Published Internally

Commodity Futures Modernization Act of 2000

This Jones Day Commentaries provides a summary of recent legal and regulatory changes in the United States ("U.S."), which, in our view, significantly liberalize the ability of investment banks and other financial institutions to distribute Asian-originated derivative products into the U.S., which up until now have primarily been distributed in the Euromarket due to regulatory uncertainty in the U.S.

The feasibility of distributing derivative instruments in the U.S. fundamentally depends upon the legal characterization of the instrument. Traditionally, if the instrument were deemed to constitute a "commodity option" or "futures contract", then, unless otherwise exempted or excluded, it would fall within the Commodity Exchange Act ("CEA"), be subject to jurisdiction of the Commodity Futures Trading Commission ("CFTC") and would generally be subject to the CEA's exchange trading requirement. On the other hand, if the instrument were deemed to constitute a "security", then it would fall within the U.S. securities laws, be subject to the jurisdiction of the Securities and Exchange Commission ("SEC"), and the instrument could generally be distributed in a typical capital markets transaction in the U.S. (e.g., registered public offering, 4(2) private placement, 144A offering, etc.).

Due to the CEA's expansive definition of the term "commodity", many types of derivative instruments which are commonly seen in the Euromarket (such as notes linked to baskets of stocks, inflation rates, price of oil, price of gold, etc.) may be deemed to have embedded a commodity component, and thus the characterization of those instruments for purposes of U.S. distribution and trading becomes uncertain and subject to inquiry.

Before CFMA

The U.S. regime on the regulation of derivatives has been very complex. From the perspective of an investment bank that is considering the distribution of Asian-originated derivative instruments in the U.S., the following are what we consider to have been the highlights of the U.S. regulatory framework prior to enactment of the CFMA.

Treasury Amendment. In 1974, the CEA was amended (the "Treasury Amendment") to exclude from CEA regulation transactions in foreign currencies, government securities, mortgages and other specified financial instruments, so long as such transactions did not involve contracts for future delivery "conducted on a board of trade" (a phrase that, unfortunately, has in itself spawned much debate and thus resulted in some regulatory uncertainty).

Shad-Johnson Accord. From 1983 until recently, the Shad-Johnson Accord has governed the allocation of jurisdiction between the CFTC and the SEC with respect to derivative instruments. Generally speaking, under Shad-Johnson:

• the CFTC retained jurisdiction over: (i) options on commodities; (ii) futures contracts and options on futures contracts on commodities (including individual exempt securities, permitted securities indices and foreign currencies); and (iii) futures contracts and options on foreign currencies not traded on a national securities exchange;
• the SEC retained jurisdiction over: (i) options on securities and securities indices; (ii) options on foreign currencies traded on a national securities exchange; and (iii) the offer and sale of securities issued by commodity pools; and
• certain instruments were prohibited, generally, futures contracts and options on futures contracts on: (i) individual securities (other than certain exempt securities); (ii) indices of non-exempt securities settled by physical delivery; and (iii) indices of non-exempt securities that are not broad-based.

Statutory Interpretation. In 1989, the CFTC published the Statutory Interpretation Concerning Hybrid Instruments (the "Statutory Interpretation"), which excluded from regulation under the CEA certain hybrid instruments (i.e., debt or equity with payments linked to a commodity component) having minimal features of commodity options or futures contracts. In order to qualify for exclusion, the Statutory Interpretation required, among other things, that the "commodity independent yield" of the hybrid instrument be between 50% and 150% of the estimated yield on a comparable non-hybrid instrument. In other words, quantitative tests had to be applied, and this led to a variety of uncertainties when calculating the value of the "commodity independent yield", the value of the yield on similarly situated non-hybrid instruments, and the value of the commodities to which the instruments were indexed. This in turn resulted in regulatory uncertainty as to whether a particular hybrid instrument were excluded from CFTC jurisdiction.

Hybrid Exemption. In 1993, the CFTC promulgated an exemption from regulation under the CEA for a broad class of hybrid instruments (the "Hybrid Exemption"). Under the Hybrid Exemption, among other things, a "predominance test" was applicable, under which the debt or equity component of the hybrid instrument (the "commodity-independent component") must exceed the value of the option-like or futures-like commodity component of the instrument (the "commodity-dependent component"). In applying the predominance test, the CFTC had prescribed a methodology for calculating the commodity-dependent component whereby the commodity indexation had to be decomposed into an option position or series of option positions, to which premium values had to be assigned and then aggregated to determine the value of that component. Not surprisingly, in many cases these calculations yielded vastly differing results depending on the various assumptions upon which they were based, and this in turn produced considerable regulatory uncertainty.

Swap Policy Statement and Swap Exemption. In 1989, the CFTC issued a policy statement (the "Swap Policy Statement"), whereby swap transactions meeting certain requirements would not be subject to regulation under the CEA as futures or commodity option transactions. To qualify for the "safe harbor" under the Swap Policy Statement, a swap agreement must, among other things, have individually negotiated terms, be entered in conjunction with the swap parties' line of business, and not be terminable without the consent of the other swap party.

Concurrent with the Hybrid Exemption, the CFTC in 1993 also promulgated an exemption from regulation under the CEA for a broad class of swap agreements (the "Swap Exemption"). Under the Swap Exemption, a swap agreement must be entered into between "eligible swap participants" (generally, institutions or sophisticated individuals), not be fungible with a class of agreements which have standardized economic terms, involve exposure to counterparty credit risk and not traded on a "multilateral transaction execution facility". Presumably the purpose of these requirements was to prevent exempted swap agreements from looking too much like exchange-traded futures contracts. The Swap Exemption applied to most common interest rate, currency and commodity swap agreements, but it failed to cover equity derivatives; thus, the legality of equity swaps had to be analyzed under the older Swap Policy Statement.

Other exclusions and exemptions exist or have existed, but we will not elaborate on them at this time.

After CFMA

The CFMA was signed into law on December 21, 2000, with immediate effect, except with respect to the provisions governing "security futures". The CFMA is a complex and far-reaching amendment to the CEA, and amends several other statutes as well, including the Securities Act of 1933 and the Securities Exchange Act of 1934. The CFTC is currently implementing a number of rule-making procedures pursuant to or as a result of the enactment of the CFMA.

We would like to summarize below what we are able at this time to identify as potentially the most significant provisions of the CFMA from the perspective of an investment bank considering the distribution of Asian-originated derivative instruments in the U.S.

Transactions in Excluded Commodities by Eligible Contract Participants Not on a Trading Facility. The CFMA repeals the Shad-Johnson Accord. In its place, the CFMA in a sweeping manner excludes from application of the CEA bilateral transactions between "eligible contract participants" (see below) in "excluded commodities" (see below), provided that the same are either not executed on a "trading facility" (see below) or executed on an electronic trading facility and entered into on a principal-to-principal basis. In addition, swap transactions in commodities other than agricultural commodities are excluded from the CEA if they are the subject of individual negotiations by eligible contract participants and not executed on a trading facility.

The term "eligible contract participant" is based on the definition of eligible swap participant under the Swap Exemption, although the class of persons comprising eligible contract participants is expanded somewhat to include "financial institutions" generally and natural persons with more than $5 million in total assets who enter into the relevant transaction for risk management purposes. The term "financial institution" includes a foreign bank or a branch or agency of a foreign bank as defined in the International Banking Act of 1978. Also, the CFMA amends the definition of "financial institution" in the Bankruptcy Code to clarify that foreign financial institutions are entitled to the benefits thereunder, such as the exception from the automatic stay in bankruptcy for securities contracts.

The definition of "excluded commodities" is worth setting forth here in full: "The term "excluded commodity" means: (i) an interest rate, exchange rate, currency, security, security index, credit risk or measure, debt or equity instrument, index or measure of inflation, or other macroeconomic index or measure; (ii) any other rate, differential, index, or measure of economic risk, return, or value that is (I) not based in substantial part on the value of a narrow group of commodities not described in clause (i), or (II) based solely on one or more commodities that have no cash market; (iii) any economic or commercial index based on prices, rates, values, or levels that are not within the control of any party to the relevant contract, agreement or transaction; or (iv) an occurrence, extent of an occurrence, or contingency (other than a change in the price, rate, value, or level of a commodity not described in clause (i)) that is (I) beyond the control of the parties to the relevant contract, agreement or transaction, and (II) associated with a financial, commercial or economic consequence". As is apparent, the definition is very broad and would seem to encompass most derivative financial products.

The term "trading facility" means essentially an organized exchange or electronic trading facility on which trades are made, but it specifically excludes facilities that enable participants to negotiate the terms of the trade or on which bids, offers and acceptances thereof are non-binding. As such, it seems clear that a transaction in derivatives over-the-counter whereby the counterparties are able to negotiate the terms of the transaction are excluded.

Transactions in Exempt Commodities by Eligible Commercial Entities Not on a Trading Facility. The CFMA makes the CEA inapplicable to a transaction in an "exempt commodity" (see below) between eligible contract participants which is not entered into on a trading facility, although such a transaction would still be subject to the provisions of the CEA which prohibit fraud and market price manipulation in relation to commodity transactions. Furthermore, the CFMA makes the CEA inapplicable to a transaction in an exempt commodity between "eligible commercial entities" (see below) which is executed or traded on an electronic trading facility, again, still being subject to the anti-fraud and manipulation provisions of the CEA.

The term "exempt commodity" is defined simply as a commodity that is not an excluded commodity or an agricultural commodity. The residual nature of this definition is significant, because it means that if a commodity cannot be classified as either an excluded commodity or an agricultural commodity, then it is exempt, and may fall outside the scope of the CEA if the other conditions are met.

The term "eligible commercial entity" is simply a subset of the term eligible contract participant. It includes financial institutions, but excludes natural persons.

New Hybrid Exemption. The CFMA contains a new hybrid exemption which provides that the CEA generally does not apply to a hybrid instrument that is predominantly a security (the "New Hybrid Exemption"). Predominance as a security is satisfied if:

• the issuer receives payment in full of the purchase price of the hybrid instrument substantially contemporaneously with delivery of the instrument;
• the purchaser or holder of the hybrid instrument is not required to make any payment to the issuer in addition to the initial purchase price during the life of the instrument or at maturity;
• the issuer of the hybrid instrument is not subject to mark-to-market margining requirements; and
• the hybrid instrument must not be marketed as a contract for sale of a commodity for future delivery.

It is noteworthy that the New Hybrid Exemption does not include any quantitative tests, resulting in regulatory clarity so long as the aforesaid conditions are satisfied.

Banking Products. The CFMA excludes from CEA application and from CFTC jurisdiction an "identified banking product":

• certified by an appropriate banking agency to have been commonly offered, entered into, or provided in the U.S. by any "bank" on or before December 5, 2000 and not then prohibited by the CEA or regulated by the CFTC; or
• that was not commonly offered, entered into, or provided in the U.S. by any bank on or before December 5, 2000, if the product has no payment indexed to the value, level or rate of, and does not provide for the delivery of, any commodity, or the product or commodity is otherwise excluded from the CEA.

In addition, the CFMA excludes from CEA application and from CFTC jurisdiction:

• a banking product if the product is a hybrid instrument that is predominantly a banking product (under the same non-quantitative predominance test that applies for hybrid instruments which are predominantly securities, as described above); or
• a "covered swap agreement" offered, entered into, or provided by a bank.

Expanded Treasury Amendment. The CFMA expands the Treasury Amendment by excluding from CEA regulation any transactions in foreign currency, government securities, security warrants, security rights, resales of installment loan contracts, repurchase transactions in "excluded commodities" and mortgages or mortgage purchase commitments.

Security Futures. The CFMA repeals Shad-Johnson and will permit, for the first time, the trading in the U.S. of "security futures", defined to mean futures contracts on individual non-exempt securities and narrowly-based groups or indices of non-exempt securities (the term also does not include "excluded commodities"). The security futures provisions of the CFMA will generally not take effect for at least one year after the date of enactment, although transactions by eligible contract participants trading for their own accounts may be permissible eight months after such date.

Security futures will be treated as both securities and futures contracts and will, accordingly, be subject to the provisions of the securities laws as well as the CEA, with certain exceptions and exemptions set forth in the CFMA. Trading in security futures will be subject to regulation by both the SEC and the CFTC, and the CFMA provides for a variety of mechanisms for coordinating such dual regulation. Of note, margin requirements for security futures will be consistent with the margin requirements for comparable option contracts traded on national securities exchanges. Security futures will have to be traded on trading facilities that are registered under both the Securities Exchange Act of 1934 and the CEA. Transactions in security futures must be effected through persons that are registered both with the SEC as broker-dealers and with the CFTC as futures commission merchants.

Swap Agreements and the Securities Laws. The CFMA contains a broad definition of "swap agreements". The CFMA also introduces the concept of a "security-based swap agreement", defined as "a swap agreement of which a material term is based on price, yield, value or volatility of any security or any group or index of securities, or any interest therein".

Significantly, the CFMA amends both the Securities Act of 1933 and the Securities Exchange Act of 1934, to provide that swap agreements, including security-based swap agreements, are not "securities" as defined in those Acts. However, security-based swap agreements will continue to remain subject to the provisions in those Acts prohibiting fraud, manipulation and insider trading (including judicial precedents under those provisions), although the SEC may not impose reporting or record-keeping requirements or other procedures or standards as prophylactic measures against fraud, manipulation or insider trading, or otherwise require registration of security-based swap agreements.

Other Provisions. The CFMA provides that the CFMA preempts any state or local laws which regulate gaming or bucket shops, which thus eliminates concerns that excluded or exempted transactions may be voided as violating any of these laws. In addition, the CFMA contains a savings clause that provides that no transaction between eligible contract participants (or persons reasonably believed to be so) and no hybrid instrument, shall be void, voidable or unenforceable, and no party thereto shall be entitled to rescind or recover any payment with respect to, any such transaction or instrument, solely because of failure of such transaction or instrument to comply with the terms of an exemption or exclusion.

The CFMA also contains provisions regarding prohibited transactions, derivatives exchanges (introducing "multi-tiered" markets), derivatives clearing and other matters.

Further Information

This Jones Day Commentaries is a publication of Jones, Day, Reavis & Pogue and should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general informational purposes only and may not be quoted or referred to in any other publication or proceeding without the prior written consent of the Firm, to be given or withheld at its discretion. The mailing of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship.

Readers are urged to consult their regular contacts at Jones Day or Jeffrey H. Chen (telephone: 852-3189-7206; e-mail: ) or Glenn S. Arden (telephone: 1-212-326-7852; e-mail: ) concerning their own situations or any specific legal questions they may have. General e-mail messages may be sent using our Web site feedback form, which can be found at http://www.jonesday.com/admin/feedback.asp.

Footnotes:

1. In addition to specified agricultural products, the term "commodity" also encompasses "all other goods and articles . . . and all services, rights, and interests in which contracts for future delivery are presently or in the future dealt in".
2. See note 4 hereof. The definition of the term "eligible swap participant" is substantially the same as the definition of the term "eligible contract participant" under the CFMA. To conserve space and avoid duplication, the latter has been set forth in note 4 in full as the more current and relevant definition.
3. The term "multilateral transaction execution facility" means a physical or electronic facility in which all market makers and other participants that are members simultaneously have the ability to execute transactions and bind both parties by accepting offers which are made by one member and is open to all members of the facility.
4. The term "eligible contract participant" means: acting for its own account -
   1. (i) a financial institution;
   2. (ii) an insurance company that is regulated by a State, or that is regulated by a foreign government and is subject to comparable regulation as determined by the Commission, including a regulated subsidiary or affiliate of such an insurance company;
   3. (iii) an investment company subject to regulation under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.) or a foreign person performing a similar role or function subject as such to foreign regulation (regardless of whether each investor in the investment company or the foreign person is itself an eligible contract participant);
   4. (iv) a commodity pool that -
      1. (I) has total assets exceeding $5,000,000; and
      2. (II) is formed and operated by a person subject to regulation under this Act or a foreign person performing a similar role or function subject as such to foreign regulation (regardless of whether each investor in the commodity pool or the foreign person is itself an eligible contract participant);
   5. (v) a corporation, partnership, proprietorship, organization, trust or other entity -
      1. (I) that has total assets exceeding $10,000,000;
      2. (II) the obligations of which under an agreement, contract, or transaction are guaranteed or otherwise supported by a letter of credit or keepwell, support, or other agreement by an entity described in subclause (I), in clause (i), (ii), (iii), (iv), or (vii), or in subparagraph (C); or
      3. (III) that -
         1. (aa) has a net worth exceeding $1,000,000; and
         2. (bb) enters into an agreement, contract, or transaction in connection with the conduct of the entity’s business or to manage the risk associated with an asset or liability owned or incurred or reasonably likely to be owned or incurred by the entity in the conduct of the entity’s business;
   6. (vi) an employee benefit plan subject to the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1001 et seq.), a governmental employee benefit plan, or a foreign person performing a similar role or function subject as such to foreign regulation -
      1. (I) that has total assets exceeding $5,000,000; or
      2. (II) the investment decisions of which are made by -
         1. (aa) an investment advisor or commodity trading advisor subject to regulation under the Investment Advisors Act of 1940 (15 U.S.C. 80b-1 et seq.) or this Act;
         2. (bb) a foreign person performing a similar role or function subject as such to foreign regulation;
         3. (cc) a financial institution; or
         4. (dd) an insurance company described in clause (ii), or a regulated subsidiary or affiliate of such an insurance company;
   7. (vii)
      1. (I) a government entity (including the United States, a State, or a foreign government) or political subdivision of a governmental entity;
      2. (II) a multinational or supranational government entity; or
      3. (III) an instrumentality, agency, or department of an entity described in subclause (I) or (II); except that such term does not include an entity, instrumentality, agency, or department referred to in subclause (I) or (III) of this clause unless (aa) the entity, instrumentality, agency, or department is a person described in clause (i), (ii), or (iii) of section 1a(11)(A); (bb) the entity, instrumentality, agency, or department owns and invests on a discretionary basis $25,000,000 or more in investments; or (cc) the agreement, contract, or transaction is offered by, and entered into with, an entity that is listed in any of subclauses (I) through (VI) of section 2(c)(2)(B)(ii);
   8. (viii)
      1. (I) a broker or dealer subject to regulation under the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.) or a foreign person performing a similar role or function subject as such to foreign regulation, except that, if the broker or dealer or foreign person is a natural person or proprietorship, the broker or dealer or foreign person shall not be considered to be an eligible contract participant unless the broker or dealer or foreign person also meets the requirements of clause (v) or (xi);
      2. (II) an associated person of a registered broker or dealer concerning the financial or securities activities of which the registered person makes and keeps records under section 15C(b) or 17(h) of the Securities Exchange Act of 1934 (15 U.S.C. 78o-5(b), 78q(h));
      3. (III) an investment bank holding company (as defined in section 17(i) of the Securities Exchange Act of 1934 (15 U.S.C. 78q(i));
   9. (ix) a futures commission merchant subject to regulation under this Act or a foreign person performing similar role or function subject as such to foreign regulation, except that, if the futures commission merchant or foreign person is a natural person or proprietorship, the futures commission merchant or foreign person shall not be considered to be an eligible contract participant unless the futures commission merchant or foreign person also meets the requirements of clause (v) or (xi);
   10. (x) a floor broker or floor trader subject to regulation under this Act in connection with any transaction that takes place on or through the facilities of a registered entity or an exempt board of trade, or any affiliate thereof, on which such person regularly trades; or
   11. (xi) an individual who has total assets in an amount in excess of -
       1. (I) $10,000,000; or
       2. (II) $5,000,000 and who enters into the agreement, contract, or transaction in order to manage the risk associated with an asset owned or liability incurred, or reasonably likely to be owned or incurred, by the individual;
5. The term "financial institution" means:
   1. (A) a corporation operation under the fifth undesignated paragraph of section 25 of the Federal Reserve Act (12 U.S.C. 603), commonly known as ‘an agreement corporation’;
   2. (B) a corporation organized under section 25A of the Federal Reserve Act (12 U.S.C. 611 et seq.), commonly known as an ‘Edge Act corporation’;
   3. (C) an institution that is regulated by the Farm Credit Administration;
   4. (D) a Federal credit union or State credit union (as defined in section 101 of the Federal Credit Union Act (12 U.S.C. 1752));
   5. (E) a depository institution (as defined in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813));
   6. (F) a foreign bank or a branch or agency of a foreign bank (each as defined in section 1(b) of the International Banking Act of 1978 (12 U.S.C. 3101(b)));
   7. (G) any financial holding company (as defined in section 2 of the Bank Holding Company Act of 1956);
   8. (H) a trust company; or
   9. (I) a similarly regulated subsidiary or affiliate of an entity described in any of subparagraphs (A) through (H).
6. The term "trading facility" means a person or group of persons that constitutes, maintains, or provides a physical or electronic facility or system in which multiple participants have the ability to execute or trade agreements, contracts, or transactions by accepting bids and offers made by other participants that are open to multiple participants in the facility or system. The term specifically excludes: (i) facilities that enable participants to negotiate the terms of and enter into bilateral transactions as a result of communications exchanged by the parties and from interaction of multiple bids and multiple offers within a predetermined, nondiscretionary automated trade matching and execution algorithm, (ii) government securities dealers and brokers, and (iii) the facilities on which bids and offers, and acceptances of bids and offers, are not binding.
7. The term "eligible commercial entity" means, with respect to an agreement, contract or transaction in a commodity -
   1. (A) an eligible contract participant described in clause (i), (ii), (v), (vii), (viii), or (ix) of the definition of that term as contained in note 4 hereof that, in connection with its business -
      1. (i) has a demonstrable ability, directly or through separate contractual arrangements, to make or take delivery of the underlying commodity;
      2. (ii) incurs risks, in addition to price risk, related to the commodity; or
      3. (iii) is a dealer that regularly provides risk management or hedging services to, or engages in market-making activities with, the foregoing entities involving transactions to purchase or sell the commodity or derivative agreements, contracts, or transactions in the commodity;
   2. (B) an eligible contract participant, other than a natural person or an instrumentality, department, or agency of a state or local governmental entity, that -
      1. (i) regularly enters into transactions to purchase or sell the commodity or derivative agreements, contracts, or transactions in the commodity; and
      2. (ii) either -
         1. (I) in the case of a collective investment vehicle whose participants include persons other than -
            1. (aa) qualified eligible persons, as defined in Commission rule 4.7(a) (17 CFR 4.7(a));
            2. (bb) accredited investors, as defined in Regulation D of the Securities and Exchange Commission under the Securities Act of 1933 (17 CFR 230.501(a)), with total assets of $2,000,000; or
            3. (cc) qualified purchasers, as defined in section 2(a)(51)(A) of the Investment Company Act of 1940;  in each case as in effect on the date of the enactment of the Commodity Futures Modernization Act of 2000, has, or is one of a group of vehicles under common control or management having in the aggregate, $1,000,000,000 in total assets; or
         2. (II) in the case of other persons, has, or is one of a group of persons under common control or management having in the aggregate, $100,000,000 in total assets; or
      3. (C) such other persons as the Commission shall determine appropriate and shall designate by rule, regulation, or order.
8. The term "identified banking product" means the first five categories in the definition of "identified banking product" in Section 206(a) of the Gramm-Leach-Bliley Act (except that the term "bank" when used therein will have the same meaning as defined in note 8 hereof, and the term "qualified investors" when used therein will mean "eligible contract participants" as defined in note 4 hereof). These five categories are: (1) a deposit account, savings account, certificate of deposit, or other deposit instrument issued by a bank; (2) a banker’s acceptance; (3) a letter of credit issued or loan made by a bank; (4) a debit account at a bank arising from a credit card or similar arrangement; and (5) a participation in a loan which the bank or an affiliate of the bank (other than a broker or dealer) funds, participates in, or owns that is sold (A) to qualified investors; or (B) to other persons that (i) have the opportunity to review and assess any material information, including information regarding the borrower’s creditworthiness; and (ii) based on such factors as financial sophistication, net worth, and knowledge and experience in financial matters, have the capability to evaluate the information available, as determined under generally applicable banking standards or guidelines.
9. The term "bank" means: (1) any depository institution (as defined in section 3(c) of the Federal Deposit Insurance Act); (2) any foreign bank or branch or agency of a foreign bank (each as defined in section 1(b) of the International Banking Act of 1978); (3) any Federal or State credit union (as defined in section 101 of the Federal Credit Union Act); (4) any corporation organized under section 25A of the Federal Reserve Act; (5) any corporation operating under section 25 of the Federal Reserve Act; (6) any trust company; or (7) any subsidiary or any entity described in paragraph (1) through (6) of this subsection, if the subsidiary is regulated as if the subsidiary were part of the entity and is not a broker or dealer (as such terms are defined in section 3 of the Securities Exchange Act of 1934) or a futures commission merchant (as defined in section 1a(20) of the Commodity Exchange Act).
10. The term "covered swap agreement" means a "swap agreement" (as defined in Section 206(b) of the Gramm-Leach-Bliley Act), including a credit or equity swap, based on a commodity other than an agricultural commodity, if the swap agreement is: (1) between "eligible contract participants" not entered into or executed on a "trading facility"; or (2) entered into or executed on an electronic "trading facility" on a principal-to-principal basis between "eligible contract participants" in respect of an "excluded commodity".
11. 1. (a) Except as provided in subsection (b) below, the term "swap agreement" means any agreement, contract, or transaction between eligible contract participants (as defined in section 1a(12) of the Commodity Exchange Act as in effect on the date of the enactment of this section), other than a person that is an eligible contract participant under section 1a(12)(C) of the Commodity Exchange Act, the material terms of which (other than price and quantity) are subject to individual negotiation, and that -
       1. (1) is a put, call, cap, floor, collar, or similar option of any kind for the purchase or sale of, or based on the value of, one or more interest or other rates, currencies, commodities, indices, quantitative measures, or other financial or economic interests or property of any kind;
       2. (2) provides for any purchase, sale, payment or delivery (other than a dividend on an equity security) that is dependent on the occurrence, non-occurrence, or the extent of the occurrence of an event or contingency associated with a potential financial, economic, or commercial consequence;
       3. (3) provides on an executory basis for the exchange, on a fixed or contingent basis, of one or more payments based on the value or level of one or more interest or other rates, currencies, commodities, securities, instruments of indebtedness, indices, quantitative measures, or other financial or economic interests or property of any kind, or any interest therein or based on the value thereof, and that transfers, as between the parties to the transaction, in whole or in part, the financial risk associated with a future change in any such value or level without also conveying a current or future direct or indirect ownership interest in an asset (including any enterprise or investment pool) or liability that incorporates the financial risk so transferred, including any such agreement, contract, or transaction commonly known as an interest rate swap, including a rate floor, rate cap, rate collar, cross-currency rate swap, basis swap, currency swap, equity index swap, equity swap, debt index swap, debt swap, credit spread, credit default swap, credit swap, weather swap, or commodity swap;
       4. (4) provides for the purchase or sale, on a fixed or contingent basis, of any commodity, currency, instrument, interest, rights, service, good, article, or property of any kind; or
       5. (5) is any combination or permutation of, or option on, any agreement, contract, or transaction described in any of paragraphs (1) through (4).
    2. (b) The term "swap agreement" does not include -
       1. (1) any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities, including any interest therein or based on the value thereof;
       2. (2) any put, call, straddle, option, or privilege entered into on a national securities exchange registered pursuant to section 6(a) of the Securities Exchange Act of 1934 relating to foreign currency;
       3. (3) any agreement, contract, or transaction providing for the purchase or sale of one or more securities on a fixed basis;
       4. (4) any agreement, contract, or transaction providing for the purchase or sale of one or more securities on a contingent basis, unless such agreement, contract, or transaction predicates such purchase or sale on the occurrence of a bona fide contingency that might reasonably be expected to affect or be affected by the creditworthiness of a party other than a party to the agreement, contract, or transaction;
       5. (5) any note, bond, or evidence of indebtedness that is a security as defined in section 2(a)(1) of the Securities Act of 1933 or section 3(a)(10) of the Securities Exchange Act of 1934; or
       6. (6) any agreement, contract, or transaction that is -
          1. (A) based on a security; and
          2. (B) entered into directly or through an underwriter (as defined in section 2(a) of the Securities Act of 1933) by the issuer of such security for the purposes of raising capital, unless such agreement, contract, or transaction is entered into to manage a risk associated with capital raising.