By Lisa Bleier
Risk Magazine (subscription required) last week highlighted a critical and immediate issue that will affect thousands of pension funds and the men and women who rely on these funds for their retirement.
To minimize systemic risk to the financial system, the Dodd-Frank Act subjects many derivative or “swap” transactions to mandatory clearing as early as March 2013. However, uncertainty related to technical rules under the Employee Retirement Income Security Act of 1974 (ERISA), which governs corporate pension funds and certain funds in which they invest, may make it difficult, if not impossible, for pension investors to clear swaps unless the Department of Labor issues two key pieces of advice.
Pension funds are voicing their concerns and frustrations. Here is one pension fund manager quoted in Risk’s story:
“Banks have said they will not clear for us until they have received clarity from the DOL, but we want the ability to clear – especially if the European crisis hits boiling point again in the next few months. If our European swap counterparties start to look shaky, then we want to mitigate the counterparty risk through clearing."
And here is another fund manager:
"Because clearing members are not willing to take on the risk, pension funds are being put at a disadvantage relative to other counterparties and can't enjoy the benefits of counterparty risk reduction or the pricing differential. And it's all because of a technical issue."
In early 2012, SIFMA asked the Department for two pieces of guidance on swaps clearing, consistent with the Department’s stated position on futures clearing since 1982.
First, it asked the Department to confirm that clearing firms would not become fiduciaries by exercising their contractual rights such as upon closeouts (notwithstanding any technical differences between swaps and futures trading).
Second, we asked the Department to confirm that if a clearing firm has to close out a pension fund investor’s swap the transaction will continue to be exempt from the prohibited transaction provisions of ERISA and the Internal Revenue Code, just as it was when the swap was first cleared.
To date, the Department has not provided the requested guidance. If clearing firms are unsure about whether they will be able to exercise all of their close-out rights under a clearing agreement without violating ERISA, many will refuse to clear for pension fund investors at all.
SIFMA, along with many plan fiduciaries and clearing organizations, continue to urge the DOL to issue guidance so pension plans and the funds in which they invest can enter into cleared swap transactions for their portfolio. For the benefit of retirees across the country, we hope the DOL will act as soon as possible.