The US Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) have issued joint rules and interpretations clarifying the scope of key definitions of certain derivatives products, as required under Title VII of the Dodd-Frank Act. These definitions are required to be finalised in order for full implementation of the Dodd-Frank regulatory regime relating to the over-the-counter (OTC) swaps markets to proceed.
The long-awaited rules and interpretations further define the terms ‘swap, ‘security-based swap’ and ‘security-based swap agreement’. The interpretations also cover the scope of ‘mixed swaps’ which are regulated by both agencies, which both the CFTC and SEC believe to be a narrow category, and records requirements for ‘security-based swap agreements’.
Additional rules will be adopted by the CFTC to address potential evasion of Title VII. In particular, rules will be adopted to ensure that transactions that are willfully structured to evade the provisions of Title VII governing the regulation of swaps will be caught by the regime.
The issue of these definitional rules is a significant milestone in the establishment of the Dodd-Frank regulatory regime for derivatives, as the dates for compliance with many other rules under the Dodd-Frank regime are dependent on the date of adoption of these definitional rules.
The definitional rules become effective 60 days after their publication in the US Federal Register. The date of publication is not certain, but it is expected to occur shortly.
With a clearer picture on their market participant designation and the requirements placed on them as a result, firms must prepare now for the implementation of the provisions of Title VII of Dodd-Frank between now and April 2013.