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House Ag Chair Peterson Details SEC, CFTC and FERC Jurisdiction over Derivatives in Dodd-Frank Act

By Jim Hamilton

In the view of House Agriculture Committee Chair Collin Peterson, the Dodd-Frank Act allocates authority over swaps and security-based swaps as follows. First, the CFTC has exclusive jurisdiction over swaps, including swaps on broad-based security indexes. Within the swap definition is a category of swaps called security-based swap agreements. For this specific category of swaps, the CFTC will continue to exercise its full jurisdictional authority, while the SEC may exercise certain specific authorities over these products. Title VII also clarifies that the SEC has jurisdiction over security-based swaps, which are swaps on narrow-based security indexes and single securities, and that the two agencies share authority over mixed swaps.

Nothing in the SEC savings clauses, or any other provision of Title VII, alters the existing jurisdictional divide between the CFTC and SEC established by the Johnson-Shad Accord which, among other things, provides the CFTC exclusive jurisdiction over futures (and options on futures) on broad-based security indexes. Nor do these savings clauses, or any other provision of Title VII, divest or limit the authority that the CFTC shares with the SEC over security futures products as authorized by the Commodity Futures Modernization Act of 2000.

The Dodd-Frank Act also clarifies the authorities of the CFTC and FERC over financial instruments, both swaps and futures, traded pursuant to FERC or state approved tariffs or rate schedules. Section 722 preserves FERC?s existing authorities over financial instruments traded pursuant to a FERC or state approved tariff or rate schedule, which under current law does not extend to CFTC-regulated exchanges and clearinghouses, because these are within CFTC?s exclusive jurisdiction.

The CFTC?s authorities over futures and swaps traded pursuant to FERC or state approved tariffs or rate schedules are also fully preserved. The Act further specifies that, outside of regional transmission organizations/independent system operators (RTOs/ISOs) markets, the CFTC must continue to have exclusive jurisdiction over financial instruments traded on CFTC-regulated exchanges, such as NYMEX or ICE, traded through swap execution facilities, or cleared on CFTC-regulated clearinghouses. To avoid the potential for overlapping or duplicative FERC and CFTC authority, the Act provides the CFTC with the authority to exempt financial instruments traded within an RTO/ISO from CFTC regulation if the CFTC determines the exemption would be consistent with the public interest and the purposes of the Commodity Exchange Act. Section 722 also preserves FERC?s anti-manipulation authority as it currently exists under the Federal Power Act and the Natural Gas Act prior to enactment of Dodd-Frank. (Cong. Record, June 30, 2010, p. H5256).

In the 1980s, disputes arose over whether certain derivatives transactions based on stock prices were best regulated as futures or securities. In 1982, the SEC and CFTC agreed on a regulatory scheme that came to be known as the Shad-Johnson Jurisdictional Accord. The accord reinforced the SEC?s jurisdiction over options on securities and recognized the CFTC?s jurisdiction over options on certain futures. The accord also delineated jurisdiction between the SEC and CFTC on stock index futures.

Full post as published by Jim Hamilton's World of Securities Regulation on July 06, 2010 (boomark / email).