The SEC and CFTC recently have proposed rules that would clarify which types of swaps traders would be subject to the new derivatives regulations mandated under the Dodd-Frank Act. Dodd-Frank defines two critical terms at the heart of the new regulatory regime, "Swap Dealers" and "Major Swap Participants." The legislation leaves it to the CFTC and SEC to hone the definitions of each term to cover the appropriate financial actors. The broadness of the statutory definitions of each, and the subsequent proposals by the SEC and CFTC attempting to further refine these definitions, have caused some concern amongst mutual funds, because even those not qualifying as "Swap Dealers" may find themselves within the definition of "Major Swap Participant," and therefore fall into an additional new realm of regulatory provisions, including registration, capital and margin requirements, and business conduct restrictions.
Though there is a de minimus requirement, that is, a minimum threshold of swap activity must be met, and swaps employed for financial hedging and minimizing commercial risk are excluded, there is some risk that a mutual fund, or fund complex, may be considered a "Major Swap Participant" if the CFTC and SEC rules are finalized.
The CFTC and the SEC are scheduled to vote on final rules in July 2011.
The fact sheet for the proposed joint SEC and CFTC Rules to define Swap Related Terms is available at: http://sec.gov/news/press/2010/2010-237.htm
A memorandum by Dechert LLP laying out some of the issues in more detail is available at: http://www.dechert.com/library/FS_30_12-10_CFTC_SEC_Propose_Definitions.pdf