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Authorizing the Regulation of Swaps Act

Earlier this month, Senator Carl Levin (D-MI) and Senator Susan Collins (R-ME) introduced the Authorizing the Regulation of Swaps Act. If enacted, this legislation would undo significant portions of the Commodity Futures Modernization Act of 2000 (“CFMA”), which precluded both the SEC and CFTC from having any regulatory jurisdiction over most swap transactions. While the Authorizing the Regulation of Swaps Act does not cede regulation of all swaps to either the SEC or the CFTC, it does authorize “Federal financial regulators” to “exercise oversight over (A) any swap agreement that is entered into, purchased or sold by any institution, entity or person” subject to the regulator’s jurisdiction and “(B) over any swap agreement that is subject to” the regulator’s jurisdiction.

While the bill sidesteps whether swaps of various kinds are regulated as securities by the SEC, fall under the CFTC's perview, that of the Fed, or a number of other regulatory entities, the bill does provide the SEC plenary authority to regulate swaps traded on or cleared through exchanges or clearing agencies and the CFTC plenary authority to regulate swaps executed on, traded on, or cleared through trading facilities or registered entities. Because swap agreements are engaged in for such a variety of reasons, including, credit default, interest rates, currency, credit, equities, commodities, etc., and could be regulated by as many as seven regulatory entities, the bill futher requires the various "federal financial regulators" to “consult, work, and cooperate with other Federal financial regulators to promote consistency in the treatment of swap agreements.”

The ambiguity of the bill's allocation of jurisdiction between the CFTC and SEC, as well as the Fed and other potential regulators, introduces the real risk regulatory confusion, and commentators fear a regulatory free for all. Levin and Collins see the bill as acting to fill a dangerous regulatory gap, without requiring the regulators to wait for sweeping financial regulatory reform.

A more detailed examination of key sections of the Authorizing the Regulation of Swaps Act is available from Davis Polk & Wardwell at: http://www.dpw.com/1485409/clientmemos/2009/05.13.09.Levin.Collins.Bill.pdf

The full text of the bill is available at: http://levin.senate.gov/newsroom/supporting/2009/Levin-Collins.swaps.050409.pdf