SEC Takes Another Step in Regulating OTC Derivatives

July 9, 2012 ( - The Securities and Exchange Commission (SEC) took another step toward regulating the over-the-counter (OTC) derivatives market by unanimously approving rules and interpretations for key definitions of certain derivative products.

The SEC rules and interpretations further define the terms “swap” and “security-based swap” and whether a particular instrument is a “swap” regulated by the Commodity Futures Trading Commission (CFTC) or a “security-based swap” regulated by the SEC. The SEC action also addresses “mixed swaps,” which are regulated by both agencies, and “security-based swap agreements,” which are regulated by the CFTC but over which the SEC has antifraud and other authority.  

The rules and interpretations written jointly with the CFTC implement provisions of the 2010 Dodd-Frank Act that establish a comprehensive framework for regulating over-the-counter derivatives (see “SEC Provides Guidance on Swaps Requirements”).   

Regulation of OTC derivatives, such as interest rate swaps, which have become standard tools for reducing risk for defined benefit plans, may change the way pension plans will use such instruments (see “Regulations Changing DB Use of OTC Derivatives”).    

When the regulations were first proposed, the ERISA Industry Committee urged regulators to exclude from the major participant definitions employee benefit plans that are subject to the fiduciary provisions in Title I of the Employee Retirement Income Security Act (ERISA), noting that the investment activities of ERISA Title I plans are already extensively regulated and pose little risk to the U.S. financial system (see “ERIC Urges Exclusion of Benefit Plans from Swap Regs”).

The regulations could also affect defined contribution plans that hold stable value contracts. The SEC and CFTC are doing a study to determine whether stable value contracts fall within the definition of a swap, and if so, whether exempting such contracts from the swap definition is appropriate and in the public interest (see “Regulators Seek Comment on Stable Value Contract Study”).  

The latest SEC rule is at Once both agencies adopt the final rules, they will become effective 60 days after the date of publication in the Federal Register.