[Federal Register Volume 77, Number 156 (Monday, August 13, 2012)]
[Rules and Regulations]
[Pages 48207-48366]
[FR Doc No: 2012-18003]

Vol. 77

Monday,

No. 156

August 13, 2012

Part II

Commodity Futures Trading Commission

17 CFR Part 1

Securities and Exchange Commission

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17 CFR Parts 230, 240 and 241

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Further Definition of ``Swap,'' ``Security-Based Swap,'' and
``Security-Based Swap Agreement''; Mixed Swaps; Security-Based Swap
Agreement Recordkeeping; Final Rule

Federal Register / Vol. 77, No. 156 / Monday, August 13, 2012 / Rules
and Regulations

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 1

RIN 3038-AD46

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 230, 240 and 241

[Release No. 33-9338; 34-67453; File No. S7-16-11]
RIN 3235-AK65

Further Definition of ``Swap,'' ``Security-Based Swap,'' and
``Security-Based Swap Agreement''; Mixed Swaps; Security-Based Swap
Agreement Recordkeeping

AGENCY: Commodity Futures Trading Commission; Securities and Exchange
Commission.

ACTION: Joint final rule; interpretations; request for comment on an
interpretation.

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SUMMARY: In accordance with section 712(a)(8), section 712(d)(1),
sections 712(d)(2)(B) and (C), sections 721(b) and (c), and section
761(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act
(``Dodd-Frank Act''), the Commodity Futures Trading Commission
(``CFTC'') and the Securities and Exchange Commission (``SEC'')
(collectively, ``Commissions''), in consultation with the Board of
Governors of the Federal Reserve System (``Board''), are jointly
adopting new rules and interpretations under the Commodity Exchange Act
(``CEA'') and the Securities Exchange Act of 1934 (``Exchange Act'') to
further define the terms ``swap,'' ``security-based swap,'' and
``security-based swap agreement'' (collectively, ``Product
Definitions''); regarding ``mixed swaps;'' and governing books and
records with respect to ``security-based swap agreements.'' The CFTC
requests comment on its interpretation concerning forwards with
embedded volumetric optionality, contained in Section II.B.2.(b)(ii) of
this release.

DATES: Effective date: October 12, 2012.
    Compliance date: The applicable compliance dates are discussed in
the section of the release titled ``IX. Effective Date and
Implementation''.
    Comment date: Comments on the interpretation regarding forwards
with embedded volumetric optionality must be received on or before
October 12, 2012.

ADDRESSES: You may submit comments, identified by RIN number 3038-AD46,
by any of the following methods:
     CFTC Web Site: via its Comments Online process: http://comments.cftc.gov. Follow the instructions for submitting comments
through the Web site.
     Mail: Address to David A. Stawick, Secretary of the
Commission, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street NW., Washington, DC 20581.
     Hand Delivery/Courier: Same as mail above.
     Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
    All comments must be submitted in English or, if not, accompanied
by an English translation. Comments will be posted as received to
http://www.cftc.gov. You should submit only information that you wish
to make available publicly. If you wish the CFTC to consider
information that is exempt from disclosure under the Freedom of
Information Act, a petition for confidential treatment of the exempt
information may be submitted according to the procedures established in
Sec.  145.9 of the CFTC's Regulations.\1\
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    \1\ 17 CFR 145.9.
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    The CFTC reserves the right, but shall have no obligation, to
review, pre-screen, filter, redact, refuse or remove any or all of your
submission from http://www.cftc.gov that it may deem to be
inappropriate for publication, such as obscene language. All
submissions that have been redacted or removed that contain comments on
the merits of the interpretation will be retained in the public comment
file and will be considered as required under the Administrative
Procedure Act and other applicable laws, and may be accessible under
the Freedom of Information Act.

FOR FURTHER INFORMATION CONTACT: CFTC: Julian E. Hammar, Assistant
General Counsel, at<PHONE_NUMBER><EMAIL_ADDRESS>Lee Ann Duffy,
Assistant General Counsel, at<PHONE_NUMBER><EMAIL_ADDRESS>Mark
Fajfar, Assistant General Counsel, at<PHONE_NUMBER><EMAIL_ADDRESS>
or David E. Aron, Counsel, at<PHONE_NUMBER><EMAIL_ADDRESS>Office of
General Counsel, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street NW., Washington, DC 20581; SEC: Donna M.
Chambers, Special Counsel, at<PHONE_NUMBER>, or John Guidroz, Attorney-
Adviser, at<PHONE_NUMBER>, Division of Trading and Markets, or Andrew
Schoeffler, Special Counsel, at<PHONE_NUMBER>, Office of Capital Markets
Trends, Division of Corporation Finance, or Wenchi Hu, Senior Special
Counsel, at<PHONE_NUMBER>, Office of Compliance, Inspections and
Examinations, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
II. Scope of Definitions of Swap and Security-Based Swap
    A. Introduction
    B. Rules and Interpretations Regarding Certain Transactions
outside the Scope of the Definitions of the Terms ``Swap'' and
``Security-Based Swap''
    1. Insurance Products
    (a) Types of Insurance Products
    (b) Providers of Insurance Products
    (c) Grandfather Provision for Existing Insurance Transactions
    (d) Alternative Tests
    (e) ``Safe Harbor''
    (f) Applicability of Insurance Exclusion to Security-Based Swaps
    (g) Guarantees
    2. The Forward Contract Exclusion
    (a) Forward Contracts in Nonfinancial Commodities
    (i) Forward Exclusion From the Swap and Future Delivery
Definitions
    (ii) Nonfinancial Commodities
    (iii) Environmental Commodities
    (iv) Physical Exchange Transactions
    (v) Fuel Delivery Agreements
    (vi) Cleared/Exchange-Traded Forwards
    (b) Commodity Options and Commodity Options Embedded in Forward
Contracts
    (i) Commodity Options
    (ii) Commodity Options Embedded in Forward Contracts
    (iii) Certain Physical Commercial Agreements, Contracts or
Transactions
    (iv) Effect of Interpretation on Certain Agreements, Contracts
and Transactions
    (v) Liquidated Damages Provisions
    (c) Security Forwards
    3. Consumer and Commercial Agreements, Contracts, and
Transactions
    C. Final Rules and Interpretations Regarding Certain
Transactions Within the Scope of the Definitions of the Terms
``Swap'' and ``Security-Based Swap''
    1. In General
    2. Foreign Exchange Products
    (a) Foreign Exchange Products Subject to the Secretary's Swap
Determination: Foreign Exchange Forwards and Foreign Exchange Swaps
    (b) Foreign Exchange Products Not Subject to the Secretary's
Swap Determination
    (i) Foreign Currency Options
    (ii) Non-Deliverable Forward Contracts Involving Foreign
Exchange
    (iii) Currency Swaps and Cross-Currency Swaps
    (c) Interpretation Regarding Foreign Exchange Spot Transactions
    (d) Retail Foreign Currency Options
    3. Forward Rate Agreements
    4. Combinations and Permutations of, or Options on, Swaps and
Security-Based Swaps
    5. Contracts for Differences
    D. Certain Interpretive Issues
    1. Agreements, Contracts, or Transactions That May Be Called, or
Documented

Using Form Contracts Typically Used for, Swaps or Security-Based
Swaps
    2. Transactions in Regional Transmission Organizations and
Independent System Operators
III. The Relationship Between the Swap Definition and the Security-
Based Swap Definition
    A. Introduction
    B. Title VII Instruments Based on Interest Rates, Other Monetary
Rates, and Yields
    1. Title VII Instruments Based on Interest Rates or Other
Monetary Rates That Are Swaps
    2. Title VII Instruments Based on Yields
    3. Title VII Instruments Based on Government Debt Obligations
    C. Total Return Swaps
    D. Security-Based Swaps Based on a Single Security or Loan and
Single-Name Credit Default Swaps
    E. Title VII Instruments Based on Futures Contracts
    F. Use of Certain Terms and Conditions in Title VII Instruments
    G. The Term ``Narrow-Based Security Index'' in the Security-
Based Swap Definition
    1. Introduction
    2. Applicability of the Statutory Narrow-Based Security Index
Definition and Past Guidance of the Commissions to Title VII
Instruments
    3. Narrow-Based Security Index Criteria for Index Credit Default
Swaps
    (a) In General
    (b) Rules Regarding the Definitions of ``Issuers of Securities
in a Narrow-Based Security Index'' and ``Narrow-Based Security
Index'' for Index Credit Default Swaps
    (i) Number and Concentration Percentages of Reference Entities
or Securities
    (ii) Affiliation of Reference Entities and Issuers of Securities
With Respect to Number and Concentration Criteria
    (iii) Public Information Availability Regarding Reference
Entities and Securities
    (iv) Affiliation of Reference Entities and Issuers of Securities
With Respect to Certain Criteria of the Public Information
Availability Test
    (v) Application of the Public Information Availability
Requirements to Indexes Compiled by a Third-Party Index Provider
    (vi) Treatment of Indexes Including Reference Entities That Are
Issuers of Exempted Securities or Including Exempted Securities
    4. Security Indexes
    5. Evaluation of Title VII Instruments on Security Indexes That
Move From Broad-Based to Narrow-Based or Narrow-Based to Broad-Based
    (a) In General
    (b) Title VII Instruments on Security Indexes Traded on
Designated Contract Markets, Swap Execution Facilities, Foreign
Boards of Trade, Security-Based Swap Execution Facilities, and
National Securities Exchanges
    H. Method of Settlement of Index CDS
    I. Security-Based Swaps as Securities Under the Exchange Act and
Securities Act
IV. Mixed Swaps
    A. Scope of the Category of Mixed Swap
    B. Regulation of Mixed Swaps
    1. Introduction
    2. Bilateral Uncleared Mixed Swaps Entered Into by Dually-
Registered Dealers or Major Participants
    3. Regulatory Treatment for Other Mixed Swaps
    V. Security-Based Swap Agreements
    A. Introduction
    B. Swaps That Are Security-Based Swap Agreements
    C. Books and Records Requirements for Security-Based Swap
Agreements
VI. Process for Requesting Interpretations of the Characterization
of a Title VII Instrument
VII. Anti-Evasion
    A. CFTC Anti-Evasion Rules
    1. CFTC's Anti-Evasion Authority
    (a) Statutory Basis for the Anti-Evasion Rules
    2. Final Rules
    (a) Rule 1.3(xxx)(6)
    (b) Rule 1.6
    (c) Interpretation on the Final Rules
    3. Interpretation Contained in the Proposing Release
    (a) Business Purpose Test
    (b) Fraud, Deceit or Unlawful Activity
    B. SEC Position Regarding Anti-Evasion Rules
VIII. Miscellaneous Issues
    A. Distinguishing Futures and Options From Swaps
    B. Transactions Entered Into by Foreign Central Banks, Foreign
Sovereigns, International Financial Institutions, and Similar
Entities
    C. Definition of the Terms ``Swap'' and ``Security-Based Swap''
as Used in the Securities Act
IX. Effective Date and Implementation
X. Administrative Law Matters--CEA Revisions
    A. Paperwork Reduction Act
    B. Regulatory Flexibility Act
    C. Costs and Benefits Considerations
XI. Administrative Law Matters--Exchange Act Revisions
    A. Economic Analysis
    B. Paperwork Reduction Act
    C. Regulatory Flexibility Act Certification
XII. Statutory Basis and Rule Text

I. Backbround

    On July 21, 2010, President Obama signed the Dodd-Frank Act into
law.\2\ Title VII of the Dodd-Frank Act \3\ (``Title VII'') established
a comprehensive new regulatory framework for swaps and security-based
swaps. The legislation was enacted, among other reasons, to reduce
risk, increase transparency, and promote market integrity within the
financial system, including by: (i) Providing for the registration and
comprehensive regulation of swap dealers, security-based swap dealers,
major swap participants, and major security-based swap participants;
(ii) imposing clearing and trade execution requirements on swaps and
security-based swaps, subject to certain exceptions; (iii) creating
rigorous recordkeeping and real-time reporting regimes; and (iv)
enhancing the rulemaking and enforcement authorities of the Commissions
with respect to, among others, all registered entities and
intermediaries subject to the Commissions' oversight.
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    \2\ See Dodd-Frank Wall Street Reform and Consumer Protection
Act, Public Law 111-203, 124 Stat. 1376 (2010). The text of the
Dodd-Frank Act is available at http://www.cftc.gov/LawRegulation/OTCDERIVATIVES/index.htm.
    \3\ Pursuant to section 701 of the Dodd-Frank Act, Title VII may
be cited as the ``Wall Street Transparency and Accountability Act of
2010.''
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    Section 712(d)(1) of the Dodd-Frank Act provides that the
Commissions, in consultation with the Board, shall jointly further
define the terms ``swap,'' ``security-based swap,'' and ``security-
based swap agreement'' (``SBSA'').\4\ Section 712(a)(8) of the Dodd-
Frank Act provides further that the Commissions shall jointly prescribe
such regulations regarding ``mixed swaps'' as may be necessary to carry
out the purposes of Title VII. In addition, sections 721(b) and 761(b)
of the Dodd-Frank Act provide that the Commissions may adopt rules to
further define terms included in subtitles A and B, respectively, of
Title VII, and sections 721(c) and 761(b) of the Dodd-Frank Act provide
the Commissions with authority to define the terms ``swap'' and
``security-based swap,'' as well as the terms ``swap dealer,'' ``major
swap participant,'' ``security-based swap dealer,'' and ``major
security-based swap participant,'' to include transactions and entities
that have been structured to

evade the requirements of subtitles A and B, respectively, of Title
VII.
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    \4\ In addition, section 719(d)(1)(A) of the Dodd-Frank Act
requires the Commissions to conduct a joint study, within 15 months
of enactment, to determine whether stable value contracts, as
defined in section 719(d)(2) of the Dodd-Frank Act, are encompassed
by the swap definition. If the Commissions determine that stable
value contracts are encompassed by the swap definition, section
719(d)(1)(B) of the Dodd-Frank Act requires the Commissions jointly
to determine whether an exemption for those contracts from the swap
definition is appropriate and in the public interest. Section
719(d)(1)(B) also requires the Commissions to issue regulations
implementing the determinations made under the required study. Until
the effective date of such regulations, the requirements under Title
VII do not apply to stable value contracts, and stable value
contracts in effect prior to the effective date of such regulations
are not considered swaps. See section 719(d) of the Dodd-Frank Act.
The Commissions currently are conducting the required joint study
and will consider whether to propose any implementing regulations
(including, if appropriate, regulations determining that stable
value contracts: (i) Are not encompassed within the swap definition;
or (ii) are encompassed within the definition but are exempt from
the swap definition) at the conclusion of that study.
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    Section 712(d)(2)(B) of the Dodd-Frank Act requires the
Commissions, in consultation with the Board, to jointly adopt rules
governing books and records requirements for SBSAs by persons
registered as swap data repositories (``SDRs'') under the CEA,\5\
including uniform rules that specify the data elements that shall be
collected and maintained by each SDR.\6\ Similarly, section
712(d)(2)(C) of the Dodd-Frank Act requires the Commissions, in
consultation with the Board, to jointly adopt rules governing books and
records for SBSAs, including daily trading records, for swap dealers,
major swap participants, security-based swap dealers, and security-
based swap participants.\7\
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    \5\ 7 U.S.C. 1 et seq.
    \6\ The CFTC has issued final rules regarding SDRs and,
separately, swap data recordkeeping and reporting. See Swap Data
Repositories: Registration Standards, Duties and Core Principles, 76
FR 54538 (Sep. 1, 2011); Swap Data Recordkeeping and Reporting
Requirements, 77 FR 2136 (Jan. 13, 2012). The SEC has also issued
proposed rules regarding security-based swap data repositories
(``SBSDRs''), including rules specifying data collection and
maintenance standards for SBSDRs, as well as rules regarding
security-based swap data recordkeeping and reporting. See Security-
Based Swap Data Repository Registration, Duties, and Core
Principles, 75 FR 77306 (Dec. 10, 2010); Regulation SBSR--Reporting
and Dissemination of Security-Based Swap Information, 75 FR 75208
(Dec. 2, 2010).
    \7\ The CFTC has issued final rules regarding recordkeeping
requirements for swap dealers and major swap participants. See Swap
Dealer and Major Swap Participant Recordkeeping, Reporting, and
Duties Rules; Futures Commission Merchant and Introducing Broker
Conflicts of Interest Rules; and Chief Compliance Officer Rules for
Swap Dealers, Major Swap Participants, and Futures Commission
Merchants, 77 FR 20128 (Apr. 3, 2012).
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    Under the comprehensive framework for regulating swaps and
security-based swaps established in Title VII, the CFTC is given
regulatory authority over swaps,\8\ the SEC is given regulatory
authority over security-based swaps,\9\ and the Commissions shall
jointly prescribe such regulations regarding mixed swaps as may be
necessary to carry out the purposes of Title VII.\10\ In addition, the
SEC is given antifraud authority over, and access to information from,
certain CFTC-regulated entities regarding SBSAs, which are a type of
swap related to securities over which the CFTC is given regulatory
authority.\11\
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    \8\ Section 721(a) of the Dodd-Frank Act defines the term
``swap'' by adding section 1a(47) to the CEA, 7 U.S.C. 1a(47). This
new swap definition also is cross-referenced in new section 3(a)(69)
of the Exchange Act, 15 U.S.C. 78c(a)(69). Citations to provisions
of the CEA and the Exchange Act, 15 U.S.C. 78a et seq., in this
release refer to the numbering of those provisions after the
effective date of Title VII, except as indicated.
    \9\ Section 761(a) of the Dodd-Frank Act defines the term
``security-based swap'' by adding new section 3(a)(68) to the
Exchange Act, 15 U.S.C. 78c(a)(68). This new security-based swap
definition also is cross-referenced in new CEA section 1a(42), 7
U.S.C. 1a(42). The Dodd-Frank Act also explicitly includes security-
based swaps in the definition of security under the Exchange Act and
the Securities Act of 1933 (``Securities Act''), 15 U.S.C. 77a et
seq.
    \10\ Section 721(a) of the Dodd-Frank Act describes the category
of ``mixed swap'' by adding new section 1a(47)(D) to the CEA, 7
U.S.C. 1a(47)(D). Section 761(a) of the Dodd-Frank Act also includes
the category of ``mixed swap'' by adding new section 3(a)(68)(D) to
the Exchange Act, 15 U.S.C. 78c(68)(D). A mixed swap is defined as a
subset of security-based swaps that also are based on the value of 1
or more interest or other rates, currencies, commodities,
instruments of indebtedness, indices, quantitative measures, other
financial or economic interest or property of any kind (other than a
single security or a narrow-based security index), or the
occurrence, non-occurrence, or the extent of the occurrence of an
event or contingency associated with a potential financial,
economic, or commercial consequence (other than the occurrence, non-
occurrence, or extent of the occurrence of an event relating to a
single issuer of a security or the issuers of securities in a
narrow-based security index, provided that such event directly
affects the financial statements, financial condition, or financial
obligations of the issuer).
    \11\ Section 761(a) of the Dodd-Frank Act defines the term
``security-based swap agreement'' by adding new section 3(a)(78) to
the Exchange Act, 15 U.S.C. 78c(a)(78). The CEA includes the
definition of ``security-based swap agreement'' in subparagraph
(A)(v) of the swap definition in CEA section 1a(47), 7 U.S.C.
1a(47). The only difference between these definitions is that the
definition of SBSA in the Exchange Act specifically excludes
security-based swaps (see section 3(a)(78)(B) of the Exchange Act,
15 U.S.C. 78c(a)(78)(B)), whereas the definition of SBSA in the CEA
does not contain a similar exclusion. Instead, under the CEA, the
exclusion for security-based swaps is placed in the general
exclusions from the swap definition (see CEA section 1a(47)(B)(x), 7
U.S.C. 1a(47)(B)(x)). Although the statutes are slightly different
structurally, the Commissions interpret them to have consistent
meaning that the category of security-based swap agreements excludes
security-based swaps.
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    To assist the Commissions in further defining the Product
Definitions (as well as certain other definitions) and in prescribing
regulations regarding mixed swaps as may be necessary to carry out the
purposes of Title VII, the Commissions published an advance notice of
proposed rulemaking (``ANPR'') in the Federal Register on August 20,
2010.\12\ The comment period for the ANPR closed on September 20,
2010.\13\ The Commissions received comments addressing the Product
Definitions and/or mixed swaps in response to the ANPR, as well as
comments in response to the Commissions' informal solicitations,\14\
from a wide range of commenters. Taking into account comments received
on the ANPR, the Commissions published a notice of proposed rulemaking
in the Federal Register on May 23, 2011.\15\ The comment period for the
Proposing Release closed on July 22, 2011.\16\ Together, the
Commissions received approximately 86 written comment letters in
response to the Proposing Release.
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    \12\ See Definitions Contained in Title VII of Dodd-Frank Wall
Street Reform and Consumer Protection Act, 75 FR 51429 (Aug. 20,
2010). The ANPR also solicited comment regarding the definitions of
the terms ``swap dealer,'' ``security-based swap dealer,'' ``major
swap participant,'' ``major security-based swap participant,'' and
``eligible contract participant.'' These definitions are the subject
of a separate joint rulemaking by the Commissions. See Further
Definition of ``Swap Dealer,'' ``Security-Based Swap Dealer,''
``Major Swap Participant,'' ``Major Security-Based Swap
Participant'' and ``Eligible Contract Participant,'' 77 FR 30596
(May 23, 2012) (``Entity Definitions Release''). The Commissions
also provided the public with the ability to present their views
more generally on implementation of the Dodd-Frank Act through their
Web sites, dedicated electronic mailboxes, and meetings with
interested parties. See Public Comments on SEC Regulatory
Initiatives Under the Dodd-Frank Act/Meetings with SEC Officials,
located at http://www.sec.gov/spotlight/regreformcomments.shtml;
Public Submissions, located at http://comments.cftc.gov/PublicComments/ReleasesWithComments.aspx; External Meetings, located
at http://www.cftc.gov/LawRegulation/DoddFrankAct/ExternalMeetings/index.htm.
    \13\ Copies of all comments received by the SEC on the ANPR are
available on the SEC's Internet Web site, located at http://www.sec.gov/comments/s7-16-10/s71610.shtml. Comments are also
available for Web site viewing and printing in the SEC's Public
Reference Room, 100 F Street NE., Washington, DC 20549, on official
business days between the hours of 10 a.m. and 3 p.m. Copies of all
comments received by the CFTC on the ANPR are available on the
CFTC's Internet Web site, located at http://www.cftc.gov/LawRegulation/DoddFrankAct/OTC_2_Definitions.html.
    \14\ See supra note 12.
    \15\ See Further Definition of ``Swap,'' ``Security-Based
Swap,'' and ``Security-Based Swap Agreement''; Mixed Swaps;
Security-Based Swap Agreement Recordkeeping, 76 FR 29818 (May 23,
2011) (``Proposing Release'').
    \16\ Id.
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    The Commissions have reviewed and considered the comments received,
and the staffs of the Commissions have met with many market
participants and other interested parties to discuss the
definitions.\17\ Moreover, the Commissions' staffs have consulted
extensively with each other as required by sections 712(a)(1) and (2)
of the Dodd-Frank Act and have consulted with staff of the Board as
required by section 712(d) of the Dodd-Frank Act.
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    \17\ Information about meetings that CFTC staff have had with
outside organizations regarding the implementation of the Dodd-Frank
Act is available at http://www.cftc.gov/LawRegulation/DoddFrankAct/ExternalMeetings/index.htm. Information about meetings that SEC
staff have had with outside organizations regarding the product
definitions is available at http://www.sec.gov/comments/s7-16-10/s71610.shtml#meetings.
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    Based on this review and consultation, the Commissions are adopting
rules and interpretations regarding, among other things: (i) The
regulatory treatment of insurance products; (ii) the exclusion of
forward contracts from the swap and security-

based swap definitions; (iii) the regulatory treatment of certain
consumer and commercial contracts; (iv) the regulatory treatment of
certain foreign-exchange related and other instruments; (v) swaps and
security-based swaps involving interest rates (or other monetary rates)
and yields; (vi) total return swaps (``TRS''); (vii) Title VII
instruments based on futures contracts; (viii) the application of the
definition of ``narrow-based security index'' in distinguishing between
certain swaps and security-based swaps, including credit default swaps
(``CDS'') and index CDS; and (ix) the specification of certain swaps
and security-based swaps that are, and are not, mixed swaps. In
addition, the Commissions are adopting rules: (i) To clarify that there
will not be additional books and records requirements applicable to
SBSAs other than those required for swaps; (ii) providing a mechanism
for requesting the Commissions to interpret whether a particular type
of agreement, contract, or transaction (or class of agreements,
contracts, or transactions) is a swap, security-based swap, or both
(i.e., a mixed swap); and (iii) providing a mechanism for evaluating
the applicability of certain regulatory requirements to particular
mixed swaps. Finally, the CFTC is adopting rules to implement the anti-
evasion authority provided in the Dodd-Frank Act.
Overall Economic Considerations
    The Commissions are sensitive to the costs and benefits of their
rules. In considering the adoption of the Product Definitions, the
Commissions have been mindful of the costs and benefits associated with
these rules, which provide fundamental building blocks for the Title
VII regulatory regime. There are costs, as well as benefits, arising
from subjecting certain agreements, contracts, or transactions to the
regulatory regime of Title VII.\18\ Additionally, there are costs that
parties will incur to assess whether certain agreements, contracts, or
transactions are indeed subject to the Title VII regulatory regime,
and, if so, the costs to assess whether such Title VII instrument is
subject to the regulatory regime of the SEC or the CFTC.\19\
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    \18\ The Commissions refer to these costs and benefits as
programmatic costs and benefits.
    \19\ The Commissions refer to these costs as assessment costs.
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    Title VII created a jurisdictional division between the CFTC and
SEC. The costs and benefits flowing from an agreement, contract, or
transaction being subject to the regulatory regime of the CFTC or the
SEC may be impacted by similarities and differences in the Commissions'
regulatory programs for swaps and security-based swaps. Title VII calls
on the SEC and the CFTC to consult and coordinate for the purposes of
assuring regulatory consistency and comparability to the extent
possible.\20\ Title VII also calls on the agencies to treat
functionally or economically similar products or entities in a similar
manner, but does not require identical rules.\21\ Although the
Commissions may differ on certain rulemakings, as the relevant
products, entities and markets are different, the Commissions believe
that, as the CFTC and SEC regulatory regimes share a statutory basis in
Title VII, the costs and benefits of their respective regimes should be
broadly similar and complementary.
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    \20\ See sections 712(a)(1) and (a)(2) of the Dodd-Frank Act.
    \21\ See sections 712(a)(7)(A) and (B) of the Dodd-Frank Act.
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    In acknowledging the economic consequences of the final rules, the
Commissions recognize that the Product Definitions do not themselves
establish the scope or nature of those substantive requirements or
their related costs and benefits. In determining the appropriate scope
of these rules, the Commissions consider the types of agreement,
contract, or transaction that should be regulated as a swap, security-
based swap, or mixed swap under Title VII in light of the purposes of
the Dodd-Frank Act. The Commissions have sought to further define the
terms ``swap,'' ``security-based swap,'' and ``mixed swap'' to include
agreements, contracts, and transactions only to the extent that
capturing these agreements, contracts, and transactions is necessary
and appropriate given the purposes of Title VII, and to exclude
agreements, contracts, and transactions to the extent that the
regulation of such agreements, contracts, and transactions does not
serve the statutory purposes of Title VII, so as not to impose
unnecessary burdens for agreements, contracts, and transactions whose
regulation may not be necessary or appropriate to further the purposes
of Title VII.

II. Scope of Definitions of Swap and Security-Based Swap

A. Introduction

    Title VII of the Dodd-Frank Act applies to a wide variety of
agreements, contracts, and transactions classified as swaps or
security-based swaps. The statute lists these agreements, contracts,
and transactions in the definition of the term ``swap.'' \22\ The
statutory definition of the term ``swap'' also has various
exclusions,\23\ rules of construction, and other provisions for the
interpretation of the definition.\24\ One of the exclusions to the
definition of the term ``swap'' is for security-based swaps.\25\ The
term ``security-based swap,'' in turn, is defined as an agreement,
contract, or transaction that is a ``swap'' (without regard to the
exclusion from that definition for security-based swaps) and that also
has certain characteristics specified in the statute.\26\ Thus, the
statutory definition of the term ``swap'' also determines the scope of
agreements, contracts, and transactions that could be security-based
swaps.
---------------------------------------------------------------------------

    \22\ See CEA section 1a(47)(A), 7 U.S.C. 1a(47)(A). This swap
definition is also cross-referenced in new section 3(a)(69) of the
Exchange Act, 15 U.S.C. 78c(a)(69).
    \23\ See CEA section 1a(47)(B), 7 U.S.C. 1a(47)(B), clauses (i)-
(x).
    \24\ See CEA sections 1a(47)(C)-(F), 7 U.S.C. 1a(47)(C)-(F).
    \25\ See CEA section 1a(47)(B)(x), 7 U.S.C. 1a(47)(B)(x).
    \26\ See section 3(a)(68) of the Exchange Act, 15 U.S.C.
78c(a)(68).
---------------------------------------------------------------------------

    The statutory definitions of the terms ``swap'' and ``security-
based swap'' are detailed and comprehensive, and the Commissions
believe that extensive ``further definition'' of the terms by rule is
not necessary. Nevertheless, the definitions could be read to include
certain types of agreements, contracts, and transactions that
previously have not been considered swaps or security-based swaps, and
nothing in the legislative history of the Dodd-Frank Act appears to
suggest that Congress intended such agreements, contracts, or
transactions to be regulated as swaps or security-based swaps under
Title VII. The Commissions thus believe that it is important to further
clarify the treatment under the definitions of certain types of
agreements, contracts, and transactions, such as insurance products and
certain consumer and commercial contracts.
    In addition, commenters also raised questions regarding, and the
Commissions believe that it is important to clarify: (i) The exclusion
for forward contracts from the definitions of the terms ``swap'' and
``security-based swap;'' and (ii) the status of certain commodity-
related products (including various foreign exchange products and
forward rate agreements) under the definitions of the terms ``swap''
and ``security-based swap.'' Finally, the Commissions are providing

interpretations related to the definitions.\27\
---------------------------------------------------------------------------

    \27\ In response to the ANPR, some commenters raised concerns
regarding the treatment of inter-affiliate swaps and security-based
swaps. See, e.g., Letter from Edward J. Rosen, Cleary Gottlieb Steen
& Hamilton LLP, Sep. 21, 2010 (``Cleary ANPR Letter''); Letter from
Coalition for Derivatives End Users, Sep. 20, 2010 (``CDEU ANPR
Letter''); Letter from Robert Pickel, Executive Vice President,
International Swaps and Derivatives Association, Inc. (``ISDA''),
Sep. 20, 2010; Letter from Richard A. Miller, Vice President and
Corporate Counsel, Prudential Financial Inc., Sep. 17, 2010; Letter
from Richard M. Whiting, The Financial Services Roundtable, Sep. 20,
2010. A few commenters suggested that the Commissions should further
define the term ``swap'' or ``security-based swap'' to exclude
inter-affiliate transactions. See Cleary ANPR Letter and CDEU ANPR
Letter. The Commissions are considering whether inter-affiliate
swaps or security-based swaps should be treated differently from
other swaps or security-based swaps in the context of the
Commissions' other Title VII rulemakings.
---------------------------------------------------------------------------

B. Rules and Interpretations Regarding Certain Transactions Outside the
Scope of the Definitions of the Terms ``Swap'' and ``Security-Based
Swap''

1. Insurance Products
    The statutory definition of the term ``swap'' includes, in part,
any agreement, contract or transaction ``that provides for any
purchase, sale, payment or delivery (other than a dividend on an equity
security) that is dependent on the occurrence, nonoccurrence, or the
extent of the occurrence of an event or contingency associated with a
potential financial, economic, or commercial consequence.'' \28\ As
stated in the Proposing Release, the Commissions do not interpret this
clause to mean that products historically treated as insurance products
should be included within the swap or security-based swap
definitions.\29\ The Commissions are aware of nothing in Title VII to
suggest that Congress intended for traditional insurance products to be
regulated as swaps or security-based swaps. Moreover, the fact that
swaps and insurance products are subject to different regulatory
regimes is reflected in section 722(b) of the Dodd-Frank Act which, in
new section 12(h) of the CEA, provides that a swap ``shall not be
considered to be insurance'' and ``may not be regulated as an insurance
contract under the law of any State.'' \30\ Accordingly, the
Commissions believe that state or Federally regulated insurance
products that are provided by persons that are subject to state or
Federal insurance supervision, that otherwise could fall within the
definitions should not be considered swaps or security-based swaps so
long as they satisfy the requirements of the Insurance Safe Harbor (as
defined below). At the same time, however, the Commissions are
concerned that certain agreements, contracts, or transactions that are
swaps or security-based swaps might be characterized as insurance
products to evade the regulatory regime under Title VII of the Dodd-
Frank Act.
---------------------------------------------------------------------------

    \28\ CEA section 1a(47)(A)(ii), 7 U.S.C. 1a(47)(A)(ii).
    \29\ See Proposing Release at 29821. The Commissions continue to
believe that it was not the intent of Congress through the swap and
security-based swap definitions to preclude the provision of
insurance to individual homeowners and small businesses that
purchase property and casualty insurance. See section 2(e) of the
CEA, 7 U.S.C. 2(e), and section 6(l) of the Exchange Act, 15 U.S.C.
78f(l) (prohibiting individuals and small businesses that do not
meet specified financial thresholds or other conditions from
entering into swaps or security-based swaps other than on or subject
to the rules of regulated futures and securities exchanges).
Historically, insurance has not been regulated as such under the
Federal securities laws or under the CEA. See infra note 1283.
    \30\ 7 U.S.C. 16(h). Moreover, other provisions of the Dodd-
Frank Act address the status of insurance more directly, and more
extensively, than Title VII. For example, Title V of the Dodd-Frank
Act requires the newly established Federal Insurance Office to
conduct a study and submit a report to Congress, within 18 months of
enactment of the Dodd-Frank Act, on the regulation of insurance,
including the consideration of Federal insurance regulation.
Notably, the Federal Insurance Office's authority under Title V
extends primarily to monitoring and information gathering; its
ability to promulgate Federal insurance regulation that preempts
state insurance regulation is significantly restricted. See section
502 of the Dodd-Frank Act (codified in various sections of 31
U.S.C.). Title V also addressed non-admitted insurance and
reinsurance. Title X of the Dodd-Frank Act also specifically
excludes the business of insurance from regulation by the Bureau of
Consumer Financial Protection. See section 1027(m) of the Dodd-Frank
Act, 12 U.S.C. 5517(m) (``The [Bureau of Consumer Financial
Protection] may not define as a financial product or service, by
regulation or otherwise, engaging in the business of insurance.'');
section 1027(f) of the Dodd-Frank Act, 12 U.S.C. 5517(f) (excluding
persons regulated by a state insurance regulator, except to the
extent they are engaged in the offering or provision of consumer
financial products or services or otherwise subject to certain
consumer laws as set forth in Title X of the Dodd-Frank Act).
---------------------------------------------------------------------------

    Accordingly, the Commissions are adopting final rules that (i)
clarify that certain agreements, contracts, or transactions that
satisfy the requirements of the Insurance Safe Harbor will not be
considered to be swaps or security-based swaps, and (ii) provide an
Insurance Grandfather exclusion from the swap and security-based swap
definitions for any agreement, contract, or transaction entered into on
or before the effective date of the Product Definitions, provided that,
when the parties entered into such agreement, contract, or transaction,
it was provided in accordance with the Provider Test (as defined
below), including a requirement that an agreement, contract or
transaction that is provided in accordance with the first prong of the
Provider Test must be regulated as insurance under applicable state law
or the laws of the United States.
    The final rules contain four subparts: The first subpart addresses
the agreement, contract, or transaction; the second subpart addresses
the person \31\ providing that agreement, contract, or transaction; the
third subpart includes a list of traditional insurance products that do
not have to meet the requirements set out in the first subpart; and the
fourth subpart contains the Insurance Grandfather exclusion (as defined
below).
---------------------------------------------------------------------------

    \31\ In response to commenters, the Commissions are changing the
word ``company'' from the proposal to ``person.'' Each of the CEA,
the Securities Act, and the Exchange Act contains a definition of a
``person.'' See, e.g., Letter from Carl B. Wilkerson, Vice President
& Chief Counsel, American Council of Life Insurers (``ACLI''), dated
July 22, 2011 (``ACLI Letter'') and Letter from John P. Mulhern,
Dewey & LeBoeuf LLP (``D&L''), dated July 22, 2011 (``D&L Letter'').
---------------------------------------------------------------------------

    More specifically, with respect to the first subpart, the
Commissions are adopting paragraph (i)(A) of rule 1.3(xxx)(4) under the
CEA and paragraph (a)(1) of rule 3a69-1 under the Exchange Act (the
``Product Test'') as proposed, with certain modifications to respond to
commenters' concerns. As adopted, the Product Test provides that the
terms ``swap'' and ``security-based swap'' will not include an
agreement, contract, or transaction that, by its terms or by law, as a
condition of performance:
     Requires the beneficiary of the agreement, contract, or
transaction to have an insurable interest that is the subject of the
agreement, contract, or transaction and thereby carry the risk of loss
with respect to that interest continuously throughout the duration of
the agreement, contract, or transaction;
     Requires that loss to occur and be proved, and that any
payment or indemnification therefor be limited to the value of the
insurable interest;
     Is not traded, separately from the insured interest, on an
organized market or over the counter; and
     With respect to financial guaranty insurance only, in the
event of payment default or insolvency of the obligor, any acceleration
of payments under the policy is at the sole discretion of the insurer.
    The Commissions are also adopting paragraph (i)(B) of rule
1.3(xxx)(4) under the CEA and paragraph (a)(2) of rule 3a69-1 under the
Exchange Act (the ``Provider Test'') as proposed, with certain
modifications to respond to commenters' concerns. As adopted, the
Provider Test requires that an agreement, contract, or transaction that

satisfies the Product Test must be provided:
     By a person that is subject to supervision by the
insurance commissioner (or similar official or agency) of any state
\32\ or by the United States or an agency or instrumentality \33\
thereof, and such agreement, contract, or transaction is regulated as
insurance under applicable state law \34\ or the laws of the United
States (the ``first prong'');
---------------------------------------------------------------------------

    \32\ The term ``State'' is defined in section 3(a)(16) of the
Exchange Act, 15 U.S.C. 78c(a)(16), to mean ``any State of the
United States, the District of Columbia, Puerto Rico, the Virgin
Islands, or any other possession of the United States.'' The CFTC is
incorporating this definition into rule 1.3(xxx)(4) for purposes of
ensuring consistency between the CFTC and SEC rules further defining
the terms ``swap'' and ``security-based swap.''
    \33\ For purposes of this release, the term ``instrumentality''
includes publicly supported, state operated or quasi-state operated
insurance programs that may not be subject to state regulatory
oversight, such as the Illinois Mine Subsidence Insurance Fund and
the Florida Hurricane Catastrophe Fund.
    \34\ For purposes of this release, the Commissions anticipate
that the parties to an agreement, contract, or transaction will
evaluate which state law applies prior to entering into such
agreement, contract, or transaction. The Commissions do not
anticipate that the parties' analysis of which state law applies
will change as a result of the adoption of the Insurance Safe
Harbor. In addition, the Commissions will analyze which state law
applies (if necessary, in consultation with state insurance
regulatory authorities) if and when such issues arise that the
Commissions determine to address. The Commissions note that courts
routinely determine what is the ``applicable state law'' when
adjudicating disputes involving insurance.
---------------------------------------------------------------------------

     (i) Directly or indirectly by the United States, any state
or any of their respective agencies or instrumentalities, or (ii)
pursuant to a statutorily authorized program thereof ((i) and (ii)
together, the ``second prong''); or
     In the case of reinsurance only \35\ by a person to
another person that satisfies the Provider Test, provided that:
---------------------------------------------------------------------------

    \35\ For purposes of this release, the term ``reinsurance''
means the assumption by an insurer of all or part of a risk
undertaken originally by another insurer.
---------------------------------------------------------------------------

    (i) Such person is not prohibited by applicable state law or the
laws of the United States from offering such agreement, contract, or
transaction to such person that satisfies the Provider Test;
    (ii) The agreement, contract, or transaction to be reinsured
satisfies the Product Test or is one of the Enumerated Products (as
defined below); and
    (iii) Except as otherwise permitted under applicable state law, the
total amount reimbursable by all reinsurers \36\ for such agreement,
contract, or transaction may not exceed the claims or losses paid by
the cedant \37\ ((i), (ii), and (iii), collectively, the ``third
prong''); or
---------------------------------------------------------------------------

    \36\ For purposes of this release, the term ``reinsurer'' means
any person who provides reinsurance.
    \37\ For purposes of this release, the term ``cedant'' means the
person writing the risk being ceded or transferred to a reinsurer.
---------------------------------------------------------------------------

     In the case of non-admitted insurance \38\ by a person
who:
---------------------------------------------------------------------------

    \38\ For purposes of this release, the term ``non-admitted
insurance'' means any property and casualty insurance permitted to
be placed directly or through a surplus lines broker with a non-
admitted insurer eligible to accept such insurance.
---------------------------------------------------------------------------

    (i) Is located outside of the United States and listed on the
Quarterly Listing of Alien Insurers as maintained by the International
Insurers Department of the National Association of Insurance
Commissioners; or
    (ii) Meets the eligibility criteria for non-admitted insurers \39\
under applicable state law ((i) and (ii) together, the ``fourth
prong'').
---------------------------------------------------------------------------

    \39\ For purposes of this release, the term ``non-admitted
insurer'' means, with respect to any State, an insurer not licensed
to engage in the business of insurance in such State, but does not
include a risk retention group, as that term is defined in section
2(a)(4) of the Liability Risk Retention Act of 1986, 15 U.S.C.
3901(a)(4).
---------------------------------------------------------------------------

    In response to commenters' requests that the Commissions codify the
proposed interpretation regarding certain enumerated types of
traditional insurance products in the final rules,\40\ the Commissions
are also adopting paragraph (i)(C) of rule 1.3(xxx)(4) under the CEA
and paragraph (a)(3) of rule 3a69-1 under the Exchange Act. In
addition, in response to comments, the Commissions are expanding and
revising the enumerated types of traditional insurance products. As
adopted, the rule provides that the terms ``swap'' and ``security-based
swap'' will not include an agreement, contract, or transaction that is
provided in accordance with the Provider Test and is any one of the
following (collectively, ``Enumerated Products''): Surety bonds;
fidelity bonds; life insurance; health insurance; long-term care
insurance; title insurance; property and casualty insurance; annuities;
disability insurance; insurance against default on individual
residential mortgages (commonly known as private mortgage insurance, as
distinguished from financial guaranty of mortgage pools); and
reinsurance (including retrocession) of any of the foregoing. The
Commissions note that the inclusion of reinsurance (including
retrocession) as an Enumerated Product is meant to apply to traditional
reinsurance and retrocession contracts. Specifically, traditional
reinsurance and retrocession contracts that reinsure risks ceded under
traditional insurance products included in the Enumerated Product list
and provided in accordance with the Provider test do not fall within
the swap or security-based swap definitions. An agreement, contract, or
transaction that is labeled as ``reinsurance'' or ``retrocession'', but
is executed as a swap or security-based swap or otherwise is structured
to evade Title VII of the Dodd-Frank Act, would not satisfy the
Insurance Safe Harbor, and would be a swap or security-based swap.\41\
---------------------------------------------------------------------------

    \40\ See infra notes 88, 89, and 90 and accompanying text.
    \41\ For example, if a person uses a weather derivative or
catastrophe swap to assume all or part of the risks contained in a
portfolio of property and casualty insurance policies, that weather
derivative or catastrophe swap would be a Title VII instrument that
is subject to regulation under Title VII.
---------------------------------------------------------------------------

    In order for an agreement, contract, or transaction to qualify
under the final rules as an insurance product that would not be a swap
or security-based swap: (i) The agreement, contract, or transaction
must satisfy the criteria in the Product Test or be one of the
Enumerated Products and (ii) the person providing the agreement,
contract or transaction must satisfy one prong of the Provider
Test.\42\ The fact that an agreement, contract, or transaction
satisfies the Product Test or is one of the Enumerated Products does
not exclude it from the swap or security-based swap definitions if it
is not provided by a person that satisfies the Provider Test; nor does
the fact that a product is provided by a person that satisfies the
Provider Test exclude the product from the swap or security-based swap
definitions if the agreement, contract, or transaction does not satisfy
the criteria set forth in the Product Test or is not one of the
Enumerated Products.\43\
---------------------------------------------------------------------------

    \42\ As was discussed in the Proposing Release, see Proposing
Release at 29822 n. 31, certain variable life insurance products and
annuities are securities and therefore are excluded from the swap
and security-based swap definitions regardless of whether they meet
the requirements under the final rules. See section 1a(47)(B)(v) of
the CEA, 7 U.S.C. 1a(47)(B)(v). These securities would not be swaps
or security-based swaps whether or not required to be registered
under the Securities Act. See SEC v. United Benefit Life Ins. Co.,
387 U.S. 202 (1967) (holding that the accumulation provisions of a
``flexible fund'' annuity contract were not entitled to exemption
under section 3(a)(8) of the Securities Act, 15 U.S.C. 77c(a)(8),
for insurance and annuities); SEC v. Variable Annuity Life Ins. Co.,
359 U.S. 65 (1959) (holding that a variable annuity was not entitled
to exemption under section 3(a)(8) of the Securities Act).
    \43\ For the purpose of determining whether an agreement,
contract or transaction falls within the Insurance Safe Harbor,
Title VII provides the Commissions with flexibility to address the
facts and circumstances of new products that may be marketed or sold
as insurance, through joint interpretations pursuant to section
712(d)(4) of the Dodd-Frank Act.

---------------------------------------------------------------------------

    Further, in response to commenters' concerns,\44\ the Commissions
are confirming that the Product Test, the Provider Test and the
Enumerated Products represent a non-exclusive safe harbor. None of the
Product Test, the Provider Test, or the Enumerated Products
(collectively, the ``Insurance Safe Harbor'') implies or presumes that
an agreement, contract, or transaction that does not meet any of their
respective requirements is a swap or security-based swap. Such an
agreement, contract, or transaction will require further analysis of
the applicable facts and circumstances, including the form and
substance of such agreement, contract, or transaction, to determine
whether it is insurance, and thus not a swap or security-based swap.
---------------------------------------------------------------------------

    \44\ See infra notes 178 and 179 and accompanying text.
---------------------------------------------------------------------------

    However, future market conditions or other developments may prompt
the Commissions to reconsider whether a particular product that
satisfies the requirements of the Insurance Safe Harbor should instead
fall within the swap or security-based swap definition. Because a
determination that such a product is a swap or security-based swap
could potentially have an unsettling effect on the domestic insurance
or financial markets, the Commissions would only consider making a
determination that such a product is a swap or security-based swap
through a rulemaking \45\ process that would provide market
participants with an opportunity to comment.\46\
---------------------------------------------------------------------------

    \45\ The Commissions can engage in rulemakings in a variety of
ways including an advanced notice of proposed rulemaking, a notice
of proposed rulemaking, or an interim final rule.
    \46\ When determining whether a particular product is a swap or
security-based swap instead of insurance, if such product does not
meet the requirements set out in the Insurance Safe Harbor, the
Commissions will consider prior regulation as an insurance contract
as one factor in their respective facts and circumstances analysis.
---------------------------------------------------------------------------

(a) Types of Insurance Products
Final Rules
Product Test
    The Commissions are adopting the Product Test as proposed, with
certain modifications to respond to commenters' concerns. The Product
Test sets forth four criteria for an agreement, contract, or
transaction to be considered insurance. First, the final rules require
that the beneficiary have an ``insurable interest'' underlying the
agreement, contract, or transaction and thereby carry the risk of loss
with respect to that interest continuously throughout the duration of
the agreement, contract, or transaction. The requirement that the
beneficiary be at risk of loss (which could be an adverse financial,
economic, or commercial consequence) with respect to the interest that
is the subject of the agreement, contract, or transaction continuously
throughout the duration of the agreement, contract, or transaction will
ensure that an insurance contract beneficiary has a stake in the
interest on which the agreement, contract, or transaction is
written.\47\ Similarly, the requirement that the beneficiary have the
insurable interest continuously throughout the duration of the
agreement, contract, or transaction is designed to ensure that payment
on the insurance product is inextricably connected to both the
beneficiary and the interest on which the insurance product is written.
In contrast to insurance, a credit default swap (``CDS'') (which may be
a swap or a security-based swap) does not require the purchaser of
protection to hold any underlying obligation issued by the reference
entity on which the CDS is written.\48\ One commenter identified the
existence of an insurable interest as a material element to the
existence of an insurance contract.\49\ Because neither swaps nor
security-based swaps require the presence of an insurable interest at
all (although an insurable interest may sometimes be present
coincidentally), the Commissions continue to believe that whether an
insurable interest is present continuously throughout the duration of
the agreement, contract, or transaction is a meaningful way to
distinguish insurance from swaps and security-based swaps.
---------------------------------------------------------------------------

    \47\ Requiring that a beneficiary of an insurance policy have a
stake in the interest traditionally has been justified on public
policy grounds. For example, a beneficiary that does not have a
property right in a building might have an incentive to profit from
arson.
    \48\ Standard CDS documentation stipulates that the incurrence
or demonstration of a loss may not be made a condition to the
payment on the CDS or the performance of any obligation pursuant to
the CDS. See, e.g., ISDA, 2003 ISDA Credit Derivatives Definitions,
art. 9.1(b)(i) (2003) (``2003 Definitions'') (stating that ``the
parties will be obligated to perform * * * irrespective of the
existence or amount of the parties' credit exposure to a Reference
Entity, and Buyer need not suffer any loss nor provide evidence of
any loss as a result of the occurrence of a Credit Event'').
    \49\ See D&L Letter.
---------------------------------------------------------------------------

    Second, the requirement that a loss occur and be proved similarly
ensures that the beneficiary has a stake in the insurable interest that
is the subject of the agreement, contract, or transaction. If the
beneficiary can demonstrate loss, that loss would ``trigger''
performance by the insurer on the agreement, contract, or transaction
such that, by making payment, the insurer is indemnifying the
beneficiary for such loss. In addition, limiting any payment or
indemnification to the value of the insurable interest aids in
distinguishing swaps and security-based swaps (where there is no such
limit) from insurance.\50\
---------------------------------------------------------------------------

    \50\ To the extent an insurance product provides for such items
as, for example, a rental car for use while the car that is the
subject of an automobile insurance policy is being repaired, the
Commissions would consider such items as constituting part of the
value of the insurable interest.
---------------------------------------------------------------------------

    Third, the final rules require that the insurance product not be
traded, separately from the insured interest, on an organized market or
over the counter. As the Commissions observed in the Proposing Release,
with limited exceptions,\51\ insurance products traditionally have not
been entered into on or subject to the rules of an organized exchange
nor traded in secondary market transactions (i.e., they are not traded
on an organized market or over the counter). While swaps and security-
based swaps also generally have not been tradable at will in secondary
market transactions (i.e., on an organized market or over the counter)
without counterparty consent, the Commissions understand that all or
part of swaps and security-based swaps are novated or assigned to third
parties, usually pursuant to industry standard terms and documents.\52\
In response to commenter concerns,\53\ the Commissions are clarifying
when assignments of insurance contracts and trading on ``insurances
exchanges'' do not constitute trading the contract separately from the
related insurable interest, and thus would not violate the Product
Test. The Commissions do not interpret the assignment of an insurance
contract as described by commenters \54\

to be ``trading'' as that term is used in the Product Test.\55\ Nor do
the Commissions find that the examples of exchanges offered by
commenters,\56\ such as Federal Patient Protection and Affordable Care
Act ``exchanges,'' \57\ are exchanges as that term is used in the
Product Test, e.g., a national securities exchange or designated
contract market. Mandated insurance exchanges are more like
marketplaces for the purchase of insurance, and there is no trading of
insurance policies separately from the insured interest on these
insurance exchanges. Thus, the assignment of an insurance contract as
permitted or required by state law, or the purchase or assignment of an
insurance contract on an insurance exchange or otherwise, does not
constitute trading an agreement, contract, or transaction separately
from the insured interest and would not violate the trading restriction
in the Product Test. For the foregoing reasons as clarified, the
Commissions continue to believe that lack of trading separately from
the insured interest is a feature of insurance that is useful in
distinguishing insurance from swaps and security-based swaps.
---------------------------------------------------------------------------

    \51\ See, e.g., ``Life Settlements Task Force, Staff Report to
the United States Securities and Exchange Commission'' (``In an
effort to help make the bidding process more efficient and to
facilitate trading of policies after the initial settlement occurs,
some intermediaries have considered or instituted a trading platform
for life settlements.''), available at http://www.sec.gov/news/studies/2010/lifesettlements-report.pdf (July 22, 2010).
    \52\ See, e.g., ISDA, 2005 Novation Protocol, available at
http://www.isda.org/2005novationprot/docs/NovationProtocol.pdf
(2005); ISDA, ISDA Novation Protocol II, available at http://www.isda.org/isdanovationprotII/docs/NPII.pdf (2005); 2003
Definitions, Exhibits E (Novation Agreement) and F (Novation
Confirmation).
    \53\ See infra notes 74 and 75 and accompanying text.
    \54\ See, e.g., Letter from Kim O'Brien, President & CEO,
National Association for Fixed Annuities (``NAFA''), dated July 21,
2011 (``NAFA Letter''); Letter from Robert Pickel, Executive Vice
Chairman, ISDA, dated July 22, 2011 (``ISDA Letter''); ACLI Letter;
and Letter from Letter from Stephen E. Roth, Frederick R. Bellamy
and James M. Cain, Sutherland Asbill & Brennan LLP on behalf of the
Committee of Annuity Insurers (``CAI''), dated July 22, 2011 (``CAI
Letter'').
    \55\ The assignment of the benefits or proceeds of an insurance
contract by an owner or beneficiary does not violate the trading
restriction in the Product Test. This interpretation does not extend
to ``stranger originated'' products. The transfer of obligations for
policyholder benefits between two insurance companies, such as would
occur in connection with an insurance company merger or acquisition,
also does not violate the trading restriction contained in the
Product Test.
    \56\ See Letter from Susan E. Voss, Commissioner Iowa Insurance
Division & National Association of Insurance Commissioners
(``NAIC'') President, and Therese M. Vaughan, NAIC Chief Executive
Officer, dated July 22, 2011 (``NAIC Letter'').
    \57\ See Patient Protection and Affordable Care Act;
Establishment of Exchanges and Qualified Health Plans, 76 FR 41866
(Jul. 15, 2011) (proposed).
---------------------------------------------------------------------------

    Fourth, the final rules provide that in the case of financial
guaranty insurance policies, also known as bond insurance or bond
wraps, any acceleration of payment under the policy must be at the sole
discretion of the provider of the financial guaranty insurance policy
in order to satisfy the Product Test.\58\ Although such products can be
economically similar to products such as CDS, they have certain key
characteristics that distinguish them from swaps and security-based
swaps.\59\ For example, under a financial guaranty policy, the insurer
typically is required to make timely payment of any shortfalls in the
payment of scheduled interest to the holders of the underlying
guaranteed obligation. Also, for particular bonds that are covered by a
financial guaranty policy, the indenture, related documentation, and/or
the financial guaranty policy will provide that a default in payment of
principal or interest on the underlying bond will not result in
acceleration of the obligation of the insurer to make payment of the
full amount of principal on the underlying guaranteed obligation unless
the insurer, in its sole discretion, opts to make payment of principal
prior to the final scheduled maturity date of the underlying guaranteed
obligation. Conversely, under a CDS, a protection seller frequently is
required to make payment of the relevant settlement amount to the
protection buyer upon demand by the protection buyer after any credit
event involving the issuer.\60\
---------------------------------------------------------------------------

    \58\ Financial guarantee policies are used by entities such as
municipalities to provide greater assurances to potential purchasers
of their bonds and thus reduce their interest costs. See ``Report by
the United States Securities and Exchange Commission on the
Financial Guarantee Market: The Use of the Exemption in section
3(a)(2) of the Securities Act for Securities Guaranteed by Banks and
the Use of Insurance Policies to Guarantee Debt Securities'' (Aug.
28, 1987).
    \59\ See, e.g., Letter from Sean W. McCarthy, Chairman,
Association of Financial Guaranty Insurers on the ANPR, dated Sept.
20, 2010 (explaining the differences between financial guaranty
policies and CDS); Letter from James M. Michener, General Counsel,
Assured Guaranty on the ANPR, dated Dec. 14, 2010 (noting that the
Financial Accounting Standards Board has issued separate guidance on
accounting for financial guaranty insurance and CDS); Letter from
Ernest C. Goodrich, Jr., Managing Director--Legal Department,
Deutsche Bank AG on the ANPR, dated Sept. 20, 2010 (noting that
financial guaranty policies require the incurrence of loss for
payment, whereas CDS do not).
    \60\ While a CDS requires payment in full on the occurrence of a
credit event, the Commissions recognize that there are other
financial instruments, such as corporate guarantees of commercial
loans and letters of credit supporting payments on loans or debt
securities, that allow for acceleration of payment obligations
without such guarantees or letters of credit being swaps or
security-based swaps.
---------------------------------------------------------------------------

    As noted in the Proposing Release, the Commissions do not believe
that financial guaranty policies, in general, should be regulated as
swaps or security-based swaps. However, because of the close economic
similarity of financial guaranty insurance policies guaranteeing
payment on debt securities to CDS, in addition to the criteria noted
above with respect to insurance generally, the final rules require
that, in order to satisfy the Product Test, financial guaranty policies
also must satisfy the requirement that they not permit the beneficiary
of the policy to accelerate the payment of any principal due on the
debt securities. This requirement further distinguishes financial
guaranty policies from CDS because, as discussed above, the latter
generally requires payment of the relevant settlement amount on the CDS
after demand by the protection buyer.
    Finally, in response to comments,\61\ the Commissions are
clarifying that reinsurance and retrocession transactions fall within
the scope of the Product Test. The Commissions find that these
transactions have insurable interests, as the Commissions interpret
such interests in this context, if they have issued insurance policies
covering the risks that they wish to insure (and reinsure). Moreover,
the Commissions find that retrocession transactions are encompassed
within the Product Test and the Provider Test because retrocession is
reinsurance of reinsurance (provided the retrocession satisfies the
other requirements of both tests). In addition, reinsurance (including
retrocession) of certain types of insurance products is included in the
list of Enumerated Products.\62\
---------------------------------------------------------------------------

    \61\ See infra note 105 and accompanying text.
    \62\ See supra note 41 and accompany text.
---------------------------------------------------------------------------

    Requiring all of the criteria in the Product Test will help to
limit the application of the final rules to agreements, contracts, and
transactions that are appropriately regulated as insurance, and help to
assure that agreements, contracts, and transactions appropriately
subject to the regulatory regime under Title VII of the Dodd-Frank Act
are regulated as swaps or security-based swaps. As a result, the
Commissions believe that these requirements will help prevent the final
rules from being used to circumvent the applicability of the swap and
security-based swap regulatory regimes under Title VII.
Enumerated Products
    In the Proposing Release, the Commissions proposed an
interpretation that certain enumerated types of insurance products
would be outside the scope of the statutory definitions of swap and
security-based swap under the Dodd-Frank Act if provided in accordance
with the Provider Test and regulated as insurance. Based on comments
received,\63\ the Commissions are adding three products to the list of
products as proposed (fidelity bonds, disability insurance and
insurance against default on individual residential mortgages), adding
reinsurance (including retrocession) of any of the traditional
insurance products included in the list, deleting a requirement
applicable to annuities, and codifying the Enumerated Products in the
final rules. The revised list of Enumerated Products is: Surety bonds,
fidelity bonds, life insurance, health insurance, long-term

care insurance, title insurance, property and casualty insurance,
annuities, disability insurance, insurance against default on
individual residential mortgages (commonly known as private mortgage
insurance, as distinguished from financial guaranty of mortgage pools),
and reinsurance (including retrocession) of any of the foregoing.\64\
The Commissions believe that the Enumerated Products, as traditional
insurance products, are not the types of agreements, contracts, or
transactions that Congress intended to subject to the regulatory regime
for swaps and security-based swaps under the Dodd-Frank Act. Codifying
the Enumerated Products in the final rules appropriately places
traditional insurance products outside the scope of the swap and
security-based swap definition so long as such Enumerated Products are
provided in accordance with the Provider Test, including a requirement
that an Enumerated Product that is provided in accordance with the
first prong of the Provider Test must be regulated as insurance under
applicable state law or the laws of the United States.
---------------------------------------------------------------------------

    \63\ See infra notes 93 and 94 and accompanying text.
    \64\ See supra note 41 and accompanying text.
---------------------------------------------------------------------------

Comments
Insurable Interest
    Six commenters objected to the requirement in the Product Test that
the beneficiary have an insurable interest continuously throughout the
duration of the contract.\65\ These commenters noted that, under state
law, an insurable interest may not always be required to be present
continuously throughout the duration of the policy. For example,
commenters noted that life insurance may only require an insurable
interest at the time the policy is executed; \66\ and some property and
casualty or liability insurance may only require an insurable interest
at the time a loss occurs.\67\ Commenters also noted that annuities and
health insurance do not require the existence of an insurable interest
at all.\68\ Another commenter suggested that the Commissions modify the
Product Test to indicate that annuities would not need to satisfy the
``insurable interest'' component, or to use terminology other than
insurable interest to make clear that annuities are not swaps.\69\
---------------------------------------------------------------------------

    \65\ See ACLI Letter; CAI Letter; ISDA Letter (objecting to the
requirement that the risk of loss be held continuously throughout
the contact); NAFA Letter; NAIC Letter; and Letter from Kenneth F.
Spence III, Executive Vice President & General Counsel, The
Travelers Companies, Inc. (``Travelers''), dated Nov. 14, 2011
(``Travelers Letter'').
    \66\ See ACLI Letter; CAI Letter; ISDA Letter; NAIC Letter; and
Travelers Letter. The Commissions understand that some states may
define what constitutes an insurable interest with reference to
personal or emotional consequence in addition to the financial,
economic, or commercial consequence mentioned in the statutory swap
definition.
    \67\ See NAIC Letter and Travelers Letter. However, one
commenter noted that the Product and Provider Tests, as proposed,
should be an effective means of helping to distinguish between those
contracts that qualify for exclusion from the definition of swap and
security-based swap from those contracts that will not. See Letter
from Michael A. Bell, Senior Counsel, Financial Policy, The Property
Casualty Insurers Association of America, dated July 22, 2011.
    \68\ See CAI Letter; ISDA Letter; NAFA Letter; and NAIC Letter.
    \69\ See Letter from Nicholas D. Latrenta, Executive Vice
President and General Counsel, Metropolitan Life Insurance Companies
and its insurance affiliates (``MetLife''), dated July 22, 2011
(``MetLife Letter'').
---------------------------------------------------------------------------

    As discussed above, the Commissions are retaining the insurable
interest requirement of the Product Test. The Commissions continue to
believe that this requirement is a useful tool to distinguish insurance
from swaps and security-based swaps, because swaps and security-based
swaps do not require the presence of an insurable interest (or require
either counterparty to bear any risk of loss) at any time during the
term of the agreement, contract, or transaction. While the Commissions
acknowledge commenters who argued that products such as life insurance,
property and casualty insurance, and annuities may fail the Product
Test because of the insurable interest requirement, the Commissions do
not interpret any such failure to mean that life insurance, property
and casualty insurance, and annuities are not insurance products. To
the contrary, as discussed above, these products are included in the
list of Enumerated Products that are excluded from the swap and
security-based swap definitions so long as they are provided in
accordance with the Provider Test. If a life insurance, property and
casualty insurance, or annuity is provided in accordance with the
Provider Test, such product is not a swap or security-based swap,
whether or not an insurable interest is present at all times during the
term of the contract.
Indemnification for Loss
    Five commenters objected to the requirement in the Product Test
that a loss occur and be proven, and that any payment be limited to the
value of the insurable interest, because payment under many insurance
products may not be directly based upon actual losses incurred.\70\ Two
commenters argued that annuities do not provide indemnification for
loss and that life insurance products are not constrained by the value
of the insurable interest.\71\ Another argued that many insurance
policies pay fixed amounts upon the occurrence of a loss without a
requirement that the loss be tied to the value of an insurable
interest.\72\ Disability insurance and long-term care insurance are
other products that commenters indicate would not be able to satisfy
this requirement of the Product Test.\73\
---------------------------------------------------------------------------

    \70\ See ACLI Letter; CAI Letter; ISDA Letter; NAFA Letter; and
Travelers Letter.
    \71\ See ACLI Letter and Travelers Letter.
    \72\ See Travelers Letter.
    \73\ See, e.g., ACLI Letter and CAI Letter.
---------------------------------------------------------------------------

    As discussed above, the Commissions are retaining the requirement
in the Product Test that a loss occur and be proven and that any
payment for such loss be limited to the value of the insurable
interest. The Commissions continue to believe that this requirement is
a useful tool to distinguish insurance from swaps and security-based
swaps, because payments under swaps and security-based swaps may be
required when neither party incurs a loss, nor is the amount of payment
limited by any such loss. While the Commissions acknowledge commenters
who identified various products that may fail this part of the Product
Test, the Commissions do not interpret any such failure to mean that
products such as annuities, disability insurance, and long-term care
insurance are not insurance products. To the contrary, as discussed
above, these products are included in the list of Enumerated Products
that are excluded from the swap and security-based swap definitions so
long as they are provided in accordance with the Provider Test. If
long-term care insurance, disability insurance, or an annuity is
provided in accordance with the Provider Test, such product is not a
swap or a security-based swap, whether or not a loss occurs, is proven,
or indemnification for loss is limited to the value of the insurable
interest.
Not Traded Separately
    Six commenters stated that the proposed requirement that the
agreement, contract, or transaction not be traded, separately from the
insured interest, on an organized market or over the counter, is not an
effective criterion in determining whether a product is insurance.\74\
According to commenters, this criterion is ineffective and should be
deleted from the Product Test because many conventional insurance

products, such as annuities, are assignable (and therefore tradable),
which may violate the trading restriction.\75\ Two commenters observed
that the trading of insurance policies has already occurred and is
expected to increase.\76\ One commenter stated that a number of states
have ``insurance exchanges'' that sell reinsurance and excess or
surplus lines, and that the Patient Protection and Affordable Care Act
requires states or the Federal government to establish health benefit
``insurance exchanges'' through which insurers will sell health
insurance to individuals and small groups.\77\ One commenter
recommended that the trading restriction apply only to trading by the
policyholder or beneficiary of an insurance policy.\78\
---------------------------------------------------------------------------

    \74\ See ACLI Letter; Letter from Chris Barnard (``Barnard''),
dated June 28, 2011 (``Barnard Letter''); CAI Letter; NAFA Letter;
NAIC Letter; and ISDA Letter.
    \75\ Id. ACLI stated that many conventional insurance products,
particularly annuities, can be assigned by the owner, and often
state insurance law requires such assignability as a condition for
approval of the product for sale under applicable insurance law.
ACLI also stated that insurance policies are frequently assigned
among family members, to third parties as collateral for loans, and
in a host of other situations, and does not believe that these
common kinds of assignment should cause an insurance product to be
characterized as a swap.
    \76\ See Barnard Letter and NAIC Letter.
    \77\ See NAIC Letter. The commenter explained that the
``insurance exchanges'' mandated by the Patient Protection and
Affordable Care Act would be marketplaces for insurance policies.
The commenter described them as ``cooperatives'' where people could
go to buy insurance policies with standardized terms/actuaries. The
commenter noted that the insurable interest would not ``trade''
separately from the insurance policy in these cooperatives.
    \78\ See Travelers Letter.
---------------------------------------------------------------------------

    The Commissions are retaining the requirement in the Product Test
that the agreement, contract, or transaction not be traded separately
from the insured interest, on an organized market or over the counter,
and as discussed above have provided a clarification regarding
assignments and trading on insurance exchanges. The Commissions
continue to believe that using this criterion is an effective way to
distinguish insurance from swaps and security-based swaps because swaps
and security-based swaps are traded on organized markets and over the
counter.
    As stated above, the Commissions do not interpret the assignment of
an insurance contract as described by commenters to be ``trading'' as
that term is used in the Product Test.\79\ Nor do the Commissions find
that the examples of exchanges offered by commenters, such as Federal
Patient Protection and Affordable Care Act ``exchanges,'' are exchanges
as that term is used in the Product Test, e.g., a national securities
exchange or designated contract market.\80\ Mandated insurance
exchanges are more like marketplaces for the purchase of insurance, and
there is no trading of insurance policies separately from the insured
interest on these insurance exchanges. Thus, the assignment of an
insurance contract as permitted or required by state law, or the
purchase or assignment of an insurance contract on an insurance
exchange or otherwise, does not constitute trading an agreement,
contract, or transaction separately from the insured interest and would
not violate the trading restriction in the Product Test.
---------------------------------------------------------------------------

    \79\ See supra notes 54 and 55.
    \80\ See supra notes 56 and 57.
---------------------------------------------------------------------------

Acceleration
    Three commenters believed that the proposed requirement that, in
the event of payment default or insolvency of the obligor, any
acceleration of payments under a financial guaranty insurance policy be
at the sole discretion of the insurer, is not an effective criterion in
determining whether financial guaranty insurance falls outside the swap
and security-based swap definitions and should be deleted from the
Product Test.\81\ However, one commenter supported its inclusion,
observing that the proposed requirement is ``firmly based on
substantive business realities.'' \82\ Two commenters believed that the
acceleration of payments requirement is not useful in distinguishing
between financial guaranty insurance and swaps or security-based swaps
because it is designed to protect financial guaranty insurers from
insolvency.\83\ They noted that the criterion is a regulatory
requirement imposed by state insurance commissioners that is subject to
change, and that a state could not change this regulatory requirement
without converting the financial guaranty policy into a swap or
security-based swap.\84\ One commenter stated that the acceleration of
payments criterion has been the subject of significant analysis and
interpretation by state insurance regulators, and including the
requirement in the rules could result in conflicting interpretations
and additional legal uncertainty.\85\ This commenter also stated that
this uncertainty will impose significant burdens on financial guaranty
insurers that insure municipal bonds.\86\
---------------------------------------------------------------------------

    \81\ See Letter from Bruce E. Stern, Chairman, Association of
Financial Guaranty Insurers (``AFGI''), dated July 20, 2011 (``AFGI
Letter''); ISDA Letter; and Letter from Kimberly M. Welsh, Vice
President and Assistant General Counsel, Reinsurance Association of
America (``RAA''), dated July 22, 2011 (``RAA Letter'').
    \82\ See Letter from Dennis M. Kelleher, President & CEO, Better
Markets Inc., dated July 22, 2011 (``Better Markets Letter'').
    \83\ See ISDA Letter and RAA Letter.
    \84\ Id.
    \85\ See AFGI Letter.
    \86\ Id. The commenter argued that these burdens would (a)
increase instability in the currently fragile municipal bond market
and (b) decrease the availability or attractiveness of bond
insurance to municipal issuers that would otherwise save money by
employing bond insurance. The Commissions understand that only one
member of AFGI is currently active in the municipal bond insurance
market.
---------------------------------------------------------------------------

    The Commissions are retaining the requirement that acceleration be
at the sole option of the provider of the financial guaranty insurance
policy in the Product Test. In response to commenter concerns, the
Commissions are clarifying that they plan to interpret the acceleration
limitation in accordance with applicable state law to the extent that
it does not contradict the Commissions' rules, interpretations and/or
guidance regarding what is a swap or security-based swap.\87\ The
Commissions continue to believe that, for purposes of further defining
swaps and security-based swaps, this criterion is useful to distinguish
between financial guaranty insurance on the one hand, and swaps and
security-based swaps, such as CDS, on the other because, as discussed
above, the latter generally requires payment of the relevant settlement
amount on the CDS after demand by the protection buyer.
---------------------------------------------------------------------------

    \87\ One commenter noted that ``financial guarantors, for some
time and in full compliance with state insurance laws, have issued
insurance policies that contemplate acceleration upon events
unrelated to an issuer default, e.g., upon the downgrade of the
insurer.'' See AFGI Letter. In response to this comment, the
Commissions note that the acceleration requirement in the Product
Test refers only to ``payment default or insolvency of the obligor''
(emphasis added), without precluding other triggers.
---------------------------------------------------------------------------

Enumerated Products
    The Commissions proposed an interpretation that certain enumerated
types of insurance products would be outside the scope of the statutory
definitions of swap and security-based swap. Several commenters stated
that the list of enumerated insurance products should be codified in
order to enhance legal certainty.\88\ In particular, one commenter
stated that it is important for the Commissions to codify the
interpretation because the traditional insurance products included in
the enumerated list may not satisfy the Product Test.\89\ The commenter
also expressed concern that insurance companies and state insurance

regulators would face the possibility that the Commissions could revise
or withdraw the interpretation in the future, with or without
undergoing a formal rulemaking process.\90\ As noted above, in response
to commenters' concerns, the Commissions are codifying the Enumerated
Products in the final rules.
---------------------------------------------------------------------------

    \88\ See ACLI Letter; NAIC Letter; RAA Letter; AIA Letter; NAFA
Letter; and Letter from Mark R. Thresher, Executive Vice President,
Nationwide, dated July 19, 2011 (``Nationwide Letter'').
    \89\ See Travelers Letter.
    \90\ Id.
---------------------------------------------------------------------------

    One commenter further argued that the enumerated types of insurance
products included in the list should not have to additionally satisfy
the requirements that the person offering such product be a U.S.
domiciled insurer and that the product be regulated in the U.S. as
insurance.\91\ The commenter argued that this additional requirement
would result in the Insurance Safe Harbor not applying to traditional
insurance products offered by insurers domiciled outside of the U.S. or
by insurers that are not organized as insurance companies. The
Commissions are retaining the requirement that the Enumerated Products
be provided in accordance with the Provider Test. The Commissions also
note that, in response to commenters' concerns, the Commissions have
revised the first prong of the Provider Test so that it is not limited
to insurance companies or to entities that are domiciled in the U.S. A
product that need not satisfy the Product Test must be provided in
accordance with the Provider Test, including a requirement that
products provided in accordance with the first prong of the Provider
Test must be regulated as insurance.\92\
---------------------------------------------------------------------------

    \91\ See D&L Letter.
    \92\ See infra notes 147 and 148 and accompanying text.
---------------------------------------------------------------------------

    Five commenters addressed the treatment of annuities in the
proposed interpretive guidance, with all recommending that all
annuities be excluded from the swap and security-based definitions
regardless of their status under the tax laws.\93\ In response to the
comments, the Commissions are eliminating the proposed requirement that
annuities comply with section 72 of the Internal Revenue Code in order
to qualify as an Enumerated Product. The Commissions are persuaded that
the proposed reference to the Internal Revenue Code is unnecessarily
limiting and does not help to distinguish insurance from swaps and
security-based swaps.
---------------------------------------------------------------------------

    \93\ See ACLI Letter; CAI Letter; MetLife Letter; Nationwide
Letter; and RAA Letter.
---------------------------------------------------------------------------

    Other commenters suggested adding other products to the list of
enumerated types of insurance products,\94\ with one suggesting that
the Commissions' interpretation cover all transactions currently
reportable as insurance in the provider's regulatory and financial
reports under a state's or a foreign jurisdiction's insurance laws.\95\
One commenter noted that the list of enumerated types of insurance
products does not include other state-regulated products such as
service contracts, that may not satisfy the Product Test.\96\ In
response to requests to expand the list of enumerated products, the
Commissions are adding fidelity bonds,\97\ disability insurance, and
insurance against default on individual residential mortgages (commonly
known as private mortgage insurance, as distinguished from financial
guaranty of mortgage pools) to the list of Enumerated Products. The
Commissions agree that these are traditional insurance products, and
thus their inclusion in the list of Enumerated Products is appropriate.
The Commissions have also added reinsurance (including retrocession) of
any of the traditional insurance products to the list of Enumerated
Products.\98\ However, the Commissions decline at this time to expand
the list of Enumerated Products to include other types of contracts
such as, guaranteed investment contracts (``GICs''), synthetic GICs,
funding agreements, structured settlements, deposit administration
contracts, immediate participation guaranty contracts, industry loss
warrants, and catastrophe bonds.\99\ These products do not receive the
benefit of state insurance guaranty funds; their providers are not
limited to insurance companies. The Commissions received little detail
on sales of these other products, and do not believe it is appropriate
to determine whether particular complex, novel or still evolving
products are swaps or security-based swaps in the context of a general
definitional rulemaking. Rather these products should be considered in
a facts and circumstances analysis. With respect to GICs, the
Commissions have published a request for comment regarding the study of
stable value contracts. \100\
---------------------------------------------------------------------------

    \94\ See ACLI Letter; AIA Letter; CAI Letter; D&L Letter; NAIC
Letter; Letter from Michael A. Bell, Senior Counsel, Financial
Policy, RAA Letter; and Letter from Robert J. Duke, The Surety &
Fidelity Association of America (``SFAA''), dated July 13, 2011
(``SFAA Letter''). ACLI, CAI and RAA requested the addition of other
types of annuity and pension plan products, such as group annuity
contracts, guaranteed investment contracts, funding agreements,
structured settlements, deposit administration contracts, and
immediate participation guarantee contracts. D&L requested the
addition of reinsurance of any of the enumerated types of
traditional insurance products. NAIC requested the addition of
mortgage guaranty, accident, and disability insurance. SFAA request
the addition of surety and fidelity bonds.
    \95\ See Letter from J. Stephen Zielezienski, Senior Vice
President & General Counsel, American Insurance Association
(``AIA''), dated July 22, 2011 (``AIA Letter'').
    \96\ See NAIC Letter. The Commissions note that service
contracts, although regulated as insurance in some states, comprise
consumer warranties, extended service plans, and buyer protection
plans of the sort purchased with major appliances, electronics, and
the like. The Commissions are addressing these contracts in their
interpretation regarding consumer/commercial transactions. See infra
part II.B.3.
    \97\ SFAA requested that the Commissions issue specific guidance
that surety and fidelity bonds are insurance products rather than
swaps, noting that all states include surety and fidelity bonds as
lines of insurance subject to state oversight. Surety bonds were
already included in the list of enumerated insurance products
contained in the Proposing Release.
    \98\ See supra note 41 and accompanying text.
    \99\ See, e.g., RAA Letter; CAI Letter; Letter from Ian K.
Shepherd, Managing Director, Alice Corp. Pty Ltd (``Alice Corp.''),
dated July 22, 2011. Alice Corp. stated that industry loss warrants
are a contingent instrument with a somewhat illiquid secondary
market but ``are currently treated as a reinsurance product and
require an insurable interest.'' Alice Corp. also stated that
``[c]atastrophe bonds may reference a specific insured portfolio or
a set of parameters and may be traded in a secondary market and
behave like a coupon bond if there is no triggering event but have a
contingent element since some or all of the principal may be lost if
the referenced event or loss occurs.'' Id. The Commissions note that
catastrophe bonds are ``securities'' under the Federal securities
laws and decline to provide an interpretation regarding industry
loss warrants because it is inappropriate to determine whether a
complex and novel product is a swap or a security-based swap in a
general definitional rulemaking.
    \100\ See Acceptance of Public Submissions Regarding the Study
of Stable Value Contracts, 76 FR 53162 (Aug. 25, 2011).
---------------------------------------------------------------------------

Reliance on State Law Concepts
    Two commenters noted that the Product Test relies on concepts
derived from state law, such as ``insurable interest'' and
``indemnification for loss,'' which do not have uniform
definitions.\101\ This would require the

Commissions to analyze state insurance law, as well as to determine
which state law should apply.\102\ One of these commenters also
requested that such concepts be applied consistently with the
historical interpretation by the applicable state.\103\
---------------------------------------------------------------------------

    \101\ See ACLI Letter and AFGI Letter. Some states define
concepts such as ``insurable interest'' in statute; in other states
definitions have developed through common law. The Commissions
recognize that the terms denoting such concepts may vary from state
to state; for instance, what one state calls an ``insurable
interest'' may be referred to as a ``material interest'' in another.
See, e.g., New York Insurance Law Section 1101 (``material
interest''). The Commissions believe, however, that both the
concepts and their labels are well understood by insurance
professionals and that any such variations would not impede market
participants from interpreting or applying the final rules. Indeed,
one commenter acknowledged this and applied the concepts, labeled
differently, to particular products. ``The terms used in the rule's
criteria are different from the terms used with respect to a surety
bond. For example, the bond is generally not referred to as a
`policy.' In addition, the beneficiary of a bond typically is known
as the `obligee.' Further, the bond's limit is referred to as the
`penal sum.' Nevertheless, the criteria can be applied to surety
bonds and fidelity bonds, and such application would exclude bonds
from the statutory definition of swaps.'' See SFAA Letter.
    \102\ See ACLI Letter and AFGI Letter.
    \103\ See AFGI Letter.
---------------------------------------------------------------------------

    State law differences regarding these concepts should not impede
the ability of market participants from interpreting or applying the
final rules to distinguishing between insurance and swaps or security-
based swaps, and thus the Commissions are retaining these concepts in
the Product Test. The Commissions intend to interpret these concepts
consistently with the existing and developing laws of the relevant
state(s) governing the agreement, contract, or transaction in question.
However, the Commissions note their authority to diverge from state law
if the Commissions become aware of evasive conduct.\104\
---------------------------------------------------------------------------

    \104\ The Commissions may also diverge from interpretations or
determinations of state law based on an analysis of applicable facts
and circumstances when determining whether a particular product is a
swap or security-based swap.
---------------------------------------------------------------------------

Inclusion of Reinsurance and Retrocession Transactions
    Several commenters suggested that the Commissions amend the Product
Test to explicitly address reinsurance and retrocession (i.e.,
reinsurance of reinsurance) transactions.\105\
---------------------------------------------------------------------------

    \105\ See ACLI Letter; CAI Letter; D&L Letter; ISDA Letter; NAFA
Letter; Nationwide Letter; and RAA Letter. ACLI noted that the
Product Test does not include a reference to reinsurance and that
the ``insurable interest'' requirement under state insurance law
generally does not apply to reinsurance products which, therefore,
would not satisfy the Product Test. ACLI and CAI state that
reinsurance in a chain of reinsurance also should not be considered
a swap or security-based swap. In addition to expressly referencing
reinsurance and retrocession transactions, ACLI believes that the
Product Test should be expanded to include reinsurance and
retrocession of insurance risks ceded by non-U.S. insurance
companies to domestic insurance companies. RAA recommended adding a
new clause to the Product Test to provide that ``[a]ny agreement,
contract, or transaction which reinsures any agreement, contract, or
transaction meeting the criteria of paragraph (xxx)(4)(i)(A)-(C) of
this section is also an insurance product.''
---------------------------------------------------------------------------

    In response to these comments, the Commissions are clarifying that
reinsurance and retrocession transactions may fall within the Insurance
Safe Harbor, thus, it is unnecessary for the Product Test to be
modified as suggested by these commenters. In addition, the Commissions
have modified the final rules to include reinsurance (including
retrocession) of certain types of insurance products in the list of
Enumerated Products. Reinsurance or retrocession of these Enumerated
Products will fall within the Insurance Safe Harbor so long as such
reinsurance or retrocession is provided in accordance with the Provider
Test.\106\
---------------------------------------------------------------------------

    \106\ See supra note 41 and accompanying text.
---------------------------------------------------------------------------

Payment Based on the Price, Rate, or Level of a Financial Instrument
    In the Proposing Release, the Commissions requested comment on
whether, in order for an agreement, contract, or transaction to be
considered insurance under the Product Test, the Commissions should
require that payment not be based on the price, rate, or level of a
financial instrument, asset, or interest or any commodity. The
Commissions also requested comment on whether variable annuity
contracts (where the income is subject to tax treatment under section
72 of the Internal Revenue Code) and variable life insurance should be
excepted from such a requirement, if adopted.\107\
---------------------------------------------------------------------------

    \107\ See Proposing Release at 29824. See also id. at 29825,
Request for Comment 7.
---------------------------------------------------------------------------

    Eight commenters stated that it is inappropriate to include such a
requirement in the final rules because a number of traditional
insurance products would not satisfy the requirement and suggested that
the Commissions should instead consider whether the agreement,
contract, or transaction transfers risk and argued that such a
requirement is not a useful marker for distinguishing insurance from
swaps and security-based swaps.\108\ Several commenters also believed
that the addition to the Product Test of the criterion that payment not
be based on the price, rate, or level of a financial instrument, asset,
or interest or any commodity would contribute to greater legal
uncertainty.\109\
---------------------------------------------------------------------------

    \108\ See ACLI Letter; AIA Letter; AFGI Letter; CAI Letter; ISDA
Letter; NAFA Letter; NAIC Letter; and Nationwide Letter (concurring
with ACLI's comments).
    Commenters cited several examples of products that would fail a
requirement that payment not be based on the price, rate, or level
of a financial instrument, asset, or interest or any commodity.
ACLI, CAI and NAFA cited registered and unregistered variable
annuities and variable life insurance, and certain fixed annuities
and equity indexed annuities, stating that these could be construed
as being based on, or related to, a price, rate or level of a
financial asset. ACLI also cited financial guaranty insurance, and
replacement value property and casualty insurance, where the
insurer's payment obligation may be based on the current price of
the insured property or adjusted to reflect inflation. ACLI and ISDA
cited crop insurance, because it could call for payment to be based
in some way on the market price of the covered crop on the date of
loss. ISDA and RAA cited ``dual trigger'' insurance (such as
replacement power insurance); property and casualty policies
purchased by some commodity producers (e.g., oil refineries, copper
mines) with deductibles that increase or decrease based on the price
of the commodity that the company produces; event cancellation
insurance that uses commodity indices to determine claims; and
weather insurance and malpractice insurance. NAIC cited guaranteed
investment contracts, financial guaranty insurance, and mortgage
guaranty insurance
    \109\ See AIA Letter and AFGI Letter.
---------------------------------------------------------------------------

    Two commenters agreed that such a requirement should be included in
the final rules.\110\ One commenter argued that any insurance
instrument that provides for payment based on the price, rate, or level
of a financial instrument, asset, or interest in any commodity is in
substance a swap or security-based, regardless of its label, and should
be regulated as such.\111\ One of these commenters further recommended
that the Commissions exclude annuity and variable universal life
insurance from this requirement because these products were investments
with some minimal level of life insurance cover or investment guarantee
rider on top.\112\
---------------------------------------------------------------------------

    \110\ See Barnard Letter and Better Markets Letter.
    \111\ See Better Markets Letter.
    \112\ See Barnard Letter.
---------------------------------------------------------------------------

    The Commissions are not adopting an additional requirement for the
Product Test that payment not be based on the price, rate, or level of
a financial instrument, asset, or interest or any commodity because the
Commissions find the requirement to be unsuitable for distinguishing
insurance from swaps and security-based swaps. While the provision
might work for property and casualty insurance, as many commenters
noted, it is not an effective distinction for a number of other
traditional insurance products.
Accounting Standards
    In the Proposing Release, the Commissions requested comment on
whether the proposed rules relating to insurance should include a
provision related to whether a product is recognized at fair value on
an ongoing basis with changes in fair value reflected in earnings under
U.S. generally accepted accounting principles.\113\
---------------------------------------------------------------------------

    \113\ See Proposing Release at 29827, Request for Comment 17.
---------------------------------------------------------------------------

    Three commenters argued that the proposed rules should not include
a provision that an insurance product is recognized at fair value under
generally accepted accounting principles.\114\ One commenter argued
that the determinants of what is an insurance product should be the
existence of an insurable interest, transfer of risk, and
indemnification of covered loss.\115\ Another argued that factoring
accounting standards into the analysis of whether a product is a swap

or insurance will introduce unnecessary complexity in most cases but
that the examination of accounting standards would be useful in cases
where the classification of a product as insurance or swap is
unclear.\116\
---------------------------------------------------------------------------

    \114\ See AFGI Letter; D&L Letter; and ISDA Letter.
    \115\ See D&L Letter.
    \116\ See ISDA Letter.
---------------------------------------------------------------------------

    After considering these comments, the Commissions are not including
a reference to accounting standards in the Product Test.
(b) Providers of Insurance Products
    Under the first prong of the Provider Test, the agreement,
contract, or transaction must be provided by a person that is subject
to supervision by the insurance commissioner (or similar official or
agency) of any state\117\ or by the United States.\118\ In addition,
such agreement, contract, or transaction also must be regulated as
insurance under applicable state law\119\ or the laws of the United
States.
---------------------------------------------------------------------------

    \117\ See supra note 32, regarding the definition of ``State''
contained in the Proposing Release.
    \118\ This requirement in the final rules is substantially
similar to the requirement included in section 3(a)(8) of the
Securities Act, 15 U.S.C. 77c(a)(8).
    \119\ See supra note 34.
---------------------------------------------------------------------------

    The Commissions have revised the first prong of the Provider Test
from the proposal. As proposed, the first prong of the Provider Test
could only be satisfied by a company that was organized as an insurance
company whose primary and predominant business activity was the writing
of insurance or the reinsuring of risks underwritten by insurance
companies.\120\ The Commissions have revised this prong of the Provider
Test to address commenters' concerns that the proposed rules would
exclude insurers that were not organized as ``insurance companies,'' as
well as insurers that were domiciled outside of the United States.\121\
As adopted, the first prong of the Provider Test can be satisfied by
any person that is subject to state or Federal insurance supervision,
regardless of that person's corporate structure or domicile. The
Commissions understand that, with the exception of non-admitted
insurers,\122\ foreign insurers are subject to supervision in the
states in which they offer insurance products. The treatment of non-
admitted insurers is addressed in the fourth prong of the Provider
Test.
---------------------------------------------------------------------------

    \120\ See Proposing Release at 29824.
    \121\ See infra notes 139, 140, and 141 and accompanying text.
    \122\ The Commissions understand that the surplus lines brokers
who place insurance on behalf of non-admitted insurers are subject
to supervision in the states in which they offer non-admitted
insurance products.
---------------------------------------------------------------------------

    The Commissions believe that the requirement that the agreement,
contract, or transaction be provided by a person that is subject to
state or Federal insurance supervision should help prevent regulatory
gaps that otherwise might exist between insurance regulation and the
regulation of swaps and security-based swaps by ensuring that products
provided by persons that are not subject to state or Federal insurance
supervision are not able to be offered by persons that avoid regulation
under Title VII of the Dodd-Frank Act as well.
    The first prong of the Provider Test also requires that the
agreement, contract, or transaction being provided is ``regulated as
insurance'' under applicable state law or the laws of the United
States. As stated in the Proposing Release, the purpose of this
requirement is that an agreement, contract, or transaction that
satisfies the other conditions of the final rules must be subject to
regulatory oversight as an insurance product. The Commissions believe
that this condition will help prevent products that are not regulated
as insurance in the states in which they are offered, and that are
swaps or security-based swaps, from being characterized as insurance
products in order to evade the regulatory regime under Title VII of the
Dodd-Frank Act. As noted by commenters,\123\ the Commissions recognize
that the ``regulated as insurance'' limitation means that it is
possible that a particular product that may not be regulated as
insurance in a particular state may not qualify for the Insurance Safe
Harbor.\124\
---------------------------------------------------------------------------

    \123\ See infra notes 145 and 146 and accompanying text.
    \124\ See infra notes 147 and 148 and accompanying text.
---------------------------------------------------------------------------

    As stated in the Proposing Release, the Commissions believe that it
is appropriate to exclude, from regulation under Title VII, insurance
that is issued by the United States or any of its agencies or
instrumentalities, or pursuant to a statutorily authorized program
thereof, from regulation as swaps or security-based swaps.\125\ Such
insurance includes, for example, Federal insurance of funds held in
banks, savings associations, and credit unions; catastrophic crop
insurance; flood insurance; Federal insurance of certain pension
obligations; and terrorism risk insurance. At the request of
commenters,\126\ the Commissions are persuaded that it is also
appropriate to provide a similar exclusion to insurance that is issued
by a state or any of its agencies or instrumentalities, or pursuant to
a statutorily authorized program thereof. Accordingly, the Commissions
have revised the second prong of the Provider Test to provide that
products meeting the Product Test are excluded from the swap and
security-based swap definitions if they are provided (i) directly or
indirectly by the Federal government or a state or (ii) pursuant to a
statutorily authorized program of either.\127\
---------------------------------------------------------------------------

    \125\ See Proposing Release at 29824.
    \126\ See Ex Parte Communication between NAIC and CFTC and SEC
Staff on October 5, 2011, at http://sec.gov/comments/s7-16-11/s71611-61.pdf.
    \127\ The Commissions understand that certain types of Federal
and State insurance programs, including crop insurance, are
administered by third parties; as a result, the Commissions have
added ``directly or indirectly'' to the second prong of the Provider
Test to clarify that it can be satisfied even if the agreement,
contract, or transaction is not provided directly by the federal
government or a state. See Id.
---------------------------------------------------------------------------

    As stated in the Proposing Release, the Commissions believe that
where an agreement, contract, or transaction qualifies for the safe
harbor and therefore is considered insurance excluded from the swap and
security-based swap definitions, the lawful reinsurance of that
agreement, contract, or transaction similarly should be excluded.\128\
Accordingly, the Commissions are adopting the third prong of the
Provider Test as proposed, with certain modifications, to provide that
an agreement, contract, or transaction of reinsurance will be excluded
from the swap and security-based swap definitions, provided that: (i)
The person offering such reinsurance is not prohibited by applicable
state law or the laws of the United States from offering such
reinsurance to a person that satisfies the Provider Test; (ii) the
agreement, contract, or transaction to be reinsured meets the
requirements under the Product Test or is one of the Enumerated
Products; and (iii) except as otherwise permitted under applicable
state law, the total amount reimbursable by all reinsurers for such
insurance product cannot exceed the claims or losses paid by the
cedant.
---------------------------------------------------------------------------

    \128\ See Proposing Release at 29825.
---------------------------------------------------------------------------

    In response to commenters' concerns,\129\ the Commissions have
revised the third prong of the Provider Test from that contained in the
Proposing Release. As adopted, the third prong of the Provider Test
encompasses all reinsurers wherever incorporated or organized, and not
just those based outside of the United States. The Commissions also
have revised the third prong of the Provider Test to clarify that the
total amount reimbursable by all reinsurers may not exceed the claims
or losses paid by the cedant, unless otherwise permitted by applicable
state law. It is not the Commissions' intent to

impose requirements that conflict with state law regarding the
calculation of amounts reimbursable under reinsurance contracts.
---------------------------------------------------------------------------

    \129\ See infra notes 150, 151, 152, and 153 and accompanying
text.
---------------------------------------------------------------------------

    The Commissions have added a fourth prong to the Provider Test to
address commenters' concerns that the proposed Provider Test excluded
entities issuing insurance products on a non-admitted basis through
surplus lines brokers.\130\ Non-admitted insurance is typically
property and casualty insurance that is permitted to be placed through
a surplus lines broker \131\ by an insurer that is not licensed to do
business in the state where the product is offered.\132\ In practice, a
provider of non-admitted insurance may not satisfy the first prong of
the Provider Test because it may not be subject to state or Federal
insurance supervision. The Commissions understand that non-admitted
insurance plays a very important role in the insurance marketplace. In
addition, Congress has explicitly recognized non-admitted insurance
products as insurance and specified that a state cannot prohibit
certain types of entities from offering non-admitted insurance
products.\133\ Because Congress recognized that certain persons qualify
as non-admitted insurers, the Commissions find that it is appropriate
to add the fourth prong to the Provider Test.
---------------------------------------------------------------------------

    \130\ See infra note 146 and accompanying text.
    \131\ For the purposes of this release, the term ``surplus lines
broker'' means an individual, firm, or corporation that is licensed
in a state to sell, solicit, or negotiate insurance on properties,
risks, or exposures located or to be performed in a state with non-
admitted insurers.
    \132\ See supra note 39. With respect to domestic reinsurance,
state insurance regulators do retain the authority to prevent or
allow a non-admitted company from participating in a state market.
Some states compile a list of companies that may sell as non-
admitteds; other states list non-admitted companies that may not
sell.
    \133\ See Subtitle B of Title V of the Dodd-Frank Act.
---------------------------------------------------------------------------

    A person will qualify under the fourth prong of the Provider Test
if it satisfies any one of the following two requirements:
     It is located outside of the United States and listed on
the Quarterly Listing of Alien Insurers that is compiled and maintained
by the International Insurers Department of the National Association of
Insurance Commissioners;\134\ or
---------------------------------------------------------------------------

    \134\ Section 524 of the Nonadmitted and Reinsurance Reform Act
of 2010 (15 U.S.C. 8204) provides that a state cannot prohibit a
surplus lines broker from placing non-admitted insurance with a non-
admitted insurer that is listed on the Quarterly Listing of Alien
Insurers. According to the NAIC the non-admitted alien insurers
whose names appear in the Quarterly Listing of Alien Insurers have
filed financial statements, copies of auditors' reports, the names
of their U.S. attorneys or other representatives, and details of
U.S. trust accounts with the NAIC's International Insurers
Department and, based upon those documents and other information,
appear to fulfill the criteria set forth in the International
Insurers Department Plan of Operation for Listing of Alien
Nonadmitted Insurers.
---------------------------------------------------------------------------

     It meets the eligibility criteria for non-admitted
insurers under applicable state law.
Comments
General
    The Commissions received ten comment letters that addressed the
Provider Test.\135\ A few commenters recommended that the Commissions
retract the Provider Test.\136\ These commenters argued that if a
product is subject to regulation as insurance in the United States, the
regulated status of the insurer is irrelevant.\137\ The Commissions are
retaining the Provider Test with modifications as discussed above. The
Commissions believe that insurance products should fall outside the
swap or security-based swap definitions only if they are offered by
persons subject to state or Federal insurance supervision or by certain
reinsurers.\138\ The Provider Test will help to prevent products that
are swaps or security-based swaps from being characterized as insurance
in order to evade the regulatory regime under Title VII of the Dodd-
Frank Act. Other commenters suggested various modifications to the
Provider Test and those comments are discussed in more detail below.
---------------------------------------------------------------------------

    \135\ See ACLI Letter; AIA Letter; CAI Letter; D&L Letter; ISDA
Letter; NAIC Letter; NAFA Letter; Nationwide Letter; RAA Letter; and
Travelers Letter.
    \136\ See AIA Letter; D&L Letter; and ISDA Letter.
    \137\ Id.
    \138\ See infra notes 147 and 148 and accompanying text.
---------------------------------------------------------------------------

``Insurance Company'' Limitation
    Several commenters recommended that the Commissions expand the
first prong of the Provider Test so that it is not limited to
``insurance companies,'' but to all insurers because not all insurers
are organized as ``insurance companies,''\139\ to accommodate insurers
and reinsurers that are domiciled outside of the United States,\140\
and to cover domestic and foreign insurance companies and other
entities that issue insurance products on a non-admitted basis through
surplus lines brokers.\141\
---------------------------------------------------------------------------

    \139\ See AIA Letter; D&L Letter; ISDA Letter; RAA Letter; NAIC
Letter; and Travelers Letter.
    \140\ See AIA Letter; D&L Letter; RAA Letter; and Travelers
Letter.
    \141\ See RAA Letter and Travelers Letter.
---------------------------------------------------------------------------

    The Commissions have revised the first prong of the Provider Test
to remove the ``insurance company'' limitation and to clarify that any
person that is subject to state or Federal insurance supervision will
qualify under the first prong of the Provider Test. As noted above, the
Commissions also believe that this revision should address commenters'
concerns that the proposed rules could have excluded some foreign
insurers since the revised test does not require that a person be
domiciled in the United States; it only requires that the person be
subject to state or Federal insurance supervision.
    Several commenters suggested that the proposed Provider Test would
permit an insurer that is not organized as an insurance company to
evade state insurance oversight by deliberately failing the exemption
for insurance products (that is, by issuing a contract that would fail
the proposed rules because it would not be issued by an insurance
company).\142\ These commenters were concerned that if a product were
to be considered a swap merely because it was not issued by an
insurance company, this would render the regulation of such products
outside of the scope of state insurance laws due to the Federal
preemption of swaps regulation.\143\ Commenters noted that a likely
consequence of this preemption would be that the same product would be
subject to substantially different regulation within a state's
jurisdiction based solely on the nature of the issuing person.\144\
---------------------------------------------------------------------------

    \142\ See ACLI Letter; CAI Letter; NAFA Letter; Nationwide
Letter; RAA Letter; and Travelers Letter.
    \143\ Id.
    \144\ Id.
---------------------------------------------------------------------------

    The Commissions have revised the first prong of Provider Test to
address commenters' concerns that providers of insurance products could
evade state insurance regulation by intentionally failing the Provider
Test, i.e., marketing the insurance products as swaps or security-based
swaps in order to avoid state insurance supervision. As adopted, any
person that provides insurance products (and therefore should be
subject to state or Federal insurance supervision) must, in fact, be
subject to state or Federal insurance supervision in order to satisfy
the first prong of the Provider Test. Persons that are organized as
insurance companies or whose business activity is predominantly
insurance or reinsurance, but who are not in fact subject to state or
Federal insurance supervision, would not satisfy the first prong of the
Provider Test.
    Finally, as discussed below, the Commissions have added a fourth
prong

to the Provider Test to provide relief for persons that provide
insurance products on a non-admitted basis through surplus lines
brokers.
``Regulated as Insurance'' Limitation
    Two commenters recommended that the Commissions remove the
provision in the first prong of the Provider Test that states ``and
such agreement, contract, or transaction is regulated as insurance
under the laws of such state or of the United States.''\145\ These
commenters argued that the provision should be deleted because it was
redundant with the Product Test and may exclude certain reinsurers and
non-admitted insurers, as well as products that may not be specifically
``regulated as insurance'' in all states.\146\
---------------------------------------------------------------------------

    \145\ See RAA Letter and Travelers Letter.
    \146\ Id. These commenters also recommended the addition of a