Swap agreements are one of the most popular types of over-the-counter (OTC) derivative contracts. The market's popularity stems from the financial success that market participants have experienced in using swap agreements to manage risks associated with their commercial and financing transactions. Through financial engineering, swap dealers are able to identify and to isolate various risks associated with financial portfolios, and to develop swap agreements that specifically address those risks. Unfortunately, several market participants have incurred substantial losses from trading swap agreements. The phenomenal growth of the market along with its accompanying losses have raised questions about whether the swap market should be regulated.

Currently, swap transactions are not subject to any single regulatory framework. Swap transactions are regulated only to the extent that the market participants trading such transactions are regulated. For example, banks, which are major OTC derivatives dealers, are overseen by federal bank regulators and are subject to certain regulatory requirements those regulators imposed. Other major swap dealers are insurance companies and securities firms that are subject to limited or no federal oversight.

The traditional approach to regulating the financial markets has been to allocate regulatory authority of new financial products based on whether the product falls within the definition of a security or a futures. Classifying swap agreements as futures or securities is inappropriate, given that they possess features that distinguish them from both securities and futures. The OTC derivatives market is an innovative market that designs financial instruments that are especially tailored to meet counterparties' financial needs. These instruments cannot easily be pigeonholed into categories of futures or securities. Subjecting such instruments to existing securities or commodities laws would stymie product development and prevent OTC derivatives dealers from competing effectively with foreign OTC derivatives dealers who are subject to less restrictive regulation.

This Article contends that the classification of swap agreements as securities or futures is inappropriate given that the OTC derivatives market is a wholly different market than the ones for which securities and commodities laws were devised. Part II provides an overview of the swaps market. Part III discusses the jurisdictional problems between the SEC and CFTC regarding derivatives. Part IV examines whether swap transactions are securities. Part V examines whether swap transactions are futures contracts. Part VI surveys the exemption of swaps from CFTC authority. Part VII discusses the public policy goals in the OTC derivatives market, including what regulatory framework should be implemented to achieve these goals, and it is followed by a brief conclusion.