External Meetings: Meeting with State Regulators

The state regulators primarily read their questions from their agenda (see attached). In addition, the following topics were discussed: (1) Municipal-Specific Issues. The SEC asked, in response to several questions, whether there were muni-specific issues and, if so, if the regulators could provide written comments describing those. In particular, the SEC asked if pension plans and their sponsors faced different issues than states, counties, cities, etc; (2) Bespoke Derivatives. The state regulators indicated that insurance companies, pension plans and munis all make use of bespoke derivatives and that some muni users have not understood the derivatives they have entered into; (3) Derivatives Use. The SEC inquired on several occasions what type of derivatives were used (e.g., equity derivatives, TRS, CDS) and for what purpose. The NAIC gave several examples and noted that insurers primary use of derivatives is for hedging but that replication transactions (pairing a derivatives and a cash market product to replicate a different product) are growing. NASAA stated that state pension funds typically use interest rate swaps, a number of bespoke instruments and a significant amount of CDS; (4) State Regulation. The NAIC indicated that a robust capital and disclosure regime exists for replication transactions; (5) Status; Comments. The SEC declined to provide answers to the very specific questions posed, noted they were in the early stages of review and were consulting with other regulators and requested specific written comment on the issues; (6) Statistics. The SEC asked for specific statistics on various uses of derivatives. The State regulators indicated they would provide the requested statistics.