What is a Broker-Dealer? - Davis Polk & Wardwell
What is a Broker-Dealer? - Davis Polk & Wardwell
What is a Broker-Dealer? - Davis Polk & Wardwell
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§ 1A:4.4 BROKER-DEALER REGULATION<br />
However, “security-based swap” specifically does not include agreements,<br />
contracts or transactions that only meet the definition of SBS<br />
due to referencing, being based upon, or settling through the transfer,<br />
delivery or receipt of government securities and certain other “exempted<br />
securities” (not including municipal securities). 299 The effect<br />
of th<strong>is</strong> <strong>is</strong> to allocate jur<strong>is</strong>diction of swaps on government securities to<br />
the CFTC.<br />
Certain options and physically settled forwards on securities are<br />
excluded from the definitions of “swap” and “security-based swap,”<br />
but continue to be “securities” under the Exchange Act. 300<br />
Dodd-Frank adds “security-based swap” to the definition of “security”<br />
in section 3(a)(10) of the Exchange Act. 301 Before Dodd-Frank,<br />
section 3A of the Exchange Act excluded “non-security-based swap<br />
agreements” from the definition of “security” for all purposes of the<br />
Exchange Act, and “security-based swap agreements” for purposes of<br />
the Exchange Act other than certain anti-fraud, anti-manipulation,<br />
and insider trading purposes. Section 3A has been amended to remove<br />
reference to “non-security-based swap agreements.” New section 3A(b)(1)<br />
of the Exchange Act provides that the definition of security “shall not<br />
include any security-based swap agreement.”<br />
New and amended definitions of “swap agreement” and “securitybased<br />
swap agreement” can be found in infra Appendix 1A-A. Significantly,<br />
the definition of “security-based swap agreement” excludes<br />
any SBS. Therefore, amended section 3A only serves to exclude from<br />
the definition of “security” only certain securities-related derivatives<br />
that do not constitute SBS as defined above.<br />
[C][1][b] “SBS <strong>Dealer</strong>,” “SBS MSP” and “SBS SEF”<br />
In addition to regulation of swap and SBS products, Dodd-Frank<br />
establ<strong>is</strong>hes a regime for the regulation of participants in the swap and<br />
299. Exchange Act § 3(a)(68)(C), as amended by Dodd-Frank § 761(a).<br />
300. The Dodd-Frank derivatives title excludes from the definitions of SBS and<br />
“security-based swap agreement” certain “identified banking products”<br />
that are effected by a bank under the jur<strong>is</strong>diction of an appropriate federal<br />
banking agency: (1) a deposit account, savings account, certificate of<br />
deposit or other deposit instrument <strong>is</strong>sued by a bank; (2) a banker’s<br />
acceptance; (3) a letter of credit <strong>is</strong>sued or a loan made by a bank; (4) a<br />
debit account at a bank ar<strong>is</strong>ing from a credit card or similar arrangement;<br />
and (5) a participation, sold to certain persons, in a loan that the bank or<br />
an affiliate of the bank, other than a broker or dealer, has funded and<br />
participates in or owns. However, Dodd-Frank authorizes the appropriate<br />
federal banking agency to except an identified banking product from the<br />
exclusion above if it determines, in consultation with the CFTC and the<br />
SEC, that the product has been structured to evade the Commodity<br />
Exchange Act or the Exchange Act.<br />
301. Exchange Act § 3(a)(10), as amended by Dodd-Frank § 761(a).<br />
1A–70