NU Online News Service, July 11, 2:45 p.m. EDT
Swaps definitions adopted by federal regulators Tuesday exempt the insurance industry from a new regulatory regime for the complex derivatives outlined in the Dodd-Frank financial services reform law.
However, officials of the American Insurance Association say the final rule doesn't go far enough.
Stef Zielezienski, senior vice president and general counsel of the American Insurance Association, says the property and casualty industry recommended that the Commodity Futures Trading Commission defer in its final rule to state-regulatory definitions of insurance, not propose a separate definition of its own.
"Therefore, our concern is that there will be a disconnect between the federal definition and state definitions of insurance products," Zielezienski says.
"We do appreciate that the rule recognizes an intention to exempt insurance products from the definition of swaps," Zielezienski notes.
He says the Dodd-Frank Act (DFA) respects the fact that state regulation still governs insurance, "so that what we were asking for is that the rule reflect that same deference to state regulation."
And, Zielezienski says, "Based on the fact sheet, the final rule is not as strong an exception as we requested."
The CFTC, as well as the Securities and Exchange Commission, have been writing rules to complete the new derivatives-regulatory structure that Congress included in the DFA, which was enacted by Congress in 2010.
Congress devised the new regulatory scheme in an effort to prevent the types of reckless speculative trading considered to be a key factor in the precipitous economic downturn that engulfed the world in 2007 and 2008.
The derivatives-trading provisions that the swaps definition is part of requires that most derivatives be traded on open platforms and routed through a clearinghouse that secures the deal and collects margin from both sides.
Insurance products are mostly exempted because insurers enter into swaps transactions mainly to hedge against losses in products that have long tails.
In the fact sheet, the CFTC said it is clarifying in its final rules and interpretations "that certain types of products or transactions that could be covered by an expansive reading of the swap definition, but that traditionally have not been considered to be swaps, are not swaps."
The fact sheet adds, "These products and transactions include traditional insurance products that meet certain criteria, certain consumer and commercial arrangements, and certain loan participations."
The rule will state that insurance products sold by companies engaged in the business of insurance are not swaps or security-based swaps.
The CFTC said in the fact sheet that it is clarifying that these rules are a "safe harbor," meaning that just because a particular contract fails the requirements in the final rules, that does not necessarily mean the contract is a swap or security based swap; it will be evaluated under the facts and circumstances test established in the final rule.
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