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Feds: Is a Stable Value Fund a Swap? If So, What Then?

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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)Dodd-Frank compass 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.

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.

The commissions are asking commenters questions such as, “What characteristics, if any, distinguish [stable value contracts] from swaps?” and whether stable value contracts should be classified as insurance. The commissions have proposed exempting many ordinary insurance products sold by state-regulated insurers from the official definition of swap.

The commissions also are asking about “immunization” provisions that give the stable value contract providers the right to shut down the contracts if a stable value fund performs poorly. In some cases, an immunization agreement might require, for example, that a stable value fund dispose of all securities rated below AAA, or require a portfolio to be invested 100% in Treasury securities, officials say.

The commissions ask whether the immunization provisions pose risks to investors and whether the provisions are properly disclosed.

“Do investors have incentives to make a run on a [stable value fund] when its market-to-book ratio is substantially below one?” the commissions ask elsewhere. “What protections, if any, do [stable value contracts] provide to protect fund investors who do not redeem their fund shares amid a run on the fund? How effective are any such protections?’

The commissions also ask for discussions of how the commissions should regulate stable value contracts as swaps, if they decide the contracts are swaps, and how any regulations covering the contracts might affect investor access to stable value funds.

Other swaps coverage from National Underwriter Life & Health:


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