http://www.silverdoctors.com/cftc-defines-swaps-triggering-implementation-of-positions-limits/
After nearly 9 months of delays (and as Bart Chilton informed SD readers at the end of May), the CFTC has finally defined the word Swaps, meaning the first portions of the commodities positions limits rule will go into effect 60 days from today.
The CFTC voted 4-1 for the definition of SWAPS, with BART CHILTON the lone vote against the rule. Chilton voted against the definition out of concern certain firms (ie JP Morgan) will side step the position limits by using forward contracts or swaps.
For those who missed it live, the full webcast of today’s meeting can be found at the link below:
http://onlinevideoservice.com/clients/cftc/archive.htm
Definition of “Swap” and “Security-Based Swap”
The Commissions believe that the definitions of “swap” and “security-based swap” in Title VII are detailed and comprehensive. However, as the Commissions did in the Proposing Release, the Commissions are clarifying in the final rules and interpretations that certain insurance products, consumer and commercial agreements, and loan participations are not swaps or security-based swaps.
Transactions that are Not Swaps or Security-Based Swaps
Insurance
The Commissions are issuing final rules and interpretations that would clarify that certain contracts, provided by certain entities, each meeting specified requirements would be considered insurance and not swaps or security-based swaps.
Final Rules
The final rules provide that certain transactions are swaps:
Foreign Exchange (“FX”) Forwards and FX Swaps:
These products are defined as swaps, subject to a determination by the Secretary of the Treasury, as permitted under Title VII, to exempt them.
If exempted by Treasury, the final rules reflect the provision of the statute that certain requirements will continue to apply, including reporting and business conduct standards.o FX Products that are outside Treasury’s determination and are swaps (unless otherwise excluded by the statute):
Foreign Currency Options
Non-Deliverable Forwards in Foreign Exchange
Currency Swaps and Cross-Currency Swaps
o Forward Rate Agreements, notwithstanding their “forward” label, are swaps (unless otherwise excluded in the statute).
And here comes the Grandfather clause:
Grandfather for Existing Transactions
In response to comments, the Commissions are including a grandfather provision in the final rules, which provides that a transaction entered into on or before the effective date of the Product Definitions will be considered insurance and not fall within the swap and security-based swap definitions, provided that, at the time it was entered into, the transaction was provided in accordance with the Provider Test.
Guarantees of Swaps and Security-Based Swaps
In the Proposing Release, the Commissions requested comment on the treatment of guarantees of swaps and security-based swaps.
The Final Release includes an interpretation by the CFTC that a guarantee of a swap is an integral part of the swap, and therefore the term “swap” includes a guarantee of such swap, to the extent that a counterparty to a swap position would have recourse to the guarantor in connection with the position. The Commission will address the practical implications of this interpretation, including applicable reporting requirements, in a separate release.
The SEC interprets guarantees of security-based swaps to be securities under the federal securities laws; the SEC plans to address reporting requirements for guarantees of security-based swaps in a separate rulemaking.
Entire final rules on SWAPS can be found at the pdf below:
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