World financial regulators should apply similar capital incentives to over-the-counter (OTC) derivatives trades conducted by banks, broker-dealers and insurers, the Financial Stability Board (FSB) says.
The FSB, Basel, Switzerland, is a body set up to advise the Group of 20 developed countries on strategies for increasing the stability of the world financial system.
The American Council of Life Insurers, Washington, and other world insurance groups have written to the U.S. Treasury Department to ask officials to be aware of the characteristics that distinguish insurers from banks and other types of financial services companies.
The FSB says in a report on implementing OTC derivatives market changes that it believes regulators should take a consistent approach when applying OTC derivatives market prudential requirements, or financial safety requirements, to insurers as well as to banks and broker-dealers.
The FSB refers to insurers in a description of how financial services companies use “bespoke” derivatives products
“One example is a put option that insurance companies may purchase from derivatives dealers in order to protect against principal shortfalls for variable annuity products,” the FSB says. “The protection that is provided needs to be tailored to the characteristics of the different pools of variable annuity investors, and the asset portfolios that the investors chose. We are aware of trades with greater than 100 pools of investors protected, and the period of protection lasting for more than 30 years.”
Other users of bespoke products include hedge funds, pension funds and university endowments, the FSB says.