as forward contracts be permitted to trade on registered trading
platforms such as DCMs or swap execution facilities (``SEFs'')? If so,
are additional guidance

or rules necessary to determine whether contracts traded on such
platforms are excluded from the CEA definition of ``future delivery''
and/or the swap definition? If so, please describe in detail such
markets and explain what further guidance or rules would be
appropriate? Should conditions be imposed with respect to the nature of
the market participants or the percentage of transactions that must
result in delivery over a specified measurement period, or both? If so,
what conditions would be appropriate?
    31. Should the Commissions provide guidance regarding the scope of
the term ``nonfinancial commodity'' in the forward contract exclusion
from the swap definition? If so, how and where should the Commissions
draw the line between financial and nonfinancial commodities?
    32. Should the forward contract exclusion from the swap definition
apply to environmental commodities such as emissions allowances, carbon
offsets/credits, or renewable energy certificates? If so, please
describe these commodities, and explain how transactions can be
physically settled where the commodity lacks a physical existence (or
lacks a physical existence other than on paper)? Would application of
the forward contract exclusion to such environmental commodities permit
transactions that should be subject to the swap regulatory regime to
fall outside the Dodd-Frank Act?
    33. Are there other factors that should be considered in
determining how to characterize forward contracts with embedded options
with respect to nonfinancial commodities? If so, what factors should be
considered? Do provisions in forward contracts with respect to
nonfinancial commodities other than delivery and price contain embedded
optionality? How do such provisions operate? Please provide a detailed
analysis regarding how such provisions should be analyzed under the
Dodd-Frank Act.
    34. Is the analysis of forward contracts with embedded options in
the 1985 Interpretation and the CFTC's Wright decision appropriately
applied to transactions entered into after the effective date of the
Dodd-Frank Act? Why or why not? If not, how should the analysis be
modified?
    35. How would the proposed interpretive guidance set forth in this
section affect full requirements contracts, capacity contracts, reserve
sharing agreements, tolling agreements, energy management agreements,
and ancillary services? Do these agreements, contracts, or transactions
have optionality as to delivery? If so, should they--or any other
agreement, contract, or transaction in a nonfinancial commodity that
has optionality as to delivery--be excluded from the swap definition?
If so, please provide a detailed analysis of such agreements,
contracts, or transactions and how they can be distinguished from
options that are to be regulated as swaps pursuant to the Dodd-Frank
Act. To what extent are any such agreements, contracts, or transactions
in the electric industry regulated by the Federal Energy Regulatory
Commission (``FERC''), State regulatory authorities, regional
transmission organizations (``RTOs''), independent system operators
(``ISOs'') or market monitoring units associated with RTOs or ISOs?
    36. Is there any issue with respect to the treatment of commodity
options that the Commissions have not addressed and that should be
addressed as a definitional matter in this rulemaking?
    37. Should the Commissions provide more detailed guidance regarding
what constitutes a security forward? For instance, should the
Commissions provide more guidance on what it means for a security
forward to be ``intended to be physically settled''? If so, what
further guidance would be appropriate?
    38. Should the Commissions provide more guidance regarding when
forward sales of MBS in the TBA market would fall within the exclusion
for sales of securities on a deferred settlement or delivery basis? Is
there any more guidance the Commissions should provide regarding types
of transactions that occur in the TBA market?
3. Consumer and Commercial Agreements, Contracts, and Transactions
    Commenters on the ANPR pointed out a number of areas in which a
broad reading of the swap and security-based swap definitions could
cover certain consumer and commercial arrangements that historically
have not been considered swaps or security-based swaps. Examples of
such instruments cited by commenters include evidences of indebtedness
with a variable rate of interest; \99\ commercial contracts containing
acceleration, escalation, or indexation clauses; \100\ agreements to
acquire personal property or real property, or to obtain mortgages;
\101\ employment, lease, and service agreements, including those that
contain contingent payment arrangements; \102\ and consumer mortgage
and utility rate caps.\103\
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    \99\ See Cleary Letter; Letter from Kenneth E. Auer, President
and CEO, The Farm Credit Council, Sept. 20, 2010 (``Farm Credit
Council Letter'').
    \100\ See Cleary Letter; White & Case Letter.
    \101\ See White & Case Letter; Fannie Mae Letter.
    \102\ See BlackRock Letter.
    \103\ See White & Case Letter; Deutsche Bank Letter.
---------------------------------------------------------------------------

    Consumers enter into various types of agreements, contracts, and
transactions as part of their household and personal lives that may
have attributes that could be viewed as falling within the swap or
security-based swap definition. Similarly, businesses and other
entities, whether or not for profit, also enter into agreements,
contracts, and transactions as part of their operations relating to,
among other things, acquisitions or sales of property (tangible and
intangible), provisions of services, employment of individuals, and
other matters that could be viewed as falling within the definitions.
    The Commissions do not believe that Congress intended to include
these types of customary consumer and commercial agreements, contracts,
or transactions in the swap or security-based swap definition, to limit
the types of persons that can enter into or engage in them, or to
otherwise to subject these agreements, contracts, or transactions to
the regulatory scheme for swaps and security-based swaps. The
Commissions, therefore, are proposing the following interpretive
guidance to assist consumers and businesses in understanding whether
certain agreements, contracts, or transactions that they enter into
would be regulated as swaps or security-based swaps.
    With respect to consumers, the Commissions believe that the types
of agreements, contracts, or transactions that should not be considered
swaps or security-based swaps when entered into by consumers (natural
persons or their agents) as principals primarily for personal, family,
or household purposes, include:
     Agreements, contracts, or transactions to acquire or lease
real or personal property, to obtain a mortgage, to provide personal
services, or to sell or assign rights owned by such consumer (such as
intellectual property rights);
     Agreements, contracts, or transactions to purchase
products or services at a fixed price or a capped or collared price, at
a future date or over a certain time period (such as agreements to
purchase home heating fuel);\104\
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    \104\ These agreements, contracts, or transactions involve
physical delivery which is deferred for convenience or necessity and
thus can be viewed as being akin to forward purchase agreements
(sometimes with embedded options, in the case of those with price
caps), which were discussed above in the context of the exclusion
from the swap definition for forward contracts in nonfinancial
commodities. While the CFTC traditionally has viewed forward
contracts in nonfinancial commodities as limited to commercial
merchandising transactions, the Commissions view consumer
agreements, contracts, and transactions involving periodic or future
purchases of consumer products and services, such as agreements to
purchase energy commodities to heat or cool consumers' homes, as
transactions that are not swaps.

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

     Agreements, contracts, or transactions that provide for an
interest rate cap or lock on a consumer loan or mortgage, where the
benefit of the rate cap or lock is realized only if the loan or
mortgage is made to the consumer; and
     Consumer loans or mortgages with variable rates of
interest or embedded interest rate options, including such loans with
provisions for the rates to change upon certain events related to the
consumer, such as a higher rate of interest following a default.
    The types of commercial agreements, contracts, or transactions that
involve customary business arrangements (whether or not involving a
for-profit entity) and would not be considered swaps or security-based
swaps under this proposed interpretive guidance include:
     Employment contracts and retirement benefit arrangements;
     Sales, servicing, or distribution arrangements;
     Agreements, contracts, or transactions for the purpose of
effecting a business combination transaction; \105\
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    \105\ These business combination transactions include, for
example, a reclassification, merger, consolidation, or transfer of
assets as defined under the Federal securities laws or any tender
offer subject to section 13(e) and/or section 14(d) or (e) of the
Exchange Act, 15 U.S.C. 78m(e) and/or 78n(d) or (e). These business
combination agreements, contracts, or transactions can be contingent
on the continued validity of representations and warranties and can
contain earn-out provisions and contingent value rights.
---------------------------------------------------------------------------

     The purchase, sale, lease, or transfer of real property,
intellectual property, equipment, or inventory;
     Warehouse lending arrangements in connection with building
an inventory of assets in anticipation of a securitization of such
assets (such as in a securitization of mortgages, student loans, or
receivables); \106\
---------------------------------------------------------------------------

    \106\ The Commissions believe that such lending arrangements
included in this category are traditional borrower/lender
arrangements documented using, for example, a loan agreement or
indenture, as opposed to a synthetic lending arrangement documented
in the form of, for example, a TRS. The Commissions also note that
securitization transaction agreements also may contain contingent
obligations if the representations and warranties about the
underlying assets are not satisfied.
---------------------------------------------------------------------------

     Mortgage or mortgage purchase commitments, or sales of
installment loan agreements or contracts or receivables;
     Fixed or variable interest rate commercial loans entered
into by non-banks \107\; and
---------------------------------------------------------------------------

    \107\ See infra note 115 regarding identified banking products.
---------------------------------------------------------------------------

     Commercial agreements, contracts, and transactions
(including, but not limited to, leases, service contracts, and
employment agreements) containing escalation clauses linked to an
underlying commodity such as an interest rate or consumer price index.
    The Commissions intend this proposed interpretive guidance to allow
consumers to engage in customary transactions relating to their
households and personal or family activities without concern that such
arrangements would be considered swaps or security-based swaps.
Similarly, applying this guidance to customary commercial arrangements
should allow commercial and non-profit entities to continue to operate
their businesses and operations without significant disruption and
ensure that the swap and security-based swap definitions are not read
to include commercial and non-profit operations that historically have
not been considered to involve swaps or security-based swaps.
    The types of agreements, contracts, and transactions discussed
above are not intended to be exhaustive of the customary consumer or
commercial arrangements that should not be considered to be swaps or
security-based swaps. There may be other, similar types of agreements,
contracts, and transactions that also should not be considered to be
swaps or security-based swaps. In determining whether similar types of
agreements, contracts, and transactions entered into by consumers or
commercial entities are swaps or security-based swaps, the Commissions
intend to consider the characteristics and factors that are common to
the consumer and commercial transactions listed above:
     They do not contain payment obligations, whether or not
contingent, that are severable from the agreement, contract, or
transaction;
     They are not traded on an organized market or over-the-
counter; and
     In the case of consumer arrangements, they:

--Involve an asset of which the consumer is the owner or beneficiary,
or that the consumer is purchasing, or they involve a service provided,
or to be provided, by or to the consumer, or

     In the case of commercial arrangements, they are entered
into:

--By commercial or non-profit entities as principals (or by their
agents) to serve an independent commercial, business, or non-profit
purpose, and
--Other than for speculative, hedging, or investment purposes.

    Two of the key components reflected in these characteristics that
distinguish these agreements, contracts, and transactions from swaps
and security-based swaps are that: (i) The payment provisions of the
arrangements are not severable; and (ii) the agreement, contract, or
transaction is not traded on an organized market or over-the-counter--
so that such arrangements would not involve risk-shifting arrangements
with financial entities, as would be the case for swaps and security-
based swaps.\108\
---------------------------------------------------------------------------

    \108\ There also are alternative regulatory regimes that have
been enacted as part of the Dodd-Frank Act specifically to provide
enhanced protections to consumers relating to various consumer
transactions. See, e.g., the Consumer Financial Protection Act of
2010, Public Law 111-203, title X, 124 Stat. 1376 (July 21, 2010)
(establishing the Bureau of Consumer Financial Protection to
regulate a broad category of consumer products and amending certain
laws under the jurisdiction of the Federal Trade Commission); the
Mortgage Reform and Anti-Predatory Lending Act, Public Law 111-203,
title XIV, 124 Stat. 1376 (July 21, 2010) (amending existing laws,
and adding new provisions, related to certain mortgages). Some of
these agreements, contracts, or transactions are subject to
regulation by the Federal Trade Commission and other Federal
financial regulators and state regulators.
---------------------------------------------------------------------------

    This proposed interpretive guidance is not intended to be the
exclusive means for consumers and commercial or non-profit entities to
determine whether their agreements, contracts, or transactions fall
within the swap or security-based swap definition. If there is a type
of agreement, contract, or transaction that is not enumerated above, or
does not have all the characteristics and factors that are listed above
(including new types of arrangements that may be developed in the
future), but that a party to the agreement, contract, or transaction
believes is not a swap or security-based swap, the Commissions invite
such party to seek an interpretation from the Commissions as to whether
the agreement, contract, or transaction is a swap or security-based
swap.
Request for Comment
    39. Is interpretive guidance of the type proposed in this section
necessary with respect to the application of the swap and security-
based swap definitions to certain consumer and commercial agreements,
contracts, or transactions?
    40. Is the interpretive guidance proposed in this section useful,

appropriate, and sufficient for persons to consider when evaluating
whether agreements, contracts, or transactions of the types described
in this section fall within the swap or security-based swap definition?
    41. In particular, are the listed characteristics and factors for
consumer transactions and for commercial transactions appropriate for
purposes of evaluating whether agreements, contracts, or transactions
fall within the swap or security-based swap definition? If not, what
characteristics or factors should be included or excluded, and why? Are
any of the characteristics or factors too narrow or too broad? If so,
how should the listed characteristics and factors be modified, and why?
    42. Is a joint interpretation as provided for in section 712(d)(4)
of the Dodd-Frank Act, pursuant to the proposed process discussed in
part VI below, an appropriate means of addressing any further
interpretive questions?
    43. Does the interpretive guidance proposed in this section
sufficiently enumerate the types of consumer and commercial agreements,
contracts, or transactions that should not be considered swaps or
security-based swaps? If not, please provide details of other types of
such agreements, contracts, or transactions and an explanation of the
reasons why the definitions should not apply to them.
    44. Is the treatment of consumer or commercial contracts containing
payment arrangements sufficiently clear? For example, should the
interpretive guidance expressly address any other specific types of
contracts, such as installment sales contracts, financings used in
normal business operations (such as receivables financings), pensions
and other post-retirement benefits, contracts relating to the
performance of a service, standby liquidity agreements, indemnification
agreements, reimbursement agreements, or affiliate guarantees? Why or
why not?
    45. Is the treatment of purchases, sales, leases, or transfers of
equipment and inventory sufficiently flexible to not interfere with
ordinary business operations? As an alternative, should the guidance
expressly cover the purchase, sale, lease, or transfer of assets
(excluding financial assets) that are anticipated to be owned, leased,
licensed, produced, manufactured, processed, or merchandized by one of
the parties or an affiliate? Why or why not?
4. Loan Participations
    Two commenters inquired whether loan participations fall within the
scope of the swap and security-based swap definitions.\109\ According
to these commenters, loan participations arise when a lender transfers
the economic risks and benefits of all or a portion of a loan it has
entered into with a borrower to another party as an alternative or
precursor to assigning to such person the loan or an interest in the
loan.\110\ Two types of loan participations are offered in the market
today according to these commenters: LSTA-style participations and LMA-
style participations.\111\ An LSTA-style participation ``specifically
provides that the participation is intended by the parties to be
treated as a sale by the grantor and a purchase by the participant''
and ``is intended to effect a `true sale' of the loan from the grantor
to the participant and put the participant's beneficial ownership
interest in the loan beyond the reach of the grantor's bankruptcy
estate.'' \112\ By contrast, an LMA-style participation, while not
effecting a sale, ``creates a current debtor-creditor relationship
between the grantor and the participant under which a future ownership
interest is conveyed.'' \113\ Neither type of loan participation is a
``synthetic'' transaction according to the March LSTA letter because
``they are merely transfers of cash loan positions'' and ``[t]he ratio
of underlying loan to participation is always one-to-one.''
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    \109\ See Letter from R. Bram Smith, Executive Director, The
Loan Syndications and Trading Association, Jan. 25, 2011 (``January
LSTA Letter'') and letter from Elliot Ganz, General Counsel, The
Loan Syndications and Trading Association, Mar. 1, 2011 (``March
LSTA Letter, and collectively with the January LSTA Letter, ``LSTA
Letters''); Letter from Clare Dawson, Managing Director, Loan Market
Association, Feb. 23, 2011.
    \110\ See Loan Market Association, ``Guide to Syndicated
Loans,'' section 6.2.5 (``Risk participation may be provided by a
new lender as an interim measure before it takes full transfer of a
loan.''), available at http://www.lma.eu.com/uploads/files/Introductory_Guides/Guide_to_Par_Syndicated_Loans.pdf.
    \111\ The LSTA is The Loan Syndications and Trading Association.
The LMA is the Loan Market Association.
    \112\ See January LSTA Letter (citation omitted).
    \113\ See LSTA Letters. But see Jon Kibbe, Julia Lu and Carl
Winkworth, Richards Kibbe & Orbe, LLP, ``Dodd-Frank Crosses the
Pond: Unintended Consequences for LMA-Style Loan Participations?,''
3 (Nov. 12, 2010) (``The grantor of an LMA-style participation does
not grant an ownership interest in the loan to the participant.'')
(``LMA-Style LP Memo''), available at http://www.rkollp.com/assets/attachments/Dodd-Frank%20Crosses%20the%20Pond%20-%20Unintended%20Consequences%20for%20LMA-Style%20Loan%20Participations.pdf.
---------------------------------------------------------------------------

    Depending on the facts and circumstances, a loan participation may
be a security under the Federal securities laws and, as such, the loan
participation would be excluded from the definition of swap as the
purchase and sale of a security on a fixed or contingent basis.\114\ In
addition, depending on the facts and circumstances, a loan
participation may be an identified banking product and, as such, would
be excluded from CFTC jurisdiction and from the ``security-based swap''
and ``security-based swap agreement'' definitions.\115\
---------------------------------------------------------------------------

    \114\ See CEA sections 1a(47)(B)(v) and (vi), 7 U.S.C.
1a(47)(b)(v) and (vi), as amended by section 721(a)(21) of the Dodd-
Frank Act (excluding purchases and sales of a security on a fixed or
contingent basis, respectively from the swap definition).
    \115\ See section 403(a) of the Legal Certainty for Bank
Products Act of 2000, 7 U.S.C. 27a(a), as amended by section
725(g)(2) of the Dodd-Frank Act (providing that, under certain
circumstances, the CEA shall not apply to, and the CFTC shall not
exercise regulatory authority over, identified banking products, and
the definitions of the terms ``security-based swap'' and ``security-
based swap agreement'' shall not include identified banking
products).
---------------------------------------------------------------------------

    The Commissions do not interpret the swap and security-based swap
definitions to include loan participations in which the purchaser is
acquiring a current or future direct or indirect ownership interest in
the related loan and the loan participations are ``true
participations'' (the participant acquires a beneficial ownership
interest in the underlying loans).\116\
---------------------------------------------------------------------------

    \116\ See generally Richard M. Gray and Suhrud Mehta, Milbank
Tweed Hadley & McCloy LLP, ``US and UK compared Fundamental
differences remain between the markets. But is it worth considering
using a New York participation agreement in an English deal?,''
International Financial Law Review (Oct. 1, 2009) (discussing
differences between New York and English participation markets and
features distinguishing true participations from financings),
available at http://www.milbank.com/NR/rdonlyres/B95C06AD-C3CA-44C9-8433-B6021C4455C9/0/102009_IFLR_USandUKcompared_RGray_SMehta.pdf; Cleary, Gottlieb, Steen & Hamilton, Memorandum for the
Financial Accounting Standards Board, Re: Participations (June 14,
2004) (discussing, among other things, what a ``good'' or ``true''
participation is under the Uniform Commercial Code, the Bankruptcy
Code, case law, and other authority), available at http://www.fasb.org/cs/BlobServer?blobcol=urldata&blobtable=MungoBlobs&blobkey=id&blobwhere=1175817895286&blobheader=application%2Fpdf.
---------------------------------------------------------------------------

Request for Comment
    46. Should any of the enumerated agreements, contracts, or
transactions be considered swaps or security-based swaps whether in
general or in certain narrow circumstances? If so, which ones and why?
In particular, how are loan participations similar to and different
from loan TRS? Does the proposed guidance adequately distinguish
between loan participations similar to and different from loan TRS?
    47. Does the Commissions' proposed interpretive guidance regarding
loan participations exclude from the swap or security-based swap
definitions agreements, contracts, or transactions

that are swaps or security-based swaps? If so, please describe such
agreements, contracts, or transactions and suggested adjustments to the
proposed guidance to capture such agreements, contracts, or
transactions as swaps or security-based swaps.
    48. Is the Commissions' proposed interpretive guidance regarding
loan participations as not falling within the swap and security-based
swap definitions appropriate? Why or why not? Should the Commissions
provide further guidance on what constitutes an ``ownership interest''
in the loan underlying a loan participation? If so, what should such
guidance provide?
    49. Do all loan participations convey a current or future direct or
indirect ownership interest from the grantor to the participant or sub-
participant? If so, what indicia of ownership are conveyed and when,
particularly in LMA-style loan participations? Do loan participations
use leverage? If so, how?
    50. Are any swaps or security-based swaps partly or fully defeased?
    51. Should the Commissions provide further guidance regarding the
scope of ``true participation?'' If so, how should the Commissions
delineate the scope thereof?

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
    In light of provisions in the Dodd-Frank Act that specifically
address certain foreign exchange products, the Commissions are
proposing rules to clarify the status of products such as foreign
exchange forwards, foreign exchange swaps, foreign exchange options,
non-deliverable forwards involving foreign exchange (``NDFs''), and
cross-currency swaps. The Commissions also are proposing a rule to
clarify the status of FRAs and providing interpretive guidance
regarding: (i) Combinations and permutations of, or options on, swaps
or security-based swaps; and (ii) contracts for differences (``CFDs'').
    Proposed rule 1.3(xxx)(2) under the CEA and proposed rule 3a69-2
under the Exchange Act would explicitly define the term ``swap'' to
include certain foreign exchange-related products and FRAs unless such
products would be excluded by the list of exclusions in subparagraph
(B) of the swap definition.\117\ In proposing these rules, the
Commissions do not mean to suggest that any other agreement, contract,
or transaction not mentioned in the proposed rules or specifically
enumerated in the statutory definition would not be covered by the swap
or security-based swap definitions in the Dodd-Frank Act.
---------------------------------------------------------------------------

    \117\ See CEA section 1a(47)(B), 7 U.S.C. 1a(47)(B).
---------------------------------------------------------------------------

2. Foreign Exchange Products
(a) Foreign Exchange Products Subject to the Secretary's Swap
Determination: Foreign Exchange Forwards and Foreign Exchange Swaps
    The Dodd-Frank Act provides that ``foreign exchange forwards'' and
``foreign exchange swaps'' shall be considered swaps under the swap
definition unless the Secretary of the Treasury (``Secretary'') issues
a written determination that either foreign exchange swaps, foreign
exchange forwards, or both: (i) Should not be regulated as swaps; and
(ii) are not structured to evade the Dodd-Frank Act in violation of any
rule promulgated by the CFTC pursuant to section 721(c) of the Dodd-
Frank Act.\118\ A foreign exchange forward is defined as ``a
transaction that solely involves the exchange of 2 different currencies
on a specific future date at a fixed rate agreed upon on the inception
of the contract covering the exchange.'' \119\ A foreign exchange swap,
in turn, is defined as ``a transaction that solely involves--(A) An
exchange of 2 different currencies on a specific date at a fixed rate
that is agreed upon on the inception of the contract covering the
exchange; and (B) a reverse exchange of the 2 currencies described in
subparagraph (A) at a later date and at a fixed rate that is agreed
upon on the inception of the contract covering the exchange.'' \120\
---------------------------------------------------------------------------

    \118\ See CEA section 1a(47)(E)(i), 7 U.S.C. 1a(47)(E)(i). The
Secretary has issued a request for comment about whether an
exclusion from the swap definition for foreign exchange swaps,
foreign exchange forwards, or both, is warranted, and on the
application of the statutory factors that the Secretary must
consider in making a determination regarding whether to exclude
these products. See Determinations of Foreign Exchange Swaps and
Forwards, 75 FR 66829, Oct. 29, 2010.
    \119\ See CEA section 1a(24), 7 U.S.C. 1a(24).
    \120\ See CEA section 1a(25), 7 U.S.C. 1a(25).
---------------------------------------------------------------------------

    Under the Dodd-Frank Act, if foreign exchange forwards or foreign
exchange swaps are no longer considered swaps due to a determination by
the Secretary, nevertheless, certain provisions of the CEA added by the
Dodd-Frank Act would continue to apply to such transactions.
Specifically, those transactions still would be subject to certain
requirements for reporting swaps, and swap dealers and major swap
participants engaging in such transactions still would be subject to
certain business conduct standards.\121\
---------------------------------------------------------------------------

    \121\ See, e.g., CEA sections 1a(47)(E)(iii) and (iv), 7 U.S.C.
1a(47)(E)(iii) and (iv) (reporting and business conduct standards,
respectively).
---------------------------------------------------------------------------

    The Commissions are proposing to provide greater clarity by
explicitly defining by rule the term ``swap'' to include foreign
exchange forwards and foreign exchange swaps (as those terms are
defined in the CEA).\122\ The proposed rules would incorporate the
provision of the Dodd-Frank Act that, if the Secretary issues the
written determination described above, foreign exchange forwards and
foreign exchange swaps would no longer be considered swaps. The
proposed rules also would reflect the continuing applicability of
certain reporting requirements and business conduct standards in the
event that the Secretary makes such a determination.\123\
---------------------------------------------------------------------------

    \122\ As noted above, the proposed rules provide that foreign
exchange forwards and forward exchange swaps would not be swaps if
they fall within one of the exclusions set forth in subparagraph (B)
of the swap definition.
    \123\ The exclusion of foreign exchange forwards and foreign
exchange swaps would become effective upon the Secretary's
submission of the determination to the appropriate Congressional
Committees. See CEA section 1a(47)(E)(ii), 7 U.S.C. 1a(46)(E)(ii).
---------------------------------------------------------------------------

(b) Foreign Exchange Products Not Subject to the Secretary's Swap
Determination
    The Commissions also are proposing rules to provide clarity that a
determination by the Secretary that foreign exchange forwards or
foreign exchange swaps, or both, should not be regulated as swaps would
not affect other products involving foreign currency, such as foreign
currency options, NDFs, and cross-currency swaps. The Commissions are
proposing rules to explicitly define the term ``swap'' to include such
products, irrespective of whether the Secretary makes a determination
to exempt foreign exchange forwards or foreign exchange swaps.\124\
---------------------------------------------------------------------------

    \124\ As discussed above, however, the proposed rules provide
that none of the products discussed in this section (b) would be
swaps if they fall within one of the exclusions set forth in
subparagraph (B) of the swap definition.
---------------------------------------------------------------------------

(i) Foreign Currency Options \125\
---------------------------------------------------------------------------

    \125\ This discussion is not intended to address, and has no
bearing on, the CFTC's jurisdiction over foreign currency options in
other contexts. See, e.g., CEA sections 2(c)(2)(A)(iii) and
2(c)(2)(B)-(C), 7 U.S.C. 2(c)(2)(A)(iii) and 2(c)(2)(B)-(C) (off-
exchange options in foreign currency offered or entered into with
retail customers).
---------------------------------------------------------------------------

    As discussed above, the statutory swap definition includes options,
and it expressly enumerates foreign currency options. It encompasses
any agreement, contract, or transaction: '' (i) that is a

put, call, cap, floor, collar, or similar option of any kind that is
for the purchase or sale, or based on the value, of 1 or more interest
or other rates, currencies, commodities, securities, instruments of
indebtedness, indices, quantitative measures, or other financial or
economic interests or property of any kind.'' \126\
---------------------------------------------------------------------------

    \126\ See CEA section 1a(47)(A)(i), 7 U.S.C. 1a(47)(A)(i)
(emphasis added).
---------------------------------------------------------------------------

    Foreign exchange options traded on a national securities exchange
(``NSE''), however, are securities under the Federal securities laws
and not swaps or security-based swaps.\127\
---------------------------------------------------------------------------

    \127\ See CEA section 1a(47)(B)(iv), 7 U.S.C. 1a(47)(B)(iv).
---------------------------------------------------------------------------

    Any determination by the Secretary, discussed above, that foreign
exchange forwards or foreign exchange swaps should not be regulated as
swaps would not impact foreign currency options because a foreign
currency option is neither a foreign exchange swap nor a foreign
exchange forward, as those terms are defined in the CEA. Consequently,
the Commissions are proposing rules to provide clarity by explicitly
defining the term ``swap'' to include foreign currency options (other
than foreign currency options traded on an NSE).\128\ The proposed
rules also would clarify that foreign currency options are not foreign
exchange forwards or foreign exchange swaps under the CEA.
---------------------------------------------------------------------------

    \128\ The proposed rules would treat the terms foreign currency
options, currency options, foreign exchange options, and foreign
exchange rate options as synonymous. Moreover, for purposes of the
proposed rules, foreign currency options include options to enter
into or terminate, or that otherwise operate on, a foreign exchange
swap or foreign exchange forward or on the terms thereof. As
discussed above, foreign exchange options traded on an NSE are
securities and therefore not addressed in the proposed rules.
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(ii) Non-Deliverable Forward Contracts Involving Foreign Exchange
    An NDF generally is similar to a forward foreign exchange
contract,\129\ except that at maturity, the NDF does not require
physical delivery of currencies and is typically settled in U.S.
dollars. The other currency, usually an emerging market currency
subject to capital controls, is therefore said to be
``nondeliverable.'' \130\ If the spot market exchange rate on the
settlement date is greater (in foreign currency per dollar terms) than
the previously agreed forward exchange rate, the party to the contract
that is long the emerging market currency must pay its counterparty the
difference between the contracted forward price and the spot market
rate, multiplied by the notional amount.\131\
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    \129\ A deliverable forward foreign exchange contract is an
obligation to buy or sell a specific currency on a future settlement
date at a fixed price set on the trade date. See Laura Lipscomb,
``Federal Reserve Bank of New York, An Overview of Non-Deliverable
Foreign Exchange Forward Markets,'' 1 (May 2005) (citation omitted)
(``Fed NDF Overview'').
    \130\ See id. at 1-2 (citation omitted).
    \131\ See id. at 2. Being long the emerging market currency
means that the holder of the NDF contract is the ``buyer'' of the
emerging market currency and the ``seller'' of dollars. Conversely,
if the emerging market currency appreciates relative to the
previously agreed forward rate, the holder of the contract that is
short the emerging market currency must pay its counterparty the
difference between the spot market rate and the contracted forward
price, multiplied by the notional amount. See id. at 2, n.4.
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    NDFs are not expressly enumerated in the swap definition, but they
satisfy clause (A)(iii) of the definition because they provide for a
future (executory) payment based on an exchange rate, which is an
``interest or other rate[]'' within the meaning of clause (A)(iii) of
the swap definition.\132\ Each party to an NDF transfers to its
counterparty the risk of the exchange rate moving against the
counterparty, thus satisfying the requirement that there be a transfer
of financial risk associated with a future change in rate. This
financial risk transfer in the context of an NDF is not accompanied by
a transfer of an ownership interest in any asset or liability. Thus, an
NDF is a swap under clause (A)(iii) of the swap definition.\133\
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    \132\ See CEA section 1a(47)(A)(iii), 7 U.S.C. 1a(47)(A)(iii)
(providing that a swap is an agreement, contract, or transaction
``that provides on an executory basis for the exchange, on a fixed
or contingent basis, of 1 or more payments based on the value or
level of 1 or more interest or other rates, currencies, commodities,
securities, instruments of indebtedness, indices, quantitative
measures, or other financial or economic interests or property of
any kind, or any interest therein or based on the value thereof, and
that transfers, as between the parties to the transaction, in whole
or in part, the financial risk associated with a future change in
any such value or level without also conveying a current or future
direct or indirect ownership interest in an asset (including any
enterprise or investment pool) or liability that incorporates the
financial risk so transferred * * *.'').
    \133\ It appears that at least some market participants view
NDFs as swaps today. See, e.g., Credit Suisse, ``Non-Deliverable
Forwards,'' at 1 (characterizing NDFs as ``a derivative instrument
for hedging * * * exchange-rate risk'' in the absence of a forwards
market), available at https://www.credit-suisse.com/ch/unternehmen/kmugrossunternehmen/doc/nondeliverable_forward_en.pdf; Association
of Corporate Treasurers, ``Glossary of Terms'' (defining an NDF as
``[a] foreign currency financial derivative contract''), available
at http://www.treasurers.org/glossary/N#Non-deliverableforward.
Thus, NDFs also may fall within clause (A)(iv) of the swap
definition as ``an agreement, contract, or transaction that is, or
in the future becomes, commonly known to the trade as a swap.'' See
CEA section 1a(47)(A)(iv), 7 U.S.C. 1a(47)(A)(iv). Cf. CFTC rule
35.1(b)(1)(i), 17 CFR 35.1(b)(1)(i) (providing that the definition
of ``swap agreement'' includes a ``forward foreign exchange
agreement,'' without reference to convertibility or delivery).
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    As discussed above, the Secretary may determine that foreign
exchange swaps or foreign exchange forwards should not be regulated as
swaps. The outcome of the Secretary's determination would not impact
NDFs, however, because NDFs (like foreign currency options) do not meet
the definitions of the terms foreign exchange forward or foreign
exchange swap set forth in the CEA. NDFs do not involve an ``exchange''
of two different currencies (an element of the definition of both a
foreign exchange forward and a foreign exchange swap); instead, they
are settled by payment in one currency (usually U.S. dollars).
    Notwithstanding their ``forward'' label, NDFs do not fall within
the forward contract exclusion of the swap definition. Currency is
outside the scope of the forward contract exclusion for nonfinancial
commodities. Nor have NDFs traditionally been considered commercial
merchandising transactions. Rather, the NDF markets appear to be driven
in large part by speculation \134\ and hedging,\135\ which features are
more characteristic of swap markets than forward markets.
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    \134\ See ``Fed NDF Overview,'' supra note 129, at 5
(``[E]stimates vary but many major market participants estimate as
much as 60 to 80 percent of NDF volume is generated by speculative
interest, noting growing participation from international hedge
funds.'') and 4 (``[D]ealers note that much of the volume in Chinese
yuan NDFs is generated by speculative positioning based on
expectations for an alteration in China's current, basically fixed
exchange rate.'') (italics in original).
    \135\ See id. at 4 (noting that ``[much of the] Korean won NDF
volume[,] * * * estimated to be the largest of any currency, * * *
is estimated to originate with international investment portfolio
managers hedging the currency risk associated with their onshore
investments'').
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    Based on the foregoing considerations, the Commissions are
proposing to provide greater clarity by explicitly defining the term
``swap'' to include NDFs. The proposed rules also would clarify that
NDFs are not foreign exchange forwards or foreign exchange swaps as
those terms are defined in the CEA.
(iii) Currency Swaps and Cross-Currency Swaps
    A currency swap \136\ and a cross-currency swap \137\ each
generally can be

described as a swap in which the fixed legs or floating legs based on
various interest rates are exchanged in different currencies. Such
swaps can be used to reduce borrowing costs, to hedge currency
exposure, and to create synthetic assets \138\ and are viewed as an
important tool, given that they can be used to hedge currency and
interest rate risk in a single transaction.
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    \136\ A swap that exchanges a fixed rate against a fixed rate is
known as a currency swap. See Federal Reserve System, ``Trading and
Capital-Markets Activities Manual,'' section 4335.1 (Jan. 2009).
    \137\ Cross-currency swaps with a fixed leg based on one rate
and a floating leg based on another rate, where the two rates are
denominated in different currencies, are generally referred to as
cross-currency coupon swaps, while those with a floating leg based
on one rate and another floating leg based on a different rate are
known as cross-currency basis swaps. Id. Cross-currency swaps also
include annuity swaps and amortizing swaps. In cross-currency
annuity swaps, level cash flows in different currencies are
exchanged with no exchange of principal; annuity swaps are priced
such that the level payment cash flows in each currency have the
same net present value at the inception of the transaction. An
amortizing cross-currency swap is structured with a declining
principal schedule, usually designed to match that of an amortizing
asset or liability. Id. See also Derivatives ONE, ``Cross Currency
Swap Valuation'' (``A cross currency swap is swap of an interest
rate in one currency for an interest rate payment in another
currency. * * * This could be considered an interest rate swap with
a currency component.''), available at http://www.derivativesone.com/cross-currency-swap-valuation/; Financial
Accounting Standards Board, ``Examples Illustrating Application of
FASB Statement No. 138,'' Accounting for Certain Derivative
Instruments and Certain Hedging Activities, section 2, Example 1, at
3 (``The company designates the cross-currency swap as a fair value
hedge of the changes in the fair value of the loan due to both
interest and exchange rates.''), available at http://www.fasb.org/derivatives/examples.pdf.
    \138\ BMO Capital Markets, ``Cross Currency Swaps,'' available
at http://www.bmocm.com/products/marketrisk/intrderiv/cross/default.aspx.
---------------------------------------------------------------------------

    Currency swaps and cross-currency swaps are not foreign exchange
swaps as defined in the CEA because, although they may involve an
exchange of foreign currencies, they also require contingent or
variable payments in different currencies. Because the CEA defines a
foreign exchange swap as a swap that ``solely'' involves an initial
exchange of currencies and a reversal thereof at a later date, subject
to certain parameters, currency swaps and cross-currency swaps would
not be foreign exchange swaps. Similarly, currency swaps and cross-
currency swaps are not foreign exchange forwards because foreign
exchange forwards ``solely'' involve an initial exchange of currencies,
subject to certain parameters, while currency swaps and cross-currency
swaps contain additional elements, as discussed above.
    Currency swaps are expressly enumerated in the statutory definition
of the term ``swap.'' \139\ Cross-currency swaps, however, are
not.\140\ Accordingly, based on the foregoing considerations, the
Commissions are proposing rules to provide greater clarity by
explicitly defining the term ``swap'' to include cross-currency swaps.
The proposed rules also would clarify that neither currency swaps nor
cross-currency swaps are foreign exchange forwards or foreign exchange
swaps as those terms are defined in the CEA.
---------------------------------------------------------------------------

    \139\ See CEA section 1a(47)(A)(iii)(VII), 7 U.S.C.
1a(47)(A)(iii)(VII).
    \140\ Clause (A)(iii) of the swap definition expressly refers to
a cross-currency rate swap. See CEA section 1a(47)(A)(iii)(V), 7
U.S.C. 1a(47)(A)(iii)(V). Although the swap industry appears to use
the term ``cross-currency swap,'' rather than ``cross-currency rate
swap'' (the term used in CEA section 1a(47)(A)(iii)(V)), the
Commissions interpret these terms as synonymous.
---------------------------------------------------------------------------

Request for Comment
    52. Should the proposed rules explicitly define the term ``swap''
to include foreign exchange forwards and foreign exchange swaps, unless
the Secretary determines to exempt them? Should the proposed rules
clarify that, if the Secretary determines to exempt foreign exchange
swaps or foreign exchange forwards, those transactions remain subject
to certain reporting requirements, and swap dealers and major swap
participants entering into such transactions remain subject to certain
business conduct standards, imposed by Title VII and CFTC regulations
promulgated thereunder? Why or why not?
    53. Should the proposed rules explicitly define the term ``swap''
to include foreign currency options and clarify that foreign currency
options are not foreign exchange forwards or foreign exchange swaps?
Why or why not? Should the terms foreign currency options, currency
options, foreign exchange options, and foreign exchange rate options be
interpreted as synonymous? Why or why not?
    54. Should the proposed rules explicitly define the term ``swap''
to include NDFs and clarify that NDFs are not foreign exchange forwards
or foreign exchange swaps? Why or why not?
    55. Should the proposed rules explicitly define the term ``swap''
to include cross-currency swaps as swaps and clarify that currency
swaps and cross-currency swaps are not foreign exchange forwards or
foreign exchange swaps? Why or why not? Should the terms cross-currency
swap and cross-currency rate swap be interpreted as synonymous? Why or
why not?
    56. Is additional detail needed within the proposed rules regarding
foreign exchange-related products to provide greater clarity regarding
the specific products listed in the proposed rules? If so, what
additional detail would be necessary?
3. Forward Rate Agreements
    In general, the Commissions understand an FRA to be an over-the-
counter contract for a single cash payment, due on the settlement date
of a trade, based on a spot rate (determined pursuant to a method
agreed upon by the parties) and a prespecified forward rate. The single
cash payment is equal to the product of the present value (discounted
from a specified future date to the settlement date of the trade) of
the difference between the forward rate and the spot rate on the
settlement date multiplied by the notional amount. The notional amount
itself is not exchanged.\141\
---------------------------------------------------------------------------

    \141\ See generally ``Trading and Capital-Markets Activities
Manual,'' supra note 136, section 4315.1 (``For example, in a six-
against-nine-month (6x9) FRA, the parties agree to a three-month
rate that is to be netted in six months' time against the prevailing
three-month reference rate, typically LIBOR. At settlement (after
six months), the present value of the net interest rate (the
difference between the spot and the contracted rate) is multiplied
by the notional principal amount to determine the amount of the cash
exchanged between the parties * * *. If the spot rate is higher than
the contracted rate, the seller agrees to pay the buyer the
differences between the prespecified forward rate and the spot rate
prevailing at maturity, multiplied by a notional principal amount.
If the spot rate is lower than the forward rate, the buyer pays the
seller.'').
---------------------------------------------------------------------------

    An FRA provides for the future (executory) payment based on the
transfer of interest rate risk between the parties as opposed to
transferring an ownership interest in any asset or liability.\142\
Thus, the Commissions believe that an FRA satisfies clause (A)(iii) of
the swap definition.\143\
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    \142\ It appears that at least some in the trade view FRAs as
swaps today. See, e.g., The Globecon Group, Ltd., ``Derivatives
Engineering: A Guide to Structuring, Pricing and Marketing
Derivatives,'' 45 (McGraw-Hill 1995) (``An FRA is simply a one-
period interest-rate swap.''); DerivActiv, Glossary of Financial
Derivatives Terms (``A swap is * * * a strip of FRAs.''), available
at http://www.derivactiv.com/
definitions.aspx?search=forward+rate+agreements. Cf. Don M. Chance,
et. al, ``Derivatives in Portfolio Management,'' 29 (AIMR 1998)
(``[An FRA] involves one specific payment and is basically a one-
date swap (in the sense that a swap is a combination of FRAs[,] with
some variations).''). Thus, FRAs also may fall within clause (A)(iv)
of the swap definition, as ``an agreement, contract, or transaction
that is, or in the future becomes, commonly known to the trade as a
swap.'' See CEA section 1a(47)(a)(iv), 7 U.S.C. 1a(47)(a)(iv).
    \143\ See CEA section 1a(47)(A)(iii); 7 U.S.C. 1a(47)(A)(iii).
CFTC regulations have defined FRAs as swap agreements. See CFTC rule
35.1(b)(1)(i), 17 CFR 35.1(b)(1)(i); Exemption for Certain Swap
Agreements, 58 FR 5587, Jan. 22, 1993. The CFTC recently has
proposed to repeal that rule in light of the enactment of Title VII
of the Dodd-Frank Act. See Commodity Options and Agricultural Swaps,
supra note 78.
---------------------------------------------------------------------------

    Notwithstanding their ``forward'' label, FRAs do not fall within
the forward contract exclusion from the swap definition. FRAs do not
involve nonfinancial commodities and thus are outside the scope of the
forward contract exclusion. Nor is an FRA a commercial merchandising
transaction, as there is no physical product to be delivered in an
FRA.\144\ Accordingly,

the Commissions believe that the forward contract exclusion from the
swap definition for nonfinancial commodities does not apply to
FRAs.\145\
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    \144\ See Regulation of Hybrid and Related Instruments, 52 FR
47022, 47028, Dec. 11, 1987 (stating ``[FRAs] do not possess all of
the characteristics of forward contracts heretofore delineated by
the [CFTC]'').
    \145\ Current European Union law includes FRAs in the definition
of ``financial instruments.'' See Markets in Financial Instruments
Directive (MiFID), ``Directive 2004/39/EC of the European Parliament
and of the Council,'' Annex I(C), 4, 5, 10 (Apr. 21, 2004),
available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CONSLEG:2004L0039:20070921:EN:PDF. A European
Commission legislative proposal on derivatives, central clearing,
and trade repositories applies to FRAs that are traded over-the-
counter and, thus, would subject such transactions to mandatory
clearing, reporting and other regulatory requirements. See Proposal
for a Regulation of the European Parliament and of the Council on
OTC derivatives, central counterparties and trade repositories,
title I, art. 1(1), COM(2010) 484/5 (Sept. 15, 2010), available at
http://ec.europa.eu/internal_market/financial-markets/docs/derivatives/20100915_proposal_en.pdf.
---------------------------------------------------------------------------

    Based on the foregoing considerations, the Commissions are
proposing rules to provide greater clarity by explicitly defining the
term ``swap'' to include FRAs. As with the foreign exchange-related
products discussed above, the proposed rules provide that FRAs would
not be swaps if they fall within one of the exclusions set forth in
subparagraph (B) of the swap definition.
Request for Comment
    57. Is the description of FRAs accurate? If not, please provide a
detailed description of FRAs. Are there various types of FRAs? If so,
please provide an explanation of their characteristics and how they
differ.
    58. What types of market participants use FRAs, and for what
purposes? What market (spot) and fixed rates are used in FRAs, and how
are those rates determined, or on what are those rates based?
    59. Should the proposed rules explicitly define the term ``swap''
to include FRAs? Why or why not?
    60. Should the proposed rules provide a more detailed description
of what FRAs are? Why or why not? If so, please explain what additional
language regarding FRAs should be included in the proposed rules.
4. Combinations and Permutations of, or Options on, Swaps and Security-
Based Swaps
    Clause (A)(vi) of the swap definition provides that ``any
combination or permutation of, or option on, any agreement, contract,
or transaction described in any of clauses (i) through (v)'' of the
definition is a swap or security-based swap.\146\ As a result, clause
(A)(vi) means, for example, that an option on a swap or security-based
swap (commonly known as a ``swaption'') would itself be a swap or
security-based swap, respectively. The Commissions also interpret
clause (A)(vi) to mean that a ``forward swap'' would itself be a swap
or security-based swap, respectively.\147\
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    \146\ See CEA section 1a(47)(vi), 7 U.S.C. 1a(47)(vi).
    \147\ Forward swaps are also commonly known as forward start
swaps, or deferred or delayed start swaps. A forward swap can
involve two offsetting swaps that both start immediately, but one of
which ends on the deferred start date of the forward swap itself.
For example, if a counterparty wants to hedge its risk for four
years, starting one year from today, it could enter into a one-year
swap and a five-year swap, which would partially offset to create a
four-year swap, starting one year forward. A forward swap also can
involve a contract to enter into a swap or security-based swap at a
future date or with a deferred start date. A forward swap is not a
nonfinancial commodity forward contract or security forward, both of
which are excluded from the swap definition and discussed elsewhere
in this release.
---------------------------------------------------------------------------

Request for Comment
    61. Is additional guidance regarding swaptions, necessary? Why or
why not? If so, please provide a detailed explanation of what
additional guidance would be necessary.
    62. Is the Commissions' description of forward swaps accurate? Why
or why not? If not, please provide a detailed explanation of why the
description is inaccurate. Is additional guidance regarding forward
swaps necessary? Why or why not? If so, please provide a detailed
explanation of what additional guidance would be necessary.
    63. Is additional guidance regarding other combinations or
permutations of swaps or security-based swaps necessary? Why or why
not? If so, please provide a detailed description of any particular
agreement, contract, or transaction, including the purposes for which
it is used and the market participants that use it, and what additional
guidance would be necessary.
5. Contracts for Differences
    The Commissions have received inquiries over the years regarding
the treatment of CFDs under the CEA and the Federal securities laws. A
CFD generally is an agreement to exchange the difference in value of an
underlying asset between the time at which a CFD position is
established and the time at which it is terminated.\148\ If the value
increases, the seller pays the buyer the difference; if the value
decreases, the buyer pays the seller the difference. CFDs can be traded
on a number of products, including treasuries, foreign exchange rates,
commodities, equities, and stock indexes. Equity CFDs closely mimic the
purchase of actual shares. The buyer of an equity CFD receives cash
dividends and participates in stock splits.\149\ In the case of a long
position, a dividend adjustment is credited to the client's account. In
the case of a short position, a dividend adjustment is debited from the
client's account. CFDs generally are traded over-the-counter (though
they also are traded on the Australian Securities Exchange) in a number
of countries outside the United States.
---------------------------------------------------------------------------

    \148\ See Ontario Securities Commission, Staff Notice 91-702,
``Offerings of Contracts for Difference and Foreign Exchange
Contracts to Investors in Ontario,'' at part IV.1 (defining a CFD as
``a derivative product that allows an investor to obtain economic
exposure (for speculative, investment or hedging purposes) to an
underlying asset * * * such as a share, index, market sector,
currency or commodity, without acquiring ownership of the underlying
asset''), available at http://www.osc.gov.on.ca/documents/en/Securities-Category9/sn_20091030_91-702_cdf.pdf (Oct. 30, 2009);
Financial Services Authority, Consultation Paper 7/20, ``Disclosure
of Contracts for Difference--Consultation and draft Handbook text,''
at part 2.2 (defining a CFD on a share as ``a derivative product
that gives the holder an economic exposure, which can be long or
short, to the change in price of a specific share over the life of
the contract''), available at http://www.fsa.gov.uk/pubs/cp/cp07_20.pdf (Nov. 2007).
    \149\ See, e.g., Int'l Swaps and Derivatives Ass'n, ``2002 ISDA
Equity Derivatives Definitions,'' art. 10 (Dividends) and 11
(Adjustments and Modifications Affecting Indices, Shares and
Transactions).
---------------------------------------------------------------------------

    CFDs, unless otherwise excluded, may fall within the scope of the
swap and security-based swap definitions.\150\ Whether a CFD is a swap
or security-based swap will depend on the underlying product of that
particular CFD transaction. Because CFDs are highly variable and a CFD
can contain a variety of elements that would affect its
characterization, the Commissions believe that market participants will
need to analyze the characteristics of any particular CFD in order to
determine whether it is a swap or a security-based swap. Therefore, the
Commissions are not proposing rules or additional interpretive guidance
at this time regarding CFDs.
---------------------------------------------------------------------------

    \150\ In some cases, depending on the facts and circumstances,
the SEC may determine that a particular CFD on an equity security,
for example, should be characterized as constituting a purchase or
sale of the underlying equity security and, therefore, be subject to
the requirements of the Federal securities laws applicable to such
purchases or sales.
---------------------------------------------------------------------------

Request for Comment
    64. Should the Commissions provide additional guidance regarding
CFDs? Why or why not? If so, please provide a detailed description of
any particular CFD and what additional guidance would be necessary.

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
    The Commissions are aware that individuals and companies may
generally use the term ``swap'' to refer to certain of their
agreements, contracts, or transactions. For example, the term ``swap''
may be used to refer to an agreement to exchange real or personal
property between the parties. Or, two companies that produce fungible
products may use the term ``swap'' to refer to an agreement to perform
each other's delivery obligations--for example, if one company must
deliver the product in California and the other must deliver the same
product in New York, they may use the term ``swap'' to refer to an
agreement that each company will perform the other's delivery
obligation.
    The name or label that the parties use to refer to a particular
agreement, contract, or transaction is not determinative of whether it
is a swap or security-based swap.\151\ Also, it may not be relevant
whether the agreement, contract, or transaction is documented using an
industry standard form agreement that is typically used for swaps and
security-based swaps.\152\ Instead, the relevant question is whether
the agreement, contract, or transaction falls within the definition of
the terms ``swap'' or ``security-based swap'' (as further interpreted
pursuant to the guidance proposed herein) based on its terms and other
characteristics. Even if one effect of an agreement is to reduce the
risk faced by the parties (e.g., the ``swap'' of physical delivery
obligations described above may reduce the risk of non-delivery), the
agreement is not a swap or security-based swap unless it otherwise
meets one of the statutory definitions, as further defined by the
Commissions. Similarly, the fact that the parties use another name to
refer to a swap or security-based swap would not be relevant in
determining whether the agreement, contract, or transaction is a swap
or security-based swap as those terms are defined in the CEA and the
Exchange Act and the rules and regulations thereunder.
---------------------------------------------------------------------------

    \151\ See, e.g., Haekel v. Refco, 2000 WL 1460078, at * 4 (CFTC
Sept. 29, 2000) (``[T]he labels that parties apply to their
transactions are not necessarily controlling''); Reves v. Ernst &
Young, 494 U.S. 56, 61 (1990) (stating that the purpose of the
securities laws is ``to regulate investments, in whatever form they
are made and by whatever name they are called'') (emphasis in
original).
    \152\ The CFTC consistently has found that the form of a
transaction is not dispositive in determining its nature. See, e.g.,
Grain Land, supra note 61, at *16 (CFTC Nov. 25, 2003) (holding that
contract substance is entitled to at least as much weight as form);
In the Matter of First Nat'l Monetary Corp., [1984-1986 Transfer
Binder] Comm. Fut. L. Rep. (CCH) ] 22,698 at 30,974 (CFTC Aug. 7,
1985) (``When instruments have been determined to constitute the
functional equivalent of futures contracts neither we nor the courts
have hesitated to look behind whatever self-serving labels the
instruments might bear.''); Stovall, supra note 63 (holding that the
CFTC ``will not hesitate to look behind whatever label the parties
may give to the instrument''). Likewise, the form of a transaction
is not dispositive in determining whether an agreement, contract, or
transaction falls within the regulatory regime for securities. See
SEC v. Merch. Capital, LLC, 483 F.3d 747, 755 (11th Cir. 2007)
(``The Supreme Court has repeatedly emphasized that economic reality
is to govern over form and that the definitions of the various types
of securities should not hinge on exact and literal tests.'')
(quoting Williamson v. Tucker, 645 F.2d 404, 418 (5th Cir. 1981));
Robinson v. Glynn, 349 F.3d 166, 170 (4th Cir. 2003) (``What matters
more than the form of an investment scheme is the `economic reality'
that it represents * * * .'') (internal citation omitted); Caiola v.
Citibank, N.A., New York, 295 F.3d 312, 325 (2d Cir. 2002) (quoting
United Housing Foundation v. Foreman, 421 U.S. 837, 848 (1975) (``In
searching for the meaning and scope of the word `security' * * * the
emphasis should be on economic reality'')).
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Request for Comment
    65. What agreements, contracts, or transactions that are not swaps
or security-based swaps are documented using industry standard form
agreements that are typically used for swaps and security-based swaps?
Please provide examples of such agreements, contracts, or transactions
and details regarding their documentation, including why industry
standard form agreements typically used for swaps and security-based
swaps are used.
2. Transactions in Regional Transmission Organizations and Independent
System Operators
    The Commissions received a comment letter in response to the ANPR
requesting clarification regarding the status of transactions in RTOs
and ISOs, including financial transmission rights (``FTRs''), under the
swap and security-based swap definitions.\153\ Section 722 of the Dodd-
Frank Act, though, specifically addresses how the CFTC should approach
products regulated by FERC that also may be subject to CFTC
jurisdiction. Section 722 of the Dodd-Frank Act amended CEA section
4(c) \154\ to provide that, if the CFTC determines that an exemption
for FERC-regulated instruments or other specified electricity
transactions would be in accordance with the public interest, then it
shall exempt such instruments or transactions from the requirements of
the CEA. Given this specific provision regarding these FERC-related
products, the CFTC believes the treatment of these products should be
considered under the standards and procedures specified in section 722
of the Dodd-Frank Act for a public interest waiver, rather than through
this joint rulemaking to further define the terms ``swap'' and
``security-based swap.''
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    \153\ See WGCEF Letter.
    \154\ 7 U.S.C. 6(c).
---------------------------------------------------------------------------

    Consequently, the Commissions are not addressing FTRs or other
transactions in RTOs or ISOs within this joint definitional rulemaking.
Instead, persons with concerns about whether FERC-regulated products
may be considered swaps (or futures) should request an exemption
pursuant to section 722 of the Dodd Frank Act.\155\
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    \155\ This approach, however, should not be taken to suggest any
findings by the Commissions as to whether or not FTRs or any other
FERC-regulated products are swaps (or futures contracts).
---------------------------------------------------------------------------

III. The Relationship Between the Swap Definition and the Security-
Based Swap Definition

A. Introduction

    Title VII of the Dodd-Frank Act defines the term ``swap'' under the
CEA,\156\ and also defines the term ``security-based swap'' under the
Exchange Act.\157\ Pursuant to the regulatory framework established in
Title VII, the CFTC has regulatory authority over swaps and the SEC has
regulatory authority over security-based swaps. The Commissions are
proposing to further define the terms ``swap'' and ``security-based
swap'' to clarify whether particular agreements, contracts, or
transactions are swaps or security-based swaps based on characteristics
including the specific terms and conditions of the instrument and the
nature of, among other things, the prices, rates, securities, indexes,
or commodities upon which the instrument is based.
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    \156\ See CEA section 1a(47), 7 U.S.C. 1a(47).
    \157\ See section 3(a)(68) of the Exchange Act, 15 U.S.C.
78c(a)(68).
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    Because the discussion below is focused on whether particular
agreements, contracts, or transactions are swaps or security-based
swaps, the Commissions use the term ``Title VII instrument'' in this
release to refer to any agreement, contract, or transaction that is
included in either the definition of the term ``swap'' or the
definition of the term ``security-based swap.'' Thus, the term ``Title
VII instrument'' is synonymous with ``swap or security-based swap.''
\158\
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    \158\ In some cases, the Title VII instrument may be a mixed
swap. Mixed swaps are discussed further in part IV below.
---------------------------------------------------------------------------

    The determination of whether a Title VII instrument is a swap or
security-

based swap should be made based on the facts and circumstances relating
to the Title VII instrument at the time that the parties enter into it.
If the Title VII instrument itself is not amended, modified, or
otherwise adjusted during its term by the parties, its characterization
as a swap or security-based swap should not change during its duration
because of any changes that may occur to the factors affecting its
character as a swap or security-based swap.\159\
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    \159\ See discussion infra part III.G.3(a) regarding Title VII
instruments based on indexes.
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    Classifying a Title VII instrument as a swap or security-based swap
is straightforward for most instruments. The Commissions, however, are
proposing guidance to clarify the classification of swaps and security-
based swaps in certain areas and to provide guidance regarding the use
of certain terms and conditions in Title VII instruments.

B. Title VII Instruments Based on Interest Rates, Other Monetary Rates,
and Yields

    Parties frequently use Title VII instruments to manage risks
related to, or to speculate on, changes in interest rates, other
monetary rates or amounts, or the return on various types of assets.
Broadly speaking, Title VII instruments based on interest or other
monetary rates would be swaps, whereas Title VII instruments based on
the yield or value of a single security, loan, or narrow-based security
index would be security-based swaps. However, market participants and
financial professionals sometimes use the terms ``rate'' and ``yield''
in different ways. The Commissions are proposing guidance regarding
whether Title VII instruments that are based on interest rates, other
monetary rates, or yields would be swaps or security-based swaps and
requesting comment as to whether additional clarification in this area
would be appropriate.\160\
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    \160\ Commenters did not address these instruments specifically.
A number of commenters urged clarification that various transactions
or obligations, such as commercial loans, are not Title VII
instruments solely because they reference an interest rate. See
BlackRock Letter; Cleary Letter; Farm Credit Council Letter; White &
Case Letter. The Commissions have proposed guidance to address such
customary commercial transactions in part II.B.3 above.
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1. Title VII Instruments Based on Interest Rates or Other Monetary
Rates That Are Swaps
    The Commissions believe that when payments exchanged under a Title
VII instrument are based solely on the levels of certain interest rates
or other monetary rates that are not themselves based on one or more
securities, the instrument would be a swap and not a security-based
swap.\161\ Often swaps on interest rates or other monetary rates
require the parties to make payments based on the comparison of a
specified floating rate (such as the London Interbank Offered Rate
(``LIBOR'')) to a fixed rate of interest agreed upon by the parties. A
rate swap also may require payments based on the differences between
two floating rates, or it may require that the parties make such
payments when any agreed-upon events with respect to interest rates or
other monetary rates occur (such as when a specified interest rate
crosses a threshold, or when the spread between two such rates reaches
a certain point). The rates referenced for the parties' obligations are
varied, and examples of such rates include the following:
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    \161\ See discussion supra part III.F regarding the use of
certain terms and conditions.
---------------------------------------------------------------------------

     Interbank Offered Rates: An average of rates charged by a
group of banks for lending money to each other or other banks over
various periods of time, and other similar interbank rates,\162\
including, but not limited to, LIBOR (regardless of currency); \163\
the Euro Interbank Offered Rate (``Euribor''); the Canadian Dealer
Offered Rate (``CDOR''); and the Tokyo Interbank Offered Rate
(``TIBOR''); \164\
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    \162\ Interbank lending rates are measured by surveys of the
loan rates that banks offer other banks, or by other mechanisms. The
periods of time for such loans may range from overnight to 12 months
or longer.
     The interbank offered rates listed here are frequently called
either a ``reference rate,'' the rate of ``reference banks,'' or by
a designation that is specific to the service that quotes the rate.
For some of the interbank offered rates listed here, there is a
similar rate that is stated as an interbank bid rate, which is the
average rate at which a group of banks bid to borrow money from
other banks. For example, the bid rate similar to LIBOR is called
LIBID.
    \163\ Today, LIBOR is used as a rate of reference for the
following currencies: Australian Dollar, Canadian Dollar, Danish
Krone, Euro, Japanese Yen, New Zealand Dollar, Pound Sterling,
Swedish Krona, Swiss Franc, and U.S. Dollar.
    \164\ Other interbank offered rates include the following (with
the country or city component of the acronym listed in parentheses):
AIDIBOR (Abu Dhabi); BAIBOR (Buenos Aires); BKIBOR (Bangkok);
BRAZIBOR (Brazil); BRIBOR/BRIBID (Bratislava); BUBOR (Budapest);
CHIBOR (China); CHILIBOR (Chile); CIBOR (Copenhagen); COLIBOR
(Colombia); HIBOR (Hong Kong); JIBAR (Johannesburg); JIBOR
(Jakarta); KAIBOR (Kazakhstan); KIBOR (Karachi); KLIBOR (Kuala
Lumpur); KORIBOR ((South) Korea); MEXIBOR (Mexico); MIBOR (Mumbai);
MOSIBOR (Moscow); NIBOR (Norway); PHIBOR (Philippines); PRIBOR
(Prague); REIBOR/REIBID (Reykjavik); RIGIBOR/RIGIBID (Riga); SHIBOR
(Shanghai); SIBOR (Singapore); SOFIBOR (Sofia); STIBOR (Stockholm);
TAIBOR (Taiwan); TELBOR (Tel Aviv); TRLIBOR and TURKIBOR (Turkey);
VILIBOR (Vilnius); VNIBOR (Vietnam); and WIBOR (Warsaw).
---------------------------------------------------------------------------

     Money Market Rates: A rate established or determined based
on actual lending or money market transactions, including, but not
limited to, the Federal Funds Effective Rate; the Euro Overnight Index
Average (``EONIA'' or ``EURONIA'') (which is the weighted average of
overnight unsecured lending transactions in the Euro-area interbank
market); the EONIA Swap Index; the Australian dollar RBA 30 Interbank
Overnight Cash Rate; the Canadian Overnight Repo Rate Average
(``CORRA''); the Mexican interbank equilibrium interest rate
(``TIIE''); the NZD Official Cash Rate; the Sterling Overnight
Interbank Average Rate (``SONIA'') (which is the weighted average of
unsecured overnight cash transactions brokered in London by the
Wholesale Markets Brokers' Association); the Swiss Average Rate
Overnight (``SARON''); and the Tokyo Overnight Average Rate (``TONAR'')
(which is based on uncollateralized overnight average call rates for
interbank lending);
     Government Target Rates: A rate established or determined
based on guidance established by a central bank including, but not
limited to, the Federal Reserve discount rate, the Bank of England base
rate and policy rate, the Canada Bank rate, and the Bank of Japan
policy rate (also known as the Mutan rate);
     General Lending Rates: A general rate used for lending
money, including, but not limited to, a prime rate, rate in the
commercial paper market, or any similar rate provided that it is not
based on any security, loan, or group or index of securities;
     Indexes: A rate derived from an index of any of the
foregoing or following rates, averages, or indexes, including but not
limited to a constant maturity rate (U.S. Treasury and certain other
rates),\165\ the interest rate swap rates published by the Federal
Reserve in its ``H.15 Selected Interest Rates'' publication, the
ISDAFIX rates, the ICAP Fixings, a constant maturity swap, or a rate
generated as an average (geometric, arithmetic, or otherwise) of any of
the foregoing, such as overnight index swaps (``OIS'')--provided that
such rates are not based on a specific

security, loan, or narrow-based group or index of securities;
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    \165\ A Title VII instrument based solely on the level of a
constant maturity U.S. Treasury rate would be a swap because U.S.
Treasuries are exempted securities that are excluded from the
security-based swap definition. Conversely, a Title VII instrument
based solely on the level of a constant maturity rate on a narrow-
based index of non-exempted securities under the security-based swap
definition would be a security-based swap.
---------------------------------------------------------------------------

     Other Monetary Rates: A monetary rate including, but not
limited to, the Consumer Price Index (``CPI''), the rate of change in
the money supply, or an economic rate such as a payroll index; and
     Other: The volatility, variance, rate of change of (or the
spread, correlation or difference between), or index based on any of
the foregoing rates or averages of such rates, such as forward spread
agreements, references used to calculate the variable payments in index
amortizing swaps (whereby the notional principal amount of the
agreement is amortized according to the movement of an underlying
rate), or correlation swaps and basis swaps, including but not limited
to, the ``TED spread'' \166\ and the spread or correlation between
LIBOR and an OIS.
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    \166\ The TED spread is the difference between the interest
rates on interbank loans and short-term U.S. government debt
(Treasury bills or ``T-bills''). The latter are exempted securities
that are excluded from the statutory definition of the term
``security-based swap.'' Thus, neither any aspect of U.S. Treasuries
nor interest rates on interbank loans, can form the basis of a
security-based swap. For this reason, a Title VII instrument on a
spread between interbank loan rates and T-bill rates also would not
be a security-based swap.
---------------------------------------------------------------------------

    As discussed above, the Commissions believe that when payments
under a Title VII instrument are based solely on any of the foregoing,
such Title VII instrument would be a swap.
Request for Comment
    66. The Commissions request comment generally on the foregoing
proposed guidance regarding Title VII instruments where the underlying
reference is an interest rate or other monetary rate.
    67. Does the proposed guidance in this section accurately describe
the types of interest rates and other monetary rates that are used as
an underlying reference of a Title VII instrument, and that should
cause the instrument to be considered a swap? Are any of the rates
identified in this list not used in this manner? Are there any
significant interest or monetary rates that should be added to this
list in order to provide additional guidance?
    68. As discussed above, a Title VII instrument would be considered
a security-based swap if the instrument is based on constant maturity
rates that are derived from the market prices and yields of a non-
exempted debt security or a narrow-based security index of debt
securities (depending on the other terms of the Title VII instrument,
such instrument may be a mixed swap). The Commissions request comment
on this guidance. Are there certain constant maturity rates that should
not be considered to be security-based, such that a Title VII
instrument based on those rates would instead be a swap and not a
security-based swap or mixed swap? If so, are there objective criteria
to distinguish between different types of constant maturity rates in
the determination of whether a Title VII instrument is a swap or
security-based swap? If so, please describe any such criteria in
detail.
2. Title VII Instruments Based on Yields
    The Commissions also propose guidance to clarify the status of
Title VII instruments in which one of the underlying references of the
instrument is a ``yield.'' In cases when a ``yield'' is calculated
based on the price or changes in price of a debt security, loan, or
narrow-based security index, it is another way of expressing the price
or value of a debt security, loan, or narrow-based security index. For
example, debt securities often are quoted and traded on a yield basis
rather than on a dollar price, where the yield relates to a specific
date, such as the date of maturity of the debt security (i.e., yield to
maturity) or the date upon which the debt security may be redeemed or
called by the issuer (e.g., yield to first whole issue call).\167\
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    \167\ See, e.g., Securities Confirmations, 47 FR 37920, Aug. 27,
1982.
---------------------------------------------------------------------------

    Except in the case of certain exempted securities, when one of the
underlying references of the Title VII instrument is the ``yield'' of a
debt security, loan, or narrow-based security index in the sense where
the term ``yield'' is used as a proxy for the price or value of the
debt security loan, or narrow-based security index, the Title VII
instrument would be a security-based swap. And, as a result, in cases
where the underlying reference is a point on a ``yield curve''
generated from the different ``yields'' on debt securities in a narrow-
based security index (e.g., a constant maturity yield or rate), the
Title VII instrument would be a security-based swap. In either case,
however, where certain exempted securities, such as U.S. Treasury
securities, are the only underlying reference of a Title VII instrument
involving securities, the Title VII instrument would be a swap. Title
VII instruments based on exempted securities are discussed further
below.
    The above interpretation would not apply in cases where the
``yield'' referenced in a Title VII instrument is not based on a debt
security, loan, or narrow-based security index of debt securities but
rather is being used to reference an interest rate or monetary rate as
outlined above in subsection one of this section. In these cases, this
``yield'' reference would be considered equivalent to a reference to an
interest rate or monetary rate and the Title VII instrument would be,
under the guidance in this section, a swap (or mixed swap depending on
other references in the instrument).
Request for Comment
    69. The Commissions request comment generally on the foregoing
proposed guidance regarding Title VII instruments where the underlying
reference is a ``yield.'' Please provide a detailed explanation of any
uncertainty regarding the Commissions' proposed use of the terms
``yield'' and ``yield curve'' and what additional guidance would be
necessary.
    70. Does the proposed guidance in this section appropriately
describe instruments based on the ``yield'' of a debt security that
should be considered security-based swaps? Is additional guidance
necessary regarding when the term ``yield'' is used as a proxy for
price or value? If so, please provide a detailed explanation of any
uncertainty regarding how the term ``yield'' is used and what
additional guidance would be necessary.
    71. Are there instruments where the underlying reference is a
``yield'' of a debt security that should be considered a swap as
opposed to a security-based swap? If so, what are they, and how often
are they traded? How are such instruments distinguished from
instruments based on ``yield'' that should be considered security-based
swaps?
3. Title VII Instruments Based on Government Debt Obligations
    The Commissions also are providing guidance regarding instances in
which the underlying reference of the Title VII instrument is a
government debt obligation. The security-based swap definition
specifically excludes any agreement, contract, or transaction that
meets the definition of a security-based swap only because it
``references, is based upon, or settles through the transfer, delivery,
or receipt of an exempted security under [section 3(a)(12) of the
Exchange Act], as in effect on the date of enactment of the Futures
Trading Act of 1982 (other than any municipal security as defined in
[section 3(a)(29) of the Exchange Act] * * *), unless such agreement,
contract, or transaction is of the character of, or

is commonly known in the trade as, a put, call, or other option.''
\168\
---------------------------------------------------------------------------

    \168\ Section 3(a)(68)(C) of the Exchange Act, 15 U.S.C.
76c(a)(68)(C).
---------------------------------------------------------------------------

    As a result of this exclusion in the security-based swap definition
for ``exempted securities,'' \169\ if the only underlying reference of
a Title VII instrument involving securities is, for example, the price
of a U.S. Treasury security and does not have any other underlying
reference involving securities, then the instrument would be a swap.
Similarly, if the Title VII instrument is based on the ``yield'' of a
U.S. Treasury security and does not have any other underlying reference
involving securities, then the instrument also would be a swap,
regardless of whether the term ``yield'' is a proxy for the price of
the security.
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    \169\ As of January 11, 1983, the date of enactment of the
Futures Trading Act of 1982, Public Law 97-444, 96 Stat. 2294,
section 3(a)(12) of the Exchange Act, 15 U.S.C. 78c(a)(12), provided
that, among other securities, ``exempted securities'' include: (i)
``securities which are direct obligations of, or obligations
guaranteed as to principal or interest by, the United States;'' (ii)
certain securities issued or guaranteed by corporations in which the
United States has a direct or indirect interest as designated by the
Secretary of the Treasury; and (iii) certain other securities as
designated by the SEC in rules and regulations.
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    Foreign government securities, by contrast, were not ``exempted
securities'' as of the date of enactment of the Futures Trading Act of
1982 \170\ and thus do not explicitly fall within this exclusion from
the security-based swap definition. Therefore, if the underlying
reference of the Title VII instrument is the price, value, or ``yield''
(where ``yield'' is a proxy for price or value) of a foreign government
security, or a point on a yield curve derived from a narrow-based
security index composed of foreign government securities, then the
instrument would be a security-based swap.
---------------------------------------------------------------------------

    \170\ Public Law 97-444, 96 Stat. 2294 (1983).
---------------------------------------------------------------------------

Request for Comment
    72. The Commissions request comment generally on the foregoing
proposed guidance regarding the treatment of Title VII instruments in
which the underlying reference is a government debt obligation.
    General Request for Comment: In addition to the particular requests
for comment set forth on the issues discussed above, the Commissions
also request comment generally on the following:
    73. Does the proposed guidance in this part III.B accurately
describe market practices and terminology? Will the proposed guidance
be useful in determining whether Title VII instruments are swaps or
security-based swaps?

C. Total Return Swaps

    A TRS is a Title VII instrument in which one counterparty, the
seller of the TRS, makes a payment that is based on the price
appreciation and income from an underlying security or security
index.\171\ The other counterparty, the buyer of the TRS, makes a
financing payment that is often based on a variable interest rate, such
as LIBOR (or other interbank offered rate or money market rate, as
described above), as well as a payment based on the price depreciation
of the underlying reference. The ``total return'' consists of the price
appreciation or depreciation, plus any interest or income
payments.\172\ Accordingly, where a TRS is based on a single security
or loan, or a narrow-based security index, the TRS would be a security-
based swap.\173\
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    \171\ Where the underlying security is an equity, a TRS is also
known as an ``equity swap.''
    \172\ If the total return is negative, the seller receives this
amount from the buyer. TRS can be used to synthetically reproduce
the payoffs of a position. For example, two counterparties may enter
into a 3-year TRS where the buyer of the TRS receives the positive
total return on XYZ security, if any, and the seller of the TRS
receives LIBOR plus 30 basis points and the absolute value of the
negative total return on XYZ security, if any.
    \173\ If the underlying reference of the TRS is a broad-based
equity security index, however, the Commissions believe that it
would be a swap (and an SBSA) and not a security-based swap. In
addition, a TRS on an exempted security, such as a U.S. Treasury,
under section 3(a)(12) of the Exchange Act, 15 U.S.C. 78c(a)(12), as
in effect on the date of enactment of the Futures Trading Act of
1982 (other than any municipal security as defined in section
3(a)(29) of the Exchange Act, 15 U.S.C. 78c(a)(29), as in effect on
the date of enactment of the Futures Trading Act of 1982) would be a
swap (and an SBSA) and not a security-based swap.
---------------------------------------------------------------------------

    Generally, the use of a variable interest rate in the TRS buyer's
payment obligations to the seller is incidental to the purpose of, and
the risk that the counterparties assume in, entering into the TRS.
These payments are a form of financing that reflects the security-based
swap dealer's cost of financing the position or a related hedge,
allowing the TRS buyer to receive payments based on the price
appreciation and income of a security or security index without
purchasing the security or security index. The Commissions believe that
when such interest rate payments act merely as a financing component in
a TRS, or in any other security-based swap, the inclusion of such
interest rate terms would not cause the security-based swap to be
characterized as a mixed swap.\174\ Financing terms may also involve
adding or subtracting a spread to or from the financing rate,\175\ or
calculating the financing rate in a currency other than that of the
underlying reference security or security index.\176\ However, the
Commissions note that where such payments incorporate additional
elements that create additional interest rate or currency exposures
that are unrelated to the financing of the security-based swap, or
otherwise shift or limit risks that are related to the financing of the
security-based swap, those additional elements may cause the security-
based swap to be a mixed swap.
---------------------------------------------------------------------------

    \174\ Several commenters noted that such instruments should not
be characterized as mixed swaps. See Cleary Letter (expressing the
view that such Title VII instruments should not be characterized as
mixed swaps because ``the floating rate payment obligation is not
the principal driver of the security-based swap and, in that sense,
the security-based swap is not `based on' the level of an interest
rate within the meaning of [the Dodd-Frank Act]''); Deutsche Bank
Letter (explaining that such Title VII instruments in which the
party that is ``synthetically short'' the underlying security makes
payments based on the value of the underlying security to the party
that is ``synthetically long,'' and the synthetically long party
pays the synthetically short party an amount that may be based on
LIBOR or another interest rate, should not be treated as mixed swaps
because the payments to the synthetically short party are generally
intended only for financing costs incurred in establishing or
maintaining the transaction or its hedge); ISDA Letter (noting that
variable interest rate-based payments in connection with a typical
Title VII instrument of this type are ``incidental to what is
essentially a security-based transaction and should not yield mixed
swap status''); Morgan Stanley Letter (noting that the interest
rate-based payments in such Title VII instruments ``reflect
compensation for the financing costs associated'' with the
instrument and ``are not at the core of what is being `swapped'
under the contract''); Letter from Timothy W. Cameron, Esq.,
Managing Director, Asset Management Group, Securities Industry and
Financial Markets Association, Sept. 20, 2010 (expressing the view
that such a financing component is incidental to the Title VII
instrument and should not cause it to be viewed as a mixed swap).
    \175\ See, e.g., Moorad Chowdry, ``Total Return Swaps: Credit
Derivatives and Synthetic Funding Instruments,'' at 3-4 (noting that
the spread to the TRS financing rate is a function of: the credit
rating of the counterparty paying the financing rate; the amount,
value, and credit quality of the reference asset; the dealer's
funding costs; a profit margin; and the capital charge associated
with the TRS), available at http://www.yieldcurve.com/Mktresearch/LearningCurve/TRS.pdf.
    \176\ For example, a security-based swap on an equity security
priced in U.S. dollars in which payments are made in Euros based on
the U.S. dollar/Euro spot rate at the time the payment is made would
not be a mixed swap. Under these circumstances, the currency is
merely referenced in connection with the method of payment, and the
counterparties are not hedging the risk of changes in currency
exchange rates during the term of the security-based swap.
---------------------------------------------------------------------------

    For example, where the counterparties embed interest-rate
optionality (e.g., a cap, collar, call, or put) into the terms of a
security-based swap in a manner designed to shift or limit interest
rate exposure, the inclusion of these terms would cause

the TRS to be both be a swap and a security-based swap (i.e., a mixed
swap). Similarly, if a TRS is also based on non-security-based
components (such as the price of oil, or a currency), the security-
based swap would also be a swap.\177\
---------------------------------------------------------------------------

    \177\ See Mixed Swaps, infra part IV.
---------------------------------------------------------------------------

Request for Comment
    74. Is the proposed guidance regarding TRS and other security-based
swaps for which the use of a variable interest rate in a counterparty's
payment obligations is incidental to the risk that counterparties
assume in entering into a TRS or other security-based swap appropriate?
Why or why not? If not, please provide a detailed explanation of what
guidance would be appropriate.
    75. How often do market participants use rates, other than
interbank offered rates or money market rates, in TRS to recoup their
financing costs? If so, which rates and what portion of the market
(broken down by product, country, counterparty type, and/or whatever
data are available to commenters), in percentage and/or dollar terms do
TRS with such financing rates constitute? What factors influence the
financing rates that market participants incorporate into their
security-based swaps?
    76. Do market participants embed optionality, such a cap, collar,
put, or call, into the payment component of a TRS? If so, how
frequently and for what purpose?
    77. Do market participants embed nonfinancial commodity components
into the payment component that directly affect the payments on a TRS
rather than operating as a mere financing component? If so, how
frequently and for what purpose?
    78. Do market participants embed foreign currency swaps into a
foreign currency payment component of a TRS? If so, how frequently and
for what purpose?
    79. Are there other circumstances under which a TRS should be
treated as a mixed swap rather than a security-based swap or swap? If
so, please provide a detailed description of such circumstances and
explain why.

D. Security-Based Swaps Based on a Single Security or Loan and Single-
Name Credit Default Swaps

    The second prong of the security-based swap definition includes a
swap that is based on ``a single security or loan, including any
interest therein or on the value thereof.'' \178\ The Commissions
believe that, under this prong of the definition of security-based
swap, a single-name CDS that is based on a single reference obligation
would be a security-based swap because it would be based on a single
security or loan (or any interest therein or on the value thereof).
---------------------------------------------------------------------------

    \178\ Section 3(a)(68)(A)(ii)(II) of the Exchange Act, 15 U.S.C.
78c(a)(68)(A)(ii)(II). The first prong of the security-based swap
definition is discussed below.
---------------------------------------------------------------------------

    In addition, the third prong of the security-based swap definition
includes a swap that is based on the occurrence of an event relating to
a ``single issuer of a security,'' provided that such event ``directly
affects the financial statements, financial condition, or financial
obligations of the issuer.'' \179\ This provision applies generally to
event-triggered swap contracts. With respect to a CDS, such events
could include the bankruptcy of an issuer, a default on one of an
issuer's debt securities, or the default on a non-security loan of an
issuer.\180\ Therefore, the Commissions believe that if the payout on a
CDS on a single issuer of a security is triggered by the occurrence of
an event relating to that issuer, the CDS would be a security-based
swap under the third prong.\181\
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    \179\ Section 3(a)(68)(A)(ii)(III) of the Exchange Act, 15
U.S.C. 78c(a)(68)(A)(ii)(III).
    \180\ The Commissions understand that in the context of credit
derivatives on asset-backed securities or MBS, the events include
principal writedowns, failure to pay principal and interest
shortfalls.
    \181\ The Commissions understand that some single-name CDS now
trade with fixed coupon payments expressed as a percentage of the
notional amount of the transaction and payable on a periodic basis
during the term of the transaction. See Markit, ``The CDS Big Bang:
Understanding the Changes to the Global CDS Contract and North
American Conventions,'' 3, available at http://www.markit.com/cds/announcements/resource/cds_big_bang.pdf. The Commissions believe
the existence of such single-name CDS does not change their
interpretation.
---------------------------------------------------------------------------

    In this regard, the Commissions note that each transaction under an
ISDA Master Agreement would need to be analyzed to determine whether it
is a swap or security-based swap. For example, the Commissions believe
that a number of single-name CDS that are executed at the same time and
that are documented under one ISDA Master Agreement, but in which a
separate confirmation is sent for each CDS, should be treated as an
aggregation of security-based swaps. As a practical and economic
matter, the Commissions believe that each such CDS would be a separate
and independent transaction. Thus, such an aggregation of single-name
CDS would not constitute a ``group or index'' under the security-based
swap definition but instead would constitute multiple single-name CDS.

E. Title VII Instruments Based on Futures Contracts

    A Title VII instrument that is based on a futures contract will
either be a swap or a security-based swap, or both (i.e., a mixed
swap), depending on the nature of the futures contract, including the
underlying reference of the futures contract. The Commissions believe
that a Title VII instrument where the underlying reference is a
security future would be a security-based swap.\182\ The Commissions
believe that, except with respect to certain futures on foreign
government debt securities discussed below, a Title VII instrument
where the underlying reference is a futures contract that is not a
security future would be a swap.\183\
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    \182\ A security future is specifically defined in both the CEA
and the Exchange Act as a futures contract on a single security or a
narrow-based security index, including any interest therein or based
on the value thereof, except an exempted security under section
3(a)(12) of the Exchange Act, 15 U.S.C. 78c(a)(12), as in effect on
the date of enactment of the Futures Trading Act of 1982 (other than
any municipal security as defined in section 3(a)(29) of the
Exchange Act, 15 U.S.C. 78c(a)(29), as in effect on the date of
enactment of the Futures Trading Act of 1982).
    The term security future does not include any agreement,
contract, or transaction excluded from the CEA under CEA sections
2(c), 2(d), 2(f), or 2(g), 7 U.S.C. 2(c), 2(d), 2(f), or 2(g), (as
in effect on the date of enactment of the Commodity Futures
Modernization Act of 2000 (``CFMA'') or Title IV of the CFMA). See
CEA section 1a(44), 7 U.S.C. 1a(44); section 3(a)(55) of the
Exchange Act, 15 U.S.C. 78c(a)(55).
    \183\ Depending on the underlying reference of the futures
contract, though, such swaps could be security-based swap
agreements. For example, a swap on a future on the S&P 500 index
would be a security-based swap agreement.
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    Title VII instruments involving futures contracts on foreign
government debt securities present a unique circumstance. Rule 3a12-8
under the Exchange Act exempts certain foreign government debt
securities, for purposes only of the offer, sale, or confirmation of
sale of futures contracts on such foreign government debt securities,
from all provisions of the Exchange Act which by their terms do not
apply to an ``exempted security,'' subject to certain conditions.\184\
To date, the SEC has

enumerated within rule 3a12-8 debt securities of 21 identified foreign
governments solely for purposes of futures trading.\185\
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    \184\ Specifically, rule 3a12-8 under the Exchange Act requires
as a condition to the exemption that the foreign government debt
securities not be registered under the Securities Act (or the
subject of any American depositary receipt registered under the
Securities Act) and that futures contracts on such foreign
government debt securities ``require delivery outside the United
States, [and] any of its possessions or territories, and are traded
on or through a board of trade, as defined in [CEA section 2, 7
U.S.C. 2].'' See rules 3a12-8(b), 3a12-8(a)(2) under the Exchange
Act, 17 CFR 240.3a12-8(b) and 240.3a12-8(a)(2).These conditions were
``designed to minimize the impact of the exemption on securities
distribution and trading in the United States . . . .'' See
Exemption for Certain Foreign Government Securities for Purposes of
Futures Trading, 49 FR 8595, 8596-97, Mar. 8, 1984 (citing Futures
Trading Act of 1982).
    \185\ See rule 3a12-8(a)(1) under the Exchange Act (designating
the debt securities of the governments of the United Kingdom,
Canada, Japan, Australia, France, New Zealand, Austria, Denmark,
Finland, the Netherlands, Switzerland, Germany, Ireland, Italy,
Spain, Mexico, Brazil, Argentina, Venezuela, Belgium, and Sweden).
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    The Commissions are evaluating the appropriate characterization of
Title VII instruments based on futures on such foreign government debt
securities that are traded in reliance on rule 3a12-8. The Commissions
recognize that as a result of the rule 3a12-8 exemption, futures on
foreign government debt securities of 21 foreign countries trade
pursuant to the CFTC's exclusive jurisdiction and without the futures
being considered security futures. Because futures contracts on the 21
foreign government debt securities designated in rule 3a12-8 are not
security futures, applying the above interpretive guidance to a Title
VII instrument on a futures contract on these foreign government debt
securities would mean that such Title VII instrument would be a
swap.\186\ The Commissions note, however, that the conditions in the
rule 3a12-8 exemption were established specifically for trading futures
contracts on these foreign sovereign debt obligations, not Title VII
instruments based on futures contracts on foreign government debt
securities. Furthermore, the Commissions note that the Dodd-Frank Act
did not exclude debt securities of foreign governments from the
definition of security-based swap. Therefore, a Title VII instrument
based on such debt securities would be a security-based swap. Relying
on rule 3a12-8 for the treatment of Title VII instruments on such
futures would therefore result in different treatments depending on
whether the Title VII instrument is based on a foreign government debt
security or on a future that is in turn based on a foreign government
debt security.\187\ On the other hand, to do otherwise would create
different regulators for a future and Title VII instruments based on
that future.
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    \186\ The Commissions note, by contrast, that a Title VII
instrument that is based on the price or value of, or settlement
into, a futures contract on one of the 21 foreign government debt
securities designated in rule 3a12-8 and that is also based on the
price or value of, or had the potential to settle directly into, the
foreign debt security, would be a security-based swap and, depending
on other features of the Title VII instrument, possibly a mixed
swap.
    \187\ This is the case today (i.e., different treatments) with
respect to, for example, options on broad-based security indexes and
options on futures on broad-based security indexes.
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    The SEC believes that the characterization of a Title VII
instrument involving a foreign government debt security may affect
Federal securities law provisions relating to the distribution of the
underlying foreign debt security. Specifically, the Dodd-Frank Act
included provisions that would not permit issuers, affiliates of
issuers, or underwriters to use security-based swaps to offer or sell
the issuers' securities underlying a security-based swap without
complying with the requirements of the Securities Act.\188\ In
addition, the Dodd-Frank Act provided that any offer and sale of
security-based swaps to non-ECPs would have to be registered under the
Securities Act.\189\ Thus, for example, if a Title VII instrument on a
future on foreign government debt security is characterized as a swap,
and not a security-based swap, then the provisions of the Dodd-Frank
Act enacted to ensure that there could not be offers and sales of
securities made without compliance with the Securities Act, either by
issuers, their affiliates, or underwriters or to non-ECPs, would not
apply to such swap transactions.
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    \188\ See section 2(a)(3) of the Securities Act as amended by
the Dodd-Frank Act, 15 U.S.C. 77b(a)(3). This provision applies
regardless of whether the Title VII instrument allows the parties to
physically settle any such security-based swap.
    \189\ See section 5 of the Securities Act as amended by the
Dodd-Frank Act. 15 U.S.C. 77e.
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    On the other hand, the CFTC believes that characterizing Title VII
instruments based on a future on a foreign government debt security
designated in rule 3a12-8 as security-based swaps could undermine the
regulatory scheme that Congress established in the CEA. As noted above,
the Commissions generally would treat Title VII instruments based on
futures that are not security futures as swaps. Many of the futures on
the 21 foreign government debt securities designated in rule 3a12-8
trade with substantial volume. Section 753 of the Dodd-Frank Act
provided the CFTC with additional antifraud and anti-manipulation
authorities patterned on those provided to the SEC in the Federal
securities laws. The CFTC believes that treating Title VII instruments
based on these futures as security-based swaps, while the underlying
futures come under the CEA, may undermine those authorities.
    In sum, depending on how a Title VII instrument on such a future on
a foreign government debt security is characterized, there is potential
for such an instrument: (i) to be used to avoid the application of the
Federal securities laws, including the Dodd-Frank Act provisions, that
otherwise would apply if the Title VII instrument was instead based on
the foreign government debt security directly; or (ii) to be used to
avoid the application of the CEA, including the Dodd-Frank Act
provisions, that otherwise would apply if the Title VII instrument was
instead based on any other futures contract that is not a security
future. Accordingly, the Commissions also are evaluating whether a
Title VII instrument on such a futures contract on a foreign government
debt security should be characterized as a mixed swap.
Request for Comment
    80. The Commissions request comment generally on the foregoing
discussion regarding Title VII instruments based on futures contracts
and security futures.
    81. What types of such products are traded in the market today? How
often, and where are such products traded?
    82. The Commissions are requesting comment on how to characterize a
Title VII instrument where the underlying reference is a futures
contract on one of the 21 foreign government debt securities that have
been designated as ``exempted securities'' under rule 3a12-8 only for
the offer, sale, or confirmation of sale of futures contracts on such
securities and only where the conditions of such exemption are
satisfied. When should a Title VII instrument on a futures contract on
a foreign government debt security being traded in reliance on the
exemption under rule 3a12-8 be treated as a swap, a security-based swap
or a mixed swap? Is there any economic reason why the treatment of a
Title VII instrument on a future on a foreign government debt security
should be different than the treatment of a Title VII instrument on the
foreign government debt security directly? Is there any economic reason
why the treatment of a Title VII instrument on a future on a designated
foreign government debt security should be different than the treatment
of a Title VII instrument on any other futures contract that is not a
security future? If the answer to either of the two preceding questions
is yes, please explain and provide empirical analysis. If the Title VII
instrument is able to be entered into by the issuer, affiliate of the
issuer, or an underwriter, or if the Title VII instrument is being
offered and sold to non-ECPs, should the Title VII instrument be viewed
as a security-based swap or a mixed swap so that market participants
cannot chose

whether to comply with the registration requirements of the Securities
Act with respect to the foreign government debt securities? Should such
an instrument be viewed as a swap or a mixed swap so that market
participants cannot choose whether to comply with the requirements of
the Dodd-Frank Act concerning clearing, trade execution, reporting, and
standards applicable to dealers and major participants that apply to
Title VII instruments on futures contracts that are not security
futures? Are there other suggested approaches to the treatment of Title
VII instruments on futures on foreign government debt securities that
would preserve the application of the Securities Act as contemplated by
the Dodd-Frank Act to Title VII instruments involving foreign
government debt securities? Are there other suggested approaches to the
treatment of Title VII instruments on futures on foreign government
debt securities that would preserve the application of the CEA as
contemplated by the Dodd-Frank Act to Title VII instruments involving
futures contracts that are not security futures? If the answer to
either of the two preceding questions is yes, please provide detail and
analysis.

F. Use of Certain Terms and Conditions in Title VII Instruments

    The Commissions are aware that market participants' setting of
certain fixed terms or conditions of Title VII instruments may be
informed by the value or level of a security, rate, or other commodity
at the time of the execution of the instrument. The Commissions believe
that, in evaluating whether such a Title VII instrument is a swap or
security-based swap, the nature of the security, rate, or other
commodity that informed the setting of such fixed term or condition
should not itself impact the determination of whether the Title VII
instrument is a swap or a security-based swap, provided that the fixed
term or condition is set at the time of execution of the Title VII
instrument and the value or level of that fixed term or condition may
not vary over the life of the Title VII instrument.
    For example, a Title VII instrument, such as an interest rate swap,
in which floating payments based on 3-month LIBOR are exchanged for
fixed rate payments of 5% would be a swap, and not a security-based
swap, even if the 5% fixed rate was informed by, or quoted based on,
the yield of a security, provided that the 5% fixed rate was set at the
time of execution and may not vary over the life of the Title VII
instrument.\190\ Another example would be where a private sector or
government borrower that issues a 5-year, amortizing $100 million debt
security with a semi-annual coupon of LIBOR plus 250 basis points also,
at the same time, chooses to enter into a 5-year interest rate swap on
$100 million notional in which this same borrower, using the same
amortization schedule as the debt security, receives semi-annual
payments of LIBOR plus 250 basis points in exchange for 5% fixed rate
payments. The fact that the specific terms of the interest rate swap
(e.g., 5-year, LIBOR plus 250 basis point, $100 million notional, fixed
amortization schedule) were set at the time of execution to match
related terms of a debt security does not cause the interest rate swap
to become a security-based swap. However, if the interest rate swap
contained additional terms that were in fact contingent on a
characteristic of the debt security that may change in the future, such
as an adjustment to future interest rate swap payments based on the
future price or yield of the debt security, then this Title VII
instrument would be a security-based swap that would be a mixed swap.
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    \190\ However, to the extent the fixed term or condition is set
at a future date or at a future value or level of a security, rate,
or other commodity rather than the value or level of such security,
rate, or other commodity at the time of execution of the Title VII
instrument, the discussion above would not apply, and the nature of
the security, rate, or other commodity used in determining the terms
or conditions would be considered in evaluating whether the Title
VII instrument is a swap or security-based swap.
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Request for Comment
    83. Is the guidance provided by the Commissions regarding the
relevance of the nature of a security, rate, or other commodity that
informs the determination of a fixed term or condition of a Title VII
instrument appropriate? Why or why not? If not, what guidance would be
appropriate?
    84. The Commissions are aware that quoting conventions are used in
the context of setting the fixed terms of certain Title VII
instruments, such as interest rate swaps that exchange LIBOR for a
fixed rate that is set at the time of execution by reference to U.S.
Treasury securities.\191\ Are there other Title VII instruments that
use such quoting conventions? If so, please provide a detailed
explanation of such Title VII instruments and the references they use.
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    \191\ The Commissions note that such Title VII instruments would
be swaps in any event because U.S. Treasury securities are exempted
securities that are excluded from the security-based swap definition
in Title VII but understand that such swaps use the reference or
quoting convention described above in setting the terms or
conditions of the Title VII instrument at the time of execution.
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G. The Term ``Narrow-Based Security Index'' in the Security-Based Swap
Definition

1. Introduction\192\
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    \192\ Four commenters referred to the definition of the term
``narrow-based security index,'' each in the context of CDS. See
infra notes 209 and 211.
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    As noted above, a Title VII instrument in which the underlying
reference of the instrument is a ``narrow-based security index'' is
considered a security-based swap subject to regulation by the SEC,
whereas a Title VII instrument in which the underlying reference of the
instrument is a security index that is not a narrow-based security
index (i.e., the index is broad-based), the instrument is considered a
swap subject to regulation by the CFTC. In this section, the
Commissions propose rules and guidance regarding several issues
regarding the term ``narrow-based security index'' in the security-
based swap definition, including: (i) The existing criteria for
determining whether a security index is a narrow-based security index
and the applicability of past guidance of the Commissions regarding
those criteria to Title VII instruments; (ii) new criteria for
determining whether a CDS where the underlying reference is a group or
index of entities or obligations of entities (typically referred to as
an ``index CDS'') is based on an index that is a narrow-based security
index; (iii) the meaning of the term ``index''; (iv) a rule governing
the tolerance period for Title VII instruments on security indexes
traded on DCMs, SEFs, foreign boards of trade (``FBOTs''), security-
based SEFs, or NSEs, where the security index temporarily moves from
broad-based to narrow-based or from narrow-based to broad-based; and
(v) a rule governing the grace period for Title VII instruments on
security indexes traded on DCMs, SEFs, FBOTs, security-based SEFs, or
NSEs, where the security index moves from broad-based to narrow-based
or from narrow-based to broad-based and the move is not temporary.
2. Applicability of the Statutory Narrow-Based Security Index
Definition and Past Guidance of the Commissions to Title VII
Instruments
    As defined in the CEA and Exchange Act,\193\ an index is a
``narrow-based

security index'' if, among other things, it meets any one of the
following four criteria:
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    \193\ Sections 3(a)(55)(B) and (C) of the Exchange Act, 15
U.S.C. 78c(a)(55)(B) and (C), include a definition of ``narrow-based
security index'' in the same paragraph as the definition of security
future. See also CEA sections 1a(35)(A) and (B), 7 U.S.C. 1a(35)(A)
and (B). A security future is a contract for future delivery on a
single security or narrow-based security index (including any
interest therein or based on the value thereof). See section
3(a)(55) of the Exchange Act, 15 U.S.C. 78c(a)(55), and CEA section
1a(44), 7 U.S.C. 1a(44).
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     It has nine or fewer component securities;
     A component security comprises more than 30% of the
index's weighting;
     The five highest weighted component securities in the
aggregate comprise more than 60% of the index's weighting; or
     The lowest weighted component securities comprising, in
aggregate, 25% of the index's weighting have an aggregate dollar value
of average daily trading volume of less than $50,000,000 (or in the
case of an index with more than 15 component securities, $30,000,000),
except that if there are two or more securities with equal weighting
that could be included in the calculation of the lowest weighted
component securities comprising, in the aggregate, 25 percent of the
index's weighting, such securities shall be ranked from lowest to
highest dollar value of average daily trading volume and shall be
included in the calculation based on their ranking starting with the
lowest ranked security.\194\
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    \194\ See section 3(a)(55)(B) of the Exchange Act, 15 U.S.C.
78c(a)(55)(B). See also CEA sections 1a(35)(A) and (B), 7 U.S.C.
1a(35)(A) and (B).
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    The first three criteria apply to the number and concentration of
the ``component securities'' in the index; the fourth criterion applies
to the average daily trading volume of an index's ``component
securities.'' \195\
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    \195\ The narrow-based security index definition in the CEA and
Exchange Act also excludes from its scope security indexes that
satisfy certain specified criteria. See sections 3(a)(55)(C)(i)--
(vi) of the Exchange Act, 15 U.S.C. 78c(a)(55)(C)(i)--(vi), and CEA
sections 1a(35)(B)(i)--(vi), 7 U.S.C. 1a(35)(B)(i)--(vi).
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