On August 20, 2010, the US Commodity and Futures Trading Commission (CFTC) and the US Securities and Exchange Commission (SEC) published their joint Advance Notice of Proposed Rulemaking (ANPR) in the Federal Register seeking public comments on the so-called “Key Definitions” of the Wall Street Transparency and Accountability Act (the Act), which is Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Specifically, the ANPR requests comments on the proposed definitions of the following terms:

  • Swap
  • Security-based swap
  • Swap dealer
  • Security-based swap dealer
  • Major swap participant
  • Major security-based swap participant
  • Eligible contract participant
  • Security-based swap agreement

In addition, the ANPR requests comments on the required regulations regarding “mixed swaps” under the Act.

This is an important rulemaking and will likely elicit extensive comments: indeed, some have already been made1 and many industry groups have already met with SEC and/or CFTC Staff regarding this rulemaking.

The definitions of these terms will effectively set the Act’s regulatory boundaries. For example, the Act’s definition of “swap” (especially clause (ii)) is quite broad and arguably includes the following:

  • Certain insurance and reinsurance contracts, particularly non-traditional contracts such as industry-loss warranties or contracts with embedded derivatives2
  • Gaming contracts
  • Catastrophe bonds
  • Loan participations

The definition may also include other transactions that many (if not most) market participants would not regard as a swap, and certainly would not regard as transactions that require the extensive regulation and related oversight contemplated in the Act.

In the ANPR, the CFTC and the SEC note that they are required to jointly further define these terms in consultation with the Board of Governors of the Federal Reserve System.

Under the ANPR, comments are to be in writing in any of the several methods provided in the ANPR and are to be received not later than 5:00 p.m., Eastern time, on September 20, 2010.

For more information about the proposed rulemaking, or any other matter raised in this Legal Update, please contact Joshua Cohn at +1 212 506 2539, J. Paul Forrester at +1 312 701 7366, or David R. Sahr at +1 212 506 2540.

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1. Comments are available on the SEC’s website at: http://sec.gov/comments/df-title-vii/definitions/definitions.shtml and on the CFTC’s website at: http://www.cftc.gov/LawRegulation/FederalRegister/CommentFiles/10-012.html.

2. It is far from clear that provisions of the Dodd-Frank Act pertaining to the regulation of swaps will apply to insurance and reinsurance contracts that are regulated by state law. The federal McCarran-Ferguson Act provides, in pertinent part: “No Act of Congress shall be construed to . . . supersede any law enacted by any State for the purpose of regulating the business of insurance . . . unless such Act specifically relates to the business of insurance.” 15 U.S.C. § 1012(b) (emphasis added). The decisive question, therefore, is whether the relevant provisions of the Dodd-Frank Act would be deemed to “specifically relate” to the business of insurance, and it seems unlikely that such provisions would be deemed to relate to traditional insurance and reinsurance contracts.