CFTC and SEC jointly adopt final swap entity definition rules

Abstract

Purpose

The aim of the paper is to explain the joint final rules adopted on April 18, 2012 by the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) further defining the major categories of swap and security‐based swap market participants, “swap dealer“, “security‐based swap dealer”, “major swap participant”, “major security‐based swap participant” and “eligible contract participant” and to explain the process of evaluating a party's status under the rules.

Design/methodology/approach

The paper provides the statutory definition of a dealer, and explains the CFTC's and the SEC's interpretive guidance, including four tests and a discussion of the CFTC and SEC dealer trader distinctions, swaps not considered in determining dealer status, and a de minimis exception. It provides the statutory definition of a major participant, along with the four major categories of swaps and an explanation of the “substantial position”, “substantial counterparty exposure” and “highly leveraged” criteria, along with the exclusion of positions held for hedging or mitigating commercial risk from the substantial position analysis. A Dodd‐Frank amended definition of an eligible contract participant (ECP) along with the final ECP rules is provided.

Findings

All swap market participants will need to know whether they qualify as one of these entities because each type of entity figures prominently in the new swap market requirements imposed by the Dodd‐Frank Act.

Originality/value

The paper provides practical guidance from experienced financial services lawyers.

Citation

Lurton, A., Bennett, B., Massey, W., Fleishman, R., Herman, M., Sorrell, M. and Hewitt, R. (2012), "CFTC and SEC jointly adopt final swap entity definition rules", Journal of Investment Compliance, Vol. 13 No. 3, pp. 51-59. https://doi.org/10.1108/15285811211266119