SOA Annual Meeting in Chicago
Session 91: Hot Topics
Tuesday, October 18, 2011
An Actuarial Update on the Dodd-Frank Act
Michael Frings, FSA, CFA, MAAA
Vice-President and Senior Actuary
Global Financial Solutions
RGA Reinsurance Company
Describe events giving rise to Dodd-Frank Act Outline significant provisions of Dodd-Frank Review key sections impacting actuaries and
insurance companies Update on status of Dodd-Frank implementation
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Presentation Agenda
Outsized, Unregulated OTC Derivatives Market Bank of International Settlements data
2008 Collapse of Wall-Street Banks Lehman, Bear-Sterns, Morgan Stanley
Record Number of Home Foreclosures Unprecedented US Govt Support & Spending
Backstop banks and money-market funds Bailouts of GM, AIG, Chrystler, etc. etc.
World-Wide Financial Crisis Iceland, Ireland, Greece
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Events Preceding Dodd-Frank Act
Officially, the Wall-Street Accountability and Consumer Protection Act of 2010
Signed into law July 21, 2010
Created in response to 2008 Financial Crisis
DFA written broadly Much of rulemaking left
to regulators 10 Sections
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Voilà, the Dodd-Frank Act (DFA)
I. Financial Stability Creates FSOC & OFR, Add’l authority to FRB
II. Orderly Liquidation Authority
III. Transfer of Powers to the Comptroller of the Currency, SEC and FRB
IV. Regulation of Advisors to Hedge Funds and Others
V. Insurance FIO, State-based ins reform, Non-admitted insurance, Reinsurance
VI. Improvements to Regulation of Bank and Savings Association Holding Companies and Depository Institutions (40 pages)
VII. Wall Street Transparency and Accountability Act Reg of OTC swaps markets, Reg of security based swap markets
VIII. Payment, Clearing and Settlement Supervision5
Financial Stability: Sections I – VIII
Title IX. Investor Protections and Improvements to the Regulation of Securities
Title X. Bureau of Consumer Financial Protection Title XIV. Mortgage Reform and Anti-Predatory
Lending Act Miscellaneous
XI. Federal Reserve System Provisions XII. Improving Access to Mainstream Financial Institutions XIII. Pay It Back Act XV. Miscellaneous Provisions XVI. Section 1256 Contracts
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Investor Protections, Consumer Protections, Mortgage Reform
• The Dodd-Frank Act expands the roles of the US Treasury, Federal Reserve, CFTC and SEC
• The Office of Thrift Supervision is eliminated– Authority split among the Comptroller of the Currency, SEC and the
Federal Reserve
• Prudential Regulators Keep Their Authority
• New Regulators are created– Federal Stability Oversight Council (FSOC)– Consumer Financial Protection Bureau (CFPB in Federal Reserve)– Federal Office of Insurance (FIO in US Treasury)
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Changes to Roles of Regulators
Designate specific companies as “systemically important” financial institutions (SIFI)
Instruct Federal Reserve to impose measures to regulate SIFIs
Permit the Federal Reserve, in extreme cases, to order companies to divest assets (or to be broken up)
Collect information from other regulators (federal & state) Identify regulatory gaps Identify other threats to US financial stability Facilitate cooperation and resolve disputes among
regulators Monitor US financial markets: integrity, efficiency and
competitiveness8
FSOC Key Responsibilities
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FSOC Members
Bureau of Consumer Financial
ProtectionFederal
Insurance Office(in US
Treasury)(Michael McRaith
Office of Financial Research
(in US Treasury)
Independent Member with
Insurance Experience
(Roy Woodall)
Selected State Insurance
Commissioner(John Huff-MO)
Selected State Banking
Supervisor
Selected State Securities
Commissioner
VOTING MEMBERS NON-VOTING MEMBERS
3 Insurance Members
First, and only, federal insurance body charged to Provide national coordination of the insurance sector Identify system-threatening gaps in insurance regulation Identify, to the FSOC, any insurer that is systemically important Coordinate & develop federal policy on prudential aspects of int’l
insurance Monitor extent to which communities/groups are underserved in
access to affordable insurance, excluding health insurance.
Interact with state insurance authorities Consultation on all insurance matters of national importance Consultation on prudential insurance matters of international
importance Determination of federal override of state law on issues affecting
international competition and regulation Determine state insurance matters to be pre-empted by covered
agreements10
Federal Insurance Office (FIO)
Includes Life, P&C. Excludes health insurance, some LTCi and crop insurance.
Housed within the Treasury Department which will provide most of the staffing
Headed by a Director who: Reports directly to the Treasury Secretary Attends FSOC, but does not vote
Annual Report on the US insurance industry and FIO actions
Special report within 18 months of enactment on modernization of US insurance regulation
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Federal Insurance Office (FIO)
Ceding insurer’s state of domicile now regulates Credit for reinsurance, if NAIC accredited or similar
Other states can’t impose rules for reinsurer credit and must accept credit granted by cedant’s state of domicile
Non-US domiciled reinsurers may receive similar benefit
Dispute resolution Choice of law Imposing standard terms differing from contract
Reinsurer’s state of domicile still regulates Reinsurer solvency, if NAIC accredited
Other states can’t require additional financial info
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DFA Eases Rules on Reinsurance
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Actions After Dodd-Frank Act
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Government is busy writing regulations and performing studies as directed to do under DFA
Special interest groups are busy lobbying As of Oct 3rd, per Davis Polk, DFA requires 300 rules and 87
studies 64 finalized, 28 proposed but not due, 163 future deadlines,105
missed but proposed, and 21 missed not proposed In total, 163 rules have passed deadlines, of those 37 are now final 41 of the 87 studies are complete
Notable final rules Swap Data Repositories, Removal of Securities Ratings from Rules
and Forms, Truth in Lending, Increase in Maximum FDIC
Left to be done Frankly, a great deal… 17
Recent Activity
On Oct 11th, FSOC exposed proposed rule with 3 Stage Test Stage 1: Meets 1) and one of 2) – (6)
1) $50B+ global assets for US nonbank fin cos or $50B+ US assets for foreign nonbank fin cos
2) $30B+ in gross notional CDS
3) $3.5B+ in ASC 815 derivative liabilities
4) $20B+ in O/S loans borrowed and bonds issued
5) Leverage ratio of 15:1 or greater
6) Ratio of short-term debt (<12 mos) to total assets of 10% or greater
Stage 2: Further scrutiny of primarily public and regulatory sources of quantitative and qualitative data
Stage 3: Additional non-public company info. Proposed Determination. Hearing. SIFI. 18
Systemically Important Financial Institution
Volker Rule: Limits on Bank’s Proprietary Trading CFTC/SEC—Request for comment on study to determine
whether stable value contracts fall within the definition of a swap (comment period ended 9/26/2011)
IRS—Proposed rulemaking modifying Treasury regulationsto remove references to credit reatings and credit agencies (comment period ended 8/30/2011)
SEC—Proposed rule for nationally recognized statistical rating organizations (comment period ended 8/8/2011)
CFTC/SEC—Joint proposed rule and proposed interpretive guidance on the definitions of the terms “swap”, “security-based swap” and security-based swap agreement”. (comment period ended (7/22/2011) 19
Recent Activity: Proposed Rules
FCA/FDIC/FHFA/FRS/OCC—Proposal to establish swap margin and capital requirements. (comment period ended 7/11/2011)
CFTC—Reopening and extension of comment periods for rulemakings on the new framework for regulation of swaps (comment period ended 6/2/2011)
CFTC—Proposed new rules, guidance and acceptable practices for swap execution facilities (SEFs) (comment period ended 6/3/2011)
CFTC—Proposed definitions for “Swap Dealer”, “Security-Based Swap Dealer”, Major Swap Participant”, Major Secuirty-Based Swap Participant”, and Eligible Contract Participant”. (comment period ended 6/3/2011)
CFTC—Process for review of swaps for mandatory clearing (comment period ended 6/3/2011) 20
Recent Activity: Proposed Rules
Upcoming CFTC Task List
Clearinghouse rules Data recordkeeping and reporting End use exception Entity definitions/registration External business conduct Internal business conduct Product definitions/commodity
options Real-time reporting Position limits Segregation for cleared swaps Trading-Designated contract
markets and foreign boards of trade
Capital and margin Client clearing documentation and risk
management Conforming rules Disruptive trading practices Governance and conflict of interest Internal business conduct Investment of customer funds Swap execution facilities Segregation for uncleared swaps Straight-though trade processing
Second Half of 2011 First Half of 2012
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Plus, add task list of SEC, FRB, US Treasury, CFPB, etc.
Dodd-Frank Act passed with great fanfare in July 2010 Designed to fix macro-prudential problems following 2008 Financial
Crisis As a result, broadest single US federal financial law to date However, much of the details left to regulators Congressional oversight is partisan
Democrats seek to continue legacy of legislation Republicans seek to overturn many provisions, restrict funding, grill agencies
CFTC, SEC, FRB and other govt agencies continue to implement Impact of Dodd-Frank delayed but not defeated Impact on Insurance companies directly is less once expected
Not widely designated as SIFIs Impact of swaps regs & margins and consumer protection bureau to be seen
Will the next financial crisis be adverted or diminished? Europe 2012?
Summary
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QUESTIONS?