Javacript is not enabled on your browser.
Change country
Subscription or trial required
Country Essentials
International Subscriptions
Sign Up or Log In
Manage and personalize your know-how research through personalized updates and favorites, documents annotations, and account preference options.
One of many powerful tools that are only available with a Practical Law account.
Already a subscriber?
New to Practical Law?
We offer lawyers a better place to start.
Already a subscriber?
Summary of the Dodd-Frank Act: Swaps and Derivatives
Resource type: Practice Note: Overview
Maintained
Jurisdiction:
This Note provides a comprehensive summary of the provisions of Title VII of the Dodd-Frank Act as well as related rulemaking and other applicable Dodd-Frank provisions covering both swaps (non-security-based swaps) and security-based swaps.
Practical Law Finance and Practical Law Corporate & Securities
On July 21, 2010 (the enactment date), the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act, Dodd-Frank or the Act) was signed into law by President Obama (see ). The purpose of the Act was to restructure the financial regulatory system to restore public confidence following the financial crisis and to prevent another crisis from occurring. A major component of this initiative is to address certain perceived flaws in the
markets that many hold responsible for exacerbating the crisis. Swaps and derivatives are generally covered under Title VII of the Act (Title VII). The primary goals of Title VII are to:Minimize systemic risk of derivatives trading.Create transparency in derivatives markets.Prohibit entities holding customer deposits from engaging in speculative derivatives activity.For details on the other components of the Dodd-Frank Act, see the following Practice Notes:......... . . For a legislation tracker and links to relevant Practical Law resources on proposed and final swaps and derivatives rules under the Dodd-Frank Act, as well as related regulatory activity, see .
Statutory Construction: How Are Derivatives Regulated under the Dodd-Frank Act?The regulation of OTC derivatives, commonly referred to as swaps, under Title VII of the Dodd-Frank Act is broken down by:Type of swap (see ).Type of swaps-trading entity (see ).As detailed in this Note, certain Title VII requirements, such as clearing and exchange trading, are applicable on a swap-by-swap basis, while other requirements are applicable based on the type of party entering into the swap. Uncleared swaps are also subject to a variety of enhanced requirements under the Dodd-Frank Act. Swap data reporting requirements apply to all swaps.
Types of Swaps under Title VIIThough it is often stated that swaps were not regulated prior to Title VII, the swap markets have long been regulated because most swaps are entered into by large banks, which are extensively regulated by prudential bank regulators. These regulators have long regulated the derivatives-related activities of banks as part of their overall prudential bank-regulatory responsibilities. They have therefore historically engaged in regulation of margin posting in connection with derivatives, bank regulatory capital rules for derivatives exposures and more. US prudential bank regulators continue in this regulatory capacity under Title VII. As a result, prudential bank regulators have issued rules under Title VII covering these areas for banks. However, on top of that, Title VII has introduced and overlayed an outward swaps and derivatives market regulatory framework under the jurisdiction of the CFTC and SEC. CFTC and SEC regulations under Title VII apply based on the type of swap entered into. Under Title VII, these are:Non-security-based swaps (swaps) (see ).Security-based swaps (see ).In July 2012, the CFTC and the SEC issued
on the Title VII definitions of the terms "swap" and "security-based swap," detailed below.Non-security-based Swaps ("Swaps")Non-security-based swaps are referred to in Title VII simply as "swaps." The CFTC is generally charged with regulating non-security-based swaps with input from the SEC, where appropriate, as well as from applicable bank regulators for swaps entered into by banks (see ). Because Title VII delegates many of the derivatives rulemaking and implementation responsibilities to the applicable regulators, many Dodd-Frank rules on non-security-based swaps are codified in the
(CEA) and implemented through the CFTC's regulations.Section 721(a) of the Dodd-Frank Act defines the term “swap” by adding Section 1a(47) to the Commodity Exchange Act (CEA) (). This definition was finalized and enacted by regulators in August 2012 (see ). The term "swap" is broadly defined under these final rules and includes:.Foreign exchange or currency swaps and forwards (collectively, FX swaps). Note that
FX swaps are exempt from Dodd-Frank central clearing and exchange trading requirements (see ). (CDS) that are not security-based swaps. These are CDS on broad-based indices.Agricultural and commodity swaps (see ).Certain
(TRS) that do not fall under the definition of "security-based swap" (these are TRS on broad-based indices).All , such as , , ,
and collars, or any similar options that are based on a rate such as an interest rate or a currency exchange rate.All options, such as puts, calls, caps, floors and collars, or any similar option for the purchase or sale, or based on the value of, one or more commodities. While the CFTC has clarified that most commodity options are swaps subject to regulation under Title VII, there are important exemptions for certain
commodity contracts that contemplate the delivery and/or receipt of physical commodities in connection with a business purpose, subject to certain conditions (see
and ). Exchange-traded commodity futures and options on exchange-traded commodity futures are not swaps under Title VII and are not subject to Dodd-Frank swaps rules, though these are already cleared and exchange traded by definition. Metal and energy swaps. The CFTC, however, issued a
that exempts from most of the requirements of the CEA and Dodd-Frank certain non-financial energy derivative transactions between and among government-owned and cooperatively-owned electric utilities. The exempted transactions must be physically settled and entered into for the primary purpose of meeting current or anticipated contractual obligations to facilitate the generation, transmission and delivery of electricity. Any guaranty of a swap (see CFTC
and ).Any combination of any of these, so long as the swap does not qualify as a security-based swap.Transactions that are willfully structured to evade the provisions of Title VII that cover swaps.A catch-all designed to capture future products.Loan participations. After some uncertainty during the rulemaking process, the final definitional rules clarify that loan participations, including so-called "LMA-style" and "LSTA-style" loan participations, are neither swaps nor security-based swaps. Loan participations are therefore not subject to Title VII swaps regulations.For further detail on what constitutes a "swap" under final Dodd-Frank rules, including details of certain exceptions, see .Security-based SwapsThe SEC is generally charged with regulating security-based swaps (SBS), with input from the CFTC where appropriate, as well as from applicable bank regulators for SBS entered into by banks (see ). Because Title VII delegates many of the derivatives rulemaking and implementation responsibilities to the applicable regulators, many Dodd-Frank rules on SBS are codified in the US securities laws.SBS are swaps based on securities or loans. These include:Swaps based on a single security or loan, any characteristic of a single security or loan, such as pricing information, or any interest in a single security or loan.Narrow-based security indices, in most cases comprised of less than nine component securities (among other criteria related to weighting of the securities in the index). Swaps based on the occurrence or non-occurrence of certain financial events relating to issuers of securities.The final definition of "security-based swap" therefore captures most types of commonly traded "single-name" CDS (CDS based on a single issuer of debt securities, referred to as a ), as well as most CDS on narrow-based indices. Most equity swaps, including most single-name and narrow-based-index total return swaps, are also SBS under Title VII of the Act.Title VII expands the definition of "security" under both the
so that SBS are included in the definition of "security" under the US securities laws and are subject to most of the same regulations as the underlying securities on which they are based (see ).For further detail on what constitutes a "security-based swap" under final Dodd-Frank rules, including details of certain exceptions, see .Derivatives Excluded from Title VII Swaps RegulationExcluded or exempted from the above definitions and therefore from most Title VII swaps requirements, including mandatory clearing and exchange trading, are:Equity options. Options on equity securities and on certain indexes that are subject to the securities laws.Commodity futures. Exchange-traded commodity futures and options on exchange-traded commodity futures.Physically settled forwards. Under the "Forward Contract Exclusion" (p. 73 of the ), the final definitions of the terms "swap" and "security-based swap" under Title VII exclude "any sale of a non-financial commodity or security for deferred shipment or delivery, so long as the transaction is intended to be physically settled." Therefore, most physically settled commodity contracts that contemplate the delivery and/or receipt of physical commodities in connection with a business purpose are exempt from many Title VII rules, including mandatory clearing and exchange trading, subject to certain conditions (see
and ). Non-deliverable forwards (NDFs) are not excluded from these definitions and are therefore subject to Title VII swaps rules.For a further discussion of these and other exemptions from Title VII swaps definitions, see .
Types of Swaps-trading Entities under Title VIICertain swaps regulations under Title VII apply based on the type of entity engaging in the trading activity. These primarily include:Banks and
(BHCs) (see ). (SDs) and
(SBSDs) (see ). (MSPs) and
(MSBSPs) (see ).Non-financial commercial end users (see ). Commodity pool operators (CPOs) and commodity trading advisors (CTAs) (see ).Banks and BHCsAs has historically been the case, under Title VII US prudential bank regulators are granted oversight of certain aspects of derivatives market practice among banks and BHCs engaging in swap activities, regardless of whether they enter into swaps or SBS, including:Risk capital requirements based on swap
(see ).Uncleared-swap margin collateral requirements (see ).Compliance with the Pushout Rule (see ) and the Volcker Rule (see ).These entities are also subject to all other applicable Dodd-Frank regulations applicable to swaps and SBS on a swap-by-swap basis when they enter into these types of transactions (see
and ).Banks and BHCs may also be designated as swap dealers, security-based swap dealers, MSPs and major security-based swap participants, depending on whether their swap activity reaches certain thresholds designated under final Title VII rulemaking (see
and ). If so, they are also subject to rules applicable to these entities (see ).Banks and BHCs, and their swap activities, may also be subject to regulation by the
(SSFIs) under Dodd-Frank. For information on regulation of SSFIs under Dodd-Frank, see
and .Swap Dealers and Security-based Swap DealersOn May 23, 2012, the CFTC and the SEC issued joint final rules defining the terms "swap dealer" and "security-based swap dealer." A swap dealer (SD) enters into non-security-based swaps (or swaps), which are regulated by the CFTC. A security-based swap dealer (SBSD) engages in SBS activity, which is regulated by the SEC.The final rules specify that a SD is an entity (whether a US person or otherwise) that engages in $3 billion of non-exempt
swap activity (swap dealing) annually, subject to an initial phase-in threshold of $8 billion, which is the currently applicable threshold. Though significantly higher than the originally proposed $100 million threshold, this definition still covers the major financial institutions engaging in swap activity in the US. The calculations are more complex for SBSDs. For detailed information on which parties are designated as SDs and which are SBSDs under final Dodd-Frank rulemaking, see .Note that entities are not designated as both SDs and MSPs under Title VII. If an entity's swap activity reaches the SD threshold, the entity is not considered an MSP.For an overview of rules applicable to SDs and SBSDs under Title VII, see .Major Swap Participants and Major Security-based Swap ParticipantsOn May 23, 2012, the CFTC and the SEC issued joint final rules defining the terms "major swap participant" and "major security-based swap participant." A major swap participant (MSP) enters into non-security-based swaps (or swaps), which are regulated by the CFTC. A major security-based swap participant (MSBSP) engages in SBS activity, which is regulated by the SEC. While there are dozens of CFTC-registered SDs, to date there are only a few registered MSPs.Under the final rules, a person (whether a US person or otherwise) who satisfies any of the following three criteria is an MSP or MSBSP, as applicable:It maintains a "substantial position" in any of the (non-security-based) swap or SBS categories, excluding positions held for hedging or mitigating commercial risk. The four (non-security-based) swap categories are rate swaps, credit swaps, equity swaps and other commodity swaps. The two SBS categories are security-based CDS and security-based non-CDS.
"Substantial position" is defined as either:daily average uncollateralized exposure over the most recent calendar quarter of $1 billion in the applicable category of swaps ($3 billion for rate swaps) or $1 billion in security-based CDS or in non-security-based CDS; ordaily average uncollateralized exposure over the most recent calendar quarter plus potential future exposure of $2 billion in the applicable category of swaps ($6 billion for rate swaps), security-based CDS or non-security-based CDS.Its outstanding swaps or SBS create substantial counterparty exposure that could have serious adverse effects on the financial stability of the US banking system or financial markets. "Substantial counterparty exposure" is defined:for non-security-based swaps, as current uncollateralized notional exposure of $5 billion or more, or $8 billion or more in current uncollateralized notional exposure plus potential futu andfor SBS, as current uncollateralized notional exposure of $2 billion or more, or $4 billion or more in current uncollateralized notional exposure plus potential future notional exposure.It is a financial entity that:is "highly leveraged relative to the amount of capital such entity holds" (defined by the rules as having a ratio of total liabilities to equity of 12:1);is not subject to capital requirements established by an appropriate fe andmaintains a "substantial position," as applicable, in any of the major swap categories, or in security-based CDS or non-CDS SBS.For more detail on the final definitions of "major swap participant" and "major security-based swap participant" under the Dodd-Frank Act, see .For an overview of rules applicable to MSPs and MSBSPs under Title VII, see .Non-financial Commercial End UsersTitle VII includes an exception from mandatory Dodd-Frank swap clearing and exchange-trading requirements for swaps entered into by non-financial commercial end users for the purpose of hedging commercial risk. Clearing is optional at the election of the end user for these swaps. Swaps entered into as speculative investments, or for any other purpose, are not covered by the end-user exception. Parties that are swap dealers or MSPs are explicitly included in the term "financial entity" by Title VII, and therefore cannot make use of the end-user exception. For details on final CFTC rules on the commercial end-user exemption from Title VII's mandatory swap clearing and exchange trading/trade execution requirement, see . For information on the proposed corollary exemption for end-user SBS, see .Commodity Pool Operators (CPOs) and Commodity Trading Advisors (CTAs)Unlike SDs and MSPs, CPOs and CTAs were not created by the Dodd-Frank Act. However, Title VII expanded the definition of "commodity pool" in the CEA, effective July 16, 2011, to include entities that operate pooled investment vehicles and manage commodity trading accounts that enter into swaps. This definition now encompasses pools that enter into a broad range of swaps. As a result of these changes, many funds and investment managers that enter into swaps are now required to register as CPOs and adhere to an extensive framework of regulations, including reporting obligations.CPO. A CPO is an individual or organization that operates and solicits funds for a commodity pool. A commodity pool is composed of funds contributed by a number of entities and/or individuals, which are combined for the purpose of:Trading futures contracts, options on futures or retail off-exchange foreign exchange (forex) contracts.Investing in another commodity pool.CTA. A CTA is an individual or organization that advises others on the buying or selling of futures contracts, options on futures or retail off-exchange forex contracts.For detailed information on the expanded "commodity pool" definition and its implications for funds and other vehicles, including certain securitization vehicles, that enter into swaps for investment purposes, as well as the CPO registration obligations of operators and managers of these vehicles and CPO registration exemptions, see .
Requirements for Swap Dealers and MSPsCFTC-registered SDs and MSPs must adhere to a comprehensive framework of operational, business conduct and swap-related requirements under Title VII. For an overview of these rules, see . Rules applicable to swap dealers and MSPs include:Registration (see ).Swap data reporting and recordkeeping (see ).Swap-related margin collateral requirements (see ).External business conduct (EBC) rules, also referred to as external business conduct standards or EBCS (see ).Internal business conduct (IBC) rules, including rules on swap trading-relationship documentation, transaction acknowledgement and confirmation, as well as portfolio reconciliation and compression (see ).Swap-related risk capital requirements (see ).Obligations with respect to Associated Persons (APs) (see ).Governance and risk-management requirements, including appointment of Title VII chief compliance officer (CCO) and submission of annual CCO Title VII compliance reports (see ).SDs that are major financial institutions may also be subject to comprehensive regulation under Dodd-Frank as SSFIs (see
and ).Requirements for Security-based Swap Dealers and MSBSPsThe SEC has begun to propose a comprehensive regulatory framework under Title VII for SBSDs and MSBSPs that is similar to the CFTC regulatory framework for SDs and MSPs. However, these rules are still in the proposal stage. For details, see .
Swap Clearing and Exchange Trading under Title VIIUnder Title VII, all non-exempt swaps to which a clearing exception does not apply that are capable of being cleared (that is, "standardized' swaps) must be cleared and exchange traded, in accordance with the
commitment to clear all standard swaps globally. Like the G-20 commitment, Title VII specified that this was to be implemented no later than the close of 2012. While this deadline was missed by US regulators (and all other global regulators), mandatory clearing and exchange trading under Title VII is now underway in the US. Under this Title VII mandate and the rules implemented under it, much of the OTC swaps markets - in particular, many common CDS and interest rate swaps - must now be executed on registered exchanges and cleared by clearinghouses. For details, see .Important exemptions and exceptions from mandatory Title VII clearing and exchange trading requirements include:The commercial end-user exception (for more detail, see ).The FX swap exemption.Exemptions for certain physically settled commodity options.For further information, see .For details on mandatory swap clearing under Title VII, see .For details on mandatory swap exchange trading (also referred to as "the trade execution" requirement) under Title VII, see .For information on swap clearinghouses and exchanges, including
(SEFs) and
(DCMs), as well as SBS clearinghouses and exchanges, see .
Dodd-Frank Swap Data Reporting and Recordkeeping RequirementsOne of the primary goals of the Dodd-Frank Act was to facilitate transparency in what many believe has historically been an opaque OTC derivatives market. Toward that end, regulators have issued a number of proposed and final rules covering swap data reporting under Title VII of the Act. Swap data reporting is the most broadly applicable of all Title VII swaps rules. Even swaps entered into by commercial end users that are exempt from mandatory Title VII clearing and exchange trading are still subject to Dodd-Frank swap data reporting rules. Therefore, all parties to swaps need to concern themselves with data reporting obligations for swaps they enter into where at least one party is a US person. For a user-friendly guide to compliance with final Dodd-Frank swap data reporting rules, see .For further detail on all Dodd-Frank swap data reporting rules, see:...Swap data reporting and recordkeeping rules covered in these resources include:Final SDR data reporting and recordkeeping rules. Final CFTC swap data reporting and recordkeeping rules referred to as "SDR" rules (see
and ).Real-time CFTC public data reporting rules. Final CFTC real-time public swap data reporting rules (see ).Historical swap data reporting and recordkeeping rules. Final CFTC rules on historical (transition and pre-enactment) swap data reporting and recordkeeping (see
and ).Large-trader commodity reporting. Large-trader position data reporting for physical commodity swaps (see ).Recordkeeping rules for swap dealers and MSPs. Final CFTC rules on swap data recordkeeping by SDs and MSPs (see ).Regulation SBSR data reporting rules for SBS. Final SEC rules on data reporting for SBS (see ).
Swap Margin Collateral Matters under Dodd-FrankMargin collateral arrangements for swaps and derivatives transactions are also subject to rulemaking under Title VII of the Act. Events such as the collapse of Lehman Brothers and MF Global have underscored the need for regulation of swap margin collateral matters to:Mitigate systemic risk arising from the failure of a large market participant that maintains substantial swap positions with other market participants. Protect customer and end-user swap collateral.See
for extensive detail on both proposed and final Dodd-Frank rulemaking on:Levels and threshold amounts of swap collateral that must be collected by parties to collateralize uncleared swaps entered into by banks.Segregation and treatment of posted margin collateral by the party that holds the collateral, including important issues such as collateral segregation and
of customer funds and cleared swap customer collateral.
Commodity Position LimitsIn October 2011, the CFTC implemented final position limits rules under Title VII for speculative physical commodities and their economic equivalents. However, in September 2012 a federal district court invalidated these rules, finding that they were not mandated under Title VII and that they were not properly established by the CFTC (see ). As a result, final CFTC position limits rules did not become effective on October 12, 2012 as originally scheduled. The CFTC has filed a notice of appeal of this ruling.In the meantime, the CFTC re-proposed its position limits rules, substantially as originally proposed, but accompanied by a lengthy cost-benefit discussion, as mandated by the court. These rules remain in the proposal stage for now. For details on the re-proposed Title VII position limits for speculative physical commodities, see .Security-based Swap Position Limits Not Yet ProposedTo prevent fraud and market manipulation, the SEC is authorized by Title VI of the Dodd-Frank Act to set position limits on:Individual SBS traders.The size of any SBS.For these purposes, the SEC may consider positions held by a party to a SBS in securities, groups of securities or indexes to which the particular swap relates. The SEC has yet to propose position limits for SBS.
Dodd-Frank and Related Risk Capital Requirements for Derivatives ExposuresFinal US Risk Capital Rules for Derivatives Exposures Title VII contains few specific details regarding capital reserve requirements for entities engaging in swap trading activity. However, on June 7, 2012, the Federal Reserve Board (FRB) issued final rules implementing changes to its market risk capital rules (). These rules became effective on January 1, 2013. Under these final rules, banking organizations with significant trading activities are required to adjust their capital requirements to give greater weight to the market risks of activities related to FX and commodities positions and certain trading assets and liabilities. These rules, which were also approved by the FDIC, apply to BHCs and state-chartered banks that have aggregate trading assets and liabilities that are at least:10% of the organization's total assets, or$10 billion.Trading accounts covered by the rule (called "covered positions") include assets and liabilities held: For short-term resale.With the intention of benefiting from actual or expected short-term price movements.For locking in arbitrage profits. Covered positions also include trading positions that hedge other trading positions, as well as most FX and commodity positions. Banking institutions covered by the rule are subject to: Computational requirements that set out in detail: how to calculate the necessary and minimum market risk capital levels. Governance standards for:setting, validating and changing the calculatio and publicly disclosing information about the banking institution's market risk capital requirements and exposures. These final rules apply to SDs, SBSDs, MSPs and MSBSPs, as well as other parties that qualify as covered banks.For more information on these final rules, see . Further Derivatives Risk Capital ProposalsOn April 8, 2014, US federal bank regulators issued two notices of proposed rulemaking that are expected to reduce the amount of regulatory capital that banks must hold against their uncleared derivatives exposures (see ).US bank regulators have also proposed swap-related capital requirements for nonbank SDs and MSPs (see ).SEC SBS Risk Capital ProposalThe SEC has also proposed risk capital requirements for SBSDs and MSBSPs based on the Exchange Act's rule governing capital for broker-dealers, Rule 15c3-1 () (see ).Basel Risk Capital Rules for Derivatives Exposures The rules discussed above under
have been supplemented and modified by final rules adopted by US bank regulators to implement the Basel III framework. The Basel III framework, which began phase-in on January 1, 2015, requires banks to account for derivatives exposures in their capital structures differently depending on whether the transaction is cleared or not cleared, collateralized or not collateralized, and on the quality of the collateral. Certain institutions also have a choice of how to account for these exposures, and can choose from either:A standardized approach.An advanced approach.These approaches result in differing required risk capitalization levels, both of which qualify under the final Basel III implementation rules. For details on the treatment of a variety of types of derivatives exposures under the final Basel III risk capital rules, see
Bank Lending Limits Modified to Include Derivatives ExposureOn June 19, 2013, the
(OCC) issued a
on bank lending limits under Section 610 of the Dodd-Frank Act ( and ). Under the final rule, bank single-counterparty credit exposure limits (-) must now include exposures under:Derivatives transactions.
(repos) and reverse repos.
and borrowing transactions.This rule was originally scheduled to become effective on July 1, 2013 but became effective on October 1, 2013. The rule, which is substantially similar to the 2012 interim final rule (see ), applies to all national banks and state and federal thrifts (collectively, covered banks).Under , the limits on the aggregate amount of "loans and extensions of credit" that a covered bank can extend to an individual borrower are:For loans and extensions of credit that are not fully secured, 15% of the bank's unimpaired capital and surplus.For loans and extensions of credit fully secured by readily marketable collateral, an additional 10% of the bank's unimpaired capital and surplus. This is separate and in addition to the 15% limitation on unsecured loans for an aggregate upper credit limit of 25% of the bank's unimpaired capital and surplus.State banks are not subject to the rule and are covered by the lending limits under their respective state laws. However, under another Section 610 amendment that became effective on January 21, 2012, insured state banks may engage in derivatives transactions only if the lending limit law of its chartering state takes accounts for credit exposures in connection with derivatives transactions.The final lending limits rules provide a number of alternative methods for calculating credit exposure arising from these types of transactions. For further information on the final lending limits rules, including details and models for how to calculate exposure under the rules, see this helpful Davis Polk .For information on state and national bank lending limits, see
and .Single-Counterparty Credit LimitsOn March 4, 2016, the Federal Reserve proposed a rule that would limit the credit exposure of BHCs to a single counterparty. The proposed rule was issued under section 165(e) of the Dodd-Frank Act, and is intended to complement existing overall capital requirements that do not currently address concentration of risk. The proposal includes derivatives exposures, which count toward the limit (among other types of transactions). For more detail, see .
Application of Securities Laws to Security-Based SwapsTitle VII expanded the definition of "security" under both the Securities Act and the Exchange Act to include SBS as of July 16, 2011.Section 761(a)(2) of the Act amended the definition of "security" in Exchange Act Section 3(a)(10) () to include SBS.Section 768(a)(1) of the Act amended the definition of "security" in Securities Act Section 2(a)(1) () to include SBS.However, compliance with most US securities for SBS that would result from this change has been delayed until February 11, 2017 (see ). As of that date, the US securities laws will apply to uncleared SBS. Most cleared SBS are permanently exempt from the securities laws (see ). SBS are already subject to the general antifraud provisions and beneficial ownership reporting requirements of the US securities laws. For more information on the application of US securities laws to SBS, see .
Swap Antifraud RulesThe CFTC has adopted final rules under the Dodd-Frank Act on market manipulation in connection with non-security-based swap trading (see ). These rules:Prohibit fraud, including both intentional and reckless conduct that deceives or defrauds market participants, in connection with any non-security-based swap or contract for the sale of any commodity.Make it unlawful to directly or indirectly manipulate or attempt to manipulate the price of any non-security-based swap or any commodity in interstate commerce, or for future delivery "on or subject to the rules of any registered entity." Title VII registered entities include registered clearinghouses and exchanges - DCOs, SEFs and DCMs (see ).These rules essentially lower the standard of proof in non-security-based swap antifraud cases to recklessness. The rules also give the CFTC the right to bring an action for fraud in connection with non-security-based swaps where a party has intended and attempted to create an artificial market price for a swap. CFTC Guidance on Prohibition of Disruptive Swap Trading Practices Under Dodd-FrankOn February 24, 2011, the CFTC provided clarification in an interpretive order on which swaps trading practices are prohibited as "disruptive" under Section 4c(a)(5) of the CEA, created under Dodd-Frank to promote "fair and equitable" swap trading. Among prohibited activities are "spoofing," the practice of placing and cancelling bids or offers in an attempt to manipulate prices or present the misleading appearance of market activity. For more information on this interpretive order, see . In July 2013, the CFTC issued its first disciplinary
in connection with the Dodd-Frank spoofing prohibition.
No Termination EventTitle VII provides that its implementation may not be considered a "termination event, force majeure, illegality, increased costs, regulatory change, or similar event under a swap (including any related credit support arrangement) that would permit a party to terminate, renegotiate, modify, amend, or supplement" any swap transaction, "unless specifically reserved in the applicable swap." This provision appears specifically designed to prevent termination of an , the most commonly used documentation for OTC derivatives transactions, as well as other standard trading agreements.It is noteworthy that this provision only covers "swaps" (non-security-based swaps) and does not appear to apply to SBS. This may be due to legislative oversight.
The FDIC's Orderly Liquidation Authority Under Title IIUnder Title II of the Dodd-Frank Act, a party to an uncleared swap with a non-depository financial counterparty (generally, a broker-dealer) may be subject to a stay of up to one business day on its ability to terminate, liquidate or net the swap and any other swaps with that counterparty if the counterparty becomes a covered financial company (CFC) subject to the FDIC's orderly liquidation resolution authority (OLA).A CFC is any entity:That is a financial company in default or in danger of default.Whole failure and resolution under otherwise applicable federal or state law would have serious adverse effects on US financial stability.This applies only to uncleared swaps. The cleared swaps of a failed financial company would be handled by the applicable clearinghouse. Failed insured depository institutions (IDIs) continue to be resolved by the FDIC under the Federal Deposit Insurance Act (FDIA), so the OLA does not apply to failing IDI counterparties. However, under the FDIA, swaps of an IDI that enters into FDIC receivership may be subject to a similar stay on termination and liquidation.Under final internal business conduct (IBC) rules for SDs and MSPs, swaps involving SDs and MSPs must include certain representations by the parties regarding these FDIC powers (see ). These representations can be made by parties to a swap through adherence to the ISDA March 2013 Dodd-Frank Protocol (see ).For more information on the FDIC's OLA, see:...
The Swaps Pushout Rule (Lincoln Rule)Note that the Swaps Pushout Rule was substantially repealed by federal legislation signed into law by President Obama in December 2014 (see ). The rule will now apply only to a narrow range of transactions, related to
(ABS).Under Section 716 of the Dodd-Frank Act (), the so-called "Swaps Pushout Rule" or Lincoln Rule, banks and other entities with access to the Fed discount window or FDIC deposit insurance are prohibited from engaging in many derivatives trading activities, subject to a transition period. This prohibition does not apply to and is not intended to prevent an IDI from having or establishing an affiliate which is a "swap entity" as long as the IDI:Is part of a BHC or savings and loan holding company that is supervised by the Federal Reserve.Complies with Sections 23A and 23B of the Federal Reserve Act ( and ).Complies with any other requirements as the CFTC and SEC, as applicable, and the Federal Reserve Board deem appropriate.This provision is intended to force IDIs to
their derivatives trading operations to separately capitalized affiliates in an attempt to minimize the threat of risky derivatives activities to customer deposits, as well as the need for taxpayer bailout of these entities.This prohibition does not apply to IDIs that limit their derivatives trading operations to commercial hedging or other risk mitigation activities directly related to the IDI's commercial activities. Swaps market-making activities are also permitted, as the rule is meant to capture derivatives activity that is purely speculative.The Pushout Rule exempts all swaps entered into by an IDI before the conclusion of the transition period. Each individual institution must apply for its own transition extension, which may extend to July 16, 2016 (see ). It is possible this deadline could be extended out further. For a detailed discussion of the Swaps Pushout Rule, see .
The Volcker Rule Under Section 619 of the Dodd-Frank Act, referred to as the Volcker Rule, "banking entities" (IDIs and BHCs, including most commercial banks in the US and their affiliates) are prohibited from engaging in proprietary trading, including proprietary derivatives trading. Their investment in hedge funds and private equity funds is also restricted under this section, which has been codified under Section 13 of the Bank Holding Company Act of 1956 (BHC Act). The final version of the Volcker rule implementing regulations was released by federal regulators on December 10, 2013 (see ).For detailed information on the Volcker Rule, see
and .For Volcker compliance information, including a useful table of compliance dates, see .
Dodd-Frank Swaps Compliance DatesOn August 13, 2012, final rules on the definitions of the terms "swap" (non-security-based swap) and "security-based swap" were published in the Federal Register (final definitional rules), triggering the effective dates for many key Dodd-Frank swaps rules (). The final definitions and certain other important final Title VII rules became effective on October 12, 2012, including registration requirements for SDs and MSPs.However, implementation of most final CFTC Title VII swaps rules were delayed. Some of these then became effective for certain parties on December 31, 2012, including certain data reporting rules for registered SDs and MSPs.Note the compliance details for the following major Dodd-Frank swaps rules:Registration requirement for SDs and MSPs. Registration is required for any entity after it crosses the minimum SD or MSP aggregate notional thresholds of non-exempt swap activity within any 12 month period. Aggregation of swap transactions for these purposes began on October 12, 2012. Firms have two months from the end of the month they cross the $8 billion annual threshold to register as SDs. This means that, for example, a firm that crosses the threshold in mid-October is required to register on or before December 31 of that year (though it could choose to do so earlier). MSP calculation is more complex. For details, see .Mandatory swap clearing and exchange trading. Mandatory clearing and exchange trading for certain CDS and interest rate swaps (IRS) is underway for most CDS and IRS (for certain limited exceptions, as well as recent and upcoming compliance dates, see ). Further CFTC clearing and MAT determinations will be issued by the CFTC on a rolling basis for other types of swaps. The SEC is expected to issue similar determinations for SBS but has yet to do so.For details on which CDS must now be exchange traded under final Title VII rules, see .For details on which CDS must now be cleared and exchange traded under final Title VII rules, see .For details on which IRS must now be exchange traded under final Title VII rules, see .For details on which IRS must now be cleared and exchange traded under final Title VII rules, see .Final CFTC rules on swap data reporting and recordkeeping. Most Dodd-Frank CFTC swap data reporting and recordkeeping rules are final and effective, with limited exception (see
and ). Final swap data reporting requirements for SBS are now effective (see ).Final CFTC rules on large-trader commodity position reporting. Large-trader reporting began in July 2013 for nonexempt non-US SDs and MSPs (see ). Note that the CFTC issued no-action relief delaying large-trader reporting for certain non-clearing swap dealers (see ).Position limits for certain physical commodity futures contracts and their economic equivalents. The final CFTC commodity position limits rules were originally scheduled to take effect on October 12, 2012. However, a federal district court found they were not properly established by the CFTC. As a result, with the exception of certain legacy contracts, these rules did not become effective on October 12, 2012 as scheduled (see ). The CFTC subsequently re-proposed the position limits rules. For details of the revised proposal issued by the CFTC since the ruling, see . These rules are again in the proposal stage so no compliance date is imminent.Rules subjecting uncleared SBS to US securities laws. These rules have been delayed a number of times and are scheduled to take effect on February 11, 2017 (see ). Most cleared SBS are permanently exempted from the securities laws (see ).Revised lending limits rules. Compliance with the revised lending limits rules, incorporating derivatives exposures, was required as of July 1, 2013 (see ).Among other applicable rules, the following final Title VII rules are currently effective for SDs and MSPs:External business conduct (EBC) rules.
Also referred to as external business conduct standards or EBCS, these standards and requirements apply to SD and MSPs in their dealings with their non-SD/non-MSP swap counterparties, including know-your-customer rules. Most of these rules became effective on May 1, 2013 (see ).Internal business conduct (IBC) rules. These rules have various compliance dates (see ). For details on the final IBC rules, see .For a comprehensive checklist of Dodd-Frank rules applicable to SDs and MSPs, see .For details on other important Dodd-Frank swap dates, see .
Title VII EnforcementAs reported by several sources, the CFTC's Division of Enforcement (DOE), which investigates and prosecutes alleged violations of the CEA and CFTC regulations, has created two specialized enforcement squads, the Swaps Squad and the Manipulation and Disruptive Trading Squad.This is the first time that the CFTC has created specialized enforcement groups. According to the CFTC's 2013
released in February 2012, these squads are staffed with trial attorneys and investigators from across the CFTC's regions. They are tasked with evaluating leads and serving as clearinghouses for related issues and policies. The goal of the squads is to develop a focused expertise in their respective areas to accommodate the increase in swaps enforcement activities necessitated by the Dodd-Frank Act. Matters before the DOE are addressed by both squad members and non-members at the CFTC.Over the past year or so, the CFTC has stepped up its Title VII enforcement activity. See, for example, Legal Updates:.. ..The SEC continues to rely on its existing enforcement mechanisms to police compliance with Dodd-Frank rules on SBS for which it is responsible.Congressional funding for both the CFTC and the SEC is critical to the ability of these agencies to enforce derivatives regulation under Dodd-Frank. Legislative wrangling continues regarding funding levels for these agencies, as opponents of Dodd-Frank in Congress seek to limit funding for these agencies in order to limit the impact of the Dodd-Frank Act.
Application of Dodd-Frank Swaps Regulations to Non-US EntitiesTitle VII states that it does not apply to non-security-based swap activities outside the US unless those activities either:Have a direct and significant connection with activities in, or effect on, US commerce.Contravene any rules or regulations made by the CFTC to prevent evasion of any provision of the CEA related to non-security-based swaps.If either the SEC or CFTC determines that the regulation of swaps in a foreign country undermines the stability of the US financial system, the regulator, in consultation with the Secretary of the Treasury, may prohibit an entity domiciled in that foreign country from participating in any swap activity in the US.For details on:Final CFTC guidance and other regulatory activity on the application of Dodd-Frank swaps rules to cross-border swaps (including swaps entered into by non-US branches of US entities and by US branches of non-US entities), see .Proposed SEC rules on the application of Dodd-Frank SBS rules to non-US entities (including non-US branches of US entities), see .
Updated 3/14/16 to reflect a proposal by the Fed on single-counterparty credit limits, which would include derivatives exposures.
Updated 3/14/16 to reflect recent CFTC Title VII enforcement activity.
This Note was reviewed in October 2015 by our editorial team as part of ongoing maintenance. This Note is also continually monitored for any necessary changes due to legal or practice developments.
Updated 1/17/15 to reflect the SEC's adoption of rules requiring security-based SDRs to register with the SEC and prescribing reporting and public dissemination requirements for SBS transaction data.
Updated to reflect substantial repeal of the Pushout Rule pursuant to federal legislation signed into law by president Obama in December 2014.
Updated to reflect further CFTC delay to December 1, 2015 of the compliance date for certain non-US swap dealers with final SDR and historical swap data reporting rules.
Updated to reflect the proposed exclusion of physically settled EVO forward contracts from Dodd-Frank swaps regulation.
Resource ID:&3-502-8950
Products:&
PLC UK Finance, PLC UK Financial Services, PLC US Capital Markets & Corporate Governance, PLC US Corporate & Securities, PLC US Finance, PLC US Law Department
This resource is , meaning that we monitor developments on a regular basis and update it as soon as possible.
Banking and Financial Services (/topic5-503-1386)
Market Regulation (/topic7-383-5891)
Regulatory: Finance (/topic6-380-7407)
Swaps and Derivatives (/topic1-500-0080)
Road Map to Dodd-Frank Swaps and Derivatives Regulation (topic7-557-8945)
Road Map to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (topic3-502-8479)
Summary of the Dodd-Frank Act: Bank Capital (Collins Amendment) (topic7-502-7557)
Summary of the Dodd-Frank Act: Corporate Governance (topic9-502-8358)
Summary of the Dodd-Frank Act: Credit Rating Agencies (topic0-502-8739)
Summary of the Dodd-Frank Act: Executive Compensation (topic5-502-8341)
Summary of the Dodd-Frank Act: Private Equity and Hedge Funds (topic1-502-8932)
Summary of the Dodd-Frank Act: Regulation of Systemically Significant Financial Institutions (topic1-502-8437)
Summary of the Dodd-Frank Act: Regulatory Structure (topic4-502-7974)
Summary of the Dodd-Frank Act: Resolution of Failing Financial Institutions (topic2-502-8818)
Summary of the Dodd-Frank Act: SEC Authority and Selected Securities Act and Exchange Act Provisions (topic3-502-8592)
Summary of the Dodd-Frank Act: Securitization (topic9-502-8508)
Summary of the Dodd-Frank Act: The Volcker Rule (topic6-502-7553)
EMIR: overview (topic3-521-4532)
The Dodd-Frank Act: Application of US Securities Laws to Security-Based Swaps (topic6-532-2752)
The Dodd-Frank Act: Commodity Position Limits (topic5-517-5964)
The Dodd-Frank Act: Cross-Border Application of Swaps Rules (topic7-520-3881)
The Dodd-Frank Act: Derivatives Margin Collateral Rules (topic7-517-5388)
The Dodd-Frank Act: Expanded "Commodity Pool" Definition and CPO/CTA Rules (topic2-523-3239)
The Dodd-Frank Act: Margin Collection Rules for Uncleared Swaps (topic1-596-8985)
The Dodd-Frank Act: Swap Clearing and Exchange Trading under Title VII (topic2-568-4665)
The Dodd-Frank Act: Swap Dealer and MSP Threshold Calculations (topic7-519-5126)
The Dodd-Frank Act: Swaps Pushout Rule (topic9-504-8573)
The Dodd-Frank Act: The Commercial End-User Exception to the Mandatory Swap Clearing Requirement (topic0-521-5929)
The Dodd-Frank Act’s Swap Guarantor Rule: Implications for Secured Bank Financings (topic3-524-5270)
The ISDA Dodd-Frank Protocols and ISDA/Markit Amend (topic1-524-7048)
US and EU OTC Derivatives Regulation: a Comparison of the Regimes (topic4-519-7594)
Swaps and Derivatives Compliance Calendar (topic4-523-7774)
The Dodd-Frank Act: Requirements for Swap Dealers and MSPs Checklist (topic5-522-2705)
The Dodd-Frank Act: Swap Documentation Checklist (topic2-522-4664)
Dodd-Frank Swaps and Derivatives Toolkit (topic1-521-5957)
The Final US Basel III Capital Framework (topic9-535-5185)
SEC Reopens Comment Periods for Dodd-Frank Security-based Swaps Rules (topic9-527-6485)
"siteName" :
"objType" :
"PLC_Doc_C",
"objName" :
"ACT_OWNED - READ_ONLY - 3-502-8950",
"userID" :
"objUrl" :
"/cs/Satellite/us/resource/3-502-8950?null",
"pageType" :
"Resource",
"academicUserID" :
"contentAccessed" : "true",
"analyticsPermCookie"
: "2-:-142e",
"analyticsSessionCookie"
: "2-:-142d",
"statisticSensorPath"
: "/sensor/statistic"}