Monday, November 21, 2011

House Panel Approves Legislation Allowing Pension Plans to Use Swaps to Hedge Risks

The House Capital Markets Subcommittee approved legislation that would amend the Employee Retirement Income Security Act, the Commodity Exchange Act, and the Securities Exchange Act to ensure that pension plans can use swaps to hedge risks. The Retirement Income Protection Act, HR 3045, sponsored by Rep. Francisco Canseco (R-TX), and co-sponsored by Chairman Scott Garrett (R-NJ), was approved on a partisan vote of 19-14. It deals with concerns over regulatory interpretations of Dodd-Frank Title VII.

Chairman Garrett said that he has heard from pension plans that they are concerned that SEC and CFTC regulations implementing Dodd-Frank would prohibit them from using swaps to hedge against market volatility and manage the obligations owed to retirees. H.R. 3045 ensures ERISA pension plans can engage in swap transactions without their swap dealer counterparties incorrectly being labeled as fiduciaries which, according to the Chairman, would make it impossible for the transactions to take place.

According to earlier ISDA’s testimony before the subcommittee, the need for HR 3045 arose because of provisions contained in Dodd-Frank that can be read to put a swap dealer in a fiduciary relationship to a retirement plan. Such an interpretation would effectively require a swap dealer to represent both counterparties to a swap transaction, said ISDA, and is legally unworkable. The practical result would be that financial institutions would be unwilling to accept the legal risks inherent in such transactions and would limit their activities with pension plans, effectively precluding such pension plans from using OTC derivatives to manage their investments and hedge their risks, which could adversely impact their ability to generate and provide retirement income to their plan participants.