[Federal Register Volume 76, Number 99 (Monday, May 23, 2011)]
[Proposed Rules]
[Pages 29818-29900]
[FR Doc No: 2011-11008]

Vol. 76

Monday,

No. 99

May 23, 2011

Part II

Commodity Futures Trading Commission

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17 CFR Part 1

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Securities and Exchange Commission

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17 CFR Part 240

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

Federal Register / Vol. 76 , No. 99 / Monday, May 23, 2011 / Proposed
Rules

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 1

RIN 3038-AD46

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 33-9204; 34-64372; File No. S7-16-11]
RIN 3235-AL14

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

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

ACTION: Joint proposed rules; proposed interpretations.

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SUMMARY: In accordance with section 712(a)(8), section 712(d)(1),
sections 712(d)(2)(B) and (C), sections 721(b) and (c), and section
761(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act
(``Dodd-Frank Act''), the Commodity Futures Trading Commission
(``CFTC'') and the Securities and Exchange Commission (``SEC'')
(collectively, ``Commissions''), in consultation with the Board of
Governors of the Federal Reserve System (``Board''), are jointly
issuing proposed rules and proposed interpretive guidance under the
Commodity Exchange Act (``CEA'') and the Securities Exchange Act of
1934 (``Exchange Act'') to further define the terms ``swap,''
``security-based swap,'' and ``security-based swap agreement''
(collectively, ``Product Definitions''), regarding ``mixed swaps,'' and
governing books and records with respect to ``security-based swap
agreements.''

DATES: Comments should be received on or before July 22, 2011.

ADDRESSES: Comments may be submitted, identified by File No. S7-16-11,
by any of the following methods:

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

SEC

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml);
     Send an e-mail to<EMAIL_ADDRESS>Please include
File Number S7-16-11 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090. All submissions should refer to File Number
S7-16-11. This file number should be included on the subject line if e-
mail is used. To help us process and review your comments more
efficiently, please use only one method. The SEC will post all comments
on the SEC's Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments are also available for Web site viewing and
printing in the SEC's Public Reference Room, 100 F Street, NE.,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. All comments received will be posted without change;
the SEC does not edit personal identifying information from
submissions. You should submit only information that you wish to make
available publicly.

FOR FURTHER INFORMATION CONTACT: CFTC: Julian E. Hammar, Assistant
General Counsel, at<PHONE_NUMBER><EMAIL_ADDRESS>Mark Fajfar,
Assistant General Counsel, at<PHONE_NUMBER><EMAIL_ADDRESS>or David
E. Aron, Counsel, at<PHONE_NUMBER><EMAIL_ADDRESS>Office of General
Counsel, Commodity Futures Trading Commission, Three Lafayette Centre,
1155 21st Street, NW., Washington, DC 20581; SEC: Matthew A. Daigler,
Senior Special Counsel, at<PHONE_NUMBER>, Cristie L. March, Attorney-
Adviser, at<PHONE_NUMBER>, or Leah M. Drennan, Attorney-Adviser, at 202-
551-5507, Division of Trading and Markets, or Michael J. Reedich,
Special Counsel, or Tamara Brightwell, Senior Special Counsel to the
Director, at<PHONE_NUMBER>, Division of Corporation Finance, Securities
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION: The Commissions jointly are proposing new
rules and interpretive guidance under the CEA and the Exchange Act
relating to the Product Definitions, mixed swaps, and security-based
swap agreements.

Table of Contents

I. Background
II. Scope of Definitions of Swap and Security-Based Swap
    A. Introduction
    B. Proposed Rules and Interpretive Guidance Regarding Certain
Transactions Outside the Scope of the Definitions of the Terms
``Swap'' and ``Security-Based Swap''
    1. Insurance Products
    (a) Types of Insurance Products
    (b) Providers of Insurance Products
    2. The Forward Contract Exclusion
    (a) Forward Contracts in Nonfinancial Commodities
    (b) Commodity Options and Commodity Options Embedded in Forward
Contracts
    (c) Security Forwards
    3. Consumer and Commercial Agreements, Contracts, and
Transactions
    4. Loan Participations
    C. Proposed Rules and Interpretive Guidance Regarding Certain
Transactions Within the Scope of the Definitions of the Terms
``Swap'' and ``Security-Based Swap''
    1. In General

    2. Foreign Exchange Products
    (a) Foreign Exchange Products Subject to the Secretary's Swap
Determination: Foreign Exchange Forwards and Foreign Exchange Swaps
    (b) Foreign Exchange Products Not Subject to the Secretary's
Swap Determination
    (i) Foreign Currency Options
    (ii) Non-Deliverable Forward Contracts Involving Foreign
Exchange
    (iii) Currency Swaps and Cross-Currency Swaps
    3. Forward Rate Agreements
    4. Combinations and Permutations of, or Options on, Swaps and
Security-Based Swaps
    5. Contracts for Differences
    D. Certain Interpretive Issues
    1. Agreements, Contracts, or Transactions That May Be Called, or
Documented Using Form Contracts Typically Used for, Swaps or
Security-Based Swaps
    2. Transactions in Regional Transmission Organizations and
Independent System Operators
III. The Relationship Between the Swap Definition and the Security-
Based Swap Definition
    A. Introduction
    B. Title VII Instruments Based on Interest Rates, Other Monetary
Rates, and Yields
    1. Title VII Instruments Based on Interest Rates or Other
Monetary Rates That Are Swaps
    2. Title VII Instruments Based on Yields
    3. Title VII Instruments Based on Government Debt Obligations
    C. Total Return Swaps
    D. Security-Based Swaps Based on a Single Security or Loan and
Single-Name Credit Default Swaps
    E. Title VII Instruments Based on Futures Contracts
    F. Use of Certain Terms and Conditions in Title VII Instruments
    G. The Term ``Narrow-Based Security Index'' in the Security-
Based Swap Definition
    1. Introduction
    2. Applicability of the Statutory Narrow-Based Security Index
Definition and Past Guidance of the Commissions to Title VII
Instruments
    3. Narrow-Based Security Index Criteria for Index Credit Default
Swaps
    (a) In General
    (b) Proposed Rules Regarding the Definitions of ``Issuers of
Securities in a Narrow-Based Security Index'' and ``Narrow-Based
Security Index'' for Index Credit Default Swaps
    (i) Number and Concentration Percentages of Reference Entities
or Securities
    (ii) Public Information Availability Regarding Reference
Entities and Securities
    (iii) Treatment of Indexes Including Reference Entities That Are
Issuers of Exempted Securities or Including Exempted Securities
    4. Security Indexes
    5. Evaluation of Title VII Instruments on Security Indexes That
Move From Broad-Based to Narrow-Based or Narrow-Based to Broad-Based
    (a) In General
    (b) Title VII Instruments on Security Indexes Traded on
Designated Contract Markets, Swap Execution Facilities, Foreign
Boards of Trade, Security-Based Swap Execution Facilities, and
National Securities Exchanges
    H. Method of Settlement of Index CDS
    I. Security-Based Swaps as Securities Under the Exchange Act and
Securities Act
IV. Mixed Swaps
    A. Scope of the Category of Mixed Swap
    B. Regulation of Mixed Swaps
    1. Introduction
    2. Bilateral Uncleared Mixed Swaps Entered Into by Dually-
Registered Dealers or Major Participants
    3. Regulatory Treatment for Other Mixed Swaps
V. Security-Based Swap Agreements
    A. Introduction
    B. Swaps That Are Security-Based Swap Agreements
    C. Books and Records Requirements for Security-Based Swap
Agreements
VI. Process for Requesting Interpretations of the Characterization
of a Title VII Instrument
VII. Anti-Evasion
    A. CFTC Proposed Anti-Evasion Rules
    B. SEC Request for Comment Regarding Anti-Evasion
VIII. Administrative Law Matters--CEA Revisions
IX. Administrative Law Matters--Exchange Act Revisions
X. Statutory Basis and Rule Text

I. Background

    On July 21, 2010, President Obama signed the Dodd-Frank Act into
law.\2\ Title VII of the Dodd-Frank Act \3\ (``Title VII'') established
a comprehensive new regulatory framework for swaps and security-based
swaps. The legislation was enacted, among other reasons, to reduce
risk, increase transparency, and promote market integrity within the
financial system, including by: (i) Providing for the registration and
comprehensive regulation of swap dealers, security-based swap dealers,
major swap participants, and major security-based swap participants;
(ii) imposing clearing and trade execution requirements on swaps and
security-based swaps, subject to certain exceptions; (iii) creating
rigorous recordkeeping and real-time reporting regimes; and (iv)
enhancing the rulemaking and enforcement authorities of the Commissions
with respect to, among others, all registered entities and
intermediaries subject to the Commissions' oversight.
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    \2\ See Dodd-Frank Wall Street Reform and Consumer Protection
Act, Public Law 111-203, 124 Stat. 1376 (2010). The text of the
Dodd-Frank Act is available at http://www.cftc.gov/LawRegulation/OTCDERIVATIVES/index.htm.
    \3\ Pursuant to section 701 of the Dodd-Frank Act, Title VII may
be cited as the ``Wall Street Transparency and Accountability Act of
2010.''
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    Section 712(d)(1) of the Dodd-Frank Act provides that the
Commissions, in consultation with the Board, shall jointly further
define the terms ``swap,'' ``security-based swap,'' and ``security-
based swap agreement'' (``SBSA'').\4\ Section 712(a)(8) of the Dodd-
Frank Act provides further that the Commissions shall jointly prescribe
such regulations regarding ``mixed swaps'' as may be necessary to carry
out the purposes of Title VII. In addition, sections 721(b) and 761(b)
of the Dodd-Frank Act provide that the Commissions may adopt rules to
further define terms included in subtitles A and B, respectively, of
Title VII, and sections 721(c) and 761(b) of the Dodd-Frank Act provide
the Commissions with authority to define the terms ``swap'' and
``security-based swap,'' as well as the terms ``swap dealer,'' ``major
swap participant,'' ``security-based swap dealer,'' and ``major
security-based swap participant,'' to include transactions and entities
that have been structured to evade the requirements of subtitles A and
B, respectively, of Title VII.
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    \4\ In addition, section 719(d)(1)(A) of the Dodd-Frank Act
requires the Commissions to conduct a joint study, within 15 months
of enactment, to determine whether stable value contracts, as
defined in section 719(d)(2) of the Dodd-Frank Act, are encompassed
by the swap definition. If the Commissions determine that stable
value contracts are encompassed by the swap definition, section
719(d)(1)(B) of the Dodd-Frank Act requires the Commissions jointly
to determine whether an exemption for those contracts from the swap
definition is appropriate and in the public interest. Section
719(d)(1)(B) also requires the Commissions to issue regulations
implementing the determinations made under the required study. Until
the effective date of such regulations, the requirements under Title
VII do not apply to stable value contracts, and stable value
contracts in effect prior to the effective date of such regulations
are not considered swaps. See section 719(d) of the Dodd-Frank Act.
The Commissions currently are conducting the required joint study
and will consider whether to propose any implementing regulations
(including, if appropriate, regulations determining that stable
value contracts: (i) are not encompassed within the swap definition;
or (ii) are encompassed within the definition but are exempt from
the swap definition) at the conclusion of that study.
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    Section 712(d)(2)(B) of the Dodd-Frank Act requires the
Commissions, in consultation with the Board, to jointly adopt rules
governing books and records requirements for SBSAs by persons
registered as swap data repositories (``SDRs'') under the CEA,\5\
including uniform rules that specify the data elements that shall be
collected and maintained by each SDR.\6\ Similarly,

section 712(d)(2)(C) of the Dodd-Frank Act requires the Commissions, in
consultation with the Board, to jointly adopt rules governing books and
records for SBSAs, including daily trading records, for swap dealers,
major swap participants, security-based swap dealers, and security-
based swap participants.\7\
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    \5\ 7 U.S.C. 1 et seq.
    \6\ The CFTC has issued proposed rules regarding SDRs and,
separately, swap data recordkeeping and reporting. See Regulations
Establishing and Governing the Duties of Swap Dealers and Major Swap
Participants, 75 FR 71397, Nov. 23, 2010; Swap Data Recordkeeping
and Reporting Requirements, 75 FR 76573, Dec. 8, 2010. The SEC has
also issued proposed rules regarding security-based swap data
repositories (``SBSDRs''), including rules specifying data
collection and maintenance standards for SBSDRs, as well as rules
regarding security-based swap data recordkeeping and reporting. See
Security-Based Swap Data Repository Registration, Duties, and Core
Principles, 75 FR 77306, Dec. 10, 2010; Regulation SBSR--Reporting
and Dissemination of Security-Based Swap Information, 75 FR 75208,
Dec. 2, 2010.
    \7\ The CFTC has issued proposed rules regarding recordkeeping
requirements for swap dealers and major swap participants. See
Reporting, Recordkeeping, and Daily Trading Records Requirements for
Swap Dealers and Major Swap Participants, 75 FR 76666, Dec. 9, 2010.
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    Under the comprehensive framework for regulating swaps and
security-based swaps established in Title VII, the CFTC is given
regulatory authority over swaps,\8\ the SEC is given regulatory
authority over security-based swaps,\9\ and the Commissions shall
jointly prescribe such regulations regarding mixed swaps as may be
necessary to carry out the purposes of Title VII.\10\ In addition, the
SEC is given antifraud authority over, and access to information from,
certain CFTC-regulated entities regarding SBSAs, which are a type of
swap related to securities over which the CFTC is given regulatory
authority.\11\
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    \8\ Section 721(a) of the Dodd-Frank Act defines the term
``swap'' by adding section 1a(47) to the CEA, 7 U.S.C. 1a(47). This
new swap definition also is cross-referenced in new section 3(a)(69)
of the Exchange Act, 15 U.S.C. 78c(a)(69). Citations to provisions
of the CEA and the Exchange Act, 15 U.S.C. 78a et seq., in this
release refer to the numbering of those provisions after the
effective date of Title VII, except as indicated.
    \9\ Section 761(a) of the Dodd-Frank Act defines the term
``security-based swap'' by adding new section 3(a)(68) to the
Exchange Act, 15 U.S.C. 78c(a)(68). This new security-based swap
definition also is cross-referenced in new CEA section 1a(42), 7
U.S.C. 1a(42). The Dodd-Frank Act also explicitly includes security-
based swaps in the definition of security under the Exchange Act and
the Securities Act of 1933 (``Securities Act''), 15 U.S.C. 77a et
seq.
    \10\ Section 721(a) of the Dodd-Frank Act describes the category
of ``mixed swap'' by adding new section 1a(47)(D) to the CEA, 7
U.S.C. 1a(47)(D). Section 761(a) of the Dodd-Frank Act also includes
the category of ``mixed swap'' by adding new section 3(a)(68)(D) to
the Exchange Act, 15 U.S.C. 78c(68)(D). A mixed swap is defined as a
subset of security-based swaps that also are based on the value of 1
or more interest or other rates, currencies, commodities,
instruments of indebtedness, indices, quantitative measures, other
financial or economic interest or property of any kind (other than a
single security or a narrow-based security index), or the
occurrence, non-occurrence, or the extent of the occurrence of an
event or contingency associated with a potential financial,
economic, or commercial consequence (other than the occurrence, non-
occurrence, or extent of the occurrence of an event relating to a
single issuer of a security or the issuers of securities in a
narrow-based security index, provided that such event directly
affects the financial statements, financial condition, or financial
obligations of the issuer).
    \11\ Section 761(a) of the Dodd-Frank Act defines the term
``security-based swap agreement'' by adding new section 3(a)(78) to
the Exchange Act, 15 U.S.C. 78c(a)(78). The CEA includes the
definition of ``security-based swap agreement'' in subparagraph
(A)(v) of the swap definition in CEA section 1a(47), 7 U.S.C.
1a(47). The only difference between these definitions is that the
definition of SBSA in the Exchange Act specifically excludes
security-based swaps (see section 3(a)(78)(B) of the Exchange Act,
15 U.S.C. 78c(a)(78)(B)), whereas the definition of SBSA in the CEA
does not contain a similar exclusion. Instead, under the CEA, the
exclusion for security-based swaps is placed in the general
exclusions from the swap definition (see CEA section 1a(47)(B)(x), 7
U.S.C. 1a(47)(B)(x)). Although the statutes are slightly different
structurally, the Commissions interpret them to have consistent
meaning that the category of security-based swap agreements excludes
security-based swaps.
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    To assist the Commissions in further defining the Product
Definitions (as well as certain other definitions) and in prescribing
regulations regarding mixed swaps as may be necessary to carry out the
purposes of Title VII, the Commissions published an advance notice of
proposed rulemaking (``ANPR'') in the Federal Register on August 20,
2010.\12\ The comment period for the ANPR closed on September 20,
2010.\13\ The Commissions received comments addressing the Product
Definitions and/or mixed swaps in response to the ANPR, as well as
comments in response to the Commissions' informal solicitations,\14\
from a wide range of commenters.
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    \12\ See Definitions Contained in Title VII of Dodd-Frank Wall
Street Reform and Consumer Protection Act, 75 FR 51429, Aug. 20,
2010. The ANPR also solicited comment regarding the definitions of
the terms ``swap dealer,'' ``security-based swap dealer,'' ``major
swap participant,'' ``major security-based swap participant,'' and
``eligible contract participant.'' These definitions are the subject
of a separate joint proposed rulemaking by the Commissions. See
Further Definition of ``Swap Dealer,'' ``Security-Based Swap
Dealer,'' ``Major Swap Participant,'' ``Major Security-Based Swap
Participant'' and ``Eligible Contract Participant,'' 75 FR 80174,
Dec. 21, 2010 (``Entity Definitions''). The Commissions also
provided the public with the ability to present their views more
generally on implementation of the Dodd-Frank Act through their Web
sites, dedicated electronic mailboxes, and meetings with interested
parties. See Public Comments on SEC Regulatory Initiatives Under the
Dodd-Frank Act/Meetings with SEC Officials located at http://www.sec.gov/spotlight/regreformcomments.shtml; Public Submissions,
located at http://comments.cftc.gov/PublicComments/ReleasesWithComments.aspx; External Meetings, located at  http://www.cftc.gov/LawRegulation/DoddFrankAct/ExternalMeetings/index.htm.
    \13\ Copies of all comments received by the SEC on the ANPR are
available on the SEC's Internet Web site, located at http://www.sec.gov/comments/s7-16-10/s71610.shtml. Comments are also
available for Web site viewing and printing in the SEC's Public
Reference Room, 100 F Street, NE., Washington, DC 20549, on official
business days between the hours of 10 a.m. and 3 p.m. Copies of all
comments received by the CFTC on the ANPR are available on the
CFTC's Internet Web site, located at http://www.cftc.gov/LawRegulation/DoddFrankAct/OTC_2_Definitions.html.
    \14\ See supra note 12.
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    The Commissions have reviewed the comments received, and the staffs
of the Commissions have met with many market participants and other
interested parties to discuss the definitions.\15\ Moreover, the
Commissions' staffs have consulted extensively with each other as
required by sections 712(a)(1) and (2) of the Dodd-Frank Act and have
consulted with staff of the Board as required by section 712(d) of the
Dodd-Frank Act.
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    \15\ Information about meetings that CFTC staff have had with
outside organizations regarding the implementation of the Dodd-Frank
Act is available at http://www.cftc.gov/LawRegulation/DoddFrankAct/ExternalMeetings/index.htm. Information about meetings that SEC
staff have had with outside organizations regarding the product
definitions is available at http://www.sec.gov/comments/s7-16-10/s71610.shtml#meetings. The views expressed in the comments in
response to the ANPR, in response to the Commissions' informal
solicitations, and at such meetings are collectively referred to as
the views of ``commenters.''
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    Based on this review and consultation, the Commissions are
proposing interpretive guidance, and in some instances also proposing
rules, regarding, among other things: (i) The regulatory treatment of
insurance products; (ii) the exclusion of forward contracts from the
swap and security-based swap definitions; (iii) the regulatory
treatment of certain consumer and commercial contracts; (iv) the
regulatory treatment of certain foreign-exchange related and other
instruments; (v) swaps and security-based swaps involving interest
rates (or other rates) and yields; (vi) total return swaps (``TRS'');
(vii) the application of the definition of ``narrow-based security
index'' in distinguishing between certain swaps and security-based
swaps, including credit default swaps (``CDS'') and index CDS; and
viii) the specification of certain swaps and security-based swaps that
are, and are not, mixed swaps. In addition, the Commissions are
proposing rules: (i) establishing books and records requirements
applicable to SBSAs; (ii) providing a mechanism for requesting the
Commissions to interpret whether a particular type of agreement,
contract, or transaction (or class of agreements, contracts, or
transactions) is a swap, security-based swap, or both (i.e., a mixed
swap); and (iii) providing a mechanism for evaluating the applicability
of certain regulatory requirements to particular mixed swaps. Finally,
the CFTC is proposing rules to

implement the anti-evasion authority provided in the Dodd-Frank Act.
    The Commissions believe that the proposed rules and interpretive
guidance will further the purposes of Title VII. While the Commissions
believe that these proposals, if adopted, would appropriately effect
the intent of the Dodd-Frank Act, the Commissions are very interested
in commenters' views as to whether those purposes have been achieved,
and, if not, how to improve these proposals.

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

A. Introduction

    Title VII of the Dodd-Frank Act applies to a wide variety of
agreements, contracts, and transactions classified as swaps or
security-based swaps. The statute lists these agreements, contracts,
and transactions in the definition of the term ``swap.'' \16\ The
statutory definition of the term ``swap'' also has various
exclusions,\17\ rules of construction, and other provisions for the
interpretation of the definition.\18\ One of the exclusions to the
definition of the term ``swap'' is for security-based swaps.\19\ The
term ``security-based swap,'' in turn, is defined as an agreement,
contract, or transaction that is a ``swap'' (without regard to the
exclusion from that definition for security-based swaps) and that also
has certain characteristics specified in the statute.\20\ Thus, the
statutory definition of the term ``swap'' also determines the scope of
agreements, contracts, and transactions that could be security-based
swaps.
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    \16\ See CEA section 1a(47)(A), 7 U.S.C. 1a(47)(A). This swap
definition is also cross-referenced in new section 3(a)(69) of the
Exchange Act, 15 U.S.C. 78c(a)(69).
    \17\ See CEA section 1a(47)(B), 7 U.S.C. 1a(47)(B), clauses (i)-
(x).
    \18\ See CEA sections 1a(47)(C)-(F), 7 U.S.C. 1a(47)(C)-(F).
    \19\ See CEA section 1a(47)(B)(x), 7 U.S.C. 1a(47)(B)(x).
    \20\ See section 3(a)(68) of the Exchange Act, 15 U.S.C.
78c(a)(68).
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    The statutory definitions of ``swap'' and ``security-based swap''
are detailed and comprehensive, and the Commissions believe that
extensive ``further definition'' of the terms by rule is not necessary.
Nevertheless, several commenters have stated,\21\ and the Commissions
agree, that the definitions could be read to include certain types of
agreements, contracts, and transactions that previously have not been
considered swaps or security-based swaps and that nothing in the
legislative history of the Dodd-Frank Act appears to suggest that
Congress intended such agreements, contracts, and transactions to be
regulated as swaps or security-based swaps under Title VII. The
Commissions thus believe that it is important to clarify the treatment
under the definitions of certain types of agreements, contracts, and
transactions, such as insurance products and certain consumer and
commercial contracts.
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    \21\ See, e.g., Letter from Edward J. Rosen, Cleary Gottlieb
Steen & Hamilton LLP, Sept. 21, 2010 (``Cleary Letter''); Letter
from Robert Pickel, Executive Vice President, International Swaps
and Derivatives Association, Inc., Sept. 20, 2010 (``ISDA Letter'').
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    In addition, commenters also raised questions regarding, and the
Commissions believe that it is important to clarify: (i) The exclusion
for forward contracts from the definitions of the terms ``swap'' and
``security-based swap;'' and (ii) the status of certain commodity-
related products (including various foreign exchange products and
forward rate agreements (``FRAs'')) under the definitions of the terms
``swap'' and ``security-based swap.'' Finally, the Commissions are
providing guidance regarding certain interpretive issues related to the
definitions.\22\
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    \22\ Some commenters raised concerns regarding the treatment of
inter-affiliate swaps and security-based swaps. See, e.g., Cleary
Letter; Letter from Coalition for Derivatives End Users, Sept. 20,
2010 (``CDEU Letter''); ISDA Letter; Letter from Richard A. Miller,
Vice President and Corporate Counsel, Prudential Financial Inc.,
Sept. 17, 2010; Letter from Richard M. Whiting, The Financial
Services Roundtable, Sept. 20, 2010. A few commenters suggested that
the Commissions should further define the term ``swap'' or
``security-based swap'' to exclude inter-affiliate transactions. See
Cleary Letter; CDEU Letter. The Commissions are considering whether
inter-affiliate swaps or security-based swaps should be treated
differently from other swaps or security-based swaps in the context
of the Commissions' other Title VII rulemakings.
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B. Proposed Rules and Interpretive Guidance Regarding Certain
Transactions Outside the Scope of the Definitions of the Terms ``Swap''
and ``Security-Based Swap''

1. Insurance Products
    A number of commenters expressed concern that the definitions of
the terms ``swap'' and ``security-based swap'' potentially could
include certain types of insurance products \23\ because the statutory
definition of the term ``swap'' includes, in part, any agreement,
contract, or transaction ``that provides for any purchase, sale,
payment, or delivery (other than a dividend on an equity security) that
is dependent on the occurrence, nonoccurrence, or the extent of the
occurrence of an event or contingency associated with a potential
financial, economic, or commercial consequence.'' \24\ The Commissions
do not interpret this clause to mean that products historically treated
as insurance products should be included within the swap or security-
based swap definition.\25\
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    \23\ See, e.g., Letter from Ernest C. Goodrich, Jr., Managing
Director--Legal Department, and Marcelo Riffaud, Managing Director--
Legal Department, Deutsche Bank AG, Sept. 20, 2010 (``Deutsche Bank
Letter''); Letter from Sean W. McCarthy, Chairman, Association of
Financial Guaranty Insurers, Sept. 20, 2010 (``AFGI Letter'');
Letter from Robert J. Duke, The Surety & Fidelity Association of
America, Sept. 20, 2010 (``SFAA Letter''); Letter from J. Stephen
Zielezienski, Senior Vice President & General Counsel, American
Insurance Association, Sept. 20, 2010; Letter from Franklin W.
Nutter, President, Reinsurance Association of America, Sept. 20,
2010 (``RAA Letter''); Letter from James M. Olsen, Senior Director
Accounting and Investment Policy, Property Casualty Insurers
Association of America, Sept. 17, 2010; Letter from Jane L. Cline,
President, and Therese M. Vaughan, Chief Executive Officer, National
Association of Insurance Commissioners, Sept. 20, 2010; Letter from
Joseph W. Brown, Chief Executive Officer, MBIA Inc., Sept. 20, 2010
(``MBIA Letter''); Cleary Letter; Letter from White & Case LLP
(``White & Case Letter''), Sept. 20, 2010; Letter from Carl B.
Wilkerson, Vice President and Chief Counsel, Securities &
Litigation, American Council of Life Insurers, Nov. 12, 2010 (``ACLI
Letter''); Letter from Stephen E. Roth, James M. Cain, and W. Thomas
Conner, Sutherland Asbill & Brennan LLP, for the Committee of
Annuity Insurers, Dec. 3, 2010.
    \24\ CEA section 1a(47)(A)(ii), 7 U.S.C. 1a(47)(A)(ii).
    \25\ The Commissions also believe it was not the intent of
Congress through the swap and security-based swap definitions to
preclude the provision of insurance to individual homeowners and
small businesses that purchase property and casualty insurance. See
CEA section 2(e), 7 U.S.C. 2(e) and section 6(l) of the Exchange
Act, 15 U.S.C. 78f(l) (prohibiting individuals and small businesses
that do not meet specified financial thresholds or other conditions
from entering into swaps or security-based swaps other than on or
subject to the rules of regulated futures and securities exchanges).
---------------------------------------------------------------------------

    The Commissions are aware of nothing in Title VII to suggest that
Congress intended for insurance products to be regulated as swaps or
security-based swaps. Moreover, that swaps and insurance products are
subject to different regulatory regimes is reflected in section 722(b)
of the Dodd-Frank Act which, in new section 12(h) of the CEA, provides
that a swap ``shall not be considered to be insurance'' and ``may not
be regulated as an insurance contract under the law of any State.''
\26\

Accordingly, the Commissions believe that state or Federally regulated
insurance products that are provided by state or Federally regulated
insurance companies \27\ that otherwise could fall within the
definitions should not be considered swaps or security-based swaps so
long as they satisfy the proposed rules or comport with the related
proposed interpretive guidance.\28\ At the same time, however, the
Commissions are concerned that agreements, contracts, or transactions
that are swaps or security-based swaps might be characterized as
insurance products to evade the regulatory regime under Title VII of
the Dodd-Frank Act. Accordingly, the Commissions are proposing rules
and interpretive guidance that would clarify that agreements,
contracts, or transactions meeting certain requirements would be
considered insurance and not swaps or security-based swaps.
---------------------------------------------------------------------------

    \26\ 7 U.S.C. 16(h). Moreover, other provisions of the Dodd-
Frank Act address the status of insurance more directly, and more
extensively, than Title VII. For example, Title V of the Dodd-Frank
Act requires the newly established Federal Insurance Office to
conduct a study and submit a report to Congress, within 18 months of
enactment of the Dodd-Frank Act, on the regulation of insurance,
including the consideration of Federal insurance regulation.
Notably, the Federal Insurance Office's authority under Title V
extends primarily to monitoring and information gathering; its
ability to promulgate Federal insurance regulation that preempts
state insurance regulation is significantly restricted. See section
502 of the Dodd-Frank Act (codified in various sections of 31
U.S.C.). Title X of the Dodd-Frank Act also specifically excludes
the business of insurance from regulation by the Bureau of Consumer
Financial Protection. See section 1027(m) of the Dodd-Frank Act, 12
U.S.C. 5517(m) (``The [Bureau of Consumer Financial Protection] may
not define as a financial product or service, by regulation or
otherwise, engaging in the business of insurance.''); section
1027(f) of the Dodd-Frank Act, 12 U.S.C. 5517(f) (excluding persons
regulated by a state insurance regulator, except to the extent they
are engaged in the offering or provision of consumer financial
products or services or otherwise subject to certain consumer laws
as set forth in Title X of the Dodd-Frank Act).
    \27\ As discussed above, the establishment of the Federal
Insurance Office under Title V of the Dodd-Frank Act suggests that
Federal insurance law could be established in the future. The
Commissions believe that the proposed rules should, therefore,
include a specific reference to Federal insurance law.
    \28\ To the extent an insurance product does not fall within the
language of the swap definition by its terms, it would not need to
satisfy the requirements under the proposed rules in order to avoid
being considered a swap or security-based swap.
---------------------------------------------------------------------------

    The proposed rules contain two subparts; the first subpart
addresses the agreement, contract, or transaction and the second
subpart addresses the entity providing that agreement, contract, or
transaction. More specifically, with respect to the former, paragraph
(i) of proposed rule 1.3(xxx)(4) under the CEA and paragraph (a) of
proposed rule 3a69-1 under the Exchange Act would clarify, as discussed
in more detail below, that the terms ``swap'' and ``security-based
swap'' would not include an agreement, contract, or transaction that,
by its terms or by law, as a condition of performance:
     Requires the beneficiary of the agreement, contract, or
transaction to have an insurable interest that is the subject of the
agreement, contract, or transaction and thereby carry the risk of loss
with respect to that interest continuously throughout the duration of
the agreement, contract, or transaction;
     Requires that loss to occur and to be proved, and that any
payment or indemnification therefor be limited to the value of the
insurable interest;
     Is not traded, separately from the insured interest, on an
organized market or over-the-counter; and
     With respect to financial guaranty insurance only, in the
event of payment default or insolvency of the obligor, any acceleration
of payments under the policy is at the sole discretion of the insurer.
    In addition, the second subpart of the proposed rules, in paragraph
(ii) of proposed rule 1.3(xxx)(4) under the CEA and paragraph (b) of
proposed rule 3a69-1 under the Exchange Act, would require that, in
order to be excluded from the swap and security-based swap definitions
as an insurance product, the agreement, contract, or transaction must
be provided:
     By a company that is organized as an insurance company
whose primary and predominant business activity is the writing of
insurance or the reinsuring of risks underwritten by insurance
companies and that is subject to supervision by the insurance
commissioner (or similar official or agency) of any state \29\ or by
the United States or an agency or instrumentality thereof, and such
agreement, contract, or transaction is regulated as insurance under the
laws of such state or the United States;
---------------------------------------------------------------------------

    \29\ The term ``State'' is defined in section 3(a)(16) of the
Exchange Act to mean ``any State of the United States, the District
of Columbia, Puerto Rico, the Virgin Islands, or any other
possession of the United States.'' 15 U.S.C. 78c(a)(16). The CFTC is
proposing to incorporate this definition into proposed rule
1.3(xxx)(4) for purposes of ensuring consistency between the CFTC
and SEC rules further defining the term ``swap.''
---------------------------------------------------------------------------

     By the United States or any of its agencies or
instrumentalities, or pursuant to a statutorily authorized program
thereof; or
     In the case of reinsurance only, by a person located
outside the United States to an insurance company that is eligible
under the proposed rules, provided that: (i) such person is not
prohibited by any law of any state or of the United States from
offering such agreement, contract, or transaction to such an insurance
company; (ii) the product to be reinsured meets the requirements under
the proposed rules to be an insurance product; and (iii) the total
amount reimbursable by all reinsurers for such insurance product cannot
exceed the claims or losses paid by the cedant.\30\
---------------------------------------------------------------------------

    \30\ The ``cedant'' is the insurer writing the risk being ceded
or transferred to such person located outside the United States.
---------------------------------------------------------------------------

    In order for an agreement, contract, or transaction to qualify as
an insurance product that would not be a swap or security-based swap:
(i) The agreement, contract, or transaction would have to meet the
criteria in the first subpart of the proposed rules and (ii) the person
or entity providing the agreement, contract, or transaction would have
to meet the criteria in the second subpart of the proposed rules.\31\
The fact that an agreement, contract, or transaction qualifies as an
insurance product does not exclude it from the swap or security-based
swap definitions if it is not provided by a qualifying person or
entity, nor does the fact that a product is regulated by an insurance
regulator exclude it from the swap or security-based swap definitions
if the agreement, contract, or transaction does not satisfy the
criteria for insurance set forth in the proposed rules.\32\
---------------------------------------------------------------------------

    \31\ The Commissions note that certain variable life insurance
and annuity products are securities and would not be swaps or
security-based swaps regardless of whether they met the requirements
under the proposed rules. See CEA section 1a(47)(B)(v), 7 U.S.C.
1a(47)(B)(v) (excluding from the definition of ``swap'' any
``agreement, contract, or transaction providing for the purchase or
sale of 1 or more securities on a fixed basis that is subject to--
(I) the [Securities Act]; and (II) the [Exchange Act]''). See also
SEC v. United Benefit Life Ins. Co., 387 U.S. 202 (1967) (holding
that a ``flexible fund'' annuity contract was not entitled to
exemption under section 3(a)(8) of the Securities Act, 15 U.S.C.
77c(a)(8), for insurance and annuities); SEC v. Variable Annuity
Life Ins. Co., 359 U.S. 65 (1959) (holding that a variable annuity
was not entitled to exemption under section 3(a)(8) of the
Securities Act, 15 U.S.C. 77c(a)(8), for insurance and annuities).
    \32\ The Commissions note that Title VII provides flexibility to
address the facts and circumstances of new products that may be
marketed or sold as insurance, for the purpose of determining
whether they satisfy the requirements of the proposed rules, through
joint interpretations pursuant to section 712(d)(4) of the Dodd-
Frank Act.
---------------------------------------------------------------------------

    In addition, the Commissions are proposing interpretive guidance to
clarify that, independent of paragraph (i) of proposed rule 1.3(xxx)(4)
under the CEA and paragraph (a) of proposed rule 3a69-1 under the
Exchange Act, certain insurance products do not fall within the swap or
security-based swap definitions so long as they are provided in
accordance with paragraph (ii) of proposed rule 1.3(xxx)(4) under the
CEA and paragraph (b) of proposed rule 3a69-1 under the Exchange Act.
(a) Types of Insurance Products \33\
---------------------------------------------------------------------------

    \33\ See supra note 23, regarding comments received addressing
this criterion.
---------------------------------------------------------------------------

    Paragraph (i) of proposed rule 1.3(xxx)(4) under the CEA and
paragraph (a) of proposed rule 3a69-1 under the Exchange Act would set
forth four criteria for an agreement, contract, or transaction to be
considered insurance. First, the proposed rules would require that the
beneficiary have an ``insurable interest'' underlying the

agreement, contract, or transaction at every point in time during the
term of the agreement, contract, or transaction for that agreement,
contract, or transaction to qualify as insurance. The requirement that
the beneficiary be at risk of loss (which could be an adverse
financial, economic, or commercial consequence) with respect to the
interest that is the subject of the agreement, contract, or transaction
at all times throughout the term of the agreement, contract, or
transaction would ensure that an insurance contract beneficiary has a
stake in the interest on which the agreement, contract, or transaction
is written.\34\ Similarly, the provision of the proposed rules that
would require the beneficiary to have the insurable interest
continuously during the term of the agreement, contract, or transaction
is designed to ensure that payment on the insurance product is
inextricably connected to both the beneficiary and the interest on
which the insurance product is written. In contrast to an insurance
product, a CDS (which may be a swap or a security-based swap) does not
require the purchaser of protection to hold any underlying obligation
issued by the reference entity on which the CDS is written.\35\
---------------------------------------------------------------------------

    \34\ Requiring that a beneficiary of an insurance policy have a
stake in the interest traditionally has been justified on public
policy grounds. For example, a beneficiary that does not have a
property right in a building might have an incentive to profit from
arson.
    \35\ Standard CDS documentation stipulates that the incurrence
or demonstration of a loss may not be made a condition to the
payment on the CDS or the performance of any obligation pursuant to
the CDS. See, e.g., Int'l Swaps and Derivatives Ass'n, ``2003 ISDA
Credit Derivatives Definitions,'' art. 9.1(b)(i) (2003) (``2003
Definitions) (``[T]he parties will be obligated to perform * * *
irrespective of the existence or amount of the parties' credit
exposure to a Reference Entity, and Buyer need not suffer any loss
nor provide evidence of any loss as a result of the occurrence of a
Credit Event.'').
---------------------------------------------------------------------------

    Second, the requirement that an actual loss occur and be proved
under the proposed rules similarly would ensure that the beneficiary
has a stake in the insurable interest that is the subject of the
agreement, contract, or transaction. If the beneficiary can demonstrate
actual loss, that loss would ``trigger'' performance by the insurer on
the agreement, contract, or transaction such that, by making payment,
the insurer is indemnifying the beneficiary for such loss. In addition,
limiting any payment or indemnification to the value of the insurable
interest aids in distinguishing swaps and security-based swaps (where
there is no such limit) from insurance.\36\
---------------------------------------------------------------------------

    \36\ To the extent an insurance product provides for such items
as, for example, a rental car for use while the car that is the
subject of an automobile insurance policy is being repaired, the
Commissions would consider such items as constituting part of the
value of the insurable interest.
---------------------------------------------------------------------------

    Third, the proposed rules would require that the insurance product
not be traded, separately from the insured interest, on an organized
market or over-the-counter. With limited exceptions,\37\ insurance
products traditionally have been neither entered into on or subject to
the rules of an organized exchange nor traded in secondary market
transactions (i.e., they are not traded on an organized market or over-
the-counter). Whereas swaps and security-based swaps also generally
have not been tradable at-will in secondary market transactions (i.e.,
on an organized market or over-the-counter) without counterparty
consent, the Commissions understand that swaps and security-based swaps
are routinely novated or assigned to third parties, usually pursuant to
industry standard terms and documents.\38\ For the foregoing reasons,
the Commissions believe that lack of trading separately from the
insured interest is a feature of insurance that is useful in
distinguishing insurance from swaps and security-based swaps.
---------------------------------------------------------------------------

    \37\ See, e.g., ``Life Settlements Task Force, Staff Report to
the United States Securities and Exchange Commission'' (``In an
effort to help make the bidding process more efficient and to
facilitate trading of policies after the initial settlement occurs,
some intermediaries have considered or instituted a trading platform
for life settlements.''), available at http://www.sec.gov/news/studies/2010/lifesettlements-report.pdf (July 22, 2010).
    \38\ See, e.g., Int'l Swaps and Derivatives Ass'n, ``2005
Novation Protocol,'' available at http://www.isda.org/2005novationprot/docs/NovationProtocol.pdf (2005); Int'l Swaps and
Derivatives Ass'n, ``ISDA Novation Protocol II,'' available at
http://www.isda.org/isdanovationprotII/docs/NPII.pdf (2005); Int'l
Swaps and Derivatives Ass'n, 2003 Definitions, supra note 35,
Exhibits E (Novation Agreement) and F (Novation Confirmation).
---------------------------------------------------------------------------

    Fourth, the proposed rules would address financial guarantee
policies, also known as bond insurance or bond wraps.\39\ Although such
products can be economically similar to products such as CDS, they have
certain key characteristics that distinguish them from swaps and
security-based swaps.\40\ For example, under a financial guarantee
policy, the insurer typically is required to make timely payment of any
shortfalls in the payment of scheduled interest to the holders of the
underlying guaranteed obligation. Also, for particular bonds that are
covered by a financial guarantee policy, the indenture, related
documentation, and/or the financial guarantee policy will provide that
a default in payment of principal or interest on the underlying bond
will not result in acceleration of the obligation of the insurer to
make payment of the full amount of principal on the underlying
guaranteed obligation unless the insurer, in its sole discretion, opts
to make payment of principal prior to the final scheduled maturity date
of the underlying guaranteed obligation. Conversely, under a CDS, a
protection seller frequently is required to make payment of the
relevant settlement amount to the protection buyer upon demand by the
protection buyer after any credit event involving the issuer.\41\
---------------------------------------------------------------------------

    \39\ Several commenters expressed concern that the swap and
security-based swap definitions could encompass financial guarantee
policies. See, e.g., AFGI Letter; Letter from James M. Michener,
General Counsel, Assured Guaranty, Dec. 14, 2010 (``Assured Guaranty
Letter''); MBIA Letter; Letter from the Committee on Futures and
Derivatives Regulation of the New York City Bar Association, Sept.
20, 2010. Financial guarantee policies are used by entities such as
municipalities to provide greater assurances to potential purchasers
of their bonds and thus reduce their interest costs. See ``Report by
the United States Securities and Exchange Commission on the
Financial Guarantee Market: The Use of the Exemption in section
3(a)(2) of the Securities Act of 1933 for Securities Guaranteed by
Banks and the Use of Insurance Policies to Guarantee Debt
Securities'' (Aug. 28, 1987).
    \40\ See, e.g., AFGI Letter (explaining the differences between
financial guaranty policies and CDS); Letter from James M. Michener,
General Counsel, Assured Guaranty, Sept. 13, 2010 (noting that the
Financial Accounting Standards Board has issued separate guidance on
accounting for financial guaranty insurance and CDS); Deutsche Bank
Letter (noting that financial guaranty policies require the
incurrence of loss for payment, whereas CDS do not).
    \41\ While a CDS requires payment in full on the occurrence of a
credit event, the Commissions recognize that there are other
financial instruments, such as corporate guarantees of commercial
loans and letters of credit supporting payments on loans or debt
securities, that allow for acceleration of payment obligations
without such guarantees or letters of credit being swaps or
security-based swaps.
---------------------------------------------------------------------------

    The Commissions do not believe that financial guarantee policies,
in general, should be regulated as swaps or security-based swaps.
However, because of the close economic similarity of financial
guarantee insurance policies guaranteeing payment on debt securities to
CDS, the Commissions also are proposing that, in addition to the
criteria noted above with respect to insurance generally, financial
guarantee policies also would have to satisfy the requirement that they
not permit the beneficiary of the policy to accelerate the payment of
any principal due on the debt securities. This requirement would
further distinguish financial guarantee policies from CDS because, as
discussed above, the latter generally requires payment of the relevant
settlement amount on the CDS after demand by the protection buyer.

    The Commissions believe that requiring all of the criteria in
paragraph (i) of proposed rule 1.3(xxx)(4) under the CEA and paragraph
(a) of proposed rule 3a69-1 under the Exchange Act would help limit the
application of the proposed rules to products appropriately regulated
as insurance and provide that products appropriately subject to the
regulatory regime under Title VII of the Dodd-Frank Act are regulated
as swaps or security-based swaps. As a result, the Commissions believe
that these requirements would help prevent the proposed rules from
being used to circumvent the applicability of the swap and security-
based swap regulatory regimes under Title VII.
    However, the Commissions are considering an additional criterion as
well. One ANPR commenter suggested that the proposed rules require
that, in order to qualify as insurance that is excluded from the swap
definition, payment on an agreement, contract, or transaction not be
based on the price, rate, or level of a financial instrument, asset, or
interest or any commodity.\42\ Such a requirement could help to prevent
swaps from being executed in the guise of insurance in order to avoid
the regulatory regime established by Title VII. It may ensure that an
agreement, contract, or transaction is not treated as insurance if it
is used for speculative purposes or to influence prices in derivatives
markets. Yet, another ANPR commenter stated that such a requirement for
an agreement, contract, or transaction to qualify as insurance rather
than a swap ``is not consistent with common variable life insurance and
variable annuity products, which deliver insurance guarantees that do
vary with the performance of specified assets.'' \43\
---------------------------------------------------------------------------

    \42\ See Cleary Letter.
    \43\ See ACLI Letter.
---------------------------------------------------------------------------

    The Commissions request comment on whether, in order for an
agreement, contract, or transaction to be considered insurance pursuant
to paragraph (i) of proposed rule 1.3(xxx)(4) under the CEA and
paragraph (a) of proposed rule 3a69-1 under the Exchange Act, the
Commissions should require that payment not be based on the price,
rate, or level of a financial instrument, asset, or interest or any
commodity. If so, the Commissions also request comment on whether
variable annuity contracts (where the income is subject to tax
treatment under section 72 of the Internal Revenue Code) and variable
universal life insurance should be excepted from such a
requirement.\44\
---------------------------------------------------------------------------

    \44\ 26 U.S.C. 72. See also supra note 31.
---------------------------------------------------------------------------

    Although the proposed criteria should appropriately identify
agreements, contracts, and transactions that should be considered to be
insurance, the Commissions also are proposing interpretive guidance
that certain enumerated types of insurance products are outside the
scope of the statutory definitions of swap and security-based swap
under the Dodd-Frank Act. These products are surety bonds, life
insurance, health insurance, long-term care insurance, title insurance,
property and casualty insurance, and annuity products the income on
which is subject to tax treatment under section 72 of the Internal
Revenue Code.\45\ The Commissions believe that these enumerated
insurance products do not bear the characteristics of the transactions
that Congress subjected to the regulatory regime for swaps and
security-based swaps under the Dodd-Frank Act.\46\ As a result,
excluding these enumerated insurance products should appropriately
place traditional insurance products outside the scope of the swap and
security-based swap definitions. Such insurance products, however,
would need to be provided in accordance with paragraph (ii) of proposed
rule 1.3(xxx)(4) under the CEA and paragraph (b) of proposed rule 3a69-
1 under the Exchange Act, as discussed below, and such insurance
products would need to be regulated as insurance.
---------------------------------------------------------------------------

    \45\ Id.
    \46\ The list of enumerated insurance products is generally
consistent with the provisions of section 302(c)(2) of the Gramm-
Leach-Bliley Act (``GLBA''), 15 U.S.C. 6712(c)(2), which addresses
insurance underwriting in national banks.
---------------------------------------------------------------------------

(b) Providers of Insurance Products
    The second subpart of the proposed rules, in paragraph (ii) of
proposed rule 1.3(xxx)(4) under the CEA and paragraph (b) of proposed
rule 3a69-1 under the Exchange Act, would require that, in addition to
meeting the product requirements discussed above (or being subject to
the interpretive guidance regarding enumerated insurance products
provided above) the agreement, contract, or transaction be provided by
a person or entity that meets certain criteria. Generally, the product
would have to be provided by a company that is organized as an
insurance company whose primary and predominant business activity is
the writing of insurance or the reinsuring of risks underwritten by
companies whose insurance business is subject to supervision by the
insurance commissioner (or similar official or agency) of any state
\47\ or by the United States or an agency or instrumentality thereof,
and such agreement, contract, or transaction is regulated as insurance
under the laws of such state or of the United States.\48\
---------------------------------------------------------------------------

    \47\ See supra note 29, regarding the definition of ``State''
contained in the proposed rules.
    \48\ This paragraph of the proposed rules is substantially
similar to the definition of an insurance company under the Federal
securities laws. See section 2(a)(13) of the Securities Act, 15
U.S.C. 77b(a)(13); section 2(a)(17) of the Investment Company Act of
1940, 15 U.S.C. 80a-2(a)(17). These definitions also include
reinsurance companies. In order to ensure regulatory consistency,
the Commissions believe that it is appropriate to include
substantially the same definition of an insurance company as
currently exists elsewhere in the Federal securities laws, but the
Commissions are requesting comment regarding the role played by a
receiver or similar official or any liquidating agent for such
insurance company, in its capacity as such, rather than proposing
this provision of the insurance company definition.
---------------------------------------------------------------------------

    The requirement that the agreement, contract, or transaction be
provided by a state or Federally regulated insurance company would help
ensure that entities that are not regulated under insurance laws are
not able to avoid regulation under Title VII of the Dodd-Frank Act as
well. The Commissions believe that this requirement also should help
prevent regulatory gaps that otherwise might exist between insurance
regulation and the regulation of swaps and security-based swaps.
    The proposed rules also would require that the agreement, contract,
or transaction provided by the insurance company be regulated as
insurance under the laws of the state in which it is regulated or the
United States. The purpose of this proposed requirement is that an
agreement, contract, or transaction that satisfies the other conditions
of the proposed rules must be subject to regulatory oversight as an
insurance product. As a result of the requirement that an insurance
regulator must have determined that the agreement, contract, or
transaction being sold is insurance (i.e., because state insurance
regulators are banned from regulating swaps as insurance),\49\ the
Commissions believe that this condition would help prevent products
that are swaps or security-based swaps from being characterized as
insurance products in order to evade the regulatory regime under Title
VII of the Dodd-Frank Act.
---------------------------------------------------------------------------

    \49\ See section 722(b) of the Dodd-Frank Act.
---------------------------------------------------------------------------

    The Commissions also believe that it is appropriate to exclude
insurance that is issued by the United States or any of its agencies or
instrumentalities, or pursuant to a statutorily authorized program
thereof, from regulation as swaps or security-based swaps. Such

insurance would include, for example, Federal insurance of savings in
banks, savings associations, and credit unions; catastrophic crop
insurance; flood insurance; Federal insurance of certain pension
obligations; and terrorism risk insurance. Accordingly, the proposed
rules would provide that products meeting the criteria discussed above
that are required for an agreement, contract, or transaction to qualify
as insurance are excluded from the swap and security-based swap
definitions if they are provided by the Federal government or pursuant
to a statutorily authorized program thereof.
    Finally, the Commissions believe that where an agreement, contract,
or transaction qualifies as insurance excluded from the swap and
security-based swap definitions, the lawful reinsurance of that
agreement, contract, or transaction similarly should be excluded. Such
reinsurance would be excluded from the definitions even if the
reinsurer is located abroad and is not state or Federally regulated.
Accordingly, the proposed rules would provide that an agreement,
contract, or transaction of reinsurance would be excluded from the swap
and security-based swap definitions if it is provided by a person
located outside the United States, if such person is not prohibited by
any law of any state or the United States from offering such
reinsurance to a state or Federally regulated insurance company, so
long as the product to be reinsured meets the requirements under the
proposed rules to be an insurance product, and the total amount
reimbursable by all reinsurers for such insurance product cannot exceed
the claims or losses paid by the cedant.
    The proposed rules would cover only an agreement, contract, or
transaction by an insurance company and would not affect the
characterization of the asset that is being insured. For example, if an
agreement, contract, or transaction insures or guarantees the payment
on a security, the security would remain subject to all applicable
securities laws. The guarantee agreement, contract, or transaction,
however, would not be regulated as a swap or security-based swap if it
meets all of the requirements of the proposed rules.\50\
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    \50\ The guarantee agreement, contract, or transaction, however,
could itself be a security that is subject to the Federal securities
laws.'' See, e.g., section 2(a)(1) of the Securities Act, 15 U.S.C.
77b(a)(1) (including in the statutory definition of ``security'' a
guarantee of a security).
---------------------------------------------------------------------------

    One commenter has stated that monoline insurance companies (also
called financial guarantors) continue to guarantee payments under
interest rate swaps related to municipal debt.\51\ The CFTC believes
that an insurance ``wrap'' of a swap may not be sufficiently different
from the underlying swap to suggest that Congress intended the former
to fall outside the definition of the term ``swap'' in Title VII.
---------------------------------------------------------------------------

    \51\ See Letter from Bruce E. Stern, Chairman, Association of
Financial Guaranty Insurers Government Affairs Committee, Feb. 18,
2011, at 11-12 (``[F]inancial guarantors have often guaranteed,
through the issuance of a financial guaranty insurance policy, the
obligations of unaffiliated parties under swaps with other
unaffiliated parties. These insurance policies typically cover
obligations of municipalities under interest rate or basis swaps
relating to bonds issued by municipalities or in connection with
asset backed securities.'').
---------------------------------------------------------------------------

    The SEC, however, believes that, where an agreement, contract, or
transaction is a security-based swap, the insurance of that security-
based swap should not be regulated pursuant to Title VII, provided that
the insurance meets the proposed requirements discussed above.\52\
---------------------------------------------------------------------------

    \52\ See supra note 32.
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    The Commissions request comment on this issue generally, and also
on the particular questions set forth in the Request for Comment
section below.
    The Commissions also are considering whether the issuer of such
insurance (or guarantee) in respect of swaps or security-based swaps
entered into by an affiliate or third party could be considered to be a
major swap participant or major security-based swap participant. The
Commissions have requested comment in the proposing release for the
definitions of the terms ``major swap participant'' and ``major
security-based swap participant''.\53\
---------------------------------------------------------------------------

    \53\ See proposed Entity Definitions, supra note 12.
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Request for Comment
    1. The Commissions request comment on all aspects of proposed rule
1.3(xxx)(4) under the CEA and proposed rule 3a69-1 under the Exchange
Act and the interpretive guidance in this section.
    2. Do the proposed criteria for identifying an agreement, contract,
or transaction that would not fall within the swap or security-based
swap definitions appropriately encompass insurance and reinsurance
products? If not, what types of insurance or reinsurance products are
not encompassed, and why?
    3. Are there certain products that are commonly known as swaps or
security-based swaps, or that more appropriately should be considered
swaps or security-based swaps, that could satisfy the criteria in
proposed rule 1.3(xxx)(4) under the CEA and proposed rule 3a69-1 under
the Exchange Act?
    4. Is the proposed requirement that the beneficiary of an
agreement, contract, or transaction have an insurable interest that is
the subject of the agreement, contract, or transaction, and thereby
carry the risk of loss with respect to that interest continuously
throughout the duration of the agreement, contract, or transaction in
order for the agreement, contract, or transaction not to fall within
the swap or security-based swap definition, an effective criterion in
determining whether a product is insurance? Why or why not?
    5. Is the proposed requirement that loss occur and be proved, and
that any payment or indemnification therefor be limited to the value of
the insurable interest, in order for an agreement, contract, or
transaction not to fall within the swap or security-based swap
definition, an effective criterion in determining whether a product is
insurance? Why or why not? Is the requirement that any payment or
indemnification for proved loss be limited to the value of the
insurable interest consistent with conventional insurance analysis
across a broad range of products (including traditional property and
casualty products)? Are there particular products where such a
limitation would not be appropriate? If so, please provide a detailed
description of such products and why such a limitation would not be
appropriate.
    6. Is the proposed requirement that the agreement, contract, or
transaction is not traded, separately from the insured interest, on an
organized market or over-the-counter, an effective criterion in
determining whether a product is insurance? Why or why not?
    7. Should the Commissions add, as a requirement for an insurance
agreement, contract, or transaction to not be characterized as a swap,
that the agreement, contract, or transaction not be based on the price,
rate, or level of a financial instrument, asset, or interest or any
commodity? Would such a requirement be an effective criterion in
distinguishing insurance from swaps and security-based swaps? Why or
why not? If so, should the Commissions add any carve outs from the
requirement, such as, for example, variable universal life insurance,
or annuity contracts where the income is subject to tax treatment under
section 72 of the Internal Revenue Code? Why or why not? Would such a
requirement help preclude the use of the proposed rules for products
that are swaps or security-based swaps? Why or why not? Would such a
requirement preclude the use of the proposed rules for products that
currently are insurance? If so, what

insurance products would be precluded by such a requirement, and how?
How are insurance payments determined today?
    8. Is the proposed requirement that, with respect to financial
guaranty insurance, in the event of payment default or insolvency of
the obligor, any acceleration of payments under the policy be at the
sole discretion of the insurer an effective criterion in determining
whether a financial guaranty policy is insurance that does not fall
within the swap or security-based swap definition? Why or why not?
    9. Does the interpretive guidance proposed in this section
appropriately identify certain enumerated insurance products as
traditional insurance products that would not fall within the swap or
security-based swap definition if the provider of the product satisfies
the requirements of the proposed rules? Why or why not? Is the
interpretive guidance proposed in this section sufficient? Why or why
not? Are there additional types of traditional insurance that should be
similarly enumerated? If so, which ones and why? Could the exclusion of
any of the enumerated insurance products serve to exclude products that
should be regulated as swaps or security-based swaps? If so, which ones
and why? Should the enumerated insurance products be required to be
provided in accordance with paragraph (ii) of proposed rule 1.3(xxx)(4)
under the CEA and paragraph (b) of proposed rule 3a69-1 under the
Exchange Act? Why or why not? If not, please provide a detailed
explanation of the insurance products that should not be subject to
these requirements. Are there insurance products currently offered that
do not meet these criteria? If so, please provide details regarding
such products and their providers.
    10. The Commissions are proposing guidance that certain enumerated
types of insurance products, including property and casualty insurance,
are outside the scope of the statutory definitions of the terms
``swap'' and ``security-based swap'' under the Dodd-Frank Act. The
Commissions request comment generally as to the proposed guidance
regarding property and casualty insurance. The CFTC also requests
comment on whether the products specified in section 302(c)(2) of the
GLBA, which names certain insurance products, including private
passenger or commercial automobile, homeowners, mortgage, commercial
multiperil, general liability, professional liability, workers'
compensation, fire and allied lines, farm owners multiperil, aircraft,
fidelity, surety, medical malpractice, ocean marine, inland marine, and
boiler and machinery insurance, should be considered traditional
property and casualty insurance. Why or why not? If so, please provide
an explanation of the product and how it differs from transactions that
should be subject to the swap regulatory regime of the Dodd-Frank Act.
The SEC also requests comment on whether the products specified in
section 302(c)(2) of the GLBA should be enumerated in the Commissions'
proposed guidance regarding property and casualty insurance as outside
of the scope of the swap and security-based swap definitions? Are there
other categories of traditional property and casualty insurance that
should be specifically enumerated? If so, please provide a detailed
description of such other categories of property and casualty insurance
that should be specifically identified, and why. If there are certain
types of property and casualty insurance that fall within the swap
definition, will that affect the ability of persons, including
consumers and businesses, to protect their properties against losses?
If so, please provide a detailed explanation.
    11. Are there situations in which an insurance product may be
assigned to another party that are not addressed by the criteria in
proposed rule 1.3(xxx)(4) under the CEA and proposed rule 3a69-1 under
the Exchange Act? Is additional clarification necessary to address such
situations? If so, what clarification?
    12. Is the proposed requirement that the agreement, contract, or
transaction be provided by a company that is organized as an insurance
company whose primary and predominant business activity is the writing
of insurance or the reinsuring of risks underwritten by insurance
companies and that is subject to supervision by the insurance
commissioner (or similar official or agency) of any state, as defined
in section 3(a)(16) of the Exchange Act, or by the United States or an
agency or instrumentality thereof, and that the agreement, contract, or
transaction be regulated as insurance under the laws of such state or
of the United States, an effective criterion in determining whether an
agreement, contract, or transaction falls within the swap or security-
based swap definition? Does it sufficiently preclude the use of the
proposed rules by unregulated entities? Why or why not? Does it
sufficiently prevent evasion of the requirements of Title VII with
respect to agreements, contracts, or transactions that are swaps or
security-based swaps? Why or why not?
    13. Are there circumstances under which a receiver or similar
official or any liquidating agency for a state or Federally regulated
insurance company, acting in its capacity as such, would be providing
insurance rather than administering an insurance product that is
provided by an insurance company? Please provide a detailed explanation
of any such circumstances. If there are such circumstances, should the
proposed rules include a provision that an agreement, contract, or
transaction that satisfies the criteria of insurance but that is
provided by a receiver or similar official or any liquidating agency
for a state or Federally regulated insurance company, in its capacity
as such, qualify as insurance that is excluded from the swap and
security-based swap definition? Why or why not?
    14. Do the proposed rules appropriately treat an agreement,
contract, or transaction that satisfies the criteria of insurance but
that is provided by the United States or any of its agencies or
instrumentalities, or pursuant to a statutorily authorized program
thereof, as insurance that is excluded from the swap and security-based
swap definition? Why or why not? Are there other types of government-
issued insurance products that are not covered by paragraph (ii) of
proposed rule 1.3(xxx)(4) under the CEA and paragraph (b) of proposed
rule 3a69-1 under the Exchange Act? Do states or state agencies or
instrumentalities provide insurance products? Should the proposed
requirement also include a provision that the agreement, contract, or
transaction can be provided by any state or any of its agencies or
instrumentalities, or pursuant to a statutorily authorized program
thereof? Why or why not?
    15. Do the proposed rules appropriately treat reinsurance by a
person located outside the United States of a product meeting the
requirements for insurance under the proposed rules, so long as the
total amount reimbursable by all of the reinsurers for such insurance
product cannot exceed the claims or losses paid by the cedant, as
insurance excluded from the swap and security-based swap definitions if
such person is not prohibited by any law of any state or of the United
States from offering such reinsurance to a state or Federally regulated
insurance company? Do these provisions of the proposed rules
sufficiently prevent evasion of the requirements of Title VII with
respect to agreements, contracts, or transactions that are swaps or
security-based swaps? Why or why not?

    16. Are there additional criteria for identifying contracts,
agreements, or transactions that are insurance and not swaps or
security-based swaps that the Commissions should consider? Please
provide detailed information and empirical data, to the extent
possible, supporting any suggested criteria.
    17. Should the proposed rules relating to insurance include a
provision related to whether a product is recognized at fair value on
an ongoing basis with changes in fair value reflected in earnings under
U.S. generally accepted accounting principles? If so, what specific
challenges may be encountered in light of the proposed Accounting
Standards Update ``Accounting for Financial Instruments and Revisions
to the Accounting for Derivative Instruments and Hedging Activities,''
issued by the Financial Accounting Standards Board (``FASB'') on May
26, 2010? Is recognizing a product at fair value on an ongoing basis
(with changes in fair value reflected in earnings) inconsistent with
treating such a product as insurance rather than a swap or security-
based swap? Why or why not? Please provide examples of specific
products and their correct accounting treatment under U.S. generally
accepted accounting principles.
    18. Where an agreement, contract, or transaction falls within the
swap definition, should insurance of that agreement, contract, or
transaction also be included in the swap definition? Why or why not? Is
the insurance wrap of a swap sufficiently different (economically or
otherwise) from the swap that is insured? Why or why not? Would the
regulation of such swap ``wraps'' as swaps impose costs on or otherwise
impact the underlying cash markets (e.g., the ability to issue, and
cost of issuing, municipal debt)? Please quantify to the extent
possible. Would treating such ``wraps'' as insurance falling outside
the swap definition frustrate or undermine Title VII's objectives in
regulating the swap markets in any way? Why or why not? Please provide
empirical data and analysis to the extent possible.
    19. Where an agreement, contract, or transaction falls within the
security-based swap definition, should the insurance of that agreement,
contract, or transaction also be included in the security-based swap
definition? Why or why not? Would the regulation of insurance on a
security-based swap as a security-based swap under Title VII impose
costs or otherwise impact the underlying cash markets (e.g., the
ability to issue, and cost of issuing, municipal debt)? Please quantify
to the extent possible. Would regulating such products as insurance
rather than as security-based swaps frustrate or undermine Title VII's
objectives in regulating the security-based swap and swap markets? Why
or why not? Please provide a detailed explanation and empirical data to
the extent possible.
    20. Should the proposed rules include a provision similar to
section 302(c)(1) of the GLBA \54\ that would provide that any product
regulated as insurance before July 21, 2010 (the date the Dodd-Frank
Act was signed into law) and provided in accordance with paragraph (ii)
of proposed rule 1.3(xxx)(4) under the CEA and paragraph (b) of
proposed rule 3a69-1 would be considered insurance and not fall within
the swap definition? Why or why not? Should different criteria apply to
products regulated as insurance before July 21, 2010? Why or why not?
If so, please provide a detailed description of what different criteria
should apply.
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    \54\ 15 U.S.C. 6712(c)(1).
---------------------------------------------------------------------------

    21. The Commissions understand that swap guarantees may be offered
by non-insurance companies. Should the Commissions provide guidance as
to whether swap or security-based swap guarantees (that are not
guarantees or insurance policies offered by insurance companies
discussed above) should be considered swaps or security-based swaps?
Why or why not?
2. The Forward Contract Exclusion
    The definitions of the terms ``swap'' and ``security-based swap''
do not include forward contracts. They exclude ``any sale of a
nonfinancial commodity or security for deferred shipment or delivery,
so long as the transaction is intended to be physically settled''.\55\
Commenters have requested guidance from the Commissions regarding the
scope of this exclusion. The Commissions believe it is appropriate to
provide guidance to market participants regarding the applicability of
the exclusion from the definitions of swap and security-based swap for
forward contracts with respect to nonfinancial commodities \56\ and
securities.
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    \55\ CEA section 1a(47)(B)(ii), 7 U.S.C. 1a(47)(B)(ii).
    \56\ The discussion in subsections (a) and (b) of this section
applies solely to the exclusion of nonfinancial commodity forwards
from the swap definition in the Dodd-Frank Act.
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(a) Forward Contracts in Nonfinancial Commodities
    The wording of the forward contract exclusion from the swap
definition with respect to nonfinancial commodities is similar, but not
identical, to the forward contract exclusion from the definition of
``future delivery'' in the CEA, which excludes ``any sale of any cash
commodity for deferred shipment or delivery''.\57\ Several ANPR
commenters expressed the view that, with respect to nonfinancial
commodities, the forward contract exclusion from the swap definition
should be interpreted in the same manner as the CFTC has interpreted
the forward contract exclusion from the term ``future delivery'' and,
in particular, that the CFTC's ``Brent Interpretation'' \58\ should
apply to ``book out'' transactions for purposes of the forward
exclusion from the swap definition.\59\ The CFTC believes that
clarification of the scope of the forward contract exclusion from the
swap definition with respect to nonfinancial commodities is
appropriate.\60\
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    \57\ CEA section 1a(27), 7 U.S.C. 1a(27). The CEA does not
define the term ``futures contract.'' Rather, the CEA refers to a
futures contract as a ``contract of sale of a commodity for future
delivery.'' See, e.g., CEA section 2(a)(1)(A), 7 U.S.C. 2(a)(1)(A)
(providing the CFTC with exclusive jurisdiction over ``contracts of
sale of a commodity for future delivery'' (other than security
futures) traded or executed on, among other things, a designated
contract market (``DCM'')); CEA section 4(a), 7 U.S.C. 6(a) (a
``contract for the purchase or sale of a commodity for future
delivery'' other than a contract made on an exchange located outside
the United States must be conducted on or subject to the rules of,
among other things, a DCM). Accordingly, by excluding forward
contracts from the CEA's definition of the term ``future delivery,''
the CEA provides that a forward contract is not a contract of sale
of a commodity for future delivery and, hence, not a futures
contract.
    \58\ Statutory Interpretation Concerning Forward Transactions,
55 FR 39188, Sept. 25, 1990 (``Brent Interpretation'').
    \59\ See Letter from Joanne T. Medero, Managing Director,
BlackRock, Sept. 20, 2010 (``BlackRock Letter''), Letter from Matt
Schatzman, Senior Vice President, Energy Marketing, BG Americas and
Global LNC, Sept. 20, 2010 (``BG Letter''); Cleary Letter; Letter
from Edward W. Gallagher, President, Dairy Risk Management Services,
a division of Dairy Farmers of America, Inc., Sept. 20, 2010 (``DFA
Letter''); Letter from Eric Dennison, Sr. Vice President and General
Counsel, Stephanie Miller, Assistant General Counsel--Commodities,
and Bill Hellinghausen, Director of Regulatory Affairs, EDF Trading
North America, LLC, Sept. 20, 2010 (``EDF Letter''); Richard F.
McMahon, Jr., Executive Director, Edison Electric Institute, Sept.
20, 2010 (``EEI Letter''); Letter from John M. Damgard, President,
Futures Industry Association, Sept. 20, 2010 (``FIA Letter'');
Letter from Richard Ostrander, Managing Director and Counsel, Morgan
Stanley, Sept. 20, 2010 (``Morgan Stanley Letter''); Letter of
Michael Greenberger, JD, Law School Professor, University of
Maryland School of Law, Sept. 20, 2010 (``University of Maryland
Letter''); R. Michael Sweeney, Jr., Mark W. Menezes, and David T.
McIndoe, Hunton & Williams, LLP, on behalf of the Working Group of
Commercial Energy Firms, Sept, 20, 2010 (``WGCEF Letter''); Letter
from Paul H. Stebbins, Chairman and Chief Executive Officer, World
Fuel Services Corporation, Sept. 17, 2010 (``World Fuel Letter'').
    \60\ As discussed in part II.D.1 below, the terminology and
documentation used by the parties are not dispositive of whether a
particular agreement, contract, or transaction is a swap or
security-based swap under the CEA or Exchange Act. Thus, if an
agreement, contract, or transaction with respect to a nonfinancial
commodity qualifies for the forward exclusion from the swap
definition, it would not be a swap even if the parties refer to it
as a swap or document it using an industry standard form agreement
that is typically used for swaps. Conversely, such an agreement,
contract, or transaction that does not qualify for the forward
exclusion from the swap definition would not be excluded even if the
parties refer to it as a forward contract.

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

    Forward contracts with respect to nonfinancial commodities are
commercial merchandising transactions. The primary purpose of the
contract is to transfer ownership of the commodity and not to transfer
---------------------------------------------------------------------------
solely its price risk. The CFTC has noted:

    The underlying postulate of the [forward] exclusion is that the
[CEA's] regulatory scheme for futures trading simply should not
apply to private commercial merchandising transactions which create
enforceable obligations to deliver but in which delivery is deferred
for reasons of commercial convenience or necessity.\61\
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    \61\ Brent Interpretation, supra note 58, at 39190. The CFTC has
reiterated this view in more recent adjudicative orders. See, e.g.,
In re Grain Land Coop., [2003-2004 Transfer Binder] Comm. Fut. L.
Rep. (CCH) ] 29,636 (CFTC Nov. 25, 2003); In re Competitive
Strategies for Agric., Ltd., [2003-2004 Transfer Binder] Comm. Fut.
L. Rep. (CCH) ] 29,635 (CFTC Nov. 25, 2003). Courts have expressed
this view as well. See, e.g., Salomon Forex, Inc. v. Tauber, 8 F.3d
966, 971 (4th Cir. 1993) (``[C]ash forwards are generally
individually negotiated sales * * * in which actual delivery of the
commodity is anticipated, but is deferred for reasons of commercial
convenience or necessity.''); CFTC v. Int'l Fin. Serv. (N.Y.), 323
F. Supp. 2d 482, 495 (S.D.N.Y. 2004). See also CFTC v. Co Petro
Mktg. Grp., Inc., 680 F.2d 573, 579-580 (9th Cir. 1982); CFTC v.
Noble Metals Int'l, Inc., 67 F.3d 766, 772-773 (9th Cir. 1995; CFTC
v. Am. Metal Exch. Corp., 693 F. Supp. 168, 192 (D.N.J. 1988); CFTC
v. Morgan, Harris & Scott, Ltd., 484 F. Supp. 669, 675 (S.D.N.Y.
1979) (forward contract exclusion does not apply to speculative
transactions in which delivery obligations can be extinguished under
the terms of the contract or avoided for reasons other than
commercial convenience or necessity).

    The CFTC believes that the forward contract exclusion in the Dodd-
Frank Act with respect to nonfinancial commodities should be read
consistently with this established, historical understanding that a
forward contract is a commercial merchandising transaction.
    Many commenters discussed the issue of whether the requirement in
the Dodd-Frank Act that a transaction be ``intended to be physically
settled'' in order to qualify for the forward exclusion from the swap
definition with respect to nonfinancial commodities reflects a change
in the standard for determining whether a transaction is a forward
contract.\62\ Because a forward contract is a commercial merchandising
transaction, intent to deliver historically has been an element of the
CFTC's analysis of whether a particular contract is a forward
contract.\63\ In assessing the parties' expectations or intent
regarding delivery, the CFTC consistently has applied a ``facts and
circumstances'' test.\64\ Therefore, the CFTC reads the ``intended to
be physically settled'' language in the swap definition with respect to
nonfinancial commodities to reflect a directive that intent to deliver
a physical commodity be a part of the analysis of whether a given
contract is a forward contract or a swap, just as it is a part of the
CFTC's analysis of whether a given contract is a forward contract or a
futures contract.
---------------------------------------------------------------------------

    \62\ See, e.g., BG Letter (forward exclusion for swaps should be
consistent with the forward exclusion from futures); BlackRock
Letter (the CFTC should interpret ``intended to be physically
settled'' consistently with existing CFTC principles, including book
outs); DFA Letter (forward exclusion for swaps should be interpreted
consistently with the CFTC's prior forward contract interpretations
and precedent, including forwards requiring delivery but including
embedded options); EDF Letter (forward exclusion from the definition
of swap should be construed in a consistent manner with the forward
exclusion under the CEA); EEI Letter (forward exclusion from swap
definition should be interpreted consistently with the forward
exclusion from futures); FIA Letter (the Commissions should, through
rulemaking or interpretation, provide that the ``intent'' standard
in the forward exclusion with respect to swaps will be interpreted
the same as the existing forward exclusion with respect to futures);
Morgan Stanley Letter (the forward exclusion from the swap
definition should be interpreted consistently with the forward
exclusion from futures); University of Maryland Letter (forward
exclusion from swap definition intended to be consistent with the
forward exclusion from futures); WGCEF Letter (physical delivery
forwards should be distinguished from swaps under standards
identical to those used in forwards vs. futures); World Fuel Letter
(forward exclusion for swaps should be interpreted in a manner
consistent with the forward exclusion from futures).
    \63\ As recently as October 25, 2010, the CFTC observed in In re
Wright that ``it is well-established that the intent to make or take
delivery is the critical factor in determining whether a contract
qualifies as a forward.'' In re Wright, CFTC Docket No. 97-02, 2010
WL 4388247 at *3 (CFTC Oct. 25, 2010) (citing In re Stovall, et al.,
[1977-1980 Transfer Binder] Comm. Fut. L. Rep. (CCH) 20,941 (CFTC
Dec. 6, 1979); Brent Interpretation, supra note 58). In Wright, the
CFTC noted that ``[i]n distinguishing futures from forwards, the
[CFTC] and the courts have assessed the transaction as a whole with
a critical eye toward its underlying purpose. Such an assessment
entails a review of the overall effect of the transaction as well as
a determination as to what the parties intended.'' Id. at *3
(quoting Policy Statement Concerning Swap Transactions, 54 FR 30694,
July 21, 1989 (``Swap Policy Statement'') (citations and internal
quotations omitted).
    \64\ In its recent decision in In re Wright, the CFTC applied
its facts and circumstances test in an administrative enforcement
action involving hedge-to-arrive contracts for corn, and observed
that ``[o]ur views of the appropriateness of a multi-factor analysis
remain unchanged.'' Wright, supra note 63, n.13. The CFTC let stand
the administrative law judge's conclusion that the hedge-to-arrive
contracts at issue in the case were forward contracts. Id. at **5-6.
See also Grain Land, supra note 61; Competitive Strategies for
Agric., supra note 61.
---------------------------------------------------------------------------

    Commenters also requested clarification of the treatment of one
type of forward contract--``book-out'' transactions--in the context of
the forward exclusion from the swap definition with respect to
nonfinancial commodities. The issue of book-outs first arose in 1990 in
the Brent Interpretation\65\ because the parties to the crude oil
contracts in that case could individually negotiate cancellation
agreements, or ``book-outs,'' with other parties.\66\ In describing
these transactions, the CFTC stated:

    \65\ See Brent Interpretation, supra note 58. The CFTC issued
the Brent Interpretation in response to a Federal court decision
that held that certain 15-day Brent system crude oil contracts were
illegal off-exchange futures contracts. See Transnor (Bermuda) Ltd.
v. BP N. Am. Petroleum, 738 F. Supp. 1472 (S.D.N.Y. 1990). The Brent
Interpretation provided clarification that the 15-day Brent system
crude oil contracts were forward contracts that were excluded from
the CEA definition of ``future delivery,'' and thus were not futures
contracts. See Brent Interpretation, supra note 58.
    \66\ The Brent Interpretation described these ``book-outs'' as
follows: ``In the course of entering into 15-day contracts for
delivery of a cargo during a particular month, situations often
arise in which two counterparties have multiple, offsetting
positions with each other. These situations arise as a result of the
effectuation of multiple, independent commercial transactions. In
such circumstances, rather than requiring the effectuation of
redundant deliveries and the assumption of the credit, delivery and
related risks attendant thereto, the parties may, but are not
obligated to and may elect not to, terminate their contracts and
forego such deliveries and instead negotiate payment-of-differences
pursuant to a separate, individually negotiated cancellation
agreement referred to as a `book-out.' Similarly, situations
regularly arise when participants find themselves selling and
purchasing oil more than once in the delivery chain for a particular
cargo. The participants comprising these `circles' or `loops' will
frequently attempt to negotiate separate cancellation agreements
among themselves for the same reasons and with the same effect
described above.'' Brent Interpretation, supra note 58, at 39190.

    It is noteworthy that while such [book-out] agreements may
extinguish a party's delivery obligation, they are separate,
individually negotiated, new agreements, there is no obligation or
arrangement to enter into such agreements, they are not provided for
by the terms of the contracts as initially entered into, and any
party that is in a position in a distribution chain that provides
for the opportunity to book-out with another party or parties in the
chain is nevertheless entitled to require delivery of the commodity
to be made through it, as required under the contracts.\67\
---------------------------------------------------------------------------

    \67\ Id. at 39192.

    Thus, in the scenario at issue in the Brent Interpretation, the
contracts created a binding obligation to make or take delivery without
providing any right to offset, cancel, or settle on a payment-of-
differences basis. The ``parties enter[ed] into such contracts with the
recognition that they may be required to make or take delivery.'' \68\
---------------------------------------------------------------------------

    \68\ Id. at 39189.
---------------------------------------------------------------------------

    On these facts, the Brent Interpretation concluded that the

---------------------------------------------------------------------------
contracts were forward contracts, not futures contracts:

    Under these circumstances, the [CFTC] is of the view that
transactions of this type which are entered into between commercial
participants in connection with their business, which create
specific delivery obligations that impose substantial economic risks
of a commercial nature to these participants, but which may involve,
in certain circumstances, string or chain deliveries of the type
described * * * are within the scope of the [forward contract]
exclusion from the [CFTC's] regulatory jurisdiction.\69\
---------------------------------------------------------------------------

    \69\ Id. at 39192.

    Although the CFTC did not expressly discuss intent to deliver, the
Brent Interpretation concluded that transactions retained their
character as commercial merchandising transactions, notwithstanding the
practice of terminating commercial parties' delivery obligations
through ``book-outs'' as described. At any point in the chain, one of
the parties could refuse to enter into a new contract to book-out the
transaction and, instead, insist upon delivery pursuant to the parties'
obligations under their contract.
    The CFTC believes that the principles underlying the Brent
Interpretation similarly should apply to the forward exclusion from the
swap definition with respect to nonfinancial commodities. To summarize,
then, the CFTC believes that: (i) The forward contract exclusion from
the swap definition with respect to nonfinancial commodities should be
interpreted in a manner that is consistent with the CFTC's historical
interpretation of the forward contract exclusion from the definition of
the term ``future delivery''; (ii) intent to deliver is an essential
element of a forward contract excluded from both the swap and future
delivery definitions, and such intent in both instances should be
evaluated based on the CFTC's established multi-factor approach; and
(iii) book-out transactions in nonfinancial commodities that meet the
requirements specified in the Brent Interpretation, and that are
effectuated through a subsequent, separately-negotiated agreement,
should qualify for the forward exclusion from the swap definition.\70\
---------------------------------------------------------------------------

    \70\ This interpretive guidance is consistent with legislative
history. See 156 Cong. Rec. H5247 (June 30, 2010) (colloquy between
U.S. House Committee on Agriculture Chairman Collin Peterson and
Representative Leonard Boswell during the debate on the Conference
Report for the Dodd-Frank Act, in which Chairman Peterson stated:
``Excluding physical forward contracts, including book-outs, is
consistent with the CFTC's longstanding view that physical forward
contracts in which the parties later agree to book-out their
delivery obligations for commercial convenience are excluded from
its jurisdiction. Nothing in this legislation changes that result
with respect to commercial forward contracts.''). See also 156 Cong.
Rec. H5248-49 (June 30, 2010) (introducing into the record a letter
authored by Senator Blanche Lincoln, Chairman of the U.S. Senate
Committee on Agriculture, Nutrition and Forestry, and Christopher
Dodd, Chairman U.S. Senate Committee on Banking, Housing, and Urban
Affairs, stating that the CFTC is encouraged ``to clarify through
rulemaking that the exclusion from the definition of swap for `any
sale of a nonfinancial commodity or security for deferred shipment
or delivery, so long as the transaction is intended to be physically
settled' is intended to be consistent with the forward contract
exclusion that is currently in the [CEA] and the CFTC's established
policy and orders on this subject, including situations where
commercial parties agree to `book-out' their physical delivery
obligations under a forward contract.'').
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    As noted above, the Brent Interpretation applies to ``commercial
participants in connection with their business.'' \71\ Market
participants that regularly make or take delivery of the referenced
commodity (in the case of the Brent Interpretation, a tanker full of
Brent oil) in the ordinary course of their business meet that standard.
Such entities qualify for the forward exclusion from both the future
delivery and swap definitions for their forward transactions under the
Brent Interpretation even if they enter a subsequent transaction to
``book out'' the forward contract rather than make or take delivery.
Intent to make or take delivery can be inferred from the binding
delivery obligation for the referenced commodity in the contract and
the fact that the parties to the contract do, in fact, regularly make
or take delivery of the referenced commodity in the contract in the
ordinary course of their business.
---------------------------------------------------------------------------

    \71\ See Brent Interpretation, supra note 58, at 39192.
---------------------------------------------------------------------------

    Some commenters to the ANPR requested clarification with regard to
the application of the CFTC's 1993 order exempting certain energy
contracts from regulation under the CEA (the ``Energy Exemption'') \72\
after enactment of the Dodd-Frank Act.\73\ The Energy Exemption
extended the Brent Interpretation regarding the forward contract
exclusion from the term ``future delivery'' to energy commodities other
than oil. The CFTC believes that the book-out provisions of the Brent
Interpretation similarly should apply to the forward contract exclusion
from the swap definition for nonfinancial commodities besides oil.
Further, the CFTC also is proposing interpretive guidance herein that
the Brent Interpretation with respect to the application of the forward
contract exclusion from the term ``future delivery'' in the context of
book-out transactions applies not just to oil, but to all nonfinancial
commodities. The CFTC, therefore, is proposing to withdraw the Energy
Exemption, while retaining and extending through this interpretive
guidance the Brent Interpretation regarding book-outs under the forward
contract exclusion with respect to nonfinancial commodities.\74\
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    \72\ Exemption for Certain Contracts Involving Energy Products,
58 FR 21286, Apr. 20, 1993. The Energy Exemption generally applies
to certain energy contracts: (i) Entered into by persons reasonably
believed to be within a specified class of commercial and
governmental entities; (ii) that are bilateral contracts between two
parties acting as principals; (iii) the material economic terms of
which are subject to individual negotiation by the parties; and (iv)
that impose binding obligations on the parties to make and receive
delivery of the underlying commodity, with no right of either party
to effect a cash settlement of their obligations without the consent
of the other party (except pursuant to a bona fide termination right
such as default). Like the Brent Interpretation, the Energy
Exemption provides that the parties can enter into a subsequent
book-out settlement of the obligation in a manner other than by
physical delivery of the commodity specified in the contract. Id. at
21294.
    \73\ See, e.g., WGCEF letter. The CFTC issued the Energy
Exemption shortly after Congress had provided the CFTC with
exemptive authority pursuant to CEA section 4(c), 7 U.S.C. 6(c), in
section 502 of the Futures Trading Practices Act of 1992, Public Law
102-546, 106 Stat. 3590 (1993).
    \74\ To avoid any uncertainty, the CFTC also notes that the
Dodd-Frank Act supersedes the Swap Policy Statement. The CFTC is
aware that some commenters have suggested that the Commissions
should exercise their authority to further define the term
``eligible contract participant'' to encompass the ``line of
business'' provision of the Swap Policy Statement. See Swap Policy
Statement, supra note 63, at 30696-30697. The Commissions will
address these comments in their joint final rulemaking with respect
to the Entity Definitions. See supra note 12.
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(b) Commodity Options and Commodity Options Embedded in Forward
Contracts
    Some commenters responding to the ANPR requested clarification
regarding the status of commodity options under the swap
definition.\75\ Questions also were raised regarding options embedded
in forward contracts, i.e., whether a forward contract with respect to
a nonfinancial commodity that contains an embedded option can still
qualify for the forward contract exclusion from the swap
definition.\76\
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    \75\ See, e.g., World Fuel Letter (exclusion for commercial
options set forth in CFTC Regulation 32.4 should also be an
exclusion from the swap definition).
    \76\ See, e.g., Letter from Patrick Kelly, Policy Advisor, API,
Sept. 20, 2010 (``API Letter''), EEI Letter; Letter from Daniel S.M.
Dolan, VP, Policy Research & Communications, Electric Power Supply
Association, Sept. 20, 2010 (``EPSA Letter'') (physically settled
options should be included in the forward exclusion from the swap
definition); DFA Letter; ISDA Letter. One commenter suggested that
the CFTC should apply to each contract with an enforceable delivery
obligation a rebuttable presumption of intent to deliver, even if an
option to cash settle is included in that contract. See WGCEF
Letter.
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    The statutory swap definition explicitly provides that commodity

options are swaps.\77\ Accordingly, the CFTC recently proposed
revisions to its existing options rules in parts 32 and 33 of its
regulations with respect to the treatment of commodity options under
the Dodd-Frank Act, and requested public comment on those proposed
revisions.\78\ The question of the application of the forward exclusion
from the swap definition with respect to nonfinancial commodities,
where commodity options are embedded in forward contracts (including
embedded options to cash settle such contracts), is similar to that
arising under the CEA's existing forward contract exclusion from the
definition of the term ``future delivery.'' The CFTC's Office of
General Counsel addressed forward contracts that contained embedded
options in a 1985 interpretive statement (``1985 Interpretation''),\79\
which the CFTC recently adhered to in its adjudicatory Order in the
Wright case.\80\ While both were issued prior to the effective date of
the Dodd-Frank Act, the CFTC believes that it would be appropriate to
apply this guidance to the treatment of forward contracts in
nonfinancial commodities that contain embedded options under the Dodd-
Frank Act.
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    \77\ 7 U.S.C. 1a(47)(A)(i). Options on securities and certain
options on foreign currency are excluded from the swap definition by
CEA sections 1a(47)(B)(iii) and (iv), respectively. 7 U.S.C.
1a(47)(B)(iii) and (iv). These options are not subject to the
Commissions' proposed guidance in this section.
    \78\ See Commodity Options and Agricultural Swaps, 76 FR 6095,
Feb. 3, 2011.
    \79\ See Characteristics Distinguishing Cash and Forward
Contracts and ``Trade'' Options, 50 FR 39656, Sept. 30, 1985.
    \80\ Wright, supra note 63.
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    In Wright, the CFTC described the 1985 Interpretation and stated
that the CFTC traditionally has engaged in a two-step analysis of
``embedded options'' in which the first step focuses on whether the
option operates on the price or the delivery term of the forward
contract and the second step focuses on secondary trading.\81\ The CFTC
believes that these same principles can be applied with respect to the
forward contract exclusion from the swap definition for nonfinancial
commodities in the Dodd-Frank Act, too. That is, a forward contract
that contains an embedded commodity option or options \82\ would be
considered an excluded nonfinancial commodity forward contract (and not
a swap) if the embedded option(s): (i) May be used to adjust the
forward contract price, but do not undermine the overall nature of the
contract as a forward contract; (ii) do not target the delivery term,
so that the predominant feature of the contract is actual delivery; and
(iii) cannot be severed and marketed separately from the overall
forward contract in which they are embedded.\83\ Conversely, where the
embedded commodity option(s) render delivery optional, the predominant
feature of the contract cannot be actual delivery and, therefore, the
embedded option(s) to not deliver preclude treatment of the contract as
a forward contract for a nonfinancial commodity. The CFTC would look to
the specific facts and circumstances of the transaction as a whole to
evaluate whether any embedded optionality operates on the price or
delivery term of the contract, and whether an embedded commodity option
is marketed or traded separately from the underlying contract, to
determine whether that transaction qualifies for the forward contract
exclusion from the swap definition for nonfinancial commodities.\84\
The CFTC believes that such an approach would help prevent commodity
options that should fall within the swap definition from qualifying for
the forward contract exclusion for nonfinancial commodities instead.
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    \81\ Id. at n.5. In Wright, the CFTC affirmed the Administrative
Law Judge's holding that an option embedded in a hedge-to-arrive
contract did not violate CFTC rules regarding the sale of
agricultural trade options. The CFTC first concluded that the puts
at issue operated to adjust the forward price and did not render the
farmer's overall obligation to make delivery optional. Then, turning
to the next step of the analysis, the CFTC explained that ``the put
and [hedge-to-arrive contract] operated as a single contract, and in
most cases were issued simultaneously * * *. We do not find that any
put was severed from its forward or that either of [the put or the
hedge-to-arrive contract] was traded separately from the other. We
hold that in these circumstances, no freestanding option came into
being. * * *'' Id. at *7.
    \82\ The CFTC believes that ``options'' in the plural would
include, for example, a situation in which the embedded optionality
involves option combinations, such as costless collars, that operate
on the price term of the agreement, contract, or transaction.
    \83\ See Wright, supra note 63, at **6-7.
    \84\ This facts and circumstances approach to determining
whether a particular embedded option takes a transaction out of the
forward contract exclusion for nonfinancial commodities is
consistent with the CFTC's historical approach to determining
whether a particular embedded option takes a transaction out of the
forward contract exclusion from the CEA definition of the term
``future delivery.'' See Wright, supra note 63, at *5 (``As we have
held since Stovall, the nature of a contract involves a multi-factor
analysis . * * *'').
---------------------------------------------------------------------------

(c) Security Forwards \85\
---------------------------------------------------------------------------

    \85\ The discussion above regarding the exclusion from the swap
definition for forward contracts on nonfinancial commodities does
not apply to the exclusion from the swap and security-based swap
definitions for security forwards or to the distinction between
security forwards and security futures products.
---------------------------------------------------------------------------

    No commenters sought clarification of the exclusion from the swap
and security-based swap definitions for the ``sale of a nonfinancial
commodity or security for deferred shipment or delivery, so long as the
transaction is intended to be physically settled,'' in the context of
most sales of securities for deferred shipment or delivery; however,
some commenters sought clarification of this exclusion in the context
of mortgage securitizations.\86\ The Commissions believe it is
appropriate to address how the exclusions from the definitions of swap
and security-based swap apply to security forwards and other purchases
and sales of securities.
---------------------------------------------------------------------------

    \86\ Specifically, commenters requested clarification that the
swap and security-based swap definitions do not include buying and
selling mortgages and forward trading of agency (i.e., Federal Home
Loan Mortgage Corporation (``Freddie Mac''), Federal National
Mortgage Association (``Fannie Mae''), and Government National
Mortgage Association (``Ginnie Mae'') mortgage-backed securities
(``MBS'') in the ``To-Be-Announced'' (``TBA'') market in order to
provide the certainty needed to avoid unnecessary disruption of the
securitization market. See Letter from Stephen H. McElhennon, Vice
President & Deputy General Counsel, Fannie Mae, Sept. 20, 2010
(``Fannie Mae Letter''); Letter from Lisa M. Ledbetter, Freddie Mac,
Sept. 20, 2010.
---------------------------------------------------------------------------

    The Dodd-Frank Act excludes purchases and sales of securities from
the definitions of swap and security-based swap in a number of
different clauses.\87\ Under these exclusions, purchases and sales of
securities on a fixed or contingent basis \88\ and sales of securities
for deferred shipment or delivery that are intended to be physically
delivered \89\ are explicitly excluded from the definitions of swap and
security-based swap.\90\ The exclusion from the definitions of swap and
security-based swap of a sale of a security for deferred shipment or
delivery involves an agreement to purchase securities, or groups or
indexes of securities, at a future date at a certain price.
---------------------------------------------------------------------------

    \87\ See CEA sections 1a(47)(B)(ii), (v), and (vi), 7 U.S.C.
1a(47)(B)(ii), (v), and (vi).
    \88\ See CEA section 1a(47)(B)(v), 7 U.S.C. 1a(47)(B)(v)
(excluding from the swap and security-based swap definitions ``any
agreement, contract, or transaction providing for the purchase or
sale of 1 or more securities on a fixed basis that is subject to
[the Securities Act and Exchange Act]''); CEA section 1a(47)(B)(vi),
7 U.S.C. 1a(47)(B)(vi) (excluding from the swap and security-based
swap definitions ``any agreement, contract, or transaction providing
for the purchase or sale of 1 or more securities on a contingent
basis that is subject to [the Securities Act and Exchange Act],
unless the agreement, contract, or transaction predicates the
purchase or sale on the occurrence of a bona fide contingency that
might reasonably be expected to affect or be affected by the
creditworthiness of a party other than a party to the agreement,
contract, or transaction'').
    \89\ See CEA section 1a(47)(B)(ii), 7 U.S.C. 1a(47)(B)(ii).
    \90\ The Commissions note that calling an agreement, contract,
or transaction a swap or security-based swap does not determine its
status. See discussion supra part II.D.1.

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

    As with other purchases and sales of securities, security forwards
are excluded from the definitions of swap and security-based swap. The
sale of the security in this case occurs at the time the forward
contract is entered into with the performance of the contract deferred
or delayed. If such agreement, contract, or transaction is intended to
be physically settled, the Commissions believe it would be within the
security forward exclusion and therefore outside the swap and security-
based swap definitions.\91\ Moreover, as a purchase or sale of a
security, the Commissions believe it also would be within the
exclusions for the purchase or sale of one or more securities on a
fixed basis (or, depending on its terms, a contingent basis) and,
therefore, outside the swap and security-based swap definitions.\92\
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    \91\ See CEA section 1a(47)(B)(ii), 7 U.S.C. 1a(47)(B)(ii).
    \92\ See CEA sections 1a(47)(B)(v) and (vi), 7 U.S.C.
1a(47)(B)(v) and (vi).
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    As noted above, commenters requested specific guidance in the
context of forward sales of MBS that are guaranteed or sold by Fannie
Mae, Freddie Mac, and Ginnie Mae and the mortgages underlying such MBS.
    MBS guaranteed or sold by Fannie Mae, Freddie Mac and Ginnie Mae
are eligible to be sold in the TBA market, which is essentially a
forward or delayed delivery market.\93\ The TBA market has been
described as one that ``allows mortgage lenders essentially to sell the
loans they intend to fund even before the loans are closed.'' \94\ In
the TBA market, the lender enters into a forward contract to sell MBS
and agrees to deliver MBS on the settlement date in the future. The
specific MBS that will be delivered in the future may not yet be
created at the time the forward contract is entered into.\95\ The
Commissions believe that such forward sales of MBS in the TBA market
would fall within the exclusion for sales of securities on a deferred
settlement or delivery basis even though the precise MBS are not in
existence at the time the forward MBS sale is entered into.\96\
Moreover, as the purchase or sale of a security, the Commissions
believe such forward sales of MBS in the TBA market would fall within
the exclusions for the purchase or sale of one or more securities on a
fixed basis (or, depending on its terms, a contingent basis) and
therefore outside the swap and security-based swap definitions.\97\
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    \93\ Task Force on Mortgage-Backed Securities Disclosure,
``Staff Report: Enhancing Disclosure in the Mortgage-Backed
Securities Markets,'' part II.E.2 (Jan. 2003).
    \94\ Id.
    \95\ Id.
    \96\ See CEA section 1a(47)(B)(ii), 7 U.S.C. 1a(47)(B)(ii).
    \97\ See CEA sections 1a(47)(B)(v) and (vi), 7 U.S.C.
1a(47)(B)(v) and (vi).
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Request for Comment
    22. The Commissions request comment on all aspects of the proposed
interpretive guidance set forth in this section regarding the forward
contract exclusion from the swap and security-based swap definitions
with respect to nonfinancial commodities and securities.
    23. Is the proposed interpretive guidance set forth in this section
sufficient with respect to the application of the forward contract
exclusion from the swap definition with respect to nonfinancial
commodities? If not, what changes should be made? Commenters also are
invited to comment on whether the application of the Brent
Interpretation generally, and its conclusions regarding book-outs in
particular, is appropriate to the forward exclusion from the swap
definition with respect to nonfinancial commodities. Would it permit
transactions that should be subject to the swap regulatory regime to
fall outside of the Dodd-Frank Act?
    24. Is it appropriate, in light of the Dodd-Frank Act, for the CFTC
to withdraw the Energy Exemption while concurrently retaining the Brent
Interpretation, and extending it to the forward contract exclusion from
the definition of ``future delivery'' and the swap definition, for
book-out transactions in all nonfinancial commodities? Why or why not?
Is the conclusion that the Dodd-Frank Act supersedes the Swap Policy
Statement appropriate? Why or why not?
    25. Are there any provisions of the Energy Exemption or Swap Policy
Statement that the Commissions should consider incorporating into the
definitions rulemakings (other than the request already submitted by
some commenters in response to the proposed Entity Definitions that the
``line of business'' provision of the Swap Policy Statement be
incorporated into the definition of the term ``eligible contract
participant'' (``ECP''))? If so, please explain in detail how such
provisions are consistent with the requirements of the Dodd-Frank Act
and would not permit transactions that should be subject to the swap
regulatory regime to fall outside of the Dodd-Frank Act.
    26. How frequently do book-out transactions of the type described
in the Brent Interpretation occur with respect to nonfinancial
commodities? Please provide descriptions of any such transactions, and
data with respect to their frequency. Are there any nonfinancial
commodities or transactions to which the Brent Interpretation should
not apply, either with respect to the forward contract exclusion from
the definition of ``future delivery'' or the forward contract exclusion
from the swap definition, or both? Why or why not?
    27. Should a minimum contract size for a transaction in a
nonfinancial commodity (e.g., a tanker full of Brent oil) be required
in order for the transaction to qualify as a forward contract under the
Brent Interpretation with respect to the future delivery and swap
definitions? Why or why not? If so, what standards should apply to
determine such a minimum contract size? Should the Brent Interpretation
for nonfinancial commodities with respect to the future delivery and
swap definitions be limited to market participants that meet certain
requirements? Why or why not? If so, does the ``eligible commercial
entity'' definition in CEA section 1a(17) \98\ provide an appropriate
requirement? Why or why not? What other requirements, if any, should be
imposed?
---------------------------------------------------------------------------

    \98\ 7 U.S.C. 1a(17).
---------------------------------------------------------------------------

    28. How often, and to what extent, do entities that do not
regularly make or take delivery of the commodity in the ordinary course
of their business engage in transactions that should qualify as forward
contracts? Should such contracts qualify for the safe harbor provided
by the Brent Interpretation? Why or why not? If so, how can it be
demonstrated that the primary purpose of such transaction is to acquire
or sell the physical commodity? Would including these transactions in
the scope of the Brent Interpretation permit transactions that should
be subject to the swap regulatory regime to fall outside of the Dodd-
Frank Act? If so, could this concern be addressed by imposing
conditions in order to qualify for the forward exclusion? What
conditions, if any, would be appropriate?
    29. Are ``ring'' or ``daisy chain'' markets for forward contracts,
such as the 15-day Brent market, primarily used for commercial
merchandising, or do they serve other purposes such as price discovery
or risk management? Please explain in detail.
    30. Should contracts in nonfinancial commodities that may qualify