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SEC CFTC Seek Comments on Dodd-Frank Swap Proposals

Melissa Klein Aguilar | December 8, 2010

The Securities and Exchange Commission and the Commodity Futures Trading Commission are forging ahead with their Dodd-Frank Act mandate to write new rules to bring the derivatives market under the regulatory umbrella.

As part of their work to establish a framework for regulating the over-the counter swaps market, the agencies have published their proposed definitions of the terms “swap dealer,” “security-based swap dealer,” “major swap participant,” “major security-based swap participant” and “eligible contract participant.” Those definitions will determine which swap dealers will be subject to registration, margin, capital and business conduct requirements.

The SEC has authority over security-based swaps-defined as swaps based on a single security, a loan, or a narrow-based group or index of securities, or events relating to a single issuer or issuers of securities in a narrow-based security index. The CFTC has primary regulatory authority for all other swaps. They share authority over “mixed swaps,” security-based swaps with a commodity component.

Dodd-Frank defines “security-based swap dealers” as persons who hold themselves out as a dealer; make a market in security-based swaps; regularly enter into such swaps with counterparties or are commonly known as a dealer or market maker in security-based swaps.

Among other things, the proposed rules, detailed in a 179-page release, would exempt dealers who meet four conditions: The aggregate amount of security-based swaps they enter into can't exceed $100 million over the prior year; the amount of security-based swaps with “special entities” over the prior year can't exceed $25 million; they can't enter into security-based swaps as a dealer with more than 15 counterparties over the prior year, and they can't enter into more than 20 security-based swaps as a dealer over the prior year.

Comments on the proposals are due 60 days after their publication in the Federal Register.

Meanwhile, the agencies will hold a joint public roundtable on Dec. 10, to discuss issues related to capital and margin requirements for swap and security-based swap dealers, and major swap and security-based swap participants.

The SEC and CFTC are also seeking comment until Dec. 31 for a Dodd-Frank mandated study on “the feasibility of requiring the derivatives industry to adopt standardized computer-readable algorithmic descriptions which may be used to describe complex and standardized financial derivatives.”