NU Online News Service, May 24, 3:07 p.m.EDT

The U.S. Commodity Futures Trading Commission (CFTC) and theU.S. Securities and Exchange Commission (SEC) havedefended the idea of keeping actively traded insuranceproducts out of the insurance products exclusion in aproposed swaps definition.

The CFTC and the SEC also are considering a provision that couldlet variable life insurance products and variable annuities beclassified as swaps.

The CFTC and the SEC talk about the relationship betweeninsurance products and swaps in the preamble to joint proposedrules giving definitions of terms such as "swap," "security-based swap agreement" and "mixedswaps."

The Dodd-Frank Wall Street Reform and Consumer Protection Act of2010 requires the CFTC and SEC to set up a new system forregulating swaps. The new rules could affect the swaps insurers useto hedge their own investments, and, in theory, the rules alsocould affect the insurance products that insurers sell.

The agencies began asking for public comments on the definitionsneeded to implement the regulations about a year ago.

In summaries released in April, the CFTC and the SEC said theywould automatically exclude insurance products that met amulti-part test from the definition of the term "swap," andthat they also would exclude several common insurance products fromthe definition.

The agencies now have published an 83-page collection ofproposed swaps rules and interpretations in the Federal Register. Adiscussion of the insurance products exclusion takes up about sevenpages.

The Dodd-Frank definition of "swap" includes"any agreement, contract, or transaction that provides for anypurchase, sale, payment, or delivery (other than a dividend on anequity security) that is dependent on the occurrence,nonoccurrence, or the extent of the occurrence of an event orcontingency associated with a potential financial, economic, orcommercial consequence."

The CFTC and the SEC want to avoid letting the Dodd-Frankdefinition turn insurance products into swaps, but they also wantto keep loophole seekers from dressing swaps up asinsurance products to avoid swaps regulation, officials say.

The agencies would exclude an arrangement from the definition of"swap" if the arrangement:

• Requires the beneficiary to have an insurable interestthroughout the duration of the arrangement.
• Requires the covered loss to occur and to beproved, with any payment being limited to the value of theinsurable interest.
• Is not traded, separately from the insured interest, on anorganized market or over-the-counter.

In addition, the provider of the arrangement would have to be aninsurer or reinsurer regulated by a state insurance commissioner orthe equivalent, a non-U.S. reinsurer, or a federalgovernment program.

The CFTC and SEC also are proposing a second method forexcluding insurance products from the swaps definitions—excludingmany specific types of common insurance products.

The list includes:

• Surety bonds.
• Life insurance.
• Health insurance.
• Long term care insurance.
• Title insurance.
• Property and casualty insurance.
• Annuity products on which the income is subject to taxtreatment under Section 72 of the Internal Revenue Code.

Officials are asking for comments about whether requiring thepresence of an insurable interest is an effective way to determinewhether a product is insurance; whether shutting out activelytraded products makes sense; and whether the list of commoninsurance products that are clearly not swaps is complete.

 Comments on the proposed rules are due July 22.

Allison Bell is senior web editor for National UnderwriterLife & Health.