Swaps Definitions Regulation - Stable Value Contracts - Comment Letters

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Dodd-Frank Timeline, Acceptance of Public Submissions Regarding the Study of Stable Value Contracts
Request Date Comment Period Reopened Comment Deadline
August 25, 2011 October 2, 2012 November 1, 2012

On August 19, 2011, the CFTC and SEC issued a joint appeal for public comment to assist the agencies in a determination of whether stable value contracts should fall under the definition of swaps and, if so, whether the contracts should be exempted from regulation by the agencies. The request appeared in the Federal Register on August 25, 2011. The original deadline for public comment was September 26, 2011. On October 2, 2012, the comment period was reopened by the two commissions for 30 days. The extended deadline was November 1, 2012.

The comment letters from 2011 can be found below. Regarding later submissions, the comments were generally the same as those submitter earlier. Entities wishing to exempt stable value contracts compared them to insurance products which, under the final definitions rules, were not considered to be swaps. Entities opposed to the exemption, such as the Americans for Financial Reform and Better Markets, Inc., expressed concern that the embedded principal protection component of stable value contracts, combined with the amount of retail interest in such products through 401(k) and 403(b) plans, imposes a systemic risk which should not be granted a loophole. To view the newer comment letters, visit the page on the CFTC web site.

American Council of Life Insurers - August 25, 2011

Stable Value Contracts
August 25, 2011

From the comment letter:

"ACLI values the opportunity to carefully evaluate the detailed questions posed in the joint SEC and CFTC invitation of comment on a study to determine whether “stable value contracts” fall within the definition of the term “swap”. The request for comment was published in the Federal Register today, August 25, 2011, and contains a 30 day comment period that will end on September 26, 2011. The detailed questions posed in the release merit careful analysis, and warrant an extension of the comment period. A lengthened timeframe for input will generate more valuable and informed commentary."

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Invesco - September 26, 2011

Stable Value Contracts
September 26, 2011

From the comment letter:

"Although stable value investment contracts may have some technical characteristics of swaps, we believe they do not meet the intended definition under Title VII of Dodd-Frank. In the context of collective trust funds, Stable Value investment contracts are written agreements between a stable value commingled fund and a stable value contract issuer that cannot be traded, exchanged or assigned (without consent of the issuer) as described in FASB Codification Paragraphs 945-210-45-9 through 45-18. However, should the Commissions determine that investment contracts are to be considered swaps (perhaps on technical grounds); we believe they should be exempt from further unnecessary regulation."

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Americans for Financial Reform - September 26, 2011

Stable Value Contracts
September 26, 2011

In the comment letter, Americans for Financial Reform (AFR) expresses its concern that, if unregulated, stable value contracts may be used to evade swaps rules. Additionally, AFR is concerned about:

  • The possibility that uncollateralized stable value contracts may destabilize the financial system, much as uncollateralized credit default swaps did during the 2008 crisis. The Commissions should ensure issuers of stable value guarantees have the resource to back up these guarantees.
  • The complexity of stable value contracts raises many of the same issues that led to the inclusion of business conduct standards for swaps dealers in the DFA. The Commissions should extend similar business conduct standards to issuers of stable value guarantees.
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Stable Value Investment Association/American Bankers Association/Financial Services Roundtable - September 26, 2011

Stable Value Contracts
September 26, 2011
Executive summary of the comment letter:

"The Joint Associations respectfully submit that:

  • Stable value contracts are not swaps. Congress recognized that stable value contracts are a unique risk management instrument that merits separate consideration and potentially separate treatment from “swaps” and other derivative instruments when it directed the Commissions to conduct the Stable Value Study. The Commissions should determine that stable value contracts do not fall within the definition of “swap” under the Dodd-Frank Act.
  • Stable value products are wholly unrelated to the transactions that Congress sought to regulate through the Dodd-Frank Act. Significantly, stable value contracts and stable value funds do not pose systemic risk concerns. On the contrary, stable value products are highly-specialized, conservative investment products used by plan participants to reduce their exposure to market volatility within defined contribution plans. Regulating stable value contracts as swaps could eliminate this important investment option.
  • The existing regulatory structure applicable to providers of stable value contracts and the defined contribution savings plans that offer stable value funds is effective and consistent with the goals Congress set out in the Dodd-Frank Act – namely, to provide transparency, safeguards against systemic risks to the U.S. financial system, and appropriate oversight of the financial markets.
  • Nevertheless, should the Commissions find that stable value contracts fall within the definition of “swap,” the Joint Associations believe the Commissions should utilize the exemptive authority specifically provided in Section 719(d)(1)(B) of the Dodd-Frank Act to exempt stable value contracts from the definition and thereby avoid the potentially significant unintended and detrimental consequences that would result if stable value contracts were to be subject to regulation as “swaps” under the Commodity Exchange Act, as amended (“CEA”), the Securities Exchange Act of 1934 (“Exchange Act”), and corresponding CFTC and SEC regulations thereunder.
  • An exemption is not only appropriate and in the public interest, but also necessary to ensure that defined contribution plan participants will continue to have access to high-quality, conservative investment options. Without stable value, retirees and other defined contribution plan participants would have no alternative but to switch to investments that either carry greater risk or offer lower returns. Congress did not intend to cause such uncertainty or jeopardize plan participants’ and retirees’ retirement investments or income."
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SIFMA - September 26, 2011

Stable Value Contracts
September 26, 2011
Summary of key points from the comment letter:

  • "AMG believes that the Commissions should exercise their authority to exempt SVCs from regulation under Title VII"
  • "SVCs do not present the type of systemic risk that Title VII is intended to mitigate;"
  • "SVCs are not suitable for mandatory clearing or exchange trading;"
  • "SVC trade reporting is unlikely to be informative to the Commissions or the marketplace;"
  • "if SVCs were treated as swaps, wrap providers may be considered to be fiduciaries under Department of Labor (“DOL”) regulations, causing SVCs to be prohibited for plans subject to ERISA;" and
  • "while swap regulation of SVCs is unlikely to provide significant benefits, it would be costly for retirees and other groups that Dodd-Frank seeks to protect."
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MetLife - September 26, 2011

Stable Value Contracts
September 26, 2011
From the comment letter:

"The Commissions’ study, and any recommendations that flow from it, should recognize the following key points: (1) because of the features of stable value contracts, stable value did not, and does not, pose a systemic risk to the economy; (2) stable value did not contribute to the financial crisis of 2008; and (3) stable value has significantly outperformed the other possible alternatives available as a low risk option to Defined Contribution plan sponsors, and as such has contributed importantly to the retirement security of tens of millions of plan participants. In addition, both stable value’s regulation by solvency-oriented state insurance departments, and the nature of SVCs themselves, preclude stable value from contributing to systemic risk in the future."

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BlackRock - September 26, 2011

Stable Value Contracts
September 26, 2011
From the comment letter:

"Stable Value Funds play an important role in defined contribution plans. Book value wrap contracts were introduced more than fifteen years ago in response to concerns about concentrated credit risk. Since then, Stable Value Funds have provided Plan Participants with a conservative, high quality, liquid investment option that has outperformed money market funds. Maintaining the stable value product requires book value wrap contracts, which differ significantly from swaps and should not be regulated as if they were swaps. In turn, the contract providers need more clarity about and more certainty of their regulatory status in order to write these contracts.

"The elimination or reduction of stable value investment options would have negative implications for the retirees of the 170,000 retirement plans that currently offer stable value as part of their defined contribution offerings, as well as for the capital markets. We respectfully urge you to recognize the unique aspect of book value wrap contracts and not make them subject to the rules pertaining to swaps."

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Royal Bank of Canada - September 26, 2011

Stable Value Contracts
September 26, 2011
From the comment letter:

  • "SVCs are individually tailored, negotiated agreements that are not a “traded” product. There is no secondary market for SVCs, nor could one be created.
  • SVCs are not fungible and not suitable for clearing. SVCs do not involve the counterparty credit risk associated with swaps, and rely on each party to the SVC to perform its specific obligations under the agreement.
  • SVCs do not rely on an underlying reference asset and, unlike swaps, are not priced based on a reference asset, index or similar financial instruments in the manner of most swap transactions.
  • SVCs cannot be used for speculation or arbitrage. Neither party to an SVC can automatically or unilaterally compel the SVC issuer to make payments based on the difference between the market value and book value of the high quality, diversified fixed income portfolio (the “Covered Assets”)."
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Vanguard - September 26, 2011

Stable Value Contracts
September 26, 2011
Summary of key points from the comment letter:

  • "SVCs are fundamentally different from swaps; the Commissions should determine they are not swaps."
  • "SVCs do not pose systemic risk concerns."
  • "Dodd-Frank Act risk mitigating mandates are wholly inappropriate for the stable value contract product."
  • "Regulation of SVCs as swaps would substantially reduce or effectively eliminate stable value fund offerings."
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