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You are a helpful assistant. Answer this question: When did the FINMA Circular 2016/5 "Investment guidelines - insurers" come into force? | Source Document: finma rs 2016 05 en
### Section: Page 1
Circular 2016/5 Investment guidelines -
insurers
Investments in the total assets and combined
assets of insurance companies
Reference: FINMA Circular 16/5 "Investment guidelines - insurers"
Decree:December 3, 2015
Entry into force:January 1, 2016
LastChange: January 1, 2018 [Changes are marked with * and listed at the end of the document]
Concordance: formerly FINMA Circular 08/18 "Investment Guidelines for Insurers" of November
20,2008 Legal basis: FINMASA Art. 7 para. 1 let. b
ISA Art. 17-20, 22, 37, 51, 56, 87
AVO Art. 56, 57, 68, 70-95, 96, 97, 100-109, 139
AVO-FINMA Art. 1
Appendix: Supplementary Agreement of the Swiss Bankers Association
AddresseesBankG
VAG
FINIG
FinfraG
KAG
MLA
OtherBanks
Financial groups and
conglomerates
Other intermediaries
Insurer
Insurance groups and
conglomerates
Intermediary
Asset manager
Trustees
Manager of coll. assets
Fund management companies
Account-holding investment firms
Non-accounting Investment firms
Trading venues
Central counterparties
Central securities depository
Trade repository
Payment systems
Participants
SICAV
KmG for KKA
SICAF
Custodian banks
Representative of foreign KKA
Other intermediaries
SRO
SRO supervisors
Audit firms
Rating agencies
X
Laupenstrasse 27, 3003 Berne
Tel. +41 (0)31 327 9100, Fax +41 (0)31 327 9101
www.finma.ch
### Section: Page 2
2/70Table of contents
I. Object Rz 1
II. General principles for total assets Rz 2-22
A. Investment principles Rz 2
B. Derivative financial instruments Rz 3-22
III. General principles for tied assets Rz 23-179
A. Definition, purpose and obligation to order Rz 23-24
B. Principles Rz 25-56
C. Investment strategy Rz 57-60
D. Investment regulations Rz 61-68
E. Organization and control Rz 69-87
F. Further provisions Rz 88-152
G. Safekeeping of assets Rz 153-159
H. Claims of non-life insurers against reinsurers Rz 160-175
I. Authorizations pursuant to Art. 79 para. 3 AVO Rz 176
J. Reporting to FINMA Rz 177-179
IV. Investment forms in tied assets Rz 180-505
A. Cash deposits Rz 181-185
B. Bonds, convertible bonds Rz 186-196
C. Structured products Rz 197-213
D. Securitized receivables Rz 214-226
E. Other acknowledgements of debt Rz 227-239
F. Shares and other equity securities Rz 240-245
G. Real estate Rz 246-287
H. Mortgage receivables Rz 288-316
I. Alternative investments Rz 317-350
J. Derivative financial instruments Rz 351-478
K. Collective investment schemes and single investor funds Rz 479-505
V. Supplementary provisions on tied assets Rz 506-571
A. Securities lending Rz 506-537
B. Repurchase agreements Rz 538-571
VI. Transitional provisions Rz 572-575
### Section: Page 3
3/70I. Subject matter
This circular specifies the regulations on the investment activities of supervised insurance
companies. Chapters II and III set out FINMA's expectations with regard to the overall
investment activity of all supervised insurance companies and, in particular, the general
requirements in connection with the designation of tied assets (Art. 17 of the Insurance
Supervision Act [ISA; SR 961.01]). Chapters IV and V explain the requirements for the
permissible assets in tied assets (Art. 79 of the Supervision Ordinance [SO; SR 961.011]).1
II General principles for total assets
A. Investment principles
When selecting its investments, the insurance company takes into account the structure and
development of the obligations (asset liability management, ALM), the security of the
investments, appropriate diversification and the insurance company's foreseeable need for
liquid assets.2
B. Derivative financial instruments
a) Use of derivative financial instruments
Insurance companies may only use derivative financial instruments to reduce the risks on the
investments or on their obligations to the insured persons or to manage the investments
efficiently (Art. 100 SO).3
When using derivatives, the insurance company may not take any risks that are inappropriate
to the scope of business and risk capacity of the insurance company. The use of derivatives
should also be aimed at achieving a sustainable effect.4
b) Obligation to provide cover when using derivatives
In accordance with Art. 100 para. 2 SO, all obligations that may arise from derivative financial
transactions must be covered. The obligations must be covered at all times and in full
(contract volume / notional value) either by the underlying assets on which the derivatives are
based (in the case of derivatives with an obligation to sell) or by liquidity (in the case of
derivatives with an obligation to buy).5
Liquidity can include both cash and cash equivalents. Cash equivalents
Cash deposits in accordance with margin nos. 181-185 and government bonds with a minimum
credit rating of 2 and very good liquidity are considered funds. In addition, the funds mentioned in
margin no. 1146
### Section: Page 4
4/70Receivables that are exempt from the counterparty limit are regarded as cash equivalents.
The obligation is covered at all times and in full if: 7
•the liquidity or cash equivalents are available; 8
•the underlying assets are held by the insurance company and are available without
restriction - securities lending in relation to the underlying assets and repurchase
agreements (repo, reverse repo) in connection with derivative transactions are not
permitted. Lent securities are an exception if the short-term recall of these securities is
possible without restriction. The increased operational risks arising from these
transactions must be taken into account;9
•double use of liquidity or underlying assets to cover several transactions is excluded -
underlying assets or liquidity can be used simultaneously to cover derivative positions if
these involve several risks (e.g. a market, credit or currency risk) but relate to the same
underlying assets;10
•the market value of the cash equivalents or the number of underlying assets covers the
entire obligation, whereby cash equivalents - with the exception of cash deposits in
accordance with margin nos. 181-185 - may only be used as cover to the extent of 90% of
the market value.11
In the case of derivatives with a purchase or acceptance obligation (e.g. long futures, long
forwards, short puts) of an underlying asset, such as a share, a financial index, a currency or
an interest rate, the liquidity required to fulfill the obligation must be available at all times.12
In the case of derivatives with an obligation to sell or deliver (e.g. short futures, short forwards,
short calls) an underlying asset, such as a share, a currency or an interest rate, the underlying
investment must be available at all times and without restriction to fulfill the obligation. In the
case of index derivatives, the obligations are deemed to be covered if there is an extensive
and stable correlation between the underlying assets held and the index.13
If there is a contractual right to satisfy an obligation entered into by means of a cash payment
instead of delivery of the deliverable underlying, the physically deliverable underlying must
nevertheless be held.14
If cash settlement is mandatory for underlyings that cannot be physically delivered (e.g.
underlyings for weather derivatives), the necessary liquidity must be maintained in full at all
times in the event of an obligation to sell such derivatives.15
In the case of derivatives with an obligation to exchange cash flows (e.g. interest rate swaps),
the cash flow to be paid must be ensured with the necessary liquidity or underlying.
become.16
### Section: Page 5
5/70In the case of combinations of derivatives, the obligations of the entire combination for the
fulfillment of the obligations must be covered at all times by underlying assets or liquidity
available in the assets. The underlyings of the combinations must be identical to the
underlyings used as cover.17
c) Organization, know-how and investment process
Insurance undertakings that use derivative financial instruments must have qualified and
knowledgeable staff, an appropriately designed investment strategy, an investment
management system tailored to their specific needs, a fully implemented and documented
investment process, a suitable risk management system and an adequate system
infrastructure (margin no. 76).18
The provisions of margin nos. 57-87 m u s t also be observed mutatis mutandis when using
derivative financial instruments.19
d) Analysis of the risks associated with the use of derivative financial instruments
The counterparty risks resulting from derivative transactions must be taken into account
before derivative financial instruments are used. The risks must be analyzed as often as the
situation requires, but at least once a week for market risks and once a month for credit risks.
The analysis of market and credit risks consists, among other things, of evaluating the open
positions and comparing them with the defined limits of risk exposure. The result of the risk
analysis must be presented to the Executive Board as often as the situation requires, but at
least once a month for market risks and at least once every three months for credit risks (Art.
104 SO).20
The insurance company's risk management ensures that the derivative strategies of different
divisions are recorded centrally and analyzed for interdependencies. To this end, various
relevant scenario calculations must be carried out to ensure that the overall use of derivatives
does not jeopardize the value of the assets or the solvency of the company. The insurance
company ensures that the economic impact on assets and solvency in connection with
derivative transactions is correctly shown in the various reports to FINMA.21
According to Art. 108 SO, an activity report on the use of derivative financial instruments must
be submitted to the Board of Directors at least every six months.22
III General principles for tied assets
A. Definition, purpose and obligation to appoint
The values in the tied assets represent based on the
The assets secure the claims of the insured persons based on the reported technical 23
### Section: Page 6
6/70provisions. The
### Section: Page 7
7/70Tied assets are of great importance in the event of a portfolio transfer and especially in the
event of insolvency and the subsequent liquidation of the insurance company. The tied assets
provide the insured persons with a liability substrate that ensures that their claims are satisfied
with priority over other creditors in the event of the insurance company's bankruptcy.
The assets allocated to the tied assets must be secure, unencumbered property of the
insurance company and realizable in the event of the bankruptcy of the insurance company in
Switzerland. To ensure that the claims of the insured persons are effectively secured,
attention must be paid to the intrinsic value and stability of value when allocating assets to tied
assets.24
B. Principles
a) Investment principles
aa) Security
The investments in tied assets must be selected in such a way that the claims arising from
insurance contracts can be met at all times.25
The security of investments is guaranteed if they are economically and legally secure.
Economic security is understood to mean the preservation of the value of the capital or
assets; the legal security of the investments is measured by their availability and saleability.
The requirement of economic and legal security applies to both direct and indirect
investments.26
The following criteria in particular must be observed with regard to maintaining the value of
assets:
•the fluctuation in value of the total tied assets, whereby the extent of the fluctuation in
value that can be tolerated depends on the level of overfunding of the tied assets;
•the quality of the system;
•a reliable valuation method for the system.27
The legal security of the system relates in particular to the following criteria:
•unrestricted power of disposal;
•the unrestricted saleability and transferability of the assets, in particular in the event of the
insurance company's bankruptcy.28
Assets that jeopardize the intrinsic value of the tied assets (e.g. assets that give rise to additional
funding obligations at the expense of the tied assets) are not permitted.
assets).29
### Section: Page 8
8/70bb) Orientation towards obligations (Asset Liability Management, ALM)
The order of the tied assets must be based on the structure and expected development of the
insurance obligations to be secured. Appropriate account must be taken of both the
performance of investments and liabilities and the expected cash flows from investments and
obligations.30
cc) Profitability
The insurance company selects investments that generate a return in line with the market. 31
dd) Diversification
Each tied asset must be sufficiently and appropriately diversified. Cluster risks must be
excluded. An appropriate mix in relation to the various investment categories and a spread of
investments in relation to the debtors of the assets must be achieved.32
An appropriate mix of investments with regard to the various investment categories takes into
account the following criteria in particular:
•the specific risk profile and default risk or impairment risk of the investments;
•the investment horizon (i.e. investment period) of the investment;
•the correlation of asset classes.33
An appropriate diversification of investments takes into account at least the following criteria:
•various counterparties;
•different geographical regions;
•different industries and segments.34
Investments in high-risk investments may only be made as a cautious addition to and
appropriate diversification of the total tied assets. The risk capacity of the insurance company
must always be taken into account. Investments in securities with a credit rating of 5 are only
permitted if there is corresponding technical expertise in the area of credit risks.35
ee) Liquidity
In principle, the insurance company must choose investments that can be realized quickly if
necessary, especially in the event of the insurance company's bankruptcy.36
The realizability of an investment depends, among other things, on the term of an investment
(e.g. bonds, fixed-term deposits) or the possibility of assigning (selling) the investment on the
market or on a stock exchange.37
### Section: Page 9
9/70b) Prohibition of charging and offsetting
The value of the tied assets must be unencumbered (Art. 84 para. 2 SO). In principle, the tied
assets may not be encumbered by liens, rights of retention, rights of set-off or similar rights.
No additional funding obligations may be created to the detriment of the tied assets.
Exceptions are set out in Chapters IV and V.38
c) Realization in bankruptcy
The assets in tied assets serve solely to secure claims arising from insurance contracts in the
event of the insolvency and liquidation of the insurance company under bankruptcy law. It
must therefore be ensured that the assets flow into the bankruptcy estate and can be
liquidated in Swiss bankruptcy proceedings.39
The recoverability in bankruptcy must be ensured by the insurance company, whereby proof can
be provided as follows:40
•The investment is securitized and traded on a market so that a market price can be
determined; or41
•the legal system applicable to the investment recognizes FINMA's insolvency proceedings
and the priority privilege of tied assets under Swiss law, so that special executions or
other interventions by an authority or third parties are not possible.42
At FINMA's request, the possibility of realizability in Swiss bankruptcy must be demonstrated. 43
d) Obligation to provide cover at all times
The insurance company shall take suitable organizational measures to ensure that the current
debit amount pursuant to Art. 56 and 57 or 68 SO is covered at all times by permissible assets
pursuant to Art. 68 para. 2, 79 and 81 SO. The amount of the current target amount is
determined on the basis of the current provisions if a statement of account were prepared at
that time.44
Instead of a concrete calculation of the current provisions, well-founded and prudent estimates
can also be used during the year, provided that it can be demonstrated with a high degree of
certainty that the current target amount is actually covered by the calculated values.45
This ensures that even after events and developments occurring during the year that require
further technical provisions and require a
have an influence on the target amount (e.g. unexpected claims, need for additional reserves),46
### Section: Page 10
10/70acquisition of new business or business growth) sufficient assets are available to cover the
target amount of the tied assets.
e) Order
The insurance company establishes the tied assets by allocating assets. It records and
identifies these assets in such a way that it can prove at any time without delay which assets
belong to the tied assets and that the target amount of each tied asset is covered (Art. 76
para. 1 AVO).47
f) Criteria for the allocation of assets to restricted assets
An asset can be allocated to restricted assets if: 48
•the investment is an admissible value in accordance with Art. 79 or Art. 68 para. 2 SO and
is eligible in accordance with this Circular. Partial crediting of investments (e.g. due to
non-creditable parts or increased risks) is not permitted. Partial offsetting of the
investment is only possible if the exception is explicitly described in this circular (e.g.
mortgages, margin no. 312);49
•the investment can generally be valued without any problems; 50
•the investment has a high level of liquidity in relation to the corresponding investment
category;51
•the necessary expertise is available and appropriate processes and systems are applied
that are necessary for the professional selection, management and control of the
investment made (margin no. 76);52
•The effects of the investment and its individual risk components are understood so that
the financial, legal and operational risks can be assessed at all times;53
•the debtor's creditworthiness is verifiable (margin no. 139-152); 54
•the asset is neither encumbered nor can it be offset against third-party claims (margin no. 38). 55
These principles are specified for each investment category in Chapters IV and V. 56
C. Investment strategy
The Executive Board determines the investment strategy and submits it to the Board of Directors
for approval (Art. 78 para. 1 let. a, Art. 101 SO).57
The investment strategy takes appropriate account of the type and complexity of the business
conducted, in particular the insurance business (Art. 102 para. 1 SO).58
### Section: Page 11
11/70The framework conditions for the use of the various investment categories must be defined in
the investment strategy. All investments must be anchored in the investment strategy of the
company as a whole.59
The limits of risk exposure must be set in accordance with the financial and organizational
capacities of the insurance company.60
D. Investment regulations
The investment regulations are issued by the Executive Board or a member of the Executive
Board or the general representative and define the entire investment activity (Art. 78 para. 1
let. b, Art. 106 para. 1 SO). The investment activity is comprehensively described in a
document, whereby specific references to other internal directives are possible.61
The requirements for the investment regulations are based on the complexity of the investments
in the investment universe defined by the insurance company.62
The insurance company regulates at least the following topics in the investment regulations: 63
•Internal investment principles and objectives (incl. ALM); 64
•Description of the investment universe (permitted investments / restrictions); 65
•Investment techniques and their area of application/purpose (e.g. use of derivative
financial instruments, securities lending, repurchase agreements);66
•Description of the investment process, monitoring and controls (definition of tasks,
responsibilities, competencies, accountability and escalation mechanisms);67
•Staff requirements (e.g. specialist knowledge, experience, integrity). 68
E. Organization and control
The administration (investment management) and control (risk management) of the
investment activity must be carried out by persons who are independent of each other and
must be organizationally appropriate to the complexity of the business and investment activity
(Art. 78, 106 SO).69
The staff must have adequate qualifications and knowledge of the asset classes invested in
and, in the case of investments in riskier investments, appropriate expertise (Art. 78 para. 1
let. c, Art. 107 SO).70
The systems used should be appropriate to the size and complexity of the investment portfolio,
be monitored and have the necessary stability (Art. 106 para. 2 SO).71
### Section: Page 12
12/70The administration (investment management) must ensure and perform at least the following
tasks:72
•the implementation of the investment strategy and the investment regulations; 73
•the definition and documentation of the strategic and tactical asset allocation, which is
adapted to the risk capacity, size and complexity of the insurance company, whereby the
allocation is made in relation to asset classes and other important characteristics such as
duration, sectors, creditworthiness and investment styles;74
•setting a limit system based on individual risk capacity, monitoring limits and defining
measures in the event of limit breaches;75
•the provision of an investment process that is commensurate with the complexity of the
investments. Scenario analyses must be used to ensure that the use of complex
investments does not jeopardize the value of the total assets and tied assets or the
solvency of the insurance company;76
•monitoring the value of the assets; 77
•monitoring and controlling compliance with regulatory requirements; 78
•monitoring and controlling the main risks (in particular market risk, credit risk,
concentration risk, liquidity risk, currency risk, operational risk, legal risk) in connection
with investment activities;79
•the measurement and evaluation of investment results; 80
•the definition of internal reporting. 81
If the insurance company commissions a third party with investment management, this does
not relieve it of responsibility for compliance with the investment management regulations. In
particular, the insurance company must understand the investment process, monitor the
specified strategy and investment principles and be able to track all transactions in a timely
manner for accounting purposes.82
The transfer of investment management to third parties is subject to FINMA approval in
accordance with Art. 4 para. 2 let. j ISA.83
Control (risk management) must ensure and perform at least the following tasks: 84
•monitoring and controlling compliance with the investment principles and objectives in
accordance with margin no. 64 and the other internal directives of the insurance company;85
•monitoring and controlling compliance with regulatory requirements; 86
### Section: Page 13
13/70•monitoring and controlling the main risks (in particular market risk, credit risk,
concentration risk, liquidity risk, currency risk, operational risk, legal risk) in connection
with investment activities.87
F. Further provisions
a) Separate tied assets
Separate tied assets are to be ordered for (Art. 77 para. 1 AVO):
•occupational pension insurance;
•the policyholder claims from unit-linked insurance contracts or capitalization transactions
(insurance classes A2.1, A2.2, A2.3 and A6.1);
•the policyholder claims from insurance contracts or capitalization transactions that are
linked to internal investment portfolios or other reference values (insurance sections A2.4,
A2.5, A2.6 and A6.2).
The appointment of further tied assets is possible (Art. 77 para. 2 SO) and may be ordered by
FINMA in justified cases (para. 3).88
In Art. 77 para. 1 let. b and c AVO, reference is no longer made to the savings portion of the
insurance contracts, but to the entire insured persons' claims. In particular, this is intended to
avoid the previously separate safeguarding of the savings and guarantee components.89
This Circular must be observed for each separate tied asset, whereby in particular the defined
limits, the coverage obligations and the qualitative requirements for each tied asset must be
taken into account. For the separate tied assets of unit-linked life insurance and capitalization
transactions (insurance classes A2.1-A2.6 as well as A6.1 and A6.2), however, exceptions
apply with regard to the limits (see margin no. 122).90
b) Foreign insurance portfolio
The insurance undertaking is not obliged to secure its foreign insurance portfolios with tied
assets if equivalent security must be provided abroad (Art. 17 para. 2 ISA). If no equivalent
security has to be provided abroad, the security is provided in Switzerland, whereby the
provision can be made in separate tied assets (Art. 77 para. 2 let. b SO).91
If there is no equivalent guarantee abroad, a supplementary guarantee must be provided in
Switzerland.92
The following criteria are relevant for the equivalence check: 93
•Special assets 94
### Section: Page 14
14/70There is an obligation to cover the entire technical provisions from direct insurance
through a special fund. The gross technical provisions must be covered (without taking
into account claims against reinsurers). If an analogous system for offsetting the reinsured
portions of the provisions (see margin nos. 160-175) exists for insurance companies that
operate non-life insurance, the gross principle is deemed to be fulfilled. It must be ensured
that only those contracts participate in the special fund that are fully included in the target
amount.
Instead of special assets, other forms of security for insurance claims may be taken into
account, provided their effect is certain even in the event of the bankruptcy of the
insurance company and is equivalent to the effect of special assets.95
For these other forms, margin nos. 97 and 98 apply mutatis mutandis. 96
•Bankruptcy privilege
In the event of bankruptcy, the special assets are primarily available to satisfy claims arising
from insurance contracts.97
•Investment guidelines
The local supervisory authority specifies investment guidelines aimed at maintaining the
security and value of the investment fund.98
c) Unit-linked life insurance policies
Unit-linked insurance contracts or capitalization transactions must be linked to permissible
assets for the tied assets: In the case of unit-linked contracts, these are open-ended collective
investment schemes that fall under the Collective Investment Schemes Act (CISA; SR 951.31)
(Art. 125a SO). In the case of contracts linked to internal investment portfolios or other
reference values, these are permissible values in accordance with Art. 79 SO and Art. 81
para. 2 SO.99
The investments used as collateral must correspond to those on which the contracts are
based (matching cover; Art. 81 AVO), as otherwise the insurance company bears an
additional investment risk. Any guarantees must be secured with investments in accordance
with Art. 79 AVO that replicate the fluctuations in value of these guarantees as well as
possible. Other contractual components, non-unit-linked provisions and any supplement to the
target amount must be secured with values in accordance with Art. 79 AVO.100
In accordance with Art. 93a AVO, investments to secure claims from unit-linked life insurance
policies are valued at no more than market value, irrespective of
the other capitalized values in accordance with Chapter IV.101
### Section: Page 15
15/70d) Indirect investments: Initial acquisition, restructuring
An investment - whether as an initial acquisition or through restructuring - in so-called indirect
investments (e.g. in funds, participations, structured products or bonds issued by special
purpose vehicles [SPVs]) may not be used to circumvent the provisions on direct investments
in accordance with Chapter IV.102
This circular deals with the following indirect investments:
•collective investment schemes in accordance with margin nos. 484-493;
•Single investor funds according to margin nos. 494-505;
•Real estate companies in accordance with margin no. 256 (for a participation of more than
50%) or margin no. 240 (as a listed real estate company);
•structured products and securitized receivables in accordance with margin nos. 197 and
214;
•alternative investments in accordance with margin nos. 317-350.103
Depending on the instrument, specific qualitative requirements and a high level of liquidity are
demanded for the entire investment instrument or a so-called look-through approach is
applied. An investment in an indirect investment that contains a non-eligible direct investment
is only permitted if the specific provisions for the indirect investment are met and its
characteristics mean that the disadvantages that lead to the non-eligibility of the direct
investment do not affect the indirect investment.104
Example: An investment in real estate that is relatively illiquid and difficult to value and is
therefore not a permissible investment in tied assets cannot be counted as a permissible
investment even if it is restructured as an indirect investment. It can only be included if the risk
situation for the investor actually improves, as illustrated by the following list based on an
investment in real estate.105
106Structure Creditable? Reason
Direct investment: Illiquid,
Difficult to value
investment in real estateNo Usability and assessability made more difficult
(margin no. 246)
Restructuring into a single
investor fundNo Look-through approach is applied, treatment
as direct investment (margin no. 494)
Restructuring into a real
estate companyNo Look-through approach is applied, treatment
as direct investment (margin no. 283)
Construction of a
structured product with | The FINMA Circular 2016/5 "Investment guidelines - insurers" came into force on January 1, 2016. |
You are a helpful assistant. Answer this question: Based on the provided document section, what are the eligibility criteria for an insurance company to apply for its own limits for investment categories such as equities, real estate, mortgages, and net currency exposure? | Source Document: finma rs 2016 05 en
participation in real estateNo Each individual element of the structured
product and the underlyings of the derivative
transactions must be individually eligible
(margin no.
199)
Justification of an
alternative investment, i.e.
investment in shares of a
company.
company, which in turn
owns the property in
questionNo Traditional investments that are not eligible as
direct investments may not be transferred to
the alternative investments category (margin
no. 331)
### Section: Page 16
16/70is held as an asset.
Justification Yes, if criteria for collective investment schemes are met
requirements: saleability at any time in a liquid market in accordance with Art. 82 para.
1 SO and subordination to an effective fund supervisory authority (margin no.
484). This results in a liquid, diversified and
supervised real estate portfolio.
e) Additional collateral for non-chargeable assets
If an investment has a non-eligible component, the entire investment is not permitted in the
tied assets. If the investment or the structure contains an additional security, the investment
may only be included in the tied assets if this compensates for the deficiency relating to the
non-eligible part.107
f) Limits
aa) General
Based on Art. 83 SO, limits are set for individual investment categories. 108
An insurance company may hold no more than the percentage of the target amount of each
individual tied asset specified as a limit for investments in a particular investment category.109
Both the general limits (see margin nos. 113-122) and the special limits for each investment
category must be observed.110
Exceeding the specified limits is permitted within the scope of the excess cover of the target
amount. Limits are deemed to have been exceeded if a situation can be achieved by
withdrawing assets from the tied assets in which all limits are complied with and the target
amount of the tied assets is still covered.111
i
The insurance company shall take appropriate measures to ensure that the limits are
complied with at all times. Securities that have been transferred to securities lending or
repurchase agreements must be included in the calculation of the limits.112
bb) Counterparty limits
The exposure to a counterparty may not exceed 5% of the target amount of the tied assets. If
there is a higher exposure per counterparty, this must be submitted to FINMA for approval
without delay.113
Claims against the Swiss Confederation, cantons, cantonal banks with a state guarantee and
Swiss mortgage bond institutions are exempt from the 5 % limit.
excluded. Receivables from debtors whose obligations are due at any time and114
### Section: Page 17
17/70are fully guaranteed by a state with a credit rating of 1 are also excluded from this limit.
To determine the net exposure, all receivables and investment instruments in the tied assets
vis-à-vis this party must be accumulated. If the insurance company invests in several
companies within a group, the total exposure to this group is decisive. Guarantees issued to
the insurance company, e.g. in connection with structured products, are also included in the
calculation of net exposure. Collateral received can be deducted from the exposure.115
cc) Foreign currency limits
The obligations arising from the insurance contracts should be covered by investments in
matching currencies. Investments in currencies other than the reference currency are limited
to 20% of the target amount of the tied assets. The reference currency is the currency in
which the insurance contracts concluded by the insurance company are denominated.116
dd) Exceptions
Upon request, an insurance undertaking may deviate from the limits for the categories equities
and other listed equity securities (margin no. 244), real estate (margin nos. 266-269),
mortgages (margin nos. 291-293) and the limits for net currency exposure (margin no. 116)
and apply for its own limits for these categories. The insurance company may apply for its own
limits under the following conditions:117
•The insurance company plausibly demonstrates that no negative effects on the solvency
of the company are to be expected as a result of the requested own funds.118
•The insurance company demonstrates that it has an appropriate risk management system
in place for the relevant asset classes.119
•The insurance undertaking must be able to demonstrate at all times that the chosen limits
continue to comply with the principles of this Circular on tied assets and that sufficient
account is taken of the risk of a shortfall in the target amount of tied assets as a result of a
significant reduction in the value of the corresponding investment category. To this end,
the insurance company must demonstrate plausibly by means of regular tests that stress
scenarios on the tied assets will not lead to a shortfall in the target amount of the tied
assets, even if its own limits apply. The available free, unencumbered assets must also be
included in these considerations.120
•The requirements must be met at all times, even after approval. As soon as the conditions
for the own limits are no longer met, the insurer must be authorized.
The insurance companies must comply with the specified limits.121
### Section: Page 18
18/70ee) Unit-linked life insurance
In unit-linked life insurance, the tied assets must be determined by the assets underlying the
contracts. Therefore, the quantitative limits of this Circular do not apply to the separate tied
assets of unit-linked life insurance (Art. 77 para. 1 let. b SO). For the separate tied assets of
life insurance linked to internal investment portfolios or other reference assets (Art. 77 para. 1
let. c S O ), only the limits of this circular apply.
"Exposure to a counterparty" and "Securities lending and repurchase agreements" must be
observed. However, these limits may be exceeded if the policyholder has been expressly
informed of the possible deviation from these limits before the contract is concluded.122
g) Compliance with the investment principles for small target amounts
The investment principles of security, ALM, profitability, diversification and liquidity (see margin
nos. 25-37) must also be observed by small insurance companies.123
Small insurance undertakings with only a small debit amount of tied assets may apply for an
exception to the 5% counterparty limit in justified cases (margin no. 113). In addition to the
reasons for the intended deviation from the counterparty limit, the application must contain
information on the debtor of the claims that account for more than 5% of the target amount of
tied assets and the amount of the requested counterparty limit, taking into account the
principle of appropriate diversification.124
h)Ensuring recoverability
The insurance company must review the value of the individual investment on an ongoing
basis and take into account any impairment as a result of a deterioration in creditworthiness in
the valuation of the investment. If the value of an investment is at risk (need for impairment),
the ordinary valuation method (e.g. cost amortization method for bonds) must be deviated
from for inclusion in tied assets and the inclusion must be at most at market value (cf. Art. 95
para. 2 AVO). This may affect the following investment categories in particular:125
•Cash contributions (see margin nos. 181-185) 126
•Bonds, convertible bonds (see margin nos. 186-196) 127
•Structured products (see margin nos. 197-213) 128
•Other acknowledgements of debt (see margin nos. 227-239) 129
•Mortgages (see margin nos. 288-316) 130
### Section: Page 19
19/70•Derivative financial instruments (see margin nos. 351-478) 131
i) Foreign assets
An allocation of valuable assets abroad in accordance with Chapters IV and V is possible if
the requirements of margin nos. 39-43 are met or the special provisions explicitly regulate an
allocation.132
j) Group relations
Intra-Group investments - in particular equity investments, treasury shares or shares of other
Group companies, treasury bonds, bonds of other Group companies, loans to Group
companies, derivative financial instruments from transactions with Group companies - cannot
be counted as tied assets, with the exceptions listed below.133
Loans to investment companies that meet the conditions of Art. 82 para. 4 SO may be
allocated to tied assets and credited at nominal value, provided the borrower does not have
any loans to Group companies on its own books.134
Participations in investment companies that meet the conditions of Art. 82 para. 4 SO may be
included in the tied assets at net asset value (NAV).135
Loans to real estate companies in which an interest of more than 50% is held can be allocated
to restricted assets and recognized at nominal value, provided that liquidation of the company
can be enforced and the borrower does not have any loans to Group companies on its own
books.136
Participations in real estate companies in accordance with Art. 79 para. 1 let. f SO may be
included in the tied assets at NAV if the participation is more than 50% and liquidation can be
enforced.137
This is intended to prevent intragroup investments whose value is doubtful in the event of
bankruptcy from being counted as tied assets. Double counting of investments (double
gearing) is also prevented.138
k) Credit ratings
The following credit ratings are to be used for ordering tied assets: 139
Credit rating level 1: 140
### Section: Page 20
20/70Highest grade, debtor with the highest credit rating. The debtor's ability to meet its financial
obligations is outstanding. The default risk is virtually negligible, even in the longer term.
Credit rating level 2:
High grade, safe investment. The default risk is virtually negligible, but may be somewhat
more difficult to assess in the longer term; the debtor's ability to meet its financial obligations is
very strong.141
Credit rating level 3:
Upper Medium grade. Safe investment, provided no unforeseen events affect the overall
economy or industry. The borrower's ability to meet its financial obligations is strong, but
somewhat more vulnerable to the adverse effects of changes in external circumstances and
economic conditions.142
Credit rating level 4:
Lower Medium grade, average investment. However, problems are to be expected if the
overall economy deteriorates. The borrower's ability to meet its financial obligations is
adequate, but more vulnerable to adverse economic conditions.143
Credit rating level 5:
All investments that do not meet the requirements for classification in one of the credit rating
categories 1-4.144
For regulatory purposes, the insurance company only uses ratings from recognized rating
agencies in accordance with FINMA Circular 2012/1 when assigning tied assets to the credit
rating categories
"Rating agencies" or own credit ratings.145
Own credit ratings must meet the following requirements: 146
•They are created under our own responsibility according to comprehensible criteria. 147
•They represent the assessment of the default risk from the perspective of the insurance
company.148
•The sources of information used are scrutinized in terms of how they were obtained, their
objectivity and their reliability.149
•They are reviewed on an ongoing basis and adjusted if necessary. 150
•The processes for their creation and use are documented. 151
### Section: Page 21
21/70The outsourcing of the process must be reported to FINMA in accordance with Art. 4 para. 2
let. j ISA. The insurance company remains responsible for the quality of the credit
assessments.152
G. Safekeeping of assets
a) Self-custody
The movable assets allocated to the tied assets may be held in custody by the insurance
company or the Swiss branch (Art. 86 para. 1 SO). The insurance company must notify
FINMA of the assets in its own custody and the exact place of custody (address, room
number, safe deposit box, etc.).153
b) Third-party custody
Third-party custody is permitted if the custodian in Switzerland is liable to the insurance
undertaking for the fulfillment of the custodian obligations (Art. 87 para. 2 SO). For this
purpose, the insurance company and the custodian must sign the "Supplementary
Agreement" (see Appendix) for each business relationship (custody accounts/accounts). The
assets in third-party custody, the custodian, the place of custody and the depositary as well as
the corresponding changes must be reported to FINMA. A copy of the supplementary
agreement must be submitted at the same time.154
Assets held in custody are eligible for inclusion in tied assets as soon as the formal
requirements have been met and FINMA has been notified.155
c) Custody abroad
Own or third-party safe custody abroad is permitted if the foreign bankruptcy law guarantees
the priority privilege of tied assets under Swiss law (Art. 87 para. 3 SO). The insurance
company must ensure that this requirement is met in the case of safe custody abroad.156
In the case of safe custody abroad, the insurance undertaking must prove with an official
confirmation or a well-founded legal opinion that the conditions set out in margin no. 156 are
met.157
d) Type of custody
The assets allocated to the tied assets must be kept separately from the other assets of the
insurance company and must be designated as tied assets. The accounts and custody
accounts must be identified as belonging to the tied assets and with the specific designation of
the tied assets.
characterize.158
### Section: Page 22
22/70Custody as intermediated securities is permitted. 159
H. Receivables of non-life insurers from reinsurers
a) Principles
The reinsured portions of the provisions are offset against the tied assets of the non-life
insurance companies in accordance with Art. 68 Para. 2 AVO.160
The applications for offsetting the reinsured portions of the provisions and their approvals
relate to the reinsurance companies and not to the amount of the reinsured portions. If
offsetting has been approved in relation to a reinsurer, the current amount of the reinsured
portions can be offset, subject to compliance with the limits in accordance with margin nos.
162-169. Offsetting of the reinsured portions of the provisions against a reinsurer can be
applied for as soon as a corresponding reinsurance contract exists, regardless of whether
reinsured portions of the provisions already exist.161
b) Crediting and limits
The reinsured portions of the provisions are generally credited at 100% of the amount of the
current portion; for reinsurers in run-off, at 75% of the amount of the current portion. In any
case, the offsetting is limited as follows in accordance with the credit rating levels under
margin nos. 139-144:162
•If the reinsurer's credit rating is 2 or better: 20% of the target amount of the bundled
assets.163
•For credit rating level 3 of the reinsurer: 10% of the target amount of the tied assets. 164
•For credit rating level 4 of the reinsurer: 5% of the target amount of the tied assets. 165
•In the case of reinsurers with a credit rating of 5, the reinsured portions of the provisions
cannot be offset against the tied assets.166
These limits are reduced by 50% for reinsured portions of the provisions from contracts with
insurers that belong to the same group as the insurance company.167
When offsetting reinsured portions of provisions relating to several reinsurers belonging to the
same group, the total of the offsets is limited to 1.5 times the limits (margin no. 162-166)
(based on the group's credit quality step).
limited.168
### Section: Page 23
23/70FINMA may, upon request, approve offsetting beyond the stated limits, provided this does not
impair the security of the tied assets.169
c) Special reinsurance relationships
Reinsured portions of the provisions relating to the Swiss natural hazard pool can be credited
up to 10% of the target amount of the tied assets in each case.170
d) Application and approval procedure
The form prescribed by FINMA must be used for the applications. If reinsurance contracts are
concluded with branches of reinsurers, the name and registered office of the company's head
office must be stated on the form.171
In justified cases, FINMA may limit the duration of approvals, in particular approvals in
accordance with margin no. 169.172
Applications are deemed to have been approved unless FINMA initiates a review within four
weeks.173
If the conditions change, in particular the assessment of the creditworthiness of an approved
reinsurer, the crediting must be adjusted in accordance with the limits set out in margin nos.
162-166 and FINMA must be notified immediately.174
If a further reinsurer is to be approved in addition to those already approved, all reinsurers
must be listed in the application. Those not yet approved must be marked.175
I. Authorizations pursuant to Art. 79 para. 3 AVO
FINMA may, on request, allow further assets to be included in the tied assets, provided this
does not impair the security of the tied assets (Art. 79 para. 3 SO). FINMA bases its
assessment of these applications in particular on margin nos. 23-159 of this Circular.176
J. Reporting to FINMA
Within three months of the end of the financial year, the insurance company shall inform the
audit company of the target amount calculated at the end of the financial year for each tied
asset together with the list of cover assets. Reporting to FINMA takes place within four months
of the end of the financial year (Art. 72 para. 1 SO).177
Insurance companies domiciled in Switzerland must also report on every foreign insurance
portfolio for which they have to provide security abroad.178
### Section: Page 24
24/70FINMA defines the requirements and the process for reporting tied assets on an annual basis. 179
IV. forms of investment in tied assets
In addition to the general principles listed above, the following principles apply to the systems. 180
A. Cash deposits
a) Permissible values
Cash and cash deposits, namely bank balances as well as fixed-term deposits and other
money market investments are permitted. Other money market investments include short-term
money market investments with a term of up to 12 months.181
b) Special requirements
The supplementary agreement in accordance with margin no. 154 must also be signed with
the counterparty for cash deposits or account balances. In particular, the supplementary
agreement must exclude any lien, right of retention, right of set-off or similar right on the part
of the debtor.182
In the case of claims against a debtor domiciled abroad, margin no. 132 must be observed. 183
c) Evaluation
Investments in this category are valued at no more than their nominal value, taking into account
the security and income (Art. 93 para. 2 SO).184
Money market debt register claims are recognized at no more than market value. If they are not
listed on a stock exchange, a standard market valuation method must be applied.185
B. Bonds, convertible bonds
a) Permissible values
The following values are assigned to this category:
•Government bonds
•Bonds issued by cantons, cities or municipalities and other public corporations
•Bonds issued by supranational organizations186
### Section: Page 25
25/70•Pfandbriefe regulated by special legislation (covered bonds)
•Corporate bonds (banks, finance companies and other corporate bonds)
•Medium-term notes issued by a bank licensed in Switzerland
The following types of bonds are also permitted:
•Convertible bonds with bond character and bonds with warrants
•Replicated bonds in accordance with margin nos. 422-431187
Convertible bonds are divided into convertible bonds with the character of bonds and
convertible bonds with the character of shares. If the market value of the convertible bond is
higher than 130% of the nominal value, it can be assigned to the "shares" category (Art. 79
para. 1 let. e AVO). If the market value of the convertible bond subsequently falls below 130%
of the nominal value, the convertible bond remains in the "shares" category. Convertible
bonds that must be converted into shares (e.g. mandatory convertible bonds, mandatory
convertible bonds, contingent convertible bonds [CoCo bonds]) are assigned to the "shares"
category.188
With regard to bonds from foreign issuers, margin no. 132 must be observed. 189
b)Non-permissible values
Investments that are issued as bonds but are assigned to another investment category in this
circular due to their characteristics are not assignable. Examples of this are bonds issued by a
special purpose vehicle (SPV) for the purpose of risk transfer and securitized receivables
(ABS, CDOs, etc.).190
Insurance-linked securities (e.g. cat bonds) are assigned to the category "Structured products"
(margin no. 197).191
Bonds with a conditional debt waiver (write-off bonds) cannot be allocated to restricted assets. 192
c) Evaluation
The maximum imputed value is determined according to the scientific or straight-line cost
amortization method plus accrued interest (Art. 88 para. 1 and Art. 88a AVO).193
With the scientific cost amortization method, the difference between the acquisition value and
the redemption value must be written down or written up over the remaining term of the
security on the balance sheet date to such an extent that the initial internal rate of return (yield
to maturity) can be maintained. The acquisition cost excluding accrued interest (clean price)
must be used (Art. 89 para. 1 AVO).194
Under the straight-line cost amortization method, the difference between the acquisition value
and the repayment value is amortized in equal amounts as of the balance sheet date.195
### Section: Page 26
26/70or as a revaluation over the remaining term. This method must also use the acquisition costs
excluding accrued interest (Art. 89 para. 2 AVO).
Convertible bonds, which fall into the category of bonds in accordance with margin no. 188, can
be accounted for using the cost amortization method.196
C. Structured products
a) Definition
Structured products are investments in the form of a bond or debenture in which a cash
instrument (e.g. a fixed-interest security) is firmly linked to one or more derivative financial
instruments to form a legal and economic unit. The derivative financial instruments refer to
underlying assets (e.g. shares, bonds, interest rates, exchange rates, alternative
investments).197
b) Permissible values
The admissibility of structured products is subject to the following conditions: 198
•The individual components (e.g. cash instrument and derivative) must meet the
requirements of the corresponding category of tied assets.199
•The structured product may not give rise to any delivery or purchase obligations. 200
•There must be no additional funding obligations. 201
c) Crediting and valuation
The structured products are valued according to one of the following methods and included in
the tied assets. The selected procedure must be maintained until the structured product is
sold or redeemed.202
1. structured product as a whole (overall view)
The structured product is measured as a whole at fair value. 203
The structured product as a whole is only allocated to one category of tied assets in
accordance with the embedded risks and is subject to all the provisions of the
corresponding category.204
For example, an index certificate consisting of a money market investment and long futures
on an equity index can be allocated as a whole to the "equities" category at market value.205
### Section: Page 27
27/70If the structured product contains various embedded risks, it is assigned as a whole to the
category with the highest requirements for allocation and recognition.206
For example, a cash instrument combined with various derivatives that participate in both
equity and commodity indices are allocated as a whole to the "alternative investments"
category.207
2. decomposition of the structured product into its individual components
If the structured product is broken down into eligible components, the individual
components of the corresponding investment category are taken into account. The
provisions of the respective investment category must be observed with regard to
valuation and inclusion in the tied assets.208
For example, a zero bond combined with a long call option can be split into the "bonds"
and "derivatives" categories. The zero bond is valued at amortized cost, the option is used
at market value.209
d) Special requirements
The provisions relating to foreign counterparties must be taken into account (margin no. 132). 210
Investments in insurance-linked securities are permitted insofar as these investments or the
resulting risks are not positively correlated with the company's own insurance risk.211
e) Limitations
For structured products or individual elements of structured products (when broken down), the
limitations of the categories to which they are assigned in accordance with margin no. 199
apply.212
f) Organization, know-how and investment process
Insurance companies that invest in structured products must have qualified and
knowledgeable staff, an appropriately designed investment strategy, an investment
management system tailored to their specific needs, a fully implemented and documented
investment process, an appropriate
risk management and an adequate system infrastructure (margin no. 76).213
### Section: Page 28
28/70D. Securitized receivables
a) Definition
Securitized receivables are risk transfer instruments that transfer the credit risk from the
assets transferred to a pool of receivables to the buyers of the securitized receivable. The
securitized receivable can be divided into several tranches (senior, junior, equity tranche). The
pool of receivables can have a uniform or mixed composition and consist of physical or
synthetic (structured) receivables. Examples of securitized receivables are Asset Backed
Securities (ABS), Mortgage Backed Securities (MBS, RMBS, CMBS) and Collateralized Debt
Obligations (CDO, CBO, CLO, CMO, SFCDO).214
b) Permissible values
Only investments in securitized receivables that can be assessed by the insurance company
in terms of transparency, degree of complexity, recoverability (valuation) and risk are
permitted.215
c)Non-permissible values
The following values in particular are not permitted: 216
•Intragroup transactions with securitized receivables (margin no. 133-138). 217
•Investments in the high-risk tranches of a securitized receivable, i.e. in particular in the
equity tranche, junior tranches and mezzanine tranches. Investments in higher tranches
(senior tranches, super-senior tranches) are also excluded if, taking into account all
relevant aspects, they do not correspond to an investment with at least credit quality step
4. This assessment must not be based on external credit enhancements (e.g. guarantees,
pledges). The assessment of the underlying assets is therefore relevant. Structure-related
credit enhancements (e.g. excess spread, reserve account, overcollateralization) may be
included in the analysis. The assessment process must meet the requirements of margin
nos. 221-224.218
•Investments in securitized receivables whose receivables pool is actively managed
(managed CDO), if this restricts the insurance company in its assessment of the risks and
recoverability of the receivables pool. If the investment restrictions and the management of
the receivables pool are designed in such a way that the insurance company can promptly
track changes in the composition and determine the effects on the risks and recoverability,
investments in managed CDOs are permitted.219
•CDOs of CDOs and similar nested structures. 220
### Section: Page 29
29/70d) Organization, know-how and investment process
Insurance undertakings that invest in securitized receivables must have qualified and
knowledgeable staff, an appropriately designed investment strategy, an investment
management system tailored to their specific needs, a fully implemented and documented
investment process, a suitable risk management system and an adequate system
infrastructure (margin no. 76).221
The insurance company must analyze and understand the risks of securitized receivables. If
third parties are involved in the analysis, any conflicts of interest must be clarified in advance.
The underlying pool of receivables must be analyzed with regard to its composition and
recoverability (assumptions about the distribution of default probabilities, recovery rates). In
order to make an assessment of the performance of a securitized receivable, it is therefore
necessary to have knowledge of the markets underlying the assets in the receivables pool. It
must also be taken into account whether the pool of receivables is physically present or has
been created synthetically (e.g. with the help of credit default swaps), whether the
securitization relates to cash flows or market values, whether the pool of receivables is fixed
or is actively restructured, etc. A close examination of the structure is essential to determine
the recoverability and risk of the securitized receivable. The analysis of the structure of the
securitized receivable usually requires a breakdown into the individual stages of the
securitization. At each stage, the risks and the built-in hedging measures must be closely
scrutinized with regard to their effect.222
The volume ratios of the purchased tranche and the portfolio covering this tranche
(subordination), the size of the subordinated tranches and the waterfall structure must be
examined in detail.223
The insurance company establishes a due diligence process that guarantees a
comprehensive and in-depth analysis of the structure, underlying risks and general conditions
of the securitized receivable. This review is intended to ensure that the investment is only
made in securitized receivables whose value and risks can be tracked at all times and which
comply with the insurance company's risk policy.224
e) Limitations
The investment in securitized receivables is limited to 10% of the target amount. The imputed
value per investment may not exceed 1% of the target amount.225
f) Evaluation
The securitized receivables are recognized at no more than their market value. When
determining the value, the quality of the valuation (e.g. with regard to the liquidity of the
securitized asset) must also be taken into account.
market) are reviewed.226
### Section: Page 30
30/70E. Other acknowledgements of debt
a) Permissible values
Promissory note loans granted to the following borrowers may be included in this investment
category:227
•Swiss public corporations; 228
•Banks domiciled in Switzerland; 229
•Other debtors domiciled in Switzerland who have a credit rating of at least level 3. 230
The allocation of other promissory note loans to tied assets must be approved in advance by
FINMA.231
b)Non-permissible values
In particular, the following recognitions of debt may not be included in tied assets: 232
•Loans to private equity companies (these are to be treated as alternative investments in
accordance with Art. 79 para. 1 let. h SO);233
•Policy loans; 234
•Loans to Group companies (see notes 133-138); 235
•Guarantees, letters of credit, etc. 236
c) Special requirements
There must be a written, legally valid acknowledgement of debt. 237
The debtor must expressly waive all rights of set-off, retention and similar rights (margin no. 38). 238
d) Evaluation
The loan is measured at nominal value, taking into account the recoverability of the loan (see
note 125).239
### Section: Page 31
31/70F. Shares and other equity securities
a) Permissible values
Permissible are Shares, participation certificates, participation
certificates,convertible bonds with the character of shares, share certificates
of cooperatives and similar securities.240 | Based on the provided document section from "finma rs 2016 05 en," an insurance company can apply for its own limits for investment categories such as equities, real estate, mortgages, and net currency exposure under the following conditions:
1. **Proof of No Negative Impact on Solvency**: The insurance company must plausibly demonstrate that the application of its own limits will not result in negative effects on the company's solvency. This suggests that the company has analyzed the impact of these alternative limits and concluded that they will not compromise its financial stability or its ability to meet its obligations.
2. **Appropriate Risk Management System**: The company must have an effective and suitable risk management system in place for managing the risks associated with the relevant asset classes. This condition emphasizes the importance of being able to identify, measure, monitor, and control the risks inherent in the investment categories for which the own limits are being requested.
3. **Continuous Compliance and Monitoring**: The insurance company must be able to continuously demonstrate that the chosen limits are in accordance with the principles of the circular on tied assets. It also needs to ensure that there is adequate consideration of the risk of a shortfall in the target amount of tied assets due to significant valuation reductions of the investments in question. To support this requirement, the company is expected to routinely conduct stress tests on the tied assets to verify that the target amount can be maintained even under adverse scenarios. Additionally, the firm must include its available free, unencumbered assets in these assessments to provide a comprehensive view of its financial resilience.
4. **Maintaining Requirements Post-Approval**: After obtaining approval for its own limits, the insurance company must continuously meet these conditions. If the circumstances change and the company no longer meets the conditions for the approved own limits, it is obligated to revert to the standard limits as set out in the circular. This emphasizes the dynamic nature of risk management and the need for ongoing evaluation of the company's risk profile and asset management strategies.
These criteria illustrate the regulatory emphasis on ensuring that deviations from standard limits do not jeopardize the financial health of the insurance company or its capacity to fulfill its obligations. It also underscores the need for rigorous risk management practices and regular monitoring to adapt to changing market conditions or company circumstances. |
You are a helpful assistant. Answer this question: Which of the following is not considered a permissible value for investments in the tied assets as outlined in the document?
A. Properties with contaminated sites without a guarantee that the polluter or public authorities will bear the entire remediation costs.
B. Sports facilities located in urban centers.
C. Mandatory convertible bonds.
D. Single-family homes as residential buildings. | Source Document: finma rs 2016 05 en
All securities in this category must be traded on a liquid, regulated market and be available for
sale at short notice. Securities that are listed on a secondary exchange but are not regularly
traded are not permitted.241
Convertible bonds are divided into convertible bonds with the character of bonds and
convertible bonds with the character of shares. If the market value of the convertible bond is
higher than 130% of the nominal value, it can be assigned to the "shares" category. If the
market value of the convertible bond subsequently falls below 130% of the nominal value, the
convertible bond remains in the "shares" category. Convertible bonds that must be converted
into shares (e.g. mandatory convertible bond, mandatory convertible) are assigned to this
category. CoCo bonds are treated in the same way as mandatory convertible bonds.242
b)Non-permissible values
Non-traded shares and shares in affiliated companies are not permitted investments in tied
assets (see also margin nos. 133-138).243
c) Limitations
A maximum of 30% of the target amount of the tied assets may be invested in shares and other
equity securities.244
d) Evaluation
Equity securities and convertible bonds with the character of shares are counted at market value
at most (Art. 93 para. 1 and 88 para. 2 AVO).245
G. Real estate
a) Permissible values
Tied assets include properties that are easily realizable and whose valuation is subject to little
uncertainty.246
aa) Direct investment in real estate: types of buildings
The following types of buildings in the sole ownership of the insurance company can be
assigned:247
### Section: Page 32
32/70•Residential buildings: single-family homes, apartment buildings and condominiums; 248
•Commercial buildings: Office and administration buildings; 249
•Mixed-use properties: properties with residential and commercial building shares in
accordance with margin nos. 248 and 249, regardless of the amount of the shares;250
•Mixed-use properties with non-chargeable portion. 251
Properties which, in addition to a residential or commercial building share, have a non-
assignable use in accordance with margin no. 258 can be fully credited based on the total net
rent of the entire property if the creditable portion is at least 70 %.252
Properties with a sales area share of more than 30 % of the net rent can be counted if they are
located in an urban center.253
bb) Building law
If the insurance company is the grantor of building rights, an allocation can be made if
•the building right is recorded in the land register;
•the building lease generates a regular, long-term, contractually secured income;
•the creditworthiness of the building leaseholder is good; and
•the property only includes permitted buildings (margin no. 247-253).254
If the insurance company is the building leaseholder, an allocation can be made if
•the building is recorded in the land register under building rights; and
•the building is permitted under building law (margin nos. 247-253).255
cc) Real estate companies
Investments in companies whose sole business purpose is the acquisition, sale, rental and
leasing of their own residential and commercial properties, provided that more than 50% of all
shares are held and liquidation under company law (Art. 736 para. 2 CO) can be enforced.256
b)Non-permissible values
Properties that are difficult to sell or whose valuation is subject to great uncertainty cannot be
allocated to restricted assets.257
For example, the following objects do not meet the criteria set out in margin no. 246: 258
### Section: Page 33
33/70•Building land (a plot of land on which a new building is being constructed that can be
allocated in accordance with margin nos. 247-253 can, however, be taken into account)
•Buildings in progress
•Production facilities, warehouses, distribution centers
•Sports facilities
•Shopping centers, provided they are not located in urban centers
•Hotels, restaurants
•Retirement and nursing homes and senior residences
•Schools
•Collector's and luxury properties, vacation apartments or houses
•Co-owned properties
•properties in need of remediation with contaminated sites in accordance with the
Contaminated Sites Ordinance (Art. 2 AltlV; SR 814.680)
•Properties from forced sale (if the insurance company has taken over the property as
mortgagee)
The following are also not permitted: 259
•Real estate abroad - irrespective of whether it is held directly or indirectly in an investment
company in accordance with margin no. 256.260
•All properties that were encumbered for the purpose of mortgaging. 261
In justified cases, an exception may be granted upon request, such as in the case of 262
•Retirement and nursing homes, senior residences
The potential for conversion must be demonstrated and the costs must be quantified and
included in the valuation. The value after conversion minus the conversion costs is eligible.263
•Properties from forced sale
Details of the assessment and plausibility check must be submitted with the application.264
•Properties with contaminated sites
The technical report on the expected renovation costs must be included in the
assessment. Both must be submitted with the application.
If there are guarantees that the polluter or the public authorities will bear the entire
remediation costs, these must be submitted with the application for an exemption permit.265
### Section: Page 34
34/70c) Limitations
The crediting of real estate is limited to 25% of the debit amount. 266
The crediting of an individual object may not amount to more than 5% of the target amount. 267
The deduction of real estate and mortgages is limited to a total of 35% of the debit amount. 268
When calculating this limit, shares in real estate companies (see also margin no. 256), real
estate funds and other instruments that increase or reduce the real estate exposure must be
included.269
d) Evaluation
aa) General principles
Real estate may be included in tied assets at a maximum of market value. 270
The market value is the amount for which the property could be sold or purchased between
knowledgeable, willing parties in an arm's length transaction in the ordinary course of
business.271
The insurance company determines the market value of all properties and land on an annual
basis. The principles of individual valuation and valuation continuity must be observed.272
The principle of individual valuation means that each property in a real estate portfolio is valued
at its individual market value.273
The principle of valuation continuity means that the properties are divided into groups of
comparable properties, taking into account the appropriate method for determining the market
value in each case, and that the respective valuation method is applied consistently and
continuously for each group.274
bb) Direct investments
The market value of real estate can be estimated using the following valuation methods:
•Discounted cash flow method (DCF)
•Income capitalization method
•Hedonic method275
It must be ensured that the valuation method used for each group of properties corresponds to
the market value (margin nos. 270-274).276
### Section: Page 35
35/70When using the hedonic method, it must be ensured that the hedonic estimate is based on
recognized statistical methods and sound data.277
If values determined and audited in accordance with IFRS / US GAAP or Swiss GAAP FER are
available that correspond to a market value in accordance with margin nos. 270-274, these
values are to be used.278
Allowable building land parcels are to be counted at no more than the market value of the
building land.279
In special cases, FINMA may grant an exception upon reasoned request. 280
cc) Properties with building rights
The market value of all building rights is to be determined uniformly using the same method. 281
When determining the market value of buildings under building law, the special circumstances
in connection with the building law must be taken into account.282
dd) Real estate companies
The pro rata net asset value (NAV) is deemed to be the market value for investments of 50%
or more. When calculating the NAV, the properties held are valued as direct investments,
taking into account any liabilities. Non-accountable properties are to be taken into account
with a value of zero.283
ee) Review of the valuation
At least once every 10 years, all properties must be valued individually by a real estate valuer
(including an on-site inspection) to check the market values applied. The valuation is based on
the appraiser's professional expertise and is neutral. The dossier must be updated as part of
the review.284
The insurance company documents the review process and ensures that findings from the
review estimates are included in the valuation of individual properties or the determination of
model parameters.285
If the insurance company has a different concept for periodic valuation, it can be submitted to
FINMA for approval.286
e) Documentation
Every insurance company must keep complete, up-to-date, comprehensible and verifiable
dossiers for the objects credited. They must allow an independent third party to verify the
current status, the contractual basis, the income, any
and the basis for calculating the current valuation.287
### Section: Page 36
36/70H. Mortgage receivables
a) Permissible values
Mortgage claims (mortgages) can be allocated to tied assets if the mortgage relates to a
property in accordance with margin nos. 247-253 or a permitted building under building rights
(see margin nos. 254 and 255).288
b)Non-permissible values
Mortgages whose mortgage relates to non-assignable real estate are not assignable.
Exceptions are governed by the provisions on real estate (margin nos. 257-258, 260).289
Mortgages cannot be assigned to tied assets if they are subordinate to other claims secured
by mortgage. An exception exists in the case of subsequently registered statutory mortgages
and mortgages that are included in the same tied assets.290
c) Limitations
The offsetting of mortgages is limited to 25% of the debit amount. 291
The offsetting of an individual mortgage is limited to 5% of the debit amount. 292
The deduction of real estate and mortgages is limited to a total of 35% of the debit amount. 293
d) Credit assessment and affordability
Before granting a loan, the insurance company is obliged to carry out a credit check. This
includes checking the creditworthiness of the debtor (creditworthiness and credit capacity) as
well as assessing the collateral. These must be clearly and conclusively defined by the
insurance company in internal regulations.294
The basis for calculating affordability is the borrower's sustainable income and expenditure in
the case of owner-occupied residential property or income and cost components in the case of
investment properties. The assessments must be documented and kept for the term of the
mortgage.295
The insurance company must ensure that the assessment of creditworthiness and affordability
is carried out systematically.296
### Section: Page 37
37/70The insurance company defines the procedure in internal regulations. These stipulate how
creditworthiness and affordability are to be verified and documented. They also specify the
long-term imputed mortgage interest rate to be used and the corresponding maximum limits
for the affordability calculation.297
e) Valuation of the mortgage
The insurance company determines the market value of its mortgage collateral carefully,
systematically and periodically in accordance with uniform principles and taking into account
all relevant information.298
If the purchase price is higher than the market value, the market value is decisive. 299
aa) Authorized investigation proceedings
The market value of the mortgaged property is estimated by a real estate valuer. The
appraisal is based on the appraiser's professional expertise and is neutral and independent of
instructions.300
The market value of the mortgaged property can be estimated as follows:
•Discounted cash flow method (DCF)
•Income capitalization method
•Hedonic method
•Practitioner method301
bb) Mortgages on properties with building rights
When determining the market value of properties with building rights, the special circumstances
must be taken into account.302
f) Credit monitoring
aa) Reassessment of creditworthiness and affordability
If events relevant to creditworthiness become known, a new review must be carried out and
suitable measures must be derived from this.303
bb) Monitoring and reviewing the market values of mortgaged properties
The insurance company periodically (at least every 10 years in full) reviews the
Market values of mortgaged properties with a loan-to-value ratio of over 20% or over CHF
100,000. The periodicity and methodology are based on objective criteria, which the304
### Section: Page 38
38/70insurance company internally. The insurance company documents the review process internally.
g) Valuation and crediting
aa) At nominal value
Mortgages are valued and recognized at a maximum of their nominal value. 305
bb) Loan-to-value limits
Full crediting to the tied assets can be made for each property up to the following loan-to-value
limits:306
•66 2/3 % of the market value of the mortgage for residential or commercial buildings in
accordance with margin nos. 248 and 249.307
•66 2/3 % of the market value of the mortgage for residential and commercial buildings with
mixed use in accordance with margin no. 250, provided that the non-allocable use (based
on income value) is 30 % or lower.308
•66 2/3 % of the market value of the mortgage for mixed-use residential and commercial
buildings in urban centers with a sales area share of more than 30 % of the net rent in
accordance with margin no. 253, whereby the increased credit risks of such properties
must be taken into account.309
•80 % of the market value of the mortgage for residential buildings with a minimum
residential share of 70 %, if a regular, standard market amortization has been agreed for
the portion above 66 2/3 %. The amortization can also be indirect.310
•over 80 % of the market value of the mortgage for residential properties with a minimum
residential share of 70 %, if additional collateral (e.g. pledged policies) is provided for the
portion above 80 % and, after deduction of the additional collateral, regular amortization at
market rates has been agreed for the portion above 66 2/3 %. The surrender values of the
additional collateral must not be subject to negative fluctuations in value.311
cc) Adjusted imputed value
If the senior and pari passu mortgages exceed the loan-to-value limits in accordance with
margin nos. 306-311, the mortgage can only be partially offset up to the loan-to-value limit.312
If the mortgage debtor is more than 7 months in arrears with the agreed interest and
amortization payments, a corresponding value adjustment must be made.313
### Section: Page 39
39/70In the event of a delay of more than 12 months, the corresponding mortgage is no longer
eligible.314
h) documentation
The credit relationship must be documented in a dossier in a complete, up-to-date,
comprehensible and verifiable manner. This applies to all documents on which t h e granting,
monitoring and renewal of the loan was based, i.e. both the relevant documents on the
borrower's personal situation and information on the mortgage (incl. valuation method and
result) must be available and accessible in the dossier.315
The results of the review of the borrower's creditworthiness and the periodic valuation of the
mortgage must be recorded. The documents must allow a third party to form a reliable opinion
about the mortgage, the credit decision and credit monitoring.316
I. Alternative investments
a) Definition
Alternative investments can be summarized as investment opportunities that go beyond
traditional investments. They are characterized by their alternative investment character, i.e.
more flexible investment options such as short selling, borrowing, the use of more complex
strategies and investments in less liquid assets. In general, alternative investments are
subject to less supervision and often have lower liquidity and transparency.317
Alternative systems give the insurance company the opportunity to
diversify the investment portfolio more broadly.318
Due to the special features, the general principles of tied assets only apply to alternative
investments to a limited extent. Alternative investments do not have to be securitized, have a
liquid market or be subject to effective supervision.319
b) Permissible values
aa) Permissible investment universe
The following sub-categories are allocated to alternative investments:
•Hedge funds
•Private equity320
### Section: Page 40
40/70•Private debt, incl. senior secured loans
•Commodities, incl. gold
Investments in infrastructure can be made in the alternative investments investment category
in the form of private equity and/or private debt. Infrastructure investments can also be
allocated to tied assets in other investment categories if the corresponding conditions are met.321
bb) Structure of the systems
Investments in fund solutions are permitted. Investments in the listed sub-categories may be
made with collective investment schemes pursuant to Art. 71 CISA (other funds for alternative
investments) and foreign (on- and offshore) fund structures.322
Investments based on indices, exchange-traded funds (ETFs) and baskets are permitted,
provided the investments are broadly diversified and highly liquid. Transparency with regard to
the underlying regulatory system of the investment must be guaranteed so that the special
requirements mentioned in margin nos. 334-342 can also be fulfilled analogously for these
investments.323
Structured products linked to alternative investments are permitted. 324
Gold bars that comply with the Good Delivery Rules of the London Bullion Market Association
may be allocated to the tied assets. The gold bars must be kept separately for each tied asset
in the case of own or third-party custody and must be identifiable via the manufacturer, the
serial number and the year of melting.325
Investments in other investment structures must be applied for and approved in advance by
FINMA. The insurance company must prove to FINMA that all the provisions listed in margin
nos. 317-350 are fully complied with.326
cc) Special properties
In order to be allocated to tied assets, the alternative investments must have the following
characteristics:327
•Investments in alternative investments can be made under the subcategories listed in
margin no. 320. The individual sub-categories must be diversified in themselves, with the
exception of investments in gold.328
•An exit from the individual alternative investments is possible within the usual market
periods and within a maximum of 24 months. Longer periods are permitted for
investments in private equity and private debt. However, care must be taken to ensure
that the commitments entered into are taken into account in the liquidity planning so that
sufficient liquidity is available at all times.
liquidity is available.329
### Section: Page 41
41/70•The insurance company may not incur any additional funding obligations or other liabilities
from the investment in alternative investments. This also applies in the event of
insolvency. The possibility of offsetting against debts of the insurance company must also
be excluded. Commitments that are contractually entered into and limited in amount do not
count as additional funding obligations.330
c)Non-permissible values
Investments in other (traditional) investment categories without an alternative investment
character or investments that do not meet the criteria of this Circular cannot be allocated to
the tied assets as alternative investments.331
Direct investments (e.g. in individual private equity or infrastructure companies) cannot be
allocated.332
Physical investments in commodities are not permitted, with the exception of gold. 333
d) Special requirements
aa) Concept for alternative investments
Any insurance company wishing to invest in alternative investments must submit a concept for
alternative investments to FINMA in advance, showing how the provisions and requirements
of this Circular will be met.334
The insurance company must define in the concept which alternative investments are made. 335
Material changes to a concept that has already been submitted must be reported to FINMA before
the internal directives by means of which the concept is implemented internally enter into force.336
bb) Organization, know-how and investment process
Insurance companies that invest in alternative investments must have qualified and
knowledgeable staff, an appropriately designed investment strategy, an investment
management system tailored to their specific needs, a fully implemented and documented
investment process, a suitable risk management system and an adequate system
infrastructure (see margin no. 76).337
Investments in single funds require higher standards in terms of organization, know-how and
investment process than investments in diversified fund of funds structures.338
cc) Due diligence
Investments in specialized investment managers, such as hedge funds and private equity,
require a comprehensive and in-depth review. The review process includes a339
### Section: Page 42
42/70investment-specific and operational due diligence. The insurance company conducts a
structured survey of the investment manager and assesses the documentation of the product
and the risks. A due diligence report summarizes the findings and results. A due diligence
questionnaire is generally not sufficient for this.
The insurance company has quantitative analysis tools and a documented due diligence
concept to ensure that both the selection and the ongoing monitoring of the investment are
carried out in accordance with recognized and proven standards.340
It must be ensured that the conditions specified in margin nos. 317-350 can actually be met. 341
Due diligence can also be carried out by external specialists. 342
e) Limitations
The following limits apply to this investment category: 343
•The value of all alternative investments included in the tied assets may not exceed 15% of
the target amount.344
•The imputed value per subcategory (margin no. 320) may not exceed 10% of the target
amount.345
•The imputed value per fund of funds may not exceed 5% of the target amount. 346
•For all other investments, the imputed value per investment may not exceed 1% of the
target amount. This limit does not apply to physical gold.347
Care must be taken to ensure that commitments made in subsequent years do not lead to these
limits being exceeded.348
f) Evaluation
Pursuant to Art. 93 para. 1 SO, alternative investments are recognized at no more than
market value. It must be ensured that the insurance company receives net asset values (NAV)
for hedge funds on at least a monthly basis and for private equity and private debt on a
quarterly basis.349
g) Foreign assets
The general provisions on foreign assets (margin no. 132) do not have to be complied with for
investments in alternative investments.350
### Section: Page 43
43/70J. Derivative financial instruments
a) General provisions on the permissible values
aa) Permitted derivatives
According to Art. 79 SO, derivatives are permitted in tied assets if 351
•the underlying assets on which the derivatives are based are permitted as investments in
accordance with Art. 79 (1) SO.352
Permissible underlying assets for derivatives in tied assets include not only direct
investments (e.g. equities or receivables), but also assets that track indices or interest
rates. The condition that the underlying asset on which the derivative is based must be
permissible for the tied assets must also be met for index transactions.353
Credit default swaps (CDS) are only permitted as part of tied assets for the strategies
defined in margin nos. 373-446. Other credit derivatives may not be allocated to tied
assets. The market liquidity of the respective CDS must be checked before it is used and
throughout its term.354
•they do not have a leverage effect on the tied assets, subject to the provisions of Art. 79
para. 2 SO.355
A leverage effect occurs when the relative change in value of the derivative is greater than
the relative change in value of the underlying.356
Derivatives must be covered by liquidity or existing underlying assets in order to prevent the
financial impact of leverage effects on tied assets.357
A negative leverage effect on the tied assets must be ruled out,
i.e. any sale of the bond used as cover must not lead to a shortfall in the target amount of
the tied assets.358
•they comply with the principles formulated in margin no. 3-22. 359
bb) Permitted combinations
It is permissible to combine several basic forms of derivatives that are based on the same
underlying instrument(s). The following conditions apply:360
•The various components of the combination must be broken down and evaluated
separately.361
### Section: Page 44
44/70•It must be possible to allocate the individual components of the combination - after they
have been broken down - to one of the strategies mentioned below (margin nos. 373-
446).362
•The coverage obligation pursuant to margin no. 5-17 must be complied with. 363
cc)Non-permissible values and transactions
The following derivative transactions and transactions may not be allocated to tied assets: 364
•Derivatives that are not covered by underlying assets or liquidity. 365
•Derivatives that are derived from an inadmissible underlying pursuant to Art. 79 para. 1
SO.366
•Short sales, i.e. forward sales of underlying assets without owning them when the contract
is concluded.367
•Transactions that have an overall leverage effect on the tied assets, subject to the
provisions of Art. 79 para. 2 SO.368
dd) Attribution of exposures to limits of the underlyings
Derivatives must be taken into account in the limits for the corresponding underlying assets.
The limits for derivative transactions must be complied with cumulatively with the other limits
for tied assets.369
ee) Evaluation
Derivative financial instruments may be included in tied assets at no more than their market
value. For exchange-traded derivatives (ETDs), the market value is the exchange value; for
over-the-counter derivatives (OTC derivatives), the market value is the value at which an open
derivative position can be closed out again (closing out). The positive or negative replacement
value is therefore added to the tied assets.370
If no current prices are available for derivatives or if no market prices are available for OTC
derivatives, they must be valued using valuation models that are appropriate and recognized
in practice based on the market values of the underlying assets from which the derivatives are
derived. The valuations must be documented and comprehensible at all times.371
The recognized position of the derivative and the underlying must correspond to the actual
position at all times.
value of the position: In the case of short call options, for example, at least the negative value of
the derivative i s deducted from the underlying. The combination of372
### Section: Page 45
45/70The maximum amount of the underlying security that may be included in the tied assets is the
exercise or strike price.
b) Derivatives for hedging asset portfolios
aa) Permitted derivatives
The hedging strategy serves to reduce or eliminate the risks to the value of the assets
resulting from price fluctuations, insolvency or currency fluctuations.373
Derivative instruments for hedging purposes are only permitted if they fulfill the following
conditions:374
•The hedged underlying is included in the tied assets. 375
•The obligations entered into are covered at all times by the underlying assets in the tied
assets.376
•The fluctuations in the market are tracked by recognizing the underlying in the combined
assets. For derivatives related to interest rate risk and credit risk, see margin nos. 386-
399 and margin nos. 400-405.377
•The hedging instrument used enables effective hedging of the market value of the
underlying, i.e. the absolute change in the market value of the underlying is compensated
for by the absolute change in the price of the hedging instrument. No short positions (short
sales) may be built up through the use of derivatives on a net basis, i.e. after offsetting the
underlying and derivative holdings (there must be no overhedge).378
•The instruments used have no leverage effect on the tied assets. 379
The following instruments, which can be used to effectively hedge a downside exposure, are
permitted:
•Long put options
•Short futures
•Short forwards
•Swaps380
This category does not include instruments that are used to finance the hedge but do not
themselves constitute an effective hedge, such as short call options (see margin nos. 438-
442).381
Strategies that constitute hedging in their entirety (e.g. risk reversals, put spreads) can be
allocated provided the following conditions are met:382
### Section: Page 46
46/70•The underlying asset of the long and short option is identical;
•The term of the short options is shorter than or equal to that of the long put (hedging)
options;
•The net position from the underlying instrument and the hedging strategy may not lead to
a net short position at any time;
•The counterparties to the strategy's options transactions are identical and the transactions
are subject to the same netting agreement.
Derivatives on indices (e.g. short SMI futures, long SMI put options) can also be counted as
hedging tied assets. It should be noted that the structure of the hedged portfolio of assets
essentially corresponds to the structure of the index and that the returns of the portfolio
correlate closely with the returns of the index. The hedged positions should therefore largely
correlate with the index.383
Foreign currency hedging via a third currency (proxy hedge) is not recognized as hedging.
However, if the insurance company documents any proxy hedge concluded internally and can
plausibly demonstrate that there is an intention to hedge, the derivative can be allocated to tied
assets as an asset in the corresponding category of the reference currency.384
bb) Limitations
There are no limits for derivatives used to hedge assets in accordance with margin nos. 373-
405.385
cc) Derivatives to hedge interest rate risk
Interest rate hedges for bonds that are valued using the cost amortization method cannot be
allocated to this strategy, as they do not meet the condition relating to the tracking of market
fluctuations (margin no. 377). If, in such cases, the interest rate derivatives are nevertheless
managed under the same master agreement (see margin nos. 447-465) of the tied assets, the
procedure under margin nos. 387-399 must be selected:386
According to Art. 88 and 89 AVO, a fixed-interest security can be credited at a maximum of
the value determined using the cost amortization method. The acquisition value of the security
is written down or written up to the redemption value over the remaining term. According to
Art. 79 para. 1 let. i AVO, hedging instruments that hedge an underlying security whose | A. Properties with contaminated sites without a guarantee that the polluter or public authorities will bear the entire remediation costs. |
You are a helpful assistant. Answer this question: What is required for derivatives to be recognized at market value in the case of CDS on individual securities? | Source Document: finma rs 2016 05 en
inclusion in the tied assets does not reflect the hedged market fluctuation are not eligible.
From this it is derived that a combined inclusion of hedging instrument (derivative) and
underlying security (bond) is not permitted.
may not exceed the value of the cost amortization method.387
### Section: Page 47
47/70If the hedged market value is higher than (or equal to) the value according to the cost
amortization method, the interest rate derivative can be included in the tied assets with a
value of zero. This means that both Art. 79 para. 1 let. i and Art. 88 para. 1 SO are complied
with.388
If the hedged market value on conclusion of the hedging transaction is below the imputed
value according to the cost amortization method, an impairment event occurs which is
triggered by the purchase of the hedging instrument (see margin no. 125-131). In this case,
the following options can be applied:389
•The imputed value of the bond is adjusted downwards to the hedged market value. This
new initial value is written down or up to the redemption value over the remaining term.
The derivative is credited with a value of zero.390
•Derivative transactions are settled via free assets. 391
When concluding a macro hedge, the correction on an individual security basis described
above can lead to technical problems. In such cases, the procedure may be applied
analogously at portfolio level. This is subject to the following conditions:392
•The hedged assets are included in the tied assets. The obligations entered into are
covered at all times by the underlying assets in the tied assets. The hedging instrument
used enables the underlying assets to be hedged effectively (see margin no. 378).393
•The insurance company designates the portfolio of insured bonds in the internal inventory. 394
•The derivative is recognized with a value of zero. 395
•When concluding the derivative transaction, the insurance company checks whether a
sale of the hedged securities would result in a shortfall in the target amount of the tied
assets.396
This test is carried out as follows:
[Sum of the hedged market values*] - [Sum of all imputed values at AMC*]
* Only the bonds affected by the macro hedge are to be taken into account.397
•If the difference of the test is negative, there must be a permanent surplus in the tied
assets at least in the amount of this difference until the hedge is terminated.398
•The insurance company must disclose the results of this test (with updated values) in the
annual report on tied assets to FINMA.399
### Section: Page 48
48/70dd) Derivatives to hedge credit risk
The following credit default swaps CDS are permitted for hedging the credit risk of asset
portfolios:400
•CDS on individual securities if the insurance company is the protection buyer (buy
protection)401
•CDS on index if the insurance company is the protection buyer (buy protection) 402
A CDS may only be allocated as a hedging instrument in tied assets if it is structured in such a
way with regard to credit event payment, credit event definition and reference obligation that a
high hedging effect is achieved. If a portfolio is hedged with a CDS on an index, it must be
ensured that the portfolio to be hedged and the index portfolio are largely identical in terms of
composition and portfolio weightings. If the portfolio to be hedged and the index portfolio differ
in terms of their composition and/or portfolio weights, so that there is no stable correlation
between them and the hedging effect is not ensured but can only be approximated (proxy
hedge or cross hedge), this hedging instrument cannot be assigned to this strategy.403
CDSs on individual securities are only recognized at market value if the bond (underlying
security) is permanently impaired (see margin nos. 125-131) and the CDS therefore has a
hedging effect. If the underlying security is valued according to the cost amortization method,
the CDS is included in the tied assets at a value of zero.404
CDSs on indices used for hedging purposes are always included in the tied assets with a value
of zero.405
c) Derivatives to hedge cash flows from underwriting obligations
aa) Permitted derivatives
aaa) Synthetic bonds
Synthetic bonds are investments with the characteristics of fixed-interest securities. They are
made up of a combination of financial instruments (e.g. a fixed-term deposit with a variable
interest rate and a receiver swap). Insurance companies can use synthetic bonds to make
investments with maturities that are not available on the market in the form of fixed-interest
securities.
are available.406
### Section: Page 49
49/70The same provisions apply to synthetic bonds as to derivatives with a replicating strategy
(margin nos. 422-431).407
bbb) Other derivatives
Swaptions and options that function similarly to a long swaption (options on bonds with a fixed
coupon) can be allocated to tied assets.408
The permitted options can be assigned under the following conditions: 409
•The expected underwriting obligations are hedged. The need for hedging instruments can
be determined as a lump sum on the portfolio (macro hedge).410
•It is likely that the derivatives can be held until maturity. Derivatives that are closed out
before maturity must be justified in internal reporting.411
•FINMA is notified of the transaction and documentation is submitted. In particular, this
documentation must state that there is no overhedge when the transaction is concluded.412
•The use of these derivatives must be geared towards a sustainable effect; in particular,
derivative contracts may not be concluded for the purpose of speculation.413
The inclusion of other instruments is only permitted with prior notification to FINMA and
submission of a concept.414
bb) Limitations
The premiums for open derivative financial instruments to hedge cash flows from technical
obligations (options in accordance with margin nos. 408-414) are limited to 5% of the target
amount of the tied assets.415
cc) Assessment
Swaptions and similar derivatives used to hedge technical obligations are recognized at no
more than the value of the cost amortization method (amortization runs from the date of
acquisition to the date of exercise).416
The replicating strategies pursuant to margin nos. 406-407 and 422-431 are valued in
accordance with the categories to which they are assigned.417
In the case of synthetic bonds, the fixed-term deposit may be valued and recognized at no
more than its nominal value. They are recognized separately in a sub-category of fixed-
income securities. The receiver swap is measured using the cost amortization method.
(Art. 88 para. 3 AVO). If the receiver swap has a value of zero on conclusion,418
### Section: Page 50
50/70it must be recognized at zero for the entire term. However, the swap can be settled under the
same netting agreement as the other derivatives of the tied assets.
d) Derivatives for acquisition preparation
aa) Permitted derivatives
The derivative strategy can either provide for the acquisition of certain underlying assets at a
future date (preparation for acquisition, margin nos. 420, 421) or replace the acquisition of an
underlying asset with derivatives to replicate the strategy (replicating strategy; liquidity
combined with derivative, margin nos. 422-431).419
aaa) Preparation for employment
The obligation to provide liquidity cover in accordance with margin no. 5-17 must be fulfilled. 420
The following instruments are permitted:
•Long call options
•Short put options421
bbb) Replicating strategy
Only derivatives that meet the following conditions are permitted to replicate the strategy: 422
•The combination of derivative and liquidity has a similar market risk profile and at least the
same market liquidity as the replicated investment.423
•The purpose of acquiring the derivative is to replicate the underlying assets. The strategy
must be defined and documented internally by the insurance company. The combination
of derivative and liquidity is assigned to the corresponding category (e.g. the combination
of a money market investment and equity futures is assigned to the equities category).424
•The contract volume or the nominal value is 100 % covered by liquidity (margin no. 5- 17). 425
•The transaction through the use of derivatives does not generate any additional costs
compared to the purchase of a direct investment.426
Specifically, the following instruments are permitted:
•Long futures
•Long Forwards
•Swaps427
### Section: Page 51
51/70The following instruments are specifically permitted for the purpose of replicating a corporate
bond or a portfolio of corporate bonds:428
•CDS on individual securities if the insurance company is the protection seller (sell
protection)429
•CDS on index if the insurance company is the protection seller (sell protection) 430
As an instrument of a replicating strategy, a CDS may only be allocated to tied assets if it is
structured with regard to credit event payment, credit event definition and reference obligation
in such a way that a corporate bond or a portfolio of corporate bonds is replicated with
sufficient accuracy. When selecting the respective CDS or CDS index, the insurance company
must ensure that the resulting position corresponds to the investment policy of the insurance
company. In particular, the resulting synthetic corporate bond or portfolio of corporate bonds
must have a minimum credit rating of 4.431
bb) Limitations
The open derivative financial instruments for acquisition preparation purposes (margin nos. 419-
431) and income generation purposes (margin nos. 438-442) are limited to a total of 10% of
the target amount of the tied assets.432
Derivatives for replicating the strategy (margin nos. 422-431), synthetic bonds (margin nos.
406-414) and derivative financial instruments within hedging strategies are exempt from this
limit if all the conditions of margin no. 382 are met.433
The limit of 10% relates to the open contract volumes or the nominal values of the
underlyings. The amount of the contract volume is calculated by multiplying the market value
of the underlying, the number of contracts and the multiplier. A delta adjustment can be made
to take account of the option values.434
Synthetic bonds are classified as fixed-income securities. To calculate the counterparty risk
(net exposure to a debtor, margin nos. 113-115), the value of the fixed-term deposit and any
positive replacement value of the swap must be taken into account.435
cc) Assessment
The values from replicating strategies in accordance with margin nos. 406, 407 and 422-431
are valued in accordance with the categories to which they are allocated.436
In the case of synthetic bonds, the fixed-term deposit may be valued and recognized at no
more than its nominal value. They are recognized separately in a sub-category of fixed-
income securities. The receiver swap is recognized using the cost amortization method
(amortization runs from the date of acquisition to the date of maturity).
If the receiver swap has a value of zero at the time of conclusion, it will be zero for the entire term.437
### Section: Page 52
52/70with zero. However, the swap can be settled under the same netting agreement as the other
derivatives of the tied assets.
e) Derivatives to increase earnings
aa) Permitted derivatives
The purpose of the income growth strategy is to generate additional income on existing
assets. For this purpose, only derivative contracts that are covered at all times in accordance
with margin no. 3-17 are permitted:438
The following instruments are permitted: 439
•Call and put options 440
•CDS on individual securities if the insurance company is in the position of the protection
buyer (buy protection) and the CDS does not qualify as a hedge.441
•CDS on index if the insurance company is in the position of the protection buyer (buy
protection) and the CDS does not qualify as a hedge.442
bb) Limitations
The open derivative financial instruments for acquisition preparation purposes (margin nos. 419-
431) and income generation purposes (margin nos. 438-442) are limited to a total of 10% of
the target amount of the tied assets.443
Derivatives for replicating the strategy (margin nos. 422-431), synthetic bonds (margin nos.
406-414) and derivative financial instruments within hedging strategies are exempt from this
limit if all the conditions of margin no. 382 are met.444
The limit of 10% relates to the open contract volumes or the nominal values of the
underlyings. The amount of the contract volume is calculated by multiplying the market value
of the underlying, the number of contracts and the multiplier. A delta adjustment can be made
to take account of the option values.445
Synthetic bonds are classified as fixed-interest securities. For the calculation of the
counterparty risk (net exposure to a debtor: 5% limit), the value of the fixed-term deposit and
any positive replacement value of the synthetic bond are taken into account.
swaps must be taken into account.446
### Section: Page 53
53/70f) General conditions
aa) Exchange Traded Derivatives, ETD
Insurance companies are exempt from compliance with the provisions of margin nos. 448-475
if they only trade in derivatives (exchange-traded derivatives, ETD) on a regulated exchange.447
bb)Over-the-counter (OTC) derivatives
The provisions of margin nos. 449-475 also apply to OTC derivatives that are not settled via a
central counterparty.448
aaa) Netting agreement
The netting of all derivative transactions concluded under a master agreement is only
permitted if such a master agreement is concluded separately for each individual tied asset.
Negative items arising from such contracts must be deducted from the tied assets.449
The close-out netting provided for in an ISDA agreement is permitted for tied assets, provided
that the master agreement complies with FINMA's requirements and the master agreement
only relates to tied assets (Art. 91 para. 3 SO).450
As there is a general prohibition on offsetting with regard to assets allocated to tied assets,
derivative transactions from free assets may not be offset against derivative transactions from
tied assets. It must therefore be clear to which master agreement the confirmations relate.451
Collaterals and margin accounts that must be provided to a counterparty from tied assets in
connection with the framework agreement mentioned under Art. 91 para. 3 SO do not have to
be withdrawn from tied assets if they track the fluctuations of the derivative positions (variation
margins), as the negative net position of the derivative transaction must already be deducted.452
Collateral provided to the counterparty in the form of collateral and margin accounts from the
tied assets is available to the counterparty without restriction as a realizable asset, provided that
it is used exclusively to cover obligations arising from transactions for the respective tied
assets that relate to the corresponding master agreement.453
bbb) Netting opinions
Master agreements may only be concluded if legal opinions confirm that the netting
agreement is enforceable under the law applicable to the transaction and the netting
agreement. In addition
A framework agreement may only be concluded with a counterparty whose registered office is
in a454
### Section: Page 54
54/70legal system for which the enforceability of netting under the relevant master agreement has
been demonstrated in a legal opinion. This also applies to Swiss counterparties, as certain
special cases are excluded in the netting opinions. For important counterparties that are not
covered by a general opinion, there are sometimes additional or industry-specific opinions.
The legal opinion regarding the netting agreement must confirm that the netting agreement
(close-out netting) is recognized and enforceable under the following laws:455
•according to the law of the country in which the counterparty has its registered office and
in which an involved branch office has its registered office;456
•under the law applicable to the transaction; and 457
•in accordance with the law applicable to the netting agreement. 458
The ISDA has checked the enforceability of the framework agreements for a large number of
countries by
Confirm legal opinions.459
ccc) Approved Master Agreements (framework agreements, MA)
Only framework agreements for which the enforceability of close-out netting can be
demonstrated are permitted (see margin nos. 454-459, Netting opinions).460
The most common standardized framework agreements in Switzerland are the
"Swiss Master Agreement for Over-the-Counter (OTC) Derivatives" of the Swiss Bankers
Association and the "ISDA Master Agreements" of the International Swaps and Derivatives
Association Inc.461
In every master agreement that relates to tied assets, it must be expressly stated that the
counterparty waives offsetting against claims that are not the subject of the master
agreement. This waiver must also be expressly declared as binding in the event of the
insolvency of an insurance company.462
In the case of a 1992 ISDA Master Agreement, the calculation of the
The second method must be prescribed for the close-out amount.463
In the case of a Master Agreement, the Swiss party Automatic Termination
to choose.464
If the provision of collateral is agreed, it must be contractually stipulated that the claim to
reclaim the collateral belongs to the tied assets. This is not necessary if the collateral is
always provided from free assets.465
### Section: Page 55
55/70cc) Provision of collateral
Collateral must be provided by both parties for all derivative transactions. It must be ensured
that the collateral is effectively available and can be fully included in the close-out netting
process. Any third-party claims against the insurance company must not impair access to the
collateral. This must also apply in the event of the insolvency of both parties.466
When concluding derivative transactions, it is permissible to provide collateral with assets
from the tied assets. This applies to both initial margin payments and variation margin
payments (Art. 91a para. 1 SO).467
Collateral may be provided in the form of a regular lien or an irregular lien under Swiss law or
a law comparable to Swiss law, provided that the initial margin is deposited with an
independent third-party custodian and is fully segregated from other assets. In this case, it
must be contractually ensured that, in the event of bankruptcy of either of the contracting
parties, the initial margin is only used to offset outstanding claims against the insurance
company arising from derivatives transactions concluded by the latter via the central
counterparty or the clearing broker (Art. 91a para. 2 SO).468
The collateral received by the insurance company is pledged in the name of the insurance
company.469
The custodian (the custodian bank) for the collateral received from the insurance company
must comply with the guidelines on the safekeeping of assets (margin nos. 154-159) and have
signed the corresponding supplementary agreement.470
Collateral received must comply with the investment regulations for direct investments in tied
assets. The collateral must be capable of being valued and traded on a daily basis and must
not have been issued by the counterparty or relate to it.471
Collateral received may not be repledged, lent, sold or used in the context of securities lending
or repurchase agreements or other derivative transactions.472
Threshold amounts, which must be reached before any collateral has to be provided, should
be kept as low as possible. Such thresholds must be set on both sides, taking into account the
creditworthiness of the counterparties.473
Minimum transfer amounts (MTA), which must be reached before collateral must be provided
or reclaimed, must be kept low. If MTAs are agreed, they must always be identical for both
parties. Different orders of MTAs may only be provided for due to different credit ratings of the
counterparties.474
The collateral received is allocated to the tied assets. The counterparty has an automatic right
of redemption. The collateral may be taken into account when calculating the cover475
### Section: Page 56
56/70of the tied assets, as the positive net value of all derivative transactions is already taken into
account. The collateral must be designated in such a way that third parties can recognize that
it belongs to the tied assets.
dd) Presentation of derivative transactions
The underlying is valued in accordance with the provisions of the AVO. 476
The individual financial derivatives allocated to tied assets are also valued in accordance with
the AVO. The individual derivative transaction is listed in the inventory of tied assets (not the
net amount). If the value of a derivative contract concluded under the master agreement is
negative, this negative value must be listed in the inventory of tied assets.477
When concluding a derivative transaction, the insurance company must specify the master
agreement to which the corresponding transaction belongs. The insurance company must
take the necessary organizational measures to ensure that the derivative transactions can
always be assigned to the corresponding master agreement. The inventories of tied assets
may only contain the derivative transactions that are the subject of a master agreement
concluded for the corresponding tied assets. The insurance company shall ensure that the
counterparties are able to distinguish the derivative transactions according to their destination.478
K. Collective investment schemes and single investor funds
a) Permissible values
The following assets can be allocated to tied assets under this heading:
•Securities funds (Art. 53 ff. CISA)
•Real estate funds (Art. 58 ff. CISA)
•Other funds for traditional investments (Art. 70 CISA)
•Single investor funds (Art. 82 para. 2 SO)
•Foreign collective investment schemes479
The collective investment scheme and the single-investor fund must have special asset status
(segregation in favor of the investor in the event of bankruptcy).480
For foreign collective investment schemes (e.g. UCITS funds), margin no. 479 applies mutatis
mutandis.481
Funds for alternative investments pursuant to Art. 71 CISA are deemed to be alternative
investments (margin no. 322).482
### Section: Page 57
57/70Participations in investment companies that are not traded on a regulated market can be
allocated to tied assets as collective investment schemes or single-investor funds (Art. 82
para. 4 SO).483
b) Collective capital investments
aa) Special requirements for collective investment schemes
Unit certificates in collective investment schemes may be allocated and counted as tied assets
provided they are subject to effective supervision and are traded on a regulated, liquid market
or can be sold at any time (Art. 79 and 82 para. 1 SO).484
In the case of foreign collective investment schemes, supervision equivalent to that in
Switzerland is required.485
bb) Limitations
To monitor the limits applicable to tied assets, the net asset value of the collective investment
schemes is allocated proportionately to the corresponding categories.486
The investment per collective investment scheme is limited to 5% of the target amount. This
limit does not apply if the insurance company confirms to FINMA that the following points are
contractually regulated and guaranteed:487
•The liquidity of its investments is high and the redemption and payout of units can be
requested at any time.488
•The collective investment scheme only invests in the money market, in domestic and
foreign bonds with high credit ratings and in Swiss and foreign equities; foreign currency
hedging in the fund is permitted. Higher-risk investments (e.g. emerging market equities
and bonds, high-yield bonds, convertible bonds, real estate, hedge funds, private equity,
structured products) are excluded.489
•Compliance with the basic principles of tied assets, i.e. the exclusion of liability, the
charging and offsetting of fund assets against third parties and the prohibition of
borrowing, is agreed between the parties.490
•It is contractually agreed that the asset manager has a duty to provide information to
FINMA in accordance with Art. 29 FINMASA.491
•As at the reporting date of December 31, the insurance company receives a report on the
collective investment at individual share level.492
### Section: Page 58
58/70cc) Assessment
Collective investment schemes are valued and credited at no more than market value or, if the
unit certificates are not listed, at net asset value (Art. 92 SO).493
c) Single investor funds
aa) General provisions
Single-investor funds can be allocated and counted as tied assets if they are subject to effective
supervision, are held 100% by the insurance company, access to the fund's individual
investments is guaranteed at all times, the investments are made in accordance with Art. 79
SO and the FINMA circulars and the safekeeping requirements under Art. 87 SO are met (Art.
82 SO).494
The launch of a single-investor fund corresponds to an outsourcing of essential functions (Art.
4 para. 2 let. j ISA). The launch of the fund and subsequent changes to the organization and
the service providers and contracts must be reported to FINMA in accordance with Art. 5 para.
2 ISA.495
bb) Special provisions
The insurance company is responsible for ensuring that the contractual provisions take into
account the provisions of insurance supervisory law and the explanations in this Circular and
provides FINMA with the relevant documents for information before the fund is launched and
before any changes are made.496
The insurance company ensures the supervision of the fund and regulates the responsibility,
competencies and accountability of the relevant body.497
The insurance company remains responsible for compliance with the regulatory requirements.
In particular, it ensures that the qualitative regulations and quantitative limits set out in this
circular are complied with.498
The fund management company is contractually obliged to comply with the provisions of
insurance supervisory law and in particular the provisions of this circular when investing the
assets. The fund management company should monitor compliance with the regulatory
requirements on a daily basis and, in the event of a breach, immediately order measures to be
taken and inform the insurance company.499
The fund may not make any investments by means of debt financing. Exceptions are grants
from the single investor (e.g. short-term liquidity financing).500
The insurance company is entitled at any time to demand the redemption of the units and their
payment in cash or in kind.501
### Section: Page 59
59/70If the custodian bank is located abroad, the provisions regarding safekeeping abroad must be
complied with (margin no. 156, 157).502
The fund management company, the fund management company, the custodian bank and other
service providers are obliged to provide information in accordance with Art. 29 FINMASA and
also allow FINMA to carry out on-site inspections. It is contractually agreed that the fund
management company, the fund management company, the custodian bank and other service
providers have a duty to provide information to FINMA in accordance with Art. 29 FINMASA
and that FINMA may conduct on-site inspections at the respective service providers.503
cc) Limitations
The investments per single investor fund are not limited. The fund's direct investments are
inventoried in the tied assets and allocated to the corresponding categories. They are subject
to the limits for direct investments.504
dd) Evaluation
The direct investments contained in the fund are used as the basis for the inclusion and
valuation of the single investor fund (look-through approach). The individual investments
contained in the fund must be listed in the inventory of tied assets and allocated to the
categories in accordance with Art. 79 SO. The valuation is carried out in accordance with the
principles set out in Art. 88-95 SO.505
V. Supplementary provisions on tied assets
A.Securities Lending
a) Definition
Securities lending is a legal transaction in which the insurance company transfers securities to
a borrower as a loan in kind and the borrower is obliged to pay a fee and, on maturity, to
return securities of the same type, quality and quantity as well as the income accrued during
the term of the legal transaction.506
The insurance company remains the beneficial owner of the securities lent. Interest and
dividend payments falling due during the loan are due to the lending insurance company. As
the beneficial owner, the insurance company bears the risks of fluctuations in the securities
and takes these into account in the
The securities that have been lent are counted as tied assets.507
### Section: Page 60
60/70b) Permitted transactions
aa) General conditions
Securities lending is only possible under the following conditions: 508
•Framework agreement
The insurance company concludes a framework agreement with the counterparty to the
securities lending transaction (margin nos. 519-523).509
•Counterparty / Borrower
The insurance company only engages in securities lending with first-class supervised
borrowers that are professionally active in this type of business and with authorized and
recognized central counterparties and central securities depositories that guarantee the
proper execution of securities lending.510
•Requirements for processing
•The transaction is processed promptly (step by step if possible).
•All open positions are valued at least once a day (mark-to-market).
•Net exposures are balanced with margin calls at least once a day.
•The collateral is fully segregated per tied asset.511
•Loanable securities
The insurance company may only use securities for securities lending that can be easily
valued on the basis of generally accessible information.512
•Securing the recovery
The insurance company's claim to the retransfer of the borrowed assets (title) must be
secured by depositing a corresponding amount of money or other assets eligible for
inclusion in the tied assets in favor of the insurance company (see margin nos. 524-529).513
•Liquidity
Securities lending is only permitted if sufficient liquidity is ensured for the insurance
company.514
•Runtime
The insurance company may reclaim the securities lent from the counterparty at any time,
subject to the respective value/delivery deadlines for the delivery of the securities.515
### Section: Page 61
61/70must be taken into account. If a notice period is agreed, it may not exceed seven bank
working days.
c)Non-permissible transactions
Securities accepted as collateral in the context of repurchase agreements, securities lending
and similar transactions may not be used for securities lending.516
Due to the requirement that obligations must be fully covered at all times, the underlying
assets of a derivative transaction must be held in the insurance company's assets and be
available without restriction. Simultaneous securities lending in relation to the same underlying
assets is therefore not permitted.517
d) Special requirements
aa) Requirements for securities lending
Insurance undertakings that engage in securities lending must have qualified and
knowledgeable staff, an appropriately designed investment strategy, an investment
management system tailored to their specific needs, a fully implemented and documented
investment process, a suitable risk management system and an adequate system
infrastructure (see margin no. 76).518
bb) Framework agreements
The standardized framework agreement between the insurance company and the borrower
must comply with the usual international standards and additionally regulate or comply with at
least the following topics:519
•The tied assets to which the framework agreement relates must be specified. In addition,
the underlying assets that are available for securities lending or that are excluded from
securities lending must be specified. The lending of underlyings that are held in different tied
assets or in free assets under the same master agreement is not permitted.520
•For each securities lending transaction, the provision of collateral by the borrower must be
contractually agreed and the corresponding provisions for collateral in accordance with
margin nos. 524-529 must be complied with.521
•The agreement regulates the punctual and unrestricted remuneration of the income
(dividends and interest) accruing during the loan and the compensation to be paid, the
assertion of other rights (e.g. conversion and subscription rights), as well as the
contractually compliant repayment of the securities lent of the same type, quantity and
amount.
Goodness.522
### Section: Page 62
62/70•The possibility of offsetting the claims of all participating counterparties against the
insurance company with the securities lent or with the collateral must be explicitly | For Credit Default Swaps (CDS) on individual securities to be recognized at market value, two conditions must be met according to the described regulations from the FINMA document:
1. **Permanent Impairment of the Underlying Bond:** The bond, which is the underlying security for the CDS, must be permanently impaired. This condition implies that the recognition at market value is contingent upon a significant and enduring decrease in the market value of the underlying bond, which reflects a deterioration in the issuer's creditworthiness or other factors impacting the bond's value negatively. The impairment event triggers the recognition of the CDS’s hedging effect, providing a financial instrument that compensates for the loss in value of the impaired bond.
2. **Valuation According to the Cost Amortization Method:** If the underlying security (bond) is valued according to the cost amortization method rather than its current market price, the CDS can be included in the tied assets at a value of zero. This specific approach to valuation suggests that for CDS on individual securities where the underlying bond is not impaired, or where its valuation doesn't reflect current market conditions due to the use of amortized cost, the CDS is not recognized at market value but rather included at zero value. This inclusion at zero value aligns with the regulatory framework’s requirement for a conservative valuation method that avoids recognizing unrealized gains or speculative valuations.
These criteria underscore a prudent approach to accounting for derivatives like CDS within the framework of tied assets, ensuring that such financial instruments are recognized in a way that accurately reflects their role as hedging instruments and their impact on the financial position of the insurance company. |
You are a helpful assistant. Answer this question: What is the minimum value that the collateral must be in relation to the market value of the securities lent when bonds with a credit rating of 3 (or better) are used, and the collateral is provided in the same currency as cash or bonds with a credit rating of 1? | Source Document: finma rs 2016 05 en
excluded. This waiver must also be expressly declared as binding in the event of the
insolvency of the insurance company.523
cc) Securing the reimbursement claim with collateral
•To secure uncovered claims arising from securities lending, collateral must be delivered to
a separate custody account or account. The collateral is set up in the name of the
insurance company. The collateral should be transferred at the same time as the
securities are delivered.524
•The custodian (custodian bank) for the collateral must comply with the guidelines for the
safekeeping of assets (margin nos. 154-159) and have signed the corresponding model
agreement.525
•The value of the collateral must be appropriate and amount to at least 105% of the market
value of the securities lent at all times. If bonds with a credit rating of 3 (or better) are lent
and the collateral is provided in the same currency as cash or bonds with a credit rating of
1, the value of the collateral must be at least 102% of the market value of the securities
lent.526
•The collateral must comply with the investment regulations for direct investments in tied
assets. The collateral must be capable of being valued and traded on a daily basis and
correspond to credit quality step 3 or better and must not have been issued by the
counterparty or relate to it.527
•Collateral received may not be repledged, lent, sold or used in the context of derivative
transactions, securities lending or repurchase agreements.
Cash collateral can be reinvested in highly liquid, short-term money market investments
and highly liquid bonds with a (residual) term of up to a maximum of twelve months. Due
to the fact that the cash collateral can be recalled from the borrower at any time, the
insurance company must have sufficient liquidity. Strategies and guidelines for the
reinvestment of cash collateral are part of the insurance company's investment policy and
risk management (including stress tests under various tighter market conditions) and are
documented, periodically reviewed and adjusted as necessary.528
•It must be ensured that the insurance company has full and unconditional access to the
collateral if the counterparty does not return the borrowed securities, does not return them
on time or only partially returns them. Any third-party claims against the insurance
company must not affect access to the collateral.
tainers. This must also apply in the event of insolvency.529
### Section: Page 63
63/70e) Limitations
Securities lending and repo transactions are cumulatively limited to 30% of the debit amount
f r o m a gross perspective.530
Borrowed underlying assets must be taken into account when complying with the limits in
accordance with margin nos. 108-122.531
f) Valuation, crediting and listing
In order to secure the reclaims from securities lending, the receivables and liabilities (taking
into account accrued interest) as well as the income accruing to the insurance company must
be valued daily at the current market price (mark-to-market) and the difference must be settled
daily.532
The underlying assets lent out remain allocated to tied assets. They are recognized at a
maximum of the current market value or at a maximum of the recognition value at the time of
lending, if this is lower.533
The collateral received is allocated to the tied assets and must be identified as such. The
collateral may not be taken into account when calculating the cover of the tied assets, as the
securities lent are taken into account.534
Underlying assets that have been lent are marked "lent" in the list of tied assets. The collateral
received is shown in a separate note.535
The following must be disclosed to the audit firm in an appropriate form
•The securities lending transactions carried out in the reporting year
•the outstanding securities lending positions and
•the collateral received536
The necessary documents must also be disclosed to the audit firm so that the audit firm can
verify ongoing compliance with margin no. 528. The latter is deemed to have been complied
with if it can be demonstrated that the total amount of collateral received was at no time
greater than the amount permitted for reinvestment in accordance with margin no. 528.
Values.537
### Section: Page 64
64/70B. Repurchase agreements
a) Definition
A repo (repurchase agreement) is a legal transaction in which one party (lender) transfers
ownership of securities to another party (borrower) in return for payment and in which the
borrower undertakes to return securities of the same type, quantity and quality to the lender
on maturity, as well as the income accruing during the term of the repurchase agreement. As
the repurchase amount is determined in advance, the lender bears the price risk of the
securities during the term of the repurchase agreement.538
Reverse repo (reverse repurchase agreement): Repo from the perspective of the lender. 539
Repo interest: Difference between the selling price and the purchase price of the securities. 540
While legal ownership of the securities in a repo transaction is transferred to the lender or
borrower (legal owner), the lender or borrower remains the beneficial owner. Interest and
dividend payments falling due in the course of the repo transaction are due to the lender. If
contractually agreed, the seller may repurchase the securities sold prematurely, whereby the
respective value date/delivery deadlines must be taken into account for the delivery of the
securities. As a beneficial owner, the pension provider bears the risks of fluctuations in the
securities and takes these into account when adding the securities to the tied assets.541
b) Purpose
The repo transaction serves the purpose of obtaining short-term liquidity. Reverse repo is a
short-term collateralized investment of surplus liquidity.542
c) Permitted transactions
Repurchase agreements are permitted under the following conditions: 543
•Framework agreement
The insurance undertaking concludes the necessary framework agreements with the
counterparty to the repurchase agreement (margin nos. 552-557).544
•Repo trading platform and settlement system
Repo transactions must be executed on an established repo trading platform that meets the
following requirements:
•central administration of the multilateral treaty system;
•simultaneous processing of the transaction;545
### Section: Page 65
65/70•mapping of processes in real time;
•daily valuation (mark-to-market, at least once a day) of all open repo positions and
•at least daily balancing of net exposures with automatic margin transfers (margin
calls).
•Repo-able effects
The insurance company may only use securities for repurchase transactions that can be
easily valued on the basis of generally accessible information.546
•Liquidity
Repurchase agreements are only permitted if sufficient liquidity is ensured for the insurance
company.547
•Runtime
Repurchase agreements with securities from tied assets may not exceed a term of 12
months.548
d)Non-permissible transactions
Securities accepted as collateral in the context of reverse repos, securities lending and similar
transactions may not be used for repos.549
Due to the requirement that the obligation must be fully covered at all times, the underlying
assets of a derivative transaction must be available in the assets of the insurance company
and must be available without restriction. A simultaneous repurchase agreement in relation to
the same underlying assets is therefore not permitted.550
e) Special requirements
aa) Organization, know-how and investment process
Insurance undertakings that engage in repurchase transactions must have qualified and
knowledgeable staff, an appropriately designed investment strategy, an investment
management system tailored to their specific needs, a fully implemented and documented
investment process, a suitable risk management system and an adequate system
infrastructure (margin no. 76).551
bb) Framework agreements
The standardized framework agreement between the insurance company and the
counterparty must comply with the relevant international standards and regulate or comply
with at least the following topics:552
### Section: Page 66
66/70•The tied assets to which the master agreement relates must be specified. In addition, the
underlying assets that are available for the repurchase transactions or that are excluded for
the repurchase transactions must be specified. Repurchase agreements with underlying
assets that are held in different tied assets or in free assets are not permitted under the
same framework agreement.553
•In deviation from margin no. 553, in the case of SIX/SIS SNB Repo, the tied assets for
which repurchase agreements can be concluded must be specified in addition to the repo
platform agreement. The underlying assets available for the repo transactions must be
designated and separated for the respective tied assets. A clear and unambiguous
allocation of the assets associated with a repo transaction (such as cash holdings in a SIC
account and transferred underlying assets for repo transactions) to the individual tied
assets must be ensured at all times.554
•The provision of collateral by the lender has been contractually agreed for each
repurchase transaction and the provisions for collateral in accordance with margin nos.
558-563 are complied with.555
•The contract regulates the punctual and unrestricted remuneration of the income
(dividends and interest) accruing during the subscription transaction and the
compensation to be paid, the assertion of other rights (e.g. conversion and subscription
rights) and the contractually compliant reimbursement of securities of the same type,
quantity and quality.556
•The possibility of offsetting the claims of all counterparties involved against the insurance
company with the securities lent or with the collateral must be explicitly excluded. This
exclusion must also be expressly declared as binding in the event of the insolvency of the
insurance company.557
cc) Securing the reimbursement claim with collateral
Collateral must be delivered to a separate securities account or account of the central
settlement system to secure uncovered claims from repurchase transactions. The collateral is
set up in the name of the insurance company. The collateral must be transferred at the same
time as the securities are delivered.558
The custodian for the collateral must comply with the guidelines for the safekeeping of assets
(margin nos. 154-159) and have signed the corresponding model agreement.559
The collateral must comply with the investment regulations for direct investments in tied
assets. The collateral must be capable of being valued and traded on a daily basis and
correspond to credit quality step 3 or better and must not have been issued by the
counterparty or relate to it.560
The assets received through reverse repo may not be repledged, lent, sold or used in the
context of derivative transactions, securities lending or repo transactions.561
### Section: Page 67
67/70Cash collateral can be reinvested in highly liquid, short-term money market investments and
highly liquid bonds with a (residual) term of up to a maximum of twelve months. The insurance
company must have sufficient liquidity due to the fact that the cash can be recalled by the
lessee at any time. Strategies and guidelines for the reinvestment of cash collateral are part of
the insurance company's investment policy and risk management (including stress tests under
various tighter market conditions) and are documented, periodically reviewed and adjusted if
necessary.562
It must be ensured that the transferee has full and unconditional access to the collateral if the
lender is unable to repurchase the transferred securities in full, on time or only partially as
agreed. Any third-party claims against the insurance company must not impair access to the
collateral. This must also apply in the event of the insolvency of one or more of the parties
involved.563
f) Limitations
Repo transactions and securities lending are cumulatively limited to 30% of the target amount
from a gross perspective. There is no quantitative limit for reverse repo transactions.564
Securities sold through repos must be taken into account when complying with the limits in
accordance with margin nos. 108-122.565
g) Valuation, crediting and listing
In order to secure reclaims from repurchase agreements, the receivables and liabilities (taking
account of accrued interest) as well as the income accruing to the insurance company must
be valued daily at the current market rate (mark-to-market) and the difference must be settled
daily.566
Securities sold through repo transactions remain allocated to tied assets. The maximum
amount allocated is the current market value or the maximum amount allocated at the time the
transaction was concluded, if this is lower.567
The collateral received through reverse repo is allocated to the tied assets. However, the
counterparty may repurchase the sold underlying assets at any time, subject to the notice
period. The collateral may not be taken into account when calculating the cover for the tied
assets.568
Securities sold through repo transactions are marked as "retired" in the list of tied assets.
Collateral received through reverse repo transactions is disclosed in a separate note.569
The following must be disclosed to the audit firm in an appropriate form 570
### Section: Page 68
68/70•the repurchase agreements (transactions) carried out in the reporting year,
•the outstanding repurchase agreements, and
•the collateral received.
The audit firm must also be provided with the necessary documentation to enable it to verify
ongoing compliance with margin no. 562. The latter is deemed to have been complied with if it
can be demonstrated that the sum of the collateral received was at no time greater than the
amount permitted for reinvestment in accordance with margin no. 562.571
VI. Transitional provisions
Repealed 572*
If the allocation to the tied assets of reinsured units is based on a valid approval, this will
continue to apply until December 31, 2016 at the latest in accordance with the conditions in
the approval.573
Adjustments regarding the allocation of reinsured portions of provisions from intra-group
reinsurance relationships (margin no. 167) to tied assets must be made by December 31,
2016 at the latest.574
If assets are held in safekeeping abroad, proof in accordance with margin no. 157 must be
provided for the first time by December 31, 2016.575
### Section: Page 69
Append
ix69/70Supplementary agreement1
Supplementary provisions to the business relationship (securities accounts/accounts) between Bank X
(custodian bank) and Insurance Company Y (depositor) regarding the safekeeping of assets belonging
to the "pooled assets" of Depositor Y
For the above-mentioned business relationships, the present agreement shall apply in addition, which
shall take precedence over any deviating provisions in contracts between the parties.
1. The tied assets may be held in custody or booked by the custodian bank on its own premises, at
a domestic correspondent bank, at a domestic or foreign clearing house (examples: SIS
SegaInterSettle AG, Euroclear Bank, Clearstream) or at a foreign custodian, either individually or
collectively (collective custody).
With regard to assets that the Custodian Bank transfers to a correspondent bank, a clearing
house or a custodian, it is liable to the Depositor for its custodian duties in accordance with the
principles of Art. 399 para. 2 CO.
2. The custodian bank identifies the securities accounts or accounts with values of tied assets held
with it under the heading "tied assets".
The Custodian shall ensure that only tied assets are held in such custody accounts or accounts.
3. The Custodian Bank acknowledges that the assets held in safekeeping or booked in accordance
with clause 2 are intended to secure the claims of the policyholders of the Depositor and therefore
expressly declares that it will not assert any rights of lien, retention, set-off or similar rights in respect
thereof, even if the Depositor becomes insolvent after the assets have been transferred or allocated to
the tied assets. The assertion of such rights is reserved only for claims in connection with the
management of the custody accounts or accounts (costs, fees, commissions, etc.).
If claims are asserted by third parties (including correspondent banks, clearing houses,
custodians) regarding the value of the tied assets, the Custodian Bank shall notify the Custodian
immediately.
If the Custodian wishes to book assets into custody accounts or "tied assets" accounts for which
the Custodian Bank already has a security interest, the Custodian Bank may refuse the transfer,
demand that the Custodian provide substitute collateral or demand that the collateral be redeemed.
4. The Depositor is solely and exclusively responsible for compliance with regulatory provisions, in
particular with regard to the minimum size of the tied assets, the permissible values and their
composition.
Place/date Signature
Insurance companySignature
Custodian
bank
1 Revised supplement to Circular No. 771 D of SwissBanking dated 9.4.1987
### Section: Page 70
70/70List of changes
The circular is amended as follows:
Margin no. 572 will be repealed as of 1.1.2018. | The minimum value that the collateral must be in relation to the market value of the securities lent when bonds with a credit rating of 3 (or better) are used, and the collateral is provided in the same currency as cash or bonds with a credit rating of 1, is at least 102% of the market value of the securities lent. |
You are a helpful assistant. Answer this question: What is the primary purpose of Circular 2016/5 "Investment guidelines - insurers" as outlined in the document? | Source Document: finma rs 2016 05 en
### Section: Page 1
Circular 2016/5 Investment guidelines -
insurers
Investments in the total assets and combined
assets of insurance companies
Reference: FINMA Circular 16/5 "Investment guidelines - insurers"
Decree:December 3, 2015
Entry into force:January 1, 2016
LastChange: January 1, 2018 [Changes are marked with * and listed at the end of the document]
Concordance: formerly FINMA Circular 08/18 "Investment Guidelines for Insurers" of November
20,2008 Legal basis: FINMASA Art. 7 para. 1 let. b
ISA Art. 17-20, 22, 37, 51, 56, 87
AVO Art. 56, 57, 68, 70-95, 96, 97, 100-109, 139
AVO-FINMA Art. 1
Appendix: Supplementary Agreement of the Swiss Bankers Association
AddresseesBankG
VAG
FINIG
FinfraG
KAG
MLA
OtherBanks
Financial groups and
conglomerates
Other intermediaries
Insurer
Insurance groups and
conglomerates
Intermediary
Asset manager
Trustees
Manager of coll. assets
Fund management companies
Account-holding investment firms
Non-accounting Investment firms
Trading venues
Central counterparties
Central securities depository
Trade repository
Payment systems
Participants
SICAV
KmG for KKA
SICAF
Custodian banks
Representative of foreign KKA
Other intermediaries
SRO
SRO supervisors
Audit firms
Rating agencies
X
Laupenstrasse 27, 3003 Berne
Tel. +41 (0)31 327 9100, Fax +41 (0)31 327 9101
www.finma.ch
### Section: Page 2
2/70Table of contents
I. Object Rz 1
II. General principles for total assets Rz 2-22
A. Investment principles Rz 2
B. Derivative financial instruments Rz 3-22
III. General principles for tied assets Rz 23-179
A. Definition, purpose and obligation to order Rz 23-24
B. Principles Rz 25-56
C. Investment strategy Rz 57-60
D. Investment regulations Rz 61-68
E. Organization and control Rz 69-87
F. Further provisions Rz 88-152
G. Safekeeping of assets Rz 153-159
H. Claims of non-life insurers against reinsurers Rz 160-175
I. Authorizations pursuant to Art. 79 para. 3 AVO Rz 176
J. Reporting to FINMA Rz 177-179
IV. Investment forms in tied assets Rz 180-505
A. Cash deposits Rz 181-185
B. Bonds, convertible bonds Rz 186-196
C. Structured products Rz 197-213
D. Securitized receivables Rz 214-226
E. Other acknowledgements of debt Rz 227-239
F. Shares and other equity securities Rz 240-245
G. Real estate Rz 246-287
H. Mortgage receivables Rz 288-316
I. Alternative investments Rz 317-350
J. Derivative financial instruments Rz 351-478
K. Collective investment schemes and single investor funds Rz 479-505
V. Supplementary provisions on tied assets Rz 506-571
A. Securities lending Rz 506-537
B. Repurchase agreements Rz 538-571
VI. Transitional provisions Rz 572-575
### Section: Page 3
3/70I. Subject matter
This circular specifies the regulations on the investment activities of supervised insurance
companies. Chapters II and III set out FINMA's expectations with regard to the overall
investment activity of all supervised insurance companies and, in particular, the general
requirements in connection with the designation of tied assets (Art. 17 of the Insurance | The primary purpose of Circular 2016/5 "Investment guidelines - insurers," as outlined in the document, is to specify the regulations on the investment activities of supervised insurance companies. It details FINMA's expectations regarding the overall investment activity of all supervised insurance companies. Specifically, it focuses on the general requirements related to the designation of tied assets, in accordance with Article 17 of the Insurance Supervision Act. This includes setting out the principles, strategies, regulations, organization, and controls for maintaining the total assets and the tied (or restricted) assets, ensuring that insurance companies manage their investments responsibly and in line with regulatory expectations. |
You are a helpful assistant. Answer this question: Based on the provided text, which article of the Supervision Ordinance requires insurance companies to ensure that all obligations arising from derivative financial transactions must be covered at all times and in full? | Supervision Act [ISA; SR 961.01]). Chapters IV and V explain the requirements for the
permissible assets in tied assets (Art. 79 of the Supervision Ordinance [SO; SR 961.011]).1
II General principles for total assets
A. Investment principles
When selecting its investments, the insurance company takes into account the structure and
development of the obligations (asset liability management, ALM), the security of the
investments, appropriate diversification and the insurance company's foreseeable need for
liquid assets.2
B. Derivative financial instruments
a) Use of derivative financial instruments
Insurance companies may only use derivative financial instruments to reduce the risks on the
investments or on their obligations to the insured persons or to manage the investments
efficiently (Art. 100 SO).3
When using derivatives, the insurance company may not take any risks that are inappropriate
to the scope of business and risk capacity of the insurance company. The use of derivatives
should also be aimed at achieving a sustainable effect.4
b) Obligation to provide cover when using derivatives
In accordance with Art. 100 para. 2 SO, all obligations that may arise from derivative financial
transactions must be covered. The obligations must be covered at all times and in full
(contract volume / notional value) either by the underlying assets on which the derivatives are
based (in the case of derivatives with an obligation to sell) or by liquidity (in the case of
derivatives with an obligation to buy).5
Liquidity can include both cash and cash equivalents. Cash equivalents
Cash deposits in accordance with margin nos. 181-185 and government bonds with a minimum
credit rating of 2 and very good liquidity are considered funds. In addition, the funds mentioned in
margin no. 1146
### Section: Page 4
4/70Receivables that are exempt from the counterparty limit are regarded as cash equivalents.
The obligation is covered at all times and in full if: 7
•the liquidity or cash equivalents are available; 8
•the underlying assets are held by the insurance company and are available without
restriction - securities lending in relation to the underlying assets and repurchase
agreements (repo, reverse repo) in connection with derivative transactions are not
permitted. Lent securities are an exception if the short-term recall of these securities is
possible without restriction. The increased operational risks arising from these
transactions must be taken into account;9
•double use of liquidity or underlying assets to cover several transactions is excluded -
underlying assets or liquidity can be used simultaneously to cover derivative positions if
these involve several risks (e.g. a market, credit or currency risk) but relate to the same
underlying assets;10
•the market value of the cash equivalents or the number of underlying assets covers the
entire obligation, whereby cash equivalents - with the exception of cash deposits in
accordance with margin nos. 181-185 - may only be used as cover to the extent of 90% of
the market value.11
In the case of derivatives with a purchase or acceptance obligation (e.g. long futures, long
forwards, short puts) of an underlying asset, such as a share, a financial index, a currency or
an interest rate, the liquidity required to fulfill the obligation must be available at all times.12
In the case of derivatives with an obligation to sell or deliver (e.g. short futures, short forwards,
short calls) an underlying asset, such as a share, a currency or an interest rate, the underlying
investment must be available at all times and without restriction to fulfill the obligation. In the
case of index derivatives, the obligations are deemed to be covered if there is an extensive
and stable correlation between the underlying assets held and the index.13
If there is a contractual right to satisfy an obligation entered into by means of a cash payment
instead of delivery of the deliverable underlying, the physically deliverable underlying must
nevertheless be held.14
If cash settlement is mandatory for underlyings that cannot be physically delivered (e.g.
underlyings for weather derivatives), the necessary liquidity must be maintained in full at all
times in the event of an obligation to sell such derivatives.15
In the case of derivatives with an obligation to exchange cash flows (e.g. interest rate swaps),
the cash flow to be paid must be ensured with the necessary liquidity or underlying.
become.16
### Section: Page 5
5/70In the case of combinations of derivatives, the obligations of the entire combination for the
fulfillment of the obligations must be covered at all times by underlying assets or liquidity
available in the assets. The underlyings of the combinations must be identical to the
underlyings used as cover.17
c) Organization, know-how and investment process
Insurance undertakings that use derivative financial instruments must have qualified and
knowledgeable staff, an appropriately designed investment strategy, an investment
management system tailored to their specific needs, a fully implemented and documented
investment process, a suitable risk management system and an adequate system
infrastructure (margin no. 76).18
The provisions of margin nos. 57-87 m u s t also be observed mutatis mutandis when using
derivative financial instruments.19
d) Analysis of the risks associated with the use of derivative financial instruments
The counterparty risks resulting from derivative transactions must be taken into account
before derivative financial instruments are used. The risks must be analyzed as often as the
situation requires, but at least once a week for market risks and once a month for credit risks.
The analysis of market and credit risks consists, among other things, of evaluating the open
positions and comparing them with the defined limits of risk exposure. The result of the risk
analysis must be presented to the Executive Board as often as the situation requires, but at
least once a month for market risks and at least once every three months for credit risks (Art.
104 SO).20
The insurance company's risk management ensures that the derivative strategies of different
divisions are recorded centrally and analyzed for interdependencies. To this end, various
relevant scenario calculations must be carried out to ensure that the overall use of derivatives
does not jeopardize the value of the assets or the solvency of the company. The insurance
company ensures that the economic impact on assets and solvency in connection with
derivative transactions is correctly shown in the various reports to FINMA.21
According to Art. 108 SO, an activity report on the use of derivative financial instruments must
be submitted to the Board of Directors at least every six months.22
III General principles for tied assets
A. Definition, purpose and obligation to appoint
The values in the tied assets represent based on the
The assets secure the claims of the insured persons based on the reported technical 23
### Section: Page 6
6/70provisions. The | Based on the provided text, Article 100 paragraph 2 of the Supervision Ordinance (SO) requires insurance companies to ensure that all obligations arising from derivative financial transactions must be covered at all times and in full. |
You are a helpful assistant. Answer this question: What essential characteristics must the assets allocated to tied assets possess according to the documentation? | ### Section: Page 7
7/70Tied assets are of great importance in the event of a portfolio transfer and especially in the
event of insolvency and the subsequent liquidation of the insurance company. The tied assets
provide the insured persons with a liability substrate that ensures that their claims are satisfied
with priority over other creditors in the event of the insurance company's bankruptcy.
The assets allocated to the tied assets must be secure, unencumbered property of the
insurance company and realizable in the event of the bankruptcy of the insurance company in
Switzerland. To ensure that the claims of the insured persons are effectively secured,
attention must be paid to the intrinsic value and stability of value when allocating assets to tied
assets.24
B. Principles
a) Investment principles
aa) Security
The investments in tied assets must be selected in such a way that the claims arising from
insurance contracts can be met at all times.25
The security of investments is guaranteed if they are economically and legally secure.
Economic security is understood to mean the preservation of the value of the capital or
assets; the legal security of the investments is measured by their availability and saleability.
The requirement of economic and legal security applies to both direct and indirect
investments.26
The following criteria in particular must be observed with regard to maintaining the value of
assets:
•the fluctuation in value of the total tied assets, whereby the extent of the fluctuation in
value that can be tolerated depends on the level of overfunding of the tied assets;
•the quality of the system;
•a reliable valuation method for the system.27
The legal security of the system relates in particular to the following criteria:
•unrestricted power of disposal;
•the unrestricted saleability and transferability of the assets, in particular in the event of the
insurance company's bankruptcy.28
Assets that jeopardize the intrinsic value of the tied assets (e.g. assets that give rise to additional
funding obligations at the expense of the tied assets) are not permitted.
assets).29
### Section: Page 8
8/70bb) Orientation towards obligations (Asset Liability Management, ALM)
The order of the tied assets must be based on the structure and expected development of the
insurance obligations to be secured. Appropriate account must be taken of both the
performance of investments and liabilities and the expected cash flows from investments and
obligations.30
cc) Profitability
The insurance company selects investments that generate a return in line with the market. 31
dd) Diversification
Each tied asset must be sufficiently and appropriately diversified. Cluster risks must be
excluded. An appropriate mix in relation to the various investment categories and a spread of
investments in relation to the debtors of the assets must be achieved.32
An appropriate mix of investments with regard to the various investment categories takes into
account the following criteria in particular:
•the specific risk profile and default risk or impairment risk of the investments;
•the investment horizon (i.e. investment period) of the investment;
•the correlation of asset classes.33
An appropriate diversification of investments takes into account at least the following criteria:
•various counterparties;
•different geographical regions;
•different industries and segments.34
Investments in high-risk investments may only be made as a cautious addition to and
appropriate diversification of the total tied assets. The risk capacity of the insurance company
must always be taken into account. Investments in securities with a credit rating of 5 are only
permitted if there is corresponding technical expertise in the area of credit risks.35
ee) Liquidity
In principle, the insurance company must choose investments that can be realized quickly if
necessary, especially in the event of the insurance company's bankruptcy.36
The realizability of an investment depends, among other things, on the term of an investment
(e.g. bonds, fixed-term deposits) or the possibility of assigning (selling) the investment on the
market or on a stock exchange.37
### Section: Page 9
9/70b) Prohibition of charging and offsetting
The value of the tied assets must be unencumbered (Art. 84 para. 2 SO). In principle, the tied
assets may not be encumbered by liens, rights of retention, rights of set-off or similar rights.
No additional funding obligations may be created to the detriment of the tied assets.
Exceptions are set out in Chapters IV and V.38
c) Realization in bankruptcy
The assets in tied assets serve solely to secure claims arising from insurance contracts in the
event of the insolvency and liquidation of the insurance company under bankruptcy law. It
must therefore be ensured that the assets flow into the bankruptcy estate and can be
liquidated in Swiss bankruptcy proceedings.39
The recoverability in bankruptcy must be ensured by the insurance company, whereby proof can
be provided as follows:40
•The investment is securitized and traded on a market so that a market price can be
determined; or41
•the legal system applicable to the investment recognizes FINMA's insolvency proceedings
and the priority privilege of tied assets under Swiss law, so that special executions or
other interventions by an authority or third parties are not possible.42
At FINMA's request, the possibility of realizability in Swiss bankruptcy must be demonstrated. 43
d) Obligation to provide cover at all times
The insurance company shall take suitable organizational measures to ensure that the current
debit amount pursuant to Art. 56 and 57 or 68 SO is covered at all times by permissible assets
pursuant to Art. 68 para. 2, 79 and 81 SO. The amount of the current target amount is
determined on the basis of the current provisions if a statement of account were prepared at
that time.44
Instead of a concrete calculation of the current provisions, well-founded and prudent estimates
can also be used during the year, provided that it can be demonstrated with a high degree of
certainty that the current target amount is actually covered by the calculated values.45
This ensures that even after events and developments occurring during the year that require
further technical provisions and require a
have an influence on the target amount (e.g. unexpected claims, need for additional reserves),46
### Section: Page 10 | According to the documentation, the essential characteristics that the assets allocated to tied assets must possess are:
1. **Secure and Unencumbered Ownership**: The assets must be secure, unencumbered property of the insurance company, ensuring they are clear of any claims or encumbrances that could affect their use in meeting the claims of insured persons.
2. **Realizability in Bankruptcy**: The assets must be realizable in the event of the bankruptcy of the insurance company in Switzerland, meaning they can be liquidated to satisfy claims.
3. **Attention to Intrinsic and Stability of Value**: When allocating assets to tied assets, attention must be given to their intrinsic value and the stability of that value. This ensures that the claims of the insured persons are effectively secured against market fluctuations and other factors that could erode asset value.
4. **Economic and Legal Security**: Investments that constitute the tied assets must be economically and legally secure. Economically, this means the preservation of the capital or asset's value. Legally, the investments must be available and saleable, ensuring they can be converted into cash to meet claims as needed.
5. **Adherence to Investment Principles**:
- **Security**: The investments must be selected with the security of being able to meet the claims arising from insurance contracts at all times.
- **Orientation towards obligations (Asset Liability Management, ALM)**: The structure and expected development of the insurance obligations must be considered, alongside the performance of investments and liabilities and expected cash flows.
- **Profitability**: Investments should generate a return in line with the market.
- **Diversification**: Investments must be diversified appropriately to avoid cluster risks, considering various investment categories, debtors, geopolitical regions, industries, and segments.
- **Liquidity**: Investments should be easily realizable, especially in the event of bankruptcy, considering the investments' term and the ease of selling them on the market or exchange.
6. **Prohibition of Charging and Offsetting**: The value of the tied assets must remain unencumbered, meaning they cannot be burdened with liens, rights of retention, rights of set-off, or similar rights that could compromise their value or availability.
7. **Obligation to Cover at All Times**: There must be organizational measures in place to ensure that the current debit amount is covered at all times by permissible assets, ensuring the insurance company's ability to meet its obligations without delay.
These characteristics are crucial for ensuring that tied assets can effectively secure the claims of insured persons, especially in the event of insolvency and liquidation of the insurance company. |
You are a helpful assistant. Answer this question: What are the criteria that an asset must meet in order to be allocated to restricted assets according to the circular? | 10/70acquisition of new business or business growth) sufficient assets are available to cover the
target amount of the tied assets.
e) Order
The insurance company establishes the tied assets by allocating assets. It records and
identifies these assets in such a way that it can prove at any time without delay which assets
belong to the tied assets and that the target amount of each tied asset is covered (Art. 76
para. 1 AVO).47
f) Criteria for the allocation of assets to restricted assets
An asset can be allocated to restricted assets if: 48
•the investment is an admissible value in accordance with Art. 79 or Art. 68 para. 2 SO and
is eligible in accordance with this Circular. Partial crediting of investments (e.g. due to
non-creditable parts or increased risks) is not permitted. Partial offsetting of the
investment is only possible if the exception is explicitly described in this circular (e.g.
mortgages, margin no. 312);49
•the investment can generally be valued without any problems; 50
•the investment has a high level of liquidity in relation to the corresponding investment
category;51
•the necessary expertise is available and appropriate processes and systems are applied
that are necessary for the professional selection, management and control of the
investment made (margin no. 76);52
•The effects of the investment and its individual risk components are understood so that
the financial, legal and operational risks can be assessed at all times;53
•the debtor's creditworthiness is verifiable (margin no. 139-152); 54
•the asset is neither encumbered nor can it be offset against third-party claims (margin no. 38). 55
These principles are specified for each investment category in Chapters IV and V. 56
C. Investment strategy
The Executive Board determines the investment strategy and submits it to the Board of Directors
for approval (Art. 78 para. 1 let. a, Art. 101 SO).57
The investment strategy takes appropriate account of the type and complexity of the business
conducted, in particular the insurance business (Art. 102 para. 1 SO).58
### Section: Page 11
11/70The framework conditions for the use of the various investment categories must be defined in
the investment strategy. All investments must be anchored in the investment strategy of the
company as a whole.59
The limits of risk exposure must be set in accordance with the financial and organizational
capacities of the insurance company.60
D. Investment regulations
The investment regulations are issued by the Executive Board or a member of the Executive
Board or the general representative and define the entire investment activity (Art. 78 para. 1
let. b, Art. 106 para. 1 SO). The investment activity is comprehensively described in a
document, whereby specific references to other internal directives are possible.61
The requirements for the investment regulations are based on the complexity of the investments
in the investment universe defined by the insurance company.62
The insurance company regulates at least the following topics in the investment regulations: 63
•Internal investment principles and objectives (incl. ALM); 64
•Description of the investment universe (permitted investments / restrictions); 65
•Investment techniques and their area of application/purpose (e.g. use of derivative
financial instruments, securities lending, repurchase agreements);66
•Description of the investment process, monitoring and controls (definition of tasks,
responsibilities, competencies, accountability and escalation mechanisms);67
•Staff requirements (e.g. specialist knowledge, experience, integrity). 68
E. Organization and control
The administration (investment management) and control (risk management) of the
investment activity must be carried out by persons who are independent of each other and
must be organizationally appropriate to the complexity of the business and investment activity
(Art. 78, 106 SO).69
The staff must have adequate qualifications and knowledge of the asset classes invested in
and, in the case of investments in riskier investments, appropriate expertise (Art. 78 para. 1
let. c, Art. 107 SO).70
The systems used should be appropriate to the size and complexity of the investment portfolio,
be monitored and have the necessary stability (Art. 106 para. 2 SO).71
### Section: Page 12
12/70The administration (investment management) must ensure and perform at least the following
tasks:72
•the implementation of the investment strategy and the investment regulations; 73
•the definition and documentation of the strategic and tactical asset allocation, which is
adapted to the risk capacity, size and complexity of the insurance company, whereby the
allocation is made in relation to asset classes and other important characteristics such as
duration, sectors, creditworthiness and investment styles;74
•setting a limit system based on individual risk capacity, monitoring limits and defining
measures in the event of limit breaches;75
•the provision of an investment process that is commensurate with the complexity of the
investments. Scenario analyses must be used to ensure that the use of complex
investments does not jeopardize the value of the total assets and tied assets or the
solvency of the insurance company;76
•monitoring the value of the assets; 77
•monitoring and controlling compliance with regulatory requirements; 78
•monitoring and controlling the main risks (in particular market risk, credit risk,
concentration risk, liquidity risk, currency risk, operational risk, legal risk) in connection
with investment activities;79
•the measurement and evaluation of investment results; 80
•the definition of internal reporting. 81
If the insurance company commissions a third party with investment management, this does
not relieve it of responsibility for compliance with the investment management regulations. In
particular, the insurance company must understand the investment process, monitor the
specified strategy and investment principles and be able to track all transactions in a timely
manner for accounting purposes.82
The transfer of investment management to third parties is subject to FINMA approval in
accordance with Art. 4 para. 2 let. j ISA.83
Control (risk management) must ensure and perform at least the following tasks: 84
•monitoring and controlling compliance with the investment principles and objectives in
accordance with margin no. 64 and the other internal directives of the insurance company;85
•monitoring and controlling compliance with regulatory requirements; 86
### Section: Page 13
13/70•monitoring and controlling the main risks (in particular market risk, credit risk,
concentration risk, liquidity risk, currency risk, operational risk, legal risk) in connection
with investment activities.87 | According to the circular, an asset must meet several specific criteria to be allocated to restricted assets:
1. **Admissibility and Eligibility**: The investment must be an admissible value as per Art. 79 or Art. 68 para. 2 SO and must also be eligible according to the circular. Partial crediting of investments due to non-creditable parts or increased risks is not allowed, except in cases where partial offsetting is explicitly allowed in the circular (e.g., mortgages, margin no. 312).
2. **Valuation Feasibility**: The investment must generally be able to be valued without any issues.
3. **Liquidity**: The investment must have a high level of liquidity relative to the corresponding investment category.
4. **Expertise, Processes, and Systems**: There must be necessary expertise available, and appropriate processes and systems must be employed. These are crucial for the professional selection, management, and control of the investment (margin no. 76).
5. **Risk Understanding**: The effects of the investment and its individual risk components must be comprehensively understood. This is to ensure that the financial, legal, and operational risks associated with the investment can be assessed at all times.
6. **Creditworthiness Verification**: The creditworthiness of the debtor must be verifiable (margin nos. 139-152).
7. **Freedom from Encumbrance**: The asset must not be encumbered or subject to offset against third-party claims (margin no. 38).
These principles define the framework within which assets can be considered for allocation to restricted assets, ensuring that only suitable investments are made to maintain the financial health and regulatory compliance of the insurance company. |
You are a helpful assistant. Answer this question: What are the criteria for an insurance undertaking not to secure its foreign insurance portfolios with tied assets according to Art. 17 para. 2 ISA? | F. Further provisions
a) Separate tied assets
Separate tied assets are to be ordered for (Art. 77 para. 1 AVO):
•occupational pension insurance;
•the policyholder claims from unit-linked insurance contracts or capitalization transactions
(insurance classes A2.1, A2.2, A2.3 and A6.1);
•the policyholder claims from insurance contracts or capitalization transactions that are
linked to internal investment portfolios or other reference values (insurance sections A2.4,
A2.5, A2.6 and A6.2).
The appointment of further tied assets is possible (Art. 77 para. 2 SO) and may be ordered by
FINMA in justified cases (para. 3).88
In Art. 77 para. 1 let. b and c AVO, reference is no longer made to the savings portion of the
insurance contracts, but to the entire insured persons' claims. In particular, this is intended to
avoid the previously separate safeguarding of the savings and guarantee components.89
This Circular must be observed for each separate tied asset, whereby in particular the defined
limits, the coverage obligations and the qualitative requirements for each tied asset must be
taken into account. For the separate tied assets of unit-linked life insurance and capitalization
transactions (insurance classes A2.1-A2.6 as well as A6.1 and A6.2), however, exceptions
apply with regard to the limits (see margin no. 122).90
b) Foreign insurance portfolio
The insurance undertaking is not obliged to secure its foreign insurance portfolios with tied
assets if equivalent security must be provided abroad (Art. 17 para. 2 ISA). If no equivalent
security has to be provided abroad, the security is provided in Switzerland, whereby the
provision can be made in separate tied assets (Art. 77 para. 2 let. b SO).91
If there is no equivalent guarantee abroad, a supplementary guarantee must be provided in
Switzerland.92
The following criteria are relevant for the equivalence check: 93
•Special assets 94
### Section: Page 14
14/70There is an obligation to cover the entire technical provisions from direct insurance
through a special fund. The gross technical provisions must be covered (without taking
into account claims against reinsurers). If an analogous system for offsetting the reinsured
portions of the provisions (see margin nos. 160-175) exists for insurance companies that
operate non-life insurance, the gross principle is deemed to be fulfilled. It must be ensured
that only those contracts participate in the special fund that are fully included in the target
amount.
Instead of special assets, other forms of security for insurance claims may be taken into
account, provided their effect is certain even in the event of the bankruptcy of the
insurance company and is equivalent to the effect of special assets.95
For these other forms, margin nos. 97 and 98 apply mutatis mutandis. 96
•Bankruptcy privilege
In the event of bankruptcy, the special assets are primarily available to satisfy claims arising
from insurance contracts.97
•Investment guidelines
The local supervisory authority specifies investment guidelines aimed at maintaining the
security and value of the investment fund.98
c) Unit-linked life insurance policies
Unit-linked insurance contracts or capitalization transactions must be linked to permissible
assets for the tied assets: In the case of unit-linked contracts, these are open-ended collective
investment schemes that fall under the Collective Investment Schemes Act (CISA; SR 951.31)
(Art. 125a SO). In the case of contracts linked to internal investment portfolios or other
reference values, these are permissible values in accordance with Art. 79 SO and Art. 81
para. 2 SO.99
The investments used as collateral must correspond to those on which the contracts are
based (matching cover; Art. 81 AVO), as otherwise the insurance company bears an
additional investment risk. Any guarantees must be secured with investments in accordance
with Art. 79 AVO that replicate the fluctuations in value of these guarantees as well as
possible. Other contractual components, non-unit-linked provisions and any supplement to the
target amount must be secured with values in accordance with Art. 79 AVO.100
In accordance with Art. 93a AVO, investments to secure claims from unit-linked life insurance
policies are valued at no more than market value, irrespective of
the other capitalized values in accordance with Chapter IV.101
### Section: Page 15
15/70d) Indirect investments: Initial acquisition, restructuring
An investment - whether as an initial acquisition or through restructuring - in so-called indirect
investments (e.g. in funds, participations, structured products or bonds issued by special
purpose vehicles [SPVs]) may not be used to circumvent the provisions on direct investments
in accordance with Chapter IV.102
This circular deals with the following indirect investments:
•collective investment schemes in accordance with margin nos. 484-493;
•Single investor funds according to margin nos. 494-505;
•Real estate companies in accordance with margin no. 256 (for a participation of more than
50%) or margin no. 240 (as a listed real estate company);
•structured products and securitized receivables in accordance with margin nos. 197 and
214;
•alternative investments in accordance with margin nos. 317-350.103
Depending on the instrument, specific qualitative requirements and a high level of liquidity are
demanded for the entire investment instrument or a so-called look-through approach is
applied. An investment in an indirect investment that contains a non-eligible direct investment
is only permitted if the specific provisions for the indirect investment are met and its
characteristics mean that the disadvantages that lead to the non-eligibility of the direct
investment do not affect the indirect investment.104
Example: An investment in real estate that is relatively illiquid and difficult to value and is
therefore not a permissible investment in tied assets cannot be counted as a permissible
investment even if it is restructured as an indirect investment. It can only be included if the risk
situation for the investor actually improves, as illustrated by the following list based on an
investment in real estate.105
106Structure Creditable? Reason
Direct investment: Illiquid,
Difficult to value
investment in real estateNo Usability and assessability made more difficult
(margin no. 246)
Restructuring into a single
investor fundNo Look-through approach is applied, treatment
as direct investment (margin no. 494)
Restructuring into a real
estate companyNo Look-through approach is applied, treatment
as direct investment (margin no. 283) | According to Art. 17 para. 2 ISA, an insurance undertaking is not required to secure its foreign insurance portfolios with tied assets if equivalent security must be provided abroad. This implies that if the requirement for providing security for the insurance portfolio is met through similar measures in the country where the foreign insurance portfolio is located, then the insurance undertaking is exempt from the obligation to secure it with tied assets in Switzerland. However, if no such equivalent security is mandated abroad, the insurance undertaking must then provide security in Switzerland, which can be made through separate tied assets as specified in Art. 77 para. 2 let. b SO.
The criteria for determining whether the security provided abroad is equivalent and thus fulfills the requirement under Art. 17 para. 2 ISA include:
1. Having a special fund or other forms of security that must cover the entire technical provisions from direct insurance. This security should be certain even in the event of the bankruptcy of the insurance company and equivalent to the effect of special assets.
2. The privileged treatment of special assets in the event of the insurer's bankruptcy, where these assets are primarily available to satisfy claims arising from insurance contracts.
3. Compliance with investment guidelines specified by the local supervisory authority aimed at maintaining the security and value of the investment fund.
If these criteria are met by the security provisions in place abroad, it's considered equivalent, and the insurance undertaking is not required to secure its foreign insurance portfolios with tied assets in Switzerland. Conversely, if these criteria are not met abroad, additional security must be provided in Switzerland. |
You are a helpful assistant. Answer this question: Based on your request, I need a bit more context to generate a specific question related to the construction of a structured product. Can you provide additional details or specify the aspect of structured product construction you are interested in? | Construction of a
structured product with | Certainly! To craft a comprehensive and accurate response to your inquiry about the construction of a structured product, it's essential to understand specific aspects or details you're interested in. Structured products are complex financial instruments typically created to meet specific needs or investment strategies that regular financial instruments do not address. They often involve derivatives and can be tailored to offer investment opportunities with various risk-return profiles, capital protection levels, and underlying assets.
Here are several considerations and details that could be relevant to your question:
1. **Objective and Design of the Structured Product**: Are you looking to understand the general principles behind designing a structured product, such as how to tailor it to achieve capital protection, leverage, or yield enhancement?
2. **Underlying Assets**: Structured products can be based on a wide range of assets, including stocks, bonds, commodities, currency pairs, interest rates, or market indices. Clarifying which underlying assets you're referring to could help in providing a more targeted explanation.
3. **Types of Structured Products**: There are various types of structured products, such as notes, bonds, and certificates. Each type might have a different construction methodology. Knowing the specific product type could narrow down the explanation.
4. **Risk and Return Profile**: Understanding the desired risk and return profile is crucial since structured products can be engineered to exhibit a wide range of risk/return characteristics - from conservative, principal-protected notes to high-risk, high-reward scenarios based on the performance of the underlying asset.
5. **Derivatives Utilized**: Since structured products often make use of derivatives like options, swaps, forwards, and futures, specifying which derivatives you're interested in or how they are used in constructing structured products could enhance the relevancy of the answer.
6. **Regulatory and Compliance Aspects**: Different jurisdictions have varied regulations overseeing the issuance and sale of structured products. If your question pertains to regulatory considerations, mention of the specific geographic or regulatory context would be helpful.
7. **Market and Economic Conditions**: The construction of structured products might also take into account current market conditions and economic outlooks. If your inquiry relates to how these conditions affect structured product construction, providing that context can lead to a more precise answer.
8. **Investor Target**: Structured products can be created for retail investors, high-net-worth individuals, or institutional investors. The target investor segment could influence the structure's complexity and the protections afforded.
If you could specify or elaborate on any of the points above or detail another aspect of structured product construction you're interested in, I would be able to provide a more focused and valuable explanation. |
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