1410 - Derivative transactions and derivative instruments.

§  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  thischapter,  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.