Deconstructing Caiola in light of the CFMA: can a security still be extracted from a swap?

On June 27, 2002, the Second Circuit Court of Appeals ruled in Caiola v. Citibank, N.A. (Caiola II) that cash‐settled options are “securities” under Section 3(a)(10) of the Securities Exchange Act of 1934 (Exchange Act). In doing so, the Second Circuit disagreed with the Southern District of Ohio and the lower Caiola court (Caiola I), both of which took the position that certain cash‐settled options based solely on the value of a security were not securities because they “did not give either counterparty the right to exercise an option or to take possession of any security”. The Court adopted the Securities and Exchange Commission’s (SEC) view, widely supported in the securities bar, that “neither the right to take possession of any security nor the right to choose whether to exercise a necessary feature of an option on a security”.