KRS 304.33-055: Rights and requirements of netting agreements and qualified financial

contracts.

Notwithstanding any other provision of this subtitle or statute to the contrary:

(1) As used in this section:

(a) 1. "Netting agreement":

a. Means an agreemen t, including a master agreement or bridge

agreement for one (1) or more master agreements, that:

i. Documents one (1) or more transactions between parties to

the agreement for or involving one (1) or more qualified

financial contracts; and

ii. Provides for the netting or liquidation of qualified financial

contracts among the parties to the agreement; and

b. Except as provided in subparagraph 2. of this paragraph, includes

any security agreement or arrangement or other credit

enhancement or guarantee or reim bursement obligation related to

any contract or agreement described in this paragraph.

2. Any contract or agreement described in this paragraph relating to

agreements or transactions that are not qualified financial contracts shall

be deemed a netting agreement only with respect to those agreements or

transactions that are qualified financial contracts.

3. A master agreement, or bridge agreement for one (1) or more master

agreements, together with all schedules, confirmations, definitions,

addenda thereto, and transactions under any thereof, shall be treated as

one (1) agreement.

4. As used in this paragraph:

a. "Agreement" includes any terms and conditions incorporated by

reference in the agreement; and

b. "Netting or liquidation of qualified financial contracts" includes

netting or liquidation of:

i. Present or future payment obligations or payment

entitlements under qualified financial contracts; and

ii. Liquidation or closeout values relating to present or future

payment obligations or payment entitlements under qualified

financial contracts; and

(b) "Qualified financial contract" means any:

1. Commodity contract;

2. Forward contract;

3. Repurchase agreement;

4. Securities contract;

5. Swap agreement; or

6. Similar agreement specified by the commissioner in an administrative

regulation promulgated in accordance with KRS Chapter 13A;

(2) A person shall not b e stayed or prohibited from exercising any of the following

rights:

(a) 1. A contractual right to terminate, liquidate, close out, or accelerate any

netting agreement or qualified financial contract with an insurer due to:

a. The insolvency, financial cond ition, or default of the insurer, if

such right is enforceable under applicable law other than this

subtitle; or

b. The commencement of a formal delinquency proceeding under this

subtitle.

2. As used in this paragraph, "contractual right" includes any righ t arising

under:

a. Statutory or common law;

b. Rules or bylaws of a national securities exchange, clearing

organization, or securities clearing agency;

c. Rules, bylaws, or resolutions of the governing body of a swap

execution facility, designated contrac t market, board of trade, or

any clearing organization relating to any of the foregoing; or

d. The law merchant;

(b) The right to enforce any pledge, security, collateral, guarantee agreement, or

other credit support document related to a netting agreement or qualified

financial contract; or

(c) Subject to subsection (3) of this section, the right to setoff or net any

termination value, payment amount, or other transfer obligation arising under

a netting agreement or qualified financial contract if the coun terparty or its

guarantor is organized under the laws of the United States, a state of the

United States, or a foreign jurisdiction approved by the Securities Valuation

Office of the National Association of Insurance Commissioners as eligible for

netting;

(3) (a) Upon termination of a netting agreement or qualified financial contract:

1. The net or settlement amount owed by a nondefaulting party to an

insurer against which a delinquency proceeding has been initiated shall

be transferred to, or on the order of, the receiver, even if the insurer is

the defaulting party;

2. Any limited two -way payment provision in a netting agreement or

qualified financial contract with an insurer that has defaulted shall be

deemed a full two -way payment provision as against th e defaulting

insurer; and

3. Any amount referenced in subparagraph 1. of this paragraph, except to

the extent it is subject to secondary liens or encumbrances, shall be

considered a general asset of the insurer.

(b) If a counterparty to a netting agreement or a qualified financial contract with

an insurer against which a delinquency proceeding has been initiated

terminates, liquidates, closes out, or accelerates the agreement or contract:

1. Damages shall be measured as of the date or dates of termination,

liquidation, close out, or acceleration; and

2. The amount of the claim for damages shall be actual direct

compensatory damages calculated in accordance with subsection (7) of

this section;

(4) A receiver shall not transfer a netting agreement or qualified financial contract of an

insurer unless the receiver transfers to one (1) counterparty, other than an insurer

subject to a delinquency proceeding, all:

(a) Netting agreements and qualified financial contracts between that

counterparty, or any affiliate of the counterparty, and the insurer; and

(b) Rights, obligations, guarantees, collateral, and credit support documents

related to the agreements and contracts referenced in paragraph (a) of this

subsection;

(5) (a) If a receiver transfers a netting agreemen t or qualified financial contract, the

receiver shall make best efforts to notify all counterparties to the agreement or

contract by noon, local time, of the next business day following the transfer.

(b) As used in this subsection, "business day" means any day that is not a

Saturday, a Sunday, or a day on which the New York Stock Exchange or the

Federal Reserve Bank of New York is closed;

(6) (a) Except as provided in paragraph (b) of this subsection, a transfer of money or

other property made under a netti ng agreement or qualified financial contract,

including under any pledge, security, collateral, guarantee arrangement, or

other similar security arrangement or credit support document relating to a

netting agreement or qualified financial contract, before the commencement

of a delinquency proceeding shall not be:

1. Deemed fraudulent under this subtitle; or

2. Avoided by the receiver.

(b) A transfer may be deemed fraudulent and may be avoided by the receiver

under KRS 304.33 -290 if the transfer is made with actual intent to hinder,

delay, or defraud the insurer, the receiver, or any creditor;

(7) (a) If a receiver elects to disavow, reject, or repudiate a netting agreement or

qualified financial contract of an insurer under KRS 304.33 -240 or any other

section of this subtitle, the receiver shall disavow, reject, or repudiate the

entire netting agreement or qualified financial contract between the insurer

and a counterparty, or any affiliate of the counterparty, including all related

transactions in their entirety.

(b) If the receiver disavows, rejects, or repudiates a netting agreement or qualified

financial contract, a counterparty's claim against the estate of the insurer shall

be:

1. Determined as if the claim arose before the date of:

a. Except as provided in subdivision b. of this subparagraph, the

petition for liquidation; or

b. If a rehabilitation proceeding was converted to a liquidation, the

petition for rehabilitation; and

2. Limited to actual direct compensatory damages, determined as of the

date of disavowal, rejection, or repudiation.

(c) As used in paragraph (b) of this subsection, "actual direct compensatory

damages":

1. Includes normal and reasonable costs of cover or industry -standard

damages calculations that are applicable in the derivatives, securities, or

other applicable market; and

2. Does not include punitive damages, lost profits, lost opportunities, or

pain and suffering;

(8) This section shall not apply to netting agreements and qualified financial contracts

between an insurer and any of its affiliates; and

(9) All rights of a counterparty under this section shall apply to netting agreements and

qualified financial contracts entered into on behalf of:

(a) The general account of the insurer; and

(b) Any separate account of the insurer, if the assets of the separate account are

available only to a counterparty to the netting agreements and qualified

financial contracts entered into on behalf of that separate account.