Derivatives Market Reform: The Impact of Rules Implementing Title VII of the Dodd-Frank Act on Life Insurance Companies

Abstract

The 2008 turmoil in the financial markets provided the primary impetus for significant financial reform of U. S. financial service institutions. The profound economic disruption had multiple causal factors, including, in part, the widespread use of privately negotiated over-the-counter derivatives instruments. Transactions outside the structure of exchanges or centralized clearing facilities did not universally face collateralization, margin and transparency typically associated with exchange traded derivatives. As a consequence, a significant volume of derivatives transactions lacked the limiting brakes of traditional collateral and were largely opaque to financial service regulators. These, and other factors, magnified structural and regulatory gaps that accelerated economic and financial challenges in U. S. and global markets.This paper discusses rule initiatives implementing Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act or DFA) involving derivatives market reform that affect life insurers’ asset and liability risk management through derivatives transactions, and that impact selected insurance products. The discussion will summarize the legislative purposes of Title VII of the DFA and evaluate rulemakings implementing the broad scope of the legislation, including: 1. “Swap” and “Security-Based Swap” Definitions; 2. The Stable Value Contract Study; 3. The Definition of Major Swap Participant and Major Security-Based Swap Participant; 4. Collateral and Margin for Uncleared Swaps; 5. Segregation and Protection of Customer Collateral; 6. Swap Documentation Challenges; and, 7. Mandatory Clearing Requirements.