Federal financial services regulators have proposed a rule that could give them the authority to set tougher minimum margin and capital requirements for transactions with large swaps operations, or speculative swaps operations, affiliated with insurers.

The proposed rule would implement sections 731 and 764 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which require the regulators to set standards for the swaps dealers, “major swap participants” and “major security-based swap participants” that they regulate.

The agencies involved include the Office of the Comptroller of the Currency, financial instrumentsthe Federal Reserve Board, the Federal Deposit Insurance Corp., the Farm Credit Administration and the Federal Housing Finance Agency.

The agencies are in the process of creating formal definitions of terms such as “swap,” but the term “swap” could refer to a wide range of financial transactions that involve trading one stream of cash flows for another.

The agencies did not suggest in the proposed swaps regulations published today in the Federal Register that they would impose swaps oversight directly on insurers.

An agency could not impose direct oversight on a swaps transaction participant unless the agency was the participant’s prudential regulator.

But a federal agency could indirectly regulate an insurer, by imposing relatively relaxed rules on regulated entities that engage in swaps transactions with “low-risk financial end users” and much tighter rules on covered entities that engage in swaps transactions with “high-risk financial end users.”

An insurer would be classified as a low-risk financial end user if, and only if, it met all of the following requirements:

  • Its swaps or security-based swaps fell below a specified ”significant swaps exposure” threshold.
  • It predominantly used swaps to hedge or mitigate the risks of its business activities, such as interest rate risk.
  • It was subject to capital requirements established by a prudential regulator or state insurance regulator.

An insurer that was classified as a high-risk financial end user might be a much less attractive swaps counterparty.

An agency could impose tougher margin collection requirements on a bank or thrift it regulated when the bank or thrift was participating in derivatives arrangements or other swaps arrangements with high-risk insurers, officials say in a preamble to the proposed regulations.

Agencies would expect tougher margin collection requirements to cause regulated entities to reduce their counterparty exposure to higher-risk financial end users, officials say.

Comments on the proposed regulations are due June 24.

Other swaps coverage from National Underwriter Life & Health: