Federal Register, Volume 76 Issue 165 (Thursday, August 25, 2011)[Federal Register Volume 76, Number 165 (Thursday, August 25, 2011)]
[Notices]
[Pages 53162-53164]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-21645]
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COMMODITY FUTURES TRADING COMMISSION
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-65153; File No. S7-32-11]
Acceptance of Public Submissions Regarding the Study of Stable
Value Contracts
AGENCY: Commodity Futures Trading Commission; Securities and Exchange
Commission.
ACTION: Request for comment.
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SUMMARY: The Dodd-Frank Wall Street Reform and Consumer Protection Act
(the ``Dodd-Frank Act'') was enacted on July 21, 2010. Section 719(d)
of the Dodd-Frank Act mandates that the Commodity Futures Trading
Commission (the ``CFTC'') and the Securities and Exchange Commission
(the ``SEC'' and, together with the CFTC, the ``Commissions'') jointly
conduct a study to determine whether stable value contracts (``SVCs'')
fall within the definition of a swap. Section 719(d) of the Dodd-Frank
Act also requires that the Commissions, in making that determination,
jointly consult with the Department of Labor, the Department of the
Treasury, and the State entities that regulate the issuers of SVCs.
Further, Section 719(d) of the Dodd-Frank Act provides that if the
Commissions determine that SVCs fall within the definition of a swap,
they jointly shall determine if an exemption for SVCs from the
definition of a swap is appropriate and in the public interest. In
connection with this study, the Commissions' staffs seek responses of
interested parties to the questions set forth below.
DATES: Please submit comments in writing on or before September 26,
2011.
ADDRESSES: Comments may be submitted by any of the following methods:
CFTC
Agency Web site, via its Comments Online process: http://comments.cftc.gov. Follow the instructions for submitting comments
through the Web site.
Mail: David A. Stawick, Secretary, Commodity Futures
Trading Commission, Three Lafayette Centre, 1155 21st Street, NW.,
Washington, DC 20581.
Hand Delivery/Courier: Same as mail above.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Please submit your comments using only one method. ``Stable Value
Contract Study'' must be in the subject field of responses submitted
via e-mail, and clearly indicated on written submissions. All comments
must be submitted in English, or if not, accompanied by an English
translation. Comments will be posted as received to http://www.cftc.gov. You should submit only information that you wish to make
available publicly. If you wish the CFTC to consider information that
you believe is exempt from disclosure under the Freedom of Information
Act, a petition for confidential treatment of the exempt information
may be submitted according to the procedures established in section
145.9 of the CFTC's regulations.\1\
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\1\ 17 CFR 145.9.
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The CFTC reserves the right, but shall have no obligation, to
review, pre-screen, filter, redact, refuse, or remove any or all of
your submission from http://www.cftc.gov that it may deem to be
inappropriate for publication, including obscene language. All
submissions that have been redacted or removed that contain comments on
the merits of the rulemaking will be retained in the public comment
file and will be considered as required under applicable laws, and may
be accessible under the Freedom of Information Act.
SEC
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/other.shtml);
Send an e-mail to [email protected]. Please include File
Number S7-32-11 on the subject line; or
Use the Federal eRulemaking Portal (http://www.regulations.gov).
Follow the instructions for submitting comments.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090. All submissions should refer to File Number
S7-32-11. This file number should be included on the subject line if e-
mail is used. To help us process and review your comments more
efficiently, please use only one method. The SEC will post all comments
on the SEC's Internet Web site (http://www.sec.gov/rules/other.shtml).
Comments are also available for Web site viewing and printing in the
SEC's Public Reference Room, 100 F Street, NE., Washington, DC 20549,
on official business days between the hours of 10 a.m. and 3 p.m. All
comments received will be posted without change; the SEC does not edit
personal identifying information from submissions. You should submit
only information that you wish to make available publicly.
FOR FURTHER INFORMATION CONTACT: CFTC: Stephen A. Kane, Consultant,
Office of the Chief Economist, (202) 418-5911, [email protected]; or David
E. Aron, Counsel, Office of the General Counsel, (202) 418-6621,
[email protected], Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street, NW., Washington, DC 20581; SEC: Matthew A.
Daigler, Senior Special Counsel, (202) 551-5500, Donna Chambers,
Special Counsel, (202) 551-5500, or Leah Drennan, Attorney-Adviser,
(202) 551-5500, Division of Trading and Markets, Securities and
Exchange Commission, 100 F Street, NE., Washington, DC 20549.
SUPPLEMENTARY INFORMATION: On July 21, 2010, President Obama signed the
Dodd-Frank Act into law.\2\ Pursuant to section 719(d)(1)(A) of the
Dodd-Frank Act, the Commissions jointly must conduct a study, not later
than 15 months after the date of enactment of the Dodd-Frank Act, to
determine whether SVCs fall within the definition of a swap.\3\ Section
719(d)(1)(A) of the
[[Page 53163]]
Dodd-Frank Act also requires the Commissions, in making such
determination, jointly to consult with the Department of Labor, the
Department of the Treasury, and the State entities that regulate the
issuers of SVCs.
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\2\ See Dodd-Frank Wall Street Reform and Consumer Protection
Act, Pub. L. 111-203, 124 Stat. 1376 (2010). The text of the Dodd-
Frank Act is available at http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_bills&docid=f:h4173enr.txt.pdf.
\3\ The term ``swap'' is defined in Commodity Exchange Act
(``CEA'') section 1a(47), 7 U.S.C. 1a(47). The term ``security-based
swap'' is defined as an agreement, contract, or transaction that is
a ``swap'' (without regard to the exclusion from that definition for
security-based swaps) and that also has certain characteristics
specified in the Dodd-Frank Act. See section 3(a)(68) of the
Securities Exchange Act of 1934, 15 U.S.C. 78c(a)(68). Thus, a
determination regarding whether SVCs fall within the definition of a
swap also is relevant to a determination of whether SVCs fall within
the definition of the term ``security-based swap.'' These terms are
the subject of further definition in joint proposed rulemaking by
the Commissions. See Further Definition of ``Swap,'' ``Security-
Based Swap,'' and ``Security-Based Swap Agreement''; Mixed Swaps;
Security-Based Swap Agreement Recordkeeping, File No. S7-16-11, 76
FR 29818 (May 23, 2011) (``Product Definitions Proposing Release'').
Citations herein to provisions of the Commodity Exchange Act and the
Securities Exchange Act of 1934 refer to the numbering of those
provisions after the effective date of Title VII.
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If the Commissions determine that SVCs fall within the definition
of a swap, they jointly must determine if an exemption for SVCs from
the definition of a swap is appropriate and in the public interest.\4\
Until the effective date of any regulations enacted pursuant to Section
719(d) of the Dodd-Frank Act, and notwithstanding any other provision
of Title VII of the Dodd-Frank Act, the Title VII requirements will not
apply to SVCs.\5\
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\4\ See section 719(d)(1)(B) of the Dodd-Frank Act. Pursuant to
section 719(d)(1)(B) of the Dodd-Frank Act, ``The Commissions shall
issue regulations implementing the determinations required under
this paragraph.''
\5\ See section 719(d)(1)(C) of the Dodd-Frank Act.
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Section 719(d)(2) of the Dodd-Frank Act defines a ``stable value
contract'' as:
any contract, agreement, or transaction that provides a crediting
interest rate and guaranty or financial assurance of liquidity at
contract or book value prior to maturity offered by a bank,
insurance company, or other State or federally regulated financial
institution for the benefit of any individual or commingled fund
available as an investment in an employee benefit plan (as defined
in section 3(3) of the Employee Retirement Income Security Act of
1974, including plans described in section 3(32) of such Act)
subject to participant direction, an eligible deferred compensation
plan (as defined in section 457(b) of the Internal Revenue Code of
1986) that is maintained by an eligible employer described in
section 457(e)(1)(A) of such Code, an arrangement described in
section 403(b) of such Code, or a qualified tuition program (as
defined in section 529 of such Code).\6\
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\6\ The Commissions understand that a bank, insurance company,
or other state or federally regulated financial institution that
offers an SVC is commonly referred to as an ``SVC provider.''
The Commissions' staffs understand that stable value funds
(``SVFs'') are a type of investment commonly offered through 401(k) and
other defined contribution plans with the objective of providing
preservation of principal, liquidity, and current income at levels that
are typically higher than those provided by money market funds.\7\ The
Commissions' staffs further understand that SVCs are components of SVFs
that SVF sponsors or managers purchase from SVC providers, including
banks and insurers, that provide a guarantee, or ``wrap,'' by the
service provider to pay plan participants at ``book value'' should the
market value of the SVF be worth less than the amount needed to pay
that book value.\8\ In furtherance of this SVC study, the Commissions'
staffs seek responses to the any or all of the questions below.
Commenters are encouraged to provide additional relevant information,
including empirical evidence where appropriate and to the extent
feasible, beyond that called for by these questions.
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\7\ See, e.g., U.S. Government Accountability Office, 401(K)
Plans: Certain Investment Options and Practices That May Restrict
Withdrawals Not Widely Understood, at 10-11, GAO-11-234 (Washington,
DC: Mar. 10, 2011); Proposed Exemptions From Certain Prohibited
Transaction Restrictions, Department of Labor, 75 FR 61932, 61938
(Oct. 6, 2010).
\8\ See 401(K) Plans: Certain Investment Options and Practices
That May Restrict Withdrawals Not Widely Understood, supra note 7,
at 11. In the context of an SVC, the staffs understand, based on
conversations with market participants, that the term ``book value''
means investment principal plus interest accrued using the crediting
rate formula determined for the SVF and set forth in the SVC.
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Swap Definitional and Exemptive Issues
1. Do SVCs possess characteristics that would cause them to fall
within the definition of a swap? If so, please describe those
characteristics.
2. What characteristics, if any, distinguish SVCs from swaps?
3. Does the definition of the term ``stable value contract'' in
Section 719(d)(2) of the Dodd-Frank Act encompass all of the products
commonly known as SVCs?
4. Are the proposed rules and the interpretive guidance set forth
in the Product Definitions Proposing Release \9\ useful, appropriate,
and sufficient for persons to consider when evaluating whether SVCs
fall within the definition of a swap? If not, why not? Would SVCs
satisfy the test for insurance provided in the Product Definitions
Proposing Release? Why or why not? Is additional guidance necessary
with regard to SVCs in this context? If so, what further guidance would
be appropriate? Please explain.
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\9\ See supra note 3. The Commissions note that any comment
submitted in response to this question will be taken into
consideration by the Commissions as they consider any final action
on the Product Definitions Proposing Release.
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5. If the Commissions were to determine that SVCs fall within the
definition of a swap, what would be their underlying reference asset?
6. If the Commissions were to determine that SVCs fall within the
definition of a swap, what facts and considerations, policy and
otherwise, would support exempting SVCs from the definition of a swap?
What facts and considerations, policy and otherwise, would not support
exempting SVCs from the definition of a swap?
7. If the Commissions were to (a) Determine that SVCs fall within
the definition of a swap but provide an exemption from the definition
of a swap, (b) determine that SVCs fall within the definition of a swap
and not provide an exemption from such definition, or (c) determine
that such contracts are not swaps, what beneficial or adverse
regulatory or legal consequences, if any, could result? For example,
could any of such determinations lead to beneficial or adverse
treatment under the Employee Retirement Income Security Act
(``ERISA''), bankruptcy law, tax law, or accounting standards, as
compared to the regulatory regimes applicable to SVCs, in the event
that the Commissions were to determine that SVCs are not swaps or grant
an exemption from the definition of a swap?
Market and Product Structure Issues
8. What are the different types of SVCs, how are they structured,
and what are their uses? Please describe in detail.
9. Please describe the operation of SVCs and SVFs generally in
terms of contract structure, common contract features, investments,
market structure, SVC providers, regulatory oversight, investor
protection, benefits and drawbacks, risks inherent in SVCs, and any
other information that commenters believe the Commissions should be
aware of in connection with the SVC study.
10. What provisions of SVCs, if any, allow SVC providers to
terminate SVCs that prevent benefit plan investors from transacting at
book value? What are the trade-offs, including the costs and benefits
of such provisions? Please describe in detail.
11. Describe the benefits and risks of SVCs for SVC providers. How
do SVC providers mitigate those risks? Please provide detailed
descriptions. How effective are any such measures?
12. Describe the benefits and risks of SVCs for investors in SVFs.
Please provide detailed descriptions.
13. The Commissions' staffs understand that SVC providers sometimes
negotiate so-called ``immunization'' provisions with SVF managers and
that such provisions typically allow SVC providers (or SVF managers) to
terminate the SVCs based upon negotiated triggers, which can include
underperformance of the portfolio against a benchmark. The Commissions'
staffs also understand that, once immunization provisions have been
triggered and are in effect, the
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SVF must be managed according to the immunization guidelines, which
typically require the liquidation of all securities rated below AAA and
in certain cases may require the portfolio to be invested 100% in
Treasury securities. What risks, if any, do ``immunization'' provisions
in SVCs pose to investors in SVFs? If immunization provisions in SVCs
pose risks to investors in SVFs, are these risks clearly disclosed to
investors? Are these risks required to be disclosed to investors? What
are the sources of such requirements? How do SVF managers or SVC
providers address the risk that immunization will be exercised? How
effective are any such measures?
14. The Commissions' staffs understand that some SVCs grant SVC
providers the right to limit coverage of employer-driven events or
employee benefit plan changes. Such events or changes could cause a
decrease in a SVF's value and result in large scale investor
withdrawals or redemptions (sometimes called a ``run on the fund'').
How do SVC providers and SVF managers manage this risk, if at all? How
effective are any such measures?
15. The Commissions' staffs understand that SVF managers infuse
capital into their funds in certain instances. Please describe the
circumstances under which an SVF fund manager would provide such
capital support for its fund.
16. The Commissions' staffs understand that ``pull to par''
provisions of SVCs provide that SVCs will not terminate (absent the
application of another contract termination provision) until the gap
between the market value of the wrapped assets and the SVC book value
is closed, however long that takes. The Commissions' staffs also
understand that pull to par provisions are standard for SVCs. Are these
understandings correct? Please describe pull to par provisions and how
prevalent such provisions are in SVCs.
17. How have SVFs and SVCs been affected by the recent financial
crisis? How many SVC providers are in the market today? Is the number
of SVC providers higher or lower than prior to the financial crisis
that began in 2008? Are fees now higher or lower than prior to the
financial crisis?
18. Do investors have incentives to make a run on a SVF when its
market-to-book ratio is substantially below one? What protections, if
any, do SVCs provide to protect fund investors who do not redeem their
fund shares amid a run on the fund? How effective are any such
protections?
19. How do market risk measures assess the risk of a run on a SVF?
To the extent that SVC providers use value-at-risk (``VaR'') models, do
such VaR models adequately assess the risk of loss resulting from such
events or other possible but extremely unlikely events? Do other loss
models more adequately assess the risk of loss, such as the expected
value of a loss or the expected value given a loss, which employs the
entire loss probability distribution without excluding events in the
extreme tail of the loss distribution?
20. Are certain SVC providers more likely, as a result of credit
cyclicality, to become financially distressed? If so, is such financial
distress likely to occur concurrently with financial distress of SVFs?
If so, can the risk of such concurrent financial distress be mitigated?
How effective are any such measures?
21. Do SVC providers pose systemic risk concerns? Are there
concerns with entities that may be systemically important institutions
providing SVCs? What are the consequences for SVFs, employee benefit/
retirement plans, and the financial system should an SVC provider fail?
22. Are there issues specific to financial institutions providing
SVCs, including institutions that are systemically significant, that
the Commissions should consider in connection with the SVC study? If
so, please describe.
Regulatory Issues
23. What disclosures to benefit plan investors in SVFs currently
are required, and what are the sources of such requirements? What
additional disclosure typically is provided, either voluntarily or on
request? What additional disclosure, if any, would be warranted and why
would it be warranted? Please explain in detail.
24. What financial and regulatory protections currently exist that
are designed to ensure that SVC providers can meet their obligations to
investors, and what are the sources of such protections? Does the level
of protection vary depending on the SVC provider? How effective are any
such measures?
25. Currently, do entities other than state-regulated insurance
companies and federally- or state-regulated banks provide SVCs? If so,
what kinds of entities do so and how are they regulated? If not, are
there any barriers to the provision of SVCs by entities other than
state-regulated insurance companies and federally- or state-regulated
banks?
26. What role do SVF managers play in protecting the interests of
plan participants with respect to SVFs? How effective are any such
measures?
Compliance Issues if the Commissions Were To Determine SVCs Were Swaps
27. If the Commissions were to determine that SVCs fall within the
definition of a swap and should not be exempted from such definition,
should the regulatory regime for SVCs be limited or tailored in any
way? If so, how? Please explain in detail. Should any of the
requirements for capital and margin for SVCs differ from those for
swaps that are not SVCs? Why or why not? If the requirements for
capital and margin should differ, please explain in detail what those
differences should be.
28. If the Commissions were to determine that SVCs fall within the
definition of a swap and should not be exempted from such definition,
would the requirements of any regulatory regime for swaps impact fee
structures or fees charged by SVC providers? Please describe
(quantitatively, if possible) the relationship of any new federal
regulation under the Dodd-Frank Act to possible changes in fee
structures or fees, to the extent feasible, and state any assumptions
used in quantifying such relationship.
29. If the Commissions were to determine that SVCs fall within the
definition of a swap and should not be exempted from such definition,
would this decision influence the availability of SVFs to investors?
Would this designation affect existing SVFs and the ability of SVFs to
purchase SVCs? If so, how and why?
Dated: August 18, 2011.
By the Commodity Futures Trading Commission.
David A. Stawick,
Secretary.
Dated: August 18, 2011.
By the Securities and Exchange Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-21645 Filed 8-24-11; 8:45 am]
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Last Updated: August 25, 2011