Issues Regarding the Extraterritorial Reach of U.S. Swap Regulation

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Title VII — the Wall Street Transparency and Accountability Act of 2010 — of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd Frank Act”) contains a variety of provisions that regulate or require agency action to regulate swaps and the swap markets, generally through amendments to the Commodities Exchange Act (the “CEA”) and the Securities Exchange Act of 1934 (the “Exchange Act”). In very broad terms, a typical swap is an agreement between counterparties to exchange payments on regular future dates, with the payments of each party calculated on a different basis. In an interest rate swap, for example, one party may agree to make payments based on a fixed interest rate and the other based on a floating rate. This allows the parties to hedge against exposure to fluctuating interest rates or to speculate on such fluctuations. The Dodd-Frank Act includes a definition of swap that is much broader than this typical scenario, however, and is intended to cover the entire spectrum of derivatives trading. A security-based swap is generally defined as a swap that is based on a security or loan or a narrow-based security index or the occurrence or non occurrence of an event relating to an issuer of a security or the issuers of a narrow-based security index.

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