or subject to the rules of a DCM or municipal securities) or issuers of CDS traded on these platforms is SEF, or by direct access in the U.S. from exempted securities (other than publicly available and is not readily a registered FBOT, should substitute for municipal securities), the index would susceptible to manipulation.240 the public information availability test be a ‘‘narrow-based security index’’ or an The SEC believes that a third-party under the proposed rules for index CDS. index provider that simply provides index composed of ‘‘issuers of securities Accordingly, the Commissions seek in a narrow-based security index’’ only general information about the comment as to whether the public construction of an index, index rules, if the index is narrow-based when the information availability test should securities that are, or reference entities components, and predetermined apply to indexes compiled by a third- adjustments is not a substitute for the that are issuers of, exempted securities party index provider that makes (other than municipal securities) are public availability of information about publicly available general information about the construction of the index, 241 See proposed rules 1.3(zzz)(1)(i) and 237 See CEA sections 5(d)(3), 7 U.S.C. 7(d)(3) (a index rules, identity of components, and DCM ‘‘shall list on the contract market only 1.3(aaaa)(1)(i) under the CEA and proposed rules 3a68–1a(a)(2) and 3a68–1b(a)(2) under the contracts that are not readily susceptible to predetermined adjustments, and which Exchange Act; July 2006 Rules, supra note 199. manipulation.’’); 5h(f)(3), 7 U.S.C. 7b–3(f)(3) (same index is referenced by an index CDS 242 requirement for SEFs). See section 3(a)(68)(C) of the Exchange Act, 15 that is offered on or subject to the rules U.S.C. 78c(a)(68)(C) (providing that ‘‘[t]he term 238 See Registration of Foreign Boards of Trade, 75 of a DCM or SEF, or by direct access in ‘security-based swap’ does not include any FR 70973, Nov. 19, 2010. the U.S. from an FBOT that is registered agreement, contract, or transaction that meets the 239 CFTC oversight in evaluating compliance with with the CFTC. definition of a security-based swap only because the requirement that a swap not be readily such agreement, contract, or transaction references, susceptible to manipulation for cash settled (iii) Treatment of Indexes Including is based upon, or settles through the transfer, contracts includes consideration of whether cash delivery, or receipt of an exempted security under settlement is at a price reflecting the underlying Reference Entities That Are Issuers of paragraph (12) [of the Exchange Act], as in effect on cash market, will not be subject to manipulation or Exempted Securities or Including the date of enactment of the Futures Trading Act distortion, and is based on a cash price series that Exempted Securities of 1982 (other than any municipal security as is reliable, acceptable, publicly available, and defined in paragraph (29) [of the Exchange Act] as timely. See 17 CFR Part 40, Appendix A—Guideline In addition, the proposed rules in effect on the date of enactment of the Futures No. 1. provide for alternative treatment of Trading Act of 1982), unless such agreement, 240 Such indexes also would be SBSAs, providing indexes that include exempted contract, or transaction is of the character of, or is the SEC with antifraud and anti-manipulation commonly known in the trade as, a put, call, or authority. securities or reference entities that are other option’’).

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disregarded. The Commissions believe ‘‘narrow-based security index’’ for index have publicly available distribution this approach would result in consistent CDS, those entities or securities, that on reports, the correct approach? Why or treatment for indexes regardless of average, are likely to have public why not? Should such a provision whether they include securities that are, information available, and that the explicitly also apply to include asset- or issuers of securities that are, relevant index would therefore not be backed securities issued by Fannie Mae exempted securities (other than treated as ‘‘narrow-based.’’ Do the and Freddie Mac? Why or why not? municipal securities) while ensuring proposed criteria appropriately achieve Please provide a detailed explanation of that exempted securities (other than this objective? Are the criteria for the whether and why such a condition is municipal securities) and issuers of public information availability test necessary and include empirical data to exempted securities (other than under the proposed rules appropriate to support any suggested modification. municipal securities) are not included result in a sufficient likelihood that 92. Should the proposed rules in an index merely to make the index public information about the component exclude a reference entity or security in either broad-based or narrow-based securities or issuers of securities in an the index from the public information under the proposed rules. index CDS would be available to availability test, so long as the reference properly address the regulatory interests entity or security included in the index Request for Comment of the Federal securities laws? Are the represents less than five percent of the The Commissions request comment $700 million and $1 billion thresholds index’s weighting? Why or why not? on all aspects of proposed rules 1.3(zzz) discussed above appropriate tests for the 93. Should the proposed rules and 1.3(aaaa) under the CEA and likelihood of publicly available exclude a reference entity or security in proposed rules 3a68–1a and 3a68–1b information in this context? These the index from the public information under the Exchange Act, as applied to thresholds are similar to those in the availability test, so long as the reference CDS, including the following: SEC securities offering reform rules entities or securities comprising at least 85. Do the proposed criteria for used to determine, in part, whether a 80 percent of the index’s weighting identifying when an index of reference particular issuer was a ‘‘well-known satisfy the provisions of those entities constitutes ‘‘issuers of securities seasoned issuer,’’ in order to streamline paragraphs? Why or why not? in a narrow-based security index’’ and registration requirements under the 94. The Commissions are considering when an index of securities constitutes Securities Act.243 Are there companies whether the public information a ‘‘narrow-based security index’’ that have less than $700 million in availability test in proposed rules effectively encompass the key elements worldwide equity capitalization, or less 1.3(zzz) and 1.3(aaaa) under the CEA of a narrow-based security index as it than $1 billion in outstanding debt and proposed rules 3a68–1a and 3a68– pertains to paragraph (A)(ii)(III) (i.e., the (other than asset-backed securities), and 1b under the Exchange Act should third prong) and paragraph (A)(ii)(I) that do not otherwise satisfy the public apply to an index of issuers of securities (i.e., the first prong) of the security- information availability test, that have or securities that is created and based swap definition? Why or why public information available about them published by a third-party index not? for purposes of determining whether an provider that is not a party to an index 86. Should an index with 9 or fewer index CDS that includes such a CDS and makes publicly available non-affiliated issuers of securities or 9 company as a reference entity or such a general information about the or fewer securities be ‘‘narrow-based?’’ security is broad or narrow-based? The construction of the index, index rules, Why or why not? Commissions request comment on the components, and predetermined 87. Should an index in which the appropriate thresholds for determining adjustments, and which index is effective notional amounts allocated to whether there likely is public referenced by an index CDS that is any reference entity or security included information available for purposes of offered on or subject to the rules of a in the index comprise more than 30 the proposed definition of narrow-based DCM or SEF, or by direct access in the percent of the index’s weighting be security index and issuers of securities U.S. from an FBOT that is registered ‘‘narrow-based’’? Why or why not? in a narrow-based security index for with the CFTC. How are indexes created 88. Should an index in which the purposes of index CDS, in particular by such a third-party index provider effective notional amounts allocated to whether these thresholds should be and what type of compensation do they any 5 non-affiliated reference entities or modified higher or lower, and request receive? What role do parties to a swap securities included in the index empirical data to support the response. or security-based swap play in comprise more than 60 percent of the 90. Is it appropriate to treat an issuer determining the constituents or index index’s weighting be ‘‘narrow-based’’? eligible to rely on rule 12g3–2(b) under criteria? What type of information does Why or why not? the Exchange Act as meeting the public a third-party index provider ensure is 89. Should an index in which information availability test under the publicly available on an ongoing basis publicly available information is not proposed rules? Why or why not? about each of the constituent issuers of available for a predominant percentage Would such a provision include issuers securities or securities identified in the of reference entities or securities that otherwise would not satisfy the index and what actions does the third- included in the index be ‘‘narrow-based’’ information condition in the proposed party index provider take to ensure the for purposes of index CDS? Why or why rules? Why or why not? Please provide accuracy of information about the not? The Commissions note that the a detailed explanation and include issuers of securities or securities in any criteria for the public information empirical data to support any suggested index compiled by such third-party availability test do not necessarily modification. index provider? How would a third- ensure that there is in fact public 91. With respect to asset-backed party index provider take steps to information available regarding the securities, is the proposed criterion for ensure that the indexes it creates are relevant entities or securities, or that the meeting the public information composed of issuers of securities or criteria act in any way as a substitute for availability test, that the asset-backed securities for which there likely is the actual availability of public securities were issued in a transaction public information available? Please information; instead, the criteria, taken registered under the Securities Act and provide detailed examples. as a whole, are intended to capture, for 95. If the Commissions determine to purposes of the definition of the term 243 See supra note 231. use, as an alternative to the public

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information availability test in the backed securities is publicly available? or based on the value thereof.’’ 244 The proposed rules relating to index CDS, Why or why not? Please provide a Commissions are proposing guidance as the existence of a third-party index detailed explanation and empirical data, to how to determine when a portfolio of provider that is not a party to an index to the extent feasible. securities is a narrow-based or broad- CDS and makes publicly available 99. Should the proposed rules include based security index and the general information about the additional or other criteria to determine circumstances in which changes to the construction of the index, index rules, whether an index is ‘‘narrow-based’’ composition of a security index components, and predetermined with respect to index CDS? If so, what (including a portfolio of securities) 245 adjustments, and which index is criteria should be included, and why? underlying a Title VII instrument would referenced by an index CDS that is affect the characterization of such Title 100. Does the proposed treatment of offered on or subject to the rules of a VII instrument.246 index CDS whereby a payment is DCM or SEF, or by direct access in the In most cases, a security index is contemplated based on the default of a U.S. from an FBOT that is registered designed to reflect the performance of a particular entity in the index rather than with the CFTC, what requirements, if market or sector by reference to solely on the value of the index any, should the Commissions impose on representative securities or interests in adequately address the Federal the DCM, SEF, or FBOT to ensure that securities. There are a number of well- regulatory interests under the Federal public information likely will be known security indexes established and securities laws and the Commodity available in this context regarding the maintained by recognized index issuers of securities or securities in the Exchange Act? providers currently in the market.247 index? What specified standards, if any, 101. Does the definition of ‘‘control’’ The Commissions understand, however, should the Commissions require the for purposes of identifying whether a that instead of using these established DCM, SEF, or FBOT to meet for reference entity or issuer is affiliated indexes, market participants may enter purposes of the proposed rules? with another entity (ownership of 20 into a Title VII instrument where the 96. Should index CDS based on an percent or more of an entity’s or issuer’s underlying reference of the Title VII index compiled by a third-party index equity, or the ability to direct the voting instrument is a portfolio of securities provider as described in this section be of 20 percent or more of the entity’s or selected by the counterparties or created considered a ‘‘mixed swap’’ rather than issuer’s voting equity) appropriately by a third-party index provider at the a swap in order to ensure that the identify when affiliates are in a control behest of one or both counterparties. In protections of the Federal securities relationship for these purposes? Why or some cases, the Title VII instrument laws apply with respect to index why not? Should these thresholds be may give one or both of the constituents about which public higher or lower? Please provide counterparties, either directly or information about the constituent supporting data and/or analysis. Should indirectly (e.g., through an investment issuers of securities or securities in the issuing entities of asset-backed adviser or through the third-party index index (subject to the de minimis securities be considered separate provider), discretionary authority to provisions of the proposed rules) may reference entities or issuers for purposes change the composition of the security not be available? of the proposed criteria? If not, why not? portfolio, including, for example, by 97. Are there other criteria that the Are there circumstances under which adding or removing securities in the Commissions should adopt as issuing entities of asset-backed security portfolio on an ‘‘at-will’’ basis alternative means of satisfying the securities should not be considered during the term of the Title VII public information availability test in separate reference entities or issuers for instrument.248 The Commissions believe the proposed rules? If so, please explain purposes of the proposed criteria? Why that where the counterparties, either what they are and what requirements or why not? directly or indirectly (e.g., through an the Commissions should impose to 102. Are there other categories or investment adviser or through the third- ensure the public availability of types of CDS that proposed rules party index provider), have this information regarding issuers of 1.3(zzz) and (aaaa) and proposed rules discretionary authority to change the securities or securities in index CDS. 3a68–1a and 3a68–1b do not address or 98. Should the proposed rules that require additional clarification 244 See section 3(a)(68)(E) of the Exchange Act, 15 provide, solely with respect to CDS that U.S.C. 78c(a)(68)(E). regarding their treatment under the 245 A ‘‘portfolio’’ of securities could be a group of may be entered into only between Dodd-Frank Act? If so, please provide a eligible contract participants, that the securities and therefore an ‘‘index’’ for purposes of detailed description of any such the Dodd-Frank Act. To the extent that changes are information availability test could be categories or types of CDS, as well as made to the securities underlying the Title VII satisfied if the reference entity or the instrument and each such change is individually any analysis, supported by empirical issuer of the security (i) except in the confirmed, then those substituted securities would data to the extent feasible, of what case of issuing entities of asset-backed not be part of a security index as defined in the clarification is necessary. Dodd-Frank Act, and therefore a Title VII securities, provides information to the instrument on each of those substituted securities public or to such eligible contract 103. Are there other categories of would be a security-based swap. participant pursuant to rule 144A(d)(4) event-type contracts relating to issuers 246 Solely for purposes of the discussion in this of the Securities Act; (ii) except in the of securities that require additional section, the terms ‘‘security index’’ and ‘‘security portfolio’’ are intended to include either securities case of issuing entities of asset-backed clarification regarding their treatment under the Dodd-Frank Act? If so, please or the issuers of securities. securities, financial information is 247 For instance, the S&P 500® is an index that otherwise publicly available about the provide a detailed explanation of the gauges the large cap U.S. equities market. reference entity or the issuer of the types of contracts and why the proposed 248 Alternatively, counterparties may enter into security; or (iii) in the case of asset- rules should apply to such other event- Title VII instruments where a third-party type contracts. investment manager selects an initial portfolio of backed securities and issuing entities of securities and has discretionary authority to change asset-backed securities, financial 4. Security Indexes the composition of the security portfolio in information of the type and level accordance with guidelines agreed upon with the included in public distribution reports The Dodd-Frank Act defines the term counterparties. Such security portfolios would be ‘‘ ’’ ‘‘ treated as narrow-based security indexes with Title for similar asset-backed securities about index as an index or group of VII instruments on those security portfolios being both the issuing entity and such asset- securities, including any interest therein security-based swaps.

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composition or weighting of securities underlying a Title VII instrument. In 106. Should ‘‘discretionary authority in a security portfolio, that security either of these situations, the to change’’ by the counterparties, either portfolio should be treated as a narrow- composition of a security index may directly or indirectly (e.g., through an based security index, and that therefore change pursuant to predetermined investment adviser or through the third- a Title VII instrument on that security criteria or predetermined self-executing party index provider), be a portfolio would be a security-based formulas without the Title VII determinative factor for whether a swap.249 instrument counterparties, their agents, security portfolio should be treated as a The Commissions believe, however, or third-party index providers having narrow-based security index? Why or that not all changes that occur to the any direct or indirect discretionary why not? Are there Title VII instruments composition or weighting of a security authority to change the security index. where the underlying reference is a index underlying a Title VII instrument In general, and by contrast to Title VII security portfolio where counterparties will always result in that security index instruments in which the may directly or indirectly (e.g., through being treated as a narrow-based security counterparties, either directly or an investment manager or the third- index. Many security indexes are indirectly (e.g., through an investment party provider) exercise discretionary constructed and maintained by an index adviser or through the third-party index authority to change the composition of provider pursuant to a published provider), have the discretion to change the security portfolio that should not be methodology.250 For instance, the the composition or weighting of the considered security-based swaps? Why various Standard & Poor’s security referenced security index, where there or why not? Please provide a detailed indexes are reconstituted and is an underlying security index for explanation of such Title VII rebalanced as needed and on a periodic which there are predetermined criteria instruments, the means by which, and basis pursuant to published index or a predetermined self-executing why, the composition of the underlying 251 criteria. formula for adjusting the security index security portfolio are established and In addition, counterparties to a Title that are not subject to change or subsequently changed, and for what VII instrument frequently agree to use as modification through the life of the Title purpose such Title VII instruments are the underlying reference of a Title VII VII instrument and that are set forth in used. instrument a security index based on the Title VII instrument at execution 107. Should a security index, where predetermined criteria where the (regardless of who establishes the changes to the composition are not security index composition or weighting criteria or formula), a Title VII subject to discretionary authority but may change as a result of the occurrence instrument on such underlying security instead may be made pursuant to of certain events specified in the Title index would be on a broad-based or predetermined criteria or a VII instrument at execution, such as narrow-based security index, depending predetermined self-executing formula ‘‘succession events.’’ Counterparties to a on the composition and weighting of the set forth in the Title VII instrument at Title VII instrument also may use a underlying security index. Subject to execution, be considered either a broad- predetermined self-executing formula to the interpretation discussed below based security index or a narrow-based make other changes to the composition regarding security indexes that may security index, depending on its constitution? Why or why not? Are or weighting of a security index shift from being a narrow-based security changes pursuant to such index or broad-based security index 249 The Commissions understand that a security predetermined criteria or formulas during the life of an existing Title VII portfolio could be labeled as such or could just be common? How frequently do such instrument,252 the characterization of a an aggregate of individual Title VII instruments changes occur? What sorts of events documented, for example, under a master Title VII instrument based on a security trigger such changes? Please provide a agreement or by amending an annex of securities index as either a swap or a security- detailed explanation and empirical data, attached to a master trade confirmation. If the based swap would depend on the security portfolio were created by aggregating to the extent feasible. individual Title VII instruments, each Title VII characterization of the security index 108. Are the terms ‘‘predetermined 253 instrument would need to be evaluated in using the above interpretation. ’’ ‘‘ accordance with the proposed guidance to criteria and predetermined self- determine whether it is a swap or a security-based Request for Comment executing formula’’ clear? Why or why swap. For the avoidance of doubt, if the not? If not, what alternative or counterparties to a Title VII instrument exchanged 104. The Commissions request additional guidance should be provided payments under that Title VII instrument based on comment on whether there are to clarify under what circumstances a security index that was itself created by additional or other criteria that would changes to the composition of a security aggregating individual security-based swaps, such be appropriate in determining whether Title VII instrument would be a security-based index underlying a Title VII instrument swap. See discussion supra part III.D. a security index or security portfolio may be made without being considered 250 See, e.g., NASDAQ, ‘‘NASDAQ–100 Index’’ would constitute a narrow-based ‘‘at will’’ or discretionary changes by the (‘‘The NASDAQ–100 Index is calculated under a security index for purposes of the counterparties, either directly or modified capitalization-weighted methodology. The definitions of the terms ‘‘swap’’ and methodology is expected to retain in general the indirectly (e.g., through an investment economic attributes of capitalization-weighting ‘‘security-based swap.’’ Please discuss adviser or through the third-party index while providing enhanced diversification. To any criteria in detail and provide any provider), that would result in the accomplish this, NASDAQ will review the supporting data where relevant. security index being treated as a narrow- composition of the NASDAQ–100 Index on a 105. What are the ways in which Title quarterly basis and adjust the weightings of Index based security index and the Title VII components using a proprietary algorithm, if certain VII instruments involving security instrument being a security-based swap? pre-established weight distribution requirements portfolios are structured, including Are there specific additional criteria, are not met.’’), available at http:// changes in security portfolio restrictions, or parameters that should dynamic.nasdaq.com/dynamic/ composition? nasdaq100_activity.stm be considered? If so, please provide a 251 Information regarding security indexes and detailed explanation regarding such their related methodologies may be widely available 252 As discussed further below, the Commissions criteria, restrictions, or parameters, to the general public or restricted to licensees in the are concerned about the potential use of security including the types of changes that case of proprietary or ‘‘private label’’ security indexes to game the narrow-based security index indexes. Both public and private label security definition. should or should not be permitted. indexes are frequently subject to intellectual 253 See supra note 249 regarding the aggregation 109. Are there specific methodologies property protection. of separate trades. or criteria, agreed to at or prior to the

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execution of a Title VII instrument, for characteristics of the underlying Although at certain points during the changing the composition of an security index must be reassessed at the life of the Title VII instrument the underlying security index, that should time of such an amendment or underlying security index would be be explicitly addressed by the modification to determine whether the broad-based and at other points the Commissions in providing the proposed security index has migrated from broad- underlying security index would be guidance regarding security indexes? If based to narrow-based or vice versa. If narrow-based, the Commissions believe so, please provide a detailed the security index has migrated, then that regulating such a Title VII explanation of those methodologies or the characterization of the amended or instrument as a mixed swap from the criteria and what additional guidance is modified Title VII instrument would be execution of the Title VII instrument necessary. determined by evaluating the and throughout its life reflects the 110. Would restrictions on the characterization of the underlying appropriate characterization of a Title frequency of changes to the composition security index at the time the Title VII VII instrument based on a security index of a security index underlying a Title instrument is amended or modified. that migrates pursuant to predetermined VII instrument be useful in determining Similarly, if a security index has criteria or a predetermined self- whether the underlying security index migrated from broad-based to narrow- executing formula. should be treated as a narrow-based based or vice versa, any new Title VII The Commissions believe that this security index? If so, please provide a instrument based on that security index guidance regarding the use of detailed explanation of what restrictions would be characterized pursuant to an predetermined criteria or a should apply and why, as well as evaluation of the underlying security predetermined self-executing formula empirical data to the extent feasible. index at the execution of that new Title would prevent potential gaming of the 5. Evaluation of Title VII Instruments on VII instrument. Commissions’ guidance regarding Security Indexes That Move From The Commissions are proposing security indexes and prevent potential Broad-Based to Narrow-Based or guidance regarding circumstances in regulatory arbitrage based on the Narrow-Based to Broad-Based which the character of a security index migration of a security index from on which a Title VII instrument is based broad-based to narrow-based or vice (a) In General changes according to predetermined versa. In particular, the Commissions As discussed above, the criteria or a predetermined self- note that predetermined criteria and determination of whether a Title VII executing formula set forth in the Title predetermined self-executing formulas instrument is a swap, a security-based VII instrument (or in a related or other can be constructed in ways that take swap, or both (i.e., a mixed swap), is agreement entered into by the into account the characteristics of a made at the execution of the Title VII counterparties or a third-party index narrow-based security index and instrument.254 If the security index provider to the Title VII instrument) at prevent a narrow-based security index underlying a Title VII instrument execution. Where at the time of from becoming broad-based and vice migrates from being broad-based to execution such criteria or such formula versa. being narrow-based, or vice versa, would cause the underlying broad-based during the life of a Title VII instrument, security index to become or assume the (b) Title VII Instruments on Security the characterization of that Title VII characteristics of a narrow-based Indexes Traded on Designated Contract instrument would not change from its security index or vice versa during the Markets, Swap Execution Facilities, initial characterization regardless of duration of the instrument,256 then the Foreign Boards of Trade, Security-Based whether the Title VII instrument was characterization of the Title VII Swap Execution Facilities, and National entered into bilaterally or was executed instrument based on such security index Securities Exchanges through a trade on or subject to the rules would be a mixed swap during the The Commissions recognize that of a DCM, SEF, FBOT, security-based entire life of the Title VII instrument.257 security indexes underlying Title VII SEF, or NSE. For example, if two instruments that are traded on DCMs, counterparties enter into a swap based of an index of 12 securities but is amended during SEFs, FBOTs, security-based SEFs, or on a broad-based security index, and its term to reflect the replacement of a departing NSEs raise particular issues if an ‘‘key person’’ of a hedge fund that is a counterparty three months into the life of the swap to the Title VII instrument with a new ‘‘key person,’’ underlying security index migrates from the security index underlying that Title the Commissions would not view the amended or broad-based to narrow-based or vice VII instrument migrates from being modified Title VII instrument as a new Title VII versa. The characterization of an broad-based to being narrow-based, the instrument because the amendment or modification exchange-traded Title VII instrument at is not to a material term of the Title VII instrument. Title VII instrument would remain a Because it would be a new Title VII instrument, any its execution, as explained above, would swap for the duration of its life and regulatory requirements regarding new Title VII not change through the life of the Title would not be recharacterized as a instruments would apply. VII instrument, regardless of whether security-based swap. 256 Thus, for example, if a predetermined self- the underlying security index migrates If the material terms of a Title VII executing formula agreed to by the counterparties of a Title VII instrument at or prior to the execution from broad-based to narrow-based or instrument are amended or modified of the Title VII instrument provided that the vice versa. Accordingly, a market during its life, the Commissions would security index underlying the Title VII instrument participant who enters into a swap on view the amended or modified Title VII would decrease from 20 to 5 securities after six a broad-based security index traded on instrument as a new Title VII months, such that the security index would become or subject to the rules of a DCM, SEF or 255 narrow-based as a result of the reduced number of instrument. As a result, the securities, then the Title VII instrument would be FBOT that migrates from broad-based to a mixed swap at its execution. The characterization narrow-based may hold that position 254 See discussion supra part III.A. of the Title VII instrument as a mixed swap would until the swap’s expiration without any 255 For example, if, on its effective date, a Title not change during the life of the Title VII change in regulatory responsibilities, VII instrument tracks the performance of an index instrument. of 12 securities but is amended during its term to 257 As discussed above in part III.G.4, to the requirements, or obligations, and track the performance of only 8 of those 12 extent a Title VII instrument permits ‘‘at will’’ securities, the Commissions would view the substitution of an underlying security index, swap at its execution and throughout its life amended or modified Title VII instrument as a new however, as opposed to the use of predetermined regardless of whether the underlying security index Title VII instrument. Conversely, if, on its effective criteria or a predetermined self-executing formula, was narrow-based at the execution of the Title VII date, a Title VII instrument tracks the performance the Title VII instrument would be a security-based instrument.

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similarly a market participant who continue to trade, even when the index first 30 days of trading, paragraph enters into a security-based swap on a temporarily assumes characteristics that (2)(i)(B) of proposed rule 1.3(yyy) under narrow-based security index traded on a would render it a narrow-based security the CEA and paragraph (b)(1)(ii) of security-based SEF or NSE may hold index under the statutory definition.261 proposed rule 3a68–3 under the that position until the security-based In general, an index is subject to this Exchange Act provide that the index swap’s expiration without any change in tolerance period, and therefore is not a must not have been a narrow-based regulatory responsibilities, narrow-based security index, if: (i) a security index during every trading day requirements, or obligations. futures contract on the index traded on of the 6 full calendar months preceding However, in the absence of any action a DCM for at least 30 days as a futures a date no earlier than 30 days prior to by the Commissions, if the market contract on a broad-based security index the commencement of trading of a swap participant wants to offset the swap or before the index assumed the on such index.264 If either of these enter into a new swap on the DCM, SEF characteristics of a narrow-based alternatives are met, paragraph (2)(ii) of or FBOT where the underlying security security index and (ii) the index does index has migrated from broad-based to proposed rule 1.3(yyy) under the CEA not retain the characteristics of a and paragraph (b)(2) of proposed rule narrow-based, or to offset the security- narrow-based security index for more based swap or enter into a new security- 3a68–3 under the Exchange Act provide than 45 business days over 3 that the index will not be a narrow- based swap on a security-based SEF or consecutive calendar months. Pursuant based security index if it has been a NSE where the underlying security to these statutory provisions, if the narrow-based security index for no more index has migrated from narrow-based index becomes narrow-based for more than 45 business days over 3 to broad-based, the participant would be than 45 business days over 3 prohibited from doing so. That is consecutive calendar months, the index consecutive calendar months. Paragraph because swaps may trade only on DCMs, is excluded from the definition of the (2) of proposed rule 1.3(yyy) under the SEFs, and FBOTs, and security-based term ‘‘narrow-based security index’’ for CEA and paragraph (b) of proposed rule swaps may trade only on registered the following 3 calendar months as a 3a68–3 under the Exchange Act apply 258 NSEs and security-based SEFs. The grace period. solely for purposes of swaps traded on Commissions believe it is important to The Commissions believe a similar or subject to the rules of a DCM, SEF, address how to treat Title VII tolerance period should apply to swaps or FBOT. instruments traded on trading platforms traded on DCMs, SEFs, and FBOTs and Similarly, paragraph (3) of proposed where the underlying security index security-based swaps traded on security- rule 1.3(yyy) under the CEA and migrates from broad-based to narrow- based SEFs and NSEs. Accordingly, the paragraph (c) of proposed rule 3a68–3 based or narrow-based to broad-based so Commissions are proposing rules under the Exchange Act provide a that market participants will know providing for tolerance periods for tolerance period for security-based where such Title VII instruments may swaps that are traded on DCMs, SEFs, swaps traded on security-based SEFs or be traded and can avoid potential or FBOTs and for security-based swaps NSEs. Under paragraph (3)(i)(A) of disruption of their ability to offset or traded on security-based SEFs and proposed rule 1.3(yyy) under the CEA enter into new Title VII instruments on NSEs. trading platforms when such migration and paragraph (c)(1)(i) of proposed rule Under paragraph (2)(i)(A) of proposed 3a68–3 under the Exchange Act, to be occurs. The Commissions are proposing rule 1.3(yyy) under the CEA and rules accordingly.259 subject to the tolerance period, a paragraph (b)(1)(i) of proposed rule security index underlying a security- Congress and the Commissions 3a68–3 under the Exchange Act, to be addressed a similar issue in the context based swap executed on a security- subject to the tolerance period, a based SEF or NSE must have been a of security futures, where the security security index underlying a swap index on which a future is based may narrow-based security index during the executed on or subject to the rules of a first 30 days of trading. If the index migrate from broad-based to narrow- DCM, SEF, or FBOT must not have been becomes broad-based during the first 30 based or vice versa. Congress provided a narrow-based security index 262 during ‘‘ days of trading, paragraph (3)(i)(B) of in the definition of narrow-based the first 30 days of trading.263 If the security index’’ in both the CEA and the proposed rule 1.3(yyy) under the CEA index becomes narrow-based during the Exchange Act 260 for a tolerance period and paragraph (c)(1)(ii) of proposed rule ensuring that, under certain conditions, 3a68–3 under the Exchange Act provide 261 By joint rules, the Commissions have provided a futures contract on a broad-based that ‘‘[w]hen a contract of sale for future delivery that the index must have been a non- security index traded on a DCM may on a security index is traded on or subject to the narrow-based security index during rules of a foreign board of trade, such index shall every trading day of the 6 full calendar 258 If a swap were based on a security index that not be a narrow-based security index if it would not months preceding a date no earlier than migrated from broad-based to narrow-based, a DCM, be a narrow-based security index if a futures SEF, or FBOT could no longer offer the Title VII contract on such index were traded on a designated 30 days prior to the commencement of instrument because it would be a security-based contract market * * * .’’ See CFTC rule 41.13, 17 trading of a security-based swap on such swap. Similarly, if a security-based swap were CFR 41.13, and rule 3a55–3 under the Exchange index. If either of these alternatives are Act, 17 CFR 240.3a55–3. Accordingly, the statutory based on a security index that migrated from met, paragraph (3)(ii) of proposed rule narrow-based to broad-based, a security-based SEF tolerance period rules applicable to futures on or NSE could no longer offer the Title VII security indexes traded on DCMs apply to futures 1.3(yyy) under the CEA and paragraph instrument because it would be a swap. traded on FBOTs as well. (c)(2) of proposed rule 3a68–3 under the 259 The proposed rules apply only to the 262 For purposes of the proposed rules, the term Exchange Act provide that the index particular Title VII instrument that is traded on or ‘‘narrow-based security index’’ shall also mean subject to the rules of a DCM, SEF, FBOT, security- ‘‘issuers of securities in a narrow-based security will be a narrow-based security index if based SEF, or NSE. To the extent that a particular index.’’ See supra part III.G.3(b) (discussing the it has been a security index that is not Title VII instrument is not traded on such a trading proposed rules defining ‘‘issuers of securities in a narrow-based for no more than 45 platform (even if another Title VII instrument of the narrow-based security index’’). business days over 3 consecutive same class or type is traded on such a trading 263 This provision is consistent with the platform) the proposed rules would not apply to provisions of the CEA and the Exchange Act that particular Title VII instrument. applicable to futures contracts on security indexes. 264 This alternative test is the same as the 260 CEA section 1a(35)(B)(iii), 7 U.S.C. CEA section 1a(35)(B)(iii)(I), 7 U.S.C. alternative test applicable to futures contracts in 1a(35)(B)(iii); section 3(a)(55)(C)(iii) of the Exchange 1a(35)(B)(iii)(I); section 3(a)(55)(C)(iii)(I) of the CEA rule 41.12, 17 CFR 41.12 and rule 3a55–2 Act, 15 U.S.C. 78c(a)(55)(C)(iii). Exchange Act, 15 U.S.C. 78c(a)(55)(C)(iii)(I). under the Exchange Act, 17 CFR 240.3a55–2.

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calendar months.265 Paragraph (3) of days over 3 consecutive calendar not, and what additional or alternative proposed rule 1.3(yyy) under the CEA months, solely with respect to swaps limitations would do so. and paragraph (c) of proposed rule that are traded on or subject to the rules 115. Should the standard pursuant to 3a68–3 under the Exchange Act apply of DCMs, SEFs, or FBOTs, but as a result which a Title VII instrument would be solely for purposes of security-based of the proposed rules is not considered a mixed swap during the entire life of swaps traded on security-based SEFs or a narrow-based security index during the Title VII instrument require instead NSEs. the grace period, the tolerance period that the predetermined criteria or The Commissions are proposing that, provisions would not apply, even if the predetermined self-executing formula be once the tolerance period under the security-index migrated temporarily constructed in such a manner that a proposed rules has ended, there would during the grace period. After the grace broad-based security index or security be a grace period during which a Title period has ended, a security index portfolio would be reasonably likely to VII instrument based on a security index would need to satisfy anew the become or assume the characteristics of that has migrated from broad-based to requirements under the proposed rules a narrow-based security index or narrow-based or vice versa would be regarding the tolerance period in order security portfolio, or vice versa? Why or able to trade on the platform on which to trigger a new tolerance period. why not? Are there additional or Title VII instruments based on such The Commissions note that the alternative standards that should be security index were trading before the proposed rules would not result in the used in determining when a Title VII security index migrated and can also, recharacterization of any outstanding instrument would be a mixed swap during such period, be cleared. Title VII instruments. In addition, the during the entire life of the Title VII Paragraph (4)(i) of proposed rule proposed tolerance and grace periods instrument? If so, please provide a 1.3(yyy) under the CEA and paragraph would apply only to Title VII detailed explanation of such standards (d)(1) of proposed rule3a68–3 under the instruments that are traded on or subject and why they would be effective. Exchange Act would provide for an to the rules of DCMs, SEFs, FBOTs, 116. Do the proposed tolerance period additional 3-month grace period security-based SEFs, and NSEs. rules appropriately address security applicable to a security index that indexes that temporarily change from becomes narrow-based for more than 45 Request for Comment broad-based to narrow-based, and from business days over 3 consecutive The Commissions request comment narrow-based to broad-based, in the calendar months, solely with respect to on all aspects of proposed rules 1.3(yyy) context of Title VII instruments that are swaps that are traded on or subject to under the CEA and proposed rule 3a68– executed on or subject to the rules of a the rules of DCMs, SEFs, or FBOTs. 3 under the Exchange Act, including the DCM, SEF, FBOT, security-based SEF, During the grace period, such an index following: or NSE? Why or why not? If not, how would not be considered a narrow-based 111. The Commissions request should the proposed tolerance period security index. Paragraph (4)(ii) of comment regarding whether the term rules be modified? proposed rule 1.3(yyy) under the CEA ‘‘narrow-based security index’’ as 117. Should the ‘‘grace period’’ and paragraph (d)(2) of proposed defined in the CEA and the Exchange applicable to Title VII instruments rule3a68–3 under the Exchange Act Act 267 requires further definition solely executed on or subject to the rules of a would apply the same grace period to a in the context of Title VII instruments. DCM, SEF, FBOT, security-based SEF, security-based swap on a security index 112. Are there particular types of Title or NSE regarding a security index that that becomes broad-based for more than VII instruments that require additional becomes narrow-based or broad-based, 45 business days over 3 consecutive guidance as to how the narrow-based respectively, for more than 45 business calendar months, solely with respect to security index definition applies? If so, days over 3 consecutive calendar security-based swaps that are traded on which types of Title VII instruments? months be modified? Why or why not? a security-based SEF or NSE. During the How should the definition apply to If so, what modifications should be grace period, such an index would not them? Please provide a detailed made? be considered a broad-based security explanation of such Title VII 118. What would be the impact of the index.266 As a result, this proposed rule instruments and the additional guidance proposed rules on market participants would provide sufficient time for the that would be appropriate. with open swap or security-based swap migrated Title VII instrument to satisfy 113. Does the proposed guidance positions if the security index listing and clearing requirements effectively address security indexes that underlying a swap were to become applicable to swaps or security-based migrate from broad-based to narrow- narrow-based or if the security index swaps, as appropriate. based and vice versa? Why or why not? underlying a security-based swap were There would be no overlap between If not, what additional or alternative to become broad-based? Should market the tolerance and the grace periods requirements would be appropriate, and participants be allowed to liquidate under the proposed rules and no ‘‘re- why? their swaps or security-based swaps triggering’’ of the tolerance period. For 114. Will the proposed limitations prior to expiration but after the grace example, if a security index becomes regarding the use of predetermined period? If so, how would the listing narrow-based for more than 45 business criteria or predetermined self-executing market restrict trading for liquidation formulas for Title VII instruments only? 265 These provisions are consistent with the effectively prevent gaming of the H. Method of Settlement of Index CDS parallel provisions in the CEA and the Exchange proposed rules and potential regulatory Act applicable to futures contracts on security The method that the parties have arbitrage based on the migration of a indexes traded on DCMs. CEA section chosen or use to settle an index CDS 1a(35)(B)(iii)(II), 7 U.S.C. 1a(35)(B)(iii)(II); section security index or security portfolio from following the occurrence of a credit 3(a)(55)(C)(iii)(II) of the Exchange Act, 15 U.S.C. broad-based to narrow-based or vice event under such index CDS also can 78c(a)(55)(C)(iii)(II). versa? Why or why not? If not, please 266 These provisions are consistent with the affect whether such index CDS would provide a detailed explanation of why parallel provisions in the CEA and the Exchange be a swap, a security-based swap, or Act applicable to futures contracts on security indexes traded on DCMs. See CEA section 267 CEA sections 1a(35)(A) and (B), 7 U.S.C. both (i.e., a mixed swap). The 1a(35)(D), 7 U.S.C. 1a(35)(D); section 3(a)(55)(E) of 1a(35)(A) and (B); section 3(a)(55)(B) and (C) of the Commissions believe that if an index the Exchange Act, 15 U.S.C. 78c(a)(55)(E). Exchange Act, 15 U.S.C. 78c(a)(55)(B) and (C). CDS that is not based on a narrow-based

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security index under the Commissions’ mixed swap solely because the auction, dealers and investors can proposed rules includes a mandatory determination of the cash price to be determine whether to submit limit physical settlement provision that paid is established through a securities orders and the levels of such limit would require the delivery of, and or loan auction.272 In 2009, auction orders. The limit orders, which are therefore the purchase and sale of, a settlement, rather than physical irrevocable, have a firm price in non-exempted security 268 or a loan in settlement, became the default method addition to size and whether it is a buy the event of a credit event, such an of settlement for, among other types of or sell order. The auction is conducted index CDS would be a mixed swap.269 CDS, index CDS on corporate issuers of as a ‘‘dutch’’ auction, in which the open Conversely, the Commissions believe securities.273 The amount of the cash buy interests and open sell interests are that if an index CDS that is not based settlement is determined through an matched.276 The final price of the on a narrow-based security index under auction triggered by the occurrence of a auction is the last limit order used to the Commissions’ proposed rules credit event.274 The Auction match against the open interest. The includes a mandatory cash Supplement ‘‘hard wired’’ the mechanics final price in the auction is the cash settlement 270 provision, such index of credit event auctions into the 2003 price used for purposes of calculating CDS would be a swap, and not a Definitions.275 The Commissions the settlement payments in respect of security-based swap or a mixed swap, understand that the credit event auction the orders to buy and sell the even if the cash settlement were based process that is part of the ISDA terms deliverable obligations and it is also on the value of a non-exempted security works as follows: used to determine the cash settlement or a loan. Following the occurrence of a credit payment under the CDS. The Commissions believe that an event under a CDS, a determinations index CDS that is not based on a committee (‘‘DC’’) established by ISDA, I. Security-Based Swaps as Securities narrow-based security index under the following a request by any party to a Under the Exchange Act and Securities Commissions’ proposed rules and that credit derivatives transaction that is Act provides for cash settlement in subject to the Big Bang Protocol or accordance with the 2009 ISDA Credit Auction Supplement, will determine, Pursuant to the Dodd-Frank Act, a Derivatives Determinations Committees among other matters: (i) Whether and security-based swap is defined as a and Auction Settlement Supplement to ‘‘security’’ under the Exchange Act 277 when a credit event occurred; (ii) 278 the 2003 Definitions (the ‘‘Auction whether or not to hold an auction to and Securities Act. As a result, Supplement’’) or with the 2009 ISDA enable market participants to settle security-based swaps are subject to the Credit Derivatives Determinations those of their credit derivatives Exchange Act and the Securities Act Committees and Auction Settlement and the rules and regulations transactions covered by the auction; (iii) 279 CDS Protocol (‘‘Big Bang Protocol’’) 271 the list of deliverable obligations of the promulgated thereunder. To the would be a swap, and would not be relevant reference entity; and (iv) the considered a security-based swap or a necessary auction specific terms. The 276 The second part of the credit event auction process involves offers and sales of securities that credit event auction takes place in two must be made in compliance with the provisions of 268 The Commissions note that section 3(a)(68)(C) parts. In the first part of the auction, the Securities Act and the Exchange Act. First, the of the Exchange Act, 15 U.S.C. 78c(a)(68)(C), submission of a physical settlement request provides that ‘‘[t]he term ‘‘security-based swap’’ does dealers submit physical settlement constitutes an offer by the counterparty to either not include any agreement, contract, or transaction requests, which are requests to buy or buy or sell any one of the deliverable obligations that meets the definition of a security-based swap sell any of the deliverable obligations in the auction. Second, the submission of the only because such agreement, contract, or (based on the dealer’s needs and those transaction references, is based upon, or settles irrevocable limit orders by dealers or investors are through the transfer, delivery, or receipt of an of its counterparties), and an initial sales or purchases by such persons at the time of exempted security under paragraph (12) [of the market midpoint price is created based submission of the irrevocable limit order. Through the auction mechanism, where the open interest Exchange Act], as in effect on the date of enactment on dealers’ initial bids and offers. of the Futures Trading Act of 1982 (other than any (which represents physical settlement requests) is municipal security as defined in paragraph (29) [of Following the establishment of the matched with limit orders, buyers and sellers are the Exchange Act] as in effect on the date of initial market midpoint, the physical matched. Finally, following the auction and enactment of the Futures Trading Act of 1982), settlement requests are then calculated determination of the final price, the counterparty who has submitted the physical delivery request unless such agreement, contract, or transaction is of to determine the amount of open the character of, or is commonly known in the trade decides which of the deliverable obligations will be as, a put, call, or other option.’’ interest. delivered to satisfy the limit order in exchange for 269 The Commissions’ views as to the legal basis The aggregate amount of open interest the final price. The sale of the securities in the for such a conclusion differ. The SEC also notes that is the basis for the second part of the auction occurs at the time the limit order is there must either be an effective registration auction. In the second part of the submitted, even though the identification of the statement covering the transaction or an exemption specific deliverable obligation does not occur until under the Securities Act would need to be available the auction is completed. 272 for such physical delivery of securities and The possibility that such index CDS may, in 277 See section 761(a)(2) of the Dodd-Frank Act compliance issues under the Exchange Act would fact, be physically settled if an auction is not held (inserting the term ‘‘security-based swap’’ into the also need to be considered. or if the auction fails would not affect the definition of ‘‘security’’ in section 3a(10) of the characterization of the index CDS. 270 The Commissions are aware that the 2003 Exchange Act, 15 U.S.C. 78c(a)(10)). 273 Definitions supra note 35, include ‘‘Cash The Commissions understand that the Big 278 See section 768(a)(1) of the Dodd-Frank Act Settlement’’ as a defined term and that such Bang Protocol is followed for index CDS involving (inserting the term ‘‘security-based swap’’ into the ‘‘Settlement Method’’ (also a defined term in the corporate debt obligations but is not followed for definition of ‘‘security’’ in section 2(a)(1) of the 2003 Definitions) works differently than auction index CDS based on asset-backed securities, loan- Securities Act, 15 U.S.C. 77b(a)(1)). settlement pursuant to the ‘‘Big Bang Protocol’’ or only CDS, and certain other types of CDS contracts. 279 Sections 761(a)(3) and (4) of the Dodd-Frank ‘‘Auction Supplement’’ (each as defined below). The To the extent that such other index CDS contain Act amend sections 3(a)(13) and (14) of the Commissions’ use of the term ‘‘cash settlement’’ in auction procedures similar to the auction Exchange Act, 15 U.S.C. 78c(a)(13) and (14), and this section includes ‘‘Cash Settlement,’’ as defined procedures for corporate debt to establish the cash section 768(a)(3) of the Dodd-Frank Act adds in the 2003 Definitions, and auction settlement, as price to be paid, the Commissions also would not section 2(a)(18) to the Securities Act, 15 U.S.C. described in the ‘‘Big Bang Protocol’’ or ‘‘Auction consider such other index CDS that are not based 77b(a)(18), to provide that the terms ‘‘purchase’’ and Supplement.’’ on narrow-based security indexes under the ‘‘sale’’ of a security-based swap shall mean the ‘‘the 271 See Int’l Swaps and Derivatives Ass’n, Inc., Commissions’ proposed rules to be mixed swaps. execution, termination (prior to its scheduled ‘‘2009 ISDA Credit Derivatives Determinations 274 The Commissions understand that other maturity date), assignment, exchange, or similar Committees and Auction Settlement CDS Protocol,’’ conditions may need to be satisfied as well for an transfer or conveyance of, or extinguishing of rights available at http://www.isda.org/bigbangprot/docs/ auction to be held. or obligations under, a security-based swap, as the Big-Bang-Protocol.pdf. 275 See supra note 35. context may require.’’

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extent that security-based swaps differ regulations regarding mixed swaps as agreements also include termination from more traditional securities may be necessary to carry out the and default events relating to one or products, however, the SEC is soliciting purposes of the Dodd-Frank Act.282 both of the counterparties; such comment on whether additional More generally, the Commissions counterparties may or may not be guidance may be necessary regarding believe the category of mixed swap was entities that issue securities.285 The the application of certain provisions of designed so that there would be no gaps Commissions believe that the term ‘‘any the Exchange Act and the Securities in the regulation of swaps and security- agreement * * * based on * * * the Act, and the rules and regulations based swaps. Therefore, in light of the occurrence of an event relating to a promulgated thereunder, to security- statutory scheme created by the Dodd- single issuer of a security,’’ as provided based swaps. Frank Act for swaps and security-based in the definition of the term ‘‘security- swaps, the Commissions believe the Request for Comment based swap,’’ was not intended to category of mixed swap covers only a include such termination and default 119. Are there Exchange Act or small subset of Title VII instruments.283 events relating to counterparties Securities Act provisions, or rules and For example, a Title VII instrument in included in standard agreements that regulations promulgated thereunder, which the underlying references are the are incorporated by reference into a that contemplate application to cash value of an oil corporation stock and the Title VII instrument.286 Therefore, an market securities products or other price of oil would be a mixed swap. instrument would not be securities products for which additional Similarly, a Title VII instrument in simultaneously a swap and a security- guidance may be necessary when which the underlying reference is a based swap (and thus not a mixed swap) applied to security-based swaps? If so, portfolio of both securities (assuming simply by virtue of having incorporated which provisions, and why? Please the portfolio is not an index or, if it is by reference a standard agreement, provide detailed analysis and empirical an index, that the index is narrow- including default and termination data, to the extent feasible. based) and commodities would be a events relating to counterparties to the 120. What additional guidance or mixed swap. Mixed swaps also would Title VII instrument. modifications would be necessary to include certain Title VII instruments any such provisions in order to address called ‘‘best of’’ or ‘‘out performance’’ Request for Comment the application of these provisions to swaps that require a payment based on The Commissions request comment security-based swaps while still the higher of the performance of a on the following: achieving the regulatory purposes of security and a commodity (other than a 121. Are there other examples of Title those provisions? security).284 As discussed elsewhere in VII instruments that should, or should IV. Mixed Swaps this release, the Commissions also not, be included within the mixed swap believe that certain Title VII instruments category? A. Scope of the Category of Mixed Swap may be mixed swaps if they meet 122. How frequently, and for what The category of mixed swap is specified conditions. purposes, do market participants use described, in both the definition of the The Commissions also believe that the mixed swaps? term ‘‘security-based swap’’ in the use of certain market standard 123. Can, and should, the economic Exchange Act and the definition of the agreements in the documentation of goals of mixed swaps be accomplished term ‘‘swap’’ in the CEA, as a security- Title VII instruments should not in and using a combination of separate Title VII based swap that is also: based on the of itself transform a Title VII instrument instruments, none of which would need value of 1 or more interest or other rates, into a mixed swap. For example, many to constitute a mixed swap? What currencies, commodities, instruments of instruments are documented by problems, if any, would arise from the indebtedness, indices, quantitative incorporating by reference market ‘‘disaggregation’’ of mixed swaps? measures, other financial or economic standard agreements. Such agreements B. Regulation of Mixed Swaps interest or property of any kind (other typically set out the basis of establishing than a single security or a narrow-based a trading relationship with another 1. Introduction party but are not, taken separately, a security index), or the occurrence, non- Paragraph (a) of proposed rule 1.9 swap or security-based swap. These occurrence, or the extent of the under the CEA and proposed rule 3a68– occurrence of an event or contingency 4 under the Exchange Act would define associated with a potential financial, 282 See section 712(a)(8) of the Dodd-Frank Act. 283 a ‘‘mixed swap’’ in the same manner as economic, or commercial consequence See Morgan Stanley Letter (expressing the view that ‘‘the universe of mixed swaps should be the term is defined in both the CEA and (other than an event described in relatively small’’); Letter from Timothy W. Cameron, the Exchange Act. The Commissions are subparagraph (A)(ii)(III) [of section Esq., Managing Director, Asset Management Group, proposing two rules to address the 280 Securities Industry and Financial Markets 3(a)(68) of the Exchange Act]). regulation of mixed swaps. First, A mixed swap, therefore, is both a Association (‘‘SIFMA Letter’’) (suggesting that the scope of products included in the mixed swap paragraph (b) of proposed rule 1.9 under security-based swap and a swap.281 category should be limited to ‘‘avoid unnecessary the CEA and proposed rule 3a68–4 The Commissions believe that the ’’ and duplicative regulation ). under the Exchange Act would provide scope of mixed swaps is, and is 284 See Cleary Letter (providing as examples of intended to be, narrow. Title VII mixed swaps, ‘‘a swap based on the out- a regulatory framework with which establishes robust and largely parallel performance of gold, oil or another commodity parties to bilateral uncleared mixed relative to a security or narrow-based security swaps (i.e., mixed swaps that are neither regulatory regimes for both swaps and index,’’ ‘‘a security-based swap with knock-out/ security-based swaps and directs the knock-in events tied to the value of gold, oil or executed on or subject to the rules of a Commissions to jointly prescribe such another commodity,’’ and ‘‘[s]waps on indices or DCM, NSE, SEF, security-based SEF, or baskets that include narrow-based security index FBOT nor cleared through a DCO or and physical commodity components’’); Deutsche clearing agency), as to which at least 280 Section 3(a)(68)(D) of the Exchange Act, 15 Bank Letter (indicating that ‘‘best-of’’ swaps should U.S.C. 78c(a)(68)(D); CEA section 1a(47)(D), 7 be treated as mixed swaps); Morgan Stanley Letter U.S.C. 1a(47)(D). (‘‘An example of a mixed swap might be a contract 285 Those standard events include inter alia 281 Id. The exclusion from the definition of the under which one party takes long exposure to the bankruptcy, breach of agreement, cross default to term ‘‘swap’’ for security-based swaps does not common stock of a U.S. corporation while other indebtedness, and misrepresentations. include security-based swaps that are mixed swaps. simultaneously taking short exposure to the price 286 See section 3(a)(68)(A)(ii)(III) of the Exchange See CEA section 1a(47)(B)(x), 7 U.S.C. 1a(47)(B)(x). of gold.’’). Act, 15 U.S.C. 78c(a)(68)(A)(ii)(III).

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one of the parties is dually registered mixed swap,290 where at least one party Request for Comment with both Commissions, would need to is dually-registered with the CFTC as a 124. The Commissions request comply. Second, paragraph (c) of the swap dealer or major swap participant comment generally on the foregoing proposed rules would establish a and with the SEC as a security-based proposed rules regarding the regulation process for persons to request that the swap dealer or major security-based of mixed swaps entered into by dually- Commissions issue a joint order swap participant, would be subject to all registered swap or security-based swap permitting such persons (and any other applicable provisions of the Federal dealers and major swap or security- person or persons that subsequently securities laws (and SEC rules and based swap participants. lists, trades, or clears that class of mixed regulations promulgated thereunder). 125. Does paragraph (b) of proposed swap) 287 to comply, as to parallel The proposed rules also would provide rule 1.9 under the CEA and proposed provisions 288 only, with specified that such mixed swaps would be subject rule 3a68–4 under the Exchange Act parallel provisions of either the CEA or to only the following provisions of the provide effective regulatory treatment the Exchange Act, and related rules and CEA (and CFTC rules and regulations for bilateral uncleared mixed swaps regulations (collectively ‘‘specified promulgated thereunder): entered into by persons that are dually parallel provisions’’), instead of being • Examinations and information registered both as swap dealers or major required to comply with parallel sharing: CEA sections 4s(f) and 8; 291 swap participants with the CFTC and provisions of both the CEA and the • Enforcement: CEA sections security-based swap dealers or major Exchange Act. 2(a)(1)(B), 4(b), 4b, 4c, 6(c), 6(d), 6c, 6d, security-based swap participants with 2. Bilateral Uncleared Mixed Swaps 9, 13(a), 13(b) and 23; 292 the SEC? If not, how should the Entered Into by Dually-Registered • Reporting to an SDR: CEA section proposed regulatory treatment be Dealers or Major Participants 4r; 293 modified? • 126. Are the enumerated sections of Swap dealers and major swap Real-time reporting: CEA section 294 the CEA (and the regulations participants will be comprehensively 2(a)(13); • Capital: CEA section 4s(e); 295 and promulgated thereunder) that are regulated by the CFTC and security- reserved in paragraph (b) appropriate? • Position Limits: CEA section 4a.296 based swap dealers and major security- Are there sections that should be based swap participants will be The Commissions believe that withdrawn? Why or why not? Are there comprehensively regulated by the paragraph (b) of the proposed rules sections that should be added? Why or 289 SEC. The Commissions recognize that would address potentially conflicting or why not? there may be differences in the duplicative regulatory requirements for requirements applicable to swap dealers dually-registered dealers and major 3. Regulatory Treatment for Other and security-based swap dealers, or participants that are subject to Mixed Swaps major swap participants and major regulation by both the CFTC and the Because mixed swaps are both security-based swap participants, such SEC, while requiring dual registrants to security-based swaps and swaps,297 that dually-registered market comply with the regulatory absent a joint rule or order by the participants may be subject to requirements the Commissions believe Commissions permitting an alternative potentially conflicting or duplicative are necessary to provide sufficient regulatory approach, persons who desire regulatory requirements when they regulatory oversight for mixed swaps or intend to list, trade, or clear a mixed engage in mixed swap transactions. In transactions entered into by such dual swap (or class thereof) would be order to assist market participants in registrants. The CFTC also believes that required to comply with all the statutory addressing such potentially conflicting paragraph (b) of the proposed rules provisions in the CEA and the Exchange or duplicative requirements, the would provide clarity to dually- Act (including all the rules and Commissions are proposing rules that registered dealers and major regulations thereunder) that were added would permit dually-registered swap participants, who are subject to or amended by Title VII with respect to dealers and security-based swap dealers regulation by both the CFTC and the swaps or security-based swaps.298 Such and dually-registered major swap SEC, as to the requirements of each dual regulation may not be appropriate participants and major security-based Commission that will apply to their in every instance and may result in swap participants to comply with an bilateral uncleared mixed swaps. potentially conflicting or duplicative alternative regulatory regime when they regulatory requirements. However, enter into certain mixed swaps under 290 For purposes of the proposed rules, a ‘‘bilateral before the Commissions can determine specified circumstances. uncleared mixed swap’’ would be a mixed swap the appropriate regulatory treatment for Accordingly, paragraph (b) of that: (i) Is neither executed on nor subject to the mixed swaps (other than the treatment proposed rule 1.9 under the CEA and rules of a DCM, NSE, SEF, security-based SEF, or discussed above), the Commissions rule 3a68–4 under the Exchange Act FBOT; and (ii) will not be submitted to a DCO or registered or exempt clearing agency to be cleared. would need to understand better the would provide that a bilateral uncleared To the extent that a mixed swap is subject to the nature of the mixed swaps that parties mandatory clearing requirement (see CEA section want to trade. Paragraph (c) of proposed 287 All references to Title VII instruments in this 2(h)(1)(A), 7 U.S.C. 2(h)(1)(A), and section 3C(a)(1) rule 1.9 under the CEA and proposed part IV and in part VI shall include a class of such of the Exchange Act) (and where a counterparty is Title VII instruments as well. For example, a ‘‘class’’ not eligible to rely on the end-user exclusion from of Title VII instrument would include instruments mandatory clearing requirement (see CEA section 297 See supra note 10. that are of similar character and provide 2(h)(7), 7 U.S.C. 2(h)(7), and section 3C(g) of the 298 Because security-based swaps are also substantially similar rights and privileges. Exchange Act)), this alternative regulatory treatment securities, compliance with the Federal securities 288 For purposes of paragraph (c) of proposed rule would not be available. laws and rules and regulations thereunder (in 1.9 under the CEA and rule 3a68–4 under the 291 7 U.S.C. 6s(f) and 12, respectively. addition to the provisions of the Dodd-Frank Act Exchange Act, ‘‘parallel provisions’’ means 292 7 U.S.C. 2(a)(1)(B), 6(b), 6b, 6c, 9 and 15, 13b, and the rules and regulations thereunder) would comparable provisions of the CEA and the 13a–1, 13a–2, 13, 13c(a), 13c(b), and 26, also be required. To the extent one of the Exchange Act that were added or amended by Title respectively. Commissions has exemptive authority with respect VII with respect to security-based swaps and swaps, 293 7 U.S.C. 6r. to other provisions of the CEA or the Federal and the rules and regulations thereunder. securities laws and the rules and regulations 294 7 U.S.C. 2(a)(13). 289 Section 712(a)(7)(A) of the Dodd-Frank Act thereunder, persons may submit separate exemptive 295 requires the Commissions to treat functionally or 7 U.S.C. 6s(e). requests or rulemaking petitions regarding those economically similar entities in a similar manner. 296 7 U.S.C. 6a. provisions to the relevant Commission.

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rule 3a68–4 under the Exchange Act Paragraph (c) would further provide Exchange Act? If so, please provide a would establish a process pursuant to that in response to a request pursuant to detailed explanation of what that which any person who desires or the proposed rules, the Commissions process should include. intends to list, trade, or clear a mixed may jointly issue an order, after public 128. Is the information required by swap (or class thereof) that is not subject notice and opportunity for comment, paragraph (c) in support of a request for to the provisions of paragraph (b) (i.e., permitting the requesting person (and a joint order appropriate? Are there bilateral uncleared mixed swaps entered any other person or persons that specific economic characteristics that into by at least one dual registrant) may subsequently lists, trades, or clears that should be required? In particular, request the Commissions to publicly class of mixed swap) to comply, as to should requesting persons be required issue a joint order permitting such parallel provisions only, with the to provide the specified parallel person (and any other person or persons specified parallel provisions (or another provisions, and the reasons the person that subsequently lists, trades, or clears subset of the parallel provisions that are believes it would be appropriate to that class of mixed swap) to comply, as the subject of the request, as the request that regulatory treatment, as to parallel provisions only, with the Commissions determine is appropriate), well as an analysis of (i) the nature and specified parallel provisions, instead of instead of being required to comply purposes of the parallel provisions that being required to comply with parallel with parallel provisions of both the CEA are the subject of the request; (ii) the provisions of both the CEA and the and the Exchange Act. In determining comparability of such parallel Exchange Act.299 the contents of such a joint order, the provisions; and (iii) the extent of any Paragraph (c) of the proposed rules Commissions could consider, among conflicts or differences between such would further provide that a person other things, (i) the nature and purposes parallel provisions? Why or why not? If submitting such a request to the of the parallel provisions that are the not, please provide a detailed Commissions must provide the subject of the request; (ii) the explanation, including what Commissions with: comparability of such parallel information requesting persons should (i) All material information regarding provisions; and (iii) the extent of any be required to provide. 129. Is there additional or alternative the terms of the specified, or specified conflicts or differences between such information that the Commissions class of, mixed swap; parallel provisions. Finally, paragraph (c) of the proposed should require persons to submit in (ii) the economic characteristics and rules would require the Commissions, if connection with a request regarding the purpose of the specified, or specified they determine to issue a joint order regulation of particular mixed swaps (or class of, mixed swap; pursuant to these rules, to do so within class thereof)? If so, what additional or (iii) the specified parallel provisions, 120 days of receipt of a complete alternative information should be and the reasons the person believes request (with such 120-day period being required? such specified parallel provisions tolled during the pendency of a request 130. Should persons be able to would be appropriate for the mixed for public comment on the proposed withdraw a request for a joint order swap (or class thereof); interpretation). If the Commissions do regarding the regulation of a particular (iv) an analysis of (1) the nature and not issue a joint order within the mixed swap (or class thereof)? Why or purposes of the parallel provisions that prescribed time period, the proposed why not? Should there be additional are the subject of the request; (2) the rules require that each Commission requirements regarding such comparability of such parallel publicly provide the reasons for not withdrawals? If so, what should they provisions; and (3) the extent of any having done so. Paragraph (c) makes be? conflicts or differences between such clear that nothing in the proposed rules 131. Is the 120-day timeframe for parallel provisions; and requires either Commission to issue a issuance of a requested joint order (v) such other information as may be requested joint order regarding the provided for in paragraph (c) of requested by either of the Commissions. regulation of a particular mixed swap proposed rule 1.9 under the CEA and This provision is intended to provide (or class thereof). proposed rule 3a68–4 under the the Commissions with sufficient These provisions are intended to Exchange Act appropriate? Is it too short information regarding the mixed swap provide market participants with a or too long? Are the provisions for (or class thereof) and the proposed prompt review of requests for a joint tolling this timeframe during a public regulatory approach to make an order regarding the regulation of a comment period appropriate? Why or informed determination regarding the particular mixed swap (or class thereof). why not? Where the Commissions do appropriate regulatory treatment of the The proposed rules also would provide not issue a joint order, is it appropriate mixed swap (or class thereof). transparency and accountability by that they each publicly provide the Paragraph (c) of the proposed rules requiring that at the end of the review reasons for not doing so within the also would allow a person to withdraw period, the Commissions issue the applicable timeframe? Why or why not? a request regarding the regulation of a requested order or publicly state the V. Security-Based Swap Agreements mixed swap at any time prior to the reasons for not doing so. issuance of a joint order by the A. Introduction Request for Comment Commissions. This provision is SBSAs are swaps over which the 127. Is the proposed procedure set intended to permit persons to withdraw CFTC has regulatory and enforcement forth in paragraph (c) appropriate? requests that they no longer need. This, authority but for which the SEC also has Should paragraph (c) of the proposed in turn, would save the Commissions antifraud and certain other authority.300 time and staff resources. rules include a more detailed process for persons to request that the 300 See section 3(a)(78) of the Exchange Act, 15 299 Other than with respect to the specified Commissions issue a joint order U.S.C. 78c(a)(78); CEA section 1a(47)(A)(v), 7 U.S.C. parallel provisions with which such persons may be permitting such persons to comply, as to 1a(47)(A)(v). The Dodd-Frank Act provides that permitted to comply instead of complying with parallel provisions only, with specified certain CFTC registrants, such as DCOs and SEFs, parallel provisions of both the CEA and the will keep records regarding SBSAs open to Exchange Act, any other provision of either the CEA parallel provisions, instead of being inspection and examination by the SEC upon or the Federal securities laws that applies to swaps required to comply with parallel request. See, e.g., sections 725(e) and 733 of the or security-based swaps will continue to apply. provisions of both the CEA and the Dodd-Frank Act. The Commissions are committed

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The term ‘‘security-based swap that is not based on a narrow-based the books and records required to be agreement’’ is defined as a ‘‘swap security index or on the ‘‘issuers of kept for SBSAs. Specifically, section agreement’’ (as defined in section 206A securities in a narrow-based security 712(d)(2)(B) of the Dodd-Frank Act of the GLBA 301) of which ‘‘a material index,’’ as defined in proposed rule requires the Commissions, in term is based on the price, yield, value, 1.3(zzz) under the CEA and proposed consultation with the Board, to jointly or volatility of any security or any group rule 3a68–1a under the Exchange Act, adopt rules governing books and records or index of securities, including any would be an SBSA. In addition, a swap requirements for SBSAs by persons interest therein’’ but does not include a based on a U.S. Treasury security or on registered as SDRs under the CEA, security-based swap.302 The Dodd-Frank certain other exempted securities other including uniform rules that specify the Act amended the definition of ‘‘swap than municipal securities would fall data elements that shall be collected and agreement’’ in section 206A of the within the definition of an SBSA under maintained by each SDR. Similarly, GLBA 303 to eliminate the requirements the Dodd-Frank Act.307 The section 712(d)(2)(C) of the Dodd-Frank that a swap agreement be between ECPs, Commissions have received no Act requires the Commissions, in as defined in 1a(12)(C) of the CEA,304 comments regarding the definition of consultation with the Board, to jointly and subject to individual negotiation.305 SBSA in the Dodd-Frank Act in adopt rules governing books and records B. Swaps That Are Security-Based Swap response to the ANPR, and have not for SBSAs, including daily trading Agreements been made aware of any significant records, for swap dealers, major swap market confusion regarding what participants, security-based swap Although the Commissions believe it constitutes an SBSA since the definition dealers, and major security-based swap is not possible to provide a bright line of SBSA was enacted as part of the participants. test to define an SBSA, the CFMA in 2000. Accordingly, the As discussed above, SBSAs are swaps Commissions believe that it is possible Commissions are not proposing to over which the CFTC has primary to clarify that certain types of swaps further define SBSA at this time beyond regulatory authority, but for which the clearly fall within the definition of providing the examples above.308 SBSA. For example, a swap based on an SEC has antifraud, anti-manipulation, index of securities that is not a narrow- Request for Comment and certain other authority. The CFTC based security index (i.e., a broad-based 132. The Commissions request has proposed rules governing books and security index) would fall within the records for swaps, which would apply comment on whether further 309 definition of an SBSA under the Dodd- clarification of the definition of SBSA is to swaps that also are SBSAs. The 306 Frank Act. Similarly, an index CDS necessary or appropriate. Commenters Commissions believe that the proposed should provide a detailed analysis rules would provide sufficient books to working cooperatively together regarding their regarding what further guidance should and records regarding SBSAs and do not dual enforcement authority over SBSAs. believe that additional books and 301 be provided and how that guidance 15 U.S.C. 78c note. records requirements are necessary for 302 See section 3(a)(78) of the Exchange Act, 15 would affect what constitutes an SBSA. U.S.C. 78c(a)(78). The CFMA amended the 133. The Commissions also request SBSAs. The Commissions therefore are Exchange Act and the Securities Act to exclude comment on whether there are other proposing rules to clarify that there swap agreements from the definitions of security in examples of swap transactions that the would not be additional books and those Acts but subjected ‘‘security-based swap records requirements regarding SBSAs agreements,’’ as defined in section 206B of the Commissions should clarify meet the GLBA, 15 U.S.C. 78c note, to the antifraud, anti- definition of SBSA. other than those proposed for swaps. manipulation, and anti-insider trading provisions of Specifically, proposed rule 1.7 under the Exchange Act and Securities Act. See CFMA, C. Books and Records Requirements for the CEA and proposed rule 3a69–3 supra note 182, title III. Security-Based Swap Agreements under the Exchange Act would not The CEA does not contain a stand-alone definition of ‘‘security-based swap agreement’’ but The Dodd-Frank Act requires the require persons registered as SDRs includes the definition instead in subparagraph Commissions to adopt rules regarding under the CEA and the rules and (A)(v) of the swap definition in CEA section 1a(47), regulations thereunder to (i) keep and 7 U.S.C. 1a(47). The only difference between these definitions is that the definition of SBSA in the 307 Swaps on U.S. Treasury securities that do not maintain additional books and records Exchange Act specifically excludes security-based have any other underlying references involving regarding SBSAs other than the books swaps (see section 3(a)(78)(B) of the Exchange Act, securities are expressly excluded from the and records regarding swaps that SDRs 15 U.S.C. 78c(a)(78)(B)), while the definition of definition of the term ‘‘security-based swap’’ under would be required to keep and maintain SBSA in the CEA does not contain a similar the Dodd-Frank Act. See section 3(a)(68)(C) of the exclusion. Instead, the exclusion for security-based Exchange Act, 15 U.S.C. 78c(a)(68)(C) (providing pursuant to the CEA and rules and swaps is placed in the general exclusions from the that an agreement, contract, or transaction that regulations thereunder; and (ii) collect definition of swap in the CEA (see CEA section would be a security-based swap solely because it and maintain additional data regarding 1a(47)(B)(x), 7 U.S.C. 1a(47)(B)(x)). references, is based on, or settles through the SBSAs other than the data regarding 303 15 U.S.C. 78c note. delivery of one or more U.S. Treasury securities (or 304 7 U.S.C. 1a(12)(C). certain other exempted securities) is excluded from swaps that SDRs would be required to 305 See section 762(b) of the Dodd-Frank Act. the security-based swap definition). However, collect and maintain pursuant to the Sections 762(c) and (d) of the Dodd-Frank Act also swaps on U.S. Treasury securities or on other CEA and rules and regulations made conforming amendments to the Exchange Act exempted securities covered by subparagraph (C) of thereunder. and the Securities Act to reflect the changes to the the security-based swap definition have a material regulation of ‘‘swap agreements’’ that are either term that is ‘‘based on the price, yield, value, or ‘‘security-based swaps’’ or ‘‘security-based swap volatility of any security or any group or index of 309 See Swap Data Recordkeeping and Reporting agreements’’ under the Dodd-Frank Act. securities, or any interest therein,’’ and therefore Requirements, supra note 6 (proposed rules 306 Swaps based on indexes that are not narrow- they fall within the SBSA definition. regarding swap data recordkeeping and reporting based security indexes are not included within the 308 The Commissions note that certain requirements for SDRs, DCOs, DCMs, SEFs, swap definition of the term security-based swap under transactions that were not ‘‘security-based swap dealers, major swap participants, and swap the Dodd-Frank Act. See section 3(a)(68)(A)(ii)(I) of agreements’’ under the CFMA are nevertheless counterparties who are neither swap dealers nor the Exchange Act, 15 U.S.C. 78c(a)(68)(A)(ii)(I), and included in the definition of security-based swap major swap participants); Reporting, discussion supra part III.G. However, such swaps under the Dodd-Frank Act—including, for example, Recordkeeping, and Daily Trading Records have a material term that is ‘‘based on the price, a CDS on a single loan. Accordingly, although such Requirements for Swap Dealers and Major Swap yield, value, or volatility of any security or any transactions were not subject to insider trading Participants, supra note 7 (proposed rules regarding group or index of securities, or any interest therein,’’ restrictions under the CFMA, under the Dodd-Frank reporting and recordkeeping requirements and daily and therefore such swaps fall within the SBSA Act they are subject to the Federal securities laws, trading records requirements for swap dealers and definition. including insider trading restrictions. major swap participants).

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In addition, the proposed rules would a particular Title VII instrument (or security-based swap, or both (i.e., a not require persons registered as swap class of Title VII instruments) is a swap, mixed swap), must provide the dealers or major swap participants a security-based swap, or both (i.e., a Commissions with the person’s under the CEA and rules and mixed swap). determination of the characterization of regulations thereunder, or registered as Section 718 of the Dodd-Frank Act the instrument and supporting analysis, security-based swap dealers or major establishes a process for determining the along with certain other documentation. security-based swap participants under status of ‘‘novel derivative products’’ Specifically, the person must provide the Exchange Act and rules and that may have elements of both the Commissions with the following regulations thereunder, to keep and securities and futures contracts. Section information: maintain additional books and records, 718 of the Dodd-Frank Act provides a • All material information regarding including daily trading records, useful model for a joint Commission the terms of the Title VII instrument; regarding SBSAs other than the books review process to appropriately • A statement of the economic and records regarding swaps those categorize Title VII instruments. As a characteristics and purpose of the Title persons would be required to keep and result, the Commissions’ proposed VII instrument; • maintain pursuant to the CEA and the process rules regarding swaps, security- The requesting person’s rules and regulations thereunder.310 based swaps, and mixed swaps include determination as to whether the Title various attributes of the process VII instrument should be characterized Request for Comment established in section 718 of the Dodd- as a swap, a security-based swap, or 134. The Commissions request Frank Act. In particular, to permit an both (i.e., a mixed swap), including the comment on the proposed rules basis for such determination; and appropriate review period that provides • regarding books and records sufficient time to ensure Federal Such other information as may be requirements for SBSAs. Will requiring regulatory interests are satisfied that requested by either Commission. the same recordkeeping information for also does not unduly delay the This provision is intended to provide SBSAs that will be required for swaps introduction of new financial products, the Commissions with sufficient under the CFTC’s recordkeeping rules the proposed process, like the process information regarding the Title VII be sufficient? Should the Commissions established in section 718, would instrument at issue so that the impose additional recordkeeping include a deadline for responding to a Commissions can appropriately evaluate whether it is a swap, a security-based requirements for SBSAs? If so, why, and request for a joint interpretation.311 what additional recordkeeping should Proposed rule 1.8 under the CEA and swap, or both (i.e., a mixed swap). By be required? proposed rule 3a68–2 under the requiring that requesting persons furnish a determination regarding VI. Process for Requesting Exchange Act would establish a process for parties to request a joint whether they believe the Title VII Interpretations of the Characterization instrument is a swap, a security-based of a Title VII Instrument interpretation regarding the characterization of a particular Title VII swap, or both (i.e., a mixed swap), As discussed above, there may be instrument (or class thereof). including the basis for such Title VII instruments (or classes of Title Specifically, paragraph (a) of the determination, this provision also VII instruments) that may be difficult to proposed rules would provide that any would assist the Commissions in more categorize definitively as swaps or person may submit a request to the quickly identifying and addressing the security-based swaps. Further, because Commissions to provide a public joint relevant issues involved in arriving at a mixed swaps are both swaps and interpretation of whether a particular joint interpretation of the security-based swaps, identifying a Title VII instrument is a swap, a characterization of the instrument. Paragraph (c) of proposed rule 1.8 mixed swap may not always be security-based swap, or both (i.e., a under the CEA and proposed rule 3a68– straightforward. mixed swap). Section 712(d)(4) of the Dodd-Frank Paragraph (a) of the proposed rules is 2 under the Exchange Act would Act provides that any interpretation of, intended to afford market participants provide that a person may withdraw a or guidance by, either the CFTC or SEC with the opportunity to obtain greater request made pursuant to paragraph (a) regarding a provision of Title VII shall certainty from the Commissions at any time prior to the issuance of a be effective only if issued jointly by the regarding the regulatory status of joint interpretation or joint notice of Commissions (after consultation with particular Title VII instruments under proposed rulemaking by the the Board) on issues where Title VII the Dodd-Frank Act. This provision Commissions. Notwithstanding any requires the CFTC and SEC to issue joint should decrease the possibility that such withdrawal, the Commissions may regulations to implement the provision. market participants inadvertently might provide an interpretation regarding the The Commissions believe that any violate the regulatory requirements characterization of the Title VII interpretation or guidance regarding applicable to a particular Title VII instrument that was the subject of a whether a Title VII instrument is a instrument. withdrawn request. swap, a security-based swap, or both Paragraph (b) of proposed rules 1.8 This provision is intended to permit (i.e., a mixed swap), must be issued under the CEA and proposed rule 3a68– parties to withdraw requests for which jointly pursuant to this requirement. 2 under the Exchange Act would the party no longer needs an Consequently, the Commissions are provide that a person requesting an interpretation. This, in turn, would save proposing a process for interested interpretation as to the characterization the Commissions time and staff persons to request a joint interpretation of a Title VII instrument as a swap, a resources. If the Commissions believe by the Commissions regarding whether such an interpretation is necessary 311 The Commissions note that section 718 of the regardless of a particular request for 310 Proposed rule 1.7 under the CEA and Dodd-Frank Act is a separate process from the interpretation, however, the proposed rule 3a69–3 under the Exchange Act process the Commissions are proposing, and that Commissions may provide such a joint would provide that the term ‘‘security-based swap any future interpretation involving the process interpretation of their own accord. agreement’’ has the meaning set forth in CEA under section 718 would not affect the process section 1a(47)(A)(v), 7 U.S.C. 1a(47)(A)(v), and being proposed here, nor would any future Paragraph (d) of proposed rule 1.8 section 3(a)(78) of the Exchange Act, 15 U.S.C. interpretation involving the process proposed here under the CEA and proposed rule 3a68– 78c(a)(78), respectively. affect the process under section 718. 2 under the Exchange Act would

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provide that if either Commission the characterization of a particular VII instrument is a swap, a security- receives a proposal to list, trade, or clear instrument. based swap, or both (i.e., a mixed an agreement, contract, or transaction These provisions are intended to swap)? If so, what additional or (or class thereof) that raises questions as guarantee market participants a prompt alternative information should be to the appropriate characterization of review of submissions requesting a joint required? such agreement, contract, or transaction interpretation of whether a Title VII 139. Should persons be able to (or class thereof) as a swap, security- instrument is a swap, a security-based withdraw a request for an interpretation based swap, or both (i.e., a mixed swap), swap, or both (i.e., a mixed swap). The pursuant to paragraph (c) of proposed the receiving Commission promptly proposed rules also would provide rule 1.8 under the CEA and proposed shall notify the other. This provision of transparency and accountability by rule 3a68–2 under the Exchange Act? the proposed rules would further requiring that at the end of the review Why or why not? Should there be provide that either Commission, or their period, the Commissions issue the additional parameters around or Chairmen jointly, may submit a request requested interpretation or publicly requirements regarding such for a joint interpretation as to the state the reasons for not doing so. withdrawals? If so, what should they characterization of the Title VII Paragraph (f) of proposed rule 1.8 be? instrument where no external request under the CEA and proposed rule 3a68– 140. Is the 120-day timeframe for has been received. 2 under the Exchange Act would permit issuance of a requested joint This provision is intended to ensure the Commissions, in lieu of issuing a interpretation provided for in paragraph that Title VII instruments do not fall requested interpretation, to issue (e) of proposed rule 1.8 under the CEA into regulatory gaps and will help the (within the timeframe for issuing a joint and proposed rule 3a68–2 under the Commissions to fulfill their interpretation) a joint notice of proposed Exchange Act appropriate? Is it too short responsibility to oversee the regulatory rulemaking to further define one or or too long? Are the provisions for regime established by Title VII of the more of the terms ‘‘swap,’’ ‘‘security- tolling this timeframe during a public Dodd-Frank Act by making sure that based swap,’’ or ‘‘mixed swap.’’ Such a comment period, and for permitting the Title VII instruments are appropriately rulemaking, as required by Title VII, Commissions to proceed with a joint characterized, and thus appropriately would be required to be done in notice of proposed rulemaking instead regulated. An agency, or their Chairmen consultation with the Board of of issuing a joint interpretation, jointly, submitting a request for an Governors of the Federal Reserve appropriate? Why or why not? Where interpretation as to the characterization System. This paragraph is intended to the Commissions do not issue a joint of a Title VII instrument under this provide the Commissions with needed interpretation, is it helpful that they paragraph would be required to submit flexibility to address issues that may be each publicly provide the reasons for the same information as, and could of broader applicability than the not doing so within the applicable withdraw a request in the same manner particular Title VII instrument that is timeframe? Why or why not? as, a person submitting a request to the the subject of a request for a joint 141. Title VII requires that certain Commissions. The bases for these interpretation. persons that are registered with the provisions are set forth above with Request for Comment CFTC keep books and records relating to respect to paragraphs (b) and (c) of these SBSAs open to inspection and proposed rules. 135. The Commissions request examination by the SEC. As discussed Paragraph (e) of proposed rule 1.8 comment generally on all aspects of in part V above, the Commissions are under the CEA and proposed rule 3a68– proposed rule 1.8 under the CEA and not proposing additional recordkeeping 2 under the Exchange Act would require proposed rule 3a68–2 under the or other regulatory requirements for the Commissions, if they determine to Exchange Act. SBSAs that would require pre- 136. Should proposed rule 1.8(a) issue a joint interpretation as to the transaction identification of a swap as under the CEA and proposed rule 3a68– characterization of a Title VII an SBSA by market participants. Under 2(a) under the Exchange Act include a instrument, to do so within 120 days of these circumstances, is it appropriate to more specific process for persons to receipt of the complete external or include SBSAs in the interpretation request a joint interpretation of whether agency submission (unless such 120-day process set forth in proposed rule 1.8 a Title VII instrument is a swap, a period is tolled during the pendency of under the CEA and proposed rule 3a68– security-based swap, or both (i.e., a a request for public comment on the 2 under the Exchange Act? Why or why 312 mixed swap)? If so, what additional proposed interpretation). If the not? specificity would be appropriate? Commissions do not issue a joint 142. Would it be appropriate to interpretation within the prescribed 137. Would the information required by paragraph (b) of the proposed rules include SBSAs in the interpretation time period, the proposed rules require process, if their inclusion required the that each Commission publicly provide be sufficient for the Commissions to consider a request? Should requesting Commissions to extend the 120-day the reasons for not having done so. This timeframe for issuance of a requested provision of the proposed rules also persons have to provide a statement regarding the economic characteristics joint interpretation to, for example, 180 incorporates the mandate of the Dodd- days for all products in order to address Frank Act that any joint interpretation and purpose of the Title VII instrument? Should requesting persons have to a potential increase in requests? Why or by the Commissions be issued only after why not? consultation with the Board of provide a determination regarding Governors of the Federal Reserve whether such instrument should be VII. Anti-Evasion 313 characterized as a swap, a security- System. Finally, paragraph (e) makes A. CFTC Proposed Anti-Evasion Rules clear that nothing in the proposed rules based swap, or both (i.e., a mixed swap), requires either Commission to issue a along with reasons therefor? Section 721(c) of the Dodd-Frank Act requested joint interpretation regarding 138. Is there additional or alternative requires the CFTC to adopt a rule to information that the Commissions further define the terms ‘‘swap,’’ ‘‘swap 312 This 120-day period is based on the timeframe should require persons to submit in dealer,’’ ‘‘major swap participant,’’ and set forth in section 718(a)(3) of the Dodd-Frank Act. connection with a request for an ‘‘eligible contract participant,’’ in order 313 See section 712(d)(4) of the Dodd-Frank Act. interpretation regarding whether a Title ‘‘[t]o include transactions and entities

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that have been structured to evade’’ purpose of evading the provisions of the enacted by Title VII (including any rule subtitle A of Title VII (or an amendment [CEA], the [Securities Act], or the prescribed or regulation promulgated made by subtitle A). Section 761(b)(3) of [Exchange Act].’’ 317 thereunder) shall not apply to activities the Dodd-Frank Act, in turn, grants The CFTC has determined to exercise outside the United States unless, among discretionary authority to the SEC to its anti-evasion rulemaking authority other things, those activities ‘‘contravene define the terms ‘‘security-based swap,’’ under the Dodd-Frank Act.318 such rules or regulations as the [CFTC] ‘‘security-based swap dealer,’’ ‘‘security- Structuring transactions and entities may prescribe or promulgate as are based major swap participant,’’ and to evade the requirements of the Dodd- necessary or appropriate to prevent the ‘‘eligible contract participant,’’ with Frank Act could take any number of evasion of any provision of [the CEA] regard to security-based swaps, ‘‘for the forms. As with the law of manipulation, that was enacted by [Title VII].’’ The purpose of including transactions and the ‘‘methods and techniques’’ of CFTC is proposing rules to address entities that have been structured to evasion are ‘‘limited only by the potential evasion of Title VII under this evade subtitle B of Title VII (or ingenuity of man.’’ 319 In light of the provision of the Dodd-Frank Act. amendments made by subtitle B). The myriad methods of potential evasion, Proposed rule 1.6 under the CEA CFTC notes that several provisions of any attempt to comprehensively would prohibit activities conducted Title VII reference the promulgation of determine what constitutes evasion, or outside the United States, including anti-evasion rules: to provide a bright-line test of evasion entering into transactions and • Subparagraph (E) of the definition by rule, would likely not be effective as structuring entities, to willfully evade or of ‘‘swap’’ provides that foreign would-be evaders could simply attempt to evade any provision of the exchange swaps and foreign exchange restructure their transactions or entities CEA as enacted under Title VII or the forwards shall be considered swaps to fall outside any rigid boundary. rules and regulations promulgated unless the Secretary of the Treasury Accordingly, proposed rule 1.3(xxx)(6) thereunder. No activity, however, makes a written determination that under the CEA generally would define conducted outside of the United States either foreign exchange swaps or foreign as swaps those transactions that are with respect to a security (including a exchange forwards, or both, among willfully structured to evade the security-based swap) under the other things, ‘‘are not structured to provisions of Title VII governing the securities laws (as defined in section evade the [Dodd-Frank Act] in violation regulation of swaps. Specific provisions 3(a)(47) of the Exchange Act) and that is of any rule promulgated by the [CFTC] would apply in similar fashion to subject to the jurisdiction of the SEC pursuant to section 721(c) of that currency and interest rate swaps that are would be prohibited pursuant to Act;’’ 314 willfully structured as foreign exchange proposed rule 1.6. • Section 722(d) of the Dodd-Frank forwards or foreign exchange swaps, The CFTC’s proposed rule 1.3(xxx)(6) Act provides that the provisions of the and to transactions of a bank that is not further defining the term ‘‘swap’’ would CEA relating to swaps shall not apply to under the regulatory jurisdiction of an further provide that transactions, other activities outside the United States appropriate Federal banking agency than transactions structured as unless those activities, among other where the transactions are willfully securities, willfully structured to evade things, ‘‘contravene such rules or structured as identified banking shall be considered in determining regulations as the [CFTC] may prescribe products to evade the new regulatory whether a person is a swap dealer or or promulgate as are necessary or regime for swaps that was enacted in major swap participant. Proposed rule appropriate to prevent the evasion of Title VII. These proposed rules would 1.6 would further provide that an any provision of [the CEA] that was not apply to any agreement, contract, or activity conducted outside the United enacted by the [Title VII];’’ 315 and transaction structured as a security States, other than an activity with • Section 725(g) of the Dodd-Frank (including a security-based swap) under respect to a security (including a Act amends the Legal Certainty for Bank the securities laws (as defined in section security-based swap), to willfully evade Products Act of 2000 to provide that, 3(a)(47) of the Exchange Act). or attempt to evade, shall be subject to although identified banking products The Dodd-Frank Act also gives the the swap provisions of the CEA enacted generally are excluded from the CEA, CFTC general authority to prevent under Title VII of the Dodd-Frank Act. that exclusion shall not apply to an evasion of Title VII that occurs outside The CFTC believes that these provisions identified banking product that is a of the United States. Specifically, as are necessary to fully prevent those who product of a bank that is not under the noted above, section 722(d) of the Dodd- seek to willfully evade the regulatory regulatory jurisdiction of an appropriate Frank Act states that the provisions of requirements established by Congress in Federal banking agency,316 meets the the CEA relating to swaps that were Title VII relating to swaps from enjoying definition of ‘‘swap’’ or ‘‘security-based any benefits from their efforts to evade. swap,’’ and ‘‘has been structured as an 317 Section 741(b) of the Dodd-Frank Act amends Finally, the CFTC’s proposed rules identified banking product for the section 6(e) of the CEA, 7 U.S.C. 9a, to provide that any DCO, swap dealer, or major swap participant would provide that in determining ‘‘that knowingly or recklessly evades or participates whether a transaction has been willfully 314 CEA section 1a(47)(E), 7 U.S.C. 1a(47)(E). in or facilitates an evasion of the requirements of structured to evade, neither the form, 315 CEA section 2(i), 7 U.S.C. 2(i). New CEA section 2(h) [of the CEA] shall be liable for a civil label, nor written documentation of the section 2(i), as added by section 722(d) of the Dodd- monetary penalty in twice the amount otherwise Frank Act, also provides that the provisions of Title available for a violation of section 2(h) [of the transaction shall be dispositive. The VII relating to swaps shall not apply to activities CEA].’’ This anti-evasion provision is not dependent CFTC believes that looking beyond the outside the United State unless those activities upon the promulgation of a rule under section form of the transaction to examine its ‘‘have a direct and significant connection with 721(c) of the Dodd-Frank Act, and hence this activities in, or effect on, commerce of the United release does not apply to the anti-evasion authority actual substance is necessary to prevent States.’’ regarding CEA section 2(h), 7 U.S.C. 2(h). evasion through clever draftsmanship. 316 The term ‘‘identified banking product’’ is 318 No comments were received in response to the Such an approach is consistent with the defined in section 402 of the Legal Certainty for ANPR that specifically addressed anti-evasion CFTC’s case law in the context of Bank Products Act of 2000, 7 U.S.C. 27. The term authority. One commenter, however, noted that determining whether a contract is a evasion is a concern. See Letter from David A. Berg, ‘‘appropriate Federal banking agency’’ is defined in 320 CEA section 1a(2), 7 U.S.C. 1a(2), and section Esq., Vice President & General Counsel, Air futures contract. 3(a)(72) of the Exchange Act, 15 U.S.C. 78c(a)(72), Transport Association (Sept. 20, 1010). which were added by sections 721(a) and 761(a) of 319 Cargill v. Hardin, 452 F.2d 1154, 1163 (8th 320 See, e.g., Grain Land, supra note 61, at 55748 the Dodd-Frank Act, respectively. Cir. 1971). (holding that contract substance is entitled to at

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In order to provide clarity concerning evasion of the requirements of the distinguished between tax evasion and the anti-evasion rules, the CFTC also Dodd-Frank Act with respect to swaps. legitimate means for citizens to proposes to provide interpretive The CFTC emphasizes, however, that it minimize, reduce, avoid or alleviate the guidance as to certain types of would examine each individual case on tax that they pay under the Internal circumstances that may constitute an a case-by-case basis, and additional Revenue Code. Whereas permissible evasion of the requirements of Title VII, practices or circumstances may warrant means of reducing tax (or ‘‘tax while at the same time preserving the a finding that particular conduct or avoidance,’’ as the Internal Revenue CFTC’s ability to determine, on a case- transactions constitute an evasion of the Service refers to the practice) is by-case basis, that particular or other requirements of the Dodd-Frank Act associated with full disclosure and types of transactions or actions with respect to swaps. explanation of why the tax should be constitute an evasion of the Business Purpose. The CFTC reduced under law, tax evasion consists requirements of the statute or the recognizes that transactions may be of the willful attempt to evade tax regulations promulgate thereunder. In structured, and entities may be formed, liability, and generally involves ‘‘deceit, developing this guidance, the CFTC has in particular ways for legitimate subterfuge, camouflage, concealment, or considered legislative, administrative, business purposes, without any some attempt to color or obscure events and judicial precedent with respect to intention of circumventing the or to make things seem other than they the anti-evasion provisions in other requirements of the Dodd-Frank Act are.’’ 325 Similarly, persons that craft Federal statutes. For example, the CFTC with respect to swaps. In evaluating derivative transactions, structure has examined the anti-evasion whether a person is evading or entities, or conduct themselves in a provisions in the Truth in Lending attempting to evade the requirements deceptive or other illegitimate manner Act,321 the Bank Secrecy Act,322 and the with respect to a particular instrument, in order to avoid regulatory Internal Revenue Code.323 Based on entity, or transaction, the CFTC would requirements should not be permitted to these other statutory anti-evasion consider the extent to which a person enjoy the fruits of their deceptive or provisions, as well as the CFTC’s has a legitimate business purpose for illegitimate conduct. In determining authority under the Dodd-Frank Act to structuring the instrument or entity or whether particular conduct is an define terms and promulgate rules and entering into the transaction in that evasion of the Dodd-Frank Act, the regulations to prevent evasion, the particular manner. Although different CFTC will consider the extent to which CFTC is proposing this interpretive means of structuring a transaction or the conduct involves deceit, deception, guidance as to what may constitute entity may have differing regulatory or other unlawful or illegitimate implications and attendant activity.326 least as much weight as form); First Nat’l Monetary requirements, absent other indicia of Request for Comment Corp., supra note 152, at 30974; Stovall, supra note evasion, the CFTC would not consider 152, at 23779 (holding that the CFTC ‘‘will not The CFTC requests comment on all hesitate to look behind whatever label the parties transactions, entities, or instruments may give to the instrument’’). structured in a manner solely motivated aspects of the proposed anti-evasion 321 15 U.S.C. 1604(a) provides, in relevant part, by a legitimate business purpose to rules, including the following: that the Federal Reserve Board: 143. Are the CFTC’s proposed rules constitute evasion. However, to the Shall prescribe regulations to carry out the and interpretive guidance set forth in extent a purpose in structuring an entity purposes of this subchapter * * *. [T]hese this section sufficient to address the regulations may contain such classifications, or instrument or entering into a evasion concerns in Title VII? Is further differentiations, or other provisions, and may transaction is to evade the requirements guidance necessary? If so, what further provide for such adjustments and exceptions for of Title VII with respect to swaps, the any class of transactions, as in the judgment of the guidance would be appropriate? Board are necessary or proper to effectuate the structuring of such instrument, entity, purposes of this subchapter, to prevent or transaction may be found to 325 The Internal Revenue Service explains: circumvention or evasion thereof, or to facilitate 324 constitute evasion. Avoidance of taxes is not a criminal offense. Any compliance therewith. Fraud, deceit, or unlawful activity. In affirming the Board’s promulgation of attempt to reduce, avoid, minimize, or alleviate Regulation Z, the Supreme Court noted that anti- The CFTC believes that the Internal taxes by legitimate means is permissible. The evasion provisions such as section 1604(a) evince Revenue Service’s delineation of what distinction between avoidance and evasion is fine, Congress’s intent to ‘‘stress[] the agency’s power to constitutes tax evasion, as elaborated yet definite. One who avoids tax does not conceal counteract attempts to evade the purposes of a or misrepresent. He/she shapes events to reduce or statute.’’ Mourning v. Family Publ’ns Serv., Inc., 411 upon by the courts, provides a useful eliminate tax liability and, upon the happening of U.S. 356, 370 (1973) (citing Gemsco v. Walling, 324 guidepost for determining which types the events, makes a complete disclosure. Evasion, U.S. 244 (1945) (giving great deference to a of activities should be considered to on the other hand, involves deceit, subterfuge, regulation promulgated under similar prevention- constitute an evasion of the Dodd-Frank camouflage, concealment, some attempt to color or of-evasion rulemaking authority in the Fair Labor obscure events or to make things seem other than Standards Act)). Act. The Internal Revenue Service they are. For example, the creation of a bona fide 322 31 U.S.C. 5324 (stating, in pertinent part, that partnership to reduce the tax liability of a business ‘‘[n]o person shall, for the purpose of evading the 324 A similar concept applies with respect to tax by dividing the income among several individual reporting requirements of [the Bank Secrecy Act evasion. A transaction that is structured to avoid partners is tax avoidance. However, the facts of a (BSA) or any regulation prescribed the payment of taxes but that lacks a valid business particular investigation may show that an alleged thereunder].* * * structure or assist in structuring, purpose may be found to constitute tax evasion. partnership was not, in fact, established and that or attempt to structure or assist in structuring, any See, e.g., Gregory v. Helvering, 293 U.S. 465, 469 one or more of the alleged partners secretly transaction with one or more domestic financial (1935) (favorable tax treatment disallowed because returned his/her share of the profits to the real institutions’’). The Federal Deposit Insurance transaction lacked any business or corporate owner of the business, who, in turn, did not report Corporation regulations implementing the BSA purpose). Under the ‘‘sham-transaction’’ doctrine, ‘‘a this income. This would be an instance of require banks to report transactions that ‘‘’’the bank transaction is not entitled to tax respect if it lacks attempted evasion. knows, suspects, or has reason to suspect’’ are economic effects or substance other than the Internal Revenue Service, Internal Revenue ‘‘designed to evade any regulations promulgated generation of tax benefits, or if the transaction Manual, part 9.1.3.3.2.1, available at http:// under the Bank Secrecy Act.’’ 12 CFR 353.3 (2010). serves no business purpose.’’ Winn-Dixie Stores, www.irs.gov/irm/part9/irm_09–001– 323 The Internal Revenue Code makes it unlawful Inc. v. Comm’r, 254 F.3d 1313, 1316 (11th Cir. 003.html#d0e169. for any person willfully to attempt ‘‘in any manner 2001) (citing Knetsch v. United States, 364 U.S. 361 326 Although deceitful, deceptive, or illegitimate to evade or defeat any tax * * *.’’ 26 U.S.C. 7201. (1960)). ‘‘The doctrine has few bright lines, but ‘it conduct may be sufficient to find that evasion has While a considerable body of case law has is clear that transactions whose sole function is to occurred, such conduct is not a prerequisite for a developed under the tax evasion provision, the produce tax deductions are substantive shams.’’’ Id. finding of evasion, particularly when other indicia statute itself does not define the term, but generally (quoting United Parcel Serv. of Am., Inc. v. Comm’r, of evasion are present, such as, for example, when prohibits willful attempts to evade tax. 254 F.3d 1014, 1018 (11th Cir 2001)). the transaction lacks any business purpose.

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144. Is further definition of the term interpretive guidance modeled on the should be read consistently with the ‘‘swap’’ necessary to address CFTC’s proposals? If other rules or forward contract exclusion from the transactions that have been structured to interpretive guidance are necessary, CEA definition of the term ‘‘future evade subtitle A of Title VII? If so, what please provide a detailed description of delivery.’’ In that regard, the CFTC is further definition is appropriate, and what rules or interpretative guidance proposing to retain the Brent why? Please provide specific examples would be necessary. Interpretation and extend it to apply to or scenarios, and a detailed analysis of 147. Are SEC rules or interpretive all nonfinancial commodities, and as a any such transactions and the guidance guidance addressing evasion in the result, to withdraw the Energy that would be appropriate. context of activities conducted outside Exemption,329 which had extended the 145. In addition to defining the term the United States necessary? Why or Brent Interpretation regarding the ‘‘swap’’ to address evasion generally, why not? Should the SEC adopt rules forward contract exclusion from the and with respect to certain foreign and interpretive guidance modeled on term ‘‘future delivery’’ to energy exchange products and identified the CFTC’s proposals? If other rules or commodities other than oil. The Energy banking products in particular, are interpretive guidance are necessary, Exemption listed certain ‘‘appropriate CFTC rules prohibiting transactions please provide a detailed description of persons’’ that could rely on the from being willfully structured to evade what rules or interpretative guidance exemption. or attempt to evade (similar to the would be necessary. The CFTC anticipates that this proposed rules regarding activities proposed rulemaking will affect conducted outside the United States) VIII. Administrative Law Matters—CEA primarily the following entities: DCMs, subtitle A of Title VII appropriate? Revisions DCOs, ECPs, swap dealers, major swap A. Regulatory Flexibility Act participants, SEFs, SDRs, FBOTs, and B. SEC Request for Comment Regarding those ‘‘appropriate persons’’ who Anti-Evasion The Regulatory Flexibility Act previously relied on the Energy Section 761(b)(3) of the Dodd-Frank (‘‘RFA’’) requires that agencies consider Exemption. Act grants discretionary authority to the whether the rules they propose will 2. Specific Entities That Are Not Small SEC to define the terms ‘‘security-based have a significant economic impact on Entities swap,’’ ‘‘security-based swap dealer,’’ a substantial number of small entities ‘‘security-based major swap participant,’’ and, if so, provide a regulatory The vast majority of entities impacted and ‘‘eligible contract participant,’’ with flexibility analysis respecting the by this proposed rulemaking previously 328 regard to security-based swaps, ‘‘for the impact. Most of the entities that will have been determined to not be small purpose of including transactions and be impacted by this proposed entities by the CFTC. Prior to the entities that have been structured to rulemaking have previously been enactment of the Dodd-Frank Act, the evade subtitle B of Title VII (or determined to not be small entities. In following entities had been determined amendments made by subtitle B). addition, this proposed rulemaking, by the CFTC to not be small entities for Section 772(b) of the Dodd-Frank Act which provides interpretive guidance, purposes of the RFA: DCMs, DCOs, and states that the provisions of the general rules of construction and ECPs. Other entities that will be affected Exchange Act that were added by Title definitions that will largely be used in by this rulemaking, including swap VII (including any rule or regulation other rulemakings will, by itself, not dealers, major swap participants, SEFs, thereunder) shall not apply to any impose a significant economic impact SDRs, and FBOTs, have been certified person insofar as that person transacts a on market participants or entities. by the CFTC not to be small entities in business in security-based swaps 1. Effect of the Proposed Rulemaking other proposed recent CFTC rulemaking outside the jurisdiction of the United implementing requirements of the States, unless such person transacts The proposed rulemaking in this Dodd-Frank Act. Specifically: such business ‘‘in contravention of such release further defines, and clarifies, the i. Swap Dealers, Major Swap ‘‘ ’’ ‘‘ rules and regulations as the [SEC] may statutory terms swap, security-based Participants, SEFs, SDRs, and FBOTs. ’’ ‘‘ prescribe as necessary or appropriate to swap, security-based swap The CFTC previously has certified that ’’ ‘‘ ’’ prevent evasion of any provision of [the agreement, and mixed swap. It also swap dealers, major swap participants, Exchange Act] that was added by [Title provides a process for requesting joint SEFs, SDRs, and FBOTs are not small VII].’’ 327 interpretations from the Commissions as entities for purposes of the RFA.330 The SEC is not proposing specific to whether agreements, contracts, and Nevertheless, because these are new rules regarding anti-evasion at this time. transactions are swaps, security-based categories of registrants under the Dodd- The SEC may consider whether to swaps, or mixed swaps, as well as a Frank Act, the CFTC is, again, hereby propose anti-evasion rules based on process for requesting alternative determining that these entities are not comments received or after having regulatory treatment for certain mixed small entities. experience with the new regulatory swaps. This proposed rulemaking also a. Swap Dealers: As noted above, the regime under subtitle B of Title VII. includes books and records, and data, CFTC previously has determined that requirements for SDRs, swap dealers, FCMs are not small entities for the Request for Comment and major swap participants with purpose of the RFA based upon, among 146. The SEC requests comment on respect to SBSAs, and implements the whether SEC rules or interpretive anti-evasion rulemaking authority 329 Energy Exemption, supra note 72. guidance addressing anti-evasion granted to the CFTC under several 330 See respectively, Registration of Swap Dealers provisions of the Dodd-Frank Act. and Major Swap Participants, 75 FR 71379, 71385, regarding security-based swaps, Nov. 23, 2010 (swap dealers and major swap security-based swap dealers, major Additionally, this release proposes participants); Requirements for Derivatives Clearing security-based swap participants, or interpretive guidance that the forward Organizations, Designated Contract Markets, and ECPs are necessary. Why or why not? contract exclusion from the swap Swap Execution Facilities Regarding the Mitigation definition in the Dodd-Frank Act with of Conflicts of Interest, 75 FR 63732, 63745, Oct. 18, Should the SEC adopt rules and 2010 (SEFs); Swap Data Repositories, 75 FR 80898, respect to nonfinancial commodities 80926, Dec. 23, 2010 (SDRs); Registration of Foreign 327 See section 30(c) of the Exchange Act, 15 Boards of Trade, 75 FR 70974, 70987, Nov. 19, 2010 U.S.C. 78dd(c). 328 5 U.S.C. 601 et seq. (FBOTs).

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other things, the requirements that things, of ‘‘the central role’’ they play in for purposes of the Regulatory FCMs must meet, including certain ‘‘the regulatory scheme concerning Flexibility Act.335 The Dodd-Frank Act minimum financial requirements that futures trading.’’ 331 Because of the requires that counterparties to swaps enhance the protection of customers’ ‘‘importance of futures trading in the that are traded on a bilateral basis not segregated funds and protect the national economy,’’ to be designated as on or subject to the rules of a DCM be financial condition of FCMs generally. a contract market or registered as a DCO, ECPs. Prior to the enactment of the Swap dealers similarly will be subject to the respective entity must meet Dodd-Frank Act, ECPs trading swaps minimum capital and margin stringent requirements set forth in the were generally outside the scope of requirements, and are expected to CEA. Similarly, swap positions that are CFTC oversight under the CEA. The comprise the largest global financial recorded, reported and disseminated by CFTC cannot estimate with precision firms. Entities that engage in a de SDRs will be an important part of the the number of non-ECPs that will, as minimis quantity of swap dealing in national economy. SDRs will receive connection with transactions with or on data from market participants and will permitted by the Dodd-Frank Act, trade behalf of customers will be exempt from be obligated to facilitate swap execution swaps on DCMs. Nevertheless, this designation as a swap dealer. For by reporting real-time data. Similar to proposed rulemaking by the CFTC purposes of the RFA, the CFTC is DCMs and DCOs, SDRs will play a provides proposed further definitions of hereby determining that swap dealers central role both in the regulatory the terms ‘‘swap,’’ ‘‘security-based swap,’’ not be considered to be ‘‘small entities’’ scheme concerning swap trading. ‘‘mixed swap’’ and ‘‘security-based swap for essentially the same reasons that Additionally, the Dodd-Frank Act agreement,’’ and proposes rules of FCMs previously have been determined permits DCOs to register as SDRs. For construction and interpretive guidance not to be small entities. purposes of the RFA, the CFTC is (including guidance as to agreements, b. Major Swap Participants: The CFTC hereby determining that SDRs not be contracts, and transactions that are not also previously has determined that considered to be ‘‘small entities’’ for included within the scope of the swap large traders are not small entities for essentially the same reasons that DCMs definition), that will largely be used in the purpose of the RFA. Major swap and DCOs previously have been other rulemakings and which, by participants, among other things, determined not to be small entities. themselves, do not impose significant maintain substantial positions in swaps, e. FBOTs. The term ‘‘foreign board of new regulatory requirements on market creating substantial counterparty trade’’ has been used in the CEA and in participants. exposure that could have serious the CFTC’s Regulations to refer to a adverse effects on the financial stability board of trade ‘‘located outside the iii. ‘‘Appropriate Persons’’ who relied of the U.S. banking system or financial U.S.’’ 332 The term ‘‘board of trade’’ is on the Energy Exemption. The Energy markets. For purposes of the RFA, the defined in the CEA as ‘‘any organized Exemption listed certain ‘‘appropriate CFTC is hereby determining that major exchange or trading facility.’’ 333 An persons’’ that could rely on the swap participants not be considered to ‘‘organized exchange,’’ in turn, includes exemption and also required that, to be be ‘‘small entities’’ for essentially the designated or registered exchanges, such eligible for this exemption, an same reasons that large traders as DCMs.334 The CFTC previously has ‘‘appropriate person’’ must have a previously have been determined not to determined that DCMs are not ‘‘small demonstrable capacity or ability to make be small entities. entities.’’ As noted above, because of or take delivery. The Energy Exemption c. SEFs: The Dodd-Frank Act defines DCMs’ importance to the economy, they stated: ‘‘in light of the general nature of a SEF to mean a trading system or must meet stringent requirements set the current participants in the market, platform in which multiple participants forth in the CEA. Similarly, the CFTC the CFTC believes that smaller have the ability to accept bids and offers will register an FBOT only after it has commercial firms, which cannot meet made by multiple participants in the met criteria similar to those required of [certain] financial criteria, should not be facility or system, through any means of a DCM. Critically, an FBOT will be included.’’ 336 Therefore, the CFTC does interstate commerce, including any registered only after demonstrating, not believe that the ‘‘appropriate trading facility that facilitates the among other things, that it possesses the persons’’ eligible for the Energy execution of swaps between persons attributes of an organized exchange, and is not a DCM. The CFTC previously adheres to appropriate rules prohibiting Exemption, and who may be affected by has determined that DCMs are not small abusive trading practices, and enforces its withdrawal, are ‘‘small entities’’ for entities because, among other things, appropriate rules to maintain market purposes of RFA. they may be designated only when they and financial integrity. Because FBOTs Accordingly, the Chairman, on behalf meet specific criteria, including and DCMs are functionally equivalent of the CFTC, hereby certifies pursuant to expenditure of sufficient resources to entities, for purposes of the RFA, the 5 U.S.C. 605(b) that the proposed rules establish and maintain adequate self- CFTC hereby is determining that FBOTs will not have a significant impact on a regulatory programs. Likewise, the not be considered to be small entities for substantial number of small entities. CFTC will register an entity as a SEF essentially the same reasons that DCMs Nonetheless, the CFTC specifically only after it has met specific criteria, previously have been determined not to requests comment on the impact that including the expenditure of sufficient be small entities. this proposed rulemaking may have on resources to establish and maintain an ii. DCMs, DCOs, and ECPs. The CFTC small entities. adequate self-regulatory program. For previously has determined that DCMs, purposes of the RFA, the CFTC is DCOs, and ECPs, are not small entities hereby determining that SEFs not be 335 See respectively, Policy Statement and Establishment of Definitions of ‘‘Small Entities’’ for considered to be ‘‘small entities’’ for 331 Policy Statement and Establishment of essentially the same reasons that DCMs Definitions of ‘‘Small Entities’’ for Purposes of the Purposes of the Regulatory Flexibility Act, supra note 331, at 18619 (DCMs); A New Regulatory previously have been determined to be Regulatory Flexibility Act, 47 FR 18618, Apr. 30, 1982. Framework for Clearing Organizations, 66 FR small entities. 332 See CEA section 4(a), 7 U.S.C. 6(a); CFTC rule 45604, 45609, Aug. 29, 2001 (DCOs); Opting Out of d. SDRs: The CFTC previously has 1.33(ss), 17 C.F.R. 1.33(ss). Segregation. 66 FR 20740, 20743, Apr. 25, 2001 determined that DCMs and DCOs are 333 CEA section 1a(2), 7 U.S.C. 1a(2). (ECPs). not small entities because, among other 334 CEA section 1a(27), 7 U.S.C. 1a(27). 336 Energy Exemption, supra note 72.

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B. Paperwork Reduction Act specified provisions and other statutory Federal Register. Consequently, a provisions of Title VII and the rules and comment to OMB is most ensured of 1. Introduction regulations thereunder. The being fully effective if received by OMB Proposed CFTC rules 1.8 and 1.9 Commissions also may request the (and the CFTC) within 30 days after would result in new ‘‘collection of submitting person to provide additional publication of this release. Nothing in information’’ requirements within the information. the foregoing affects the deadline meaning of the Paperwork Reduction enumerated above for public comment 3. Information Provided by Reporting Act of 1995 (‘‘PRA’’). An agency may not to the CFTC on the rules and Entities conduct or sponsor, and a person is not interpretive guidance proposed herein. required to respond to, a collection of The burdens imposed by proposed information unless it displays a CFTC rules 1.8 and 1.9 are the same as C. Cost-Benefit Analysis currently valid Office of Management the burdens imposed by the SEC’s CEA section 15(a) 338 requires the and Budget (OMB) control number. proposed rules 3a68–2 and 3a68–4. CFTC to consider the costs and benefits Therefore, the burdens that would be of its actions before issuing a 2. Summary of the Proposed imposed on market participants under rulemaking under the CEA. By its terms, Requirements CFTC rules 1.8 and 1.9 already have section 15(a) does not require the CFTC Proposed rule 1.8 of the CEA would been accounted for within the SEC’s to quantify the costs and benefits of a allow persons to submit a request for a calculations regarding the impact of this rule or to determine whether the joint interpretation from the collection of information under the PRA benefits of the rulemaking outweigh its Commissions regarding whether an and the request for a control number costs; rather, it requires that the CFTC agreement, contract or transaction (or a that will be submitted by the SEC to ‘‘consider’’ the costs and benefits of its class thereof) is a swap, security-based OMB.337 actions. Section 15(a) further specifies swap, or mixed swap. Proposed rule 1.8 that the costs and benefits shall be provides that a person requesting an 4. Information Collection Comments evaluated in light of five broad areas of interpretation as to the nature of an The CFTC invites public comment on market and public concern: (i) agreement, contract, or transaction as a any aspect of the reporting and Protection of market participants and swap, security-based swap, or mixed recordkeeping burdens discussed above. the public; (ii) efficiency, swap must provide the Commissions Pursuant to 44 U.S.C. 3506(c)(2)(B), the competitiveness, and financial integrity with the person’s determination of the CFTC solicits comments in order to: (i) of futures markets; (iii) price discovery; nature of the instrument and supporting Evaluate whether the proposed (iv) sound risk management practices; analysis, along with certain other collections of information are necessary and (v) other public interest documentation, including a statement of for the proper performance of the considerations. The CFTC may in its the economic purpose for, and a copy of functions of the CFTC, including discretion give greater weight to any one all material information regarding the whether the information will have of the five enumerated areas and could terms of, each relevant agreement, practical utility; (ii) evaluate the in its discretion determine that, contract, or transaction (or class accuracy of the CFTC’s estimate of the notwithstanding its costs, a particular thereof). The Commissions also may burden of the proposed collections of rule is necessary or appropriate to request the submitting person to provide information; (iii) determine whether protect the public interest or to additional information. In response to there are ways to enhance the quality, effectuate any of the provisions or the submission, the Commissions may utility, and clarity of the information to accomplish any of the purposes of the issue a joint interpretation regarding the be collected; and (iv) minimize the CEA. status of that agreement, contract, or burden of the collections of information transaction (or class of agreements, 1. Costs and Benefits of the Proposed on those who are to respond, including Definitions contracts, or transactions) as a swap, through the use of automated collection security-based swap, or mixed swap. techniques or other forms of information The proposed rulemaking and Proposed rule 1.9 enables persons to technology. interpretive guidance would further submit requests to the Commissions for Comments may be submitted directly define the terms ‘‘swap,’’ ‘‘security-based joint orders providing an alternative to the OMB’s Office of Information and swap,’’ ‘‘security-based swap regulatory treatment for particular Regulatory Affairs, by fax at (202) 395– agreement,’’ and ‘‘mixed swap.’’ The mixed swaps. Under proposed rule 1.9, 6566 or by e-mail at scope of the definitions of the terms a person would provide to the [email protected]. Please ‘‘swap,’’ ‘‘security-based swap,’’ Commissions a statement of the provide the CFTC with a copy of ‘‘security-based swap agreement,’’ and economic purpose for, and a copy of all submitted comments so that all ‘‘mixed swap’’ will be an important material information regarding, the comments can be summarized and factor in determining the scope of relevant mixed swap. In addition, the addressed in the preamble to the final activities and entities that will be person would provide the specific rulemaking. Please refer to the subject to various requirements set forth alternative provisions that the person Addresses section of this notice of in the Dodd-Frank Act, such as believes should apply to the mixed proposed rulemaking for comment reporting, registration, business swap, the reasons the person believes it submission instructions to the CFTC. A conduct, and capital requirements. would be appropriate to request an copy of the supporting statements for Those requirements, which will be alternative regulatory treatment, and an the collections of information discussed implemented in rules proposed or to be analysis of: (i) The nature and purposes above may be obtained by visiting proposed by the CFTC, will likely lead of the specified provisions; (ii) the RegInfo.gov. OMB is required to make a to compliance costs, capital holding comparability of the specified decision concerning the collections of costs, and other costs, which have been provisions to other statutory provisions information between 30 and 60 days or will be addressed in the CFTC’s of Title VII of the Dodd-Frank Act and after publication of this release in the proposals to implement those the rules and regulations thereunder; requirements. and (iii) the extent of any conflicting or 337 44 U.S.C. 3501–3521. See also 44 U.S.C. 3509 incompatible requirements of the and 3510. 338 7 U.S.C. 19(a).

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Yet, the CFTC believes that the burdensome means of providing clarity offering such agreement, contract, or proposal to further define the terms as to the scope of the defined terms? transaction to such insurance company, ‘‘swap,’’ ‘‘security-based swap,’’ the product to be reinsured meets the 2. Costs and Benefits of Proposed Rules ‘‘security-based swap agreement,’’ and requirements above for insurance and Interpretive Guidance Regarding ‘‘mixed swap’’ is, for the most part, in products, and the total amount Insurance line with the expectations of market reimbursable by all reinsurers for such participants and does not depart Proposed CFTC rule 1.3(xxx)(4) under insurance product cannot exceed the significantly from how market the CEA would clarify that insurance claims or losses paid by the cedant. participants would interpret the products that meet certain requirements, An agreement, contract, or transaction statutory definitions of these terms set that are provided by state or Federally would have to meet all of these criteria forth in Title VII of the Dodd-Frank Act. regulated insurance companies, and that in order to qualify as an insurance Thus, the CFTC does not believe that are regulated as insurance products, product that falls outside of the swap the proposed rules and interpretive would not be swaps. Specifically, and security-based swap definitions guidance further defining these terms proposed rule 1.3(xxx)(4) would define pursuant to the proposed rules. The impose any significant incremental the term ‘‘swap’’ so that it would not Commissions also are proposing costs beyond the costs associated with include an agreement, contract, or interpretative guidance to clarify that the statutory definitions. transaction that, by its terms or by law, certain enumerated types of traditional The CFTC also believes that the as a condition of performance on the insurance products, such as life proposed rules and guidance regarding agreement, contract, or transaction: (i) insurance, health insurance, and the definitions will lead to benefits in Requires the beneficiary to have an property and casualty insurance, are the form of increased market insurable interest that is the subject of outside the scope of the statutory swap transparency, reduced systemic risk, the agreement, contract, or transaction and security-based swap definitions. and a lower incidence of market-wide and thereby carry the risk of loss with (a) Costs crises and other market failures. respect to that interest continuously Further, the proposed rules and throughout the duration of the In complying with proposed rule guidance can be consistently applied by agreement, contract, or transaction; (ii) 1.3(xxx)(4), a market participant will substantially all market participants to requires that loss to occur and to be need to ascertain whether an agreement, determine which agreements, contracts, proved, and that any payment or contract, or transaction is an insurance or transactions are, and which are not, indemnification therefore be limited to product according to the criteria set swaps, security-based swaps, security- the value of the insurable interest, forth in the definition. This analysis based swap agreements, or mixed separately from the insured interest; (iii) will have to be performed upon entering swaps. Thus, the proposed rules and is not traded, separately from the into the agreement, contract, or interpretive guidance will help to create insured interest, on an organized market transaction to ensure compliance with a level playing field. Market participants or over-the-counter; and (iv) with the proposed rule. Absent this analysis, will be able to use Title VII instruments respect to financial guarantee insurance however, the cost associated with the more efficiently and the swap markets only, in the event of payment default or uncertainty cited by commenters as to will operate more effectively because all insolvency of the obligor, any whether an agreement, contract, or market participants will be relying on acceleration of payments under the transaction that the participants consistent and clear definitions. The policy is at the sole discretion of the consider to be insurance could instead clarity provided by the proposed rules insurer. be regulated as a swap is expected to be and interpretive guidance relating to the Proposed rule 1.3(xxx)(4) also would greater than the cost of the analysis definitions is in the public interest require that the agreement, contract, or proposed herein. because this clarity will permit the transaction: (i) Be provided by a person To the extent that the criteria under public to better evaluate information or entity that is organized as an proposed rule 1.3(xxx)(4) inadvertently about Title VII instruments made insurance company whose primary and fail to exclude certain types of insurance available under the Dodd-Frank Act. In predominant business activity is the products from the proposed definitions, particular, they will allow market writing of insurance or the reinsuring of these failures could lead to costs for participants to better understand risks underwritten by insurance market participants entering into publicly-available price data. The clarity companies and that is subject to agreements, contracts, or transactions of the definitions also has the potential supervision by the insurance that might be improperly regulated as to ease the negotiation of Title VII commissioner, or similar official or swaps and not as insurance products. instruments and reduce other agency, of a state (as defined under Similarly, to the extent that the criteria transaction costs. These factors are section 3(a)(16) of the Exchange Act 339) under the proposed rule lead to the expected to permit the public to make or by the United States or an agency or inadvertent treatment of certain types of a more extensive use of Title VII instrumentality thereof, and be swaps as insurance, costs for market instruments for risk management and regulated as insurance under the laws of participants entering into agreements, other purposes. such state or the United States; (ii) be contracts, or transactions that are The CFTC requests comment as to the provided by the United States or any of improperly regulated as insurance costs and benefits of the proposed rules its agents or instrumentalities, or products and not as swaps may and interpretive guidance regarding the pursuant to a statutorily authorized increase. definitions for market participants, program thereof; or (iii) in the case of markets, and the public. In particular, reinsurance only, be provided by a (b) Benefits comment is requested as to whether person located outside the United States The proposed rule and interpretative there are any aspects of the proposed to an insurance company that meets the guidance regarding insurance will help rules and interpretive guidance above requirements, provided that such to assure that traditional insurance regarding the definitions that are both person is not prohibited by the law of products remain subject to the current burdensome to apply and not helpful to any state or the United States from regulatory scheme for insurance and not achieving clarity as to the scope of the to the regulatory regime established by defined terms. In addition, are there less 339 15 U.S.C. 78c(a)(16). the Dodd-Frank Act for swaps. Market

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participants, therefore, will be able to foreign exchange forward or foreign agreements, contracts, or transactions continue to rely on their previous exchange swap (specifically, the would be swaps. Proposed rule understanding of insurance regulations reporting requirements in section 4r of 1.3(xxx)(2) would clarify that a currency without any additional burden that may the CEA and regulations thereunder swap, cross-currency swap, currency have resulted if they had to instead and, in the case of a swap dealer or option, foreign currency option, foreign comply with regulations under the major swap participant that is a party to exchange option, foreign exchange rate Dodd-Frank Act. a foreign exchange swap or foreign option, or non-deliverable forward Without the proposed rule and exchange forward, the business conduct involving foreign exchange is a swap interpretative guidance herein, market standards in section 4s of the CEA and (unless it is otherwise excluded by the participants may be uncertain about regulations thereunder). Proposed rule statutory definition of the term ‘‘swap’’). whether an agreement, contract, or 1.3(xxx)(2) further clarifies that a The proposed rule also would clarify transaction is an insurance product that currency swap, cross-currency swap, that reporting requirements, and is subject to regulation as a swap. currency option, foreign currency business conduct requirements for swap Proposed rule 1.3(xxx)(4) is intended to option, foreign exchange option, foreign dealers and major swap participants, are eliminate the potential uncertainty of exchange rate option, or non-deliverable applicable to foreign exchange forwards what constitutes an insurance product forward involving foreign exchange is and foreign exchange swaps even if the by setting forth clear and objective not a foreign exchange forward or Secretary of the Treasury determines criteria for determining that an foreign exchange swap subject to a that they should not be considered agreement, contract, or transaction is an determination by the Secretary of the swaps. The CFTC also is concerned that insurance product that is not subject to Treasury as described above. confusion could be generated by the regulation as a swap. Providing such an ‘‘forward’’ label of non-deliverable objective rule and guidance alleviates (a) Costs forwards involving foreign exchange, additional costs of inquiring with the In complying with proposed rule and forward rate agreements. Proposed Commissions, or obtaining an opinion 1.3(xxx)(2), a market participant will rule 1.3(xxx)(2) would clarify that these of counsel, about whether an agreement, need to ascertain whether an agreement, types of agreements, contracts, and contract, or transaction is an insurance contract, or transaction is a swap under transactions are swaps. product or a swap. The added clarity the definition. This analysis will have to Providing a clarifying rule to market provided by the rule and guidance be performed upon entering into the participants to determine whether proposed herein will enhance the agreement, contract, or transaction to certain types of agreements, contracts, efficiency of the swaps market and also ensure compliance with the proposed or transactions are swaps alleviates allow market participants to engage in rule. However, any costs associated with additional costs to persons of inquiring sound risk management practices this analysis are expected to be less than with the Commissions, or obtaining an because they will be readily able to the costs of doing the same analysis opinion of counsel, about whether such consider whether a particular absent the proposed rule, particularly agreements, contracts, or transactions agreement, contract, or transaction is given potential confusion in the event of are swaps. In addition, a clarifying rule insurance or a swap at the outset. a determination by the Secretary of the regarding the requirements that apply to The CFTC requests comment as to the Treasury that foreign exchange forwards foreign exchange forwards and foreign costs and benefits of proposed rule and/or foreign exchange swaps not be exchange swaps that are subject to a 1.3(xxx)(4) and interpretive guidance considered swaps. To the extent that determination by the Secretary of the contained herein to distinguish between proposed rule 1.3(xxx)(2) leads to the Treasury similarly alleviates additional insurance products and swaps for improper inclusion of certain types of costs to persons of inquiring with the market participants, markets, and the agreements, contracts, and transactions Commissions, or obtaining an opinion public. in the swap definition, and therefore the of counsel, to determine the 3. Costs and Benefits of Proposed Rule imposition of additional requirements requirements that are applicable to such Regarding Foreign Exchange Products and obligations, these requirements and foreign exchange forwards and foreign and Forward Rate Agreements obligations could lead to costs for exchange swaps. As with the other rules related to product definitions, added Proposed CFTC rule 1.3(xxx)(2) under market participants entering into such agreements, contracts, or transactions. clarity will increase the efficiency of the the CEA would explicitly define the swaps market and also will enable term ‘‘swap’’ to include an agreement, (b) Benefits market participants to engage in sound contract, or transaction that is a cross- Because the statutory definition of the risk management practices, which will currency swap, currency option, foreign benefit both market participants and the currency option, foreign exchange term ‘‘swap’’ includes a process by which the Secretary of the Treasury may public. option, foreign exchange rate option, The CFTC requests comment as to the foreign exchange forward, foreign determine that certain agreements, contracts, and transactions that meet the costs and benefits of proposed rule exchange swap, forward rate agreement, 1.3(xxx)(2) for market participants, and non-deliverable forward involving statutory definition of a ‘‘foreign exchange forward’’ or ‘‘foreign exchange markets, and the public. foreign exchange, unless such 340 agreement, contract, or transaction is swap,’’ respectively, shall not be 4. Costs and Benefits of Proposed Rules otherwise excluded by section 1a(47)(B) considered a swap, the CFTC is and Interpretive Guidance Regarding of the CEA. Proposed rule 1.3(xxx)(2) concerned that application of the Title VII Instruments Where the also provides that: (i) A foreign definition, without further clarification, Underlying Reference Is a Security exchange forward or a foreign exchange may cause uncertainty about whether, if Index swap shall not be considered a swap if the Secretary of the Treasury makes Proposed CFTC rule 1.3(yyy)(1) the Secretary of the Treasury makes the such a determination, certain provides that, for purposes of the determination described in CEA section security-based swap definition, the term 340 CEA section 1a(24), 7 U.S.C. 1a(24)(definition ‘‘ ’’ 1a(47)(E)(i); and (ii) notwithstanding of a ‘‘foreign exchange forward’’); CEA section narrow-based security index would any such determination, certain 1a(25), 7 U.S.C. 1a(25)(definition of a ‘‘foreign have the same meaning as the statutory provisions of the CEA will apply to such exchange swap’’). definition set forth in CEA section

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1a(35), and the rules, regulations, and disruption of their ability to offset or would result in potential impediments orders issued by the Commissions enter into new Title VII instruments, to the ability of market participants to relating to such definition. As a result, and incur additional costs as a result. offset their swap positions. except as the new rules the Finally, the Commissions are (b) Benefits Commissions are proposing provide for proposing interpretive guidance that the other treatment, market participants Proposed rules 1.3(zzz) and 1.3(aaaa) determination of whether a Title VII generally will be able to use the would clarify the treatment of an index instrument is a swap, a security-based Commissions’ past guidance in CDS as either a swap or a security-based swap, or both (i.e., a mixed swap), is determining whether certain Title VII swap by setting forth objective criteria made at the execution of the Title VII instruments based on a security index for meeting the definition of the terms instrument. If the security index are swaps or security-based swaps. ‘‘issuers of securities in a narrow-based underlying a Title VII instrument The Commissions also are proposing security index’’ and ‘‘narrow-based migrates from being broad-based to interpretive guidance and additional security index,’’ respectively. These being narrow-based, or vice versa, rules regarding Title VII instruments objective rules will alleviate additional during the life of a Title VII instrument, based on a security index. The costs to persons trading index CDS of the characterization of that Title VII interpretive guidance and additional inquiring with the Commissions, or instrument would not change from its rules set forth new narrow-based obtaining an opinion of counsel, to initial characterization regardless of security index criteria with respect to make complex determinations regarding whether the Title VII instrument was indexes composed of securities, loans, whether an index is broad- or narrow- entered into bilaterally or was executed or issuers of securities referenced by an based, and whether an index CDS based through a trade on or subject to the rules index CDS. The proposed interpretive on such an underlying index is a swap of a DCM, SEF, FBOT, security-based guidance and rules also address the or security-based swap. SEF, or NSE. Absent this guidance, definition of an ‘‘index’’ and the Also, proposed rules 1.3(zzz) and market participants may need to expend treatment of broad-based security 1.3(aaaa) should reduce the potential for additional resources to continually indexes that become narrow-based and market participants to use an index CDS monitor their swaps to see if the indexes narrow-based indexes that become to evade regulations, because they set on which they are based have migrated objective requirements relating to the broad-based, including rule provisions from broad-based to narrow-based. concentration of the notional amount regarding tolerance and grace periods Since the proposal provides that the allocated to each reference entity or for swaps on security indexes that are initial determination prevails regardless security included in the index, as well traded on CFTC-regulated trading of whether the underlying index as the eligibility conditions for reference platforms. migrates from broad-based to narrow- entities and securities. Finally, these based, market participants do not need (a) Costs proposed rules benefit the public by to expend these monitoring costs. In complying with the proposed rules, requiring that the providers of index The CFTC requests comment as to the a market participant will need to CDS make publicly available sufficient costs and benefits of proposed rules ascertain whether an index CDS is a information regarding the reference 1.3(yyy), 1.3(zzz), and 1.3(aaaa), and the swap or a security-based swap entities in an index underlying the proposed guidance contained herein, according to the criteria set forth in the index CDS. By requiring that such regarding Title VII instruments where definitions of the terms ‘‘issuers of information be made publicly available, securities in a narrow-based security proposed rules 1.3(zzz) and 1.3(aaaa) the underlying reference is a security index’’ and ‘‘narrow-based security seek to assure the transparency of the index, and regarding index CDS, for index’’ as used in the security-based index components that will be market participants, markets, and the swap definition. This analysis will have beneficial to market participants who public. to be performed upon entering into an trade such instruments and to the 5. Costs and Benefits of Processes To index CDS, and when the material terms public. Determine Whether a Title VII of an index CDS are amended or Separately, proposed rule 1.3(yyy) Instrument Is a Swap, Security-Based modified, to ensure compliance with addresses exchange-traded swaps based Swap, or Mixed Swap, and To proposed rules 1.3(zzz) or 1.3(aaaa). on security indexes where the Determine Regulatory Treatment for However, any such costs are expected to underlying index migrates from broad- Mixed Swaps be less than the costs of doing the same based to narrow-based. The proposed (a) Costs analysis absent the proposed rules, rule includes provisions that many which the CFTC believes would be more market participants are familiar with Proposed rule 1.8 under the CEA difficult and lead to greater uncertainty. from security futures trading. The CFTC would allow persons to submit a request Proposed rules 1.3(zzz) and 1.3(aaaa) believes that by using a familiar for a joint interpretation from the allow market participants to minimize regulatory scheme, market participants Commissions regarding whether an the costs of determining whether an will be able to more readily understand agreement, contract or transaction (or a index CDS is a swap or a security-based the proposed rule as compared to a class of agreements, contracts, or swap by providing a test with objective wholly new regulatory scheme. Also, transactions) is a swap, security-based criteria that is similar to a test with the proposal of a ‘‘tolerance period’’ for swap, or mixed swap. The CFTC which they already are familiar in the swaps on security indexes that migrate estimates the cost of submitting a security futures context, yet tailored to from broad-based to narrow-based also request for a joint interpretation index CDS in particular. creates greater clarity by establishing a pursuant to rule 1.8 would be Additionally, absent proposed rule 45-day timeframe (and subsequent grace approximately 20 hours of internal 1.3(yyy), which applies the tolerance period) on which market participants company or individual time and a cost period rules, if a security index may rely. This tolerance period results of $9,480 for the services of outside underlying a Title VII instrument traded in cost savings when compared to the professionals. Once such a joint on a trading platform migrated from alternative scenario where no tolerance interpretation is made, however, other being broad-based to being narrow- period is provided and a migration of an market participants that seek to transact based, market participants may suffer index from broad-based to narrow-based in the same agreement, contract, or

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transaction (or class thereof) would have security-based swaps, or mixed swaps, provides clarity by establishing uniform regulatory clarity about whether it is a and the regulatory treatment applicable requirements regarding books and swap, security-based swap, or mixed to particular mixed swaps. The records, and data collection, swap. availability of such joint interpretations requirements for swaps and for SBSAs. Separately, proposed CFTC rule 1.9 and joint orders regarding the scope of The CFTC requests comment as to the under the CEA allows persons to submit the definitions and the regulatory costs and benefits of proposed rule 1.7 a request for a joint order from the treatment of mixed swaps will reduce for market participants, markets, and the Commissions regarding an alternative transaction costs and thereby promote public. regulatory treatment for particular the use of Title VII instruments and the 7. Costs and Benefits of the Proposed mixed swaps. This process applies efficient operation of the swap markets. Interpretive Guidance Regarding the except with respect to bilateral, This, in turn, is expected to encourage Forward Contract Exclusion From the uncleared mixed swaps where one of the use of Title VII instruments for risk Swap Definition the parties to the mixed swap is dually management and other purposes. The registered with the CFTC as a swap separate proposed rule for bilateral The CFTC is proposing interpretive dealer or major swap participant and uncleared mixed swaps where at least guidance that the forward contract with the SEC as a security-based swap one party is dually registered should exclusion from the swap definition for dealer or major security-based swap eliminate potentially duplicative and nonfinancial commodities should be participant. With respect to bilateral inconsistent regulation. read consistently with the forward uncleared mixed swaps where one of The CFTC requests comment as to the contract exclusion from the CEA the parties is a dual registrant, the costs and benefits of the processes for definition of the term ‘‘future delivery.’’ proposed rule provides that such mixed seeking joint interpretations and joint In that regard, the CFTC is proposing to swaps would be subject to a regulatory orders in proposed rules 1.8 and 1.9, retain the Brent Interpretation and scheme set forth in rule 1.9 in order to respectively, for market participants, extend it to apply to all nonfinancial provide clarity as to the regulatory markets, and the public. commodities, and to withdraw the treatment of such mixed swaps. Energy Exemption which had extended The CFTC estimates that the cost of 6. Costs and Benefits of SBSA Books the Brent Interpretation regarding the submitting a request for a joint order and Records, and Data, Requirements forward contract exclusion from the seeking an alternative regulatory Proposed CFTC rule 1.7 under the term ‘‘future delivery’’ to energy treatment for a particular mixed swap CEA would clarify that there would not commodities other than oil. The CFTC would be approximately 30 hours of be books and records, or data, also is proposing that its prior guidance internal company or individual time requirements regarding SBSAs other regarding commodity options embedded and a cost of approximately $15,800 for than those that would exist for swaps. in forward contracts should be applied the services of outside professionals. The proposed rule alleviates any as well to the treatment of forward Absent such a process, though, market additional books and records or contracts in nonfinancial commodities participants that desire or intend to information costs to persons who are that contain embedded options under enter into such a mixed swap (or class required to keep and maintain books the Dodd-Frank Act. thereof) would be required pursuant to and records regarding, or collect and The CFTC anticipates that its Title VII of the Dodd-Frank Act to maintain data regarding, SBSAs because proposed interpretive guidance comply with all regulatory requirements the proposed rule does not require such construing the forward contract applicable to both swaps and security- persons to keep or maintain any books exclusion consistently with respect to based swaps. The CFTC believes that and records, or collect and maintain any the definitions of the terms ‘‘swap’’ and the cost of such dual regulation would data, regarding, SBSAs that differs from ‘‘future delivery’’ in this manner will not likely be at least as great, if not greater, the books, records, and data required impose any material costs on market than the costs of the process set forth in regarding swaps. participants. It also will establish a proposed rule 1.9 to request an Specifically, proposed rule 1.7 would uniform interpretation of the forward alternative regulatory treatment for such require persons registered as SDRs to: (i) contract exclusion for the definitions of the mixed swap. The proposed rule keep and maintain books and records both statutory terms, which will avoid regarding bilateral uncleared mixed regarding SBSAs only to the extent that the significant costs that some swaps where at least one party is a dual SDRs are required to keep and maintain commenters stated would result if the registrant does not entail any additional books and records regarding swaps; and forward contract exclusion were costs, and may reduce costs for dual (ii) collect and maintain data regarding construed differently in these two registrants that enter into such mixed SBSAs only to the extent that SDRs are contexts.341 swaps by eliminating potentially required to collect and maintain data The CFTC requests comment as to the duplicative or inconsistent regulation. regarding swaps. In addition, proposed costs and benefits of the proposed rule 1.7 would require persons interpretative guidance regarding the (b) Benefits registered as swap dealers or major The CFTC believes that the proposed swap participants to keep and maintain 341 See EEI Letter (‘‘Without legal certainty as to rules that enable market participants to books and records, including daily the regulatory treatment of their forward contracts, EEI’s members and other end users who rely on the submit requests for joint interpretations trading records, regarding SBSAs only forward contract exclusion likely will face higher regarding the nature of various to the extent that those persons would transaction costs due to greater uncertainty. These agreements, contracts, or transactions, be required to keep and maintain books increased transaction costs may include: (i) More and requests for joint orders regarding and records regarding swaps. volatile or higher commodity prices; and (ii) increased credit costs, in each case caused by the regulatory treatment of mixed Because proposed rule 1.7 imposes no changes in market liquidity as end users change the swaps, will help to create a level requirements with respect to SBSAs way they transact in the commodity markets. A playing field (since the joint other than those that exist for swaps, single regulatory approach that uses the same interpretations and joint orders will be proposed rule 1.7 would impose no criteria to confirm that a forward contract is excluded from the Commission’s jurisdiction over available to all market participants) costs other than those that are required swaps and futures will reduce this uncertainty and regarding which agreements, contracts, with respect to swaps in the absence of the associated costs to end users.’’ (footnote or transactions constitute swaps, proposed rule 1.7. Proposed rule 1.7 omitted)).

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forward contract exclusion from the scope of transactions and entities within them to the Office of Management and swap definition, including the retention the regulatory framework established by Budget (‘‘OMB’’) for review in of the Brent Interpretation and its the Dodd-Frank Act, which will better accordance with the PRA.344 An agency extension to all nonfinancial allow the CFTC to assure transparency may not conduct or sponsor, and a commodities and the withdrawal of the and address systemic risk. person is not required to respond to, a Energy Exemption, for market collection of information unless it Request for Comment participant, markets, and the public. displays a currently valid OMB control 148. After considering the costs and number. OMB has not yet assigned a 8. Costs and Benefits of the Proposed benefits of the proposed rules and control number to the new collection of Anti-Evasion Rules and Interpretive interpretive guidance as discussed in information. Guidance this section, the CFTC has determined These proposed rules contain The CFTC is proposing to exercise the to issue the proposal. The CFTC invites collections and are being proposed anti-evasion rulemaking authority public comment on all of its cost-benefit pursuant to the Exchange Act. The granted to it by the Dodd-Frank Act. considerations. Commenters are proposed rules would establish a Generally, proposed CFTC rule requested to submit empirical data or process through which a person could 1.3(xxx)(6) under the CEA would define other factual information quantifying or submit a request to the Commissions as a swap any agreement, contract, or qualifying the costs and benefits of the that the Commissions provide a joint transaction that is willfully structured to proposed rules and interpretive interpretation of whether an agreement, evade (or as an attempt to evade) the guidance with their comments, to the contract, or transaction (or class thereof) provisions of Title VII governing the extent possible. is a swap, security-based swap, or both regulation of swaps. Further, proposed D. Consideration of Impact on the (i.e., a mixed swap). The rules also CFTC rule 1.6 under the CEA would Economy would establish a process with respect prohibit activities conducted outside the to mixed swaps through which a person United States, including entering into For purposes of the Small Business could submit a request to the agreements, contracts, and transactions Regulatory Enforcement Fairness Act of Commissions that the Commissions and structuring entities, to willfully 1996 (‘‘SBREFA’’) 342 the CFTC must issue a joint order permitting the evade any provision of the CEA as advise the Office of Management and requesting person (and any other person enacted by Title VII or the rules and Budget as to whether the proposed rules or persons that subsequently lists, regulations promulgated thereunder. constitute a ‘‘major’’ rule. Under trades, or clears that class of mixed As opposed to providing a bright-line SBREFA, a rule is considered ‘‘major’’ swap) to comply, as to parallel test, proposed rule 1.3(xxx)(6) would where, if adopted, it results or is likely provisions only, with the specified apply to agreements, contracts, and to result in: (i) An annual effect on the parallel provisions, instead of being transactions, and proposed rule 1.6 economy of $100 million or more (either required to comply with parallel would apply to agreements, contracts, in the form of an increase or a decrease); provisions of both the CEA and the transactions and entities, that are (ii) a major increase in costs or prices for Exchange Act. The hours and costs willfully structured to evade (or as an consumers or individual industries; or associated with preparing and sending attempt to evade) the provisions of Title (iii) significant adverse effect on these requests would constitute VII governing the regulation of swaps. competition, investment or innovation. reporting and cost burdens imposed by Although this test does not provide a If a rule is ‘‘major,’’ its effectiveness will each collection of information. bright line, it helps ensure that would- generally be delayed for 60 days be evaders cannot intentionally pending Congressional review. The 2. Summary of Collection of Information structure their transactions or entities CFTC does not believe that any of the Under Proposed Rules 3a68–2 and for the sole purpose of evading the proposed rules in this release, in their 3a68–4(c) requirements of Title VII. The CFTC also current form, would constitute a major The SEC is proposing new rules that is proposing interpretive guidance as to rule. would allow persons to submit requests certain types of circumstances that may The CFTC requests comment on the to the Commissions for joint constitute an evasion of the potential impact of the proposed rules interpretations regarding whether a requirements of Title VII, while at the on the economy on an annual basis, on particular agreement, contract, or same time preserving the CFTC’s ability the costs or prices for consumers or transaction (or class thereof) is a swap, to determine, on a case-by-case basis, individual industries, and on security-based swap, or both (i.e., a that other types of transactions or competition, investment or innovation. mixed swap), and for joint orders actions constitute an evasion of the Commenters are requested to provide permitting alternative regulatory requirements of the statute or the empirical data and other factual support treatment for particular mixed swaps. regulations promulgated thereunder. for their views to the extent possible. First, the SEC is proposing new rule This will promote the enforcement of IX. Administrative Law Matters— 3a68–2, which would allow persons to the anti-evasion rules in a manner that Exchange Act Revisions submit a request for a joint does not inappropriately interfere with interpretation from the Commissions activities undertaken for legitimate A. Paperwork Reduction Act regarding whether an agreement, business purposes. 1. Background contract, or transaction (or a class Absent the proposed anti-evasion thereof) is a swap, security-based swap, rules and interpretive guidance, price Proposed rules 3a68–2 and 3a68–4(c) or both (i.e., a mixed swap). Under ‘‘ discovery would be impaired because would contain new collection of proposed rule 3a68–2, a person would information’’ requirements within the markets would not be informed about provide to the Commissions a copy of meaning of the Paperwork Reduction those transactions. Additionally, all material information regarding the Act of 1995.343 The SEC is submitting systemic risk could increase in a terms of, and a statement of the manner that the CFTC would not be able economic characteristics and purpose 342 Public Law 104–121, Title II, 110 Stat. 857 to measure accurately. The proposed (1996) (codified in various sections of 5 U.S.C., 15 of, each relevant agreement, contract, or anti-evasion rules and interpretive U.S.C. and as a note to 5 U.S.C. 601). guidance will bring the appropriate 343 44 U.S.C. 3501 et seq. 344 44 U.S.C. 3507(d) and 5 CFR 1320.11.

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transaction (or class thereof), along with related to the initial determination approximately 30 hours of internal that person’s determination as to requirements. company or individual time and a cost whether each such agreement, contract, Second, the SEC is proposing new of approximately $15,800 for the or transaction (or class thereof) should rule 3a68–4(c), which would allow services of outside professionals, which be characterized as a swap, security- persons to submit requests to the the SEC believes would consist of based swap, or both (i.e., a mixed swap). Commissions for joint orders regarding services provided by attorneys.346 As The Commissions also may request the the regulation of a particular mixed discussed further below, these total submitting person to provide additional swap (or class thereof). Under proposed costs include all collection burdens information. rule 3a68–4(c), a person would provide associated with the proposed rules, The Commissions may issue in to the Commissions a copy of all including burdens related to the initial response a joint interpretation or joint material information regarding the terms determination requirements. of, and the economic characteristics and notice of proposed rulemaking regarding 3. Proposed Use of Information the status of that agreement, contract, or purpose of, the specified (or specified transaction (or class thereof) as a swap, class of) mixed swap. In addition, a The SEC would use the information security-based swap, or both (i.e., a person would provide the specified collected pursuant to proposed rule mixed swap). Any joint interpretation, parallel provisions, and the reasons the 3a68–2 to evaluate an agreement, like any joint notice of proposed person believes such specified parallel contract, or transaction (or class thereof) rulemaking, will be public and may provisions would be appropriate for in order to provide joint interpretations discuss the material information relevant mixed swap (or class thereof), or joint notices of proposed rulemaking regarding the terms of the relevant and an analysis of: (i) The nature and with the CFTC regarding whether these agreement, contract, or transaction (or purposes of the parallel provisions that agreements, contracts, or transactions are the subject of the request; (ii) the class thereof), as well as any other (or classes thereof) are swaps, security- comparability of such parallel information the Commissions deem based swaps, or both (i.e., mixed swaps) provision; and (iii) the extent of any material to the interpretation. as defined in the Dodd-Frank Act. The conflicts or differences between such SEC would use the information Requesting persons also would be parallel provisions. The Commissions collected pursuant to proposed rule permitted to withdraw a request made also may request the submitting person 3a68–4(c) to evaluate a specified, or a pursuant to proposed rule 3a68–2 at any to provide additional information. specified class of, mixed swaps in order time before the Commissions have The Commissions may issue in to provide joint orders or joint notices issued a joint interpretation or joint response a joint order, after public of proposed rulemaking with the CFTC notice of proposed rulemaking in notice and opportunity for comment, regarding the regulation of that response to the request. Regardless of a providing that the requesting person particular mixed swap or class of mixed particular request for interpretation, (and any other person or persons that swap. The information provided to the however, the Commissions could subsequently lists, trades, or clears that SEC pursuant to proposed rules 3a68–2 provide such a joint interpretation or mixed swap (or class thereof)) is and 3a68–4(c) also would allow the SEC joint notice of proposed rulemaking of permitted to comply, as to parallel to monitor the development of new OTC their own accord. provisions only, with the specified derivatives products in the marketplace Persons would submit requests parallel provisions (or another subset of and determine whether additional pursuant to proposed rule 3a68–2 on a the parallel provisions that are the rulemaking or interpretive guidance is voluntary basis. However, if a person subject of the request, as the necessary or appropriate. submits a request, all of the information Commissions determine is appropriate), required under the proposed rule, instead of being required to comply 4. Respondents including any additional information with parallel provisions of both the CEA It is difficult to calculate the precise requested by the Commissions, must be and the Exchange Act. Any joint order number of requests that would be submitted to the Commission, except to will be public and may discuss the submitted to the Commissions under the extent a person withdraws the material information regarding the terms proposed rules 3a68–2 and 3a68–4(c), request pursuant to the proposed rule. of the mixed swap (or class thereof), as given the historical unregulated state of For purposes of the PRA, the SEC well as any other information the the OTC derivatives market. Although estimates that the total annual Commissions deem material to the any person could submit a request paperwork burden resulting from order. Requesting persons also would be under proposed rule 3a68–2, the SEC proposed rule 3a68–2 would be permitted to withdraw a request made believes as a practical matter that the approximately 20 hours of internal pursuant to proposed rule 3a68–4(c) at relevant categories of such persons company or individual time and a cost any time before the Commissions have would be swap dealers and security- of approximately $9,480 for the services issued a joint order in response to the based swap dealers, major swap of outside professionals that the SEC request. participants and major security-based believes would consist of services Persons would submit requests swap participants, SEFs, security-based provided by attorneys.345 As discussed pursuant to proposed rule 3a68–4(c) on SEFs, DCOs clearing swaps, DCMs further below, these total costs include a voluntary basis. However, if a person trading swaps, SDRs, SBSDRs, and all collection burdens associated with submits a request, all of the information clearing agencies clearing security-based the proposed rules, including burdens required under the proposed rule, swaps, and the total number of persons including any additional information could be 475.347 Similarly, although any requested by the Commissions, must be 345 For convenience, the estimated PRA hour burdens have been rounded to the nearest whole submitted to the Commission, except to 346 See supra note 345. dollar. Data from SIFMA’s ‘‘Management & the extent a person withdraws the 347 This total number includes an estimated 250 Professional Earnings in the Securities Industry request pursuant to the proposed rule. swap dealers, 50 major swap participants, 50 2009,’’ modified by SEC staff to account for an 1800- For purposes of the PRA, the SEC security-based swap dealers, 10 major security- hour work-year and multiplied by 5.35 to account based swap participants, 35 SEFs, 20 security-based for bonuses, firm size, employee benefits, and estimates that the total annual SEFs, 12 DCOs, 17 DCMs, 15 SDRs, 10 SBSDRs, and overhead, suggest that that the cost of an attorney incremental paperwork burden resulting 6 clearing agencies, as set forth by the CFTC and is $316 per hour. from proposed rule 3a68–4(c) would be SEC, respectively, in their other Dodd-Frank Act

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person could submit a request under interpretation pursuant to proposed rule 5. Paperwork Reduction Act Burden proposed rule 3a68–4(c), the SEC 3a68–2. Also, as the Commissions Estimates believes as a practical matter that the provide joint interpretations regarding Proposed rules 3a68–2 and 3a68–4(c) relevant categories of such persons whether agreements, contracts, or would, if adopted, require submission of would be SEFs, security-based SEFs, transactions (or classes thereof) are or certain information to the Commissions and DCMs trading swaps, and the total are not swaps, security-based swaps, or to the extent persons elect to request an number of persons could be 72.348 both (i.e., mixed swaps), the SEC interpretation and/or alternative However, based on the SEC’s expects that the number of requests for regulatory treatment. Proposed rules experience and information received interpretation will decrease over time. 3a68–2 and 3a68–4(c) each require the from commenters to the ANPR 349 and The SEC believes that the rules and information that a requesting party must during meetings with the public to interpretive regarding swaps, security- include in its request to the discuss the Product Definitions based swaps, and mixed swaps the Commissions in order to receive a joint generally, including the interpretation Commissions are proposing, as well as interpretation or order, as applicable. of whether a transaction is a swap, the additional guidance issues pursuant (a) Proposed Rule 3a68–2 security-based swap, or both (i.e., a to joint interpretations and orders under mixed swap), and taking into proposed rules 3a68–2 and 3a68–4 will Proposed rule 3a68–2 would require consideration the certainty provided by result in a narrow pool of potential any party requesting a joint the proposed rules and interpretive respondents, approximately 50,351 to the interpretation under the rule to include disclosures about the agreement, guidance in this release, the SEC collection of information requirements believes that the number of requests that contract, or transaction (or class thereof) of proposed rule 3a68–2. would be submitted by such persons to in question as well as a statement of the Commissions to provide joint Similarly, because the SEC believes economic purpose and the requesting interpretations as to whether a given that both the category of mixed swap party’s initial determination regarding agreement, contract, or transaction is a transactions and the number of market whether the agreement, contract, or swap, security-based swap, or both (i.e., participants that engage in mixed swap transaction (or class thereof) is a swap, a mixed swap), would be small, and transactions are small, the SEC believes security-based swap, or both (i.e., a therefore expects that only a small that the pool of potential persons mixed swap). The proposed rule would number of requests would be submitted requesting a joint order regarding the apply only to requests made by persons pursuant to proposed rule 3a68–2. With regulation of a specified, or specified that desire an interpretation from the respect to proposed rule 3a68–4(c), the class of, mixed swap pursuant to Commissions. For each agreement, SEC also estimates the number of proposed rule 3a68–4(c) would be small contract, or transaction (or class thereof) requests for joint orders would be (approximately 10 352). Also, those for which a person requests the small.350 Pursuant to the Commissions’ requests submitted pursuant to Commissions’ joint interpretation, the proposed rules and interpretive proposed rule 3a68–2 that result in an requesting person would be required to guidance, a number of persons that interpretation that the agreement, provide a copy of all material engage in agreements, contracts, or contract, or transaction (or class thereof) information regarding the applicable transactions that are swaps, security- is not a mixed swap would reduce the terms; a statement of the economic based swaps, or both (i.e., a mixed pool of possible persons submitting a characteristics and purpose; and the swap) would be certain that their request regarding the regulation of requesting person’s determination as to transactions are, indeed, swaps, particular mixed swaps (or class thereof) whether such agreement, contract, or security-based swaps, or both, (i.e., a pursuant to proposed rule 3a68–4(c). In transaction (or class thereof) is a swap, mixed swap) and would not request an addition, not only the requesting party, security-based swap, or both (i.e., a but also any other person or persons mixed swap), including the basis for the rulemaking proposals. See Entity Definitions, supra that subsequently lists, trades, or clears requesting person’s determination. The note 12 (regarding security-based swap dealers and requesting person also would be major security-based swap participants); that mixed swap, would be subject to, Registration of Swap Dealers and Major Swap and must comply with, the joint order required to provide such other Participants, supra note 330 (regarding swap regarding the regulation of the specified, information as the Commissions may dealers and major security-based swap or specified class of, mixed swap, as request. participants); Security-Based Swap Data Repository As discussed above, the SEC believes issued by the Commissions. Therefore, Registration, Duties, and Core Principles, supra the number of persons that would note 6 (regarding SBSDRs); Swap Data Repositories, the SEC believes that the number of submit requests pursuant to proposed supra note 330 (regarding SDRs); Core Principles requests for a joint order regarding the rule 3a68–2 is quite small given the and Other Requirements for Swap Execution regulation of mixed swaps, particularly Facilities, 76 FR 1214, Jan. 7, 2011 (regarding SEFs); proposed rules and interpretive Registration and Regulation of Security-Based Swap involving specified classes of mixed guidance regarding swaps, security- Execution Facilities, 76 FR 10948, Feb. 28, 2011 would decrease over time. (regarding security-based SEFs); Financial based swaps, and mixed swaps the Resources Requirements for Derivatives Clearing The SEC seeks comment on the Commissions are providing.353 Organizations, 75 FR 63113, Oct. 14, 2010 number of persons that potentially Although the SEC does not have precise (regarding DCOs); Information Management would submit requests pursuant to rules figures for the number of requests that Requirements for Derivatives Clearing Organizations, 75 FR 78185, Dec. 15, 2010 3a68–2 and 3a68–4(c). persons would submit, the SEC believes (regarding DCOs); Risk Management Requirements it is reasonable to estimate that it likely for Derivatives Clearing Organizations, 76 FR 3698, 351 The SEC believes that there would be Jan. 20, 2011 (regarding DCOs); Core Principles and approximately 50 requests in the first year. See 353 This estimate is based on comments from and Other Requirements for Designated Contract discussion infra part IX.A.5. The SEC recognizes discussions with market participants regarding Markets, 75 FR 80572, Dec. 22, 2010 (regarding that one person might submit more than one uncertainty concerning whether certain contracts DCMs); Clearing Agency Standards for Operation request, but for purposes of the PRA is considering might be considered swaps, security-based swaps, and Governance, 76 FR 14472, Mar. 16, 2011 each such request as one person in order to provide or both, i.e., mixed swaps, and the size of the mixed (regarding clearing agencies). a more conservative estimate of the number of swaps category, although the SEC has not received 348 Id. persons that would be subject to paperwork data regarding the specific number of potential 349 See supra note 283 and accompanying text. burdens. transaction types for which there is uncertainty or 350 See discussion supra part IV.A. 352 See id. that are mixed swaps.

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would be fewer than 50 requests in the parallel provisions; and (iii) the extent paperwork burden under the PRA first year. For purposes of the PRA, the of any conflicts or differences between associated with preparing and SEC estimates the total paperwork such parallel provisions. The requesting submitting a party’s request to the burden associated with preparing and person also would be required to Commissions pursuant to proposed rule submitting a person’s request to the provide such other information as the 3a68–4(c) would be 10 hours fewer and Commissions pursuant to proposed rule Commissions may request. $4,740 less per request than for mixed 3a68–2 would be 20 hours per request As discussed above, the SEC believes swaps for which a request for a joint and associated costs of $9,480.354 the number of requests that persons interpretation pursuant to proposed rule Assuming 50 requests in the first year, would submit pursuant to proposed rule 3a68–2 was not previously made the SEC estimates that this would result 3a68–4(c) is quite small given the because certain, although not all, of the in an aggregate burden for the first year limited types of agreements, contracts, information required to be submitted of 1000 hours of company time (50 or transactions (or class thereof) the and necessary to prepare pursuant to requests × 20 hours/request) and Commissions believe would constitute proposed rule 3a68–4(c) would have $474,000 for the services of outside mixed swaps.355 In addition, depending been required to be submitted and professionals (e.g., attorneys) (50 on the characteristics of a mixed swap necessary to prepare pursuant to requests × 30 hours/request × $316). (or class thereof), a person may choose proposed rule 3a68–2.357 Although As discussed above, the SEC believes not to submit a request pursuant to certain requests made pursuant to that as the Commissions provide joint proposed rule 3a68–4(c). The SEC also proposed rule 3a68–4(c) may be made interpretations or joint notices of notes that any joint order issued by the without a previous request for a joint proposed rulemaking, the number of Commissions would apply to any interpretation pursuant to proposed rule requests received will decrease over person that subsequently lists, trades, or 3a68–2, the SEC believes that most time. Although the SEC does not have clears that specified, or specified class requests under proposed rule 3a68–2 precise figures for the number of of, mixed swap, so that requests for joint that result in the interpretation that an requests that persons would submit after orders could diminish over time. Also, agreement, contract, or transaction (or the first year, the SEC believes it is persons may submit requests for an class thereof) is a mixed swap will reasonable to estimate that it likely interpretation under proposed rule result in a subsequent request for would be fewer than 10 requests on 3a68–4(c) that do not result in an alternative regulatory treatment average in ensuing years. Assuming 10 interpretation that the agreement, pursuant to proposed rule 3a68–4(c). requests in ensuing years, the SEC contract, or transaction (or class thereof) Assuming, therefore, that 90 percent, or estimates that this would result in an is a mixed swap. Therefore, although 18 of the estimated 20 requests pursuant aggregate burden in each ensuing year of the SEC does not have precise figures to proposed rule 3a68–4(c) in the first 200 hours of company time (10 requests for the number of requests that persons year, as discussed above, would be such × 20 hours/request) and $94,800 for the would submit, the SEC believes it is ‘‘follow-on’’ requests, the SEC estimates services of outside professionals (e.g., reasonable to estimate that it likely that this would result in an aggregate attorneys) (10 requests × 30 hours/ would be fewer than 20 requests in the burden in the first year of 360 hours of request × $316). first year. For purposes of the PRA, the company time (18 requests × 20 hours/ SEC estimates the total paperwork request) and $199,080 for the services of (b) Proposed Rule 3a68–4(c) burden associated with preparing and outside professionals (18 requests × 35 Proposed rule 3a68–4(c) would submitting a party’s request to the hours/request × $316). require any party requesting a joint Commissions pursuant to proposed rule As discussed above, the SEC believes order regarding the regulation of a 3a68–4(c) would be 30 hours and that as the Commissions provide joint specified, or specified class of, mixed associated costs of $15,800 per request orders regarding alternative regulatory swap under the rule to include for mixed swaps for which a request for treatment, the number of requests disclosure about the agreement, a joint interpretation pursuant to received will decrease over time. The contract, or transaction (or class thereof) proposed rule 3a68–4(c) was not SEC believes it is reasonable to estimate that is a mixed swap as well as a previously made.356 Assuming 20 that it likely would be fewer than 5 statement of economic purpose for the requests in the first year, the SEC requests on average in ensuing years. mixed swap (class thereof). In addition, estimates that this would result in an Assuming 5 requests in ensuing years, a person would provide the specified aggregate burden for the first year of 600 the SEC estimates that this would result parallel provisions that the person hours of company time (20 requests × 30 in an aggregate burden in each ensuing believes should apply to the mixed hours/request) and $316,000 for the year of 150 hours of company time (5 swap (or class thereof), the reasons the services of outside professionals (20 requests × 30 hours/request) and person believes the specified parallel requests × 50 hours/request × $316). $79,000 for the services of outside provisions would be appropriate for the For mixed swaps for which a request professionals (5 requests × 50 hours/ mixed swap, and an analysis of: (i) The for a joint interpretation pursuant to request × $316). As discussed above, nature and purposes of the parallel proposed rule 3a68–2 was previously assuming that approximately 90 provisions that are the subject of the made, the SEC estimates the total percent, or 4 of the estimated 5 requests request; (ii) the comparability of such pursuant to proposed rule 3a68–4(c) in 355 See supra note 283 and accompanying text. 354 This estimate is based on information 356 This estimate is based on information 357 This estimate takes into account that certain indicating that the average burden associated with indicating that the average burden associated with information regarding the mixed swap (or class preparing and submitting a no-action request to the preparing and submitting a no-action request to the thereof), namely the material terms and the SEC staff in connection with the identification of SEC staff in connection with the regulatory economic purpose, will have already been gathered whether certain products were securities, which the treatment of certain securities products which the and prepared as part of the request submitted SEC believes is a process similar to the process SEC believes is a process similar to the process pursuant to proposed rule 3a68–2. The SEC under proposed rule 3a68–2, was approximately 20 under proposed rule 3a68–4(c), was approximately estimates that these items constitute approximately hours and associated costs of $9,480. Assuming 30 hours and associated costs of $15,800. Assuming 10 hours fewer and a reduction in associated costs these costs correspond to legal fees, which we these costs correspond to legal fees, which we of $4,740. Assuming these costs correspond to legal estimate at an hourly cost of $316, we estimate that estimate at an hourly cost of $316, we estimate that fees, which we estimate at an hourly cost of $316, this cost is equivalent to approximately 30 hours this cost is equivalent to approximately 50 hours we estimate that this cost is equivalent to ($9,480/$316). ($15,800/$316). approximately 15 hours ($4,740/$316).

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ensuing years would be ‘‘follow-on’’ of information requirements should over ‘‘security-based swaps,’’ 359 and the requests to requests for joint direct the comments to the Office of Commissions shall jointly prescribe interpretation from the Commissions Management and Budget, Attention such regulations regarding mixed swaps under proposed rule 3a68–4(c), the SEC Desk Officer for the Securities and as may be necessary to carry out the estimates that this would result in an Exchange Commission, Office of purposes of Title VII.360 In addition, the aggregate burden in each ensuing year of Information and Regulatory Affairs, SEC is given antifraud authority over, 80 hours of company time (4 requests × Washington, DC 20503, and should send and access to information from certain 20 hours/request) and $44,240 for the a copy to Secretary, Securities and CFTC-regulated entities (e.g., DCOs, services of outside professionals (4 Exchange Commission, 100 F Street NE., SEFs, and swap dealers) regarding, requests × 35 hours/request × $316). Washington, DC 20549–1090, with SBSAs.361 reference to File No. S7–16–11. In most instances, the Commissions’ Request for Comment Requests for materials submitted to proposed rules and guidance merely Pursuant to 44 U.S.C. 3506(c)(2)(B), OMB by the SEC with regard to these clarify the application of the Product the SEC solicits comments to: (i) collections of information should be in Definitions to specific products as is Evaluate whether the proposed writing, refer to File No. S7–16–11, and required by the relevant provisions of collection of information is necessary be submitted to the Securities and the CEA and Exchange Act, as modified for the proper performance of the Exchange Commission, Office of by the Dodd-Frank Act and the functions of the agency, including Investor Education and Advocacy, 100 F regulation of mixed swaps. However, for whether the information will have Street NE., Washington, DC 20549– some of the rules the Commissions are practical utility; (ii) evaluate the 0213. OMB is required to make a proposing, the Commissions are accuracy of the SEC’s estimate of burden decision concerning the collection of exercising their discretion to further of the proposed collection of information between 30 and 60 days define the Product Definitions and to information; (iii) determine whether after publication of this release. regulate mixed swaps, which would there are ways to enhance the quality, Consequently, a comment to OMB is generate costs and benefits to market utility, and clarity of the information to best ensured of having its full effect if participants. The Commissions also are be collected; and (iv) evaluate whether OMB receives it within 30 days of fulfilling the requirement in Dodd-Frank there are ways to minimize the burden publication. that they establish requirements of the collection of information on those B. Cost-Benefit Analysis regarding books and records with that are to respond, including through respect to SBSAs, which also would the use of automated collection 1. Background generate costs and benefits to market techniques or other forms of information Title VII establishes a regulatory participants. The costs and benefits technology. In addition, the SEC framework for OTC derivatives. As part regarding these rules are discussed requests comment on the accuracy of of that framework, Title VII amends the below. the estimates regarding the total CEA and the Exchange Act to broadly 2. Proposed Rule 3a68–1a paperwork burden. categorize covered derivative products In particular, the SEC requests as swaps, security-based swaps, SBSAs, (a) Benefits comment for purposes of the PRA on the and/or mixed swaps. In particular, A security-based swap includes a following: section 712(d)(1) of the Dodd-Frank Act swap that is based on the ‘‘occurrence, 149. How many requests for a joint provides that the Commissions, in nonoccurrence, or extent of the interpretation from the Commissions consultation with the Board, shall occurrence of an event relating to a would be submitted pursuant to rule jointly further define, among other single issuer of a security or the issuers 3a68–2? things, the terms ‘‘swap,’’ ‘‘security- of securities in a narrow-based security 150. How many requests for a joint based swap,’’ and ‘‘security-based swap index, provided that such event directly order from the Commissions would be agreement.’’ Section 712(a)(8) of the affects the financial statements, submitted pursuant to rule 3a68–4(c)? Dodd-Frank Act provides further that 151. How many requests for a joint financial condition, or financial the Commissions shall jointly prescribe ’’ ‘‘ order from the Commissions would be obligations of the issuer (the Event such regulations regarding ‘‘mixed ’’ 362 submitted pursuant to rule 3a68–4(c) Provision ). Proposed rule 3a68–1a swaps’’ as may be necessary to carry out would provide that, solely for purposes regarding the same agreement, contract, the purposes of Title VII. In addition, or transaction (or class thereof) that was of determining whether a CDS is a sections 712(d)(2)(B) and (C) of the security-based swap under the Event the subject of a request for a joint Dodd-Frank Act require the interpretation from the Commissions Provision, the term ‘‘issuers of securities Commissions, in consultation with the in a narrow-based security index’’ would submitted pursuant to rule 3a68–2? Board, to jointly adopt rules governing 152. Are the paperwork burden have the meaning as set forth in books and records for SBSAs for SDRs proposed rule 3a68–1a. estimates, for both company time and that are registered under the CEA, swap outside services, as discussed above Because index CDS typically are dealers, major swap participants, written on indexes of entity names, not accurate? Do these estimates reflect the security-based swap dealers, and major paperwork burdens and costs associated on indexes of the specific securities of security-based swap participants. those entities, the Commissions are with requests made pursuant to The Product Definitions and the proposed rules 3a68–2 and 3a68–4(c)? regulation of mixed swaps are part of 359 Commenters should, when possible, See section 3(a)(68) of the Exchange Act, 15 the Dodd-Frank Act’s comprehensive U.S.C. 78c(a)(68) (cross-referenced in CEA section provide empirical data to support their framework for regulating the swaps 1a(42), 7 U.S.C. 1a(42)). views. markets whereby the CFTC is given 360 See CEA section 1a(47)(D), 7 U.S.C. 1a(47)(D); Any member of the public may direct section 3(a)(68)(D) of the Exchange Act, 15 U.S.C. regulatory authority over ‘‘swaps,’’ 358 to us or to OMB any comments 78c(68)(D). the SEC is given regulatory authority 361 concerning the accuracy of these burden See 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. estimates and any suggestions for 358 See CEA section 1a(47), 7 U.S.C. 1a(47) (cross- 1a(47)(A)(v). reducing these burdens. Persons referenced in section 3(a)(69) of the Exchange Act, 362 Section 3(a)(68)(A)(ii)(III) of the Exchange Act, submitting comments on the collection 15 U.S.C. 78c(a)(69)). 15 U.S.C. 78c(a)(68)(A)(ii)(III).

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concerned that the application of the futures.364 Because some market index’’ and therefore being a security- Event Provision, without further participants are familiar with this based swap. clarification, may cause uncertainty definition, as well as with performing The SEC requests comments, data, about whether certain index CDS would analyses of products in the security and estimates regarding the benefits be security-based swaps or swaps. futures context based on this definition, associated with proposed rule 3a68–1b. Therefore, proposed rule 3a68–1a would the SEC believes that the proposed The SEC also requests comments, data, eliminate the potential uncertainty of definition of ‘‘issuers of securities in a and estimates regarding any additional the treatment of index CDS as either narrow-based security index’’ will benefits that could be realized with security-based swaps or swaps by mitigate uncertainty for those market proposed rule 3a68–1b. setting forth clear and objective criteria participants regarding the treatment of (b) Costs for meeting the definition of ‘‘issuers of index CDS. In addition, because such In complying with proposed rule securities in a narrow-based security market participants would be familiar 3a68–1b, a market participant will need index’’ and therefore being a security- with many of the criteria in proposed to ascertain whether an index CDS is a based swap. rule 3a68–1a, such market participants security-based swap or swap according The SEC requests comments, data, would require less time and effort, and to the criteria set forth for meeting the and estimates regarding the benefits thus incur less cost, in determining the definition of ‘‘narrow-based security associated with proposed rule 3a68–1a. scope and applicability of such criteria index.’’ This analysis will have to be The SEC also requests comments, data, to the determination of whether an performed by market participants upon and estimates regarding any additional index CDS is a swap or security-based entering into an index CDS to determine benefits that could be realized with swap. whether the index CDS is subject to the proposed rule 3a68–1a. The SEC requests comment as to the SEC’s regulatory regime for security- (b) Costs costs that determinations under based swaps or the CFTC’s regulatory proposed rule 3a68–1a would impose regime for swaps. The SEC notes, In complying with proposed rule on market participants, as well as however, that any such costs would be 3a68–1a, a market participant will need estimates and empirical data to support in lieu of the costs of doing the same to ascertain whether an index CDS is a these costs. In addition, the SEC analysis under the statutory security- security-based swap or swap according requests comment on any other costs based swap definition. Because the to the criteria set forth for meeting the associated with proposed rule 3a68–1a statutory security-based swap definition definition of ‘‘issuers of securities in a that have not been considered and what lacks the specificity provided by narrow-based security index.’’ This the extent of those costs would be. proposed rule 3a68–1b, the SEC believes analysis will have to be performed by analysis of an index CDS would under market participants upon entering into 3. Proposed Rule 3a68–1b proposed rule 3a68–1b lead to less an index CDS to determine whether the (a) Benefits uncertainty than would the same index CDS is subject to the SEC’s analysis under the statutory security- regulatory regime for security-based A security-based swap includes a based swap definition. Providing a clear swaps or the CFTC’s regulatory regime swap that is based on ‘‘an index that is rule to persons to determine whether an for swaps. The SEC notes, however, that a narrow-based security index, index CDS is a security-based swap any such costs would be in lieu of the including any interest therein or on the under section 3(a)(68)(A)(ii)(I) of the costs of doing the same analysis under value thereof.’’ 365 Proposed rule 3a68– Exchange Act 368 could alleviate the statutory security-based swap 1b would provide that, solely for additional costs to persons of inquiring definition. Because the statutory purposes of determining whether a CDS with the Commissions about whether an security-based swap definition lacks the is a security-based swap under section index CDS is a swap or security-based specificity provided by proposed rule 3(a)(68)(A)(ii)(I) of the Exchange Act,366 swap under that provision, as well as 3a68–1a, the SEC believes analysis of an the term ‘‘narrow-based security index’’ costs of obtaining an opinion of counsel index CDS would under proposed rule would have the meaning as set forth in regarding the applicability of that 3a68–1a would lead to less uncertainty proposed rule 3a68–1b. provision to a particular index CDS. than would the same analysis under the Because index CDS may be written in In addition, proposed rule 3a68–1b is statutory security-based swap generally consistent with the definition definition. Providing a clear rule to indexes of the specific securities of entities as well as on indexes of entity of ‘‘narrow-based security index’’ that persons to determine whether an index exists in section 3(a)(55)(B) of the CDS is a security-based swap under names, the Commissions are concerned that the application of section Exchange Act, as modified to address section 3(a)(68)(A)(ii)(III) of the 367 debt securities in the context of security 363 3(a)(68)(A)(ii)(I) of the Exchange Act, Exchange Act could alleviate futures.369 Because some market additional costs to persons of inquiring without further clarification, may cause uncertainty about whether certain index participants are familiar with this with the Commissions about whether an definition, as well as with performing index CDS is a swap or security-based CDS would be security-based swaps or swaps. Therefore, proposed rule 3a68– analyses of products in the security swap under that provision, as well as futures context based on this definition, costs of obtaining an opinion of counsel 1b would eliminate the potential uncertainty of the treatment of index the SEC believes that the proposed regarding the applicability of that definition of ‘‘narrow-based security provision to a particular index CDS. CDS as either security-based swaps or swaps by setting forth clear and index’’ will mitigate uncertainty for In addition, proposed rule 3a68–1a is objective criteria for meeting the those market participants regarding the generally consistent with the definition definition of ‘‘narrow-based security treatment of index CDS. In addition, of ‘‘narrow-based security index’’ that because such market participants would exists in section 3(a)(55)(B) of the 364 be familiar with many of the criteria in Exchange Act, as modified to address See July 2006 Rules, supra note 199. 365 Section 3(a)(68)(A)(ii)(I) of the Exchange Act, proposed rule 3a68–1b, such market debt securities in the context of security 15 U.S.C. 78c(a)(68)(A)(ii)(I). 366 15 U.S.C. 78c(a)(68)(A)(ii)(I). 368 15 U.S.C. 78c(a)(68)(A)(ii)(I). 363 15 U.S.C. 78c(a)(68)(A)(ii)(III). 367 15 U.S.C. 78c(a)(68)(A)(ii)(I). 369 See July 2006 Rules, supra note 199.

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participants would require less time and outside professionals.370 The SEC notes, index underlying the swap or security- effort, and thus incur less cost, in however, that any such costs are in lieu based swap temporarily assumes determining the scope and applicability of the costs of doing the same analysis characteristics that would render it a of such criteria to the determination of without requesting the Commissions to narrow-based security index or not a whether an index CDS is a swap or provide an interpretation. In addition, narrow-based security index, security-based swap. as noted above, if the Commissions respectively. In addition, proposed rule The SEC requests comment as to the provide an interpretation pursuant to a 3a68–3 would provide for an additional costs that determinations under request under proposed rule 3a68–2, a 3-month grace period applicable to a proposed rule 3a68–1a would impose market participant, and other market security index that becomes narrow- on market participants, as well as participants that desire to transact in the based, or broad-based, as applicable, for estimates and empirical data to support same (or same class of) agreement, more than 45 business days over 3 these costs. In addition, the SEC contract, or transaction, would have consecutive calendar months. requests comment on any other costs regulatory certainty about whether that Because security indexes underlying associated with proposed rule 3a68–1a agreement, contract, or transaction (or Title VII instruments may migrate from that have not been considered and what class thereof) is a swap, security-based narrow-based to broad-based, or vice the extent of those costs would be. swap, or both (i.e., a mixed swap). versa, the Commissions are concerned Also, the SEC believes that as persons that application of the narrow-based 4. Proposed Rule 3a68–2 make requests for interpretations about security index definition, without (a) Benefits whether agreements, contracts, or further clarification, may cause transactions (or classes thereof uncertainty regarding treatment of Title Proposed rule 3a68–2 would establish agreements) are swaps, security-based VII instruments traded on trading a process for persons to request an swaps, or both, i.e., mixed swaps, platforms when such migration has interpretation of whether an agreement, pursuant to proposed rule 3a68–2, the occurred. Therefore, proposed rule contract, or transaction (or class of subsequent costs for persons transacting 3a68–3 would eliminate the potential agreements, contracts, or transactions) is in those products for which the uncertainty of the treatment of such a swap, security-based swap, or both Commissions have provided Title VII instruments by setting forth (i.e., a mixed swap). interpretations should be reduced. clear and objective criteria regarding the Proposed rule 3a68–2 would afford The SEC requests comment as to the application of the narrow-based security persons with the opportunity to obtain costs that proposed rule 3a68–2 would index definition to security indexes that greater certainty from the Commissions impose on market participants, as well have migrated from narrow-based to regarding whether certain products are as estimates and empirical data to broad-based or from broad-based to swaps, security-based swaps, or both, support these costs. In addition, the SEC narrow-based. i.e., mixed swaps. The SEC believes that requests comment on any other costs The SEC requests comments, data, this provision would decrease the associated with proposed rule 3a68–2 and estimates regarding the benefits possibility that market participants that have not been considered herein associated with proposed rule 3a68–3. inadvertently might violate regulatory and what the extent of those costs The SEC also requests comments, data, requirements regarding products that would be. and estimates regarding any additional may constitute swaps, security-based benefits that could be realized with 5. Proposed Rule 3a68–3 swaps, or mixed swaps, which could proposed rule 3a68–3. lead to enforcement action. It also (a) Benefits (b) Costs would decrease the likelihood that Proposed rule 3a68–3 would provide products might fall into regulatory gaps that, except as otherwise provided in In complying with proposed rule by providing a method for market proposed rule 3a68–3, for purposes of 3a68–3, a market participant will need participants to seek interpretations section 3(a)(68) of the Exchange Act,371 to ascertain whether a security index regarding the status of products for the term ‘‘narrow-based security index’’ underlying a Title VII instrument is which the applicable regulatory regime has the meaning set forth in section narrow-based or broad-based according might otherwise remain uncertain. In 3(a)(55) of the Exchange Act,372 and the to the criteria set forth for the tolerance addition, the SEC believes the proposed rules, regulations, and orders of the SEC periods and grace periods in the rule will provide the opportunity for thereunder. This definition would proposed rule. This analysis would be financial innovation by providing a eliminate potential uncertainty performed upon entering into Title VII flexible structure that will allow for the regarding the treatment of a narrow- instrument on a security index to ensure development of new products that based security index to which section compliance with proposed rule 3a68–3. otherwise might be hindered by the lack 3(a)(55) of the Exchange Act also The SEC notes, however, that any such of regulatory certainty. applies.373 costs would be in lieu of the costs of doing the same analysis under the (b) Costs Proposed rule 3a68–3 also would provide a tolerance period for the narrow-based security index definition, Under proposed rule 3a68–2, a person definition of ‘‘narrow-based security which the SEC believes would be more could request the Commissions to index’’ to ensure that, under certain difficult and lead to greater uncertainty, provide an interpretation of whether an conditions, a security index underlying rather than the clarity provided under agreement, contract, or transaction (or a swap will not be considered a narrow- proposed rule 3a68–3. Providing a clear class thereof) is a swap, security-based based security index and a security rule to market participants to determine swap, or mixed swap. The SEC index underlying a security-based swap whether a Title VII instrument traded on estimates that the cost of requesting this will be considered a narrow-based a trading platform where the underlying interpretation for a particular security index, even when the security security index has so migrated could agreement, contract, or transaction (or alleviate additional costs to persons of class thereof) would be approximately 370 See discussion supra part VIII. inquiring with the Commissions about 20 hours of internal company or 371 15 U.S.C. 78c(a)(68). whether a Title VII instrument is a swap individual time and a cost of 372 15 U.S.C. 78c(a)(55). or a security-based swap, as well as approximately $9,480 for the services of 373 15 U.S.C. 78c(a)(55). costs of obtaining an opinion of counsel

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regarding a particular Title VII that is not executed on or subject to the uncleared mixed swaps entered into by instrument. rules of a DCM, SEF, FBOT, NSE, or dually-registered dealers and major In addition, proposed rule 3a68–3 is security-based SEF and that will not be participants. generally consistent with the tolerance submitted to a DCO or registered or Proposed rule 3a68–4(c) also would period and grace period that exist in exempt clearing agency to be cleared afford persons with an opportunity to section 3(a)(55) of the Exchange Act for (‘‘bilateral uncleared mixed swap’’), and seek alternative regulatory treatment of futures contracts.374 Because market where at least one party to the mixed a specified, or specified class of, mixed participants are familiar with such swap is registered with the SEC as a swap. Absent such alternative tolerance period and grace period as security-based swap dealer or major regulatory treatment, a person that well as with performing analyses of security-based swap participant and desires or intends to list, trade, or clear products in the futures context based on also with the CFTC as a swap dealer or a mixed swap would be required to these provisions, the SEC believes that major swap participant, shall be subject comply with all the statutory provisions the proposed tolerance period and grace to the provisions of the Securities Act of Title VII, including all the rules and period in proposed rule 3a68–3 will and the rules and regulations regulations thereunder, that are mitigate uncertainty for market promulgated thereunder and only to applicable to both security-based swaps participants regarding the treatment of certain provisions of the CEA and the and swaps. The SEC believes that such these Title VII instruments. Proposed rules and regulations promulgated a requirement could pose practical rule 3a68–3 also would allow market thereunder. In addition, proposed rule difficulties for mixed swap participants to minimize the costs of 3a68–4 would establish a process for transactions 376 and that permitting determining whether a security index persons to request that such persons be persons to request alternative regulatory underlying a Title VII instrument is permitted to comply, as to parallel treatment of a specified, or specified considered narrow-based or not by provisions only, with the specified class of, mixed swaps would allow the providing a test that is substantially parallel provisions, instead of being Commissions to address the potential similar to a test with which they are required to comply with parallel for duplicative or contradictory familiar in the futures context. In provisions of both the CEA and the regulatory requirements regarding a addition, the tolerance period under Exchange Act. particular mixed swap. proposed rule 3a68–3 mitigates Because, as noted above, mixed swaps The information submitted by persons uncertainty for market participants are both swaps and security-based pursuant to proposed rule 3a68–4(c) trading Title VII instruments on trading swaps, and thus are subject to regulation would assist the Commissions in more platforms by allowing temporary as both swaps and security-based swaps, quickly identifying and addressing the migration of an underlying security the Commissions are concerned that, relevant issues involved in providing index within certain specifications without further clarification, there may alternative regulatory treatment. without disrupting the status of Title VII be uncertainty as to the scope of, and The SEC requests comments, data, instruments based on that security the requirements applicable to, and estimates regarding the benefits index. Similarly, the grace period under transactions that fall within the associated with proposed rule 3a68–4. proposed rule 3a68–3 mitigates definition of the term ‘‘mixed swap.’’ The SEC also requests comments, data, uncertainty for market participants Proposed rule 3a68–4(a) would define and estimates regarding any additional trading Title VII instruments on trading the term ‘‘mixed swap’’ in the same benefits that could be realized with platforms by allowing time for any manner as the term is defined in the proposed rule 3a68–4. necessary actions to be made to Exchange Act. This rule, coupled with (b) Costs accommodate the non-temporary guidance regarding mixed swaps migration of a security index underlying provided by the Commissions, further Providing a clear rule for persons who Title VII instruments. clarifies whether a security-based swap engage in bilateral uncleared mixed The SEC requests comment as to the is a mixed swap and could eliminate the swaps would reduce the potential for costs that determinations under need to obtain an opinion of counsel duplicative or contradictory regulatory proposed rule 3a68–3 would impose on regarding a particular security-based requirements that apply to such bilateral market participants, as well as estimates swap. uncleared mixed swaps. and empirical data to support these The Commissions are proposing rule Under proposed rule 3a68–4(c), a costs. In addition, the SEC requests 3a68–4(b) to eliminate potentially person also could request the comment on any other costs associated duplicative and conflicting regulation in Commissions to provide alternative with proposed rule 3a68–3 that have not the context of mixed swaps by regulatory treatment of a specified, or been considered, and what the extent of providing that a bilateral uncleared specified class of, mixed swap. The SEC those costs would be. mixed swap, where at least one party to estimates that the cost of requesting the mixed swap is dually-registered alternative regulatory treatment for a 6. Proposed Rule 3a68–4 with the SEC as a security-based swap particular mixed swap (or class thereof) (a) Benefits dealer or major security-based swap would be approximately 30 hours of participant and also with the CFTC as A mixed swap is both a security-based internal company or individual time a swap dealer or major swap participant, swap and a swap, subject to dual and a cost of approximately $15,800 for would be subject to all applicable 377 regulation by the Commissions, and the services of outside professionals. provisions of the securities laws (and proposed rule 3a68–4 would define the The SEC notes, however, that any such SEC rules and regulations promulgated term ‘‘mixed swap’’ in the same manner costs are in lieu of the costs of thereunder) but would be subject only as the term is defined in both the complying with all the statutory to certain CEA provisions (and CFTC Exchange Act.375 provisions in Title VII, including all the Proposed rule 3a68–4 rules and regulations promulgated would also provide that a mixed swap rules and regulations thereunder, that thereunder). Therefore, proposed rule are applicable to both security-based 3a68–4(a) would reduce both the 374 See supra note 261 and accompanying text. swaps and swaps, which the SEC 375 Section 3(a)(68)(D) of the Exchange Act, 15 number of and potential uncertainty U.S.C. 78c(a)(68)(D); CEA section 1(a)(47)(D), 7 regarding which requirements of each 376 See discussion supra part IV. U.S.C. 1(a)(47)(D). Commission will apply to bilateral 377 See discussion supra part VIII.

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believes would be more costly than risks underwritten by insurance into the agreement, contract, or requesting alternative regulatory companies and that is subject to transaction to ensure compliance with treatment, and which potentially could supervision by the insurance proposed rule 3a69–1. The SEC notes, pose practical difficulties.378 commissioner, or similar official or however, that any such costs would be Also, the SEC believes that as persons agency, of a state, as defined under in lieu of the costs of doing the same make requests for alternative regulatory section 3(a)(16) of the Exchange Act,379 analysis absent proposed rule 3a69–1, treatment of specified, or specified or by the United States or an agency or which the SEC believes would be more classes of, mixed swaps pursuant to instrumentality thereof, and be difficult and lead to greater uncertainty proposed rule 3a68–4, the subsequent regulated as insurance under the laws of than if the analysis were done under costs for persons transacting in those such state or the United States; (ii) be proposed rule 3a69–1. Providing an products for which the Commissions provided by the United States or any of objective rule to determine whether an have provided for alternative regulatory its agents or instrumentalities, or agreement, contract, or transaction is an treatment should be reduced. pursuant to a statutorily authorized insurance product could alleviate The SEC requests comment as to the program thereof; or (iii) in the case of additional costs of inquiring with the costs that proposed rule 3a68–4 would reinsurance only, be provided by a Commissions about whether an impose on market participants, as well person located outside the United States agreement, contract, or transaction is an as estimates and empirical data to to an insurance company that meets the insurance product or a swap, or costs of support these costs. In addition, the SEC above requirements, provided that such obtaining an opinion of counsel requests comment on any other costs person is not prohibited by the law of regarding a particular agreement, associated with proposed rule 3a68–4 any state or the United States from contract, or transaction. that have not been considered herein, offering such agreement, contract, or To the extent that the criteria under and what the extent of those costs transaction to such insurance company, proposed rule 3a69–1 lead to the would be. the product to be reinsured meets the inadvertent omission of certain types of requirements above for insurance insurance products, these omissions 7. Proposed Rule 3a69–1 products, and the total amount could lead to costs for market (a) Benefits reimbursable by all reinsurers for such participants entering into agreements, insurance product cannot exceed the Proposed rule 3a69–1 would clarify contracts, or transactions that might be claims or losses paid by the cedant. An omitted because these agreements, that state or Federally regulated agreement, contract, or transaction insurance products provided by state or contracts, or transactions would be would have to meet all of these criteria regulated as swaps and not as insurance Federally regulated insurance in order to qualify as an insurance companies, or by certain reinsurers, products. Similarly, to the extent that product that falls outside of the swap the criteria under proposed rule 3a69– provided such insurance products meet and security-based swap definitions certain other requirements, would not 1 lead to the inadvertent inclusion of pursuant to the proposed rules. certain types of swaps or security-based be swaps. Specifically, proposed rule The SEC is concerned that, without 3a69–1 would define the term ‘‘swap’’ so swaps, these inclusions could lead to further clarification, market participants costs for market participants entering that it would not include an agreement, may be uncertain about whether an contract, or transaction that, by its terms into agreements, contracts, or agreement, contract, or transaction is an transactions that are regulated as or by law, as a condition of performance insurance product that is not subject to on the agreement, contract, or insurance products and not as swaps or regulation as a swap or security-based security-based swaps. The SEC has transaction: (i) Requires the beneficiary swap. Therefore, proposed rule 3a69–1 of the agreement, contract, or requested comment on whether the would eliminate the potential criteria under proposed rule 3a69–1 transaction to have an insurable interest uncertainty of what constitutes an that is the subject of the agreement, inadvertently omits certain types of insurance product by setting forth clear insurance products or includes certain contract, or transaction and thereby and objective criteria for meeting the carry the risk of loss with respect to that types of swaps in order to minimize definition of an insurance product that these potential costs. The SEC believes interest continuously throughout the is not subject to regulation as a swap or duration of the agreement, contract, or that, pursuant to comments on the security-based swap. proposed criteria, any subsequent transaction; (ii) requires that loss to The SEC requests comments, data, modifications the Commissions make to occur and to be proved, and that any and estimates regarding the benefits proposed rule 3a69–1 would payment or indemnification therefor be associated with proposed rule 3a69–1. significantly curtail the potential for limited to the value of the insurable The SEC also requests comments, data, inadvertent omissions or inclusions. interest; (iii) is not traded, separately and estimates regarding any additional The SEC requests comment as to the from the insured interest, on an benefits that could be realized with costs that determinations under organized market or over-the-counter; proposed rule 3a69–1. and (iv) with respect to financial proposed rule 3a69–1 would impose on guarantee insurance only, in the event (b) Costs market participants, as well as estimates of payment default or insolvency of the In complying with proposed rule and empirical data to support these obligor, any acceleration of payments 3a69–1, a market participant will need costs. In addition, the SEC requests under the policy is at the sole discretion to analyze its agreements, contracts, and comment on any other costs associated of the insurer. Proposed rule 3a69–1 transactions that are insurance products with proposed rule 3a69–1 that have not also would require that the agreement, under the provisions of the proposed been considered, and what the extent of contract, or transaction: (i) Be provided rule to determine whether such those costs would be. by a company that is organized as an insurance products fall outside the 8. Proposed Rule 3a69–2 insurance company whose primary and definitions of the terms ‘‘swaps’’ and (a) Benefits predominant business activity is the ‘‘security-based swap.’’ This analysis writing of insurance or the reinsuring of will have to be performed upon entering Proposed rule 3a69–2 provides that the term ‘‘swap’’ has the meaning set 378 See discussion supra part IV.B. 379 15 U.S.C. 78c(a)(16). forth in section 3(a)(69) of the Exchange

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Act and that, without limiting the concerned that application of the or additional reporting or business definition of ‘‘swap’’ in section 3(a)(69) definition, without further clarification, conduct obligations for certain swaps, of the Exchange Act, an agreement, may cause uncertainty about whether these inclusions and additional contract, or transaction that is a cross- certain agreements, contracts, or requirements could lead to costs for currency swap, currency option, foreign transactions would be swaps. Proposed market participants entering into currency option, foreign exchange rule 3a69–2 would eliminate the agreements, contracts, or transactions to option, foreign exchange rate option, potential uncertainty of the treatment of which proposed rule 3a69–2 applies. foreign exchange forward, foreign such agreements, contracts, and The SEC has requested comment on exchange swap, FRA, or NDF would fall transactions as swaps by setting forth whether the criteria under proposed within the meaning of the term ‘‘swap’’, clear and objective criteria for certain rule 3a69–2 provide sufficient clarity unless such agreement, contract, or agreements, contracts, and transactions regarding the specific products included transaction is otherwise excluded by without limiting the scope of the in the rule and whether the criteria section 1a(47)(B) of the CEA.380 statutory definition of the term ‘‘swap.’’ should clarify the applicability of Proposed rule 3a69–2 also provides that Proposed rule 3a69–2 also would reporting and business conduct a foreign exchange forward or a foreign eliminate the potential uncertainty requirements in order to minimize these exchange swap shall not be considered regarding the reporting and business potential costs. The SEC believes that, a swap if the Secretary of the Treasury conduct requirements applicable to pursuant to comments on the proposed makes a determination described in foreign exchange forwards and foreign criteria, any subsequent modifications section 1a(47)(E)(i) of the CEA381 and exchange swaps by specifying the the Commissions make to proposed rule that, notwithstanding such provision, provisions for which compliance is 3a69–2 would significantly curtail the certain provisions of the CEA will apply required. potential for inadvertent inclusions or to such foreign exchange forward or (b) Costs additional reporting or business conduct foreign exchange swap, namely the requirements. reporting requirements in section 4r of In complying with proposed rule The SEC requests comment as to the the CEA,382 and regulations thereunder, 3a69–2, a market participant will need costs that determinations under and and, in the case of a swap dealer or to analyze its agreements, contracts, and compliance with proposed rule 3a69–2 major swap participant that is a party to transactions under the provisions of the would impose on market participants, a foreign exchange swap or foreign proposed rule to determine whether as well as estimates and empirical data exchange forward, the business conduct such agreements, contracts, and to support these costs. In addition, the 383 transactions are swaps according to the standards in section 4s of the CEA, SEC requests comment on any other criteria set forth in the proposed rule. and regulations thereunder. In addition, costs associated with proposed rule This analysis will have to be performed proposed rule 3a69–2 provides that the 3a69–2 that have not been considered, upon entering into the agreement, terms ‘‘foreign exchange forward’’ and and what the extent of those costs contract, or transaction to ensure ‘‘foreign exchange swap’’ have the would be. meanings set forth in the CEA and that compliance with proposed rule 3a69–2. a currency swap, cross-currency swap, The SEC notes, however, that any such 9. Proposed Rule 3a69–3 currency option, foreign currency costs would be in lieu of the costs of (a) Benefits option, foreign exchange option, foreign doing the same analysis absent Proposed rule 3a69–3 would provide exchange rate option, and NDF is not a proposed rule 3a69–2, which the SEC that the term ‘‘security-based swap foreign exchange forward or foreign believes would be more difficult and agreement’’ has the meaning set forth in exchange swap for purposes of sections lead to greater uncertainty than if the section 3(a)(78) of the Exchange Act.385 1a(24) and 1a(25) of the CEA.384 analysis were done under proposed rule Proposed rule 3a69–2 would restate 3a69–2. Proposed rule 3a69–3 also would portions of the statutory definition of Providing an objective rule to market provide that registered SDRs, swap ‘‘swap’’ and enumerate certain types of participants to determine whether dealers, major swap participants, agreements, contracts, and transactions certain types of agreements, contracts, security-based swap dealers, and major that are swaps in order to consolidate or transactions are swaps could alleviate security-based swap participants are not parts of the definition and related additional costs to persons of inquiring required to maintain additional books with the Commissions about whether interpretations for ease of reference. and records, or, in the case of registered such agreements, contracts, or Proposed rule 3a69–2 would also SDRs, collect and maintain additional transactions are swaps, as well as costs specify certain reporting and business information regarding, SBSAs other of obtaining an opinion of counsel conduct requirements that are than the books and records (and, in the regarding a particular agreement, applicable to foreign exchange forwards case of registered SDRs, information) contract, or transaction. In addition, an and foreign exchange swaps, and required to be kept (or collected) and objective rule regarding reporting and provide definitions for such terms. maintained regarding swaps pursuant to Because the statutory definition of the business conduct requirements could the CEA and the CFTC rules and term ‘‘swap,’’ though broadly worded alleviate additional costs to persons of regulations promulgated thereunder. and specific regarding the status of inquiring with the Commissions about Because, as noted above, security- certain agreements, contracts, and which reporting and business conduct based swap agreements are subject the transactions, does not explicitly requirements are applicable to foreign CFTC’s regulatory and enforcement mention every agreement, contract, or exchange forwards and foreign exchange authority and the SEC’s antifraud and transaction that would fall within the swaps, and could reduce the costs of certain other authority, the definition, the Commissions are obtaining an opinion of counsel Commissions are concerned that, regarding a particular foreign exchange without further clarification, there may 380 15 U.S.C. 78c(a)(69); 7 U.S.C. 1a(47)(B). forward or foreign exchange swap. be uncertainty as to the scope of 381 7 U.S.C. 1a(47)(E)(i). To the extent that the criteria under transactions that fall within the 382 7 U.S.C. 6r. proposed rule 3a69–2 lead to the definition of the term ‘‘security-based 383 7 U.S.C. 6s. inadvertent inclusion of certain types of 384 7 U.S.C. 1a(24) and 1a(25). agreements, contracts, and transactions 385 15 U.S.C. 78c(a)(78).

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swap agreement.’’ Proposed rule 3a69– any other costs associated with impose a burden on competition not 3(c) would define the term ‘‘security- proposed rule 3a69–3 that have not been necessary or appropriate in furtherance based swap agreement’’ in the same considered, and what the extent of those of the purposes of the Exchange Act.388 manner as the term is defined in the costs would be. 1. Proposed Rule 3a68–1a Exchange Act. This rule, coupled with Request for Comment guidance regarding security-based swap The SEC believes that proposed rule agreements provided by the 153. The SEC has considered the costs 3a68–1a would create an efficient Commissions, further clarifies whether a and benefits of the proposed rules and process for a market participant to swap is a security-based swap clarifications regarding the Product determine whether an index CDS is a agreement and could eliminate the need Definitions, the regulation of mixed swap or a security-based swap by setting to obtain an opinion of counsel swaps, and the books and records forth clear methods and guidelines, regarding a particular security-based requirements for SBSAs. The SEC is thereby reducing potential uncertainty. swap agreement. sensitive to these costs and benefits, and Because swaps and security-based Section 712(d)(2)(B) and (C) of the encourages commenters to discuss any swaps both are regulated pursuant to the Dodd-Frank Act requires the additional costs or benefits beyond Dodd-Frank Act by either the CFTC or Commissions to engage in joint those discussed here, as well as any the SEC, and an index CDS would be rulemaking regarding books and records reductions in costs. In particular, the either a swap or a security-based swap, requirements for SBSAs. Providing that SEC requests comment on the potential regardless of whether the SEC proposed persons required to keep and maintain costs, as well as any potential benefits, rule 3a68–1a, the SEC believes that the books and records regarding, or collect resulting from the proposed rules and proposed rule would not have an and maintain data regarding, swaps are clarifications regarding the Product adverse effect on capital formation. not required to keep or maintain Definitions, the regulation of mixed Similarly, the SEC believes that additional books and records regarding, swaps, and the books and records proposed rule 3a68–1a would not or collect and maintain additional data requirements for SBSAs for issuers, impose any significant burdens on regarding, SBSAs alleviates any investors, broker-dealers, security-based competition because an index CDS additional books and records or swap dealers, major security-based swap would be regulated as a swap or information costs to such persons. participants, persons associated with a security-based swap regardless of security-based swap dealer or a major (b) Costs whether the SEC proposed rule 3a68–1a. security-based swap participant, other The proposed rule is a means of The SEC believes that, because security-based swap industry providing greater clarity for market proposed rule 3a69–3 includes within professionals, regulators, and other participants on whether a specific index the definition of SBSA no agreements, market participants. The SEC also seeks CDS is a swap or a security-based swap. contracts, or transactions that would not comment on the accuracy of any of the be an SBSA in the absence of the benefits identified and also welcomes 2. Proposed Rule 3a68–1b proposed rule, proposed rule 3a69–3 comment on any of the costs identified The SEC believes that proposed rule would impose no costs other than those here. In addition, the SEC encourages 3a68–1b would create an efficient that are required with respect to swaps commenters to identify, discuss, process for a market participant to in the absence of proposed rule 3a69– analyze, and supply relevant data, determine whether an index CDS is a 3. In addition, the SEC believes that, information, or statistics regarding any swap or a security-based swap by setting because proposed rule 3a69–3 imposes such costs or benefits, including forth clear methods and guidelines, no requirements with respect to SBSAs estimates and views regarding these thereby reducing potential uncertainty. other than those that exist for swaps, costs and benefits for particular types of Because swaps and security-based proposed rule 3a69–3 would impose no market participants, as well as any other swaps both are regulated pursuant to the costs other than those that are required costs or benefits that may result from Dodd-Frank Act by either the CFTC or with respect to swaps in the absence of the adoption of the proposed rules, as the SEC, and an index CDS would be proposed rule 3a69–3. well as the clarifications provided. either a swap or a security-based swap, To the extent that the criteria under regardless of whether the SEC proposed C. Consideration of Burden on proposed rule 3a69–3 inadvertently lead rule 3a68–1b, the SEC believes that the Competition, and Promotion of to additional requirements with respect proposed rule would not have an Efficiency, Competition, and Capital to SBSAs, these additional requirements adverse effect on capital formation. could lead to costs for market Formation Similarly, the SEC believes that participants entering into the SBSAs to Section 3(f) of the Exchange Act 386 proposed rule 3a68–1b would not which proposed rule 3a69–3 applies. requires the SEC, whenever it engages in impose any significant burdens on The SEC has requested comment rulemaking and is required to consider competition because an index CDS regarding whether the requirements or determine whether an action is would be regulated as a swap or under proposed rule 3a69–3 are necessary or appropriate in the public security-based swap regardless of sufficient. The SEC believes that, interest, to consider whether the action whether the SEC proposed rule 3a68– pursuant to comments on the proposed would promote efficiency, competition, 1b. The proposed rule is a means of rule, any subsequent modifications the and capital formation. In addition, providing greater clarity for market Commissions make to proposed rule section 23(a)(2) of the Exchange Act 387 participants on whether a specific index 3a69–3 would significantly curtail the requires the SEC, when adopting rules CDS is a swap or a security-based swap. potential for inadvertent additional under the Exchange Act, to consider the requirements. impact such rules would have on 3. Proposed Rule 3a68–2 The SEC requests comment as to the competition. Section 23(a)(2) of the The SEC believes that proposed rule costs that compliance with proposed Exchange Act also prohibits the SEC 3a68–2 would create an efficient process rule 3a69–3 would impose on market from adopting any rule that would for a market participant to request the participants, as well as estimates and Commissions to determine whether an empirical data to support these costs. In 386 15 U.S.C. 78c(f). addition, the SEC requests comment on 387 15 U.S.C. 78w(a)(2). 388 Id.

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agreement, contract, or transaction (or because a Title VII instrument on a the SEC believes that the proposed rule class thereof) is a swap, security-based security index would be regulated as a would not have an adverse effect on swap, or both (i.e., a mixed swap) by swap or security-based swap regardless capital formation. setting forth clear methods and of whether the SEC proposed rule 3a68– Similarly, the SEC believes that guidelines, thereby reducing potential 3. The proposed rule is a means of proposed rule 3a69–1 would not impose uncertainty. Because swaps, security- providing greater clarity for market any significant burdens on competition based swaps, and mixed swaps all are participants regarding whether a because insurance products and regulated pursuant to the Dodd-Frank specific Title VII instrument on a insurance companies currently are Act by either the CFTC, the SEC, or both security index is a swap or a security- regulated pursuant to state insurance the CFTC and SEC, and because market based swap. law and would continue to be so participants still would need to regardless of whether the SEC proposed 5. Proposed Rule 3a68–4 determine whether an agreement, rule 3a69–1. The proposed rule is a contract, or transaction (or class thereof) The SEC believes that proposed rule means of providing greater clarity for is a swap, security-based swap, or 3a68–4 would create an efficient process market participants on whether a mixed swap regardless of whether the for a market participant to request specific agreement, contract, or SEC proposed rule 3a68–2, the SEC alternative regulatory treatment transaction is an insurance product and believes that the proposed rule would regarding a specified, or specified class is not a swap. of, mixed swap by setting forth clear not have an adverse effect on capital 7. Proposed Rule 3a69–2 formation. methods and guidelines, thereby In addition, the SEC believes the reducing potential uncertainty and dual The SEC believes that proposed rule proposed rule will provide the regulatory requirements. Because a 3a69–2 would create an efficient process opportunity for financial innovation by mixed swap is regulated pursuant to the for a market participant to determine providing a flexible structure that will Dodd-Frank Act, and, absent proposed whether an agreement, contract, or allow for the development of new rule 3a68–4, persons that desire or transaction is a swap, a foreign products, which may promote capital intend to list, trade, or clear a mixed exchange forward, or a foreign exchange formation. swap would be required to comply with swap or is subject to certain reporting Similarly, the SEC believes that all the statutory provisions in Title VII, and business conduct requirements, by proposed rule 3a68–2 would not impose including all the rules and regulations setting forth clear methods and any significant burdens on competition thereunder, that are applicable to both guidelines, thereby reducing potential because, to the extent an agreement, swaps and security-based swaps, the uncertainty. Because agreements, contract, or transaction (or class thereof) SEC believes that the proposed rule contracts, and transactions that are is a swap, security-based swap, or both would not have an adverse effect on swaps, foreign exchange forwards, or (i.e., a mixed swap), that agreement, capital formation. Proposed rule 3a68– foreign exchange swaps under proposed contract, or transaction (or class thereof) 4 would permit such persons to request rule 3a69–2 would be swaps, foreign would be regulated as a swap, security- a joint order permitting themto comply exchange forwards, or foreign exchange based swap, or mixed swap regardless of with an alternative regulatory regime swaps and, in the case of foreign whether the SEC proposed rule 3a68–2. that would address the potential dual exchange forwards and foreign exchange The proposed rule is a means of regulatory requirements applicable to swaps, would be subject to reporting providing a process for market transactions in mixed swaps under Title and business conduct requirements participants to request clarity regarding VII. under the CEA, in the absence of whether a specific agreement, contract, Similarly, the SEC believes that proposed rule 3a69–2, the SEC believes or transaction (or class thereof) is a proposed rule 3a68–4 would not impose that the proposed rule would not have swap, security-based swap, or mixed any significant burdens on competition an adverse effect on capital formation. swap. because to the extent an agreement, Similarly, the SEC believes that contract, or transaction (or class thereof) proposed rule 3a69–2 would not impose 4. Proposed Rule 3a68–3 is a mixed swap, transactions in that any significant burdens on competition The SEC believes that proposed rule mixed swap would be subject to all of because swaps, foreign exchange swaps, 3a68–3 would create an efficient process the statutory provisions of Title VII, and foreign exchange forwards continue for a market participant to determine including all the rules and regulations to be regulated as such regardless of whether a security index underlying a thereunder, that are applicable to both whether the SEC proposed rule 3a69–2. Title VII instrument is narrow-based or swaps and security-based swaps, if the The proposed rule is a means of broad-based, and therefore whether the Commissions were not to provide providing greater clarity for market Title VII instrument is a swap or a alternative regulatory treatment participants on whether a specific security-based swap, by setting forth pursuant to proposed rule 3a68–4. agreement, contract, or transaction is a clear methods and guidelines, thereby swap, foreign exchange forward, or 6. Proposed Rule 3a69–1 reducing potential uncertainty. Because foreign exchange swap and whether swaps and security-based swaps both The SEC believes that proposed rule certain reporting and business conduct are regulated pursuant to the Dodd- 3a69–1 would create an efficient process requirements apply in the case of Frank Act by either the CFTC or the for a market participant to determine foreign exchange forwards and foreign SEC, and a Title VII instrument on a whether an agreement, contract, or exchange swaps. security index would be either a swap transaction is an insurance product and or a security-based swap regardless of is not a swap by setting forth clear 8. Proposed Rule 3a69–3 whether the SEC proposed rule 3a68–3, methods and guidelines, thereby The SEC believes that proposed rule the SEC believes that the proposed rule reducing potential uncertainty. Because 3a69–3 would create an efficient process would not have an adverse effect on insurance products and insurance for registered SDRs, SDs, MSPs, capital formation. companies currently are regulated security-based swap dealers, and major Similarly, the SEC believes that pursuant to state insurance law, and security-based swap participants to proposed rule 3a68–3 would not impose would continue to be so regardless of determine the books and records any significant burdens on competition whether the SEC proposed rule 3a69–1, requirements for SBSAs by setting forth

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clear guidelines, thereby reducing If a rule is ‘‘major,’’ its effectiveness will person (other than a natural person) that potential uncertainty. Proposed rule generally be delayed for 60 days is not a small business or small 3a69–3(c) also would define the term pending Congressional review. organization.395 Under the standards ‘‘security-based swap agreement’’ in the The SEC requests comment on the adopted by the Small Business same manner as the term is defined in potential impact of the proposed rules Administration, small entities in the the Exchange Act. Because SBSAs are and interpretive guidance under the finance and insurance industry include swaps, they are subject to certain books Exchange Act on the economy on an the following: (i) For entities in credit and records requirements under the annual basis, on the costs or prices for intermediation and related activities, CEA (and CFTC rules and regulations consumers or individual industries, and entities with $175 million or less in promulgated thereunder) that are on competition, investment, or assets or, for non-depository credit applicable to swaps and would continue innovation. Commenters are requested intermediation and certain other to be so regardless of whether the SEC to provide empirical data and other activities, $7 million or less in annual proposed rule 3a69–3. The SEC believes factual support for their view to the receipts; (ii) for entities in financial that the proposed rule would thus not extent possible. investments and related activities, have an adverse effect on capital E. Initial Regulatory Flexibility Act entities with $7 million or less in formation. Certification annual receipts; (iii) for insurance Similarly, the SEC believes that carriers and entities in related activities, proposed rule 3a69–3 would not impose The RFA requires Federal agencies, in entities with $7 million or less in any significant burdens on competition promulgating rules, to consider the annual receipts; and (iv) for funds, because SBSAs would be regulated as impact of those rules on small entities. trusts, and other financial vehicles, swaps regardless of whether the SEC Section 603(a) 389 of the Administrative entities with $7 million or less in proposed rule 3a69–3. The proposed Procedure Act,390 as amended by the annual receipts.396 rule is a means of providing greater RFA, generally requires the SEC to Based on the SEC’s existing clarity for market participants regarding undertake a regulatory flexibility information about the swap markets, the SBSAs, including the books and records analysis of all proposed rules, or SEC believes that the swap markets, requirements for SBSAs. proposed rule amendments, to while broad in scope, are largely determine the impact of such dominated by entities such as those that Request for Comment rulemaking on ‘‘small entities.’’ 391 would be covered by the ‘‘swap dealer,’’ 154. The SEC requests comment on Section 605(b) of the RFA states that ‘‘security-based swap dealer,’’ ‘‘major the possible effects of the proposed this requirement shall not apply to any swap participant,’’ and ‘‘major security- rules under the Exchange Act regarding proposed rule or proposed rule based swap participant’’ definitions.397 efficiency, competition, and capital amendment, that, if adopted, would not The SEC believes that such entities formation. The SEC requests that have a significant economic impact on exceed the thresholds defining ‘‘small commenters provide views and a substantial number of small entities’’ set out above. Moreover, supporting information regarding any entities.392 although it is possible that other persons such effects. The SEC notes that such For purposes of SEC rulemaking in may engage in swap and security-based effects are difficult to quantify. The SEC connection with the RFA, a small entity swap transactions, the SEC does not seeks comment on possible anti- includes: (i) When used with reference believe that any of these entities would competitive effects of the proposed rules to an ‘‘issuer’’ or a ‘‘person,’’ other than be ‘‘small entities’’ as defined in rule 0– under the Exchange Act not already an investment company, an ‘‘issuer’’ or 10 under the Exchange Act.398 Feedback identified. The SEC also requests ‘‘person’’ that, on the last day of its most from industry participants about the comment regarding the competitive recent fiscal year, had total assets of $5 swap markets indicates that only effects of pursuing alternative regulatory million or less,393 or (ii) a broker-dealer persons or entities with assets approaches that are consistent with with total capital (net worth plus significantly in excess of $5 million (or section 712(a) and 712(d) of the Dodd- subordinated liabilities) of less than with annual receipts significantly in Frank Act. In addition, the SEC requests $500,000 on the date in the prior fiscal excess of $7 million) participate in the comment on how the other provisions of year as of which its audited financial swap markets. the Dodd-Frank Act for which SEC statements were prepared pursuant to To the extent that a small number of rulemaking is required will interact rule 17a–5(d) under the Exchange transactions did have a counterparty with and influence the competitive Act,394 or, if not required to file such that was defined as a ‘‘small entity’’ effects of the proposed rules and statements, a broker-dealer with total under SEC rule 0–10, the SEC believes clarifications under the Exchange Act. capital (net worth plus subordinated it is unlikely that the proposed rules liabilities) of less than $500,000 on the and clarifications regarding the Product D. Consideration of Impact on the last day of the preceding fiscal year (or Definitions, the regulation of mixed Economy in the time that it has been in business, swaps, and the books and records For purposes of SBREFA the SEC if shorter); and is not affiliated with any requirements for SBSAs would have a must advise the OMB as to whether the significant economic impact on that proposed rules and interpretive 389 5 U.S.C. 603(a). guidance under the Exchange Act 390 5 U.S.C. 551 et seq. 395 See 17 CFR 240.0–10(c). constitute ‘‘major’’ rules. Under 391 Although section 601(b) of the RFA defines 396 See 13 CFR 121.201. SBREFA, a rule is considered ‘‘major’’ the term ‘‘small entity,’’ the statute permits agencies 397 See, e.g., CEA section 1a(49), 7 U.S.C. 1a(49) to formulate their own definitions. The SEC has where, if adopted, it results or is likely (defining ‘‘swap dealer’’); section 3(a)(71)(A) of the adopted definitions for the term small entity for the Exchange Act, 15 U.S.C. 78c(a)(71)(A) (defining to result in: (1) An annual effect on the purposes of SEC rulemaking in accordance with the ‘‘security-based swap dealer’’); CEA section 1a(33), economy of $100 million or more (either RFA. Those definitions, as relevant to this proposed 7 U.S.C. 1a(33) (defining ‘‘major swap participant’’); in the form of an increase or a decrease); rulemaking, are set forth in rule 0–10, 17 CFR section 3(a)(67)(A) of the Exchange Act, 15 U.S.C. 240.0–10. See Statement of Management on Internal (2) a major increase in costs or prices for 78c(a)(67)(A) (defining ‘‘major security-based swap Accounting Control, 47 FR 5215, Feb. 4, 1982. participant’’). Such entities also would include consumers or individual industries; or 392 See 5 U.S.C. 605(b). commercial entities that may use swaps to hedge or (3) significant adverse effect on 393 See 17 CFR 240.0–10(a). mitigate commercial risk. competition, investment or innovation. 394 See 17 CFR 240.17a–5(d). 398 See 17 CFR 240.0–10(a).

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entity. The proposed rules and PART 1—GENERAL REGULATIONS exchange forward has the meaning set clarifications simply would address UNDER THE COMMODITY EXCHANGE forth in section 1a(24) of the Commodity whether certain products fall within the ACT Exchange Act. swap definition, address whether (iv) For purposes of section 1a(47)(E) certain products are swaps, security- 1. The authority citation for part 1 is of the Commodity Exchange Act and based swaps, SBSAs, or mixed swaps, revised to read as follows: this § 1.3(xxx), the term foreign provide a process for requesting Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, exchange swap has the meaning set interpretations of whether agreements, 6c, 6e, 6f, 6g, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, forth in section 1a(25) of the Commodity contracts, and transactions are swaps, 6p, 6r, 7, 7a, 7b, 8, 9, 10, 12, 12a, 12c, 13a, Exchange Act. security-based swaps, and mixed swaps, 13a–1, 16, 16a, 21, 23, and 24. (v) For purposes of sections 1a(24) provide a process for requesting 2. Amend § 1.3 by adding paragraphs and 1a(25) of the Commodity Exchange alternative regulatory treatment for (xxx), (yyy), (zzz), and (aaaa) to read as Act and this § 1.3(xxx), the following mixed swaps, and establish books and follows: transactions are not foreign exchange forwards or foreign exchange swaps: records requirements for SBSAs, which § 1.3 Definitions. are applicable to all entities. (A) A currency swap or a cross- * * * * * currency swap; For the foregoing reasons, the SEC (xxx) Swap. (1) In general. The term (B) A currency option, foreign certifies that the proposed rules and swap has the meaning set forth in currency option, foreign exchange clarifications regarding the Product section 1a(47) of the Commodity option, or foreign exchange rate option; Definitions, the regulation of mixed Exchange Act. and swaps, and the books and records (2) Inclusion of particular products. (C) A non-deliverable forward requirements for SBSAs would not have (i) The term swap includes, without involving foreign exchange. a significant economic impact on a limiting the meaning set forth in section (4) Insurance. The term swap as used substantial number of small entities for 1a(47) of the Commodity Exchange Act, in section 1a(47) of the Commodity purposes of the RFA. The SEC the following agreements, contracts, and Exchange Act does not include an encourages written comments regarding transactions: agreement, contract, or transaction that: this certification. The SEC requests that (A) A cross-currency swap; (i) By its terms or by law, as a commenters describe the nature of any (B) A currency option, foreign condition of performance on the impact on small entities and provide currency option, foreign exchange agreement, contract, or transaction: empirical data to support the extent of option and foreign exchange rate option; (A) Requires the beneficiary of the the impact. (C) A foreign exchange forward; agreement, contract, or transaction to (D) A foreign exchange swap; have an insurable interest that is the X. Statutory Basis and Rule Text (E) A forward rate agreement; and subject of the agreement, contract, or List of Subjects (F) A non-deliverable forward transaction and thereby carry the risk of involving foreign exchange. loss with respect to that interest 17 CFR Part 1 (ii) The term swap does not include continuously throughout the duration of an agreement, contract, or transaction the agreement, contract, or transaction; Definitions, General swap provisions. described in paragraph (xxx)(2)(i) of this (B) Requires that loss to occur and to 17 CFR Part 240 section that is otherwise excluded by be proved, and that any payment or section 1a(47)(B) of the Commodity indemnification therefor be limited to Reporting and recordkeeping Exchange Act. the value of the insurable interest; requirements, Securities. (3) Foreign exchange forwards and (C) Is not traded, separately from the foreign exchange swaps. insured interest, on an organized market Commodity Futures Trading Notwithstanding paragraph (xxx)(2) of or over-the-counter; and Commission this section: (D) With respect to financial guaranty Pursuant to the Commodity Exchange (i) A foreign exchange forward or a insurance only, in the event of payment Act, 7 U.S.C. 1 et seq., as amended by foreign exchange swap shall not be default or insolvency of the obligor, any Title VII of the Dodd-Frank Wall Street considered a swap if the Secretary of the acceleration of payments under the Reform and Consumer Protection Act, Treasury makes a determination policy is at the sole discretion of the Public Law 111–203, 124 Stat. 1376 described in section 1a(47)(E)(i) of the insurer; and (ii) Is provided: (2010) (‘‘Dodd-Frank Act’’), and sections Commodity Exchange Act. (A) By a company that is organized as 712(a)(8), 712(d), 721(a), 721(b), 721(c), (ii) Notwithstanding paragraph (xxx)(3)(i) of this section: an insurance company whose primary 722(d), and 725(g) of the Dodd-Frank (A) The reporting requirements set and predominant business activity is the Act, the CFTC is proposing to adopt forth in section 4r of the Commodity writing of insurance or the reinsuring of rules 1.3(xxx) through 1.3(aaaa) and 1.6 Exchange Act and regulations risks underwritten by insurance through 1.9 under the Commodity promulgated thereunder shall apply to a companies and that is subject to Exchange Act. foreign exchange forward or foreign supervision by the insurance Text of Proposed Rules exchange swap; and commissioner (or similar official or (B) The business conduct standards agency) of any State or by the United For the reasons stated in the set forth in section 4s of the Commodity States or an agency or instrumentality preamble, the CFTC is proposing to Exchange Act and regulations thereof, and such agreement, contract, further amend Title 17, Chapter I, of the promulgated thereunder shall apply to a or transaction is regulated as insurance Code of Federal Regulations, as swap dealer or major swap participant under the laws of such State or of the amended at 75 FR 63732, October 18, that is a party to a foreign exchange United States; 2010, 75 FR 65586, Oct. 26, 2010, 75 FR forward or foreign exchange swap. (B) By the United States or any of its 77576, Dec. 13, 2010, 75 FR 80174, Dec. (iii) For purposes of section 1a(47)(E) agencies or instrumentalities, or 21, 2010, and 76 FR 722, Jan. 6, 2011, of the Commodity Exchange Act and pursuant to a statutorily authorized as follows: this § 1.3(xxx), the term foreign program thereof; or

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(C) In the case of reinsurance only, by provided in paragraphs (xxx)(6)(i) security-based swaps traded on a a person located outside the United through (xxx)(6)(iii) of this section. national securities exchange or security- States to an insurance company that is (v) An agreement, contract, or based swap execution facility, a security eligible under paragraph (xxx)(4)(ii) of transaction that has been willfully index underlying such security-based this section, provided that: structured to evade as provided in swaps shall be considered a narrow- (1) Such person is not prohibited by paragraphs (xxx)(6)(i) through based security index if: any law of any State or of the United (xxx)(6)(iii) of this section shall be (i)(A) A security-based swap on the States from offering such agreement, considered in determining whether a index is traded on a national securities contract, or transaction to such an person is a swap dealer or major swap exchange or security-based swap insurance company; participant. execution facility for at least 30 days as (2) The product to be reinsured meets (vi) Notwithstanding the foregoing, no a security-based swap on a narrow- the requirements under paragraph agreement, contract, or transaction based security index; or (xxx)(4)(i) of this section to be structured as a security (including a (B) Such index was a narrow-based insurance; and security-based swap) under the security index during every trading day (3) The total amount reimbursable by securities laws (as defined in section of the six full calendar months all reinsurers for such insurance 3(a)(47) of the Securities Exchange Act preceding a date no earlier than 30 days product cannot exceed the claims or of 1934 (15 U.S.C. 78c(a)(47))) shall be prior to the commencement of trading of losses paid by the cedant. deemed a swap pursuant to this a security-based swap on such index on (5) State. For purposes of paragraph § 1.3(xxx)(6) or shall be considered for a market described in paragraph (xxx)(4) of this section, the term State purposes of paragraph (xxx)(6)(v) of this (yyy)(3)(i)(A) of this section; and means any state of the United States, the section. District of Columbia, Puerto Rico, the (ii) The index has been a security (yyy) Narrow-based security index as index that is not a narrow-based U.S. Virgin Islands, or any other used in the definition of ‘‘security-based possession of the United States. security index for no more than 45 swap.’’ business days over three consecutive (6) Anti-evasion. (i) An agreement, (1) In general. Except as otherwise calendar months. contract, or transaction that is willfully provided in paragraphs (zzz) and (aaaa) (4) Grace period. (i) Solely with structured to evade any provision of of this section, for purposes of section respect to a swap that is traded on or Subtitle A of the Wall Street 1a(42) of the Commodity Exchange Act, subject to the rules of a designated Transparency and Accountability Act of the term narrow-based security index contract market, swap execution facility, 2010, including any amendments made has the meaning set forth in section or foreign board of trade, an index that to the Commodity Exchange Act thereby 1a(35) of the Commodity Exchange Act, becomes a narrow-based security index (Subtitle A), shall be deemed a swap for and the rules, regulations and orders of under paragraph (yyy)(2) of this section purposes of Subtitle A and the rules, the Commission thereunder. regulations, and orders of the (2) Tolerance period for swaps traded solely because it was a narrow-based Commission promulgated thereunder. on designated contract markets, swap security index for more than 45 business (ii) An interest rate swap or currency execution facilities, and foreign boards days over three consecutive calendar swap, including but not limited to a of trade. Notwithstanding paragraph months shall not be a narrow-based transaction identified in paragraph (yyy)(1) of this section, solely for security index for the following three (xxx)(3)(v) of this section, that is purposes of swaps traded on or subject calendar months. willfully structured as a foreign to the rules of a designated contract (ii) Solely with respect to a security- exchange forward or foreign exchange market, swap execution facility, or based swap that is traded on a national swap to evade any provision of Subtitle foreign board of trade, a security index securities exchange or security-based A shall be deemed a swap for purposes underlying such swaps shall not be swap execution facility, an index that of Subtitle A and the rules, regulations, considered a narrow-based security becomes a security index that is not a and orders of the Commission index if: narrow-based security index under promulgated thereunder. (i)(A) A swap on the index is traded paragraph (yyy)(3) of this section solely (iii) An agreement, contract, or on or subject to the rules of a designated because it was not a narrow-based transaction of a bank that is not under contract market, swap execution facility, security index for more than 45 business the regulatory jurisdiction of an or foreign board of trade for at least 30 days over three consecutive calendar appropriate Federal banking agency (as days as a swap on an index that was not months shall be a narrow-based security defined in section 1a(2) of the a narrow-based security index; or index for the following three calendar Commodity Exchange Act), where the (B) Such index was not a narrow- months. agreement, contract, or transaction is based security index during every (zzz) Meaning of ‘‘issuers of securities willfully structured as an identified trading day of the six full calendar in a narrow-based security index’’ as banking product (as defined in section months preceding a date no earlier than used in the definition of ‘‘security-based 402 of the Legal Certainty for Bank 30 days prior to the commencement of swap’’ as applied to index credit default Products Act of 2000) to evade the trading of a swap on such index on a swaps. provisions of the Commodity Exchange market described in paragraph (1) Notwithstanding paragraph Act, shall be deemed a swap for (yyy)(2)(i)(A) of this section; and (yyy)(1) of this section, and solely for purposes of the Commodity Exchange (ii) The index has been a narrow- purposes of determining whether a Act and the rules, regulations, and based security index for no more than credit default swap is a security-based orders of the Commission promulgated 45 business days over three consecutive swap under the definition of ‘‘security- thereunder. calendar months. based swap’’ in section 3(a)(68)(A)(ii)(III) (iv) The form, label, and written (3) Tolerance period for security- of the Securities Exchange Act of 1934 documentation of an agreement, based swaps traded on national (15 U.S.C. 78c(a)(68)(A)(ii)(III), as contract, or transaction shall not be securities exchanges or security-based incorporated in section 1a(42) of the dispositive in determining whether the swap execution facilities. Commodity Exchange Act, the term agreement, contract, or transaction has Notwithstanding paragraph (yyy)(1) of issuers of securities in a narrow-based been willfully structured to evade as this section, solely for purposes of security index means issuers of

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securities identified in an index in (6) The reference entity is a Securities Exchange Act of 1934 (15 which: government of a foreign country or a U.S.C. 78c(a)(29))), the remaining (i)(A) There are 9 or fewer non- political subdivision of a foreign portion of the index would be a narrow- affiliated issuers of securities that are country; based security index under paragraph reference entities in the index, provided (7) If the reference entity is an issuer (zzz)(1)(i) of this section. that an issuer of securities shall not be of asset-backed securities as defined in (2) Paragraph (zzz)(1)(i)(D) of this deemed a reference entity for purposes section 3(a)(77) of the Securities section will not apply with respect to a of this section unless: Exchange Act of 1934 (15 U.S.C. reference entity included in the index if: (1) A credit event with respect to such 78c(a)(77)), such asset-based securities (i) The effective notional amounts reference entity would result in a were issued in a transaction registered allocated to such reference entity payment by the credit protection seller under the Securities Act of 1933 (15 comprise less than five percent of the to the credit protection buyer under the U.S.C. 77a et seq.) and have publicly index’s weighting; and credit default swap based on the related available distribution reports; and (ii) The effective notional amounts notional amount allocated to such (8) For a credit default swap entered allocated to reference entities that reference entity; or into solely between eligible contract satisfy paragraph (zzz)(1)(i)(D) of this (2) The fact of such credit event or the participants as defined in section 1a(18) section comprise at least 80 percent of calculation in accordance with of the Commodity Exchange Act: the index’s weighting. paragraph (zzz)(1)(i)(A)(1) of this section (i) The reference entity (other than a (3) For purposes of this paragraph of the amount owed with respect to reference entity that is an issuing entity (zzz): such credit event is taken into account of an asset-backed security as defined in (i) A reference entity is affiliated with in determining whether to make any section 3(a)(77) of the Securities another entity if it controls, is controlled future payments under the credit default Exchange Act of 1934 (15 U.S.C. by, or is under common control with, swap with respect to any future credit 78c(a)(77))) provides to the public or to that entity; provided that each reference events; such eligible contract participant entity that is an issuing entity of an (B) The effective notional amount information about the reference entity asset-backed security as defined in allocated to any reference entity pursuant to rule 144A(d)(4) under the section 3(a)(77) of the Securities included in the index comprises more Securities Act of 1933 (17 CFR Exchange Act of 1934 (15 U.S.C. than 30 percent of the index’s 230.144A(d)(4)); 78c(a)(77)) will not be considered weighting; (ii) Financial information about the affiliated with any other issuing entity (C) The effective notional amount reference entity (other than a reference of an asset-backed security. allocated to any five non-affiliated entity that is an issuing entity of an (ii) Control means ownership of 20 reference entities included in the index asset-backed security as defined in percent or more of an entity’s equity, or comprises more than 60 percent of the section 3(a)(77) of the Securities the ability to direct the voting of 20 index’s weighting; or Exchange Act of 1934 (15 U.S.C. percent or more of the entity’s voting (D) Except as provided in paragraph 78c(a)(77))) is otherwise publicly equity. (zzz)(2) of this section, for each available; or (iii) The term reference entity reference entity included in the index, (iii) In the case of a reference entity includes: none of the following criteria is that is an issuing entity of asset-backed (A) An issuer of securities; satisfied: securities as defined in section 3(a)(77) (B) An issuing entity of an asset-based (1) The reference entity is required to of the Securities Exchange Act of 1934 security as defined in section 3(a)(77) of file reports pursuant to section 13 or (15 U.S.C. 78c(a)(77)), information of the the Securities Exchange Act of 1934 (15 section 15(d) of the Securities Exchange type and level included in public U.S.C. 78c(a)(77)); and Act of 1934 (15 U.S.C. 78m or 78o(d)); distribution reports for similar asset- (C) A single reference entity or a (2) The reference entity is eligible to backed securities is publicly available group of affiliated entities; provided that rely on the exemption provided in rule about both the reference entity and such each issuing entity of an asset-backed 12g3–2(b) under the Securities asset-backed securities; and security as defined in section 3(a)(77) of Exchange Act of 1934 (17 CFR (ii)(A) The index is not composed the Securities Exchange Act of 1934 (15 240.12g3–2(b)); solely of reference entities that are U.S.C. 78c(a)(77)) is a separate reference (3) The reference entity has a issuers of exempted securities as entity. worldwide market value of its defined in section 3(a)(12) of the (aaaa) Meaning of ‘‘narrow-based outstanding common equity held by Securities Exchange Act of 1934 (15 security index’’ as used in the definition non-affiliates of $700 million or more; U.S.C. 78c(a)(12)), as in effect on the of ‘‘security-based swap’’ as applied to (4) The reference entity (other than an date of enactment of the Futures index credit default swaps. issuing entity of an asset-backed Trading Act of 1982 (other than any (1) Notwithstanding paragraph security as defined in section 3(a)(77) of municipal security as defined in section (yyy)(1) of this section, and solely for the Securities Exchange Act of 1934 (15 3(a)(29) of the Securities Exchange Act purposes of determining whether a U.S.C. 78c(a)(77)) has outstanding of 1934 (15 U.S.C. 78c(a)(29))), as in credit default swap is a security-based securities that are notes, bonds, effect on the date of enactment of the swap under the definition of ‘‘security- debentures, or evidences of Futures Trading Act of 1982); and based swap’’ in section 3(a)(68)(A)(ii)(I) indebtedness having a total remaining (B) Without taking into account any of the Securities Exchange Act of 1934 principal amount of at least $1 billion; portion of the index composed of (15 U.S.C. 78c(a)(68)(A)(ii)(I), as (5) The reference entity is the issuer reference entities that are issuers of incorporated in section 1a(42) of the of an exempted security as defined in exempted securities as defined in Commodity Exchange Act, the term section 3(a)(12) of the Securities section 3(a)(12) of the Securities narrow-based security index means an Exchange Act of 1934 (15 U.S.C. Exchange Act of 1934 (15 U.S.C. index in which: 78c(a)(12)) (other than any municipal 78c(a)(12)), as in effect on the date of (i)(A) The index is composed of 9 or security as defined in section 3(a)(29) of enactment of the Futures Trading Act of fewer securities or securities that are the Securities Exchange Act of 1934 (15 1982 (other than any municipal security issued by 9 or fewer non-affiliated U.S.C. 78c(a)(29))); as defined in section 3(a)(29) of the issuers, provided that a security shall

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not be deemed a component of the (7) If the security is an asset-backed (i) The effective notional amounts index for purposes of this section security as defined in section 3(a)(77) of allocated to all securities of such issuer unless: the Securities Exchange Act of 1934 (15 included in the index comprise less (1) A credit event with respect to the U.S.C. 78c(a)(77)), the security was than five percent of the index’s issuer of such security or a credit event issued in a transaction registered under weighting; and with respect to such security would the Securities Act of 1933 (15 U.S.C. 77a (ii) The securities that satisfy result in a payment by the credit et seq.) and has publicly available paragraph (aaaa)(1)(i)(D) of this section protection seller to the credit protection distribution reports; and comprise at least 80 percent of the buyer under the credit default swap (8) For a credit default swap entered index’s weighting. based on the related notional amount into solely between eligible contract (3) For purposes of this paragraph allocated to such security; or participants as defined in section 1a(18) (aaaa): (2) The fact of such credit event or the of the Commodity Exchange Act: (i) An issuer is affiliated with another calculation in accordance with (i) The issuer of the security (other issuer if it controls, is controlled by, or paragraph (aaaa)(1)(i)(A)(1) of this than an issuing entity of an asset-backed is under common control with, that section of the amount owed with respect security as defined in section 3(a)(77) of issuer; provided that each issuing entity to such credit event is taken into the Securities Exchange Act of 1934 (15 of an asset-backed security as defined in account in determining whether to make U.S.C. 78c(a)(77))) provides to the section 3(a)(77) of the Securities any future payments under the credit public or to such eligible contract Exchange Act of 1934 (15 U.S.C. default swap with respect to any future participant information about such 78c(a)(77)) will not be considered credit events; issuer pursuant to rule 144A(d)(4) of the affiliated with any other issuing entity (B) The effective notional amount Securities Act of 1933 (17 CFR of an asset-backed security. allocated to the securities of any issuer 230.144A(d)(4)); (ii) Control means ownership of 20 included in the index comprises more (ii) Financial information about the percent or more of an issuer’s equity, or than 30 percent of the index’s issuer of the security (other than an the ability to direct the voting of 20 weighting; asset-backed security as defined in percent or more of the issuer’s voting (C) The effective notional amount section 3(a)(77) of the Securities equity. allocated to the securities of any five Exchange Act of 1934 (15 U.S.C. (iii) The term issuer includes: non-affiliated issuers included in the 78c(a)(77))) is otherwise publicly (A) An issuer of securities; index comprises more than 60 percent available; or (B) An issuing entity of an asset-based of the index’s weighting; or (iii) In the case of an asset-backed security as defined in section 3(a)(77) of (D) Except as provided in paragraph security as defined in section 3(a)(77) of the Securities Exchange Act of 1934 (15 (aaaa)(2) of this section, for each the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(77)); and security included in the index, none of U.S.C. 78c(a)(77)), information of the (C) A single issuer or a group of the following criteria is satisfied: type and level included in public affiliated issuers; provided that each (1) The issuer of the security is distribution reports for similar asset- issuing entity of an asset-backed required to file reports pursuant to backed securities is publicly available security as defined in section 3(a)(77) of section 13 or section 15(d) of the about both the issuing entity and such the Securities Exchange Act of 1934 (15 Securities Exchange Act of 1934 (15 asset-backed security; and U.S.C. 78c(a)(77)) is a separate issuer. U.S.C. 78m or 78o(d)); (ii)(A) The index is not composed 3. Add §§ 1.6 through 1.9 to read as (2) The issuer of the security is solely of exempted securities as defined follows: eligible to rely on the exemption in section 3(a)(12) of the Securities Sec. provided in rule 12g3–2(b) under the Exchange Act of 1934 (15 U.S.C. 1.6 Anti-evasion. 1.7 Books and records requirements for Securities Exchange Act of 1934 (17 78c(a)(12)), as in effect on the date of security-based swap agreements. CFR 240.12g3–2(b)); enactment of the Futures Trading Act of 1.8 Interpretation of swaps, security-based (3) The issuer of the security has a 1982 (other than any municipal security swaps, and mixed swaps. worldwide market value of its as defined in section 3(a)(29) of the 1.9 Regulation of mixed swaps. outstanding common equity held by Securities Exchange Act of 1934 (15 * * * * * non-affiliates of $700 million or more; U.S.C. 78c(a)(29))), as in effect on the (4) The issuer of the security (other date of enactment of the Futures § 1.6 Anti-evasion. than an issuing entity of an asset-backed Trading Act of 1982); and (a) It shall be unlawful to conduct security as defined in section 3(a)(77) of (B) Without taking into account any activities outside the United States, the Securities Exchange Act of 1934 (15 portion of the index composed of including entering into agreements, U.S.C. 78c(a)(77))) has outstanding exempted securities as defined in contracts, and transactions and securities that are notes, bonds, section 3(a)(12) of the Securities structuring entities, to willfully evade or debentures, or evidences of Exchange Act of 1934 (15 U.S.C. attempt to evade any provision of the indebtedness having a total remaining 78c(a)(12)), as in effect on the date of Commodity Exchange Act as enacted by principal amount of at least $1 billion; enactment of the Futures Trading Act of Subtitle A of the Wall Street (5) The security is an exempted 1982 (other than any municipal security Transparency and Accountability Act of security as defined in section 3(a)(12) of as defined in section 3(a)(29) of the 2010 or the rules, regulations, and the Securities Exchange Act of 1934 (15 Securities Exchange Act of 1934 (15 orders of the Commission promulgated U.S.C. 78c(a)(12)) (other than any U.S.C. 78c(a)(29))), the remaining thereunder (Subtitle A). municipal security as defined in section portion of the index would be a narrow- (b) The form, label, and written 3(a)(29) of the Securities Exchange Act based security index under paragraph documentation of an agreement, of 1934 (15 U.S.C. 78c(a)(29))); (aaaa)(1)(i) of this section. contract, or transaction, or an entity, (6) The issuer of the security is a (2) Paragraph (aaaa)(1)(i)(D) of this shall not be dispositive in determining government of a foreign country or a section will not apply with respect to whether the agreement, contract, or political subdivision of a foreign securities of an issuer included in the transaction, or entity, has been entered country; index if: into or structured to willfully evade as

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provided in paragraph (a) of this section 1a(47)(A)(v) of the Commodity (1) If the Commission or the Securities section. Exchange Act. and Exchange Commission receives a (c) An activity conducted outside the 6. Add § 1.8 to read as follows: proposal to list, trade, or clear an United States to evade as provided in agreement, contract, or transaction (or paragraph (a) of this section shall be § 1.8 Interpretation of swaps, security- based swaps, and mixed swaps. class thereof) that raises questions as to subject to the provisions of Subtitle A. the appropriate characterization of such (d) Notwithstanding the foregoing, no (a) In general. Any person may submit agreement, contract, or transaction (or agreement, contract, or transaction a request to the Commission and the class thereof) as a swap, a security-based structured as a security (including a Securities and Exchange Commission to swap, or both (i.e., a mixed swap), the security-based swap) under the provide a joint interpretation of whether Commission or the Securities and securities laws (as defined in section a particular agreement, contract, or Exchange Commission, as applicable, 3(a)(47) of the Securities Exchange Act transaction (or class thereof) is: promptly shall notify the other of the (1) A swap, as that term is defined in of 1934 (15 U.S.C. 78c(a)(47))) shall be agreement, contract, or transaction (or section 1a(47) of the Commodity deemed a swap pursuant to this § 1.6. class thereof); and 5. Add § 1.7 to read as follows: Exchange Act and the rules and (2) The Commission or the Securities regulations promulgated thereunder; and Exchange Commission, or their § 1.7 Books and records requirements for (2) A security-based swap, as that Chairmen jointly, may submit a request security-based swap agreements. term is defined in section 1a(42) of the for a joint interpretation as described in (a) A person registered as a swap data Commodity Exchange Act and the rules paragraph (a) of this section; such repository under section 21 of the and regulations promulgated submission shall be made pursuant to Commodity Exchange Act and the rules thereunder; or paragraph (b) of this section, and may be and regulations thereunder: (3) A mixed swap, as that term is (1) Shall not be required to keep and defined in section 1a(47)(D) of the withdrawn pursuant to paragraph (c) of maintain additional books and records Commodity Exchange Act and the rules this section. (e) Timeframe for joint interpretation. regarding security-based swap and regulations promulgated (1) If the Commission and the Securities agreements other than the books and thereunder. and Exchange Commission determine to records regarding swaps required to be (b) Request process. In making a issue a joint interpretation as described kept and maintained pursuant to section request pursuant to paragraph (a) of this in paragraph (a) of this section, such 21 of the Commodity Exchange Act and section, the requesting person must joint interpretation shall be issued the rules and regulations thereunder; provide the Commission and the within 120 days after receipt of a and Securities and Exchange Commission (2) Shall not be required to collect and with the following: complete submission requesting a joint maintain additional data regarding (1) All material information regarding interpretation under paragraph (a) or (d) security-based swap agreements other the terms of the agreement, contract, or of this section. than the data regarding swaps required transaction (or class thereof); (2) The Commission and the to be collected and maintained by such (2) A statement of the economic Securities and Exchange Commission persons pursuant to section 21 of the characteristics and purpose of the shall consult with the Board of Commodity Exchange Act and the rules agreement, contract, or transaction (or Governors of the Federal Reserve and regulations thereunder. class thereof); System prior to issuing any joint (b) A person shall not be required to (3) The requesting person’s interpretation as described in paragraph keep and maintain additional books and determination as to whether the (a) of this section. records, including daily trading records, agreement, contract, or transaction (or (3) If the Commission and the regarding security-based swap class thereof) should be characterized as Securities and Exchange Commission agreements other than the books and a swap, a security-based swap, or both, seek public comment with respect to a records regarding swaps required to be (i.e., a mixed swap), including the basis joint interpretation regarding an kept and maintained by such persons for such determination; and agreement, contract, or transaction (or pursuant to section 4s of the Commodity (4) Such other information as may be class thereof), the 120-day period Exchange Act and the rules and requested by the Commission or the described in paragraph (e)(1) of this regulations thereunder if such person is Securities and Exchange Commission. section shall be stayed during the registered as: (c) Request withdrawal. A person may pendency of the comment period, but (1) A swap dealer under section withdraw a request made pursuant to shall recommence with the business day 4s(a)(1) of the Commodity Exchange Act paragraph (a) of this section at any time after the public comment period ends. and the rules and regulations prior to the issuance of a joint (4) Nothing in this section shall thereunder; interpretation or joint notice of require the Commission and the (2) A major swap participant under proposed rulemaking by the Securities and Exchange Commission to section 4s(a)(2) of the Commodity Commission and the Securities and issue any joint interpretation. Exchange Act and the rules and Exchange Commission in response to (5) If the Commission and the regulations thereunder; the request; provided, however, that Securities and Exchange Commission do (3) A security-based swap dealer notwithstanding such withdrawal, the not issue a joint interpretation within under section 15F(a)(1) of the Securities Commission and the Securities and the time period described in paragraph Exchange Act of 1934 (15 U.S.C. 78o- Exchange Commission may provide a (e)(1) or (e)(3) of this section, each of the 10(a)(1)) and the rules and regulations joint interpretation of whether the Commission and the Securities and thereunder; or agreement, contract, or transaction (or Exchange Commission shall publicly (4) A major security-based swap class thereof) is a swap, a security-based provide the reasons for not issuing such participant under section 15F(a)(2) of swap, or both (i.e., a mixed swap). a joint interpretation within the the Securities Exchange Act of 1934 (15 (d) Request by the Commission or the applicable timeframes. U.S.C. 78o-10(a)(2)) and the rules and Securities and Exchange Commission. (f) Joint notice of proposed regulations thereunder. In the absence of a request for a joint rulemaking. (1) Rather than issue a joint (c) The term security-based swap interpretation under paragraph (a) of interpretation pursuant to paragraph (a) agreement has the meaning set forth in this section: of this section, the Commission and the

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Securities and Exchange Commission (c) Process for determining regulatory (4) Issuance of orders. In response to may issue a joint notice of proposed treatment for other mixed swaps—(1) In a request under paragraph (c)(1) of this rulemaking, in consultation with the general. Any person who desires or section, the Commission and the Board of Governors of the Federal intends to list, trade, or clear a mixed Securities and Exchange Commission, Reserve System, to further define one or swap (or class thereof) that is not subject as necessary to carry out the purposes more of the terms swap, security-based to paragraph (b) of this section may of the Wall Street Transparency and swap, or mixed swap. request the Commission and the Accountability Act of 2010, may issue a (2) A joint notice of proposed Securities and Exchange Commission to joint order, after notice and opportunity rulemaking described in paragraph (f)(1) issue a joint order permitting the for comment, permitting the requesting of this section shall be issued within the requesting person (and any other person person (and any other person or persons timeframe for issuing a joint or persons that subsequently lists, that subsequently lists, trades, or clears interpretation set forth in paragraph (e) trades, or clears that mixed swap) to that mixed swap) to comply, as to of this section. comply, as to parallel provisions only, parallel provisions only, with the 7. Add § 1.9 to read as follows: with specified parallel provisions of specified parallel provisions (or another either the Commodity Exchange Act or subset of the parallel provisions that are § 1.9 Regulation of mixed swaps. the Securities Exchange Act of 1934 (15 the subject of the request, as the (a) In general. The term mixed swap U.S.C. 78a et seq.), and the rules and Commissions determine is appropriate), has the meaning set forth in section regulations thereunder (collectively, instead of being required to comply 1a(47)(D) of the Commodity Exchange specified parallel provisions), instead of with parallel provisions of both the Act. being required to comply with parallel Commodity Exchange Act and the (b) Regulation of bilateral uncleared provisions of both the Commodity Securities Exchange Act of 1934. In mixed swaps entered into by dually- Exchange Act and the Securities determining the contents of such joint registered dealers or major participants. Exchange Act of 1934. For purposes of order, the Commission and the A mixed swap: this paragraph (c), parallel provisions Securities and Exchange Commission (1) That is neither executed on nor means comparable provisions of the may consider, among other things: subject to the rules of a designated Commodity Exchange Act and the (i) The nature and purposes of the contract market, national securities Securities Exchange Act of 1934 that parallel provisions that are the subject exchange, swap execution facility, were added or amended by the Wall of the request; security-based swap execution facility, Street Transparency and Accountability (ii) The comparability of such parallel or foreign board of trade; Act of 2010 with respect to swaps and provisions; and (2) That will not be submitted to a security-based swaps, and the rules and derivatives clearing organization or (iii) The extent of any conflicts or regulations thereunder. differences between such parallel registered or exempt clearing agency to (2) Request process. A person be cleared; and provisions. submitting a request pursuant to (5) Timeframe. (i) If the Commission (3) Where at least one party is paragraph (c)(1) of this section must registered with the Commission as a and the Securities and Exchange provide the Commission and the Commission determine to issue a joint swap dealer or major swap participant Securities and Exchange Commission and also with the Securities and order as described in paragraph (c)(4) of with the following: this section, such joint order shall be Exchange Commission as a security- (i) All material information regarding based swap dealer or major security- issued within 120 days after receipt of the terms of the specified, or specified a complete request for a joint order based swap participant, shall be subject class of, mixed swap; to: under paragraph (c)(1) of this section, (ii) The economic characteristics and which time period shall be stayed (i) The following provisions of the purpose of the specified, or specified Commodity Exchange Act, and the rules during the pendency of the public class of, mixed swap; comment period provided for in and regulations promulgated (iii) The specified parallel provisions, paragraph (c)(4) of this section and shall thereunder: and the reasons the person believes recommence with the business day after (A) Examinations and information such specified parallel provisions the public comment period ends. sharing: sections 4s(f) and 8 of the would be appropriate for the mixed (ii) Nothing in this section shall Commodity Exchange Act; swap (or class thereof); and (B) Enforcement: sections 2(a)(1)(B), (iv) An analysis of: require the Commission and the 4(b), 4b, 4c, 6(c), 6(d), 6c, 6d, 9, 13(a), (A) The nature and purposes of the Securities and Exchange Commission to 13(b), and 23 of the Commodity parallel provisions that are the subject issue any joint order. Exchange Act; of the request; (iii) If the Commission and the (C) Reporting to a swap data (B) The comparability of such parallel Securities and Exchange Commission do repository: section 4r of the Commodity provisions; not issue a joint order within the time Exchange Act; (C) The extent of any conflicts or period described in paragraph (c)(5)(i) of (D) Real-time reporting: section differences between such parallel this section, each of the Commission 2(a)(13) of the Commodity Exchange provisions; and and the Securities and Exchange Act; (D) Such other information as may be Commission shall publicly provide the (E) Capital: section 4s(e) of the requested by the Commission or the reasons for not issuing such a joint order Commodity Exchange Act; and Securities and Exchange Commission. within that timeframe. (F) Position Limits: section 4a of the (3) Request withdrawal. A person may Securities and Exchange Commission Commodity Exchange Act; and withdraw a request made pursuant to (ii) The provisions of the Federal paragraph (c)(1) of this section at any Pursuant to the Exchange Act, 15 securities laws, as defined in section time prior to the issuance of a joint U.S.C. 78a et seq., and particularly, 3(a)(47) of the Securities Exchange Act order under paragraph (c)(4) of this sections 3 and 23 thereof, and sections of 1934 (15 U.S.C. 78c(a)(47)), and the section by the Commission and the 712(a)(8), 712(d), 721(a), 761(a) of the rules and regulations promulgated Securities and Exchange Commission in Dodd-Frank Act, the SEC is proposing to thereunder. response to the request. adopt rules 3a68–1a through 3a68–4 and

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3a69–1 through 3a69–3 under the (A) A credit event with respect to participants as defined in section Exchange Act. such reference entity would result in a 3(a)(65) of the Act (15 U.S.C. 78c(a)(65)): payment by the credit protection seller (1) The reference entity (other than a Text of Proposed Rules to the credit protection buyer under the reference entity that is an issuing entity For the reasons stated in the credit default swap based on the related of an asset-backed security as defined in preamble, the SEC is proposing to notional amount allocated to such section 3(a)(77) of the Act (15 U.S.C. amend Title 17, Chapter II of the Code reference entity; or 78c(a)(77))) provides to the public or to of the Federal Regulations as follows: (B) The fact of such credit event or the such eligible contract participant calculation in accordance with information about the reference entity PART 240—GENERAL RULES AND paragraph (a)(1)(i)(A) of this section of pursuant to § 230.144A(d)(4)) of this REGULATIONS, SECURITIES the amount owed with respect to such chapter; EXCHANGE ACT OF 1934 credit event is taken into account in (2) Financial information about the determining whether to make any future reference entity (other than a reference 1. The general authority citation for payments under the credit default swap entity that is an issuing entity of an Part 240 is revised to read as follows: with respect to any future credit events; asset-backed security as defined in Authority: 15 U.S.C. 77c, 77d, 77g, 77j, (ii) The effective notional amount section 3(a)(77) of the Act (15 U.S.C. 77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn, allocated to any reference entity 78c(a)(77))) is otherwise publicly 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 78j, included in the index comprises more available; or 78j–1, 78k, 78k–1, 78l, 78m, 78n, 78n–1, 78o, (3) In the case of a reference entity 78o–4, 78o–8, 78p, 78q, 78s, 78u–5, 78w, than 30 percent of the index’s weighting; that is an issuing entity of asset-backed 78x, 78dd(b), 78dd(c), 78ll, 78mm, 80a–20, securities as defined in section 3(a)(77) 80a–23, 80a–29, 80a–37, 80b–3, 80b–4, 80b– (iii) The effective notional amount 11, and 7201 et seq.; 18 U.S.C. 1350; and 12 allocated to any five non-affiliated of the Act (15 U.S.C. 78c(a)(77)), U.S.C. 5221(e)(3), unless otherwise noted. reference entities included in the index information of the type and level included in public distribution reports * * * * * comprises more than 60 percent of the for similar asset-backed securities is 2. Add §§ 240.3a68–1a through index’s weighting; or (iv) Except as provided in paragraph publicly available about both the 240.3a68–4 and §§ 240.3a69–1 through reference entity and such asset-backed 240.3a69–3 to read as follows: (b) of this section, for each reference ‘‘ entity included in the index, none of the securities; and 240.3a68–1a Meaning of issuers of (2)(i) The index is not composed securities in a narrow-based security following criteria is satisfied: index’’ as used in section (A) The reference entity is required to solely of reference entities that are 3(a)(68)(A)(ii)(III) of the Act. file reports pursuant to section 13 or issuers of exempted securities as 240.3a68–1b Meaning of ‘‘narrow-based section 15(d) of the Act (15 U.S.C. 78m defined in section 3(a)(12) of the Act (15 security index’’ as used in section or 78o(d)); U.S.C. 78c(a)(12)), as in effect on the 3(a)(68)(A)(ii)(I) of the Act. (B) The reference entity is eligible to date of enactment of the Futures 240.3a68–2 Interpretation of swaps, Trading Act of 1982 (other than any security-based swaps, and mixed swaps. rely on the exemption provided in § 240.12g3–2(b) of this chapter; municipal security as defined in section 240.3a68–3 Meaning of ‘‘narrow-based 3(a)(29) of the Act (15 U.S.C. ’’ (C) The reference entity has a security index as used in the definition 78c(a)(29))), as in effect on the date of of ‘‘security-based swap’’. worldwide market value of its enactment of the Futures Trading Act of 240.3a68–4 Regulation of mixed swaps. outstanding common equity held by 1982); and 240.3a69–1 Definition of ‘‘swap’’ as used in non-affiliates of $700 million or more; (ii) Without taking into account any section 3(a)(69) of the Act—insurance. (D) The reference entity (other than an ‘‘ ’’ portion of the index composed of 240.3a69–2 Definition of swap as used in issuing entity of an asset-backed section 3(a)(69) of the Act—additional reference entities that are issuers of products. security as defined in section 3(a)(77) of exempted securities as defined in 240.3a69–3 Books and records requirements the Act (15 U.S.C. 78c(a)(77))) has section 3(a)(12) of the Act (15 U.S.C. for security-based swap agreements. outstanding securities that are notes, 78c(a)(12)), as in effect on the date of * * * * * bonds, debentures, or evidences of enactment of the Futures Trading Act of indebtedness having a total remaining 1982 (other than any municipal security § 240.3a68–1a Meaning of ‘‘issuers of principal amount of at least $1 billion; securities in a narrow-based security index’’ as defined in section 3(a)(29) of the Act (E) The reference entity is the issuer (15 U.S.C. 78c(a)(29))), the remaining as used in section 3(a)(68)(A)(ii)(III) of the of an exempted security as defined in Act. portion of the index would be a narrow- section 3(a)(12) of the Act (15 U.S.C. based security index under paragraph (a) Notwithstanding § 240.3a68–3(a) 78c(a)(12)) (other than any municipal (a)(1) of this section. of this chapter, and solely for purposes security as defined in section 3(a)(29) of (b) Paragraph (a)(1)(iv) of this section of determining whether a credit default the Act (15 U.S.C. 78c(a)(29))); will not apply with respect to a swap is a security-based swap under (F) The reference entity is a reference entity included in the index if: section 3(a)(68)(A)(ii)(III) of the Act (15 government of a foreign country or a (1) The effective notional amounts U.S.C. 78c(a)(68)(A)(ii)(III)), the term political subdivision of a foreign allocated to such reference entity issuers of securities in a narrow-based country; comprise less than five percent of the security index as used in section (G) If the reference entity is an issuer index’s weighting; and 3(a)(68)(A)(ii)(III) of the Act means of asset-backed securities as defined in (2) The effective notional amounts issuers of securities identified in an section 3(a)(77) of the Act (15 U.S.C. allocated to reference entities that index in which: 78c(a)(77)), such asset-based securities satisfy paragraph (a)(1)(iv) of this (1)(i) There are 9 or fewer non- were issued in a transaction registered section comprise at least 80 percent of affiliated issuers of securities that are under the Securities Act of 1933 (15 the index’s weighting. reference entities in the index, provided U.S.C. 77a et seq.) and have publicly (c) For purposes of this § 3a68–1a: that an issuer of securities shall not be available distribution reports; and (1) A reference entity is affiliated with deemed a reference entity for purposes (H) For a credit default swap entered another entity if it controls, is controlled of this section unless: into solely between eligible contract by, or is under common control with,

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that entity; provided that each reference (iv) Except as provided in paragraph (2)(i) The index is not composed entity that is an issuing entity of an (b) of this section, for each security solely of exempted securities as defined asset-backed security as defined in included in the index none of the in section 3(a)(12) of the Act (15 U.S.C. section 3(a)(77) of the Act (15 U.S.C. following criteria is satisfied: 78c(a)(12)), as in effect on the date of 78c(a)(77)) will not be considered (A) The issuer of the security is enactment of the Futures Trading Act of affiliated with any other issuing entity required to file reports pursuant to 1982 (other than any municipal security of an asset-backed security. section 13 or section 15(d) of the Act (15 as defined in section 3(a)(29) of the Act (2) Control means ownership of 20 U.S.C. 78m or 78o(d)); (15 U.S.C. 78c(a)(29))), as in effect on percent or more of an entity’s equity, or (B) The issuer of the security is the date of enactment of the Futures the ability to direct the voting of 20 eligible to rely on the exemption Trading Act of 1982); and percent or more of the entity’s voting provided in § 40.12g3–2(b) of this (ii) Without taking into account any equity. chapter; portion of the index composed of (3) The term reference entity includes: (C) The issuer of the security has a exempted securities as defined in (i) An issuer of securities; worldwide market value of its section 3(a)(12) of the Act (15 U.S.C. (ii) An issuing entity of an asset-based outstanding common equity held by 78c(a)(12)), as in effect on the date of security as defined in section 3(a)(77) of non-affiliates of $700 million or more; enactment of the Futures Trading Act of the Act (15 U.S.C. 78c(a)(77)); and (D) The issuer of the security (other 1982 (other than any municipal security (iii) A single reference entity or a than an issuing entity of an asset-backed as defined in section 3(a)(29) of the Act group of affiliated entities; provided that security as defined in section 3(a)(77) of (15 U.S.C. 78c(a)(29))), the remaining each issuing entity of an asset-backed the Act (15 U.S.C. 78c(a)(77))) has portion of the index would be a narrow- security as defined in section 3(a)(77) of outstanding securities that are notes, based security index under paragraph the Act (15 U.S.C. 78c(a)(77)) is a bonds, debentures, or evidences of (a)(1) of this section. separate reference entity. indebtedness having a total remaining (b) Paragraph (a)(1)(iv) of this section principal amount of at least $1 billion; will not apply with respect to securities § 240.3a68–1b Meaning of ‘‘narrow-based (E) The security is an exempted of an issuer included in the index if: security index’’ as used in section security as defined in section 3(a)(12) of 3(a)(68)(A)(ii)(I) of the Act. (1) The effective notional amounts the Act (15 U.S.C. 78c(a)(12)) (other allocated to all securities of such issuer (a) Notwithstanding § 240.3a68–3(a) than any municipal security as defined included in the index comprise less of this chapter, and solely for purposes in section 3(a)(29) of the Act (15 U.S.C. than five percent of the index’s of determining whether a credit default 78c(a)(29))); weighting; and swap is a security-based swap under (F) The issuer of the security is a (2) The securities that satisfy section 3(a)(68)(A)(ii)(I) of the Act (15 government of a foreign country or a paragraph (a)(1)(iv) of this section U.S.C. 78c(a)(68)(A)(ii)(I)), the term political subdivision of a foreign comprise at least 80 percent of the narrow-based security index as used in country; index’s weighting. section 3(a)(68)(A)(ii)(I) of the Act (G) If the security is an asset-backed (c) For purposes of this § 240.3a68–1b: means an index in which: security as defined in section 3(a)(77) of (1) An issuer is affiliated with another (1)(i) The index is composed of 9 or the Act (15 U.S.C. 78c(a)(77)), the issuer if it controls, is controlled by, or fewer securities or securities that are security was issued in a transaction is under common control with, that issued by 9 or fewer non-affiliated registered under the Securities Act of issuer; provided that each issuing entity issuers, provided that a security shall 1933 (15 U.S.C. 77a et seq.) and has of an asset-backed security as defined in not be deemed a component of the publicly available distribution reports; section 3(a)(77) of the Act (15 U.S.C. index for purposes of this section and 78c(a)(77)) will not be considered unless: (H) For a credit default swap entered affiliated with any other issuing entity (A) A credit event with respect to the into solely between eligible contract of an asset-backed security. issuer of such security or a credit event participants as defined in section (2) Control means ownership of 20 with respect to such security would 3(a)(65) of the Act (15 U.S.C. 78c(a)(65)): percent or more of an issuer’s equity, or result in a payment by the credit (1) The issuer of the security (other the ability to direct the voting of 20 protection seller to the credit protection than an issuing entity of an asset-backed percent or more of the issuer’s voting buyer under the credit default swap security as defined in section 3(a)(77) of equity. based on the related notional amount the Act (15 U.S.C. 78c(a)(77))) provides (3) The term issuer includes: allocated to such security; or to the public or to such eligible contract (i) An issuer of securities; (B) The fact of such credit event or the participant information about such (ii) An issuing entity of an asset-based calculation in accordance with issuer pursuant to § 230.144A(d)(4)) of security as defined in section 3(a)(77) of paragraph (a)(1)(i)(A) of this section of this chapter; the Act (15 U.S.C. 78c(a)(77)); and the amount owed with respect to such (2) Financial information about the (iii) A single issuer or a group of credit event is taken into account in issuer of the security (other than an affiliated issuers; provided that each determining whether to make any future asset-backed security as defined in issuing entity of an asset-backed payments under the credit default swap section 3(a)(77) of the Act (15 U.S.C. security as defined in section 3(a)(77) of with respect to any future credit events; 78c(a)(77))) is otherwise publicly the Act (15 U.S.C. 78c(a)(77)) is a (ii) The effective notional amount available; or separate issuer. allocated to the securities of any issuer (3) In the case of an asset-backed included in the index comprises more security as defined in section 3(a)(77) of § 240.3a68–2 Interpretation of swaps, than 30 percent of the index’s the Act (15 U.S.C. 78c(a)(77)), security-based swaps, and mixed swaps. weighting; information of the type and level (a) In general. Any person may submit (iii) The effective notional amount included in public distribution reports a request to the Commission and the allocated to the securities of any five for similar asset-backed securities is Commodity Futures Trading non-affiliated issuers included in the publicly available about both the issuing Commission to provide a joint index comprises more than 60 percent entity and such asset-backed security; interpretation of whether a particular of the index’s weighting; or and agreement, contract, or transaction (or

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class thereof) is a swap, as that term is Trading Commission, as applicable, define one or more of the terms swap, defined in section 3(a)(69) of the Act (15 promptly shall notify the other of the security-based swap, or mixed swap. U.S.C. 78c(a)(69)) and the rules and agreement, contract, or transaction (or (2) A joint notice of proposed regulations promulgated thereunder, a class thereof); and rulemaking described in paragraph (f)(1) security-based swap, as that term is (2) The Commission or the of this section shall be issued within the defined in section 3(a)(68) of the Act (15 Commodity Futures Trading timeframe for issuing a joint U.S.C. 78c(a)(68)) and the rules and Commission, or their Chairmen jointly, interpretation set forth in paragraph (e) regulations promulgated thereunder, or may submit a request for a joint of this section. a mixed swap, as that term is defined in interpretation as described in paragraph section 3(a)(68)(D) of the Act and the § 240.3a68–3 Meaning of ‘‘narrow-based (a) of this section; such submission shall security index’’ as used in the definition of rules and regulations promulgated be made pursuant to paragraph (b) of ‘‘security-based swap.’’ thereunder. this section, and may be withdrawn (a) In general. Except as otherwise (b) Request process. In making a pursuant to paragraph (c) of this section. request pursuant to paragraph (a) of this provided in § 240.3a68–1a and (e) Timeframe for joint interpretation. § 240.3a68–1b of this chapter, for section, the requesting person must (1) If the Commission and the provide the Commission and the purposes of section 3(a)(68) of the Act Commodity Futures Trading (15 U.S.C. 78c(a)(68)), the term narrow- Commodity Futures Trading Commission determine to issue a joint Commission with the following: based security index has the meaning interpretation as described in paragraph set forth in section 3(a)(55) of the Act (1) All material information regarding (a) of this section, such joint the terms of the agreement, contract, or (15 U.S.C. 78c(a)(55)), and the rules, interpretation shall be issued within 120 regulations, and orders of the transaction (or class thereof); days after receipt of a complete (2) A statement of the economic Commission thereunder. submission requesting a joint characteristics and purpose of the (b) Tolerance period for swaps traded interpretation under paragraph (a) or (d) agreement, contract, or transaction (or on designated contract markets, swap of this section. class thereof); execution facilities and foreign boards (3) The requesting person’s (2) The Commission and the of trade. Notwithstanding paragraph (a) determination as to whether the Commodity Futures Trading of this section, solely for purposes of agreement, contract, or transaction (or Commission shall consult with the swaps traded on or subject to the rules class thereof) should be characterized as Board of Governors of the Federal of a designated contract market, swap a swap, a security-based swap, or both Reserve System prior to issuing any execution facility, or foreign board of (i.e., a mixed swap), including the basis joint interpretation as described in trade pursuant to the Commodity for such determination; and paragraph (a) of this section. Exchange Act (7 U.S.C. 1 et seq.), a (4) Such other information as may be (3) If the Commission and the security index underlying such swaps requested by the Commission or the Commodity Futures Trading shall not be considered a narrow-based Commodity Futures Trading Commission seek public comment with security index if: Commission. respect to a joint interpretation (1)(i) A swap on the index is traded (c) Request withdrawal. A person may regarding an agreement, contract, or on or subject to the rules of a designated withdraw a request made pursuant to transaction (or class thereof), the 120- contract market, swap execution facility, paragraph (a) of this section at any time day period described in paragraph (e)(1) or foreign board of trade pursuant to the prior to the issuance of a joint of this section shall be stayed during the Commodity Exchange Act (7 U.S.C. 1 et interpretation or joint notice of pendency of the comment period, but seq.) for at least 30 days as a swap on proposed rulemaking by the shall recommence with the business day an index that was not a narrow-based Commission and the Commodity after the public comment period ends. security index; or Futures Trading Commission in (4) Nothing in this section shall (ii) Such index was not a narrow- response to the request; provided, require the Commission and the based security index during every however, that notwithstanding such Commodity Futures Trading trading day of the six full calendar withdrawal, the Commission and the Commission to issue any joint months preceding a date no earlier than Commodity Futures Trading interpretation. 30 days prior to the commencement of Commission may provide a joint (5) If the Commission and the trading of a swap on such index on a interpretation of whether the agreement, Commodity Futures Trading market described in paragraph (b)(1)(i) contract, or transaction (or class thereof) Commission do not issue a joint of this section; and is a swap, a security-based swap, or both interpretation within the time period (2) The index has been a narrow- (i.e., a mixed swap). described in paragraph (e)(1) or (e)(3) of based security index for no more than (d) Request by the Commission or the this section, each of the Commission 45 business days over three consecutive Commodity Futures Trading and the Commodity Futures Trading calendar months. Commission. In the absence of a request Commission shall publicly provide the (c) Tolerance period for security- for a joint interpretation under reasons for not issuing such a joint based swaps traded on national paragraph (a) of this section: interpretation within the applicable securities exchanges or security-based (1) If the Commission or the timeframes. swap execution facilities. Commodity Futures Trading (f) Joint notice of proposed Notwithstanding paragraph (a) of this Commission receives a proposal to list, rulemaking. section, solely for purposes of security- trade, or clear an agreement, contract, or (1) Rather than issue a joint based swaps traded on a national transaction (or class thereof) that raises interpretation pursuant to paragraph (a) securities exchange or security-based questions as to the appropriate of this section, the Commission and the swap execution facility, a security index characterization of such agreement, Commodity Futures Trading underlying such security-based swaps contract, or transaction (or class thereof) Commission may issue a joint notice of shall be considered a narrow-based as a swap, a security-based swap, or proposed rulemaking, in consultation security index if: both (i.e., a mixed swap), the with the Board of Governors of the (1)(i) A security-based swap on the Commission or the Commodity Futures Federal Reserve System, to further index is traded on a national securities

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exchange or security-based swap Trading Commission as a swap dealer or such specified parallel provisions execution facility for at least 30 days as major swap participant, shall be subject would be appropriate for the mixed a security-based swap on a narrow- to: swap (or class thereof); and based security index; or (i) The following provisions of the (iv) An analysis of: (ii) Such index was a narrow-based Commodity Exchange Act (7 U.S.C. 1 et (A) The nature and purposes of the security index during every trading day seq.), and the rules and regulations parallel provisions that are the subject of the six full calendar months promulgated thereunder, set forth in the of the request; preceding a date no earlier than 30 days rules and regulations of the Commodity (B) The comparability of such parallel prior to the commencement of trading of Futures Trading Commission: provisions; a security-based swap on such index on (A) Examinations and information (C) The extent of any conflicts or a market described in paragraph (c)(1)(i) sharing: 7 U.S.C. 6s(f) and 12; differences between such parallel of this section; and (B) Enforcement: 7 U.S.C. 2(a)(1)(B), provisions; and (2) The index has been a security 6(b), 6b, 6c, 9, 13b, 13a–1, 13a–2, 13, (D) Such other information as may be index that is not a narrow-based 13c(a), 13c(b), 15 and 26; requested by the Commission or the security index for no more than 45 (C) Reporting to a swap data Commodity Futures Trading business days over three consecutive repository: 7 U.S.C. 6r; Commission. calendar months. (D) Real-time reporting: 7 U.S.C. (3) Request withdrawal. A person may (d) Grace period. 2(a)(13); withdraw a request made pursuant to (1) Solely with respect to a swap that (E) Capital: 7 U.S.C. 6s(e); and paragraph (c)(1) of this section at any is traded on or subject to the rules of a (F) Position Limits: 7 U.S.C. 6a; and time prior to the issuance of a joint designated contract market, swap (ii) The provisions of the Federal order under paragraph (c)(4) of this execution facility or foreign board of securities laws, as defined in section section by the Commission and the trade pursuant to the Commodity 3(a)(47) of the Act (15 U.S.C. 78c(a)(47)), Commodity Futures Trading Exchange Act (7 U.S.C. 1 et seq.), an and the rules and regulations Commission in response to the request. index that becomes a narrow-based promulgated thereunder. (4) Issuance of orders. In response to security index under paragraph (b) of (c) Process for determining regulatory a request under paragraph (c)(1) of this this section solely because it was a treatment for mixed swaps. section, the Commission and the narrow-based security index for more (1) In general. Any person who Commodity Futures Trading than 45 business days over three desires or intends to list, trade, or clear Commission, as necessary to carry out consecutive calendar months shall not a mixed swap (or class thereof) that is the purposes of the Wall Street be a narrow-based security index for the not subject to paragraph (b) of this Transparency and Accountability Act of following three calendar months. section may request the Commission 2010, may issue a joint order, after (2) Solely with respect to a security- and the Commodity Futures Trading notice and opportunity for comment, based swap that is traded on a national Commission to issue a joint order permitting the requesting person (and securities exchange or security-based permitting the requesting person (and any other person or persons that swap execution facility, an index that any other person or persons that subsequently lists, trades, or clears that becomes a security index that is not a subsequently lists, trades, or clears that mixed swap) to comply, as to parallel narrow-based security index under mixed swap) to comply, as to parallel provisions only, with the specified paragraph (c) of this section solely provisions only, with specified parallel parallel provisions (or another subset of because it was not a narrow-based provisions of either the Act (15 U.S.C. the parallel provisions that are the security index for more than 45 business 78a et seq.) or the Commodity Exchange subject of the request, as the days over three consecutive calendar Act (7 U.S.C. 1 et seq.), and the rules Commissions determine is appropriate), months shall be a narrow-based security and regulations thereunder (collectively, instead of being required to comply index for the following three calendar specified parallel provisions), instead of with parallel provisions of both the Act months. being required to comply with parallel (15 U.S.C. 78a et seq.) and the provisions of both the Act and the Commodity Exchange Act (7 U.S.C. 1 et § 240.3a68–4 Regulation of mixed swaps. Commodity Exchange Act. For purposes seq.). In determining the contents of (a) In general. The term mixed swap of this paragraph (c), parallel provisions such joint order, the Commission and has the meaning set forth in section means comparable provisions of the Act the Commodity Futures Trading 3(a)(68)(D) of the Act (15 U.S.C. and the Commodity Exchange Act that Commission may consider, among other 78c(a)(68)(D)). were added or amended by the Wall things: (b) Regulation of mixed swaps entered Street Transparency and Accountability (i) The nature and purposes of the into by dually-registered dealers or Act of 2010 with respect to security- parallel provisions that are the subject major participants. A mixed swap: based swaps and swaps, and the rules of the request; (1) That is neither executed on nor and regulations thereunder. (ii) The comparability of such parallel subject to the rules of a designated (2) Request process. A person provisions; and contract market, national securities submitting a request pursuant to (iii) The extent of any conflicts or exchange, swap execution facility, paragraph (c)(1) of this section must differences between such parallel security-based swap execution facility, provide the Commission and the provisions. or foreign board of trade; Commodity Futures Trading (5) Timeframe. (2) That will not be submitted to a Commission with the following: (i) If the Commission and the derivatives clearing organization or (i) All material information regarding Commodity Futures Trading registered or exempt clearing agency to the terms of the specified, or specified Commission determine to issue a joint be cleared; and class of, mixed swap; order as described in paragraph (c)(4) of (3) Where at least one party is (ii) The economic characteristics and this section, such joint order shall be registered with the Commission as a purpose of the specified, or specified issued within 120 days after receipt of security-based swap dealer or major class of, mixed swap; a complete request for a joint order security-based swap participant and (iii) The specified parallel provisions, under paragraph (c)(1) of this section, also with the Commodity Futures and the reasons the person believes which time period shall be stayed

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during the pendency of the public pursuant to a statutorily authorized regulations promulgated thereunder comment period provided for in program thereof; or shall apply to a swap dealer or major paragraph (c)(4) of this section and shall (3) In the case of reinsurance only, by swap participant that is a party to a recommence with the business day after a person located outside the United foreign exchange forward or foreign the public comment period ends. States to an insurance company that is exchange swap. (ii) Nothing in this section shall eligible under paragraph (b) of this (3) For purposes of section 1a(47)(E) require the Commission and the section, provided that: of the Commodity Exchange Act (7 Commodity Futures Trading (i) Such person is not prohibited by U.S.C. 1a(47)(E)) and this § 240.3a69–2, Commission to issue any joint order. any law of any State or of the United the term foreign exchange forward has (iii) If the Commission and the States from offering such agreement, the meaning set forth in section 1a(24) Commodity Futures Trading contract, or transaction to such an of the Commodity Exchange Act (7 Commission do not issue a joint order insurance company; U.S.C. 1a(24)). within the time period described in (ii) The product to be reinsured meets (4) For purposes of section 1a(47)(E) paragraph (c)(5)(i) of this section, each the requirements under paragraph (a) of of the Commodity Exchange Act (7 of the Commission and the Commodity this section to be insurance; and U.S.C. 1a(47)(E)) and this § 240.3a69–2, Futures Trading Commission shall (iii) The total amount reimbursable by the term foreign exchange swap has the publicly provide the reasons for not all reinsurers for such insurance meaning set forth in section 1a(25) of issuing such a joint order within that product cannot exceed the claims or the Commodity Exchange Act (7 U.S.C. timeframe. losses paid by the cedant. 1a(25)). (5) For purposes of sections 1a(24) § 240.3a69–1 Definition of ‘‘swap’’ as used § 240.3a69–2 Definition of ‘‘swap’’ as used and 1a(25) of the Commodity Exchange in section 3(a)(69) of the Act—Insurance in section 3(a)(69) of the Act—Additional Products. Act (7 U.S.C. 1a(24) and (25)) and this The term swap as used in section § 240.3a69–2, the following transactions 3(a)(69) of the Act (15 U.S.C. 78c(a)(69)) (a) In general. The term swap has the are not foreign exchange forwards or does not include an agreement, contract, meaning set forth in section 3(a)(69) of foreign exchange swaps: or transaction that: the Act (15 U.S.C. 78c(a)(69)). (i) A currency swap or a cross- (b) Inclusion of particular products. (a) By its terms or by law, as a currency swap; (1) The term swap includes, without condition of performance on the (ii) A currency option, foreign limiting the meaning set forth in section agreement, contract, or transaction: currency option, foreign exchange 3(a)(69) of the Act (15 U.S.C. 78c(a)(69), (1) Requires the beneficiary of the option, or foreign exchange rate option; the following agreements, contracts, and agreement, contract, or transaction to and transactions: have an insurable interest that is the (iii) A non-deliverable forward (i) A cross-currency swap; involving foreign exchange. subject of the agreement, contract, or (ii) A currency option, foreign transaction and thereby carry the risk of currency option, foreign exchange § 240.3a69–3 Books and records loss with respect to that interest option and foreign exchange rate option; requirements for security-based swap continuously throughout the duration of (iii) A foreign exchange forward; agreements. the agreement, contract, or transaction; (iv) A foreign exchange swap; (a) A person registered as a swap data (2) Requires that loss to occur and to (v) A forward rate agreement; and repository under section 21 of the be proved, and that any payment or (vi) A non-deliverable forward Commodity Exchange Act (7 U.S.C. 24a) indemnification therefor be limited to involving foreign exchange. and the rules and regulations the value of the insurable interest; (2) The term swap does not include an thereunder: (3) Is not traded, separately from the agreement, contract, or transaction (1) Shall not be required to keep and insured interest, on an organized market described in paragraph (b)(1) of this maintain additional books and records or over-the-counter; and section that is otherwise excluded by regarding security-based swap (4) With respect to financial guaranty section 1a(47)(B) of the Commodity agreements other than the books and insurance only, in the event of payment Exchange Act (7 U.S.C. 1a(47)(B)). records regarding swaps required to be default or insolvency of the obligor, any (c) Foreign exchange forwards and kept and maintained pursuant to section acceleration of payments under the foreign exchange swaps. 21 of the Commodity Exchange Act (7 policy is at the sole discretion of the Notwithstanding paragraph (b)(2) of this U.S.C. 24a) and the rules and insurer; and section: regulations thereunder; and (b) Is provided: (1) A foreign exchange forward or a (2) Shall not be required to collect and (1) By a company that is organized as foreign exchange swap shall not be maintain additional data regarding an insurance company whose primary considered a swap if the Secretary of the security-based swap agreements other and predominant business activity is the Treasury makes a determination than the data regarding swaps required writing of insurance or the reinsuring of described in section 1a(47)(E)(i) of the to be collected and maintained by such risks underwritten by insurance Commodity Exchange Act (7 U.S.C. persons pursuant to section 21 of the companies and that is subject to 1a(47)(E)(i)). Commodity Exchange Act (7 U.S.C. 24a) supervision by the insurance (2) Notwithstanding paragraph (c)(1) and the rules and regulations commissioner (or similar official or of this section: thereunder. agency) of any State, as defined in (i) The reporting requirements set (b) A person shall not be required to section 3(a)(16) of the Act (15 U.S.C. forth in section 4r of the Commodity keep and maintain additional books and 78c(a)(16)), or by the United States or an Exchange Act (7 U.S.C. 6r) and records, including daily trading records, agency or instrumentality thereof, and regulations promulgated thereunder regarding security-based swap such agreement, contract, or transaction shall apply to a foreign exchange agreements other than the books and is regulated as insurance under the laws forward or foreign exchange swap; and records regarding swaps required to be of such State or of the United States; (ii) The business conduct standards kept and maintained by such persons (2) By the United States or any of its set forth in section 4s of the Commodity pursuant to section 4s of the Commodity agencies or instrumentalities, or Exchange Act (7 U.S.C. 6s) and Exchange Act (7 U.S.C. 6s) and the rules

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and regulations thereunder if such broad-based index swaps, such as index provisions, and I point out that the person is registered as: credit default swaps, are all swaps. Securities and Exchange Commission (1) A swap dealer under section Consistent with Congress’s definition of today has declined to promulgate such 4s(a)(1) of the Commodity Exchange Act swaps, the rule also defines options as provisions in this joint rulemaking. (7 U.S.C. 6s(a)(1)) and the rules and swaps. By promulgating a broad regulation regulations thereunder; In preparing the proposed rule, staff today that essentially says that any (2) A major swap participant under worked to address the more than 80 transaction that does not fall within the section 4s(a)(2) of the Commodity comments that were submitted by the definition of ‘‘swap’’ because it has been Exchange Act (7 U.S.C. 6s(a)(2)) and the public in response to the joint advance structured to evade Dodd-Frank rules and regulations thereunder; notice of proposed rulemaking on nonetheless is a swap, the Commission (3) A security-based swap dealer product definitions. Many of the is over-reading its Congressional under section 15F(a)(1) of the Act (15 commenters asked that the mandate. The statutory definition of U.S.C. 78o–10(a)(1)) and the rules and Commissions specifically provide ‘‘swap’’ includes a laundry-list of regulations thereunder; or guidance on what is not a swap or transactions that Congress intended to (4) A major security-based swap security-based swap. include within the definition. If participant under section 15F(a)(2) of For example, under the Commodity Congress intended the definition of the Act (15 U.S.C. 78o–10(a)(2)) and the Exchange Act, the CFTC does not ‘‘swap’’ also to include a broad statement rules and regulations thereunder. regulate forward contracts. Over the that any transaction structured to evade (c) The term security-based swap decades, there has been a series of Dodd-Frank is a ‘‘swap,’’ Congress agreement has the meaning set forth in orders, interpretations and cases that would have incorporated such a section 3(a)(78) of the Act (15 U.S.C. market participants have come to rely provision within the statutory 78c(a)(78)). upon regarding the exception from definition. By directing the Commission futures regulation for forwards and Dated: April 29, 2011. to ‘‘further define’’ the term ‘‘swap’’ by forwards with embedded options. rule, Congress is directing the By the Commodity Futures Trading Consistent with that history, the Dodd- Commission. Commission not to make the broad Frank Act excluded from the definition statement it declined to make, but to David A. Stawick, of swaps ‘‘any sale of a nonfinancial think through whether the definition of Secretary. commodity or security for deferred ‘‘swap’’ needs to be modified by rule to Dated: April 29, 2011. shipment or delivery, so long as the include specific transactions within the By the Securities and Exchange transaction is intended to be physically definition. Commission. settled.’’ The proposed rule interprets In addition to my concern about the Cathy H. Ahn, that exclusion in a manner that is ‘‘Anti-Evasion’’ provisions included Deputy Secretary. consistent with the Commission’s within this proposal, I am concerned previous history of the forward Product Definitions Contained in Title about an important issue that is not exclusion from futures regulation. raised within this proposal. VII of the Dodd-Frank Wall Street Further, consistent with the Dodd- Reform and Consumer Protection Act— Multinational organizations whose Frank Act, the proposed rule clarifies statutory mission is to combat poverty CFTC Voting Summary and Statements that state or Federally regulated of CFTC Commissioners and foster economic development have insurance products that are provided by raised concerns about the application of regulated insurance companies will not Dodd-Frank to their activities. This Note: The following will not appear in the be regulated under Title VII of the Act. Code of Federal Regulations. proposal omits any discussion of their Similarly, the proposal clarifies that issues. In my view the following CFTC Voting Summary certain consumer and commercial language should be included within the arrangements that historically have not On this matter, Chairman Gensler and proposal, and I urge the public to been considered swaps, such as comment upon the issues raised: Commissioners Dunn, Chilton and consumer mortgage rate locks, contracts O’Malia voted in the affirmative; to lock in the price of home heating oil Transactions Involving Certain Foreign Commissioner Sommers voted in the and contracts relating to inventory or or Multinational Entities negative. equipment, also will not be regulated The swap definition expressly Statement of CFTC Chairman Gary under Title VII of the Act. excludes ‘‘any agreement, contract, or Gensler Statement of CFTC Commissioner Jill transaction a counterparty of which is a I support the proposed rulemaking to Sommers Federal Reserve bank, the Federal Government, or a Federal agency that is implement the Dodd-Frank Act’s I respectfully dissent from the action expressly backed by the full faith and requirement to further define taken today by the Commission to issue credit of the United States.’’ 399 Some derivatives products that come under proposed regulations relating to commenters have suggested that the Title VII of the Act. ‘‘Product Definitions Contained in Title Commissions should exercise their The CFTC worked closely with the VII of the Dodd-Frank Wall Street authority to further define the terms SEC, in consultation with the Federal Reform and Consumer Protection Act.’’ Reserve, on this proposed rule to further I disagree with the approach taken by ‘‘swap’’ and ‘‘security-based swap’’ to define swaps, security-based swaps, the Commission with regard to the similarly exclude transactions in which mixed swaps and security-based swap proposed ‘‘Anti-Evasion’’ provisions. I a counterparty is an international public agreements. The statutory definition of agree that Dodd-Frank Section 721(c) organization, a foreign central bank, a directs the Commission to further define foreign sovereign, or a multi-or supra- swap is very detailed. This rule is 400 consistent with that detailed definition certain terms to include transactions or national organization. Commenters and Congressional intent. For example, entities that have been structured to 399 7 U.S.C. 1a(47)(B)(ix). interest rate swaps, currency swaps, evade Dodd-Frank. I do not agree that 400 See, e.g., letter from Gunter Pleines, Head of commodity swaps, including energy, Congress directed the Commission to Banking Department, and Diego Devos, General metals and agricultural swaps, and promulgate broad ‘‘Anti-Evasion’’ Continued

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have advanced international comity, Request for Comment explain the reasons for such an national treatment, limited regulatory • The Commissions request comment exclusion. Would such an exclusion resources, limits on the Commissions’ generally on the appropriate application inappropriately cause transactions that respective extraterritorial jurisdiction, of the Dodd-Frank Act to international should be regulated as swaps or and international harmonization as public organizations, foreign central security-based swaps to fall outside of rationales for such an approach.401 banks, foreign sovereigns (or foreign the regulatory regime established by the sovereign wealth funds), supranational Dodd-Frank Act? Why or why not? Counsel, Bank for International Settlements (‘‘BIS organizations, and any other foreign or • If the Commissions further define Letter’’); Cleary Letter. The Commissions note that multinational entity that may be ‘‘ ’’ ‘‘ various other terms may be used to refer to the terms swap and security-based organizations that generally: (i) Limit their analogous to the entities excluded from swap’’ to exclude any such entity, membership to sovereign nations; (ii) are the swap definition in CEA Section should the exclusion be subject to any established by treaty; (iii) have a separate legal 1a(47)(B)(ix). conditions, or should the exclusion be identity from their members; and (iv) ‘‘are usually • Should the Commissions further limited to particular requirements of specialized and of international or regional scope’’ ‘‘ ’’ ‘‘ and ‘‘formed between three or more nations to work define the terms swap and security- Title VII? Why or why not? If so, what on issues that relate to all of the countries in the based swap’’ to exclude transactions in conditions would be appropriate, and/or organization. See, e.g., http://portal.unesco.org/en/ which a counterparty is an international what requirements of Title VII should ev.php-URL_ID=32408&URL_DO=DO_TOPIC& public organization, foreign central _ the exclusion apply to, and why? URL SECCTION=201.html; http://www.geni.org/ bank, foreign sovereign (or foreign globalenergy/library/organizations/index.shtml. For • sovereign wealth fund), supranational If the Commissions further define convenience, the Commissions use the term the terms ‘‘swap’’ and ‘‘security-based ‘‘ ’’ organization, or any other foreign or supranational organization herein to refer to ’’ organizations having such characteristics. multinational entity that may be swap to exclude any such entity, to 401 See, e.g., BIS Letter (citing Article 1, paragraph analogous to an entity excluded from what extent should counterparties to 4, of the proposed EU Regulation on Central such transactions be subject to the Clearing of OTC Derivatives, available at http:// the swap definition in CEA Section 1a(47)(B)(ix)? Why or why not? If so, requirements of Title VII? What would register.consilium.europa.eu/pdf/en/11/st05/ be the appropriate regulatory treatment st05059.en11.pdf, which excludes from its coverage how should the Commissions delineate the BIS, multilateral development banks, European the scope of entities whose transactions of such counterparties in these central banks and similarly situated ‘‘other national circumstances? bodies performing similar functions and other would be excluded? Please describe in [FR Doc. 2011–11008 Filed 5–20–11; 8:45 am] public bodies charged with or intervening in the detail the nature of the entity whose management of the public debt’’). transactions would be excluded and BILLING CODE 6351–01–P; 8011–01–P

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