<nobr>Dec 4, 2009</nobr>

ERIC Expresses Concern Over Derivatives Legislation Impact on Pension Plans

ERIC, along with several other employer groups, on December 4 wrote to Members of the House Financial Services Committee and the House Agriculture Committee to express concern over pending derivative legislation and the potential impact on pension plans.

The Wall Street Reform and Consumer Protection Act (H.R. 4173) approved last week by the House Financial Services Committee includes a comprehensive set of financial regulatory reforms that would, among other things, create a Consumer Financial Protection Agency, provide shareholders a "say on pay," and regulate the derivatives marketplace. H.R. 4173 includes several pieces of legislation that have been approved by various committees over the past several months, including H.R. 3795, the Over-the-Counter Derivatives Markets Act of 2009, approved by the House Agriculture Committee. The full House is scheduled to consider the legislation on December 9.

The letter specifically addresses provisions in the legislation that would regulate the derivatives marketplace, whereby all standardized swap transactions between dealers and "Major Swap Participants" would have to be cleared and traded on an exchange or electronic platform. The bill defines a major swap participant as anyone that maintains a substantial net position in swaps, exclusive of hedging for commercial risk, or whose positions create such significant exposure to others that it requires monitoring.

The letter argues that both the House Financial Services Committee and the House Agriculture Committee bills create serious risks for the operations of major pension funds that use swap transactions to manage pension assets. "Our principal concern related to the use of derivatives in the management of pension plan assets is that each bill could be interpreted as defining certain pension plans as 'Major Swap Participants' (MSP), facing registration, capital, margin, and other regulatory obligations from both the SEC and CFTC," the letter says.

The letter points out that since pension plans are mitigating or hedging "financial risk," not technically "commercial risk," these plans would not meet the exception to the definition of MSP. ERIC and the other groups do not believe this is the intended result, but the impact would be detrimental to the ability of pension funds to serve the interests of their plan participants and beneficiaries.

The letter provides sample legislative language to provide an exception from the MSP definition for union, public and private pension funds that use derivatives to manage or hedge pension plans assets, consistent with Department of Labor prudential standards.

Questions or comments on this issue should be addressed to Kathryn Ricard (kricard@eric.org).

Websites:

Letter to House Committees

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