WASHINGTON — Municipal and other interest rate swaps that are based on indexes would be regulated by the Commodity Futures Trading Commission rather than the Securities and Exchange Commission under draft legislation proposed by the Treasury Department earlier this week, sources said.

The draft revises and significantly narrows the current legal definition of securities-based swaps so that the SEC would not have jurisdiction over interest rate swaps based on indices that include more than nine securities. Under the draft, the SEC would only have regulatory authority over securities based-swaps defined as swap agreements or contracts that are based on: a narrow-based security index that has nine or fewer securities, among other things; a single security or loan; the occurrence or nonoccurrence of an event relating to a single issue of a security or the issuers of securities in a narrow-based security index.

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