Comment Text:
We wanted to thank you and your colleagues again for taking the time to meet with the Stable Value Investment Association (SVIA) on October 12th to discuss the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) stable value study required by Section 719 of the Dodd-Frank Act.
During the meeting, a question was posed whether there is a difference from the perspective of the SVIA between a finding by the CFTC/SEC that stable value contracts do not fall within the definition of “swap”, as that term is defined in Section 721 of the Dodd-Frank Act, or a finding that stable value contracts are swaps, but should be exempt from the definition of swap pursuant to Section 719(d)(1)(B) of the Act. We expressed our view that stable value contracts are not swaps; that even if the CFTC and SEC conclude otherwise, it would be appropriate and in the public interest to exempt stable value contracts from the definition of swap; and importantly that the SVIA prefers a finding that stable value contracts are not swaps.
SVIA believes that a determination that stable value investment contracts are not swaps provides needed certainty to the millions of defined contribution plan investors and plans that have invested over $561 billion towards their retirement security. The SVIA does not believe that stable value investment contracts are swaps for many reasons that we discussed in our meeting. Importantly, stable value investment contracts only permit participants in stable value funds to transact at book value (principal plus accrued interest). This feature is known as “benefit responsiveness.” Thus, for example, if today the fund’s market value is 102 and book value is 100, the participant cannot withdraw from the fund at 102, but only at 100. Stated simply, the stable value investment contract, which facilitates benefit responsiveness, does not allow stable value fund participants to capitalize/react to fluctuations in market value.
If the CFTC and SEC were to find otherwise, we believe stable value contracts should be exempted from the definition of swap. Stable value funds and the investment contracts, which provide benefit responsiveness, have a strong, proven and dynamic regulatory structure in place with oversight by the U.S. Department of Labor, the Federal Reserve, the Office of the Comptroller of the Currency, the Securities and Exchange Commission and state insurance departments. This regulation delivers not only oversight but also the transparency that the Dodd-Frank seeks through periodic reporting from both defined contribution plans and stable value investment contract issuers. Further, stable value funds and their investment contracts do not pose a systemic risk to the financial markets since they function similar to catastrophic self-insurance and are supported by an underlying portfolio of fixed income securities. Further, stable value investment contracts are supported by short duration portfolios of high quality, liquid, fixed income securities. These investment contracts are not tradable, assignable, or leveraged.
A determination that stable value investment contracts are not swaps also provides certainty as to how and by whom stable value contracts are, and will be, regulated going forward. While this may appear to be a minor point, it does eliminate any collateral damage to the stable value industry due to uncertainty and complexity of new regulations.
SVIA is happy to be a resource to you as the CFTC and the SEC examines stable value contracts. Should you have additional questions or need more information, please call upon us. We look forward to working with you on this important issue and thank you for your consideration of our views.
Sincerely,
Gina Mitchell
President
Stable Value Investment Association
1025 Connecticut Avenue, NW
Suite 1000
Washington, DC 20036
202-580-7620 phone
202-580-7621 fax
