2023 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.