Washington Administrative Code › Title 284 - Insurance Commissioner, Office of the › Chapter 284-13 - Assets-Liabilities-Investments and reinsurance › DERIVATIVE INSTRUMENTS › Section 284-13-910 - Definitions

Current through Register Vol. 24-14, July 15, 2024
The definitions in this section apply to WAC
				  284-13-920 through
				  284-13-960.
"Business entity" includes a sole proprietorship,
				  corporation, limited liability company, association, partnership, joint stock
				  company, joint venture, mutual fund, trust, joint tenancy or other similar form
				  of business organization, whether for-profit or not-for-profit.
"Cap" means an agreement obligating the seller to make
				  payments to the buyer, with each payment based on the amount by which a
				  reference price or level or the performance or value of one or more underlying
				  interests exceeds a predetermined number, sometimes called the strike rate or
				  strike price.
"Collar" means an agreement to receive payments as the buyer
				  of an option, cap, or floor and to make payments as the seller of a different
				  option, cap, or floor.
"Counterparty exposure amount" means:
(1) The net amount of credit risk attributable to a
				  derivative instrument entered into with a business entity other than through a
				  qualified exchange, qualified foreign exchange, or cleared through a qualified
				  clearinghouse (over-the-counter derivative instrument). The amount of credit
				  risk equals:
(a) The market value of the over-the-counter derivative
				  instrument if the liquidation of the instrument would result in a final cash
				  payment to the insurance company; or
(b) Zero if the liquidation of the derivative instrument
				  would not result in a final cash payment to the insurance company.
(2) If over-the-counter derivative instruments are entered
				  into under a written master agreement which 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 foreign jurisdiction listed in the Purposes and Procedures of
				  the Securities Valuation Office of the NAIC as eligible for netting, the net
				  amount of credit risk must be the greater of zero or the net sum of:
(a) The market value of the over-the-counter derivative
				  instruments entered into under the agreement, the liquidation of which would
				  result in a final cash payment to the insurance company; and
(b) The market value of the over-the-counter derivative
				  instruments entered into under the agreement, the liquidation of which would
				  result in a final cash payment by the insurance company to the business
				  entity.
(3) For open transactions, market value must be determined at
				  the end of the most recent quarter of the insurance company's fiscal year and
				  must be reduced by the market value of acceptable collateral held by the
				  insurance company or placed in escrow by one or both parties.
"Covered" means that an insurer owns or can immediately
				  acquire, through the exercise of options, warrants, or conversion rights
				  already owned, the underlying interest in order to fulfill or secure its
				  obligations under a call option, cap or floor it has written, or has set aside
				  under a custodial or escrow agreement cash or cash equivalents with a market
				  value equal to the amount required to fulfill its obligations under a put
				  option it has written in an income generation transaction.
"Derivative instrument" means an agreement, option,
				  instrument, or a series or combination thereof:
(1)
(a) To make or take delivery of, or assume or relinquish a
				  specified amount of one or more underlying interests, or to make a cash
				  settlement in lieu thereof; or
(b) That has a price, performance, value, or cash flow based
				  primarily upon the actual or expected price, level, performance, value, or cash
				  flow of one or more underlying interests.
(2) Derivative instruments include options, warrants, caps,
				  floors, collars, swaps, forwards, futures, and any other agreements, options,
				  or instruments substantially similar thereto or any series or combination
				  thereof. Derivative instruments shall additionally include any agreements,
				  options, or instruments permitted under WAC
				  284-13-920 through
				  284-13-960. Derivative
				  instruments shall not include an investment authorized by
				  RCW
				   48.13.061(2) through (10).
"Floor" means an agreement obligating the seller to make
				  payments to the buyer in which each payment is based on the amount by which a
				  predetermined number, sometimes called the floor rate or price, exceeds a
				  reference price, level, performance, or value of one or more underlying
				  interests.
"Future" means an agreement, traded on a qualified exchange
				  or qualified foreign exchange, to make or take delivery of, or effect a cash
				  settlement based on the actual or expected price, level, performance, or value
				  of, one or more underlying interests.
"Hedging transaction" means a derivative transaction which is
				  entered into and maintained to reduce:
(1) The risk of change in value, yield, price, cash flow, or
				  quantity of assets or liabilities which an insurer has acquired or incurred or
				  anticipates acquiring or incurring; or
(2) The currency exchange rate risk or the degree of exposure
				  as to assets or liabilities which an insurer has acquired or incurred or
				  anticipates acquiring or incurring.
"Insurer" includes domestic insurance companies authorized
				  under chapter 48.05
				  RCW, United States branches of alien insurers entered through this state, alien
				  insurers admitted and using this state as their port of entry, domestic
				  fraternal benefit societies formed pursuant to chapter 48.36A RCW, domestic
				  health care service contractors registered under
				  chapter
				  48.44 RCW, domestic health
				  maintenance organizations registered under
				  chapter
				  48.46 RCW, and domestic
				  self-funded multiple employer welfare arrangements registered under chapter
				  48.125 RCW.
"Option" means an agreement giving the buyer the right to buy
				  or receive (a "call option"), sell or deliver (a "put option"), enter into,
				  extend, or terminate or effects a cash settlement based on the actual or
				  expected price, level, performance, or value of one or more underlying
				  interests.
"Qualified clearinghouse" means a clearinghouse for, and
				  subject to the rules of a qualified exchange or a qualified foreign exchange,
				  which clearinghouse provides clearing services, including acting as a
				  counterparty to each of the parties to a transaction so that the parties no
				  longer have credit risk to each other.
"Qualified exchange" means:
(1) A securities exchange registered as a national securities
				  exchange, or a securities market regulated under the Securities Exchange Act of
				  1934 (  15 U.S.C. Sec. 78  et seq.), as amended;
(2) A board of trade or commodities exchange designated as a
				  contract market by the Commodity Futures Trading Commission (CFTC) or any
				  successors thereto;
(3) Private Offerings, Resales and Trading through Automated
				  Linkages (PORTAL);
(4) A designated offshore securities market as defined in
				  Securities Exchange Commission Regulation S,  17 C.F.R. Part 230, as amended;
				  or
(5) A qualified foreign exchange.
"Qualified foreign exchange" means a foreign exchange, board
				  of trade or contract market located outside the United States, it territories
				  or possessions:
(1) That has received regulatory comparability relief under
				  Commodity Futures Trading Commission Rule 30.10 (as set forth in Appendix C to
				  Part 30 of the CFTC's Regulations,   17 C.F.R. Part 30);
(2) That is, or its members are, subject to the jurisdiction
				  of a foreign futures authority that has received regulatory comparability
				  relief under Commodity Futures Trading Commission Rule 30.10 (as set forth in
				  Appendix C to Part 30 of the CFTC's Regulations, 17 C.F.R. Part 30) as to
				  futures transactions in the jurisdiction where the exchange, board of trade, or
				  contract market is located; or
(3) Upon which foreign stock index futures contracts are
				  listed that are the subject of no-action relief issued by the CFTC's Office of
				  General Counsel, but an exchange, board of trade, or contracts market that
				  qualifies as a "qualified foreign" only under this subsection shall be a
				  "qualified foreign exchange" as to foreign stock index futures contracts that
				  are the subject of the no-action relief under this subsection.
"Swap" means an agreement to exchange or to net payments at
				  one or more times based on the actual or expected price, level, performance, or
				  value of one or more underlying interests.
"Underlying interest" means the assets, liabilities, other
				  interests, or a combination thereof underlying a derivative instrument, such as
				  any one or more securities, currencies, rates, indices, commodities, or
				  derivative instruments.
"Warrant" means an instrument that gives the holder the right
				  to purchase an underlying financial instrument at a given price and time or at
				  a series of prices and times outlined in the warrant agreement. Warrants may be
				  issued alone or in connection with the sale of other securities, for example,
				  as part of a merger or recapitalization agreement, or to facilitate divesture
				  of the securities of another business entity.