By: Randy Myers
Are stable value wrap contracts a swap? The stable value industry argues that answer to the first question is no, making the second question moot.
Federal regulators are undecided.
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, a study group formed by the Securities & Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC) is trying to decide whether a stable value wrap contract qualifies as a swap under the terms of the Act. (See “Swap or Not? Regulators Assess Stable Value under Dodd-Frank Act,” Stable Times, volume 14, issue 2.)
If the SEC and CFTC conclude that a wrap contract is a swap, the stable value industry could be hit with new clearing and reporting requirements. However, the regulators also have the option under Dodd-Frank of deciding that even if a wrap contract is a swap, stable value funds should be exempted from Dodd-Frank oversight.
Attorney Anthony Mansfield, a partner with the firm of Cadwalader, Wickersham & Taft LLP, told participants at the 2011 SVIA Spring Seminar that regulators may ultimately choose to go the second route. Otherwise, he said, the financial services industry might be encouraged to push for similar treatment of other financial instruments, making it difficult to achieve what Congress intended under the Act.
The SVIA has been trying to position itself as a resource for the stable value study group, said Mansfield, who has been advising the organization, noting that “the more information we can provide, the better outcome we can anticipate.”
Dodd-Frank gave the study group until October of this year to complete its work. However, the sheer number of regulations required by the new law have put regulators woefully behind the Act’s scheduled deadlines, including the stable value study. The study team will most likely release a series of questions for public comment sometime late this summer, which follows the Commission’s epic release in May of a 300-page swap definition.
The stable value study group could come out with its own notice of proposed rule-making and then invite public comment too, Mansfield noted, or it could issue an “advanced notice” inviting public comment prior to rule- making. He did not predict which was more likely.
There is, Mansfield noted, an outside chance that nothing will come of any of this if the U.S. House of Representatives, now controlled by Republicans, tries to slow down implementation of Dodd-Frank. Many House Republicans elected last year have expressed reservations about the Act and its costs, he said, and have mused about the possibility of revising it. “It would be a difficult thing to do,” Mansfield said, “but it’s lurking.”
Alternatively, he noted, Republicans could try to starve the SEC and CFTC of the resources they need to implement the Act. The CFTC has said, for example, that it will need hundreds of mil- lions of dollars in additional resources to carry out its Dodd- Frank mandates.
The fiscal 2011 budget approved by Congress shortly after the Spring Seminar didn’t go that far in awarding additional funds, but it did add $34 million to the CFTC budget and $74 million to the SEC budget.
If regulators do find themselves having to pick and choose projects due to budget constraints, Mansfield said, it seems likely that the stable value initiative might be put on a back burner since it was not identified as a high priority under the Dodd-Frank Act.
Absent a resolution of the matter, he said, the industry would take the position that stable value funds are not subject to additional regulation under Dodd-Frank until and if regulators say otherwise.
“The longer the delay, the longer we are definitely out,” Mansfield said. “We are not in until they reach some sort of conclusion.”