The U.S. Securities and Exchange Commission (SEC) is taking another step toward defining the terms that will be used in implementing the swaps provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The SEC commissioners have voted 5-0 to get comments on draft definitions for terms such as “major swap participant,” “financial entity” and “highly leveraged.”

In the Dodd-Frank Act, Congress has defined a swap as any agreement, contract or transaction Dodd-Frank compassthat 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 SEC is supposed to share jurisdiction over swaps with the Commodity Futures Trading Commission, and the precise definitions could affect which agency, if any, regulates a transaction, and how strict the rules governing the parties involved in the swaps will be.

The SEC has not yet published the draft definitions in the Federal Register. A summary of the draft swaps definitions on the SEC website does not refer directly to insurers or insurance.

Officials do discuss the definition of a “financial entity,” other than a federally regulated bank, “that is ‘highly leveraged’ relative to the amount of capital it holds, and that maintains a substantial position in a major category of security-based swaps.”

“For this aspect of the definition, the Commission proposes to use the definition of ‘financial entity’ that is based on the definition of that term in the Dodd-Frank Act provision for an end-user exception from mandatory clearing,” officials say.

In Section 723 of the Dodd-Frank Act, drafters define the term “financial entity” to include an employee benefit plan, a “major swap participant,” a “major security-based swap participant,” a private fund, or “a person predominantly engaged in activities that are in the business of banking, or in activities that are financial in nature, as defined in section 4(k) of the Bank Holding Company Act of 1956.”

Insurers use swaps and other types of derivatives to manage investment risk, currency risk, and the risks associated with offering guaranteed benefits and guaranteed premium rates.

Regulators have taken a keen interest in swaps and other derivatives because the derivatives markets tend to operate on the assumption that counterparty defaults are unlikely, and that a party’s gains will usually offset most of its losses. Because of faith that gains and losses will net out, the parties may let total, “notional” exposure rise to a high level.

The notional amount of derivatives outstanding June 30 was about $434 trillion, and the notional amount of outstanding default swaps was about $26 trillion, according to the International Swaps and Derivatives Association Inc., New York.