§ 1410. Derivative transactions and derivative instruments. (a) For purposes of this section, except subsection (k) of this section, an insurer shall mean a domestic life insurer, a domestic property/casualty insurer, a domestic reciprocal insurer, a domestic mortgage guaranty insurer, a domestic co-operative property/casualty insurance corporation or a domestic financial guaranty insurer. (b) (1) An insurer may only engage in derivative transactions pursuant to and in compliance with the requirements of this section. Any insurer subject to the provisions of subsection (c) of section one thousand four hundred three of this article shall also comply with the requirements set forth in such subsection relative to derivative transactions authorized by this section. (2) An insurer may use derivative instruments under this section to engage in hedging transactions, replication transactions, and for certain limited income generation transactions authorized pursuant to this section. (3) Prior to entering into any derivative transaction authorized pursuant to this section: (A) the board of directors of the insurer or a committee thereof charged with the responsibility for supervising investments shall: (i) authorize such transactions, (ii) assure that all individuals conducting, monitoring, controlling and auditing derivative transactions are suitably qualified and have appropriate levels of knowledge and experience, and (iii) approve a derivative use plan for such transactions or an amendment to a previously adopted derivative use plan. If such determinations are made by a committee of such a board, the minutes of the committee reflecting such determinations shall be recorded and a report thereon shall be submitted to the board of directors for its review at such board's next meeting; (B) the insurer shall submit a written derivative use plan or amendment thereto to the superintendent for approval; and (C) the superintendent shall approve the insurer's written derivative plan for engaging in derivative transactions and investment practices related to derivative transactions. The plan shall specify guidelines as to the quality, maturity and diversification of derivative investments and other specifications, including investment strategies, asset/liability management practices, its liquidity needs and its capital and surplus as they relate to the derivative use plan. The board of directors or a committee thereof charged with the responsibility for supervising investments shall determine at least quarterly whether all derivative transactions have been made in accordance with delegations, standards, limitations and investment objectives prescribed in the insurer's derivatives use plan. If such determinations are made by a committee of such a board, the minutes of the committee reflecting such determinations shall be recorded and a report thereon shall be submitted to the board of directors for its review at such board's next meeting. (D) (i) Within ninety days of receipt of a derivative use plan application, the superintendent shall, in writing, approve, submit a detailed list to the insurer requesting all additional information necessary to make a determination on the plan, or deny such plan; otherwise, such plan shall be deemed approved. Any denial issued by the superintendent shall state the reasons for such disapproval. If an insurer does not provide the additional information requested by the superintendent, within forty-five days of receipt of such request, then such plan shall be deemed denied. Such forty-five day limit for providing such additional information may be extended at the option of the superintendent.
(ii) In the event that an insurer properly submits the additional
information requested by the superintendent, then such plan shall be
deemed approved sixty days after receipt of such information by the
superintendent, unless the insurer is notified in writing prior to such
date that the filing has been denied. Such denial shall state the
reasons for such disapproval. Notwithstanding anything to the contrary
in this section, the superintendent may, at any time, before a plan is
approved, affirmatively approved or denied, raise objections to the plan
that is based on the requirements of this chapter.
(iii) The superintendent shall, as soon as practicable, but no later
than sixty days after receipt of a plan, notify the insurer if its
filing is incomplete or fails to comply with applicable statutory or
regulatory requirements. Such notice shall indicate that the filing is
being returned with no action by the superintendent and that the period
for the superintendent's substantive review has not commenced.
(4) An insurer which engages in hedging transactions or replication
transactions as authorized pursuant to this section shall:
(A) only maintain its position in any outstanding derivative
instrument used as part of a hedging transaction or replication
transaction for as long as the hedging transaction or replication
transaction, as the case may be, continues to be effective; and
(B) be able to demonstrate to the superintendent, upon request, that
any derivative transaction entered into and involving a hedging
transaction or replication transaction, at the point of inception is
and, for as long as the derivative transaction remains outstanding,
continues to be, an effective hedging or replication transaction.
(5) An insurer which enters into derivative transactions as authorized
pursuant to this section shall be required to include, as part of the
evaluation of accounting procedures and internal controls required to be
filed pursuant to subsection (b) of section three hundred seven of this
chapter, a statement describing the assessment by the independent
certified public accountant of the internal controls relative to
derivative transactions. If the internal controls relative to derivative
transactions are determined to be deficient, the insurer shall require
the accountant to include in the evaluation a description of such
deficiencies and the insurer shall append to the evaluation a
description of any remedial actions taken or proposed to be taken to
correct these deficiencies, if such actions are not already described in
the accountant's report.
(c)(1) An insurer may enter into hedging transactions pursuant to this
section if, as a result of and after giving effect to the transaction:
(A) the aggregate statement value of options, swaptions, caps, floors
and warrants purchased pursuant to this section does not exceed seven
and one-half percent of its admitted assets;
(B) the aggregate statement of value of options, swaptions, caps and
floors written pursuant to this section does not exceed three percent of
its admitted assets; and
(C) the aggregate potential exposure of collars, swaps, forwards and
futures entered into and options, swaptions, caps and floors written
pursuant to this section does not exceed six and one-half percent of its
admitted assets.
(2) Transactions entered into to effectively hedge the currency risk
of investments denominated in a currency other than United States
dollars, pursuant to subparagraph (C) of paragraph seven of subsection
(a) of section one thousand four hundred five of this article, shall not
be included in the limits under paragraph one of this subsection.
(d) An insurer may enter into income generation transactions under
this section only through the sale of call options on securities,
provided that the insurer holds, or can immediately acquire through the
exercise of options, warrants or conversion rights already owned, the
underlying securities during the entire period the option is
outstanding.
(e) An insurer may purchase or sell one or more derivative instruments
to offset any derivative instrument previously purchased or sold, as the
case may be, without regard to the quantitative limitations of
subsection (c) of this section provided that such derivative instrument
is an exact offset to the original derivative instrument being offset.
(f)(1) The counterparty exposure under a derivative instrument entered
into by an insurer authorized to engage in transactions pursuant to this
section shall be deemed to be an obligation of the institution to which
the insurer is exposed to credit risk and shall be included in
determining compliance with any single or aggregate quantitative
limitation on investments made by an insurer under this chapter.
(2) Notwithstanding any single or aggregate quantitative limitation on
investments made by an insurer under this chapter, the aggregate
counterparty exposure under one or more derivative transactions to:
(A) any single counterparty, other than a "qualified counterparty",
shall be limited to one percent of an insurer's admitted assets; and
(B) all counterparties, other than qualified counterparties, are
limited to three percent of an insurer's admitted assets.
(3) For purposes of this section:
(A) a "qualified counterparty" is a "qualified broker or dealer" or a
"qualified bank" or other counterparty rated AA-/Aa3 or higher by a
nationally recognized statistical rating organization if it is also
approved by the superintendent;
(B) a "qualified broker or dealer" means a broker or dealer that is
organized under the laws of a state and is registered under the
Securities Exchange Act of 1934, 15 U.S.C. §§ 78a-78kk, and has net
capital in excess of two hundred fifty million dollars;
(C) a "qualified bank" means a bank or trust company that:
(i) is organized and existing, or in the case of a branch or agency of
a foreign banking organization is licensed, under the laws of the United
States or any state thereof;
(ii) is regulated, supervised and examined by United States federal or
state authorities having regulatory authority over banks and trust
companies;
(iii) has assets in excess of five billion dollars;
(iv) has senior obligations outstanding, or has a parent corporation
that has senior obligations outstanding, rated AA or better (or the
equivalent thereto) by two independent nationally recognized statistical
rating organizations; and
(v) has a ratio of primary capital to total assets of at least five
and one-half percent and a ratio of total capital to total assets of at
least six percent; and
(D) "aggregate counterparty exposure" means the sum of: (i) the
aggregate statement value of options, swaptions, caps, floors, and
warrants purchased; and (ii) the aggregate potential exposure of
collars, swaps, forwards and futures entered into.
(g) For the purposes of this section, "admitted assets" means the
assets, as shown on the insurer's last annual statement filed with the
superintendent, which conform to the requirements of section one
thousand three hundred one of this chapter, except that a domestic life
insurer shall include assets held in separate accounts established under
section four thousand two hundred forty of this chapter to the extent of
amounts allocated to such separate accounts pursuant to paragraph three
of subsection (a) of section four thousand two hundred forty of this
chapter, and shall exclude investments in subsidiaries referred to in
subsection (c) of section one thousand seven hundred four of this
chapter.
(h) The superintendent shall promulgate regulations to:
(1) define terms used in this section that are not otherwise defined;
(2) establish the content of the derivative use plan to be submitted
by an insurer to the superintendent pursuant to this section;
(3) establish effective management oversight standards, including
quarterly reporting to the board of directors or a committee thereof
charged with the responsibility for supervising investments, for
transactions authorized pursuant to this section;
(4) require that the insurer establish adequate systems of internal
control and reporting to ensure that derivative transactions are
properly supervised and that transactions are in accordance with the
insurer's authorized policies and procedures;
(5) establish documentation and reporting requirements for
transactions authorized pursuant to this section;
(6) establish appropriate accounting standards for derivative
transactions authorized pursuant to this section; and
(7) the provisions of this section shall not be deemed to authorize
the superintendent to promulgate any rule or regulation, circular letter
or directive, that in any way expands the superintendent's authority to
(i) approve or regulate an insurer's entire investment portfolio or
investment strategy, or (ii) impose standards on corporate governance
that are either stricter or contrary to the provisions contained in this
article or the business corporation law.
(i) For purposes of other provisions of this chapter, derivative
instruments and derivative transactions entered into under this section
shall be deemed to be investments, provided that if this section
conflicts with any other provisions of this chapter, the provisions of
this section shall prevail.
(j) The superintendent may order an insurer to cease effecting and
maintaining transactions authorized by this section upon a finding that
continued operations hereunder could be detrimental to the best
interests of the policyholders or the public.
(k) Any foreign insurer engaging in derivative transactions and
derivative instruments shall be subject to and comply with all the
provisions of this section. However, a foreign insurer may engage in
derivative transactions not authorized by this section provided that:
(1) such insurer is authorized to engage in such transactions pursuant
to its domestic state law; (2) such insurer includes the intent to
engage in such derivative transactions in the derivative use plan
submitted to and approved by the superintendent pursuant to paragraph
three of subsection (b) of this section; (3) the transactions are not
deemed, by the superintendent, to be potentially detrimental to the
policy holders or the public in this state; and (4) the insurer complies
with subsection (a) of section one thousand four hundred thirteen of
this article after the surplus to policyholders is reduced by the amount
of all derivative transactions not authorized by this section in
accordance with the measurement standards of paragraph one of subsection
(c) of this section. For purposes of this subsection, a foreign insurer
shall include foreign insurers as defined in paragraph twenty-one of
subsection (a) of section one hundred seven of this chapter, foreign
fraternal benefit societies, and accredited reinsurers.
(l) An insurer may enter into replication transactions provided that:
(1) the insurer would otherwise be authorized to invest its funds
under this chapter in the asset being replicated;
(2) the asset being replicated is subject to all provisions and
limitations (including quantitative limits) on the making thereof
specified in this chapter with respect to investments by the insurer, as
if the transaction constituted a direct investment by the insurer in the
asset being replicated; and
(3) as a result of giving effect to the replication transaction, the
aggregate statement value of all assets being replicated does not exceed
ten percent of the insurer's admitted assets.
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