01/15/2013 10:32:39 AM EST
Who's In and Who's Out? CFTC and SEC Finalize the Swap Entity Definitions
by Susan I. Gault-Brown, Anthony R.G. Nolan, Lawrence
B. Patent, and Daniel A. Goldstein
The Dodd-Frank Wall Street
Reform and Consumer Protection Act ("Dodd-Frank Act") contains
definitions for the new terms "swap dealer," "security-based
swap dealer," "major swap participant" and "major
security-based swap participant" (together, "Regulated Swap
Entities") and an amended definition for the term "eligible contract
participant" ("ECP"). As directed by that statute, on April 18,
2012, the Commodity Futures Trading Commission ("CFTC") and the
Securities and Exchange Commission ("SEC") (collectively, the
"Commissions") adopted a final rule (the "Final Rule") that
clarifies these Dodd-Frank Act definitions, particularly in terms of scope and
applicability to market participants. The Final Rule revises proposed
definitions published on December 21, 2010 (the "Proposed Rule"). In
this Alert, we focus on the major differences between the Proposed Rule and the
The Final Rule will generally be effective July 23, 2012. However, registration
of Regulated Swap Entities will not be mandatory, and the substantive
regulatory provisions applicable to them will not be enforced, until after the
effective date of a joint final rule of the Commissions further defining the
terms "swap" and "security-based swap." That rule is
commonly expected to be adopted sometime in the summer or fall of 2012.
The Final Rule is of great importance for participants in derivatives markets
for several reasons. Entities that fall within the Regulated Swap Entity
definitions will be required to register with, and will be regulated by, the
CFTC, the SEC or both. Entities that become Regulated Swap Entities will also
be subject to the panoply of substantive rules and regulations that are being
proposed, or have been issued, under the Dodd-Frank Act's new swap market
regulatory scheme, including capital and margin requirements, business conduct
rules, conflict of interest rules, chief compliance officer requirements,
reporting obligations, and recordkeeping requirements. While the number of
potentially affected entities appears to be considerably smaller than many had
feared during consideration of the proposed rule, it is still significant.
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Susan I. Gault-Brown is
a partner in K&L Gates' Washington, D.C. office and a member of the
Investment Management practice. She advises participants in the financial
services industry, including commodity trading advisors, commodity pool
operators, investment advisers, private funds, and registered investment
companies on regulatory, transactional and counseling matters involving the
securities and commodities laws. She also regularly provides advice with
respect to exemptions, no-action letters, and other forms of regulatory relief.
Anthony R.G. Nolan, a partner in K&L Gates' New York City office,
specializes in domestic and cross-border structured finance, structured
products and derivatives.
Lawrence B. Patent joined K&L Gates in 2008 after serving more than
thirty years as an attorney with the CFTC, the last five as the Deputy Director
of the Division of Clearing and Intermediary Oversight. Mr. Patent regularly
counsels businesses with respect to commodity interest trading compliance and
the legal requirements governing trading in over-the-counter derivatives and
exchange-traded futures, including both international and U.S. markets. His
clients include, among others, hedge funds, currency dealers, commodity pool
operators, commodity trading advisors, futures commission merchants, and
Daniel A. Goldstein is an associate at K&L Gates' New York office.