NY Ins L § 1410 (2021)
2021 New York Laws ISC - Insurance Article 14 - Investments 1410 - Derivative Transactions and Derivative Instruments.

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