SEC and CFTC Seek Comment on ‘Swaps’ Amid CME Lawsuit

The Securities and Exchange Commission and the Commodity Futures Trading Commission issued a joint request for public comment on how to define “swaps” and where to draw lines between swaps, security-based swaps and other exchange-traded products. The request follows a lawsuit filed by CME Group contesting the agencies' approach to classifying certain exchange-traded contracts.

The agencies outlined questions about the economic features and contractual terms that should determine classification. They invited exchanges, market participants, clearinghouses, dealers and end users to submit examples, legal analyses and data showing how alternative classification approaches would affect trading, clearing obligations, reporting and legal jurisdiction.

The notice asks whether specific contractual language, the way traders use instruments, counterparties' identities, or the presence of clearing and centralized trading should determine treatment. It also requests input on cross-border issues and on applying definitions consistently to products traded internationally.

CME Group's lawsuit contends that longstanding products offered on regulated exchanges should not be folded into the swaps regime. The dispute highlights areas of overlap between SEC and CFTC authority and the potential for duplicated requirements or inconsistent interpretations of statutory language.

The agencies set a period for public submissions and said they will review comments before deciding whether to propose rule changes or issue interpretive guidance. Market participants can provide practical examples, data on market effects, and analyses of how different definitions would affect risk management, liquidity and regulatory compliance.

Under the Dodd-Frank Act, federal oversight of over-the-counter derivatives expanded and separate categories were created for swaps and security-based swaps. The CFTC generally oversees most swaps while the SEC oversees security-based swaps tied to individual securities or narrow-based security indexes. CME Group is the largest U.S. derivatives exchange operator and a major clearinghouse; its legal challenge could influence the regulatory treatment of a wide range of derivatives going forward.