Eva Marie Carney, Patricia C. OPrey, Publications
Memorandum: The SEC Invokes Its Enforcement Authority Over What It Asserts Are Security-Based Swap Agreements
May 30, 2008
The market for interest rate swaps – a derivative product in which one party pays to the other party interest based on a fixed rate in exchange for payment of interest based on a floating rate – now exceeds $309 trillion. The market for interest rate swaps has burgeoned with little regard for potential U.S. Securities and Exchange Commission (“SEC”) enforcement interest. Interest rate swaps and, indeed, most other types of swaps, are not “securities.” Nonetheless, at the beginning of this decade, Congress subjected those swaps that are “security-based” to the federal securities laws’ antifraud jurisdiction.
A recently-filed SEC complaint illustrates the power of this “security-based” distinction, alleging that the antifraud provisions of the securities laws were violated in certain transactions involving interest rate swap agreements. Our partners Patricia C. O’Prey and Eva Marie Carney have written the attached brief memorandum that details the SEC’s complaint and characterizes it as a “listen up” warning to the derivatives market that counterparties and their advisors may
be called to account by the SEC pursuant to the agency’s authority to invoke the federal securities laws’ antifraud provisions if the instruments in which they deal can be forced into the “security-based swap” definition.
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