Derivatives Rules Could Hurt Pensions

Testifying before the House of Representatives Committee on Agriculture Subcommittee on General Farm Commodities and Risk Management, Bella Sanevich, general counsel of NISA Investment Advisors, L.L.C., said the derivatives title of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 is of particular concern for employer sponsors of pension plans, which use swaps to manage risk and reduce the volatility of the plan funding obligations. “If plans’ ability to hedge effectively with swaps is curtailed by the new rules, funding obligations will become more volatile. This will, in turn, force many employers to reserve large amounts of cash to cover possible funding obligations, diverting cash from critical job retention, business growth projects and future pension benefits,” Sanevich told the panel, according to a press release.  

The groups noted the U.S. Department of Labor, Securities and Exchange Commission, and Commodity Futures Trading Commission (CFTC) have been working feverishly to issue new rules and guidance pursuant to the Dodd-Frank Act. To create a more deliberate regulatory process, Sanevich suggested: “The agencies need more time to develop proposed rules, the retirement plan community needs more time to review those proposed rules and to provide comments to the agencies, the agencies need more time to consider the comments and provide final rules and the retirement plan community needs more time to prepare to comply with a whole new system.”  

Her testimony also covered technical topics including: 

• Business conduct standards: Under the regulations, a swap dealer entering into a swap with a plan is required to provide counsel and assistance to the plan. These rules would actually have devastating effects on pension plans by requiring actions that would make swaps impossible and permitting dealers to veto plan advisors. The CFTC and the DOL must jointly announce that the business conduct rules will not be interpreted in a manner that will result in an inadvertently illegal act. 
• Required clearing: Business end-users, such as operating companies, have the right to decide whether to clear a swap, but the plans sponsored by such companies do not have that right. Fiduciaries, acting pursuant to the highest standard of conduct under the law, should have the right to decide whether to clear a swap. 
• Real-time reporting. The CFTC has issued rules regarding the real-time public reporting of swaps. The purpose of such reporting is to enhance price transparency, with the ultimate goal of reducing prices. But the CFTC issued rules that the organizations believe would likely have exactly the opposite effect. In fact, we believe that if the CFTC rules were finalized in their current form, swap prices would increase dramatically, perhaps by as much as 100% in some cases.