The U.S. swaps regulator approved on Tuesday a key definition that will start the clock ticking on a host of reforms for the murky $650 trillion over-the-counter global swaps market.

The Commodity Futures Trading Commission voted 4 to 1 on the definition of a “swap,” which triggers a countdown on compliance requirements for other rules such as registration and reporting for major swaps players.

“This rule means that two months after the rule is published, light will begin to shine on the swaps market for the first time,” Chairman Gary Gensler said in a statement.

The Securities and Exchange Commission unanimously approved its parallel swap definition rule in a closed-door vote Monday.

The definition also determines which products will face a host of rules mandated by the 2010 Dodd-Frank financial reform law, which requires most swaps to be centrally cleared and traded on exchanges or swap execution facilities.

Those reforms are aimed at boosting oversight and limiting risk in the opaque swaps market. Risky derivatives trading at firms such as insurer American International Group and investment bank Lehman Brothers nearly toppled the financial system during the crisis of 2007-2009 and led to billion-dollar taxpayer bailouts.

The swaps definition hews closely to the one first proposed by regulators in April 2011 and contained in the Dodd-Frank law itself.

Swaps include foreign exchange swaps and forwards, foreign currency options, commodity options, cross-currency swaps, and forward rate agreements.

An exemption would apply to certain insurance products and some consumer and commercial transactions, such as a contract to purchase home heating oil and loan participations.

The final rule clarifies that the exemption for some insurance products is a “safe harbor,” meaning some products not specifically excluded could still avoid swaps regulation.

The agency also added a seven-part test for distinguishing swaps from commodity forwards, contracts to buy or sell a certain amount of a commodity at a particular point in the future.

The regulators moved ahead with their rule even though Treasury Secretary Timothy F. Geithner has not finalized a proposed decision to exempt foreign exchange swaps and forwards from central clearing and exchange trading requirements.

Many of the rules set in motion by the definition fall heavily on “swap dealers,” mostly banks with more than $8 billion in swap trades annually.

They will have 60 days to register with the National Futures Association after the final definition is published.

They will also soon have to put in place robust internal and external business conduct standards and begin reporting swaps to swap data warehouses.

— Reuters