The U.S. Securities and Exchange Commission (SEC) and U.S. Commodity Futures Trading Commission (CFTC) have released final rules and guidance explaining how various loan-based swaps should be classified under the Dodd-Frank Wall Street Reform and Consumer Protection Act’s (the “Dodd-Frank Act”) regulatory regime. Prior to these rules, it was relatively clear that such transactions would be subject to regulation under the Dodd-Frank Act. It was not clear, however, whether certain loan total return swaps (“LTRS”) and single-name and index loan credit default swaps (“LCDS”) would be governed as “swaps,” subject to the CFTC’s rules and oversight, or “security-based swaps,” subject to SEC jurisdiction. The regulators’ final rules provide several bright-line tests for determining whether various single-name LTRS and LCDS transactions are “swaps” or “security-based swaps.” They also provide lengthy and complex criteria used for determining whether a given index LCDS is a “swap” or “security-based swap.”
In this memorandum, Richards Kibbe & Orbe LLP attorneys Jennifer Grady and John A. Clark provide an overview of the regulators’ new definitional tests and criteria for loan-based swaps.