Federal swaps regulators are asking whether the contracts at the heart of stable value funds should be regulated as swaps, and, if so, how that might affect the funds’ cost and availability.
The U.S. Commodity Futures Trading Commission (CFTC) and the U.S. Securities and Exchange Commission (SEC) will be including those questions in a stable value fund request for comment to be published within the next few weeks in the Federal Register.
The CFTC and the SEC are looking at stable value funds to implement Section 719(d) of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
A stable value funds is a type of investment oftened offered through 401(k) plans and other defined contribution plans. The fund typically offer liquidity, principal protection and current income, but they tend to offer higher returns than most money market funds do.
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The companies that offer the funds protect the principal by buying a stable value contract from an insurer or bank. The contract provider offers to pay the plan participants at bok value if the fund value proves to be less the amount needed to pay the participants book value.
The Dodd-Frank Act drafters responded to concerns about the credit freeze that started in 2007 by putting the SEC in charge of regulating security-based swaps and the CFTC in charge of regulating other swaps. Because of concerns that stable-value funds proved to be more vulnerable to the crisis than expected — and because of concerns that some guarantee providers’ practices had contributed to the crisis — act drafters have asked the CFTC and the SEC to decide whether stable value contracts are swaps, and, if so, whether the contracts should be exempt from the official definition of swap.
If the commissions decide the contracts should be defined as swaps, they are supposed to then decide whether the contracts should be subject to the same rules that apply to other types of swaps or different rules.