STATE OF NEW YORK
25 BEAVER STREET
NEW YORK, NEW YORK 10004
|David A. Paterson
OGC Op. No. 09-06-02
The Office of General Counsel issued the following opinion on June 3, 2009 representing the position of the New York State Insurance Department.
Re: Qualified Counterparty and Investment Limits Under New York Insurance Law Section 1410(f)
1. Under the definition of the term “qualified counterparty” as set forth in Insurance Law
2. If the answer to Question No. 1 is in the affirmative, to what ratings category of the “other counterparty” does the AA-/Aa3 requirement apply?
3. Can a bank or trust company that does not meet the AA or better ratings qualification of Insurance Law
4. Are transactions with qualified counterparties subject only to the 10% single entity investment limits of Insurance Law
5. Should the 3% aggregate investment limit applicable to non-qualified counterparties set forth in Insurance Law
6. Should the 1% investment limit applicable to a single non-qualified counterparty set forth in Insurance Law
1. Yes. The AA-/Aa3 rating requirement set forth in Insurance Law
2. The AA-/Aa3 rating requirement applies to the issuer’s overall rating.
3. No. A bank or trust company that does not meet the AA or better ratings qualification of Insurance Law
4. Yes and no. The 10% single entity investment limit set forth in Insurance Law
5. & 6. As explained below, Insurance Law
The inquiry is general in nature, without reference to any particular facts.
(1) The counterparty exposure under a 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, the aggregate counterparty exposure under one or more derivative transactions to:
(A) any single counterparty, other than a "qualified counterparty", shall be limited to one percent of an insurer's admitted assets; and
(B) all counterparties, other than qualified counterparties, are limited to three percent of an 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 Securities Exchange Act of 1934, 15 U.S.C.
§§ 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) "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. (Emphasis added.)
Question 1 – Application of the AA-/Aa3 Requirement
With respect to the issue of qualified counterparties, the AA-/Aa3 rating requirement set forth in Insurance Law
Question 2 – Applicable Ratings Category
The second inquiry asks about the ratings category of an “other counterparty” to which the AA-/Aa3 applies. The Insurance Law expressly refers to specific ratings categories where applicable. See, e.g., Insurance Law
Question 3 – Qualification of a Bank or Trust Company as “other counterparties”
The third question asks whether a bank or trust company that does not meet the AA or better ratings qualification of Insurance Law
Question 4 – Application of the 10% Investment Limit of N.Y. Ins. Law
The fourth question asks whether transactions with qualified counterparties are subject only to the 10% single entity investment limitation set forth in Insurance Law
Questions 5 & 6 – Determination of the 3% Aggregate and 1% Single Counterparty Exposure Limits
The fifth and sixth questions ask how the 3% aggregate and 1% single counterparty exposure limits are determined. Insurance Law
The inquiry suggests that Insurance Law
Section 1410(f)(1) provides that, in determining compliance with any single and aggregate quantitative limitation on investments set forth in the Insurance Law, the counterparty exposure amounts with respect to derivative instruments must be included. For purposes of Article 14, these counterparty exposure amounts are deemed to be an obligation of the institutions to which the insurer is expose to credit risks.
Thus, Insurance Law
For further information you may contact Supervising Attorney Michael Campanelli at the New York City Office.