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Regulation and Compliance > Federal Regulation > SEC

Dodd-Frank: The Swaps Dictionary

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The U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) refer to insurers in two sections of a swaps definitions document.

The SEC and the CFTC have developed the swaps definitions document to implement parts of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Title VII of the act will create a new swaps regulatory system that involves both the SEC and the CFTC. The SEC is supposed to define and regulate “security-based swaps,” and the CFTC is supposed to regulate other types of swaps.

The SEC and CFTC asking for public comments on the efforts to fine-tune the “key definitions” to be used in the regulatory process.

“Commenters are encouraged to address aspects of the key definitions such as the extent to which the definitions should be based on qualitative or quantitative factors and what those factors should be, any analogous areas of law, economics, or industry practice, and any factors specific to the commenter’s experience,” officials say.

In the Dodd-Frank Act, Congress has developed a long definition of the term “swap.”

The definition includes any agreement, contract or transaction that is a “put, call, cap, floor, collar, or similar option of any kind that is for the purchase or sale, or based on the value, of 1 or more interest or other rates, currencies, commodities, securities, instruments of indebtedness, indices, quantitative measures, or other financial or economic interests or property of any kind.”

The definition also includes any arrangement that provides for “any purchase, sale, payment, or delivery (other than a dividend on an equity security) that is dependent on the occurrence, nonoccurrence, or the extent of the occurrence of an event or contingency associated with a potential financial, economic, or commercial consequence,” and it includes any security-based swap agreement that meets the definition of “swap agreement” given in Section 206A of the GrammLeach-Bliley Financial Services Modernization Act of 1999 in which “a material term is based on the price, yield, value, or volatility of any security or any group or index of securities, or any interest therein.”

The SEC and CFTC will be implementing another term included in the Dodd-Frank Act: “Eligible contract participant.”

Eligible contract participants can continue to participate in swaps transactions without going through an exchange or similar facility; other parties that want to get involved with swaps must have the transactions cleared.

Under the terms of the Dodd-Frank Act, the definition of “eligible contract participant” includes “an insurance company that is regulated by a state, or that is regulated by a foreign government and is subject to comparable regulation as determined by the [Commodity Futures Trading] Commission, including a regulated subsidiary or affiliate of such an insurance company,” officials say.

In another part of the definition of eligible contract participant, the SEC and CFTC say the definition includes an employee benefit plan subject to the Employee Retirement Income Security Act, a governmental employee benefit plan, or a foreign person performing a similar role, if the plan has more than $5 million in assets or the plan’s investment decisions are made by an investment advisor or commodity advisor, a foreign investment or commodity advisor, a financial institution, or an insurance company or a regulated subsidiary or affiliate of an insurance company.


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