Federal agencies are proposing swaps regulations that would exclude insurance products written by regulated insurers from the definition of the term “swap.”

Members of the U.S. Securities and Exchange Commission (SEC) voted 5-0 to release a draft of the proposed definition for public comment, and members of the U.S. Commodity Futures Trading Commission (CFTC) voted 4-1 to release the draft.

Staffers at the SEC and the CFTC have developed the definition to implement Dodd-Frank compassprovisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act that require the agencies to work together to set up a new system for regulating “swaps” and “security-based” swaps.

The agencies have proposed a broad definition that would include many types of arrangements with terms that depend on the occurrence, nonoccurrence or partial occurrence of future events with economic or commercial consequences.

The proposed definition of “swap” would provide that certain types of products would automatically qualify as insurance, and not as swaps or security-based swaps “if offered by a regulated insurance company,” CFTC officials say in a swaps definition fact sheet.

“These products are surety bonds, life insurance, health insurance, long-term care insurance, title insurance, property and casualty insurance, and annuity products the income on which is subject to tax treatment under Section 72 of the Internal Revenue Code,” officials say.

Even if a contract was not one of the products that automatically qualify for the insurance product exclusion, the contract could still qualify for an exclusion if it is provided by an insurer regulated in the United States, a federal agency, or a non-U.S. reinsurer, and:

  • The beneficiary of the contract has an insurable interest that is the subject of the contract and bears “the risk of loss with respect to that interest continuously throughout the duration of the contract.”
  • Any payment or indemnification for loss is limited to the value of the insurable interest
  • The contract cannot be traded separately from the insured interest on an organized market or over-the-counter.

The summaries provided by the CFTC do not mention life settlements directly, but

another provision provides an exclusion from the swaps definition for “consumer transactions” that involve “transactions entered into by consumers (natural persons or their agents) as principals primarily for personal, family or household purposes.”

That provision would apply to a consumer’s efforts to “sell or assign rights owned by such consumer (such as intellectual property rights),” officials say.

Parties that are not sure whether a particular transaction is a swap can ask the CFTC and the SEC for a joint interpretation, CFTC officials say in a collection to answers to questions about the proposed swaps definition regulations.

Other swaps coverage from National Underwriter Life & Health: