Swaps Exemptions for Insurers Upheld by CFTC

Federal regulators are supporting the insurance industry in its request for an exemption from the new regulatory regime for complex derivatives called “swaps,” which are mandated by the Dodd-Frank financial services reform law.

In a final rule approved Tuesday, the Commodity Futures Trading Commission exempted from oversight all traditional insurance products, according to Fred Bellamy, a partner at Sutherland, Asbill & Brennan in Washington, D.C.  The CFTC, as well as the Securities and Exchange Commission, have been writing rules to complete the new derivatives regulatory structure that Congress included in the DFA, which was enacted by Congress in 2010.

Congress devised the new regulatory scheme to prevent reckless, speculative trading considered to be a key factor in the precipitous economic downturn that engulfed the world in 2007 and 2008.

The derivatives trading provisions, of which the swaps definition is a part, require that most derivatives be traded on open platforms and routed through a clearinghouse that secures the deal and collects margin from both sides.

The CFTC’s ruling mostly exempts insurance products because insurers enter into swaps transactions mainly to hedge against losses in products that have so-called “long tails”—contracts that go on long periods of time. In other words, insurers do not engage in derivatives trading for speculative purposes.

In the final rule, the CFTC also accepted a request by Congress that commercial companies and small banks with assets of $10 billion or less be excluded from the requirement to clear their trades. The banks argued the new requirements would be too onerous and tie up money that could be used for investment and lending.

Commenting on a comment letter sent by the Committee on Annuity Insurers on the proposed rule in July 2011, Bellamy said the annuity insurers’ letter made other suggestions. But changes made in the rule, as requested by the CAI, “are a vast improvement from the perspective of issuers of annuities and life insurance products.”

“Of course, we don’t know what other changes, if any, may be included in the final rule release,” Bellamy said.

In the fact sheet, the CFTC said it is clarifying in its final rules and interpretations “that certain types of products or transactions that could be covered by an expansive reading of the swap definition, but that traditionally have not been considered to be swaps, are not swaps.”

The fact sheet adds that, “These products and transactions include traditional insurance products that meet certain criteria, certain consumer and commercial arrangements, and certain loan participations.”

However, officials of a trade group representing property and casualty insurers said the final rule doesn’t go far enough.

Stef Zielezienski, senior vice president and general counsel of the American Insurance Association, said the PC industry recommended that the CFTC defer to state regulatory definitions of insurance, not propose a separate definition of its own.