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U.S. Securities and Exchange Commission


Background: In 2000, Congress passed the Commodity Futures Modernization Act (CFMA) to provide legal certainty for swap agreements. The CFMA explicitly prohibited the SEC and CFTC from regulating the over-the-counter (OTC) swaps markets, but provided the SEC with antifraud authority over “security-based swap agreements,” such as credit default swaps. However, the SEC was specifically prohibited from, among other things, imposing reporting, recordkeeping, or disclosure requirements or other prophylactic measures designed to prevent fraud with respect to such agreements. This limited the SEC’s ability to detect and deter fraud in the swaps markets.

Title VII of Dodd-Frank Wall Street Reform and Consumer Protection Act addresses the gap in U.S. financial regulation of OTC swaps by providing a comprehensive framework for the regulation of the OTC swaps markets.

The Dodd-Frank Act divides regulatory authority over swap agreements between the CFTC and SEC (though the prudential regulators, such as the Federal Reserve Board, also have an important role in setting capital and margin for swap entities that are banks). The SEC has regulatory authority over “security-based swaps,” which are defined as swaps based on a single security or loan or a narrow-based group or index of securities (including any interest therein or the value thereof), or events relating to a single issuer or issuers of securities in a narrow-based security index. Security-based swaps are included within the definition of “security” under the Securities Exchange Act of 1934 and the Securities Act of 1933.

The CFTC has primary regulatory authority over all other swaps, such as energy and agricultural swaps. The CFTC and SEC share authority over “mixed swaps,” which are security-based swaps that also have a commodity component.

In addition, the SEC has anti-fraud enforcement authority over swaps that are related to securities but that do not come within the definition of “security-based swap.” These are called “security-based swap agreements.” The Dodd-Frank Act provides the SEC with access to information relating to security-based swap agreement in the possession of the CFTC and certain CFTC-regulated entities, such as derivatives clearing organizations, designated contract markets, and swap data repositories.

Implementation: There are a number of rulemakings required under Title VII. The CFTC and SEC are required to act jointly to define key terms relating to jurisdiction (such as swap, security-based swap, and security-based swap agreement) and market intermediaries (such as swap and security-based swap dealers and major swap and security-based swap participants), as well as adopt joint regulations regarding mixed swaps and prescribe trade repository recordkeeping requirements, and books and records requirements for swap entities related to security-based swap agreements. The SEC is required to consult with the CFTC and the Federal Reserve Board on non-joint rulemakings and with the other prudential regulators on capital and margin rules. The CFTC, SEC and U.S. prudential regulators also are consulting with non-U.S. regulatory authorities on the establishment of consistent international standards for products and entities in this area.

As of May 2013, the SEC has proposed:

In addition, as of May 2013, the SEC has adopted:

The SEC also has adopted an interim final rule regarding the reporting of outstanding security-based swaps entered into prior to the date of enactment of the Dodd-Frank Act.

Interim Actions

The SEC has taken a number of steps to provide legal certainty and avoid unnecessary market disruption that might otherwise have arisen as a result of final rules not having been enacted by the July 16, 2011, effective date of Title VII. Specifically, the SEC has:

Road Map

The SEC has issued a policy statement describing the order in which it expects new rules regulating the derivatives market would take effect. The policy statement does not estimate when the rules would be put in place, but describes the sequence in which they would take effect. The phased-in approach is intended to avoid the disruption that could occur if all the new rules took effect simultaneously.

In addition, the policy statement discusses the timing of the expiration of the temporary relief the SEC previously granted to securities-based swaps market participants under the interim actions described above.

Modified: 05/02/2013