The Study of Stable Value Contracts
Summary
The Asset Management Group of SIFMA provides comments to the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) on the joint study being conducted by the CFTC and SEC on stable value contracts (SVCs) as required under Section 719(d) the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). SVCs are used by many retirement plans and provide investors with a steady rate of return with less exposure to changes in interest rates than money market funds. In order to gain more clarity on these instruments, the CFTC and SEC issued a study to assess whether or not SVCs should be deemed swaps. If categorized as swaps, SVCs would be subject to centralized clearing and a host of other regulations. Among its recommendations, SIFMA AMG argues that these products are not suitable for mandatory clearing as they are highly customized, unleveraged, and non speculative instruments.
Excerpt
Mr. David A. Stawick
Secretary
Commodity Futures Trading Commission
Three Lafayette Centre
1155 21st Street, N.W.
Washington, DC 20581
Ms. Elizabeth M. Murphy
Secretary
Securities and Exchange
Commission
100 F Street, N.E.
Washington, DC 20549-1090
Re: Study of Stable Value Contracts (Release No. 34-65153; File No. S7-32-11)
The Asset Management Group (the “AMG”)1 of the Securities Industry and Financial Markets Association (“SIFMA”) appreciates the opportunity to comment on the study of stable value contracts (“SVCs”)2 being conducted by the Commodity Futures Trading Commission (the “CFTC”) and the Securities and Exchange Commission (the “SEC,” and together with the CFTC, the “Commissions”). Section 719(d) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) requires that the Commissions complete a study by October 21, 2011 to determine whether SVCs fall within the definition of “swap” under Title VII of Dodd-Frank and, if so, whether SVCs should be exempted from that definition in the public interest.3
AMG members have significant experience with SVCs. Many AMG members advise stable value funds (“SVFs”),4 which purchase SVC “wraps” from banks and insurance companies (“wrap providers”). SVFs are a popular, conservative investment for many retirement plans because they provide capital preservation and liquidity similar to money market funds, but typically at higher yields. SVFs are a $540 billion market and are available in over 127,000 defined contribution retirement savings plans.5 They “are included in half of all 401(k) plans,”6 and represent 10% to 13% of all defined contribution plan assets.7
As discussed in greater detail below, the AMG believes that the statutory exclusion for options from the definition of swap, as well as the unique characteristics of SVCs, place them outside the definition of “swap” and “security-based swap.” If, however, the Commissions find that SVCs are within those definitions, the AMG believes that the Commissions should exercise their
authority to exempt SVCs from regulation under Title VII for the following reasons:
- SVCs do not present the type of systemic risk that Title VII is intended to mitigate;
- SVCs are not suitable for mandatory clearing or exchange trading;
- SVC trade reporting is unlikely to be informative to the Commissions or the marketplace;
- if SVCs were treated as swaps, wrap providers may be considered to be fiduciaries under Department of Labor (“DOL”) regulations, causing SVCs to be prohibited for plans subject to ERISA; and
- while swap regulation of SVCs is unlikely to provide significant benefits, it would be costly for retirees and other groups that Dodd-Frank seeks to protect.