18 Del. Admin. Code § 404-2.0

Current through Register Vol. 28, No. 5, November 1, 2024

Section 404-2.0 - Definitions

The following words and terms, when used in this regulation, shall have the following meaning unless the context clearly indicates otherwise:

"Aggregate statement value" means the sum of the statement values of individual derivative instruments. In calculating this sum, an insurer shall assign absolute values to negative values.

"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" means the net amount of credit risk attributable to an over-the-counter derivative instrument determined as follows:

(1) For an over-the-counter derivative instrument not entered into under or subject to a written master agreement which provides for netting of payments owed by the respective parties:

(i) the market value of the over-the-counter derivative instrument if the liquidation of the derivative instrument would result in a final cash payment to the insurer; or

(ii) zero if the liquidation of the derivative instrument would not result in a final cash payment to the insurer.

(2) For over-the-counter derivative instruments entered into under or subject to 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 (not United States) jurisdiction deemed by the SVO as eligible for netting, the greater of zero or the net sum payable to the insurer in connection with all derivative instruments subject to the written master agreement upon their liquidation in the event of default by the counterparty under the master agreement (assuming no conditions precedent to the obligations of the counterparty to make such a payment and assuming no setoff of amounts payable under any other instrument or agreement).

(3) For the purposes of this definition, market value or the net sum payable, as the case may be, shall be determined at the end of the most recent quarter of the insurer's fiscal year and will be reduced by the market value of acceptable collateral held by the insurer or a custodian on the insurer's behalf.

"Credit rating" means with respect to a party or entity, the rating currently assigned to its unsecured and unsubordinated long-term debt, an issuer rating, financial strength rating or other similar rating which assesses the creditworthiness of a party to meet its financial or deposit obligations.

"Derivative instrument" means an agreement, instrument or a series or combination thereof:

(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 or is dependent on the occurrence or nonoccurrence of any event associated with one or more potential financial, economic, or commercial consequences. The term "derivative instrument" includes, without limitation, options, warrants used in a hedging transaction and not attached to another financial instrument, caps, floors, collars, swaps, swaptions, forwards, futures and any other agreements or instruments substantially similar thereto or any series or combination thereof. The term "derivative instrument" does not include other categories of investments specifically authorized under 18Del.C.Chapter 13.

"Derivative transaction" means a transaction involving the use of one or more derivative instruments.

"Derivatives clearinghouse" means a derivatives clearing organization registered with the Commodity Futures Trading Commission or the Securities Exchange Commission or regulated, supervised and examined by a foreign regulatory authority.

"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.

"Foreign regulatory authority" means any foreign (non-United States) government, or any department, agency, governmental body, or regulatory organization empowered by a foreign government to administer or enforce a law, rule, or regulation as it relates to a derivative instrument matter, or any department or agency of a political subdivision of a foreign government empowered to administer or enforce a law, rule, or regulation as it relates to a derivative instrument matter.

"Forward" means an agreement (other than a future) to make or take delivery in the future of one or more underlying interests, or effect a cash settlement, based on the actual or expected price, level, performance or value of such underlying interests, but shall not mean or include spot transactions effected within customary settlement periods, when-issued purchases, or other similar cash market transactions.

"Future" means an agreement traded on a futures 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" is a derivative transaction which is entered into and maintained to manage or reduce:

(1) The risk of change in the value, yield, price, cash flow or quantity of assets or liabilities which the 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.

"Income generation transaction" is a transaction involving a derivative instrument set forth in Section 6.0 of this regulation that is intended to generate income or enhance return. Other types of derivative instruments may not be used in income generation transactions.

"Option" means an agreement giving the buyer the right but not the obligation to buy or receive (a "call option"), sell or deliver (a "put option"), enter into, extend or terminate or effect a cash settlement based on the actual or expected price, spread, level, performance or value of one or more underlying interests.

"Over-the-counter derivative instrument" means a derivative instrument the use of which is authorized under this regulation other than a derivative instrument (i) cleared through a U.S. or foreign derivatives clearinghouse or (ii) traded on or through a U.S. or foreign exchange.

"Potential exposure" means a statistically derived measure of the potential increase in derivative instrument credit risk exposure, for derivative instruments which generally do not have an initial cost paid or consideration received, resulting from future fluctuations in the underlying interests upon which derivative instruments are based. For collars, swaps and forwards, the potential exposure = 0.5% x notional amount x square root of (remaining years to maturity). For futures, the potential exposure = (initial margin per contract on the valuation date, set by the exchange on which contract trades) x (the number of contracts open on the valuation date).

"Qualified counterparty" means a counterparty:

(1) Which has a designation of "1" or "2" by the SVO, or an investment grade credit rating from at least one nationally recognized statistical rating organization; and

(2) With which the insurer has entered into a master agreement, together with a credit support annex or other documentation providing for the collateralization of the counterparty's obligations to the insurer under the master agreement, if that collateral documentation provides for (i) daily margin and collateral settlement, (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. For this purpose "minimum transfer amount" means an amount below which a daily margin and collateral settlement is not required.

"Replication (synthetic asset) transaction" means a derivative transaction entered into in conjunction with other permissible investments under 18Del.C.Chapter 13 in order to reproduce the investment characteristics of investments otherwise permissible under 18Del.C.Chapter 13. A derivative transaction entered into by an insurer as a hedging transaction or income generation transaction shall not be considered a replication (synthetic asset) transaction.

"SVO" means the Securities Valuation Office of the National Association of Insurance Commissioners or any successor office established by the National Association of Insurance Commissioners.

"Swap" means an agreement to exchange or to net payments at one or more times based on the actual or expected price, yield, level, performance or value of one or more underlying interests.

"Swaption" means an option to purchase or sell a swap at a given price and time or at a series of prices and times. A swaption does not mean a swap with an embedded option.

"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.

18 Del. Admin. Code § 404-2.0

18 DE Reg. 393 (11/1/2014) (Final)