senate Bill S2713

Signed by Governor Amended

Relates to treatment of qualified financial contracts in an insurance insolvency proceeding affecting a domestic, foreign or alien insurer

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Bill Status


  • Introduced
  • In Committee
  • On Floor Calendar
    • Passed Senate
    • Passed Assembly
  • Delivered to Governor
  • Signed by Governor
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actions

  • 31 / Jan / 2011
    • REFERRED TO INSURANCE
  • 21 / Mar / 2011
    • 1ST REPORT CAL.239
  • 22 / Mar / 2011
    • 2ND REPORT CAL.
  • 23 / Mar / 2011
    • ADVANCED TO THIRD READING
  • 16 / Jun / 2011
    • AMENDED ON THIRD READING 2713A
  • 20 / Jun / 2011
    • PASSED SENATE
  • 20 / Jun / 2011
    • DELIVERED TO ASSEMBLY
  • 20 / Jun / 2011
    • REFERRED TO CODES
  • 22 / Jun / 2011
    • SUBSTITUTED FOR A6603A
  • 22 / Jun / 2011
    • ORDERED TO THIRD READING RULES CAL.571
  • 22 / Jun / 2011
    • PASSED ASSEMBLY
  • 22 / Jun / 2011
    • RETURNED TO SENATE
  • 30 / Nov / 2011
    • DELIVERED TO GOVERNOR
  • 12 / Dec / 2011
    • SIGNED CHAP.600
  • 12 / Dec / 2011
    • APPROVAL MEMO.17

Summary

Relates to treatment of qualified financial contracts in an insurance insolvency proceeding affecting a domestic, foreign or alien insurer.

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Bill Details

Versions:
S2713
S2713A
Legislative Cycle:
2011-2012
Law Section:
Insurance Law
Laws Affected:
Add §7437, Ins L
Versions Introduced in 2009-2010 Legislative Cycle:
S4772

Votes

15
1
15
Aye
1
Nay
2
aye with reservations
0
absent
0
excused
0
abstained
show Insurance committee vote details

Sponsor Memo

BILL NUMBER:S2713

TITLE OF BILL:
An act
to amend the insurance law, in relation to the treatment of
qualified financial
contracts in an insurance insolvency proceeding affecting a domestic,
foreign or alien insurer

PURPOSE:
The purpose of this bill is to increase the certainty of
insurers and their creditors with respect to the enforceability of
certain financial market transactions and related netting agreements
in the event of insurer insolvency. Insurance companies are
significant users of these financial market contracts (called
"qualified financial contracts" in the Bill), including derivatives,
securities lending, repurchase agreements, futures contracts and
other financial instruments. These contracts are typically documented
under master agreements providing for netting of obligations between
the parties. The agreements also establish a right of the
non-defaulting party to close out, liquidate and terminate the
agreements immediately upon the insolvency of the other party and
provide for collateralization of obligations on a net, rather than
gross, basis. The importance of maintaining certainty among the
participants in these markets has been acknowledged and addressed
through changes in the Federal Bankruptcy Code, the Federal Deposit
Insurance Act, governing the bankruptcy of banks and other federal
legislation and regulatory orders, as well as in the New York State
Banking Law and in the laws of major non-U.S. jurisdictions applicable
to the insurers' trading counterparties. All of these legal
structures recognize and enforce the netting and closeout provisions
of financial contract master agreements.

The only major category of financial and business institutions in the
U.S. which lack such certainty are insurance companies. This lack of
certainty threatens the ability of New York insurers to continue to
use these investment tools to manage their risks and remain
financially strong. Recent changes in the international capital rules
for banks under the Base II accords, events in the financial markets
over the past year and the increasingly sophisticated risk control
methods of financial institutions have placed a spotlight on the lack
of protections for these contracts under the insurance laws of New
York and most other states. While a framework (or such protection was
adopted by the NAIC in its Insurer Receivership Model Law (and a
predecessor model), only (i states have thus far taken action to
adopt legislation validating these netting arrangements for insurers.
This bill, if adopted, will reduce uncertainty and risk to NY
insurance companies, as well as the banks, broker-dealers and other
financial institutions with which they deal and will also reduce
systemic risks to the financial markets. The bill will also redress
the competitive disadvantage of New York insurers vis-a-vis their
competitors in Connecticut and elsewhere
where netting legislation has been adopted.

SUMMARY OF PROVISIONS:


This Bill would add a new §7437 to Article 74
of the Insurance Law in regard to the following:

*Subsection (a) provides, for the purposes of Article 74 of the
insurance law, definitions of specific types of financial contracts
commonly used in the financial markets, including swap contracts,
repurchase agreements, forward contracts, commodity contracts and
security contracts as "qualified financial contracts" and the related
"netting contracts". These definitions are intended to be consistent
with those used under the Federal Deposit Insurance Act, applicable
to bank insolvencies, and are similar to those contained in §619 of
the New York banking law.

*Subsection (b) provides for the enforcement and recognition of the
contractual rights of the insurer's counterparties under qualified
financial contracts, netting agreements and related security
arrangements to terminate, accelerate and
close out such contracts, to offset and net all obligations owing
under such contracts, and to enforce any security rights under such
agreements, free of any stay or prohibition which might otherwise
apply under Article 74.

*Subsection (c) provides for the transfer of any net or settlement
amount owing under a qualified financial contract by the
non-defaulting counterparty to the insurer to the superintendent as
liquidator, conservator or rehabilitator of the insurer. If netting
results in an amount owing to the insurer, this provision confirms
that the superintendent steps into the insurer's shoes with respect
to that net amount.

*Subsections (d) and (e) provide for the transfer of all financial
contracts between an insurer and a single counterparty and its
affiliates together if a bulk transfer of insurer liabilities or
contracts is made by the superintendent

*Subsection (f) provides for validation of payments and transfers of
money and property under netting agreements and qualified financial
contracts made prior to the commencement of a rehabilitation,
insolvency or conservation proceeding, unless such transfers were
made with actual intent to hinder, delay or defraud the insurer, the
superintendent or other creditors Parties to "qualified financial
contracts" make payments and transfer collateral continually through
the life of the agreements, Subsection (f) protects the creditor from
the risk of "claw-back" of normal payment and collateral transfers
under these agreements during the statutory preference period.

*Subsection (g) provides that, likewise, if the superintendent
disaffirms or repudiates any qualified financial contracts or netting
agreements with a counterparty, it must disaffirm or repudiate all
such contracts, The Bill also establishes the amount of the
counterparty's claim in the event of disaffirmance or repudiation,
These provisions secure the integrity of the netting provisions under
qualified financial contracts by protect the insurer's counterparties
from "selective enforcement," the practice of keeping favorable
contracts and rejecting unfavorable contracts.


This new section of the law would apply to contracts of both general
and separate accounts of insurers, and would be effective
immediately, except that it would not apply to any liquidation,
receivership or conservatorship proceedings that have previously been
commenced under Article 74.

JUSTIFICATION:
Recent turmoil in the financial markets have heightened
scrutiny, in the markets and among financial institutions about
identifying, managing and limiting risk, the need for adequate
capitalization and for understanding the interdependency of the
different financial sectors. One source of risk to financial market
participants has arisen due the lack of certainty in the treatment of
financial intermediaries in the event of the insolvency of state
regulated insurers, Under the patchwork of state laws, only a handful
attempt to address the issue of certainty, This bill attempts to
correct this lack of clarity in New York insurance law by specifying
the status of "qualified financial contracts" in an insurance
insolvency proceeding, This amendment brings New York's insurance law
into conformRnce with similar provisions of the state banking code,
the Federal bankruptcy law and the NAIC Insurance Receivership Model
Act (IRMA).

As defined in this Bill, "Qualified Financial Contracts" encompass a
range of commonly traded financial market contracts, including
over-the counter and exchange traded derivatives, such as swaps,
forwards and futures contracts, securities contracts, including
securities lending arrangements and options, repurchase (repo) and
reverse repurchase agreements. What these transactions have in common
is that they are time sensitive, normally valued based on current
market prices and traded repetitively and continuously between
financial market participants Trading in these contracts frequently
involves chains of transactions, with intermediary institutions
aggregating and transferring risk and providing liquidity to
financial institutions and markets,

Because of the key role played by these transactions in facilitating
financial market functioning, the Federal Bankruptcy Code and other
laws regulating market participants have been revised to provide
special treatment for these transactions. For example, the
legislative history of the Bankruptcy Code states that these
obligations warranted a degree of finality at the outset of bankruptcy
in order to prevent uncertainty in a marketplace where trading is
continuous and often transactional. Other regulators have noted the
important liquidity function in the financial markets played by these
contracts and their providers and the financial systemic risks that a
lack of certainty in these contracts could cause, including the
potential for chain insolvencies,
The use of netting agreements for financial market contracts has
evolved from common law setoff and recoupment law. Netting reduces
the credit risk between two parties by offsetting of mutual
obligations and liabilities. Qualified transactions are typically
entered into under master agreements, which allow the execution of
multiple individual transactions and the close-out or termination of
all of these transactions upon the occurrence of an event of default,
including insolvency. Following the termination of the transactions,
the close-out amount, representing the total lost value to one of the


parties for terminating the transactions prior to their stated
maturity is calculated for each individual transaction. Since a party
may be "in the money" on some transactions and "out of the money" on
others, such amount are then netted against one another, creating a
single net amount owing from one party to another.

The power of netting agreements to reduce credit exposure and risk
from these financial market contracts can be illustrated with a
simple example:

Under a single netting agreement, Party A and Party B have entered
into 10 contracts. There are 5 contracts under which Party A owes
money to Party B - worth 51000. There are 5 contracts under which
Party Bowes Party A money - worth $800. If this contract is
terminated, a net amount owing is calculated: Party A owes Party B a
net amount of $200.

Collateral arrangements normally included in the netting agreements
further reduce exposure of market participants under these contracts,
collateral is computed and collected, based on the "net" exposure. If
enforceable these agreements potentially dramatically reduce the
credit exposure of financial institutions to each other that are
inherent to these financial market transactions and the risk that the
default or insolvency of an institution could have on the financial
system. Therefore, the importance of clarifying enforceability of
these agreements is great.

Netting can also involve the setoff of securities, whether as a true
setoff (as in the case of repurchase or securities lending
agreements) or as foreclosure on collateral (as in the case of cash
or securities held to secure derivative transactions.) The ability of
an institution to set off or to sell securities to immediately
satisfy a claim against an insolvent counterparty is critical not
only to reduce the parties' credit risk but to maintain liquidity in
the securities markets, since many of these transactions are part of
a whole chain of interlocking trades. The imposition of a stay on the
liquidation of these securities, as is normally the case in a New
York insurer insolvency proceeding, could result in uncertainty,
gridlock or a chain of insolvencies.

Finally, financial market transactions are usually valued,
collateralized and traded based 011 current market prices, and credit
exposures are calculated or managed on this basis. Any legal
uncertainty which affects the ability to make exposure calculations,
any delay or uncertainty around the time of payment or any subsequent
legal determinations in an insolvency proceeding which might overturn
the previously calculated credit exposures undermine the
effectiveness of these contractual provisions and procedures and the
certainty they provide in the market.

This bill would substitute the needed certainty and reliability to
enforcement of these important contractual protections for the
current state of doubt and unpredictability which currently prevails
under the New York insolvency laws.

Qualified financial contracts are widely used by insurers, largely for
hedging purposes. They have proven to be of great assistance to


insurers during the recent market downturn Derivative instruments are
used for hedging risks, for asset/liability management and for
creation of synthetic asset exposures in the insurer's investment
operations. The Legislature recognized the importance of this
activity in granting New York insurers' derivative authority in 1998
under . 1410 of the insurance law and making that law permanent just
last year, in 2008. Pursuant to that law, insurers use of these types
of instruments are largely limited to hedging purposes and are
strictly governed by derivative use plans that are filed with and
approved by the New York State Insurance Department. These Plans must
be re-filed with the Insurance Department when updated and are
required to be audited annually by an independent auditing firm.

The New York insurance industry's continued access to these
instruments, on favorable tern1s, is threatened by recent
developments in the financial markets. In particular, implementation
of the Basel II accords intensifies the pressure on insurers and
their major counterparties. Basel II has currently been implemented in
Europe and is in the
process of implementation for major US banks through their regulation
by the Federal Reserve and Office of Comptroller of the currency, and
for major investment banking organizations through consolidated
regulation by the Securities Exchange Commission. Under Basel II,
regulated institutions will be required to maintain significant
additional capital for its derivatives transactions and other
financial contracts with parties with which it does not have a
legally enforceable netting agreement, including the ability to close
out upon insolvency without being effected by any stay.

Without the certainty sought through the amendment of New York law
proposed in the Bill it will become difficult for the counterparties
of NY insurers to obtain the necessary legal comfort to transact
business with New York insurers. The consequence for the domestic
companies will be increasingly poor pricing for their transactions,
and potentially, lack of equal access to these financial markets. An
inability to continue to trade or a deterioration of the prices at
which insurers can transact potentially threatens the competitiveness
and financial strength of New York companies.

By providing for the enforcement of netting and closeout rights for
"qualified financial contracts" in an insurer insolvency, New York
will be bringing its insurer insolvency law into harmony with federal
law as well as the New York banking law and will give both insurers
and their creditors the certainty and safety they need to continue to
transact business

LEGISLATIVE HISTORY:
S.4772 of 2009-10

FISCAL IMPLICATIONS:
None to the state.

EFFECTIVE DATE:
This act will take effect immediately, except that
section one will only apply to a liquidation, rehabilitation or
conservation proceeding that commences under article 74 of the
insurance law on or after the effective date.


view bill text
                    S T A T E   O F   N E W   Y O R K
________________________________________________________________________

                                  2713

                       2011-2012 Regular Sessions

                            I N  S E N A T E

                            January 31, 2011
                               ___________

Introduced  by  Sen.  SEWARD -- read twice and ordered printed, and when
  printed to be committed to the Committee on Insurance

AN ACT to amend the insurance law, in relation to the treatment of qual-
  ified  financial  contracts  in  an  insurance  insolvency  proceeding
  affecting a domestic, foreign or alien insurer

  THE  PEOPLE OF THE STATE OF NEW YORK, REPRESENTED IN SENATE AND ASSEM-
BLY, DO ENACT AS FOLLOWS:

  Section 1. The insurance law is amended by adding a new  section  7437
to read as follows:
  S 7437. QUALIFIED FINANCIAL CONTRACTS. (A) AS USED IN THIS SECTION:
  (1) "ACTUAL DIRECT COMPENSATORY DAMAGES" MEANS AND INCLUDES NORMAL AND
REASONABLE  COSTS  OF  COVER  OR  OTHER  REASONABLE  MEASURES OF DAMAGES
UTILIZED IN THE DERIVATIVES, SECURITIES OR OTHER MARKET FOR THE CONTRACT
AND AGREEMENT CLAIMS BUT DOES NOT INCLUDE PUNITIVE OR EXEMPLARY DAMAGES,
DAMAGES FOR LOST PROFIT OR LOST OPPORTUNITY  OR  DAMAGES  FOR  PAIN  AND
SUFFERING.
  (2)  "BUSINESS DAY" MEANS A DAY OTHER THAN A SATURDAY, A SUNDAY OR ANY
DAY ON WHICH EITHER THE NEW YORK STOCK EXCHANGE OR THE  FEDERAL  RESERVE
BANK OF NEW YORK IS CLOSED.
  (3)  "COMMODITY  CONTRACT"  MEANS:  (A) A CONTRACT FOR THE PURCHASE OR
SALE OF A COMMODITY FOR FUTURE DELIVERY ON, OR SUBJECT TO THE RULES  OF,
A  BOARD OF TRADE OR CONTRACT MARKET UNDER THE COMMODITY EXCHANGE ACT (7
U.S.C. S 1, ET SEQ.) OR A BOARD OF TRADE OUTSIDE THE UNITED STATES;  (B)
AN  AGREEMENT  THAT  IS  SUBJECT  TO  REGULATION UNDER SECTION 19 OF THE
COMMODITY EXCHANGE ACT (7 U.S.C. S 1, ET  SEQ.)  AND  THAT  IS  COMMONLY
KNOWN  TO  THE  COMMODITIES  TRADE AS A MARGIN ACCOUNT, MARGIN CONTRACT,
LEVERAGE ACCOUNT OR LEVERAGE CONTRACT; (C) AN AGREEMENT  OR  TRANSACTION
THAT  IS  SUBJECT  TO  REGULATION  UNDER  SECTION 4C(B) OF THE COMMODITY
EXCHANGE ACT (7 U.S.C. S 1, ET SEQ.) AND THAT IS COMMONLY KNOWN  TO  THE
COMMODITIES  TRADE  AS  A  COMMODITY  OPTION; (D) ANY COMBINATION OF THE
AGREEMENTS OR TRANSACTIONS REFERRED TO IN THIS PARAGRAPH; (E) ANY OPTION

 EXPLANATION--Matter in ITALICS (underscored) is new; matter in brackets
                      [ ] is old law to be omitted.
                                                           LBD05498-02-1

S. 2713                             2

TO ENTER INTO AN AGREEMENT OR TRANSACTION REFERRED TO IN THIS PARAGRAPH;
OR (F) ANY OTHER CONTRACT THAT IS  INCLUDED  FROM  TIME  TO  TIME  AS  A
COMMODITY  CONTRACT  AS DEFINED IN THE FEDERAL DEPOSIT INSURANCE ACT, 12
U.S.C. S 1821(E)(8)(D).
  (4)  "CONTRACTUAL  RIGHT"  MEANS AND INCLUDES ANY RIGHT SET FORTH IN A
RULE OR BYLAW OF A DERIVATIVES CLEARING ORGANIZATION (AS DEFINED IN  THE
COMMODITY  EXCHANGE  ACT),  A  MULTILATERAL  CLEARING  ORGANIZATION  (AS
DEFINED IN THE FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT  OF
1991),  A  NATIONAL  SECURITIES  EXCHANGE, A NATIONAL SECURITIES ASSOCI-
ATION, A SECURITIES CLEARING AGENCY, A CONTRACT MARKET DESIGNATED  UNDER
THE COMMODITY EXCHANGE ACT, A DERIVATIVES TRANSACTION EXECUTION FACILITY
REGISTERED  UNDER  THE  COMMODITY  EXCHANGE ACT, OR A BOARD OF TRADE (AS
DEFINED IN THE COMMODITY EXCHANGE ACT) OR IN A RESOLUTION OF THE GOVERN-
ING BOARD THEREOF AND ANY RIGHT, WHETHER OR NOT  EVIDENCED  IN  WRITING,
ARISING  UNDER  STATUTORY  OR  COMMON  LAW, OR UNDER LAW MERCHANT, OR BY
REASON OF NORMAL BUSINESS PRACTICE.
  (5) "FORWARD CONTRACT" SHALL HAVE THE MEANING SET FORTH IN THE FEDERAL
DEPOSIT INSURANCE ACT, 12 U.S.C. S 1821(E)(8)(D).
  (6) "NETTING AGREEMENT" MEANS: (A) A CONTRACT OR AGREEMENT  (INCLUDING
THE  TERMS  AND CONDITIONS INCORPORATED BY REFERENCE IN SUCH AGREEMENT),
INCLUDING A MASTER AGREEMENT (WHICH MASTER AGREEMENT, TOGETHER WITH  ALL
SCHEDULES,  CONFIRMATIONS,  DEFINITIONS  AND  ADDENDA THERETO AND TRANS-
ACTIONS UNDER ANY THEREOF, SHALL BE TREATED AS ONE  NETTING  AGREEMENT),
THAT  DOCUMENTS  ONE  OR  MORE  TRANSACTIONS  BETWEEN THE PARTIES TO THE
AGREEMENT FOR OR INVOLVING ONE OR MORE QUALIFIED FINANCIAL CONTRACTS AND
THAT PROVIDES FOR THE NETTING, OFFSET, LIQUIDATION, TERMINATION,  ACCEL-
ERATION  OR CLOSE OUT, UNDER OR IN CONNECTION WITH ONE OR MORE QUALIFIED
FINANCIAL CONTRACTS OR PRESENT OR FUTURE PAYMENT OR DELIVERY OBLIGATIONS
OR PAYMENT OR DELIVERY ENTITLEMENTS THEREUNDER (INCLUDING LIQUIDATION OR
CLOSE-OUT VALUES RELATING TO SUCH OBLIGATIONS OR ENTITLEMENTS) AMONG THE
PARTIES TO THE NETTING AGREEMENT; (B) ANY  MASTER  AGREEMENT  OR  BRIDGE
AGREEMENT  FOR  ONE  OR MORE MASTER AGREEMENTS DESCRIBED IN SUBPARAGRAPH
(A) OF THIS PARAGRAPH; OR (C) ANY SECURITY ARRANGEMENT RELATED TO ONE OR
MORE CONTRACTS OR AGREEMENTS DESCRIBED IN SUBPARAGRAPH  (A)  OR  (B)  OF
THIS  PARAGRAPH;  PROVIDED  THAT  ANY CONTRACT OR AGREEMENT DESCRIBED IN
SUBPARAGRAPH (A) OR (B) OF THIS  PARAGRAPH  RELATING  TO  AGREEMENTS  OR
TRANSACTIONS  THAT ARE NOT QUALIFIED FINANCIAL CONTRACTS SHALL BE DEEMED
TO BE A NETTING AGREEMENT ONLY WITH RESPECT TO THOSE AGREEMENTS OR TRAN-
SACTIONS THAT ARE QUALIFIED FINANCIAL CONTRACTS.
  (7) "QUALIFIED  FINANCIAL  CONTRACT"  MEANS  ANY  COMMODITY  CONTRACT,
FORWARD CONTRACT, REPURCHASE AGREEMENT, SECURITIES CONTRACT, SWAP AGREE-
MENT  AND  ANY  SIMILAR  AGREEMENT THAT THE SUPERINTENDENT DETERMINES BY
REGULATION TO BE A QUALIFIED FINANCIAL CONTRACT FOR THE PURPOSES OF THIS
ARTICLE.
  (8) "REPURCHASE AGREEMENT" SHALL HAVE THE MEANING  SET  FORTH  IN  THE
FEDERAL DEPOSIT INSURANCE ACT, 12 U.S.C. S 1821(E)(8)(D).
  (9)  "SECURITIES  CONTRACT"  SHALL  HAVE  THE MEANING SET FORTH IN THE
FEDERAL DEPOSIT INSURANCE ACT, 12 U.S.C. S 1821(E)(8)(D).
  (10) "SECURITY ARRANGEMENT" MEANS ANY SECURITY AGREEMENT  OR  ARRANGE-
MENT  OR  OTHER  CREDIT  ENHANCEMENT OR GUARANTEE OR REIMBURSEMENT OBLI-
GATION, INCLUDING A PLEDGE, SECURITY, COLLATERAL OR GUARANTEE  AGREEMENT
OR CREDIT SUPPORT DOCUMENT.
  (11)  "SEPARATE  ACCOUNT"  MEANS  AN  ACCOUNT  ESTABLISHED PURSUANT TO
SECTION FOUR THOUSAND TWO HUNDRED FORTY OF THIS CHAPTER.
  (12) "SWAP AGREEMENT" SHALL HAVE THE MEANING SET FORTH IN THE  FEDERAL
DEPOSIT INSURANCE ACT, 12 U.S.C. S 1821(E)(8)(D).

S. 2713                             3

  (13)  "WALKAWAY  CLAUSE" MEANS A PROVISION IN A NETTING AGREEMENT OR A
QUALIFIED FINANCIAL CONTRACT THAT, AFTER CALCULATION OF  A  VALUE  OF  A
PARTY'S  POSITION  OR  AN  AMOUNT  DUE  TO OR FROM ONE OF THE PARTIES IN
ACCORDANCE WITH ITS TERMS UPON TERMINATION, LIQUIDATION OR  ACCELERATION
OF  THE  NETTING  AGREEMENT OR QUALIFIED FINANCIAL CONTRACT, EITHER DOES
NOT CREATE A PAYMENT OBLIGATION OF A PARTY  OR  EXTINGUISHES  A  PAYMENT
OBLIGATION  OF A PARTY IN WHOLE OR IN PART SOLELY BECAUSE OF THE PARTY'S
STATUS AS A NON-DEFAULTING PARTY.
  (B)(1) NOTWITHSTANDING ANY OTHER PROVISION OF THIS ARTICLE,  INCLUDING
ANY  OTHER  PROVISION  OF  THIS  ARTICLE  PERMITTING THE MODIFICATION OF
CONTRACTS, OR OTHER LAW OF THIS STATE, NO  PERSON  SHALL  BE  STAYED  OR
PROHIBITED  FROM EXERCISING: (A) A CONTRACTUAL RIGHT TO CAUSE THE TERMI-
NATION, LIQUIDATION, ACCELERATION OR CLOSE OUT OF ANY  OBLIGATION  UNDER
OR  IN  CONNECTION  WITH  A  NETTING  AGREEMENT  OR  QUALIFIED FINANCIAL
CONTRACT WITH AN INSURER  BECAUSE  OF:  (I)  THE  INSOLVENCY,  FINANCIAL
CONDITION OR DEFAULT OF THE INSURER AT ANY TIME, PROVIDED THAT THE RIGHT
IS ENFORCEABLE UNDER APPLICABLE LAW OTHER THAN THIS ARTICLE; OR (II) THE
COMMENCEMENT OF ANY PROCEEDING UNDER THIS ARTICLE; (B) ANY RIGHT UNDER A
SECURITY ARRANGEMENT RELATING TO ONE OR MORE NETTING AGREEMENTS OR QUAL-
IFIED FINANCIAL CONTRACTS; OR (C) SUBJECT TO ANY PROVISION OF SUBSECTION
(B) OF SECTION SEVEN THOUSAND FOUR HUNDRED TWENTY-SEVEN OF THIS CHAPTER,
ANY RIGHT TO OFFSET OR NET OUT ANY TERMINATION VALUE, PAYMENT AMOUNT, OR
OTHER  TRANSFER  OBLIGATION  ARISING  UNDER OR IN CONNECTION WITH ONE OR
MORE QUALIFIED FINANCIAL CONTRACTS WHERE THE COUNTERPARTY OR ITS GUARAN-
TOR IS ORGANIZED UNDER THE LAWS OF THE UNITED  STATES,  A  STATE,  OR  A
FOREIGN  JURISDICTION APPROVED BY THE SECURITIES VALUATION OFFICE OF THE
NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS AS ELIGIBLE FOR NETTING.
  (2) IF A COUNTERPARTY TO A MASTER NETTING  AGREEMENT  OR  A  QUALIFIED
FINANCIAL  CONTRACT  WITH  AN INSURER SUBJECT TO A PROCEEDING UNDER THIS
ARTICLE TERMINATES, LIQUIDATES, CLOSES OUT OR ACCELERATES THE  AGREEMENT
OR CONTRACT, DAMAGES SHALL BE MEASURED AS OF THE DATE OR DATES OF TERMI-
NATION,  LIQUIDATION,  CLOSE  OUT OR ACCELERATION. THE AMOUNT OF A CLAIM
FOR DAMAGES SHALL BE ACTUAL DIRECT COMPENSATORY DAMAGES.
  (C) UPON TERMINATION OF A NETTING  AGREEMENT  OR  QUALIFIED  FINANCIAL
CONTRACT,  THE NET OR SETTLEMENT AMOUNT, IF ANY, OWED BY A NONDEFAULTING
PARTY TO AN INSURER AGAINST WHICH AN APPLICATION HAS  BEEN  FILED  UNDER
THIS  ARTICLE SHALL BE TRANSFERRED TO OR ON THE ORDER OF THE SUPERINTEN-
DENT, AS LIQUIDATOR, REHABILITATOR OR CONSERVATOR FOR THE INSURER,  EVEN
IF  THE  INSURER  IS  THE DEFAULTING PARTY, NOTWITHSTANDING ANY WALKAWAY
CLAUSE IN THE NETTING AGREEMENT OR  QUALIFIED  FINANCIAL  CONTRACT.  ANY
LIMITED TWO-WAY PAYMENT OR FIRST METHOD PROVISION IN A NETTING AGREEMENT
OR QUALIFIED FINANCIAL CONTRACT WITH AN INSURER THAT HAS DEFAULTED SHALL
BE  DEEMED  TO  BE  A FULL TWO-WAY PAYMENT OR SECOND METHOD PROVISION AS
AGAINST THE DEFAULTING INSURER.  ANY  SUCH  PROPERTY  OR  AMOUNT  SHALL,
EXCEPT  TO  THE  EXTENT  IT IS SUBJECT TO ONE OR MORE SECONDARY LIENS OR
ENCUMBRANCES OR RIGHTS OF NETTING OR SETOFF, BE AN ASSET OF THE INSURER.
  (D) IN MAKING ANY TRANSFER OF A NETTING AGREEMENT OR QUALIFIED  FINAN-
CIAL  CONTRACT OF AN INSURER SUBJECT TO A PROCEEDING UNDER THIS ARTICLE,
THE SUPERINTENDENT, AS LIQUIDATOR, REHABILITATOR OR CONSERVATOR FOR  THE
INSURER, SHALL EITHER:
  (1) TRANSFER TO ONE PARTY (OTHER THAN AN INSURER SUBJECT TO A PROCEED-
ING  UNDER  THIS ARTICLE) ALL NETTING AGREEMENTS AND QUALIFIED FINANCIAL
CONTRACTS BETWEEN A COUNTERPARTY OR ANY AFFILIATE OF  SUCH  COUNTERPARTY
AND  THE  INSURER  THAT IS THE SUBJECT OF THE PROCEEDING, INCLUDING: (A)
ALL RIGHTS AND OBLIGATIONS OF EACH PARTY UNDER EACH SUCH NETTING  AGREE-
MENT  AND  QUALIFIED FINANCIAL CONTRACT; AND (B) ALL PROPERTY, INCLUDING

S. 2713                             4

ANY GUARANTEES OR OTHER CREDIT ENHANCEMENT, SECURING ANY CLAIMS OF  EACH
PARTY   UNDER  EACH  SUCH  NETTING  AGREEMENT  AND  QUALIFIED  FINANCIAL
CONTRACT; OR
  (2)  TRANSFER  NONE  OF  THE  NETTING  AGREEMENTS, QUALIFIED FINANCIAL
CONTRACTS, RIGHTS, OBLIGATIONS OR PROPERTY REFERRED TO IN PARAGRAPH  ONE
OF  THIS SUBSECTION (WITH RESPECT TO SUCH COUNTERPARTY AND ANY AFFILIATE
OF SUCH COUNTERPARTY).
  (E) IF THE SUPERINTENDENT, AS LIQUIDATOR, REHABILITATOR OR CONSERVATOR
FOR AN INSURER, MAKES A TRANSFER OF ONE OR MORE  NETTING  AGREEMENTS  OR
QUALIFIED  FINANCIAL CONTRACTS, THEN THE SUPERINTENDENT SHALL USE HIS OR
HER BEST EFFORTS TO NOTIFY ANY PERSON WHO IS PARTY TO THE NETTING AGREE-
MENTS OR QUALIFIED FINANCIAL CONTRACTS OF THE TRANSFER  BY  12:00  NOON,
NEW YORK TIME, ON THE BUSINESS DAY FOLLOWING THE TRANSFER.
  (F)  NOTWITHSTANDING  ANY  OTHER PROVISION OF THIS ARTICLE, THE SUPER-
INTENDENT, AS LIQUIDATOR, REHABILITATOR OR CONSERVATOR FOR  AN  INSURER,
MAY  NOT AVOID A TRANSFER OF MONEY OR OTHER PROPERTY ARISING UNDER OR IN
CONNECTION WITH A NETTING AGREEMENT OR QUALIFIED FINANCIAL CONTRACT,  OR
ANY  SECURITY  ARRANGEMENT  RELATING TO A NETTING AGREEMENT OR QUALIFIED
FINANCIAL CONTRACT, THAT IS MADE BEFORE THE  COMMENCEMENT  OF  A  LIQUI-
DATION,  REHABILITATION  OR  CONSERVATION PROCEEDING UNDER THIS ARTICLE,
EXCEPT THAT A TRANSFER MAY BE AVOIDED UNDER SECTION SEVEN THOUSAND  FOUR
HUNDRED TWENTY-FIVE OF THIS CHAPTER IF THE TRANSFER WAS MADE WITH ACTUAL
INTENT  TO  HINDER, DELAY OR DEFRAUD THE INSURER, THE SUPERINTENDENT, AS
LIQUIDATOR, REHABILITATOR OR  CONSERVATOR  OF  THE  INSURER,  ANY  OTHER
RECEIVER APPOINTED FOR THE INSURER, OR EXISTING OR FUTURE CREDITORS.
  (G)(1)  IN  EXERCISING ANY RIGHTS OF DISAFFIRMANCE OR REPUDIATION OF A
LIQUIDATOR, REHABILITATOR OR CONSERVATOR WITH  RESPECT  TO  ANY  NETTING
AGREEMENT  OR  QUALIFIED  FINANCIAL  CONTRACT  TO  WHICH AN INSURER IS A
PARTY, THE SUPERINTENDENT, AS LIQUIDATOR, REHABILITATOR  OR  CONSERVATOR
FOR  THE  INSURER SHALL EITHER:   (A) DISAFFIRM OR REPUDIATE ALL NETTING
AGREEMENTS AND QUALIFIED FINANCIAL CONTRACTS BETWEEN A  COUNTERPARTY  OR
ANY  AFFILIATE  OF SUCH COUNTERPARTY AND THE INSURER THAT IS THE SUBJECT
OF THE PROCEEDING; OR (B) DISAFFIRM OR REPUDIATE  NONE  OF  THE  NETTING
AGREEMENTS AND QUALIFIED FINANCIAL CONTRACTS REFERRED TO IN SUBPARAGRAPH
(A)  OF  THIS PARAGRAPH (WITH RESPECT TO SUCH PERSON OR ANY AFFILIATE OF
SUCH PERSON).
  (2) NOTWITHSTANDING ANY OTHER PROVISION OF THIS ARTICLE, ANY CLAIM  OF
A  COUNTERPARTY  AGAINST  THE  ESTATE  ARISING FROM THE SUPERINTENDENT'S
DISAFFIRMANCE OR REPUDIATION OF A NETTING AGREEMENT OR QUALIFIED  FINAN-
CIAL  CONTRACT  THAT HAS NOT BEEN PREVIOUSLY AFFIRMED IN THE LIQUIDATION
PROCEEDING OR IN THE  IMMEDIATELY  PRECEDING  REHABILITATION  PROCEEDING
SHALL  BE  DETERMINED  AND SHALL BE ALLOWED OR DISALLOWED: (A) AS IF THE
CLAIM HAD ARISEN BEFORE THE DATE OF THE FILING OF  THE  APPLICATION  FOR
LIQUIDATION;  OR  (B)  IF  A REHABILITATION PROCEEDING IS CONVERTED TO A
LIQUIDATION PROCEEDING, AS IF THE CLAIM HAD ARISEN BEFORE  THE  DATE  OF
THE FILING OF THE APPLICATION FOR REHABILITATION.
  (3)  THE  AMOUNT  OF  THE  CLAIM  IDENTIFIED  IN PARAGRAPH TWO OF THIS
SUBSECTION SHALL BE THE ACTUAL DIRECT COMPENSATORY DAMAGES DETERMINED AS
OF THE DATE OF THE DISAFFIRMANCE OR REPUDIATION OF THE NETTING AGREEMENT
OR QUALIFIED FINANCIAL CONTRACT.
  (H) ALL RIGHTS OF A COUNTERPARTY UNDER THIS ARTICLE SHALL APPLY  TO  A
NETTING  AGREEMENT  AND  A  QUALIFIED FINANCIAL CONTRACT ENTERED INTO ON
BEHALF OF OR ALLOCATED TO: (1) THE GENERAL ACCOUNT OF  THE  INSURER;  OR
(2)  A  SEPARATE  ACCOUNT  OF  THE INSURER IF THE ASSETS OF THE SEPARATE
ACCOUNT ARE AVAILABLE ONLY TO A COUNTERPARTY TO A NETTING AGREEMENT  AND

S. 2713                             5

A  QUALIFIED  FINANCIAL CONTRACT ENTERED INTO ON BEHALF OF, OR ALLOCATED
TO, THAT SEPARATE ACCOUNT.
  S  2.  This  act shall take effect immediately; provided, however, the
provisions of section 7437 of the insurance law, as added by section one
of this act shall only apply to a liquidation, rehabilitation or conser-
vation proceeding that commences under article 74 of the  insurance  law
on or after such effective date.

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