The COMMODITY FUTURES TRADING COMMISSION (CFTC) today (Tuesday, July 10th, 2012) voted 4 to 1 to approve final overdue rules defining the controversial term "swap" as it pertains to commodities. This necessary and important definition of "swap" will now help facilitate much-needed major reforms in the so-called "Swaps" industry.
The CFTC's sister agency, the Securities and Exchange Commission (SEC), approved the final rules in a unanimous closed-door vote on Monday, July 9th, 2012. Approval by the SEC was required by the 2010 Dodd-Frank financial reform law, which requires most "swaps" to be centrally cleared and traded on exchanges (places where securities or commodities are bought and sold).
Traditionally, a "swap" is a derivative or agreement in which counterparties exchange cash flows of one party's financial instrument or commodity for those of the other party's financial instrument or commodity.
Once the appropriate regulators decide which derivatives or agreements are considered legally to be "swaps" under the 2010 Dodd-Frank Act, U.S. regulators will unleash a large number of rules on this $648 trillion global market of "swaps" which will be designed to prevent a repeat of the 2008 credit crisis.
[www.businessweek.com/news/2012-07-09/sweap=definition; John C. Hulls, "Options, Futures and Other Derivatives" (6th Edition), Prentice Hall: New Jersey, 2006; "Fundamentals of Corporate Finance" (9th, Alternate Edition), McGraw Hill (2010); news.yahoo.com/u-swaps-regulators-finalize-key-reform-trigger-133304154 (07/10/2012); in.reuters.com/article/2012/07/10/cftc-swap-definition, 07/10/2012
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