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Dodd-Frank Financial Services Regulatory Reform:
NAIC Initiatives Regulatory Regime for Over-the-Counter Derivatives Market

Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act establishes a regulatory regime for the over-the-counter derivatives market:

• Many derivatives must be cleared and traded on registered exchanges;
• Those derivatives that cannot be cleared and traded on registered exchanges must be reported to swap repositories; and
• The Securities & Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) are given authority to impose margin and capital requirements on swap dealers and major swap participants.

While state insurance regulators recognize the importance of this new regulatory regime, particularly the transparency that it will bring to derivatives markets, it is important that this new layer of regulation not conflict with the states’ current authority over insurance products and insurers.

State investment laws govern the type and extent of financial products in which insurance companies may invest. Such laws exist so that insurers do not expose themselves to significant risk in the financial markets. As part of their solvency regulation activities, state insurance regulators closely monitor insurer investments, including the use of derivatives, to ensure that companies are not exposed to financial risks that could undermine their ability to pay insurance claims on an ongoing basis.

Financial institutions use derivatives differently to achieve different institutional goals.  Insurers predominately use them to hedge against commercial risks, particularly the type of risks for which they write insurance policies.  The NAIC is working with the SEC and the CFTC on rules implementing Title VII, which should be crafted to recognize the uses for and the extent to which insurers use derivatives, thereby ensuring that insurers do not face an unfair disadvantage in the capital markets as compared to other institutions.