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Dodd-Frank: ACLI Releases Swaps Proposal (WITH ACLI RESPONSE) (Corrected)

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WASHINGTON BUREAU — The American Council of Life Insurers (ACLI) has proposed definitions that could free life insurers from most of the swaps activity oversight required by the new Dodd-Frank Wall Street Reform and Consumer Protection Act.

The ACLI, Washington, submitted the definition proposals in a comment letter to the U.S. Securities and Exchange Commission (SEC) and the U.S. Commodity Futures Trading Commission (CFTC).

The SEC and the CFTC asked for definition proposals in a call for comments on implementing swaps activity regulation provisions in Title VII of the Dodd-Frank Act. The act defines swaps as as including any arrangement that is a “put, call, cap, floor, collar, or similar option of any kind that is for the purchase or sale, or based on the value, of 1 or more interest or other rates, currencies, commodities, securities, instruments of indebtedness, indices, quantitative measures, or other financial or economic interests or property of any kind.”

The CFTC is involved because Congress decided to split oversight over swaps between the SEC and the CFTC. The SEC will oversee securities-based swaps, and the CFTC will oversee other types of swaps; the agencies are supposed to give more details about the boundaries as they go about implementing Title VII.

The SEC and the CFTC are starting off by looking at how Title VII terms such as “major swap participant,” “major securities-based swap participant,” and “swap” ought to be defined. The agencies plan to use the terms in a regulation that will govern oversight of major swaps dealers.

Carl Wilkerson, a vice president at the ACLI, writes in the ACLI’s comment letter that the conferees who drafted the final version of Title VII, including Sen. Blanche Lincoln, D-Ark., and Sen. Christopher Dodd, D-Conn., stated that it should be the intent of the bill to distinguish between commercial end users hedging their risk and larger, riskier, market participants.

Wilkerson also argues that in determining which derivatives activities should be regulated by the agencies, one of the issues that should be taken into consideration is the “value and quality of the collateral held against counterparty exposures.”

The current “entire [state] insurance regulatory regime is designed to ensure insurer solvency and protect the interests of policy and contract holders,” Wilkerson says. “We respectfully submit that life insurers engaging in such activities in compliance with state law are highly unlikely to produce risk having the potential to significantly impact the financial system of the U.S.

Regulators relying on other sections of the Dodd-Frank Act could deem a life insurer to be systemically important, “however, its derivatives positions alone should not be the cause of such classification, not because it is a life insurer, but because of the prudent, well-regulated, commercial risk-mitigating nature of the activities in which it is engaged,” Wilkerson says.

The lawmakers who drafted Title VII were thinking partly of the fate of American International Group Inc., New York (NYSE:AIG), a financial services company that ran into trouble after it insured $2.7 trillion in mortgage-backed securities by issuing credit default swaps that were not hedged.

A commenter from another group, the American Insurance Association, Washington, noted that Lincoln said while engaged in the negotiations that produced the final version of the Dodd-Frank Act that she was working with other senators to craft a provision that would give the CFTC and the SEC time to study the issue of whether stable value fund options or the contract wrappers for these stable value funds, are swaps or some other type of financial instrument, such as an insurance contract.



ACLI officials have told us that they believe this article gives the mistaken impression that its derivatives definition comments were designed to provide life insurers with an exemption from oversight of its derivatives activities.

The Dodd-Frank financial services reform legislation has a “very broad scope” and a number of issues beyond derivatives oversight “have not yet been addressed,” ACLI officials say

Federal regulators “have over 90 mandates to engage in rulemaking or conduct studies that will establish the scope of the new legislation,” ACLI officials say.

The ACLI says its comment letter addresses only the definitions of the terms “major swaps participant” and “major security-based swaps participant,” not the definition of “swaps.”

The Dodd-Frank Act “covers many complex issues beyond these two definitions,” ACLI officials say.


CORRECTION: The original version of this article misattributed comments submitted to the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission in connection with proposed regulations relating to derivatives.

The article mistakenly attributed a statement regarding stable value funds to the American Council of Life Insurers (ACLI), Washington. The statement about stable value funds was in a letter filed by the American Insurance Association, Washington. We apologize for the error.


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