senate Bill S7306A

Signed By Governor
2011-2012 Legislative Session

Relates to derivative transactions and derivative instruments

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Archive: Last Bill Status Via A10532 - Signed by Governor


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

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Actions

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Assembly Actions - Lowercase
Senate Actions - UPPERCASE
Aug 17, 2012 signed chap.398
Aug 06, 2012 delivered to governor
Jun 20, 2012 returned to assembly
passed senate
3rd reading cal.998
substituted for s7306b
Jun 20, 2012 substituted by a10532a
Jun 14, 2012 amended on third reading 7306b
Jun 06, 2012 advanced to third reading
Jun 05, 2012 2nd report cal.
Jun 04, 2012 1st report cal.998
May 29, 2012 print number 7306a
amend and recommit to insurance
May 02, 2012 referred to insurance

Votes

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Bill Amendments

Original
A
B (Active)
Original
A
B (Active)

S7306 - Bill Details

See Assembly Version of this Bill:
A10532
Law Section:
Insurance Law
Laws Affected:
Amd §§1401 & 1410, Ins L

S7306 - Bill Texts

view summary

Relates to derivative transactions and over the counter derivative instruments.

view sponsor memo
BILL NUMBER:S7306

TITLE OF BILL:
An act
to amend the insurance law, in relation to derivative transactions and
derivative instruments

PURPOSE:
This bill would amend §§ 1401 and 1410 of the insurance law
to refine the definition of "qualified counterparty" and make other
definitional amendments to the provisions of the law relating to
permissible counterparties with which insurers may enter into
derivative transactions pursuant to the current restrictions in the
insurance law.

SUMMARY OF PROVISIONS:
This bill would amend subsection (a) of section
1401 of the insurance law to add new paragraphs (19) - (21) which
establish new definitions of "over the counter derivative
instrument", "clearinghouse" and "master agreement" to Article 14 of
the insurance law which addresses investment by insurers.
This bill would also amend subsection (f) of section 1410 of the
insurance law to redefine the terms "qualified counterparty" and
"aggregate counterparty exposure" and to refine the rules which
insurers must follow in order to enter into derivative transactions
with "qualified counterparties" and other than qualified
counterparties. The new, alternative standard provided for in this
bill will require that, in order for a counterparty to be qualified
to enter into a derivative transaction with an insurer, it would need
to be either rated A- or above by at least one nationally recognized
statistical rating organization ill rated investment grade and have
entered into a credit annex (collateral) agreement) with the
insurer. Insurers would also be qualified to enter into derivative
transactions with an entity whose parent has such a rating or which
has credit enhancement for its obligations to the insurer under the
derivative from an entity which has such ratings.

EXISTING LAW:
Section 1401 of the insurance law currently does not
define the terms over the counter derivative instrument",
"clearinghouse" and "master agreement." Section 1410 of the insurance
law currently contains an alternative definition for "qualified
counterparty" and "aggregate counterparty exposure." The current
restrictions placed on insurers entering into derivative transactions
remain intact.

JUSTIFICATION:
Section 1410 of the insurance law was adopted in 1998
to establish the rules which domestic insurers must follow in order
to enter into derivative transactions in New York. The law strictly
limits the number of derivative transactions that insurers may enter
into and provides that they should be used primarily for hedging
purposes. It also requires that insurer derivative use must be
overseen by the Board of Directors, or a Committee thereof, of the
insurer and requires that insurers must have a derivative use plan
approved by the Superintendent and audited by an independent, outside


auditing firm. This law has proven to be successful in ensuring that
insurers in New York are limited to entering only into appropriate
derivative transactions which are suitable for their level of assets.
By requiring that these transactions are used primarily for the
purposes of hedging, this law has allowed insurers to have the
ability to adjust to the changing markets during the recent economic
downturn.

Under the current law, which was adopted in 1998, the term "qualified
counterparty" is defined as a counterparty rated AA or higher by at
least one nationally recognized statistical rating organization and
meeting certain other qualifications. These standards were carried
over from the prior law governing insurance derivative
transactions and, even in 1998, did not reflect the current
derivatives marketplace. Current derivatives markets and participants
are considerably different from that which were in place in 1998 and,
following the restructuring of this market due to certain provisions
of the federal Dodd-Frank Wall Street Reform and Consumer
Protection Act, additional changes are occurring.

The primary counterparties with which insurers will enter into
derivatives transactions are banks. Bank ratings have deteriorated
markedly since 1998 and are expected to continue to decline. On
February 15, 2012, Moody's announced a review of the long-term debt
ratings of 17 banks and securities firms with global capital markets
operations. Additional ratings actions may follow. Downgrades to date
and these further downgrade actions will reduce the number of
qualified counterparties available to insurers, perhaps even to the
point where there will no longer be any "qualified counterparties"
with which insurers will be authorized to enter into derivatives
transactions.

The current law is also outdated due to the fact that broker-dealers,
which are included as potential "qualified counterparties" under
section 1410(t) of the insurance law no longer participate in this
market at all. Additionally, the current law definition of "qualified
counterparty" does not include foreign banks, which are major
participants in this market. Lastly, the federal Dodd-Frank Act will
begin to require that banks must spin off certain of their
derivatives activities into affiliate entities and many of these
newly-created entities will not meet the current AA standard
necessary in order to be determined a "qualified counterparty" under
the current law.

Enactment of this bill will result in simplification of the current
"qualified counterparty" standard to reflect current and projected
market conditions, will permit lower-rated counterparties to be
qualified, if collateral is provided to protect the insurers, and
will update the law for the new Dodd-Frank era derivatives marketplace.

By making these refinements to the current law, insurers will be
enabled to continue entering into responsible derivative transactions
in the limited manner provided for in the current law, with the
continuing oversight by their Board of Directors and the NYS
Department of Financial Services.

LEGISLATIVE HISTORY:


New bill.

FISCAL IMPLICATIONS:
None.

EFFECTIVE DATE:
Immediately.

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

                                  7306

                            I N  S E N A T E

                               May 2, 2012
                               ___________

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  derivative  trans-
  actions and derivative instruments

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

  Section 1. Subsection (a) of section 1401  of  the  insurance  law  is
amended by adding three new paragraphs 19, 20 and 21 to read as follows:
  (19)  "OVER  THE  COUNTER  DERIVATIVE  INSTRUMENT"  MEANS A DERIVATIVE
INSTRUMENT WHICH IS AUTHORIZED UNDER THIS CHAPTER OTHER THAN  A  DERIVA-
TIVE INSTRUMENT (A) CLEARED THROUGH A UNITED STATES OR FOREIGN CLEARING-
HOUSE  OR  (B)  TRADED ON OR THROUGH A UNITED STATES OR FOREIGN EXCHANGE
PROVIDING CLEARING SERVICES.
  (20) "CLEARINGHOUSE" MEANS A DERIVATIVES CLEARING  ORGANIZATION  WHICH
ACTS  AS  A MEDIUM FOR CLEARING, OR EFFECTING SETTLEMENTS OF, DERIVATIVE
INSTRUMENTS SUCH THAT THE CLEARINGHOUSE  IS  SUBSTITUTED  AS  THE  OTHER
PARTY TO THE DERIVATIVE TRANSACTION.
  (21)  "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 COUNTER-
PARTY  IS  EITHER  WITHIN  THE UNITED STATES OR IF NOT WITHIN THE UNTIED
STATES, WITHIN A FOREIGN (NOT UNITED STATES) JURISDICTION DEEMED BY  THE
SECURITIES  VALUATION  OFFICE  OF  THE NATIONAL ASSOCIATION OF INSURANCE
COMMISSIONERS, OR ANY SUCCESSOR OFFICE ESTABLISHED BY THE NATIONAL ASSO-
CIATION OF INSURANCE COMMISSIONERS, AS ELIGIBLE FOR NETTING.
  S 2. Subsection (f) of section 1410 of the insurance law, as added  by
chapter 650 of the laws of 1998, is amended to read as follows:
  (f)(1) The counterparty exposure under [a] AN OVER THE COUNTER deriva-
tive instrument entered into by an insurer authorized to engage in tran-
sactions 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 quan-
titative  limitation  on investments made by an insurer under this chap-
ter.

 EXPLANATION--Matter in ITALICS (underscored) is new; matter in brackets
                      [ ] is old law to be omitted.
                                                           LBD15578-01-2

S. 7306                             2

  (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 [trans-
actions] INSTRUMENTS to:
  [(A) any single counterparty, other than a  "qualified  counterparty",
shall  be  limited  to one] (I) THAT NON-QUALIFIED COUNTERPARTY DOES NOT
EXCEED ONE percent of [an] THE insurer's admitted assets; and
  [(B)] (II) all counterparties, other  than  qualified  counterparties,
[are  limited  to]  DOES  NOT EXCEED three percent of [an] THE insurer's
admitted assets.
  (3) For purposes of this section:
  (A) a "qualified counterparty" is a ["qualified broker or dealer" or a
"qualified bank" or other counterparty rated  AA-/Aa3  or  higher  by  a
nationally  recognized  statistical  rating  organization  if it is also
approved by the superintendent;
  (B) a "qualified broker or dealer" means a broker or  dealer  that  is
organized  under the laws of a state and is registered under the Securi-
ties Exchange Act of 1934, 15 U.S.C. SS 78a-78kk, and has net capital in
excess of two hundred fifty million dollars;
  (C) a "qualified bank" means a bank or trust company that:
  (i) is organized and existing, or in the case of a branch or agency of
a foreign banking organization is licensed, under the laws of the United
States or any state thereof;
  (ii) is regulated, supervised and examined by United States federal or
state authorities having  regulatory  authority  over  banks  and  trust
companies;
  (iii) has assets in excess of five billion dollars;
  (iv)  has  senior obligations outstanding, or has a parent corporation
that has senior obligations outstanding, rated  AA  or  better  (or  the
equivalent thereto) by two independent nationally recognized statistical
rating organizations; and
  (v)  has  a  ratio of primary capital to total assets of at least five
and one-half percent and a ratio of total capital to total assets of  at
least six percent; and
  (D)] COUNTERPARTY:
  (I)  WHICH  MEETS  ONE OF THE FOLLOWING RATING STANDARDS: (I) A CREDIT
RATING OF AT LEAST A- OR THE EQUIVALENT FROM  AT  LEAST  ONE  NATIONALLY
RECOGNIZED  STATISTICAL  RATING  ORGANIZATION;  (II)  WHOSE PARENT HAS A
CREDIT RATING OF AT LEAST  A-  OR  THE  EQUIVALENT  FROM  AT  LEAST  ONE
NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATION; OR (III) THAT HAS
CREDIT  ENHANCEMENT  FOR  ALL OF ITS FINANCIAL OR SETTLEMENT OBLIGATIONS
UNDER THE OVER THE COUNTER DERIVATIVE INSTRUMENT FOR THE DURATION OF THE
DERIVATIVE INSTRUMENT FROM AN ENTITY THAT HAS  A  CREDIT  RATING  OF  AT
LEAST  A-  OR  THE  EQUIVALENT  FROM  AT LEAST ONE NATIONALLY RECOGNIZED
STATISTICAL RATING ORGANIZATION FOR THE BENEFIT OF THE INSURER; OR
  (II) 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 AND WHICH MEETS ONE OF THE FOLLOWING
RATING STANDARDS:
  (I) AN INVESTMENT GRADE CREDIT RATING FROM  AT  LEAST  ONE  NATIONALLY
RECOGNIZED STATISTICAL RATING ORGANIZATION;

S. 7306                             3

  (II)  WHOSE PARENT HAS AN INVESTMENT GRADE CREDIT RATING FROM AT LEAST
ONE NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATION; OR
  (III)  THAT HAS CREDIT ENHANCEMENT FOR ALL OF ITS FINANCIAL OR SETTLE-
MENT OBLIGATIONS UNDER THE OVER THE COUNTER  DERIVATIVE  INSTRUMENT  FOR
THE  DURATION  OF  THE  DERIVATIVE INSTRUMENT FROM AN ENTITY THAT HAS AN
INVESTMENT GRADE CREDIT RATING FROM AT LEAST ONE  NATIONALLY  RECOGNIZED
STATISTICAL RATING ORGANIZATION FOR THE BENEFIT OF THE INSURER; AND
  (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] AGGREGATE, NET AMOUNT
OF CREDIT RISK ATTRIBUTABLE TO ALL OVER THE COUNTER  DERIVATIVE  INSTRU-
MENTS ENTERED INTO WITH A COUNTERPARTY, CALCULATED AS FOLLOWS:
  (I)  IF  THERE  IS NO MASTER AGREEMENT IN PLACE WITH THE COUNTERPARTY,
THE SUM OF THE MARKET VALUES OF ALL OVER THE COUNTER DERIVATIVE  INSTRU-
MENTS  WITH THE COUNTERPARTY THAT HAVE A POSITIVE MARKET VALUE, LESS ANY
COLLATERAL; OR
  (II) IF A MASTER AGREEMENT IS IN  PLACE  WITH  THE  COUNTERPARTY,  THE
GREATER OF ZERO OR THE NET SUM PAYABLE TO THE INSURER IN CONNECTION WITH
ALL  OVER  THE  COUNTER  DERIVATIVE  INSTRUMENTS  SUBJECT  TO THE MASTER
NETTING AGREEMENT, LESS ANY COLLATERAL.
  S 3. This act shall take effect immediately.

S7306A - Bill Details

See Assembly Version of this Bill:
A10532
Law Section:
Insurance Law
Laws Affected:
Amd §§1401 & 1410, Ins L

S7306A - Bill Texts

view summary

Relates to derivative transactions and over the counter derivative instruments.

view sponsor memo
BILL NUMBER:S7306A

TITLE OF BILL:
An act
to amend the insurance law, in relation to derivative transactions and
derivative instruments

PURPOSE:
This bill would amend §§1401 and 1410 of the insurance law to
refine the definition of "qualified counterparty" and make other
definitional amendments to the provisions of the law relating to
permissible counterparties with which insurers may enter into
derivative transactions pursuant to the current restrictions in the
insurance law.

These amendments are intended to strengthen the rules applied to
insurer derivative transactions with "qualified counterparties" in
order to ensure that they are fully collateralized pursuant to a
master netting agreement. These amendments will allow insurers to
continue entering into responsible derivatives arrangements to hedge
their investment strategies. These arrangements assist insurers in
supporting their ability to continue to offer certain variable
insurance products to consumers, to keep product pricing affordable
and ensure that they can continue to meet their policyholder
obligations.

SUMMARY OF PROVISIONS:
This bill would amend subsection (a) of section
1401 of the insurance law to add new paragraphs (19) - (21) which
establish new definitions of "over the counter derivative
instrument", "clearinghouse" and "master agreement" to Article 14 of
the insurance law which addresses investment by insurers. This bill
would also amend subsection (f) of section 1410 of the insurance law
to redefine the terms "qualified counterparty" and "aggregate
counterparty exposure" and to refine the rules which insurers must
follow in order to enter into derivative transactions with "qualified
counterparties" and other than qualified counterparties. The new
standard provided for in this bill will require that, in order for a
counterparty to be a "qualified counterparty" it would need to have
entered into a netting and collateral agreement with the insurer and
would also need to he rated (or have a parent or guarantor or other
credit enhancer rated) investment grade or better.

EXISTING LAW:
Section 1401 of the insurance law currently does not
define the terms over the counter derivative instrument",
"clearinghouse" and "master agreement." Section 1410 of the insurance
law currently contains an alternative definition for "qualified
counterparty" and "aggregate counterparty exposure." The current
definitions of these terms are meant to establish that, in order to
be qualified to enter into a derivative transaction with an insurer,
an entity must have a credit rating of AA or better by a
nationally-recognized statistical rating organization. The current
restrictions contained in section 1410 of the insurance law and
placed on insurers entering into derivative transactions remain intact.


JUSTIFICATION:
Section 1410 of the insurance law was adopted in 1998
to establish the rules which domestic insurers must follow in order
to enter into derivative transactions in New York. The law strictly
limits the amount of derivative transactions that insurers may enter
into and provides that they should be used primarily for hedging
purposes. It also requires that insurer derivative use must be
overseen by the company Board of Directors and requires that insurers
must have a derivative use plan approved by the Superintendent and
audited by an independent, outside auditing firm. This law has proven
to be successful in ensuring that insurers in New York are limited to
entering only into appropriate derivative transactions which are
suitable for their level of assets, By requiring that
these transactions are used primarily for the purposes of hedging,
this law has allowed insurers to have the ability to adjust to the
changing markets during the recent economic downturn.

Most importantly, the ability to enter into responsible and
well-regulated derivative transactions, primarily for the purposes of
hedging insurer investment strategies, has enabled insurers to
continue to offer certain variable life insurance products that are
currently very popular with consumers and also allowed them 10 offer
their products at more affordable rates, since the 2008 economic
downturn.

Chapter 650 of the Laws of 1998 allowed for certain, expanded insurer
derivative use authority with restrictions and significant oversight
by insurer Boards, the Superintendent of the Department of Financial
Services and outside auditors. Under the current law, insurer
derivative transactions with counterparties which are not "qualified
counterparties" are subject to strict quantitative limits. The term
"qualified counterparty" is defined as a counterparty rated AA or
higher by at least one nationally recognized statistical rating
organization and meeting certain other qualifications. These
standards were carried over from earlier law governing insurance
derivative transactions and, even in 1998, did not reflect the actual
counterparty universe. Current derivatives markets and participants
are considerably different from that which were in place in 1998 and,
following the restructuring of this market due to certain provisions
of the Federal Dodd-Frank Wall Street Reform and Consumer Protection
Act, additional changes are occurring.

The primary counterparties with which insurers enter into derivatives
transactions are banks. Bank ratings have deteriorated markedly since
1998 and are expected to continue to decline. On February 15, 2012,
Moody's announced a review for downgrade of the long-term debt
ratings of 17 banks and securities firms with global capital markets
operations. This action will likely result in additional downgrades
in this sector. The downgrading of insurer banking counterparties
will reduce the number of qualified counterparties available, perhaps
even to the point where there will no longer be any "qualified
counterparties" under New York law.

The current law is also outdated in its enumeration of types of
qualified counterparties. It includes registered broker dealers,
which no longer engage in this business, and does not include either
foreign banks or non-rated derivatives dealers guaranteed by a parent


or affiliate, both of which are major participant categories in this
market. Also, the Federal Dodd-Frank Act will begin to require that
banks must spin off certain of their derivatives activities into
affiliate entities and many of these newly-created entities will not
meet the current AA standard necessary in order to be determined a
"qualified counterparty".

The utility of using rating categories to define a "qualified
counterparty" has been called into question since the 2008 economic
downturn when several very highly rated banking organizations were
downgraded to junk status overnight. Recognizing this, many, if not
most, insurers have moved to the use of standard netting and
collateral agreements, under which the counterparty's obligations to
the insurer are collateralized, subject to normal credit thresholds
and minimum transfer amounts. This has greatly reduced the risk to
insurers of these trading relationships.

This bill would codify the responsible practice of collateralizing
these types of transactions by requiring that a "qualified
counterparty" will need to have entered into a netting and collateral
agreement with the insurer and would also need to be rated (or have a
parent or guarantor or other credit enhancer rated) investment grade
or better.

Enactment of this bill will result in simplification of the current
"qualified counterparty" standard to more flexibly reflect current
and future market conditions, will permit lower rated counterparties
to be qualified, so long as collateral arrangements are entered into
to protect insurers and their policyholders, and will update the law
for the new Dodd-Frank era derivatives marketplace.

By making these refinements to the current law, insurers will be
enabled to continue entering into responsible derivative transactions
in the limited manner provided for in the current law, with the
continuing oversight by their
Board of Directors and the NYS Department of Financial Services. It
will also enable insurers to continue offering certain variable life
insurance products that are currently very popular with consumers and
to offer these and other products at more affordable rates.

LEGISLATIVE HISTORY:
New bill.

FISCAL IMPLICATIONS:
None.

EFFECTIVE DATE:
Immediately.

view full text
download pdf
                    S T A T E   O F   N E W   Y O R K
________________________________________________________________________

                                 7306--A

                            I N  S E N A T E

                               May 2, 2012
                               ___________

Introduced  by  Sen.  SEWARD -- read twice and ordered printed, and when
  printed to be committed to the Committee  on  Insurance  --  committee
  discharged, bill amended, ordered reprinted as amended and recommitted
  to said committee

AN  ACT  to  amend  the  insurance law, in relation to derivative trans-
  actions and derivative instruments

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

  Section  1.  Subsection  (a)  of  section 1401 of the insurance law is
amended by adding three new paragraphs 19, 20 and 21 to read as follows:
  (19) "OVER THE  COUNTER  DERIVATIVE  INSTRUMENT"  MEANS  A  DERIVATIVE
INSTRUMENT  WHICH  IS AUTHORIZED UNDER THIS CHAPTER OTHER THAN A DERIVA-
TIVE INSTRUMENT (A) CLEARED THROUGH A UNITED STATES OR FOREIGN CLEARING-
HOUSE OR (B) TRADED ON OR THROUGH A UNITED STATES  OR  FOREIGN  EXCHANGE
PROVIDING CLEARING SERVICES.
  (20)  "CLEARINGHOUSE"  MEANS A DERIVATIVES CLEARING ORGANIZATION WHICH
ACTS AS A MEDIUM FOR CLEARING, OR EFFECTING SETTLEMENTS  OF,  DERIVATIVE
INSTRUMENTS  SUCH  THAT  THE  CLEARINGHOUSE  IS SUBSTITUTED AS THE OTHER
PARTY TO THE DERIVATIVE TRANSACTION.
  (21) "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 COUNTER-
PARTY IS EITHER WITHIN THE UNITED STATES OR IF  NOT  WITHIN  THE  UNITED
STATES,  WITHIN A FOREIGN (NOT UNITED STATES) JURISDICTION DEEMED BY THE
SECURITIES VALUATION OFFICE OF THE  NATIONAL  ASSOCIATION  OF  INSURANCE
COMMISSIONERS, OR ANY SUCCESSOR OFFICE ESTABLISHED BY THE NATIONAL ASSO-
CIATION OF INSURANCE COMMISSIONERS, AS ELIGIBLE FOR NETTING.
  S  2. Subsection (f) of section 1410 of the insurance law, as added by
chapter 650 of the laws of 1998, is amended to read as follows:
  (f)(1) The counterparty exposure under [a] AN OVER THE COUNTER deriva-
tive instrument entered into by an insurer authorized to engage in tran-
sactions 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 quan-

 EXPLANATION--Matter in ITALICS (underscored) is new; matter in brackets
                      [ ] is old law to be omitted.
                                                           LBD15578-02-2

S. 7306--A                          2

titative limitation on investments made by an insurer under  this  chap-
ter.
  (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  [trans-
actions] INSTRUMENTS to:
  [(A)  any  single counterparty, other than a "qualified counterparty",
shall be limited to one] (I) THAT NON-QUALIFIED  COUNTERPARTY  DOES  NOT
EXCEED ONE percent of [an] THE insurer's admitted assets; and
  [(B)]  (II)  all  counterparties, other than qualified counterparties,
[are limited to] DOES NOT EXCEED three percent  of  [an]  THE  insurer's
admitted assets.
  (3) For purposes of this section:
  (A) a "qualified counterparty" is a ["qualified broker or dealer" or a
"qualified  bank"  or  other  counterparty  rated AA-/Aa3 or higher by a
nationally recognized statistical rating  organization  if  it  is  also
approved by the superintendent;
  (B)  a  "qualified  broker or dealer" means a broker or dealer that is
organized under the laws of a state and is registered under the  Securi-
ties Exchange Act of 1934, 15 U.S.C. SS 78a-78kk, and has net capital in
excess of two hundred fifty million dollars;
  (C) a "qualified bank" means a bank or trust company that:
  (i) is organized and existing, or in the case of a branch or agency of
a foreign banking organization is licensed, under the laws of the United
States or any state thereof;
  (ii) is regulated, supervised and examined by United States federal or
state  authorities  having  regulatory  authority  over  banks and trust
companies;
  (iii) has assets in excess of five billion dollars;
  (iv) has senior obligations outstanding, or has a  parent  corporation
that  has  senior  obligations  outstanding,  rated AA or better (or the
equivalent thereto) by two independent nationally recognized statistical
rating organizations; and
  (v) has a ratio of primary capital to total assets of  at  least  five
and  one-half percent and a ratio of total capital to total assets of at
least six percent; and
  (D)] COUNTERPARTY 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  AND  WHICH  MEETS  ONE  OF  THE
FOLLOWING RATING STANDARDS:
  (I)  AN  INVESTMENT  GRADE  CREDIT RATING FROM AT LEAST ONE NATIONALLY
RECOGNIZED STATISTICAL RATING ORGANIZATION;
  (II) WHOSE PARENT HAS AN INVESTMENT GRADE CREDIT RATING FROM AT  LEAST
ONE NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATION; OR
  (III)  THAT HAS CREDIT ENHANCEMENT FOR ALL OF ITS FINANCIAL OR SETTLE-
MENT OBLIGATIONS UNDER THE OVER THE COUNTER  DERIVATIVE  INSTRUMENT  FOR
THE  DURATION  OF  THE  DERIVATIVE INSTRUMENT FROM AN ENTITY THAT HAS AN
INVESTMENT GRADE CREDIT RATING FROM AT LEAST ONE  NATIONALLY  RECOGNIZED
STATISTICAL RATING ORGANIZATION FOR THE BENEFIT OF THE INSURER; AND
  (B)  "aggregate  counterparty  exposure"  means  the  [sum of: (i) the
aggregate statement value  of  options,  swaptions,  caps,  floors,  and

S. 7306--A                          3

warrants  purchased;  and  (ii)  the  aggregate  potential  exposure  of
collars, swaps, forwards and futures entered into] AGGREGATE, NET AMOUNT
OF CREDIT RISK ATTRIBUTABLE TO ALL OVER THE COUNTER  DERIVATIVE  INSTRU-
MENTS ENTERED INTO WITH A COUNTERPARTY, CALCULATED AS FOLLOWS:
  (I)  IF  THERE  IS NO MASTER AGREEMENT IN PLACE WITH THE COUNTERPARTY,
THE SUM OF THE MARKET VALUES OF ALL OVER THE COUNTER DERIVATIVE  INSTRU-
MENTS  WITH THE COUNTERPARTY THAT HAVE A POSITIVE MARKET VALUE, LESS ANY
COLLATERAL; OR
  (II) IF A MASTER AGREEMENT IS IN  PLACE  WITH  THE  COUNTERPARTY,  THE
GREATER OF ZERO OR THE NET SUM PAYABLE TO THE INSURER IN CONNECTION WITH
ALL  OVER  THE  COUNTER  DERIVATIVE  INSTRUMENTS  SUBJECT  TO THE MASTER
NETTING AGREEMENT, LESS ANY COLLATERAL.
  S 3. This act shall take effect immediately.

S7306B (ACTIVE) - Bill Details

See Assembly Version of this Bill:
A10532
Law Section:
Insurance Law
Laws Affected:
Amd §§1401 & 1410, Ins L

S7306B (ACTIVE) - Bill Texts

view summary

Relates to derivative transactions and over the counter derivative instruments.

view sponsor memo
BILL NUMBER:S7306B

TITLE OF BILL:
An act
to amend the insurance law, in relation to derivative transactions and
derivative instruments

PURPOSE:
This bill would amend §§1401 and 1410 of the insurance law to
refine the definition of "qualified counterparty" and make other
definitional amendments to the provisions of the law relating to
permissible counterparties with which insurers may enter into
derivative transactions pursuant to the current restrictions in the
insurance law.

These amendments are intended to strengthen the rules applied to
insurer derivative transactions with "qualified counterparties" in
order to ensure that they are fully collateralized pursuant to a
master netting agreement. These amendments will allow insurers to
continue entering into responsible derivatives arrangements to hedge
their investment strategies. These arrangements assist insurers in
supporting their ability to continue to offer certain variable
insurance products to consumers, to keep product pricing affordable
and ensure that they can continue to meet their policyholder
obligations.

SUMMARY OF PROVISIONS:
This bill would amend subsection (a) of section
1401 of the insurance law to add new paragraphs (19) - (21) which
establish new definitions of "over the counter derivative
instrument", "clearinghouse" and "master agreement" to Article 14 of
the insurance law which addresses investment by insurers.
This bill would also amend subsection (t) of section 1410 of the
insurance law to redefine the terms "qualified counterparty" and
"aggregate counterparty exposure" and to refine the rules which
insurers must follow in order to enter into derivative transactions
with "qualified counterparties" and other than qualified
counterparties. The new standard provided for in this bill will
require that, in order for a counterparty to be a "qualified
counterparty" it would need to have entered into a netting and
collateral agreement with the insurer and would also need to be rated
(or have a parent or guarantor or other credit enhancer rated)
investment grade or better.

EXISTING LAW:
Section 1401 of the insurance law currently does not
define the terms over the counter derivative instrument",
"clearinghouse" and "master agreement." Section 1410 of the insurance
law currently contains an alternative definition for "qualified
counterparty" and "aggregate counterparty exposure." The current
definitions of these terms are meant to establish that, in order to
be qualified to enter into a derivative transaction with an insurer,
an entity must have a credit rating of AA or better by a
nationally-recognized statistical rating organization. The current
restrictions contained in section 1410 of the insurance law and
placed on insurers entering into derivative transactions remain intact.


JUSTIFICATION:
Section 1410 of the insurance law was adopted in 1998
to establish the rules which domestic insurers must follow in order
to enter into derivative transactions in New York. The law strictly
limits the amount of derivative transactions that insurers may enter
into and provides that they should be used primarily for hedging
purposes. It also requires that insurer derivative use must be
overseen by the company Board of Directors and requires that insurers
must have a derivative use plan approved by the Superintendent and
audited by an independent, outside auditing firm. This law has proven
to be successful in ensuring that insurers in New York are limited to
entering only into appropriate derivative transactions which are
suitable for their level of assets. By requiring that
these transactions are used primarily for the purposes of hedging,
this law has allowed insurers to have the ability to adjust to the
changing markets during the recent economic downturn.

Most importantly, the ability to enter into responsible and
well-regulated derivative transactions, primarily for the purposes of
hedging insurer investment strategies, has enabled insurers to
continue to offer certain variable life insurance products that are
currently very popular with consumers and also allowed them to offer
their products at more affordable rates, since the 2008 economic
downturn.

Chapter 650 of the Laws of 1998 allowed for certain, expanded insurer
derivative use authority with restrictions and significant oversight
by insurer Boards, the Superintendent of the Department of Financial
Services and outside auditors. Under the current law, insurer
derivative transactions with counterparties which are not "qualified
counterparties" are subject to strict quantitative limits. The term
"qualified counterparty" is defined as a counterparty rated AA or
higher by at least one nationally recognized statistical rating
organization and meeting certain other qualifications. These
standards were carried over from earlier law governing insurance
derivative transactions and, even in 1998, did not reflect the actual
counterparty universe. Current derivatives markets and participants
are considerably different from that which were in place in 1998 and,
following the restructuring of this market due to certain provisions
of the Federal Dodd-Frank Wall Street Reform and Consumer Protection
Act, additional changes are occurring.

The primary counterparties with which insurers enter into derivatives
transactions are banks. Bank ratings have deteriorated markedly since
1998 and are expected to continue to decline. On February 15, 2012,
Moody's announced a review for downgrade of the long-term debt
ratings of 17 banks and securities firms with global capital markets
operations. This action will likely result in additional downgrades
in this sector. The downgrading of insurer banking counterparties
will reduce the number of qualified counterparties available, perhaps
even to the point where there will no longer be any "qualified
counterparties" under New York law.

The current law is also outdated in its enumeration of types of
qualified counterparties. It includes registered broker dealers,
which no longer engage in this business, and does not include either
foreign banks or non-rated derivatives dealers guaranteed by a parent


or affiliate, both of which are major participant categories in this
market. Also, the Federal Dodd-Frank Act will begin to require that
banks must spin off certain of their derivatives activities into
affiliate entities and many of these newly-created entities will not
meet the current AA standard necessary in order to be determined a
"qualified counterparty".

The utility of using rating categories to define a "qualified
counterparty" has been called into question since the 2008 economic
downturn when several very highly rated banking organizations were
downgraded to junk status overnight. Recognizing this, many, if not
most, insurers have moved to the use of standard netting and
collateral agreements, under which the counterparty's obligations to
the insurer are collateralized, subject to normal credit thresholds
and minimum transfer amounts. This has greatly reduced the risk to
insurers of these trading relationships.

This bill would codify the responsible practice of collateralizing
these types of transactions by requiring that a "qualified
counterparty" will need to have entered into a netting and collateral
agreement with the insurer and would also need to be rated (or have a
parent or guarantor or other credit enhancer rated) investment grade
or better.

Enactment of this bill will result in simplification of the current
"qualified counterparty" standard to more flexibly reflect current
and future market conditions, will permit lower rated counterparties
to be qualified, so long as collateral arrangements are entered into
to protect insurers and their policyholders, and will update the law
for the new Dodd-Frank era derivatives marketplace.

By making these refinements to the Current law, insurers will be
enabled to continue entering into responsible derivative transactions
in the limited manner provided for in the current law, with the
continuing oversight by their
Board of Directors and the NYS Department of Financial Services. It
will also enable insurers to continue offering certain variable life
insurance products that are currently very popular with consumers and
to offer these and other products at more affordable rates.

LEGISLATIVE HISTORY:
New bill.

FISCAL IMPLICATIONS:
None.

EFFECTIVE DATE:
Immediately.

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

                                 7306--B
    Cal. No. 998

                            I N  S E N A T E

                               May 2, 2012
                               ___________

Introduced  by  Sen.  SEWARD -- read twice and ordered printed, and when
  printed to be committed to the Committee  on  Insurance  --  committee
  discharged, bill amended, ordered reprinted as amended and recommitted
  to  said  committee -- reported favorably from said committee, ordered
  to first and second report, ordered to a third  reading,  amended  and
  ordered reprinted, retaining its place in the order of third reading

AN  ACT  to  amend  the  insurance law, in relation to derivative trans-
  actions and derivative instruments

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

  Section  1.    Subsection (f) of section 1410 of the insurance law, as
added by chapter 650 of the laws of 1998, is amended to read as follows:
  (f)(1) The counterparty exposure under [a] AN OVER THE COUNTER deriva-
tive instrument entered into by an insurer authorized to engage in tran-
sactions 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 quan-
titative limitation on investments made by an insurer under  this  chap-
ter.
  (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  [trans-
actions] INSTRUMENTS to:
  [(A)  any  single counterparty, other than a "qualified counterparty",
shall be limited to one] (I) THAT NON-QUALIFIED  COUNTERPARTY  DOES  NOT
EXCEED ONE percent of [an] THE insurer's admitted assets; and
  [(B)]  (II)  all  counterparties, other than qualified counterparties,
[are limited to] DOES NOT EXCEED three percent  of  [an]  THE  insurer's
admitted assets.
  (3) For purposes of this section:

 EXPLANATION--Matter in ITALICS (underscored) is new; matter in brackets
                      [ ] is old law to be omitted.
                                                           LBD15578-04-2

S. 7306--B                          2

  (A) a "qualified counterparty" is a ["qualified broker or dealer" or a
"qualified  bank"  or  other  counterparty  rated AA-/Aa3 or higher by a
nationally recognized statistical rating  organization  if  it  is  also
approved by the superintendent;
  (B)  a  "qualified  broker or dealer" means a broker or dealer that is
organized under the laws of a state and is registered under the  Securi-
ties Exchange Act of 1934, 15 U.S.C. SS 78a-78kk, and has net capital in
excess of two hundred fifty million dollars;
  (C) a "qualified bank" means a bank or trust company that:
  (i) is organized and existing, or in the case of a branch or agency of
a foreign banking organization is licensed, under the laws of the United
States or any state thereof;
  (ii) is regulated, supervised and examined by United States federal or
state  authorities  having  regulatory  authority  over  banks and trust
companies;
  (iii) has assets in excess of five billion dollars;
  (iv) has senior obligations outstanding, or has a  parent  corporation
that  has  senior  obligations  outstanding,  rated AA or better (or the
equivalent thereto) by two independent nationally recognized statistical
rating organizations; and
  (v) has a ratio of primary capital to total assets of  at  least  five
and  one-half percent and a ratio of total capital to total assets of at
least six percent; and
  (D)] COUNTERPARTY WHICH HAS AN INVESTMENT GRADE RATING FROM  AT  LEAST
ONE  NATIONALLY  RECOGNIZED  STATISTICAL RATING ORGANIZATION OR A DESIG-
NATION OF ONE FROM THE SECURITIES VALUATION OFFICE OF THE NATIONAL ASSO-
CIATION 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 AGREE-
MENT, 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 aggre-
gate  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  DERIVA-
TIVE  INSTRUMENT  (I) CLEARED THROUGH A UNITED STATES OR FOREIGN DERIVA-
TIVES CLEARINGHOUSE, OR (II) TRADED ON OR THROUGH  A  UNITED  STATES  OR
FOREIGN EXCHANGE PROVIDING DERIVATIVES CLEARING SERVICES;
  (D) "DERIVATIVES CLEARINGHOUSE" MEANS A DERIVATIVES CLEARING ORGANIZA-
TION  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 COUNTER-
PARTY  IS  EITHER  WITHIN  THE UNITED STATES OR IF NOT WITHIN THE UNITED

S. 7306--B                          3

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.
  S 2. This act shall take effect immediately;  provided,  however  that
the documentation requirements set forth in items (i), (ii) and (iii) of
subparagraph  (A)  of paragraph (3) of subsection (f) of section 1410 of
the insurance law as added by section one of this act shall take  effect
on January 1, 2013.

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