A Dodd-Frank Update: Stable Value Still in Limbo

Stable value wrap contracts aren’t considered swap contracts under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010—and they won’t be unless the Commodities Futures Trading Commission (CFTC) and the Securities Exchange Commission (SEC) determine that stable value contracts are swaps.

A major goal of the Dodd-Frank Act was to bring greater transparency and regulatory oversight to over-the-counter derivatives, or, in the language of the legislation, swaps.” The statute’s definition of a swap was broad, however, threatening to encompass products that many observers felt were never intended to be subject to the legislation. Perhaps the most prominent example: stable value contracts, which back the contract-value guarantees offered by stable value funds.

In a late bid to resolve the issue, Congress included language in the legislation requiring regulators at the SEC and the CFTC to study whether stable value contracts should fall under the statute’s umbrella. If the study concluded they did not, that would be the end of the matter. If it found that stable value contracts should qualify as swaps, however, Congress also gave the regulators express authority to exclude them if doing so would be “appropriate” and in the public’s best interest.

“The study was supposed to be finished about a year ago, but it hasn’t been completed,” attorney Anthony Mansfield, a partner with the law firm of Cadwalader, Wickersham & Taft, told participants at the 2012 SVIA Fall Forum. But he called the study mandate and the authority to exclude stable value contracts from the legislation a “very, very powerful tool” in the current political climate.

Mansfield said that if regulators eventually decide that stable value contracts qualify as swaps, they would then have to propose rules for how to regulate them, put those proposed rules out for comment, and ultimately issue final rules. Only then would stable value contracts be subject to Dodd-Frank, he emphasized. Until then, they remain exempt.

For now, Mansfield said, regulators appear to be caught up in more pressing matters. “I think we have always been positioned last in line, and often that is not a good thing,” he said. “But in this case I’ve taken the view that I think it is a good thing that stable value contracts are not a pressing issue for the Commissions—particularly since the Commissions must determine first if stable value contracts are swaps and if these contracts should also be regulated as swaps.”

No one can predict with certainty how the matter will ultimately be resolved, of course, but, Mansfield said, “I continue to think there is a bias among regulators to conclude that stable value is not a swap and cannot be regulated as a swap.” He noted that the stable value industry has made a concerted effort to educate regulators about their product. “I have a degree of comfort that we’ve appropriately managed this process to date,” he said. “We will continue to argue that stable value contracts are not swaps, and identify for regulators why they are not.”

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