Swaps, Security-Based Swaps and Mixed Swaps

With the final rule defining a swap due to be published in the Federal Register on 13 August, 2012, firms should be analyzing whether the transactions they enter into will qualify as a swap, security-based swap or mixed swap. A swap is generally defined as an instrument used to transfer financial risk without also assigning ownership of the asset.

A copy of the proposed final rule can be downloaded from the CFTC website, although it will not become effective until it is published in the Federal Register.

The challenge for firms

Despite the publication of the proposed final rule defining swap, security-based swap and mixed swap, firms still face the challenge of reading the 600 pages used to define these terms and determining whether the swaps they enter into are regulated by the CFTC, SEC, both or neither, and what effect this determination will have from a regulatory perspective.

The analysis should be conducted on a case-by-case basis. However, generally*, instruments based on a single security, a narrow-based security index or yield will be a security-based swap and under the jurisdiction of the SEC; whereas, instruments based on a broad-based security index, or interest / monetary rates, will be a swap and governed by the CFTC. Instruments with dual characteristics will be a mixed swap falling under the jurisdiction of the SEC and CFTC. The exceptions are future contracts, options on futures and non-financial forwards that are intended to be physically settled that are excluded.

A word of caution

The CFTC has wide powers under the Dodd-Frank Wall Street Reform and Consumer Protection Act to prevent the willful evasion of the swap rules. Any instrument that has been willfully structured to evade the regulation of swaps will be deemed a swap for CFTC purposes. In determining whether a transaction has been structured to evade regulation, the CFTC will consider whether there is a legitimate business purpose for structuring the transaction, entity or instrument. In addition, the CFTC will consider whether there has been any kind of deception involved. Therefore, firms should avoid structuring trades in a way that could be interpreted as evading swap regulations.

* There may be specific factors which change this determination.

Swaps, Security-Based Swaps and Mixed Swaps 2012-08-07T00:00:00.0000000 /insights/publications/compliance-and-regulatory-consulting/swaps-security-based-swaps-and-mixed-swaps publication {DE05ECA4-1852-4BEF-A4E1-491CB497F9CB} {1C3CB363-1B9A-40E2-AF19-5C433260F861} {65648E61-ED08-40DF-AEE6-DB90ABD49289} {95D7F66C-11BB-4E7D-B07C-48874A321F98}

Related Services

Duff & Phelps Compliance and Regulatory Consulting

Compliance and Regulatory Consulting

By Jurisdiction

Regionally targeted assistance for asset managers in compliance program development, implementation and maintenance

By Jurisdiction
Duff & Phelps Compliance and Regulatory Consulting

Compliance and Regulatory Consulting

EU Regulation

Comprehensive compliance and regulatory support for EU firms.

EU Regulation
Duff & Phelps Valuation Advisory Services

Valuation Advisory

Portfolio Valuation

Alternative investment valuation for private equity and hedge funds.

Portfolio Valuation

Insights