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2011-21645

  • 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 rule-comments@sec.gov. 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, skane@cftc.gov; or David

    E. Aron, Counsel, Office of the General Counsel, (202) 418-6621,

    daron@cftc.gov, 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

    [[Page 53164]]

    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]

    BILLING CODE P

    Last Updated: August 25, 2011



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