1. An Actuarial Update on
the Dodd-Frank Act
SOA Annual Meeting in Chicago
Session 91: Hot Topics
Tuesday, October 18, 2011
Michael Frings, FSA, CFA, MAAA
Vice-President and Senior Actuary
Global Financial Solutions
RGA Reinsurance Company
2. Presentation Agenda
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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3. Events Preceding Dodd-Frank Act
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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4. Voilà, the Dodd-Frank Act (DFA)
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 4
5. Financial Stability: Sections I – VIII
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 Supervision
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6. Investor Protections, Consumer
Protections, Mortgage Reform
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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7. Changes to Roles of Regulators
• 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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8. FSOC Key Responsibilities
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
competitiveness
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9. FSOC Members
VOTING MEMBERS NON-VOTING MEMBERS
Selected State
Office of Insurance
Financial Commissioner
Research
(in US (John Huff-MO)
Treasury)
Bureau of
Consumer
Financial Selected State
Protection Banking
Federal
Insurance Supervisor
Office
(in US
Treasury)
(Michael Selected State
McRaith
Securities
Commissioner
Independent
Member with
Insurance
Experience 3 Insurance Members
(Roy Woodall)
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10. Federal Insurance Office (FIO)
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
agreements 10
11. 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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12. DFA Eases Rules on Reinsurance
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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17. Recent Activity
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…
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18. Systemically Important Financial Institution
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.
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19. Recent Activity: Proposed Rules
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
20. 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)
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21. Upcoming CFTC Task List
Second Half of 2011 First Half of 2012
Clearinghouse rules Capital and margin
Data recordkeeping and reporting Client clearing documentation and risk
End use exception management
Entity definitions/registration Conforming rules
External business conduct Disruptive trading practices
Internal business conduct Governance and conflict of interest
Product definitions/commodity Internal business conduct
options Investment of customer funds
Real-time reporting Swap execution facilities
Position limits Segregation for uncleared swaps
Segregation for cleared swaps Straight-though trade processing
Trading-Designated contract
markets and foreign boards of
trade
Plus, add task list of SEC, FRB, US Treasury, CFPB, etc.
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22. Summary
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?
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“Regulator Swapping” was one of the issues addressed by the Dodd-Frank Act. However, contrary to initial drafts of the Dodd-Frank Act, only one regulator is removed, that is the Office of Thrift Supervision. The OTS’s duties are distributed as follows. The Board of Governors will regulate Thrift Holding Companies and their non-depository subsidiaries. The Comptroller of the Currency will regulate all Federal savings associations. The FDIC will regulate State savings associations. Existing regulators are given more authority to prevent a future, financial crisis.