N.Y. Insurance Law § 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 subsection (f) 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 an over the counter 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, an insurer may only

transact an over the counter derivative instrument with:

(A) a qualified counterparty; or

(B) a counterparty other than a "qualified counterparty" if, after

giving effect to that transaction, the aggregate counterparty exposure

of the insurer under one or more over the counter derivative instruments

to:

(i) that non-qualified counterparty does not exceed one percent of the

insurer's admitted assets; and

(ii) all counterparties, other than qualified counterparties, does not

exceed three percent of the insurer's admitted assets.

(3) For purposes of this section:

(A) a "qualified counterparty" is a counterparty which has an

investment grade rating from at least one nationally recognized

statistical rating organization or a designation of one from the

Securities Valuation Office of the National Association of Insurance

Commissioners, or any successor office established by the National

Association of Insurance Commissioners, and with which the insurer has

entered into a master agreement, together with a credit support annex or

other documentation providing for the collateralization of the

counterparty's obligations to the insurer under the master agreement, if

that collateral documentation provides for (i) daily margin and

collateral settlement, in cash or investment grade securities, between

the parties, (ii) a minimum transfer amount of no more than one million

dollars, and (iii) a requirement that collateral be provided by the

counterparty from the first dollar of exposure, subject to the minimum

transfer amount;

(B) "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;

(C) "over the counter derivative instrument" means a derivative

instrument which is authorized under this chapter other than a

derivative instrument (i) cleared through a United States or foreign

derivatives clearinghouse, or (ii) traded on or through a United States

or foreign exchange providing derivatives clearing services;

(D) "derivatives clearinghouse" means a derivatives clearing

organization registered with the Commodity Futures Trading Commission or

the Securities and Exchange Commission or, if not so registered, is a

foreign clearinghouse regulated, supervised and examined by a regulatory

authority in a foreign jurisdiction approved by the superintendent;

(E) "master agreement" means a written master agreement relating to

derivatives transactions that provides for netting of payments owed by

the respective parties, and the domiciliary jurisdiction of the

counterparty is either within the United States or if not within the

United States, within a jurisdiction approved by the superintendent as

eligible for netting; and

(F) "minimum transfer amount" means an amount below which a daily

margin and collateral settlement is not required.

(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.