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Administration Backs Life Access To Customized Derivatives

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WASHINGTON BUREAU — The Obama wants to continue to let life insurers and others trade customized derivatives, Michael Barr said Thursday.

Barr, assistant secretary of the Treasury for financial institutions, spoke here at an ALI-ABA Conference on Life Insurance Company Products.

As the Over-the-Counter Derivatives Market Act of 2009 bill makes its way through Congress, there will be “disagreements this way and that way how we define who is and who isn’t an end-user,” Barr said.

But “a core principal that needs to be preserved–that will be preserved–[in any legislation regulating the credit default swaps market] is that end users will have the flexibility to customize derivatives,” Barr said.

The OTC derivatives bill would require that major financial players, such as banks and hedge funds, that are speculating on derivatives to handle transactions through exchanges.

But airlines, manufacturers, farmers and other “end users” that use derivatives to hedge against business risk would be exempted from the requirement to feed transactions through exchanges.

Life insurers would be exempt when they were using derivatives contracts to manage the interest rate risk and capital-loss risk associated with the long-term securities that fund insurance products.

The draft bill also would give the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission the authority to exempt firms from the exchange requirement, and the draft would require that all derivatives transactions, both standard and customized, be reported to a central trade repository, in an effort to make prices more transparent.

Barr talked about the OTC derivatives bill in response to a question from Gary Hughes, the general counsel of the American Council of Life Insurers, Washington.

Hughes said he was asking the question because ACLI members “are concerned” that Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, would seek to substantively limit the exception the bill currently provides for trading of customized derivatives.

He was referring to a letter Frank wrote Nov. 3 to SEC Chairman Mary Schapiro and to CFTC Chairman Gary Gensler.

Frank asks Schapiro and Gensler to tighten the exemption. Otherwise, he writes, parties not eligible for the end user exemption might try to use it to avoid the clearing and trading requirement.

Frank wants Schapiro and Gensler to tell him whether the bill should be amended when it comes up for debate on the House floor to put regulators, rather than clearinghouse managers, in charge of deciding whether a transaction is subject to trading on an exchange.


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