Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

As permitted by the Dodd-Frank Act,  the SEC and CFTC, in consultation with the Federal Reserve Board, have proposed to further define the term “swap.”  Commenters on an advance notice of proposed rulemaking 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 include variable rate debt, commercial contracts containing acceleration, escalation, or indexation clauses; agreements to acquire personal property or real property, or to obtain mortgages; employment, lease, and service agreements, including those that contain contingent payment arrangements; and consumer mortgage and utility rate caps.

According to the proposed rules, 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, proposed 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.

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;
  • 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);
  •  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; and
  • 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 types of agreements, contracts, and transactions discussed above are not intended to be exhaustive of the customary 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;
  • 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.

A similar list was provided by the Commissions for consumer transactions, and a similar analysis applies for transactions not on the specified list.

Check frequently for updates on the Dodd-Frank Act and other important securities law matters.

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