The U.S. Commodity Futures Trading Commission (the "CFTC") and the SEC have unanimously adopted new rules under the Commodity Exchange Act (the "CEA") and the Securities Exchange Act of 1934 (the "Exchange Act"), which further define certain terms under the comprehensive regulatory framework for derivatives established by the Dodd-Frank Act. In addition, the CFTC and SEC adopted a joint final interim rule which excludes certain hedging swaps for purposes of determining whether a person is a swap dealer.
In general, the Dodd-Frank Act divides regulatory authority in respect of swaps among the CFTC and the SEC. The Act also adds the terms "swap dealer," "security-based swap dealer," "major swap participant," "major security-based swap participant" and "eligible contract participant" to the CEA and the Exchange Act. In turn, Congress called upon the CFTC and SEC to further define these terms, among others.
Under the final rules, a person may determine if it is a swap dealer by satisfying one of four regulatory tests. For purposes of these tests, a person may exclude any swap activities that are not part of such person's regular business as well as swaps falling into specifically excluded categories (e.g., swaps that hedge physical positions and swaps between majority-owned affiliates). The final rules also provide for a de minimis exemption for certain credit default swaps of not more than $3 billion ($150 million for other security-based swaps). Persons that meet either the definition of "swap dealer" or "security-based swap dealer" are subject to statutory requirements related to, among other things, registration, margin, capital and business conduct.
Alternatively, a person may be a "major swap participant" or a "major security-based swap participant" under the new rules if it is not a "swap dealer" and it meets one of three statutory tests. In providing guidance with respect to these tests, the CFTC and SEC stated that investment advisers are not required to include the swap positions of their managed accounts. The rules also clarify the definition of "eligible contract participants" generally and for purposes of retail forex transactions.
The rules will become effective 60 days from their publication in the Federal Register, except that the rules with respect to "eligible contract participants" will not take effect until the end of 2012.