Explanation

United States Government Accountability Office
Washington, DC 20548

B-323829
August 28, 2012
The Honorable Debbie Stabenow
Chairwoman
The Honorable Pat Roberts
Ranking Member
Committee on Agriculture, Nutrition, and Forestry
United States Senate
The Honorable Tim Johnson
Chairman
The Honorable Richard C. Shelby
Ranking Member
Committee on Banking, Housing, and Urban Affairs
United States Senate
The Honorable Frank D. Lucas
Chairman
The Honorable Collin C. Peterson
Ranking Member
Committee on Agriculture
House of Representatives
The Honorable Spencer Bachus
Chairman
The Honorable Barney Frank
Ranking Member
Committee on Financial Services
House of Representatives
Subject: Commodity Futures Trading Commission and Securities and Exchange
Commission: Further Definition of “Swap,” “Security-Based Swap” and
“Security-Based Swap Agreement”; Mixed Swaps; Security-Based Swap
Agreement Recordkeeping
Pursuant to section 801(a)(2)(A) of title 5, United States Code, this is our report on a
major rule promulgated by the Commodity Futures Trading Commission (CFTC) and
Securities and Exchange Commission (SEC) (collectively, Commissions), entitled
“Further Definition of “Swap,” “Security-Based Swap” and “Security-Based Swap
Agreement”; Mixed Swaps; Security-Based Swap Agreement Recordkeeping” (RINs:
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3038-AD46; 3235-AK65). We received the rule from SEC on July 19, 2012 and
CFTC on August 13, 2012. It was published in the Federal Register as a “joint final
rule; interpretations; request for comment on an interpretation” on August 13, 2012.
77 Fed. Reg. 48,208.
The joint final rule adopts new rules and interpretations under the Commodity
Exchange Act (“CEA”) and the Securities Exchange Act of 1934 (“Exchange Act’”) to
further define the terms “swap,” “security-based swap,” and “security-based swap
agreement” (collectively, “Product Definitions”); regarding “mixed swaps;” and
governing books and records with respect to “security-based swap agreements” in
accordance with section 712(a)(8), section 712(d)(1), sections 712(d)(2)(B) and (C),
sections 721(b) and (c), and section 761(b) of the Dodd- Frank Wall Street Reform
and Consumer Protection Act (“Dodd-Frank Act”). The Commissions, in consultation
with the Board of Governors of the Federal Reserve System (“Board”), are jointly
adopting the final rule. The CFTC requests comment on its interpretation
concerning forwards with embedded volumetric optionality.
The joint final rule has an effective date of October 12, 2012. The compliance date
for the final rules and interpretations also will be October 12, 2012; with the following
exceptions: the compliance date for the interpretation regarding guarantees of
swaps will be the effective date of the rules proposed in the separate CFTC release
when such rules are adopted by the CFTC. Solely for the purposes of the Order
Granting Temporary Exemptions under the Securities Exchange Act of 1934 in
Connection with the Pending Revision of the Definition of ‘‘Security’’ to Encompass
Security-Based Swaps and the Exemptions for Security-Based Swaps, the
compliance date for the final rules further defining the term ‘‘security-based swap’’
will be February 11, 2013. Comments on the interpretation regarding forwards with
embedded volumetric optionality must be received on or before October 12, 2012.
Enclosed is our assessment of the Commissions’ compliance with the procedural
steps required by section 801(a)(1)(B)(i) through (iv) of title 5 with respect to the rule.
Our review of the procedural steps taken indicates that the Commissions complied
with the applicable requirements.
If you have any questions about this report or wish to contact GAO officials
responsible for the evaluation work relating to the subject matter of the rule, please
contact Shirley A. Jones, Assistant General Counsel, at (202) 512-8156.
signed
Robert J. Cramer
Managing Associate General Counsel
Enclosure
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cc: Elizabeth M. Murphy
Secretary
Securities and Exchange Commission
David A. Stawick
Secretary of the Commission
Commodity Futures Trading Commission

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ENCLOSURE
REPORT UNDER 5 U.S.C. § 801(a)(2)(A) ON A MAJOR RULE
ISSUED BY THE
COMMODITY FUTURES TRADING COMMISSION AND
SECURITIES AND EXCHANGE COMMISSION
ENTITLED
"FURTHER DEFINITION OF “SWAP,” “SECURITY-BASED SWAP” AND
“SECURITY-BASED SWAP AGREEMENT”; MIXED SWAPS;
SECURITY-BASED SWAP AGREEMENT RECORDKEEPING"
(RINS: 3038-AD46; 3235-AK65)
(i) Cost-benefit analysis
The Commissions stated in the rule that they are sensitive to the costs and benefits
of their rules. In considering the adoption of the Product Definitions, the
Commissions have been mindful of the costs and benefits associated with these
rules, which provide fundamental building blocks for the Title VII regulatory regime.
There are costs, as well as benefits, arising from subjecting certain agreements,
contracts, or transactions to the regulatory regime of Title VII, known as
programmatic costs and benefits. Additionally, there are assessment costs that
parties will incur to assess whether certain agreements, contracts, or transactions
are indeed subject to the Title VII regulatory regime, and, if so, the costs to assess
whether such Title VII instrument is subject to the regulatory regime of the SEC or
the CFTC.
Title VII created a jurisdictional division between the CFTC and SEC. The
Commissions explain that costs and benefits flowing from an agreement, contract,
or transaction being subject to the regulatory regime of the CFTC or the SEC may
be impacted by similarities and differences in the Commissions’ regulatory
programs for swaps and security-based swaps. Title VII calls on the SEC and the
CFTC to consult and coordinate for the purposes of assuring regulatory consistency
and comparability to the extent possible. Title VII also calls on the agencies to treat
functionally or economically similar products or entities in a similar manner, but
does not require identical rules. Although the Commissions may differ on certain
rulemakings, as the relevant products, entities and markets are different, the
Commissions believe that, as the CFTC and SEC regulatory regimes share a
statutory basis in Title VII, the costs and benefits of their respective regimes should
be broadly similar and complementary. In acknowledging the economic
consequences of the final rules, the Commissions recognize that the Product
Definitions do not themselves establish the scope or nature of those substantive
requirements or their related costs and benefits. In determining the appropriate
scope of these rules, the Commissions consider the types of agreement, contract,
or transaction that should be regulated as a swap, security-based swap, or mixed
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swap under Title VII in light of the purposes of the Dodd-Frank Act. The
Commissions have sought to further define the terms “swap,” “security-based
swap,” and “mixed swap” to include agreements, contracts, and transactions only
to the extent that capturing these agreements, contracts, and transactions is
necessary and appropriate given the purposes of Title VII, and to exclude
agreements, contracts, and transactions to the extent that the regulation of such
agreements, contracts, and transactions does not serve the statutory purposes of
Title VII, so as not to impose unnecessary burdens for agreements, contracts, and
transactions whose regulation may not be necessary or appropriate to further the
purposes of Title VII.
(ii) Agency actions relevant to the Regulatory Flexibility Act (RFA), 5 U.S.C. §§ 603605, 607, and 609
With respect to the proposed release, while the CFTC provided an RFA statement
that the proposed rule would have a direct effect on numerous entities, specifically
DCMs, SDRs, SEFs, SDs, MSPs, ECPs, FBOTs, DCOs, and certain “appropriate
persons” who relied on the Energy Exemption, the Chairman, on behalf of the
CFTC, certified that the rulemaking would not have a significant economic effect on
a substantial number of small entities and sought comments on that certification.
Accordingly, for the reasons stated in the proposal and the foregoing discussion in
response to one comment received respecting CFTC’s RFA certification, the CFTC
continues to believe that the rulemaking will not have a significant impact on a
substantial number of small entities. Therefore, the Chairman, on behalf of the
CFTC, certified pursuant to 5 U.S.C. § 605(b) that the rules will not have a
significant impact on a substantial number of small entities.
For purposes of SEC rulemaking in connection with the RFA, a small entity
includes: (1) when used with reference to an “issuer” or a “person,” other than an
investment company, an “issuer” or “person” that, on the last day of its most recent
fiscal year, had total assets of $5 million or less and (2) a broker dealer with total
capital (net worth plus subordinated liabilities) of less than $500,000 on the date in
the prior fiscal year as of which its audited financial statements were prepared
pursuant to rule 17a–5(d) under the Exchange Act, or, if not required to file such
statements, a broker-dealer with total capital (net worth plus subordinated liabilities)
of less than $500,000 on the last day of the preceding fiscal year (or in the time that
it has been in business, if shorter); and is not affiliated with any person (other than a
natural person) that is not a small entity. The SEC continues to believe that the
types of entities that would participate in the swap markets—which generally would
be swap market dealers and major participants—would not be ‘‘small entities’’ for
purposes of the RFA. The final rules and interpretive guidance do not themselves
impose any compliance obligations. Instead they describe the categories of
agreements, contracts, and transactions that are outside the scope of the Product
Definitions and delineate the jurisdictional divide between the SEC’s and the
CFTC’s regulatory regime. Accordingly, the SEC certifies that the final rules and
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interpretive guidance would not have a significant economic impact on a substantial
number of small entities for purposes of the RFA.
(iii) Agency actions relevant to sections 202-205 of the Unfunded Mandates Reform
Act of 1995, 2 U.S.C. §§ 1532-1535
As independent regulatory agencies, the Commissions are not subject to title II of
the Unfunded Mandates Reform Act of 1995.
(iv) Other relevant information or requirements under acts and executive orders
Administrative Procedure Act, 5 U.S.C. §§ 551 et seq.
On May 23, 2011, the Commissions published a notice of proposed rulemaking in
the Federal Register entitled Further Definition of “Swap,” “Security- Based Swap,”
and “Security-Based Swap Agreement”; Mixed Swaps; Security-Based Swap
Agreement Recordkeeping. 76 Fed. Reg. 29,818. The Commissions received
approximately 86 written comment letters in response to the Proposing Release.
The Commissions have reviewed and considered the comments received, and the
staffs of the Commissions have met with many market participants and other
interested parties to discuss the definitions. Moreover, the Commissions’ staffs
have consulted extensively with each other as required by sections 712(a)(1) and
(2) of the Dodd-Frank Act and have consulted with staff of the Board as required by
section 712(d) of the Dodd-Frank Act.
Paperwork Reduction Act, 44 U.S.C. §§ 3501-3520
Certain provisions of this rule will result in new collection of information
requirements within the meaning of the PRA. With the exception of the new “bookout” confirmation requirement, the CFTC believes that the burdens that will be
imposed on market participants under rules 1.8 and 1.9 already have been
accounted for within the SEC’s calculations regarding the impact of this collection of
information under the PRA and the request for a control number submitted by the
SEC to the Office of Management and Budget (OMB) for rule 3a68–2
(‘”Interpretation of Swaps, Security-Based Swaps, and Mixed Swaps”) and rule
3a68–4 (“Regulation of Mixed Swaps: Process for Determining Regulatory
Treatment for Mixed Swaps”). In response to this submission, OMB issued control
number 3235–0685.
Rules 3a68–2 and 3a68–4(c) under the Exchange Act contain new “collection of
information” requirements within the meaning of the Paperwork Reduction Act of
1995. The SEC has submitted them to OMB for review in accordance with the
PRA.

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Statutory authorization for the rule
Pursuant to the Commodity Exchange Act, 7 U.S.C. §§ 1 et seq., as amended by
Title VII of the Dodd-Frank Act, and sections 712(a)(8), 712(d), 721(a), 721(b),
721(c), 722(d), and 725(g) of the Dodd-Frank Act, the CFTC is adopting rules
1.3(xxx) through 1.3(bbbb) and 1.6 through 1.9 under the Commodity Exchange
Act.
Pursuant to the Securities Act, 15 U.S.C. §§ 77a et seq., and particularly, sections
19 and 28 thereof, and the Exchange Act, 15 U.S.C. §§ 78a et seq., and
particularly, sections 3 and 23 thereof, and sections 712(a)(8), 712(d), 721(a),
761(a) of the Dodd-Frank Act, the SEC is adopting rule 194 under the Securities Act
and rules 3a68–1a through 3a68–5 and 3a69–1 through 3a69–3 under the
Exchange Act.
Executive Order No. 12,866 (Regulatory Planning and Review)
As independent regulatory agencies, the Commissions are not subject to the review
requirements of the Order.
Executive Order No. 13,132 (Federalism)
As independent regulatory agencies, the Commissions are not subject to the review
requirements of the Order.

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