By Randy Myers
When Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, it tasked the Securities & Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) with conducting a study of stable value contracts. The goal was to determine whether stable value contracts should be treated as over-the-counter derivatives contracts—what Dodd-Frank calls swaps—under the legislation, making them subject to additional regulation and oversight. At the time of the law’s passage, there was concern that the statute’s definition of a swap was so broad that it might encompass products, most prominently stable value contracts, that many policymakers felt were never intended to be subject to the law.
Of the two regulatory bodies, the CFTC has been taking the lead in the study, while the SEC has been addressing more pressing imperatives imposed by Dodd-Frank. Recently, the SEC asked some wrap issuers to provide examples of their contracts for the study, suggesting that the Commissions may be devoting more time to the stable value study in the months ahead.
Regulators have three options for how to handle stable value contracts. They can rule that the contracts do qualify as swaps and are subject to Dodd-Frank regulation. They can rule that they do not qualify, and are not subject to regulation. Or they can determine that stable value contracts qualify as swaps but are exempt from Dodd-Frank regulation, assuming regulators conclude that such an exemption would be “appropriate” and in the public’s best interest.
The Commissions’ heightened interest in the study does not guarantee that anything is imminent in terms of the study being completed, Steve Kolocotronis, vice president and general counsel for Fidelity Investments and chair of the SVIA Government Relations Committee, said at the 2013 SVIA Spring Seminar. The request for stable value contracts does indicate, however, that the CFTC and SEC are paying attention to the issue. “I don’t know that we have a timeframe as to when we think we will get the study,” he said.
Based on discussions with regulators, Kolocotronis said it appeared that the CFTC has “some nervousness” about declaring that stable value contracts are not swaps, as it might encourage other financial services firms to argue that they’ve developed similar products that should be exempt. “It seems from their perspective that the safer thing is to say that a stable value contract is a swap, but exempt,” he said. “That way, they maintain some control over other products that come along down the line.”
By contrast, Kolocotronis said, the SEC seemed more comfortable with the idea of declaring that stable value contracts are not swaps.
The SVIA position, which it has conveyed to regulators, has consistently been that stable value contracts are not swaps. The association has noted that stable value products do not present a systemic risk to the financial system, and did not cause any problems during the 2008 financial crisis, nor did stable value contribute to the financial crisis. The SVIA has also stressed that stable value products are already heavily regulated. They have a 39-year history of operating under the Employee Retirement Income Security Act through a diverse range of financial stresses and cycles and have continued to perform well despite these market challenges. All this, SVIA President Gina Mitchell said at the Spring Seminar, suggests that “the potential for this product to have a bad outcome for plan participants is pretty remote.”
One good bit of news for the stable value industry as it pertains to the study’s delayed completion, Mitchell noted, is that delays do no harm. Until regulators make a decision as to how stable value contracts are to be treated, stable value contracts do not count as swaps, and any stable value contracts issued prior to the study’s conclusion will be grandfathered as such.
Kolocotronis reaffirmed that the SVIA position has been and remains that stable value contracts are not swaps. He also said the SVIA has suggested to regulators that Dodd-Frank may offer some clues to Congress’ intent on this matter. “If you look at Dodd-Frank, although they (regulators) are required to do the study, there seems to be an indication of what Congress thought here,” he said. “If Congress is willing to grandfather this entire set of contracts—basically every contract that exists today gets grandfathered—that seems to be an indication of some intent that should push them (regulators) in the direction of this not being a swap.”