into will be regulated as swaps or security-based swaps. The
interpretation is intended to allow the flexibility necessary,
including the consideration of the applicable facts and circumstances
by the Commissions, in evaluating consumer and commercial arrangements
to ascertain whether they may be swaps or security-based swaps. The
representative characteristics and factors taken together are
indicators that a consumer or commercial arrangement is not a swap or
security-based swap, and the Commissions have provided specific
examples demonstrating how these characteristics and factors apply to
some common types of consumer and commercial arrangements. However, as
the interpretation is not intended to be a bright-line test for
determining whether a particular consumer or commercial arrangement is
a swap or security-based swap, if the particular arrangement does not
meet all of the identified characteristics and factors, the arrangement
will be evaluated based on its particular facts and circumstances.
Also, the courts may rely on the interpretation and as such, the CFTC
does not believe that the adoption of rule text as opposed to an
interpretation will mitigate costs associated with perceived legal
uncertainty.\1167\
---------------------------------------------------------------------------

    \1166\ See ETA Letter; ICEA Letter; and Just Energy Letter.
    \1167\ The additional research costs associated with an
interpretation as opposed to codification in the Code of Federal
Regulations will be small, because the CFTC has placed this
interpretation, and all other products interpretations, in this
adopting release for the convenience of practitioners.
---------------------------------------------------------------------------

    A commenter \1168\ asserted that Federal courts will have to hear
more disputes, because proposed CFTC jurisdiction would pre-empt
significant aspects of state and Federal law concerning the purchase
and sale of goods and services. This rulemaking includes safe-harbors
from the definition of a swap for customary consumer and commercial
transactions. The Commissions have expanded the list of consumer
transactions that are excluded from the swap definition. While it may
be possible that Federal courts will nevertheless hear more disputes,
that would be a result of the statutory swap definition and not from
the interpretation being adopted by the Commissions (which should
reduce the number of such disputes).
---------------------------------------------------------------------------

    \1168\ See IECA Letter.
---------------------------------------------------------------------------

    Another commenter \1169\ agreed with the general factors proposed
for identifying agreements, contracts, or transactions that are not
swaps, but requested additional clarity with respect to particular
transactions. Specifically, the commenter requested that commercial
loans and financing facilities with embedded interest rate options
should not be considered swaps. To clarify, interest rate options are
swaps. As discussed in section II.B.3. above, plain vanilla interest
rate options embedded in a loan, such as rate locks, rate caps and rate
collars, are not swaps. If a product is more complex, it may be
appropriate for the CFTC to consider it in response to a specific
request for interpretation.
---------------------------------------------------------------------------

    \1169\ See FCC Letter.
---------------------------------------------------------------------------

7. Residential Exchange Program (``REP'')
    The REP \1170\ was established by Congress ``[t]o extend the
benefits of low cost Federal System hydro power to residential and
small farm electric power consumers throughout the Pacific Northwest
Region.'' \1171\ A commenter requests that the CFTC further define the
term ``swap'' to exclude consumer benefits under the Pacific Northwest
Electric Power Planning and Conservation Act of 1980 (``Northwest Power
Act'') \1172\ and transactions under the REP \1173\ to allow a subsidy
to continue to be received by residential and small farm utilities.
---------------------------------------------------------------------------

    \1170\ The BPA refers to the implementation of Section 5(c) of
the Northwest Power Act, 16 U.S.C. 839c(c), as the ``Residential
Exchange Program.''
    \1171\ Id. at 3.
    \1172\ 16 U.S.C. Chapter 12H.
    \1173\ See Bonneville Letter.
---------------------------------------------------------------------------

    The Commissions do not consider the REP transactions described by
the commenter to be swaps or security-based swaps. Consequently, this
rulemaking clarifies that Dodd-Frank regulatory costs will not be
imposed on REPs and allows the subsidy to continue to be provided to
residential and small farm utilities.
8. Costs and Benefits of Rule Regarding Foreign Exchange Products and
Forward Rate Agreements
    CFTC rule 1.3(xxx)(2) under the CEA explicitly defines the term
``swap'' to include an agreement, contract, or transaction that is a
cross-currency swap, currency option, foreign currency option, foreign
exchange option, foreign exchange rate option, foreign exchange
forward, foreign exchange swap, forward rate agreement, and non-
deliverable forward involving foreign exchange, unless such agreement,
contract, or transaction is otherwise excluded by section 1a(47)(B) of
the CEA. Rule 1.3(xxx)(3) provides that: (i) A foreign exchange forward
or a foreign exchange swap shall not be considered a swap if the
Secretary of the Treasury makes the determination described in CEA
section 1a(47)(E)(i); and (ii) notwithstanding any such determination,
certain provisions of the CEA will apply to such a foreign exchange
forward or foreign exchange swap (specifically, the reporting
requirements in section 4r of the CEA \1174\ and regulations thereunder
and, in the case of a swap dealer or major swap participant that is a
party to a foreign exchange swap or foreign exchange forward, the
business conduct standards in section 4s of the CEA \1175\ and
regulations thereunder). Rule 1.3(xxx)(3) further clarifies that a
currency swap, cross-currency swap, currency option, foreign currency
option, foreign exchange option, foreign exchange rate option, or non-
deliverable forward involving foreign exchange is not a foreign
exchange forward or foreign exchange swap subject to a determination by
the Secretary of the Treasury as described in the preamble.
---------------------------------------------------------------------------

    \1174\ 7 U.S.C. 6r.
    \1175\ 7 U.S.C. 6s.
---------------------------------------------------------------------------

    The Commissions are also clarifying that a bona fide foreign
exchange spot transaction, i.e., a foreign exchange transaction that is
settled on the customary timeline \1176\ of the relevant

spot market, is not within the definition of the term ``swap.'' In
addition, the interpretation clarifies that retail foreign currency
options described in CEA Section 2(c)(2)(B) are not swaps. This
clarification allows market participants to engage in these
transactions with non-ECP customers who would otherwise have to engage
in on-exchange transactions.
---------------------------------------------------------------------------

    \1176\ As discussed in section II.C.2.(c) above, in general, a
foreign exchange transaction will be considered a bona fide spot
transaction if it settles via an actual delivery of the relevant
currencies within two business days. However a foreign exchange
transaction with a longer settlement period concluding with the
actual delivery of the relevant currencies may be considered a bona
fide spot transaction depending on the customary timeline of the
relevant market. In particular, a foreign exchange transaction that
is entered into solely to effect the purchase or sale of a foreign
security is a bona fide spot transaction where certain conditions
are met.
---------------------------------------------------------------------------

(a) Costs
    In complying with rule 1.3(xxx)(2), a market participant will need
to ascertain whether an agreement, contract, or transaction is a swap
under the definition. This analysis will have to be performed upon
entering into the agreement, contract, or transaction. However, any
costs associated with this analysis are expected to be less than the
costs of doing the same analysis absent the rule, particularly given
potential confusion in the event of a determination by the Secretary of
the Treasury that foreign exchange forwards and/or foreign exchange
swaps not be considered swaps. To the extent that rule 1.3(xxx)(2)
improperly includes certain types of agreements, contracts, and
transactions in the swap definition, and therefore the imposition of
additional requirements and obligations, these requirements and
obligations could lead to costs for market participants entering into
such agreements, contracts, or transactions. However, the CFTC has
carefully considered each of the agreements, contracts and transactions
described above that it is further defining as swaps under rule
1.3(xxx)(2) and believe that they are appropriately classified as such,
subject to the statutory exclusions.
(b) Benefits
    Because the statutory definition of the term ``swap'' includes a
process by which the Secretary of the Treasury may determine that
certain agreements, contracts, and transactions that meet the statutory
definition of a ``foreign exchange forward'' or ``foreign exchange
swap,'' respectively,\1177\ shall not be considered swaps, the CFTC is
concerned that application of the definition, without further
clarification, may cause uncertainty about whether, if the Secretary of
the Treasury makes such a determination, certain agreements, contracts,
or transactions would be swaps. Rule 1.3(xxx)(3) increases legal
certainty that a currency swap, cross-currency swap, currency option,
foreign currency option, foreign exchange option, foreign exchange rate
option, or non-deliverable forward involving foreign exchange, is a
swap (unless it is otherwise excluded by the statutory definition of
the term ``swap''). The rule also increases legal certainty that
reporting requirements, and business conduct requirements for swap
dealers and major swap participants, are applicable to foreign exchange
forwards and foreign exchange swaps even if the Secretary of the
Treasury determines that they should not be considered swaps, and is
consistent with the statute. The CFTC also is concerned that confusion
could be generated by the ``forward'' label of non-deliverable forwards
involving foreign exchange, and forward rate agreements. Rule
1.3(xxx)(2) increases legal certainty that these types of agreements,
contracts, and transactions are swaps.
---------------------------------------------------------------------------

    \1177\ CEA section 1a(24), 7 U.S.C. 1a(24)(definition of a
``foreign exchange forward''); CEA section 1a(25), 7 U.S.C.
1a(25)(definition of a ``foreign exchange swap'').
---------------------------------------------------------------------------

    Providing such a rule to market participants to determine whether
certain types of agreements, contracts, or transactions are swaps
alleviates additional costs to persons of inquiring with the
Commissions, or obtaining an opinion of counsel, about whether such
agreements, contracts, or transactions are swaps. In addition, such a
rule regarding the requirements that apply to foreign exchange forwards
and foreign exchange swaps that are subject to a determination by the
Secretary of the Treasury similarly alleviates additional costs to
persons of inquiring with the Commissions, or obtaining an opinion of
counsel, to determine the requirements that are applicable to such
foreign exchange forwards and foreign exchange swaps. As with the other
rules comprising the Product Definitions, enhanced legal certainty will
help market participants to engage in sound risk management practices,
which will benefit both market participants and the public.
    The interpretation concerning bona fide foreign exchange spot
transactions should result in the appropriate classification of such
transactions as not subject to Dodd-Frank Act regulation. The
interpretation regarding retail foreign currency options subject to CEA
Section 2(c)(2)(B) as not swaps provides clarity and reduces costs for
market participants, who could not offer the product to non-ECP
customers off-exchange in accordance with the provisions of CEA Section
2(c)(2)(B).
    In addition, including certain FX transactions, forward rate
agreements and certain other transactions in the swap definition
protects the public by explicitly subjecting these transactions to
Dodd-Frank regulation.
(c) Comments and Consideration of Alternatives
    The CFTC requested comment as to the costs and benefits of proposed
rules 1.3(xxx)(2) and (3). As discussed in the preamble, some
commenters \1178\ argued that non-deliverable foreign exchange forward
transactions should be regulated as foreign exchange forwards, because
regulating them as swaps would increase the cost of hedging foreign
currency exposures in emerging markets.
---------------------------------------------------------------------------

    \1178\ See CEIBA Letter; Covington Letter; ISDA Letter; and MFA
Letter.
---------------------------------------------------------------------------

    Non-deliverable forward transactions do not satisfy the statutory
definition of foreign exchange forwards, as explained in section
II.C.2.(b)(ii), supra. They do satisfy the swap definition, however.
Accordingly, the CFTC lacks discretion not to define them as swaps.
9. Costs and Benefits of Rule Regarding Title VII Instruments on
Futures on Foreign Sovereign Debt Under Exchange Act Rule 3a12-8
    Rule 1.3(bbbb) provides that a Title VII instrument that is based
on or references a qualifying foreign futures contract on the debt
securities of one or more of the 21 enumerated foreign governments is a
swap and not a security-based swap if the Title VII instrument
satisfies the following conditions:
     The futures contract on which the Title VII instrument is
based or that is referenced must be a qualifying foreign futures
contract (as defined in rule 3a12-8) on the debt securities of any one
or more of the 21 enumerated foreign governments that satisfies the
conditions of rule 3a12-8;
     The Title VII instrument is traded on or through a board
of trade (as defined in section 1a(6) of the CEA);
     The debt securities on which the qualifying foreign
futures contract is based or referenced and any security used to
determine the cash settlement amount pursuant to the fourth condition
below are not registered under the Securities Act or the subject of any
American depositary receipt registered under the Securities Act;
     The Title VII instrument may only be cash settled; and
     The Title VII instrument is not entered into by the issuer
of the securities upon which the qualifying

foreign futures contract is based or referenced (including any security
used to determine the cash payment due on settlement of such Title VII
instrument), an affiliate (as defined in the Securities Act and the
rules and regulations thereunder) \1179\ of the issuer, or an
underwriter with respect to such securities.
---------------------------------------------------------------------------

    \1179\ See, e.g., rule 405 under the Securities Act, 17 CFR
230.405.
---------------------------------------------------------------------------

    Only those Title VII instruments that are based on qualifying
foreign futures contracts on the debt securities of the 21 enumerated
foreign governments and that satisfy these five conditions will be
swaps. The final rules are intended to provide consistent treatment
(other than with respect to method of settlement) of qualifying foreign
futures contracts and Title VII instruments based on qualifying foreign
futures contracts on the debt securities of the 21 enumerated foreign
governments.\1180\ The Commissions understand that many of the
qualifying foreign futures contracts on the debt securities of the 21
enumerated foreign governments trade with substantial volume through
foreign trading venues under the conditions set forth in rule 3a12-8
\1181\ and permitting swaps on such futures contracts subject to
similar conditions would not raise concerns that such swaps could be
used to circumvent the conditions of rule 3a12-8 and the Federal
securities laws concerns that such conditions are intended to
protect.\1182\ Further, providing consistent treatment for qualifying
foreign futures contracts on the debt securities of the 21 enumerated
foreign governments and Title VII instruments based on futures
contracts on the debt securities of the 21 enumerated foreign
governments will allow trading of these instruments through DCMs on
which such futures are listed. There may also be cross-margining
benefits when different contracts are margined at the same derivatives
clearing organization, such as may be the case if a swap on a futures
contract and a corresponding futures contract trade on the same DCM.
This cross-margining would enhance sound risk management practices.
---------------------------------------------------------------------------

    \1180\ The Commissions note that the final rules provide
consistent treatment of qualifying foreign futures contracts on the
debt securities of the 21 enumerated foreign governments and Title
VII instruments based on qualifying foreign futures contracts on the
debt securities of the 21 enumerated foreign governments unless the
Title VII instrument is entered into by the issuer of the securities
upon which the qualifying foreign futures contract is based or
referenced (including any security used to determine the cash
payment due on settlement of such Title VII instrument), an
affiliate of the issuer, or an underwriter with respect to such
securities.
    \1181\ See supra note 716 and accompanying text.
    \1182\ See supra note 712 and accompanying text.
---------------------------------------------------------------------------

    The CFTC believes that the assessment cost associated with
determining whether a swap on certain futures contracts on foreign
government securities constitute a swap or security-based swap under
rule 1.3(bbbb) should be minimal. Currently, qualifying foreign futures
contracts on debt securities of the 21 enumerated foreign governments
are traded on exchanges or boards of trade. Market participants may
look at the exchange or board of trade listing to determine what they
are. Therefore, the assessment, in accordance with the rule, would
primarily focus on whether such swap itself is traded on or through a
board of trade; whether the swap is cash-settled; whether the futures
is traded on a board of trade; whether any security used to determine
the cash settlement amount are not registered under the Securities Act
or the subject of any American depositary receipt registered under the
Securities Act; and whether the swap is entered into by the foreign
government issuing the debt securities upon which the qualifying
futures contract is based or referenced, an affiliate of such foreign
government or an underwriter of such foreign government securities. All
of these determinations may be readily and quickly ascertained by the
parties entering into the agreement, contract, or transaction.
Therefore, the assessment costs associated with rule 1.3(bbbb) should
be nominal because parties should be able to make assessments in less
than an hour.
10. Costs and Benefits of Rules and Interpretations Regarding Title VII
Instruments Where the Underlying Reference Is a Security Index
    Historically, the market for index CDS did not divide along
jurisdictional divisions between the CFTC and SEC; \1183\ however, the
Dodd-Frank Act created a jurisdictional divide between swaps and
security-based swaps. Under the jurisdictional division, the CFTC has
jurisdiction over Title VII instruments based on non-narrow-based
security indexes while the SEC has jurisdiction over Title VII
instruments based on narrow-based security indexes. The SEC also has
jurisdiction over Title VII instruments based on a single security or
loan, and certain events related to an issuer of securities or issuers
of securities in a narrow-based security index.
---------------------------------------------------------------------------

    \1183\ For example, index CDS and single name CDS have typically
been traded on the same trading desk, and customers have typically
held their positions in a single account. The CFTC notes that the
jurisdictional divide will impact among other things portfolio
margining.
---------------------------------------------------------------------------

    Rule 1.3(yyy)(1) under the CEA provides that, for purposes of the
security-based swap definition, the term ``narrow-based security
index'' would have the same meaning as the statutory definition set
forth in CEA section 1a(35), and the rules, regulations, and orders
issued by the Commissions relating to such definition. As a result,
except where the new rules the Commissions are adopting provide for
other treatment, market participants generally will be able to use the
Commissions' past guidance in determining whether certain Title VII
instruments based on a security index are swaps or security-based
swaps.
    The Commissions are promulgating additional rules and providing
interpretations regarding Title VII instruments based on a security
index. The interpretations and additional rules set forth new narrow-
based security index criteria with respect to indexes composed of
securities, loans, or issuers of securities referenced by an index CDS.
The interpretations and rules also address the definition of an
``index'' and the treatment of broad-based security indexes that become
narrow-based and narrow-based indexes that become broad-based,
including rule provisions regarding tolerance and grace periods for
swaps on security indexes that are traded on CFTC-regulated and SEC-
regulated trading platforms.
(a) Costs
    In complying with the rules and interpretations, a market
participant will need to ascertain whether a Title VII instrument is a
swap or a security-based swap according to the criteria set forth in
the definitions of the terms ``issuers of securities in a narrow-based
security index'' and ``narrow-based security index'' as used in the
security-based swap definition. This analysis will have to be performed
prior to the execution of, but no later than an offer to enter into, a
Title VII instrument, and when the material terms of a Title VII
instrument are amended or modified, to ensure compliance with rules
1.3(yyy), 1.3(zzz) or 1.3(aaaa).
    However, any such costs are expected to be less than the costs of
doing the same analysis absent the rules, which the CFTC believes would
be more difficult and lead to greater uncertainty. In particular, rule
1.3(yyy) allows market participants to reduce the costs of determining
whether a Title VII instrument based on a security index, other than an
index CDS, is a swap or security-based swap by clarifying that they
will be able to use the

Commissions' past guidance regarding narrow-based security index in
making that determination. In the context of index CDS, the
Commissions' past guidance regarding narrow-based security indexes does
not establish criteria on whether index CDS is a swap or a security-
based swap. Accordingly, without further explanation, it would not be
clear on which side of the CFTC/SEC jurisdictional divide index CDS
would fall. CFTC rules 1.3(zzz) and 1.3(aaaa) allow market participants
to reduce the costs of determining whether an index CDS is a swap or a
security-based swap by providing a test with objective criteria that is
similar to a test with which they already are familiar in the security
futures context, yet tailored to index CDS in particular.
    Additionally, absent rule 1.3(yyy), which applies the tolerance
period rules, if a security index underlying a Title VII instrument
traded on a trading platform migrated from being broad-based to being
narrow-based, market participants may suffer disruption of their
ability to offset or enter into new Title VII instruments, and incur
additional costs as a result.
    DCMs and SEFs will incur costs in assessing whether an index
underlying a Title VII instrument is broad-based, in monitoring the
index for migration from broad to narrow-based. There will also be
other costs resulting from the migration such as delisting costs. Such
migration costs are mitigated by the tolerance period of 45 business
days over three calendar months which should reduce the incidence of
migration. Similarly, the three-month grace period following an indexes
failure of the tolerance period should mitigate delisting and other
costs. There will be a range of assessment costs depending on how
customized the index underlying an index CDS is.\1184\
---------------------------------------------------------------------------

    \1184\ Additionally, the number of components in an index may
impact the assessment costs based on having to determine whether the
indexes components satisfy the various tests within the rule.
---------------------------------------------------------------------------

    In determining whether a Title VII instrument is a swap or a
security-based swap, market participants will need to apply the
criteria found in CFTC rules 1.3(yyy), 1.3(zzz) and 1.3(aaaa). Market
participants may conduct such analysis in-house or employ outside
third-party service providers to conduct such analysis. The costs
associated with obtaining such outside professional services would vary
depending on the relevant facts and circumstances, particularly the
composition of the index. The CFTC believes, however, that $20,000
represents a reasonable estimate of the upper end of the range of the
costs of obtaining the services of outside professional in undertaking
the analysis.\1185\ The CFTC believes that some index CDS based on an
established index would not need the assistance of outside counsel, and
a determination can be made in less than one hour. If an agreement,
contract, or transaction is more complex, the CFTC estimates the
analysis will require up to approximately 20 hours of in-house counsel
time and 30 hours of outside counsel time.
---------------------------------------------------------------------------

    \1185\ The average cost incurred by market participants in
connection with assessing whether an agreement, contract, or
transaction is a swap or security-based swap is based upon the
estimated amount of time that staff believes will be required for
both in-house counsel and outside counsel to apply the definition.
The staff estimates that costs associated with determining whether
an agreement, contract, or transaction is a swap or security-based
swap will range up to $20,000 after rounding to two significant
digits. Staff estimates that some index CDS will be standard and an
internal attorney, without the assistance of outside counsel will be
able to make a determination in less than one hour. Based upon data
from SIFMA's Management & Professional Earnings in the Securities
Industry 2011 (modified by CFTC staff to account for an 1800-hour-
work-year and multiplied by 5.35 to account for bonuses, firm size,
employee benefits and overhead), staff estimates that the average
national hourly rate for an internal attorney is $378. If an
agreement, contract, or transaction is more complex, the CFTC
estimates the analysis will require approximately 20 hours of in-
house counsel time and 30 hours of outside counsel time. The CFTC
estimates the costs for outside legal services to be $400 per hour.
Accordingly, on the high end of the range the CFTC estimates the
cost to be $19,560 ($7,560 (based on 20 hours of in-house counsel
time x $378) + $12,000 (based on 30 hours of outside counsel x $400)
which is then rounded to two significant digits to $20,000.
---------------------------------------------------------------------------

(b) Benefits
    Rules 1.3(zzz) and 1.3(aaaa) clarify the treatment of an index CDS
as either a swap or a security-based swap by setting forth objective
criteria for meeting the definition of the terms ``issuers of
securities in a narrow-based security index'' and ``narrow-based
security index,'' respectively. These objective rules alleviate
additional costs to persons trading index CDS of inquiring with the
Commissions, or obtaining an opinion of counsel, to make complex
determinations regarding whether an index is broad- or narrow-based,
and whether an index CDS based on such an underlying index is a swap or
security-based swap.
    Also, rules 1.3(zzz) and 1.3(aaaa) should reduce the potential for
market participants to use an index CDS to evade regulations, because
they set objective requirements relating to the concentration of the
notional amount allocated to each reference entity or security included
in the index, as well as the eligibility conditions for reference
entities and securities. Finally, these rules benefit the public by
requiring that the providers of index CDS make publicly available
sufficient information regarding the reference entities in an index
underlying the index CDS. By requiring that such information be made
publicly available, rules 1.3(zzz) and 1.3(aaaa) seek to assure the
transparency of the index components that will be beneficial to market
participants who trade such instruments and to the public.
    Separately, rule 1.3(yyy) addresses exchange-traded swaps based on
security indexes where the underlying index migrates from broad-based
to narrow-based. The rule includes provisions that many market
participants are familiar with from security futures trading. The CFTC
believes that by using a familiar regulatory scheme, market
participants will be able to more readily understand the rule as
compared to a wholly new regulatory scheme. Also, the use of a
``tolerance period'' for swaps on security indexes that migrate from
broad-based to narrow-based also creates greater clarity by
establishing a 45-day timeframe (and subsequent grace period) on which
market participants may rely. This tolerance period results in cost
savings when compared to the alternative scenario where no tolerance
period is provided and a migration of an index from broad-based to
narrow-based would result in potential impediments to the ability of
market participants to offset their swap positions.
    Finally, the Commissions are stating that the determination of
whether a Title VII instrument is a swap, a security-based swap, or
both (i.e., a mixed swap), is made prior to the execution of, but no
later than an offer to enter into, the Title VII instrument. If the
security index underlying a Title VII instrument migrates from being
broad-based to being narrow-based, or vice versa, during the life of a
Title VII instrument, the characterization of that Title VII instrument
would not change from its initial characterization regardless of
whether the Title VII instrument was entered into bilaterally or was
executed through a trade on or subject to the rules of a DCM, SEF,
FBOT, security-based SEF, or NSE. Absent this interpretation, market
participants potentially would need to expend additional resources to
continually monitor their swaps to see if the indexes on which they are
based have migrated from broad-based to narrow-based. Since the rule
provides that the initial determination prevails regardless of whether
the underlying index migrates from broad-based to narrow-based, market
participants do

not need to expend these monitoring costs.
(c) Comments and Consideration of Alternatives
    A commenter asserted that the regulatory complexity for index CDS
is not worth the high compliance costs.\1186\ The statute provides that
the CFTC has jurisdiction over swaps on broad-based security indices,
and the SEC has jurisdiction over swaps on narrow-based security
indices, single securities or loans, and certain events related to the
issuers of securities. The Commissions need to establish criteria for
index CDS, because their past guidance regarding narrow-based security
indices does not address them. Without further explanation, it would
not be clear on which side of the CFTC/SEC jurisdictional division
certain products would fall. The number and concentration limits are
derived from criteria that Congress has imposed in the security futures
context. The public information availability test does not require that
index constituents satisfy all of its requirements; rather, the
constituents may satisfy any one of them for the index to be broad-
based, and there is a de minimis level for noncompliance.
---------------------------------------------------------------------------

    \1186\ See ISDA Letter.
---------------------------------------------------------------------------

    Another commenter \1187\ stated that the proposed interpretation
needs to be clearer on loan-based swap transactions and that it is
costly to determine whether a particular set of loans or borrowers
meets the Commissions' public information availability requirement. The
Commissions are clarifying that a TRS on two or more loans is not
subject to the broad-based/narrow-based jurisdictional divide, but is a
swap under the CFTC's jurisdiction. With respect to loan index CDS, the
Commissions believe that the index CDS rules, including the public
information availability requirement, should apply to indexes of loans
underlying index CDS. However, the Commissions are amending the
proposed rules to include loans within the categories of instruments to
be aggregated for the total principal amount of debt outstanding
threshold of the public information availability requirement, and will
aggregate outstanding debt of affiliates for purposes of the test,
which the CFTC believes should address the commenter's concerns.
---------------------------------------------------------------------------

    \1187\ See LSTA Letter.
---------------------------------------------------------------------------

    A commenter \1188\ pointed out that there may be costs to relist
index-based CDS when the index stops being, or becomes, broad-based.
Another commenter \1189\ believed that the public information
availability test will cause indices to switch between narrow-based and
broad-based classification, which could result in unnecessary cost,
confusion, and market disruption.
---------------------------------------------------------------------------

    \1188\ See MarketAxess Letter.
    \1189\ See Markit Letter.
---------------------------------------------------------------------------

    The statutory framework requires delisting and relisting. These
costs are mitigated by the tolerance period for migration, which may
help to prevent frequent migration of indices from broad-based to
narrow-based or vice versa. Moreover, it is the case for both on and
off-exchange Title VII instruments that the Commissions are stating
that the determination of whether a Title VII instrument on a security
index is a swap or security-based swap is made prior to execution, but
no later than the offer to enter into the instrument, and remains the
same throughout the life of the instrument. Accordingly, even if the
public information availability test would cause indexes underlying
index CDS to migrate as suggested by a commenter, that will not affect
the classification of outstanding index CDS entered into prior to such
migration. However, if an amendment or change is made to such
outstanding index CDS that would cause it to be a new purchase or sale
of such index CDS, that could affect the classification of such
outstanding index CDS.
    A commenter asserted that extending the ``grace period'' from three
months to six months would ease any disruption or dislocation
associated with the delisting process with respect to an index that has
migrated from broad to narrow, or narrow to broad, and that has failed
the tolerance period.\1190\ The commenter further suggested that where
an index CDS migrates, for entities operating both a SEF and a
security-based SEF, such entities should be permitted to move the index
from one platform to the other simply by providing a notice to the SEC
and CFTC.
---------------------------------------------------------------------------

    \1190\ See MarketAxess Letter.
---------------------------------------------------------------------------

    The Commissions are adopting the proposed rules without
modification. As discussed in Section III.G.5(b) above, the Commissions
note that the three-month grace period applicable to security futures
was mandated by Congress in that context,\1191\ and the commenter has
provided no data or evidence for its request that the Commissions
diverge from that grace period and provide for a longer grace period
with respect to swaps and security-based swaps. The Commissions believe
that the three-month grace period is similarly appropriate to apply in
the context of an index that has migrated to provide sufficient time to
execute off-setting positions. With respect to the commenter's other
suggestion that entities operating both a SEF and a security-based SEF
should be able to move the index from one platform to another where an
index CDS migrates simply by filing a notice with the SEC and CFTC, the
Commissions do not believe that this proposal is within the scope of
this rulemaking.
---------------------------------------------------------------------------

    \1191\ See July 2006 Debt Index Rules. The Commissions are not
aware of any disruptions caused by the three-month grace period in
the context of security futures.
---------------------------------------------------------------------------

    Many commenters offered alternatives to the various tests in
proposed rules 1.3(zzz) and 1.3(aaaa).\1192\ As discussed more fully
above in Section III.G.3.(b), the Commissions have incorporated many of
the suggested alternatives into the final rules and interpretations and
rejected, after careful consideration, other suggested alternatives.
For example, three commenters requested that the Commissions revise the
affiliation definition that applies when calculating the number and
concentration criteria to require a majority control affiliation
threshold, rather than the 20 percent threshold in the proposed
rules.\1193\ As discussed in section III.G.3.(b) above, the Commissions
are modifying the affiliation definition that applies when calculating
the number and concentration criteria in response to commenters to use
an affiliation test based on majority ownership. Based on commenters'
letters, the Commissions understand that the current standard CDS
documentation and the current approach used by certain index providers
for index CDS with respect to the inclusion of affiliated entities in
the same index use majority ownership rather than 20 percent ownership
to determine affiliation. The Commissions are persuaded by commenters
that in the case of index CDS only it is more appropriate to use
majority ownership because majority-owned entities are more likely to
have their economic interests aligned and be viewed by the market as
part of a group. The Commissions believe that revising the affiliation
definition in this manner for purposes of calculating the number and
concentration criteria responds to commenters' concerns that the
percentage control threshold may inadvertently include entities that
are not viewed as part of a group. Thus, as revised, the affiliation
definition will include only those reference entities or issuers
included in an index that satisfy

the more than 50 percent (i.e., majority ownership) control threshold.
---------------------------------------------------------------------------

    \1192\ See section III.G.3.(b).
    \1193\ See ISDA Letter; Markit Letter; and SIFMA Letter.
---------------------------------------------------------------------------

    Due to the high compliance costs resulting from the public
information availability test in particular, a commenter \1194\ argued
that the Commissions should abandon that test. The final rules retain
the public information availability test, which does not present
significant compliance costs because it does not require that
constituents satisfy all of the requirements and permits a de minimis
level of noncompliance.
---------------------------------------------------------------------------

    \1194\ See SIFMA Letter.
---------------------------------------------------------------------------

    One commenter offered an alternative to the public information
availability test based on the volume of trading.\1195\ After careful
consideration and as described more fully above in section II.G.3.(b),
above, the Commissions are not adopting a volume based test either as a
replacement or alternative for the public information availability
test. A volume based test would not be readily ascertainable with
respect to certain underlying components which are not exchange traded
or do not satisfy listing standards. The public information
availability test allows for more flexibility with respect to the
components included in indexes underlying index CDS than a volume-based
test. Individual components in an index CDS may not satisfy a volume-
based test but could otherwise satisfy one of the criteria of the
public information availability test. The public information
availability test is similar to the test in the rules for debt security
indexes, which, as noted above, apply in the context of Title VII
Instruments. The public information availability test, accordingly,
provides a consistent set of rules under which index compilers and
market participants can analyze the characterization of index CDS.
---------------------------------------------------------------------------

    \1195\ See Markit Letter.
---------------------------------------------------------------------------

    In the public information availability test, one commenter proposed
moving the outstanding debt threshold from $1 billion to $100
million.\1196\ As stated above, the CFTC believes that the $1 billion
debt threshold, which is the same amount as the outstanding debt
threshold in the rules for debt security indexes, is set at the
appropriate level to achieve the objective that such entities are
likely to have public information available about them.\1197\ However,
the adopted rules expand on the types of debt that are counted toward
the $1 billion debt threshold to include any indebtedness, including
loans, so long as such indebtedness in not a revolving credit facility.
---------------------------------------------------------------------------

    \1196\ Id.
    \1197\ See supra part III.G.3(b)(iii); See Securities Offering
Reform, Release No. 33-8591 (Jul. 19, 2005), 70 FR 44722 (Aug. 3,
2005) (discussing economic analysis involved in determining the $1
billion threshold for non-convertible securities in the context of
well-known seasoned issuers).
---------------------------------------------------------------------------

    In response to a request for comment by the Commissions, two
commenters believed that the presence of a third-party index provider
would assure that sufficient information is available regarding the
index CDS itself, but neither commenter provided an analysis to explain
how or whether a third-party index provider would be able to provide
information about the underlying securities or issuers of securities in
the index.\1198\ Accordingly, the Commissions are not adopting this
alternative.
---------------------------------------------------------------------------

    \1198\ See ISDA Letter and SIFMA Letter.
---------------------------------------------------------------------------

    A commenter \1199\ argued that legal uncertainty would present a
burden to market participants absent the Commissions clarifying the
status of swaps on shares of exchange traded funds that reference
broad-based security indices. However, market participants can request
a clarification through the interpretation process established herein
by the Commissions.
---------------------------------------------------------------------------

    \1199\ See Anon. Letter.
---------------------------------------------------------------------------

II. Costs and Benefits of Processes To Determine Whether a Title VII
Instrument is a Swap, Security-Based Swap, or Mixed Swap, and To
Determine Regulatory Treatment for Mixed Swaps
(a) Costs
    Rule 1.8 under the CEA allows persons to submit a request for a
joint interpretation from the Commissions regarding whether an
agreement, contract or transaction (or a class of agreements,
contracts, or transactions) is a swap, security-based swap, or mixed
swap. The CFTC estimates the cost of submitting a request for a joint
interpretation pursuant to rule 1.8 would be a cost of about $7,700 for
internal company or individual time and associated costs of $12,000 for
the services of outside professionals.\1200\ Once such a joint
interpretation is made, however, other market participants that seek to
transact in the same agreement, contract, or transaction (or class
thereof) would have regulatory clarity about whether it is a swap,
security-based swap, or mixed swap, so the CFTC expects the aggregate
costs of submitting joint interpretations to decrease over time as
joint interpretations are issued and the number of new requests
decrease as a result.
---------------------------------------------------------------------------

    \1200\ This estimate is based on information indicating that the
average costs associated with preparing and submitting a no-action
request to the SEC staff in connection with the identification of
whether certain products are securities, which the CFTC believes is
a process similar to the process under rule 1.8. The staff estimates
that costs associated with such a request will cost approximately
$20,000. The CFTC estimates the analysis will require approximately
20 hours of in-house counsel time and 30 hours of outside counsel
time. Based upon data from SIFMA's Management & Professional
Earnings in the Securities Industry 2011 (modified by CFTC staff to
account for an 1800-hour-work-year and multiplied by 5.35 to account
for bonuses, firm size, employee benefits and overhead), staff
estimates that the average national hourly rate for an internal
attorney is $378. The CFTC estimates the costs for outside legal
services to be $400 per hour. Accordingly, the CFTC estimates the
cost to be $20,000 ($7,560 (based on 20 hours of in-house counsel
time x $378) + $12,000 (based on 30 hours of outside counsel x $400)
rounded to two significant digits to $20,000 to submit a joint
request for interpretation.
---------------------------------------------------------------------------

    Separately, CFTC rule 1.9 under the CEA allows persons to submit a
request for a joint order from the Commissions regarding an alternative
regulatory treatment for particular mixed swaps. This process applies
except with respect to bilateral, uncleared mixed swaps where one of
the parties to the mixed swap is dually registered with the CFTC as a
swap dealer or major swap participant and with the SEC as a security-
based swap dealer or major security-based swap participant. With
respect to bilateral uncleared mixed swaps where one of the parties is
a dual registrant, the rule provides that such mixed swaps would be
subject to the regulatory scheme set forth in rule 1.9 in order to
provide clarity as to the regulatory treatment of such mixed swaps.
    The CFTC estimates that the cost of submitting a request for a
joint order seeking an alternative regulatory treatment for a
particular mixed swap would be approximately $31,000.\1201\ Absent such
a process, though, market participants that desire or intend to enter
into such a mixed swap (or class thereof) would be required pursuant to

Title VII of the Dodd-Frank Act to comply with all regulatory
requirements applicable to both swaps and security-based swaps. The
CFTC believes that the cost of such dual regulation would likely be at
least as great, if not greater, than the costs of the process set forth
in rule 1.9 to request an alternative regulatory treatment for such the
mixed swap. The rule regarding bilateral uncleared mixed swaps where at
least one party is a dual registrant does not entail any additional
costs, and may reduce costs for dual registrants that enter into such
mixed swaps by eliminating potentially duplicative or inconsistent
regulation.
---------------------------------------------------------------------------

    \1201\ This estimate is based on information indicating that the
average costs associated with preparing and submitting a no-action
request to the SEC staff in connection with the identification of
whether certain products are securities, which the CFTC believes is
a process similar to the process under rule 3a68-4(c). The staff
estimates that costs associated with such a request will cost
approximately $31,000. The CFTC estimates the analysis will require
approximately 30 hours of in-house counsel time and 50 hours of
outside counsel time. Based upon data from SIFMA's Management &
Professional Earnings in the Securities Industry 2011 (modified by
CFTC staff to account for an 1800-hour-work-year and multiplied by
5.35 to account for bonuses, firm size, employee benefits and
overhead), staff estimates that the average national hourly rate for
an internal attorney is $378. The CFTC estimates the costs for
outside legal services to be $400 per hour. Accordingly, the CFTC
estimates the cost to be $31,000 ($11,340 (based on 30 hours of in-
house counsel time x $378) + $20,000 (based on 50 hours of outside
counsel x $400) rounded to two significant digits to submit a joint
request for interpretation.
---------------------------------------------------------------------------

(b) Benefits
    The CFTC believes that the rules that enable market participants to
submit requests for joint interpretations regarding the nature of
various agreements, contracts, or transactions, and requests for joint
orders regarding the regulatory treatment of mixed swaps will help to
create a more level playing field (since the joint interpretations and
joint orders will be available to all market participants) regarding
which agreements, contracts, or transactions constitute swaps,
security-based swaps, or mixed swaps, and the regulatory treatment
applicable to particular mixed swaps. The joint interpretations and
joint orders will be available to all market participants. The
availability of such joint interpretations and joint orders regarding
the scope of the definitions and the regulatory treatment of mixed
swaps will reduce transaction costs and thereby promote the use of
Title VII instruments for risk management and other purposes.
    The product interpretation process established by the Commissions
has a 120-day deadline. This deadline will facilitate new products
coming to market relatively quickly. Further, the process holds the
Commissions accountable because they will have to state why they are
not providing an interpretation when they decline to do so.
(c) Comments and Consideration of Alternatives
    A commenter \1202\ recommended that the Commissions require that
market participants disaggregate mixed swaps and enter into separate
simultaneous transactions so that they cannot employ mixed swaps to
obscure the underlying substance of transactions.\1203\ The Commissions
are not adopting any rules or interpretations to require disaggregation
of mixed swaps into their separate components, as the Dodd-Frank Act
specifically contemplated that there would be mixed swaps comprised of
both swaps and security-based swaps. Moreover, the CFTC believes that
requiring market participants to disaggregate their agreements,
contracts, or transactions into swaps and security-based swaps may
limit the freedom of contract or discourage innovation of financial
products and potentially increase transaction costs for swap market
participants.
---------------------------------------------------------------------------

    \1202\ See Better Markets Letter.
    \1203\ Id.
---------------------------------------------------------------------------

12. Costs and Benefits of SBSA Books and Records, and Data,
Requirements
    CFTC rule 1.7 under the CEA would clarify that there would not be
books and records or data requirements regarding SBSAs other than those
that would exist for swaps. The rule alleviates any additional books
and records or information costs to persons who are required to keep
and maintain books and records regarding, or collect and maintain data
regarding, SBSAs because the rule does not require such persons to keep
or maintain any books and records, or collect and maintain any data,
regarding SBSAs that differs from the books, records, and data required
regarding swaps.
    Specifically, rule 1.7 would require persons registered as SDRs to:
i) keep and maintain books and records regarding SBSAs only to the
extent that SDRs are required to keep and maintain books and records
regarding swaps; and ii) collect and maintain data regarding SBSAs only
to the extent that SDRs are required to collect and maintain data
regarding swaps. In addition, rule 1.7 would require persons registered
as swap dealers or major swap participants to keep and maintain books
and records, including daily trading records, regarding SBSAs only to
the extent that those persons would be required to keep and maintain
books and records regarding swaps.
    Because rule 1.7 imposes no requirements with respect to SBSAs
other than those that exist for swaps, rule 1.7 would impose no costs
other than those that are required with respect to swaps in the absence
of rule 1.7. Rule 1.7 provides clarity by establishing uniform
requirements regarding books and records, and data collection,
requirements for swaps and for SBSAs. No comments were received with
respect to Rule 1.7.
13. Costs and Benefits of the Anti-Evasion Rules and Interpretation
    The CFTC is exercising the anti-evasion rulemaking authority
granted to it by the Dodd-Frank Act. Generally, CFTC rule 1.3(xxx)(6)
under the CEA defines as a swap any agreement, contract, or transaction
that is willfully structured to evade the provisions of Title VII
governing the regulation of swaps. Further, CFTC rule 1.6 under the CEA
would prohibit activities conducted outside the United States,
including entering into agreements, contracts, and transactions and
structuring entities, to willfully evade or attempt to evade any
provision of the CEA as enacted by Title VII or the rules and
regulations promulgated thereunder.
    As opposed to providing a bright-line test, rule 1.3(xxx)(6) would
apply to agreements, contracts, and transactions that are willfully
structured to evade and rule 1.6 would apply to entering into
agreements, contracts, or transactions to evade (or as an attempt to
evade) and structuring entities to evade (or as an attempt to evade)
subtitle A of Title VII governing the regulation of swaps. Although
this test does not provide a bright line, it helps ensure that would-be
evaders cannot willfully structure their transactions or entities for
the purpose of evading the requirements of subtitle A of Title VII. The
CFTC also is explaining some circumstances that may constitute an
evasion of the requirements of subtitle A of Title VII, while at the
same time preserving the CFTC's ability to determine, on a case-by-case
basis, with consideration given to all the facts and circumstances,
that other types of transactions or actions constitute an evasion of
the requirements of the statute or the regulations promulgated
thereunder.
(a) Costs
    Market participants may incur costs when deciding whether a
particular transaction or entity could be construed as being willfully
structured to evade subtitle A of Title VII of the Dodd-Frank Act;
however, the rules and related interpretations explain what constitutes
evasive conduct, which should serve to mitigate such costs.
(b) Benefits
    Absent the proposed anti-evasion rules and related interpretations,
price discovery might be impaired because markets would not be informed
about those transactions, since through evasion such transactions would
not comply with Dodd-Frank Act regulatory requirements. Additionally,
certain risks could increase in a manner that the CFTC would not be
able to measure accurately. The anti-evasion rules and related
interpretations will bring the appropriate scope of transactions and

entities within the regulatory framework established by the Dodd-Frank
Act, which will better allow the CFTC to assure transparency and
protect the U.S. financial system from certain risks that could go
undetected through evasive conduct.
(c) Comments and Consideration of Alternatives
    A commenter \1204\ asserted that a market participant should be
able to enter into a transaction or structure an instrument or entity
to avoid higher regulatory burdens and attendant costs as long as the
transaction or entity has an overriding business purpose. Another
commenter \1205\ noted that the CFTC recognized in the Proposing
Release that choosing to do a security-based swap over a swap to lessen
a regulatory burden does not constitute evasion in itself, but
expressed the view that this should not be limited to a choice between
structuring a transaction as a swap and security. In this commenter's
view, parties must be able to legitimately consider all relevant
factors, including the cost and burden of regulation, in making their
structuring choices. Another commenter \1206\ requested that the CFTC
make clear that movements away from swaps towards physical trades that
reduce regulatory burdens will not be considered evasion under the
final rule. A different commenter \1207\ argued that the anti-evasion
proposal is overly broad and unnecessarily limits the ability of market
participants to choose between legitimate structuring alternatives.
Finally, another commenter \1208\ believes that the proposed rules will
create an ``impossible burden'' on the innocent (non-evading) party.
---------------------------------------------------------------------------

    \1204\ See CME Letter.
    \1205\ See ISDA Letter.
    \1206\ See COPE Letter.
    \1207\ See SIFMA Letter.
    \1208\ See IECA Letter II.
---------------------------------------------------------------------------

    Activity conducted solely for a legitimate business purpose, absent
other indicia of evasion, does not constitute evasion as described in
the CFTC's interpretation. The CFTC has clarified that consideration of
regulatory burdens, including evidence of regulatory avoidance, is not
dispositive of whether there has been evasion or not, but should be
considered along with all other relevant facts and circumstances. For
example, activities structured as securities instead of swaps and
transactions that meet the forward exclusion are not evasion per se.
The CFTC has clarified that it will impose appropriate sanctions on the
willful evader for violation of the CEA and CFTC regulations and not on
non-evading parties.
    A commenter suggests that an alternative standard for a finding of
evasion should be ``whether the transaction is lawful or not'' under
the CEA, CFTC rules and regulations, orders, or other applicable
federal, state or other laws.\1209\ While the commenter's alternative
standard for evasion may impose lower costs on market participants
because it is a bright-line test, the CFTC is not adopting it. The
commenter's alternative standard would blur the distinction between
whether a transaction (or entity) is lawful and whether it is
structured in a way to evade Dodd-Frank and the CEA. The anti-evasion
rules provided herein are concerned with the latter conduct, not the
former.\1210\ Thus, the CFTC does not believe it is appropriate to
limit the enforcement of its anti-evasion authority to only unlawful
transactions.
---------------------------------------------------------------------------

    \1209\ See WGCEF Letter.
    \1210\ If a transaction is unlawful, the CFTC (or another
authority) may be able to bring an action alleging a violation of
the applicable rule, regulation, order or law.
---------------------------------------------------------------------------

CEA Section 15(a) Summary:

(1) Protection of Market Participants and the Public
    Including certain foreign exchange transactions, forward rate
agreements and certain other transactions in the swap definition
protects the public by subjecting these transactions to Dodd-Frank
regulation. Similarly, the anti-evasion rules protect market
participants against evasive conduct that would take away the
protection afforded to them under Dodd-Frank regulation.
(2) Efficiency, Competitiveness, and the Financial Integrity of Markets
    The CFTC believes that the final rules and interpretations can be
consistently applied by substantially all market participants to
determine which agreements, contracts, or transactions are, and which
are not, swaps, security-based swaps, security-based swap agreements,
or mixed swaps. This may improve resource allocation efficiency as
market participant may not have to incur the cost of petitioning the
Commissions or obtaining an opinion of counsel to determine the status
of agreements, contracts or transactions as frequently as would be
necessary without the rules or interpretations.
    Moreover, the Commissions' statement that the determination of
whether a Title VII instrument is a swap, a security-based swap, or
both (i.e., a mixed swap), is made prior to the execution of, but no
later than an offer to enter into, the Title VII instrument, and
remains the same throughout the instrument's life (absent amendment of
the instrument), improves resource allocation efficiency because,
without this interpretation, market participants potentially would need
to expend additional resources to continually monitor their swaps to
see if the indexes on which they are based have migrated from broad-
based to narrow-based. The tolerance and grace periods for index CDS
traded on CFTC and SEC-regulated trading platforms should lower the
frequency of index migration and attendant costs, also improving
resource allocation efficiency.
(3) Price Discovery
    Not exempting swaps from foreign central banks, foreign sovereigns,
international financial institutions, such as multilateral development
banks, and similar organizations helps improve transparency and price
discovery through disclosure that might otherwise not occur. Market
participants will be informed about the prices of these transactions.
Furthermore, they will be better informed about the risks that these
transactions entail.
    The CFTC's interpretation of the term ``swap'' to include
guarantees of swaps that are not security-based swaps or mixed swaps
and the separate CFTC release will enable the CFTC and market
participants to receive more price-forming data about such swaps, which
help improve price discovery for swaps. Without anti-evasion rules,
price discovery might be impaired, since market participants would
otherwise not be informed about relevant but evasive swap transactions.
(4) Sound Risk Management Practices
    Properly classifying transactions as swaps or not swaps may lead to
sound risk management practices, because the added clarity provided by
the rules and interpretations herein will enable market participants to
consider whether a particular agreement, contract, or transaction is a
swap, prior to entering into such agreement, contract or transaction.
    The business of insurance is already subject to established pre-
Dodd-Frank Act regulatory regimes. Requirements that may work well for
swaps and security-based swaps may not be appropriate for traditional
insurance products. To the extent that the final rules distinguish
insurance from swaps and security-based swaps, the CFTC believes that
the Commissions should be able to tailor rules for specific

products that are swaps or security-based swaps to achieve Title VII
regulatory objectives. In adopting the Insurance Safe Harbor, the CFTC
believes that the Commissions seek to achieve those net benefits that
may be obtained from not supplanting existing insurance regulation.
    Documenting oral book-outs should promote good business practices
and aid the CFTC in preventing evasion through abuse of the forward
exclusion.
    Title VII instruments on qualifying foreign futures contracts on
debt securities of one of the 21 enumerated foreign governments is a
swap and not a security-based swap if the Title VII instrument
satisfies certain conditions. The classification may provide cross-
margining benefits when swap contracts and the futures contract are
margined at the same derivatives clearing organization, and thus, may
enhance sound risk management practices.
Other Public Interest Considerations
    Documenting oral book-outs should promote good business practices
and aid the CFTC in preventing evasion through abuse of the forward
exclusion.
    The product interpretation process established by the Commissions
has a 120-day deadline. This deadline will facilitate new products
coming to market relatively quickly. Further, the process holds the
Commissions accountable, because they will have to state why they are
not providing an interpretation when they decline to do so.
    The rule for books and records requirements for SBSAs does not
impose new recordkeeping requirements on SBSAs, but relies on existing
recordkeeping requirements for swaps, which avoids unnecessary
regulation.

                             Appendix--Rules Effectuated by the Product Definitions
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Agricultural Swaps......................  Makes no distinction between agricultural  76 FR 49291, 49297, Aug.
                                           swaps and other swaps.                     10, 2011
Commodity Options.......................  Exempts subject to conditions certain      77 FR 25320, 25331, Apr.
                                           options on physical commodities where      27, 2012
                                           parties are commercials or ECPs. The
                                           option results in physical delivery of
                                           the underlying.
CPO/CTA compliance obligations..........  Rescinds the exemption from CPO            77 FR 11252, 11275, Feb.
                                           registration; rescinds relief from the     24, 2012
                                           certification requirement for annual
                                           reports provided to operators of certain
                                           pools offered only to qualified eligible
                                           persons (QEPs; modifies the criteria for
                                           claiming relief); and require the annual
                                           filing of notices claiming exemptive
                                           relief under several sections of the
                                           Commission's regulations. Finally, the
                                           adopted amendments include new risk
                                           disclosure requirements for CPOs and
                                           CTAs.
Business Conduct Standards for SDs and    Applies to SDs and (except where           77 FR 9734, 9805, Feb. 17,
 MSPs With Counterparties.                 indicated) MSPs and prohibits certain      2012
                                           abusive practices, requires disclosures
                                           of material information to
                                           counterparties and requires SDs/MSPs to
                                           undertake certain due diligence relating
                                           to their dealings with counterparties.
                                           Certain rules do not apply to
                                           transactions initiated on a swap
                                           execution facility (SEF) or designated
                                           contract market (DCM) when the SD/MSP
                                           does not know the identity of the
                                           counterparty prior to execution.
SD and MSP Recordkeeping, Reporting, and  Establishes reporting, recordkeeping, and  77 FR 20128, 20166, Apr. 3,
 Duties Rules; FCMs and IBs Conflicts of   daily trading records requirements for     2012
 Interest Rules; and Chief Compliance      SDs and MSPs; establishes and governs
 Officer Rules for SDs, MSPs, and FCMs.    the duties of SDs and MSPs; establishes
                                           conflicts of interest requirements for
                                           SDs, MSPs, FCMs, and IBs; establishes
                                           the designation, qualifications, and
                                           duties of the chief compliance officers
                                           (CCOs) of FCMs, SDs, and MSPs and
                                           describes the required contents of the
                                           annual report detailing a registrant's
                                           compliance policies and activities, to
                                           be prepared by the chief compliance
                                           officer and furnished to the CFTC.
Position Limits for Futures and Swaps...  Establishes limits on speculative          76 FR 71626, 71662, Nov.
                                           positions in 28 selected physical          18, 2011
                                           commodity futures and swaps.
Real-Time Public Reporting of Swap        Establishes regulations concerning the     77 FR 1182, 1232, Jan. 9,
 Transaction Data.                         real-time public reporting of swap         2012
                                           transactions and pricing data.
Swap Data Recordkeeping and Reporting     Establishes swap data recordkeeping and    77 FR 2136, 2176, Jan. 13,
 Requirements.                             reporting requirements for registered      2012
                                           entities and counterparties.
Swap Data Repositories: Registration      Establishes regulations concerning the     76 FR 54538, 54572, Sept.
 Standards, Duties and Core Principles.    registration and regulation of swap data   1, 2011
                                           repositories.
Registration of SDs and MSPs............  Establishes the process for the            77 FR 2613, 2623, Jan. 19,
                                           registration of SDs and MSPs.              2012
----------------------------------------------------------------------------------------------------------------

XI. Administrative Law Matters--Exchange Act Revisions

A. Economic Analysis

1. Overview
    The SEC is sensitive to the costs and benefits of its rules. In
adopting the final rules in this release, the SEC has been mindful of
the costs and benefits associated with these rules which provide
fundamental building blocks for the Title VII regulatory regime
established by Congress. In addition, section 3(f) of the Exchange Act
requires the SEC, whenever it engages in rulemaking and is required to
consider or determine whether an action is necessary or appropriate in
the public interest, to consider, in addition to the protection of
investors, whether the action will promote competition, efficiency, and
capital formation.\1211\ Moreover, section 23(a)(2) of the Exchange Act
requires the SEC, when adopting rules under the Exchange Act, to
consider the impact such rules would have on competition. Section
23(a)(2) also prohibits the SEC from adopting any rule that would
impose a burden on competition not necessary or appropriate in
furtherance of the

purposes of the Exchange Act.\1212\ The SEC requested comment on all
aspects of the costs and benefits of the proposed rules in the
Proposing Release,\1213\ and any effect these rules may have on
competition, efficiency, and capital formation.
---------------------------------------------------------------------------

    \1211\ 15 U.S.C. 78c(f).
    \1212\ 15 U.S.C. 78w(a)(2).
    \1213\ See Proposing Release at 29885.
---------------------------------------------------------------------------

    These final rules implement the mandate of Title VII that the CFTC
and the SEC, in consultation with the Federal Reserve Board, jointly
further define the terms ``swap,'' ``security-based swap,'' and
``security-based swap agreement.'' \1214\ The rules adopted in this
release may be divided into three categories:
---------------------------------------------------------------------------

    \1214\ See section 712(d)(1) of the Dodd-Frank Act.
---------------------------------------------------------------------------

    First, the Commissions are adopting rules that will assist market
participants in determining whether particular agreements, contracts,
and transactions fall within or outside the swap and security-based
swap definitions (i.e., identifying products subject to Title VII). The
final rules provide: (1) An Insurance Safe Harbor for those agreements,
contracts, and transactions that the Commissions believe Congress does
not intend to be Title VII instruments; \1215\ (2) a ``grandfather''
for those insurance agreements, contracts, or transactions (as opposed
to insurance product categories) 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; \1216\ and (3) further
definition of the term ``swap'' to specifically list certain enumerated
products and not include certain foreign exchange forwards and foreign
exchange swaps.\1217\
---------------------------------------------------------------------------

    \1215\ See supra part II.B.1.
    \1216\ See supra part II.B.1.c).
    \1217\ See supra part II.C.2.
---------------------------------------------------------------------------

    Second, the Commissions are adopting rules that will assist market
participants in determining whether a particular Title VII instrument
is a swap subject to CFTC regulation, a security-based swap subject to
SEC regulation, or a mixed swap subject to regulation by the CFTC and
the SEC (i.e., mapping the jurisdictional divide between the CFTC and
the SEC). Specifically, Title VII instruments that are CDS referencing
a security index or a group or index of issuers of securities or
obligations of issuers of securities may be swaps subject to CFTC
regulation or security-based swaps subject to SEC regulation, depending
on whether such Title VII instruments are based on events relating to
``issuers of securities in a narrow-based security index'' or events
relating to securities in a ``narrow-based security index''.\1218\ The
final rules further define the terms ``issuers of securities in a
narrow-based security index'' and ``narrow-based security index'' for
purposes of this analysis.\1219\ Further, the Commissions are adopting
rules that provide tolerance and grace periods for Title VII
instruments based on a security index that are traded on certain
trading platforms where the security index may temporarily move from
being within the ``narrow-based security index'' definition to being
outside (e.g.,. moving from narrow-based to broad-based, or vice
versa.) \1220\ Additionally, the Commissions are providing
clarification that a Title VII instrument based on a qualifying foreign
futures contract on the debt securities of one or more of the 21
enumerated foreign governments is a swap and not a security-based swap,
if certain conditions are met.\1221\
---------------------------------------------------------------------------

    \1218\ See section 3(a)(68)(A)(ii)(III) of the Exchange Act, 15
U.S.C. 78c(a)(68)(A)(ii)(III).
    \1219\ See supra part III.G.
    \1220\ See supra part III.G.5.
    \1221\ See supra part III.E.
---------------------------------------------------------------------------

    Third, the Commissions are adopting rules that provide: (1) A
regulatory framework for certain mixed swaps and a process for market
participants to request that the Commissions issue a joint order
determining the appropriate regulatory treatment of certain other mixed
swaps \1222\ and (2) a process for market participants to request a
joint interpretation from the Commissions regarding whether a
particular Title VII instrument is a swap, security-based swap, or
mixed swap.\1223\ The final rules also provide that market participants
have no additional books and records requirements for SBSAs other than
those for swaps.\1224\
---------------------------------------------------------------------------

    \1222\ See supra part IV.
    \1223\ See supra part VI.
    \1224\ See supra part V.
---------------------------------------------------------------------------

    In considering the economic consequences of the final rules, the
SEC acknowledges the regulatory regime that was in place prior to the
enactment of Title VII. Prior to the enactment of Title VII, swaps and
security-based swaps were by-and-large unregulated. The Commodity
Futures Modernization Act of 2000 (``CFMA'') created a regulatory
regime that prohibited the SEC from regulating security-based swap
agreements,\1225\ though it provided the SEC with limited enforcement
authority over such instruments with respect to fraud, manipulation,
and insider trading.\1226\ Title VII created an entirely new regulatory
regime to regulate swaps, security-based swap agreements and security-
based swaps.
---------------------------------------------------------------------------

    \1225\ The CFMA added section 206A to the GLBA, 15 U.S.C. 78c
note, to define the term ``swap agreement'' to mean any agreement,
contract, or transaction between ECPs, the material terms of which
(other than price and quantity) are subject to individual
negotiation, that fall within certain categories of transactions.
Additionally, the CFMA added section 206B to the GLBA, 15 U.S.C. 78c
note, which defined a ``security-based swap agreement'' to mean a
swap agreement (as defined in section 206A of the GLBA) on which a
material term is based on the price, yield, value, or volatility of
any security or any group or index of securities, or any interest
therein. Furthermore, the CFMA added section 206C to the GLBA, 15
U.S.C. 78c note, which defined a ``non-security-based swap
agreement'' to mean any swap agreement (as defined in section 206A
of the GLBA) that is not a security-based swap agreement (as defined
in section 206B of the GLBA). Title VII amended the definition of
the term ``swap agreement'' (discussed in footnote 1284) and
repealed the definition of the terms ``security-based swap
agreement'' and ``non-security-based agreement.'' See sections
762(a) and (b) of the Dodd-Frank Act. However, Title VII also added
a new definition of the term ``security-based swap agreement'' in
section 3(a)(78) of the Exchange Act, 15 U.S.C. 78c(a)(78), that is
generally consistent with the repealed definition, except that the
new definition excludes security-based swaps. Accordingly, Title VII
provides jurisdiction to the CFTC for security-based swap
agreements, such as Title VII Instruments based on broad-based
securities indexes, and also retains the SEC's jurisdiction over
such instruments in instances of fraud, manipulation, or insider
trading.
    \1226\ The CFMA excluded from the definition of the term
``security'' the term ``security-based swap agreement'' as well as
the term ``non-security based swap agreement'' (as those terms are
defined in section 206B and 206C (respectively) of the GLBA, 15
U.S.C. 78c note). See sections 2A(a) and (b)(1) of the Securities
Act, 15 U.S.C. 77b-1(a) and (b)(1), and sections 3A(a) and (b)(1) of
the Exchange Act, 15 U.S.C. 78c-1(a) and (b)(1). Furthermore, the
CFMA explicitly prohibited the SEC from registering, or requiring,
recommending, or suggesting the registration under the Securities
Act and the Exchange Act of any security-based swap agreement (as
defined in section 206B of the GLBA). See section 2A(b)(2) of the
Securities Act, 15 U.S.C. 77b-1(b)(2), and section 3A(b)(2) of the
Exchange Act, 15 U.S.C. 78c-1(b)(2). The CFMA also made explicit
that the SEC is prohibited from either (1) promulgating,
interpreting, or enforcing rules or (2) issuing orders of general
applicability under the Securities Act or Exchange Act in a manner
that imposes or specifies reporting or recordkeeping requirements,
procedures, or standards as prophylactic measures against fraud,
manipulation, or insider trading with respect to any security-based
swap agreement (as defined in section 206B of the GLBA). However,
the CFMA did provide the SEC with limited enforcement authority
under section 10(b) of the Exchange Act, 15 U.S.C. 78j(b), and the
rules promulgated thereunder that prohibit fraud, manipulation, or
insider trading (but not rules imposing or specifying reporting or
record-keeping requirements, procedures, or standards as
prophylactic measures against fraud, manipulation, or insider
trading). Furthermore, the CFMA applies judicial precedents under
sections 9, 10(b), 15, 16, 20, and 21A of the Exchange Act, 15
U.S.C. 78i, 78j(b), 78o, 78p, 78t, and 78u-1, as well as section
17(a) of the Securities Act, 15 U.S.C. 77q(a), to security-based
swap agreements (as defined in section 206B of the GLBA) to the same
extent as they apply to securities.
---------------------------------------------------------------------------

2. Economic Analysis Considerations
    The rules adopted in this release implicate different types of
potential costs and benefits. First, there are costs,

as well as benefits, arising from subjecting certain agreements,
contracts, or transactions to the regulatory regime of Title VII. The
SEC refers to these costs and benefits as ``programmatic'' costs and
benefits. 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, costs to
assess whether such Title VII instrument is subject to the regulatory
regime of the SEC or the CFTC. The SEC refers to these costs as
``assessment'' costs.\1227\
---------------------------------------------------------------------------

    \1227\ The SEC expects that the benefits resulting from further
defining the terms ``swap,'' ``security-based swap,'' and ``mixed
swap'' will likely accrue primarily at the programmatic level. To
the extent appropriate, given the purposes of Title VII, the
Commissions have sought to mitigate the costs persons will incur in
connection with determining whether the instrument is a swap,
security-based swap, or mixed swap.
---------------------------------------------------------------------------

    The programmatic costs and benefits and the assessment costs raise
distinct analytic issues. First, the SEC recognizes that the Product
Definitions, while integral to the regulatory requirements that will be
imposed on the swap and security-based swap markets pursuant to Title
VII, do not themselves establish the scope or nature of those
substantive requirements or their related costs and benefits. The SEC
anticipates that the rules implementing the substantive requirements
under Title VII will be subject to their own economic analysis, but
final rules have not yet been adopted that would subject agreements,
contracts, or transactions, or entities that act as intermediaries
(such as security-based swap dealers (``SBS dealers'') or major
security-based swap participants (``MSBSPs'')) or provide market
infrastructures (such as clearing agencies, trade repositories and
trade execution facilities), to such substantive requirements. The
costs and benefits described below are therefore those that may arise
in connection with: (1) Determining whether certain agreements,
contracts, or transactions are Title VII instruments (i.e., the
assessment costs) and (2) subjecting those agreements, contracts, or
transactions that are Title VII instruments, determined based on the
statutory definitional lines that the Commissions are further defining,
to a complete and fully effective complement of Title VII statutory and
regulatory requirements. In addition, the discussion below addresses
the costs and benefits arising from security-based swaps being within
the definition of security under the Securities Act and the Exchange
Act. Once a Title VII Instrument is determined to be a security-based
swap, the security-based swap will be a security subject to the full
panoply of the Federal securities laws. Such treatment will give rise
to costs and benefits, including those that apply to securities
generally. Security-based swaps may be subject to additional costs to
the extent that there are overlapping regulatory requirements arising
from the Title VII regulatory requirements and those Federal securities
laws requirements that apply to securities generally. The SEC has
already taken action to address some of such overlapping or
inconsistent requirements \1228\ and will continue to evaluate other
needed actions, if any, to minimize any such overlapping regulatory
implications.
---------------------------------------------------------------------------

    \1228\ See Order Pursuant to Sections 15F(b)(6) and 36 of the
Securities Exchange Act of 1934 Granting Temporary Exemptions and
Other Temporary Relief, Together With Information on Compliance
Dates for New Provisions of the Securities Exchange Act of 1934
Applicable to Security-Based Swaps, and Request for Comment, Release
No. 34-64678 (June 15, 2011), 76 FR 36287 (June 22, 2011); Exchange
Act Exemptive Order; and SB Swaps Interim Final Rules.
---------------------------------------------------------------------------

    Second, in determining the appropriate scope of these rules, the
SEC considers the types of agreements, contracts, or transactions that
should be regulated as swaps, security-based swaps, or mixed swaps
under Title VII in light of the purposes of the Dodd-Frank Act, the
overall regulatory framework, the historical treatment of the
instruments and other regulatory frameworks, and the data currently
available to the SEC. The SEC has sought to further define the terms
``swap,'' ``security-based swap,'' and ``mixed swap'' to address the
status of agreements, contracts, and transactions that are appropriate
to regulate as swaps, security-based swaps and mixed swaps within the
purposes of Title VII and not to include those agreements, contracts,
and transactions that historically have not been considered to be swaps
or security-based swaps thereby not imposing unnecessary or
inappropriate Title VII costs and burdens on parties engaging in
agreements, contracts, and transactions. In addition, the SEC
recognizes that these rules may have effects on competition,
efficiency, and capital formation as a result of certain agreements,
contracts, and transactions being determined to fall under or outside
the Title VII regulatory regime, or as a result of the jurisdictional
divide between the SEC and CFTC as mandated by the statute.
    In the sections below, the SEC begins by recognizing that the Title
VII regulatory regime has programmatic benefits and costs, as well as
assessment costs. These costs and benefits have informed the decisions
and the actions taken that are described throughout the release.
Accordingly, the analysis below includes references to the discussions
of the decisions and actions taken by the Commissions set forth above
in other parts of this release. Finally the SEC discusses the effects
of these rules on competition, efficiency, and capital formation.
3. Programmatic Benefits and Costs
    By enacting Title VII, Congress created a regulatory regime for
swaps and security-based swaps that previously did not exist.\1229\
Title VII amendments to the Exchange Act impose, among other
requirements, the following: (1) Registration and comprehensive
oversight of SBS dealers and MSBSPs; \1230\ (2) reporting of security-
based swaps to a registered security-based swap data repository (``SB
SDR''), or to the SEC (if the security-based swap is uncleared and no
SB SDR will accept the security-based swap for reporting), and
dissemination of the security-based swap market data to the public;
\1231\ (3) clearing of security-based swaps at a registered clearing
agency (or a clearing agency that is exempt from registration) if the
SEC makes a determination that such security-based swaps are required
to be cleared, unless an exception from the mandatory clearing
requirement applies; \1232\ and (4) if a security-based

swap is subject to the clearing requirement, execution of the security-
based swap transaction on an exchange, on a security-based swap
execution facility (``SB SEF'') registered under the Exchange
Act,\1233\ or on an SB SEF that has been exempted from registration by
the SEC under the Exchange Act,\1234\ unless no SB SEF or exchange
makes such security-based swap available for trading.\1235\ In
addition, Title VII amends the Securities Act and the Exchange Act to
include security-based swaps in the definition of ``security'' for the
purposes of those statutes.\1236\ As a result, security-based swaps are
subject to the full panoply of the Federal securities laws. Title VII
also added specific provisions to the Securities Act and Exchange Act
affecting how security-based swaps may be sold. For example, Title VII
amended section 5 of the Securities Act to require that a registration
statement meeting the requirements of the Securities Act be in effect
before there can be an offer to sell, offer to buy, purchase or sale of
a security-based swap from or to any person who is not an ECP.\1237\ In
addition, Title VII added section 6(l) to the Exchange Act to require
that any security-based swap transaction with or for a person that is
not an ECP must be effected on a national securities exchange.\1238\
---------------------------------------------------------------------------

    \1229\ See supra part XI.A.1.
    \1230\ See section 15F of the Exchange Act, 15 U.S.C. 78o-10.
    \1231\ See section 3(a)(75) of the Exchange Act, 15 U.S.C.
78c(a)(75) (defining the term ``security-based swap data
repository''); section 13(m) of the Exchange Act, 15 U.S.C. 78m(m)
(regarding public availability of security-based swap data); section
13(n) of the Exchange Act, 15 U.S.C. 78m(n) (regarding requirements
related to SB SDRs); and section 13A of the Exchange Act, 15 U.S.C.
78m-1 (regarding reporting and recordkeeping requirements for
certain security-based swaps). See also Security-Based Swap Data
Repository Registration, Duties, and Core Principles, Release No.
34-63347 (Nov. 19, 2010), 75 FR 77306 (Dec. 10, 2010); corrected at
75 FR 79320 (Dec. 20, 2010) and 76 FR 2287 (Jan. 13, 2011) (``SDR
Proposing Release''); and Regulation SBSR--Reporting and
Dissemination of Security-Based Swap Information, Release No. 34-
63346 (Nov. 19, 2010), 75 FR 75208 (Dec. 2, 2010) (``Regulation SBSR
Proposing Release''). In each proposing release the SEC invited
comment with respects to the costs and benefits of each of the
proposed rules. The costs associated with these and other
substantive rules, along with any comments received by the SEC
addressing the costs of the proposed rules, are being addressed in
more detail in connection with the applicable rulemakings.
    \1232\ See section 3C(a)(1) of the Exchange Act, 15 U.S.C. 78c-
3(a)(1). See also Process for Submissions for Review of Security-
Based Swaps for Mandatory Clearing and Notice Filing Requirements
for Clearing Agencies; Technical Amendments to Rule 19b-4 and Form
19b-4 Applicable to All Self-Regulatory Organizations, 75 FR 82490
(Dec. 30, 2010) (``Clearing Procedures Proposing Release''). In the
Clearing Procedures Proposing Release the SEC invited comment with
respects to the costs and benefits of each of the proposed rules.
The costs associated with these and other substantive rules, along
with any comments received by the SEC addressing the costs of the
proposed rules, are being addressed in more detail in connection
with the applicable rulemakings.
    \1233\ See section 3D of the Exchange Act, 15 U.S.C. 78c-4.
    \1234\ See section 3D(e) of the Exchange Act, 15 U.S.C. 78c-
4(e).
    \1235\ See sections 3C(g) and (h) of the Exchange Act, 15 U.S.C.
78c-3(g) and (h). See also section 3(a)(77) of the Exchange Act, 15
U.S.C. 78c(77) (defining the term ``security-based swap execution
facility''). See also Registration and Regulation of Security-Based
Swap Execution Facilities, Release No. 34-63825 (Feb. 2, 2011), 76
FR 10948 (Feb. 28, 2011) (``SB SEF Proposing Release''). In the SB
SEF Proposing Release each proposing release the SEC invited comment
with respects to the costs and benefits of each of the proposed
rules. The costs associated with these and other substantive rules,
along with any comments received by the SEC addressing the costs of
the proposed rules, are being addressed in more detail in connection
with the applicable rulemakings.
    \1236\ See sections 761(a)(2) and 768(a)(1) of the Dodd-Frank
Act (amending sections 3(a)(10) of the Exchange Act, 15 U.S.C.
78c(a)(10), and 2(a)(1) of the Securities Act, 15 U.S.C. 77b(a)(1),
respectively). The Dodd-Frank Act also amended the Securities Act to
provide that any offer or sale of a security-based swap by or on
behalf of the issuer of the securities upon which such security-
based swap is based or is referenced, an affiliate of the issuer, or
an underwriter, shall constitute a contract for sale of, sale of,
offer for sale, or offer to sell such securities. See section 768(a)
of the Dodd-Frank Act (amending section 2(a)(3) of the Securities
Act, 15 U.S.C. 77b(a)(3)).
    \1237\ 15 U.S.C. 77e.
    \1238\ See section 6(l) of the Exchange Act, 15 U.S.C. 78f(l).
---------------------------------------------------------------------------

    The creation of regulatory regimes for agreements, contracts, or
transactions that are defined as a swap or security-based swap will
result in an array of programmatic benefits. However, if an agreement,
contract or transaction falls within the swap or security-based swap
definition, the parties to the agreement, contract, or transaction also
may incur a number of upfront and ongoing costs associated with the
regulation of Title VII instruments and transactions. These
programmatic benefits and costs, discussed in more detail below, relate
to Title VII registration; business conduct standards, compliance,
operation and governance; clearing, trade execution, and reporting and
processing; investor protection provisions of Title VII and the
application of the Federal securities laws.\1239\
---------------------------------------------------------------------------

    \1239\ For example, dealers and major participants will be
subject to business conduct requirements of section 15F of the
Exchange Act, and thus will be required, among other things, to
determine that their counterparty meets certain eligibility
standards before entering into security-based swaps with them and to
disclose information about material risks and characteristics,
material incentives, conflicts of interest, the daily mark, and
clearing rights. See Business Conduct Standards for Security-Based
Swaps Dealer and Major Security-Based Swap Participants, Release No.
34-64766 (June 29, 2011), 76 FR 42396, 42406, 42410 (July 18, 2011)
(``Business Conduct Standards Proposing Release''). Also, for
example, in connection with registration requirements the SEC
expects security-based swap dealers and major security-based swap
participants to incur costs in connection with completing and filing
forms, providing related certifications, addressing additional
requirements in connection with associated persons, as well as
certain additional costs. See Registration of Security-Based Swap
Dealers and Major Security-Based Swap Participants, Release No. 34-
65543 (Oct. 12, 2011), 76 FR 65784, 65813-18 (Oct. 24, 2011) (``SB
Swap Participant Registration Proposing Release''). In each
proposing release the SEC invited comment with respects to the costs
and benefits of each of the proposed rules. The costs associated
with these and other substantive rules, along with any comments
received by the SEC addressing the costs of the proposed rules, are
being addressed in more detail in connection with the applicable
rulemakings.
---------------------------------------------------------------------------

(a) Title VII Registration of Entities Involved in Security-Based Swaps
    As a result of Title VII imposing a new regulatory regime on
security-based swaps, in addition to making such security-based swaps
securities under the Securities Act and the Exchange Act, Title VII
will require the registration of entirely new types of registrants with
the SEC, including SBS dealers and MSBSPs,\1240\ SB SEFs,\1241\ SB
SDRs,\1242\ and clearing agencies registered to clear security-based
swaps.\1243\ The SEC expects that registrants will incur costs in
gathering information, accurately completing forms and filing these
forms with the SEC.\1244\ Registration will provide the SEC with
information regarding registrants which will enable the SEC to oversee
the SEC's security-based swap registrants.
---------------------------------------------------------------------------

    \1240\ See section 15F(b)(5) of the Exchange Act, 15 U.S.C. 78o-
10(b)(5).
    \1241\ See section 3D(a) of the Exchange Act, 15 U.S.C. 78c-4.
    \1242\ See section 13(n)(1) of the Exchange Act, 15 U.S.C.
78m(n)(1).
    \1243\ See section 17A(g) of the Exchange Act, 15 U.S.C. 78q-
1(g).
    \1244\ The SEC has proposed rules related to the registration
requirements for each of these new registrants. See SB Swap
Participant Registration Proposing Release; SB SEF Proposing
Release; SDR Proposing Release; and Clearing Agency Standards for
Operation and Governance, Release No. 34-64017 (Mar. 3, 2011), 76 FR
14472 (Mar. 16, 2011) (``Clearing Agency Standards Proposing
Release''). In each proposing release the SEC invited comment with
respects to the costs and benefits of each of the proposed rules.
The costs associated with these and other substantive rules, along
with any comments received by the SEC addressing the costs of the
proposed rules, are being addressed in more detail in connection
with the applicable rulemakings.
---------------------------------------------------------------------------

(b) Business Conduct Standards, Compliance, Operation, and Governance
    Title VII imposes requirements on registrants that did not exist
prior to the adoption of Title VII, including core principles, duties
and/or standards that are related to the type of registrant and its
function.\1245\ For example, Title VII includes core principles for SB
SEFs, many of which require SB SEFs to establish and enforce rules
specific to the trading of security-based swaps.\1246\ Similarly, Title
VII assigns duties (in addition to core principles) that are specific
to the nature of SB SDRs, e.g. the acceptance and maintenance of data
related to security-based swaps.\1247\ The

provisions of Title VII related to SB SEFs and SB SDRs are designed to
provide transparency in the security-based swap market.
---------------------------------------------------------------------------

    \1245\ See sections 3D(d), 13(n)(5) and (7), and 15F(h) and (j)
of the Exchange Act, 15 U.S.C. 78c-4(d), 78m(n)(5) and (7), and 78o-
10(h) and (j).
    \1246\ See sections 3D(d)(2), (3), (4), (6), and (8) of the
Exchange Act, 15 U.S.C. 78c-4(d)(2), (3), (4), (6), and (8). See
also SB SEF Proposing Release. In the SB SEF Proposing Release the
SEC invited comment with respects to the costs and benefits of each
of the proposed rules. The costs associated with these and other
substantive rules, along with any comments received by the SEC
addressing the costs of the proposed rules, are being addressed in
more detail in connection with the applicable rulemakings.
    \1247\ See section 13(n)(5) of the Exchange Act, 15 U.S.C.
78m(n)(5). See also SDR Proposing Release. In the SDR Proposing
Release the SEC invited comment with respects to the costs and
benefits of each of the proposed rules. The costs associated with
these and other substantive rules, along with any comments received
by the SEC addressing the costs of the proposed rules, are being
addressed in more detail in connection with the applicable
rulemakings.
---------------------------------------------------------------------------

    Title VII also imposes a number of requirements on registered SBS
dealers and MSBSPs, such as external business conduct
requirements.\1248\ Specifically, section 15F(h)(3)(B) of the Exchange
Act establishes certain disclosure requirements for SBS dealers and
MSBSPs,\1249\ and section 15F(h)(3)(C) of the Act requires that
communications by these entities meet certain standards of fairness and
balance.\1250\ The level of protection becomes higher for special
entities \1251\ to whom dealers offer security-based swaps.\1252\ For
example, an SBS dealer that acts as an advisor to a special entity has
a duty to act in the best interest of the special entity and is
required to make reasonable efforts to obtain such information as is
necessary for the SBS dealer to make a reasonable determination that
any security-based swap recommended by the SBS dealer is in the best
interests of the special entity.\1253\ In addition, section 15F(j)(5)
of the Exchange Act imposes requirements intended to address potential
conflicts of interest that may arise in transactions between a SBS
dealer or MSBSP and its counterparty.\1254\ Title VII also imposes upon
SBS dealers and MSBSPs requirements to implement risk management
policies and procedures that are designed to prevent them from taking
on excessive risk and to enable them to better deal with market
fluctuations that might otherwise endanger their financial
health.\1255\
---------------------------------------------------------------------------

    \1248\ The SEC has proposed rules regarding business conduct
standards for security-based swap dealers and major security-based
swap participants. See Business Conduct Standards Proposing Release.
In the Business Conduct Standards Proposing Release the SEC invited
comment regarding the costs and benefits associated with the
proposed rules. The costs associated with these and other
substantive rules, along with any comments received by the SEC
addressing the costs of the proposed rules, are being addressed in
more detail in connection with the applicable rulemakings.
    \1249\ See section 15F(h)(3)(B) of the Exchange Act, 15 U.S.C.
78o-10(h)(3)(B).
    \1250\ See section 15F(h)(3)(C) of the Exchange Act, 15 U.S.C.
78o-10(h)(3)(C).
    \1251\ Title VII amends the Exchange Act to define a special
entity as: (1) A Federal agency; (2) a State, State agency, city,
county, municipality, or other political subdivision of a State; (3)
any employee benefit planned, as defined in section 3 of the
Employee Retirement Income Security Act of 1974; or (4) any
governmental plan, as denied in section 3 of the Employee Retirement
Income Security Act of 1974; or any endowment, including an
endowment that is an organization in section 501(c)(3) of the
Internal Revenue Code of 1986. See section 15F(h)(2)(C) of the
Exchange Act, 15 U.S.C. 78o-10(h)(2)(C).
    \1252\ See sections 15F(h)(2), (h)(4), and (h)(5) of the
Exchange Act, 15 U.S.C. 78o-10(h)(2), (h)(4), and (h)(5).
    \1253\ See section 15F(h)(4)(B) and (C) of the Exchange Act, 15
U.S.C. 78o-10(h)(4)(B) and (C).
    \1254\ See section 15F(j)(5) of the Exchange Act, 15 U.S.C. 78o-
10(j)(5).
    \1255\ See section 15F(j)(2) of the Exchange Act, 15 U.S.C. 78o-
10(j)(2).
---------------------------------------------------------------------------

    Section 15F(e) of the Exchange Act as added by section 764(a) of
the Dodd Frank Act, imposes capital and margin requirements on dealers
and major participants,\1256\ which are designed to reduce the
financial risks of these institutions and contribute to the stability
of the security-based swap market in particular and the U.S. financial
system more generally.\1257\ With respect to a security-based swap
submitted for clearing, counterparties will be required to post initial
margin and maintenance margin to secure its obligations under the
trade.
---------------------------------------------------------------------------

    \1256\ See section 15F(e) of the Exchange Act, 15 U.S.C. 78o-
10(e).
    \1257\ See Entity Definitions Release at 30723, supra note 12.
---------------------------------------------------------------------------

    Section 3E of the Exchange Act, among other things, requires
registered brokers, dealers and SBS dealers that collect initial and
variation margin from counterparties to cleared security-based swap
transactions to maintain that collateral in segregated accounts.\1258\
With respect to uncleared swaps, section 3E gives a counterparty to a
SBS dealer or MSBSP that collects collateral the right to request
segregation of initial margins and maintenance of such initial margins
in accordance with rules promulgated by the SEC.\1259\ These
protections provide market participants who enter into transactions
with these entities confidence that their collateral accounts will
remain separate from the SBS dealer or MSBSP's assets in the event of
bankruptcy.\1260\
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    \1258\ See 15 U.S.C. 78c-5.
    \1259\ Id.
    \1260\ Id.
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(c) Clearing, Trade Execution, Reporting and Processing
    Section 763 of the Dodd-Frank Act adds section 3C to the Exchange
Act, which deals with clearing for security-based swaps.\1261\ Prior to
the enactment of Title VII, swaps which traded on a bilateral basis
were subject to counterparty credit risk, which may not have been fully
mitigated by the posting of collateral.\1262\ Section 3C of the
Exchange Act requires that security-based swaps, with some exceptions,
be cleared through a central counterparty (``CCP'') registered with the
SEC.\1263\ Clearing a security-based swap places a CCP between the
parties to a trade and reduces the counterparty risk.
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    \1261\ See 15 U.S.C. 78c-3. See also Clearing Procedures
Proposing Release; Clearing Agency Standards Proposing Release; End-
User Exception of Mandatory Clearing of Security-Based Swaps,
Release No. 34-63556 (Dec. 15, 2010), 75 FR 79992 (Dec. 21, 2010)
(``End-User Exception Proposing Release''); and Ownership
Limitations and Governance Requirements for Security-Based Swap
Clearing Agencies, Security-Based Swap Execution Facilities, and
National Securities Exchanges with Respect to Security-Based Swaps
under Regulation MC, Release No. 34-63107, (Oct. 14, 2010), 75 FR
65882 (Oct. 26, 2010) (``Proposed Regulation MC''). In each
proposing release the SEC invited comment with respects to the costs
and benefits of each of the proposed rules. The SEC has received
comments on the cost and benefits of these proposed rules. The costs
associated with these and other substantive rules are being
addressed in more detail in connection with the applicable
rulemakings.
    \1262\ See U.S. Gov't Accountability Office, Systemic Risk:
Regulatory Oversight and Recent Initiatives to Address Risk Posed by
Credit Default Swaps, GAO-09-397T, at 13 (Mar. 5, 2009).
    \1263\ 15 U.S.C. 78c-3. Such clearing agencies also are required
to register. See section 17A(g) of the Exchange Act, 15 U.S.C. 78q-
1(g).
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    Title VII also requires the execution of clearable security-based
swaps on exchanges or SB SEFs if such security-based swaps are
available to trade and the reporting of trades to an SB SDR and
dissemination of trading data to the public.\1264\ Title VII also
imposes requirements relating to the operations of the SB SEFs and
SDRs.\1265\ Section 15F(i) of the Exchange Act establishes regulatory
standards for certain [registered security-based swap entities] related
to the confirmation, processing, netting, documentation, and valuation
of security-based swaps, which should enhance the efficiency of the
trade execution and processing of security-based swaps.\1266\
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    \1264\ See sections 3C(h) and 13(m) of the Exchange Act, 15
U.S.C. and 13m(m). See also Regulation SBSR Proposing Release; and
SDR Proposing Release.
    \1265\ See SDR Proposing Release; and SB SEF Proposing Release.
In each proposing release the SEC invited comment with respects to
the costs and benefits of each of the proposed rules. The costs
associated with these and other substantive rules, along with any
comments received by the SEC addressing the costs of the proposed
rules, are being addressed in more detail in connection with the
applicable rulemakings.
    \1266\ See section 15F(i) of the Exchange Act, 15 U.S.C. 78o-
10(i). See also Trade Acknowledgment and Verification on Security-
Based Swap Transactions, Release No. 34-63727 (Jan. 14, 2011), 76 FR
3859 (Jan. 21, 2011) (``Trade Documentation Proposing Release''). In
the Trade Documentation Proposing Release the SEC invited comment
with respects to the costs and benefits of each of the proposed
rules. The costs associated with these and other substantive rules,
along with any comments received by the SEC addressing the costs of
the proposed rules, are being addressed in more detail in connection
with the applicable rulemakings.
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    Furthermore, sections 15F(f), (g), and (j)(3) of the Exchange Act
impose certain reporting, recordkeeping, and regulatory disclosure
requirements on SBS dealers

and MSBSPs.\1267\ Specifically, Title VII imposes on parties to a
security-based swap the responsibility to ``report security-based swap
transaction information to the appropriate registered entity in a
timely manner as may be prescribed by the [SEC].'' \1268\ Title VII's
reporting, recordkeeping, and disclosure requirements should enhance
the volume and quality of information available in the market and
facilitate effective oversight by the SEC.
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    \1267\ See section 15F(f) of the Exchange Act, 15 U.S.C. 78o-
10(f) (reporting and recordkeeping requirements); section 15F(g) of
the Exchange Act, 15 U.S.C. 78o-10(g) (daily trading records
requirements); section 15F(j)(3) of the Exchange Act, 15 U.S.C. 78o-
10(j)(3) (requirements related to the disclosure of information to
regulators). See also Regulation SBSR Proposing Release. In the
Regulation SBSR Proposing Release the SEC invited comment with
respects to the costs and benefits of each of the rules proposed in
the release. The costs associated with these and other substantive
rules, along with any comments received by the SEC addressing the
costs of the proposed rules, are being addressed in more detail in
connection with the applicable rulemakings.
    \1268\ See section 13(m)(1)(F) of the Exchange Act, 15 U.S.C.
13m(m)(1)(F). See also Regulation SBSR Proposing Release. In the
Regulation SBSR Proposing Release the SEC invited comment with
respects to the costs and benefits of each of the proposed rules.
The costs associated with these and other substantive rules, along
with any comments received by the SEC addressing the costs of the
proposed rules, are being addressed in more detail in connection
with the applicable rulemakings.
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(d) Investor Protection Provisions of Title VII and the Application of
the Federal Securities Laws
    Prior to the enactment of Title VII, the SEC had the ability to
bring actions based on fraud, manipulation or insider trading relating
to security-based swap agreements (as defined in section 206B of the
GLBA \1269\) but did not have any other regulatory authority over
swaps, security-based swaps or market participants involved in
security-based swap transactions.\1270\ Title VII provides the SEC with
antifraud enforcement authority over SBSAs under Title VII and gives
the SEC the authority to regulate security-based swap transactions and
the security-based swaps market, including the authority to prevent or
deter fraud, manipulation or deceptive conduct and take other
actions.\1271\
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    \1269\ 15 U.S.C. 78c note.
    \1270\ See supra part XI.A.1, notes 1225 and 1226.
    \1271\ See supra part XI.A.1, notes 1225 and 1226 and part I.
See also Prohibition Against Fraud, Manipulation, and Deception in
Connection with Security-Based Swaps, Release No. 34-63236 (Nov. 3,
2010), 75 FR 68560 (Nov. 8, 2010) (``SB Swap Antifraud Proposing
Release''). In the SB Swap Antifraud Proposing Release the SEC
invited comment with respects to the costs and benefits of each of
the proposed rules. The costs associated with these and other
substantive rules, along with any comments received by the SEC
addressing the costs of the proposed rules, are being addressed in
more detail in connection with the applicable rulemakings.
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    By including security-based swaps in the definition of security
under the Securities Act and the Exchange Act and repealing the
restrictions on regulating security-based swap agreements as
securities, Title VII extended the investor protections under the
Federal securities laws to security-based swaps. In particular, Title
VII amends the Exchange Act and the Securities Act to include security-
based swaps within the definition of the term ``security.'' \1272\
Accordingly, security-based swaps are securities and benefit from the
investor protections provided by the Federal securities laws.\1273\ In
addition to the antifraud and anti-manipulation provisions, these
protections include the registration, disclosure and civil liability
provisions of the Securities Act and the disclosure provisions of the
Exchange Act. Title VII specifically provides protections to non-ECPs
by adding section 5(e) to the Securities Act, which requires that a
registration statement must be in effect before a person can offer to
sell, offer to purchase from, or otherwise enter into security-based
swaps with non-ECPs.\1274\ Any security-based swap with or for a person
that is not an ECP must be effected on a national securities
exchange.\1275\ Furthermore, Title VII ensures that a security-based
swap cannot be used to avoid registration or investor protection under
the Securities Act by providing that if a security-based swap is
entered into by an issuer's affiliate or underwriter, the offer and
sale of the underlying security must comply with the Securities
Act.\1276\
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    \1272\ See section 2(a)(1) of the Securities Act and section
3(a)(10) of the Exchange Act, 15 U.S.C. 77b(a)(1) and 15 U.S.C.
78c(a)(10).
    \1273\ See, e.g., Order Granting Temporary Exemptions under the
Securities Exchange Act of 1934 in Connection with the Pending
Revision of the Definition of ``Security'' to Encompass Security-
Based Swaps, and Request for Comment, 76 FR 39927 (July 7, 2011)
(discussing the effect of the amendment to the definition of the
term ``security'' to include security-based swaps under the Exchange
Act and granting certain temporary relief and providing interpretive
guidance).
    \1274\ See section 768(b) of the Dodd Frank Act (adding section
5(e) of the Securities Act, 15 U.S.C. 77e(d)).
    \1275\ See section 6(l) of the Exchange Act, 15 U.S.C. 78f(l).
    \1276\ See section 768(a) of the Dodd-Frank Act (amending
section 2(a)(3) of the Securities Act, 15 U.S.C. 77b(a)(3)).
---------------------------------------------------------------------------

    The programmatic benefits related to investor protection under the
Federal securities laws have corresponding costs including costs
associated with compliance with the registration and disclosure regime
of the Securities Act if an exemption from such registration provisions
is not available.\1277\
---------------------------------------------------------------------------

    \1277\ For offers and sales to non-ECPs, the statute requires
registration of the security-based swap transaction.
---------------------------------------------------------------------------

    The above programmatic benefits and costs that will flow from
regulation of the security-based swap market mandated by Title VII will
be significant, although very difficult to quantify and measure.\1278\
Moreover, the benefits can be expected to manifest themselves over the
long run and be distributed over the market as a whole. The
programmatic costs and benefits associated with substantive rules
applicable to security-based swaps under Title VII are being addressed
in more detail in connection with the applicable rulemakings
implementing Title VII. There are programmatic costs that may arise
from the application of other provisions of the Federal securities laws
to security-based swaps, security-based swap transactions and market
participants involved in such security-based swap transactions,
including costs arising from potential overlapping regulatory
requirements. The SEC already has taken interim actions to mitigate
such overlapping and potentially conflicting regulatory requirements
and will be carefully evaluating any future actions that may be
necessary and appropriate to address such overlapping or conflicting
requirements.
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    \1278\ One commenter suggested that the best measure of the
benefits of the Dodd-Frank Act is the cost of the 2008 financial
crisis. This commenter provided, as an example, an estimate from the
Bank of England that the cost of the 2008 financial crisis in terms
of lost output was between $60 trillion and $200 trillion. See
Letter from Dennis Kelleher, Better Markets to the CFTC, June 3,
2011, regarding the reopening and extension of comment periods for
rulemaking implementing the Dodd-Frank Wall Street Reform and
Consumer Protection Act. The SEC recognizes that this estimate
addresses the aggregate cost of the financial crisis. It is also
recognized that others have expressed concern regarding the
potential cost of the requirements of Dodd-Frank. See, e.g., letters
from SIFMA, the American Bankers Association, the Financial Services
Roundtable and the Clearing House Association, dated February 13,
2012 (commenting on Prohibitions and Restrictions on Proprietary
Trading and Certain Interests in, and Relationships With, Hedge
Funds and Private Equity Funds, 76 FR 68846 (Nov. 7, 2011)) and The
Financial Services Roundtable, dated October 17, 2011 (commenting on
Further Definition of ``Swap Dealer,'' ``Security-Based Swap
Dealer,'' ``Major Swap Participant,'' ``Major Security-Based Swap
Participant'' and ``Eligible Contract Participant,'' 75 FR 80174
(Dec. 21, 2010)).

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4. Costs and Benefits Associated With Specific Rules
(a) Insurance Safe Harbor and Grandfather for Insurance Products (Rules
3a69-1 Under the Exchange Act)
(i) Programmatic Benefits and Costs
    The Commissions are adopting rules that establish an Insurance Safe
Harbor and an Insurance Grandfather for certain agreements, contracts,
and transactions that meet the conditions and tests set forth in rule
3a69-1 under the Exchange Act.\1279\ The agreements, contracts, and
transactions that satisfy the Insurance Safe Harbor or Insurance
Grandfather under the Exchange Act will fall outside the statutory swap
and security-based swap definitions.\1280\ The SEC believes that the
conditions and tests set forth in the Insurance Safe Harbor represent
the characteristics of many types of traditional insurance
products.\1281\ As stated above, the Commissions are not aware of
anything in the legislative history or Title VII itself to suggest that
Congress intended for traditional insurance products to be regulated as
swaps or security-based swaps.\1282\
---------------------------------------------------------------------------

    \1279\ See supra part II.B.1.
    \1280\ Id.
    \1281\ Id.
    \1282\ Id.
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    Typically, insurance has not been regulated under the Federal
securities laws; although variable life insurance and annuities are
securities and are regulated under the Federal securities laws.\1283\
Although a broad reading of the swap definition could encompass
traditional insurance, the SEC does not believe that such a reading is
consistent with Congressional intent.\1284\ To include products that
meet the Insurance Safe Harbor or Insurance Grandfather in the swap or
security-based swap definition would subject traditional insurance
products to the Title VII regime which the SEC does not believe is
intended by Congress. Imposing programmatic costs on the insurance
industry, such as those associated with compliance with the
registration, compliance, and operation and governance requirements as
described above, in addition to the Securities Act and Exchange Act
requirements applicable to security-based swap transactions involving
non-ECPs, would increase the business costs of insurance providers,
which costs could be passed on to the consumers who need such
insurance. In addition, because of the above costs as well as the
Securities Act and Exchange Act restrictions applicable to offers and
sales of security-based swaps to non-ECPs, including products that meet
the Insurance Safe Harbor in the swap or security-based swap definition
could potentially affect the ability of insurance providers to continue
to offer insurance products and disrupt contracts that satisfy the
Insurance Grandfather that are used every day in the American economy.
For example, if Title VII applied to traditional insurance products,
people who purchased insurance to protect their property or families
against accidental hazards or risks would need to be qualified as ECPs
\1285\ or the offer and sale of the insurance products that were
security-based swaps would need to be registered with the SEC \1286\
and traded on an exchange; \1287\ and for swaps that are under the CFTC
jurisdiction would only be able to be sold on or subject to the rules
of a board of trade. In addition, insurance providers that offer
insurance products exceeding the de minimis threshold (as adopted in
the Entities Release) applicable to swap dealers and security-based
swap dealers would be required to register as swap dealers or SBS
dealers \1288\ and be subject to the substantive requirements that
result from such registration.
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    \1283\ See generally section 3(a)(8) of the Securities Act, 15
U.S.C. 77c(a)(8), and section 12(g) of the Exchange Act, 15 U.S.C.
78l(g). The SEC has previously stated its view that Congress
intended any insurance contract falling within section 3(a)(8) to be
excluded from all provisions of the Securities Act notwithstanding
the language of the Securities Act indicating that section 3(a)(8)
is an exemption from the registration but not the antifraud
provisions. See Definition of ``Annuity Contract or Optional Annuity
Contract'', 49 FR 46750, 46753 (Nov. 28, 1984). See also Tcherepnin
v. Knight, 389 U.S. 332, 342 n.30 (1967) (Congress specifically
stated that ``insurance policies are not to be regarded as
securities subject to the provisions of the [Securities] act,''
(quoting H.R. Rep. 85, 73rd Cong., 1st Sess. 15 (1933)). See also
supra note 42.
    \1284\ Section 206A of the GLBA, 15 U.S.C. 78c note defined the
term ``swap agreement'' and the CFMA had two requirements in
addition to the definition of ``swap'' itself: (1) The transaction
is between ECPs (as defined prior to enactment of the Dodd-Frank
Act); and (2) the material terms of the swap agreement (other than
price and quantity) are subject to individual negotiation. Section
762 of the Dodd-Frank Act removed these requirements from the
definition of swap agreement. See supra part XI.A.1, notes 1225 and
1226. The definition of swap in Title VII of the Dodd-Frank Act is
not conditioned on the existence of either of the two requirements,
although swap or security-based swap transactions with non-ECPs are
subject to additional restrictions under the Federal securities laws
and the Commodity Exchange Act. See CEA section 1a(47), 7 U.S.C.