N.J. Admin. Code § 11:7-1.5

Current through Register Vol. 57, No. 1, January 6, 2025

Section 11:7-1.5 - Limitations and restrictions--asset-backed securities and consumer debt obligations

(a) For purposes of this subchapter, "asset-backed securities" means:

1. Securities or other financial obligations of an issuer, provided that the issuer is a special purpose corporation, trust, or other entity, or (provided that the securities or other financial obligations constitute an insurable risk) is a bank, trust company, or other financial institution, deposits in which are insured by the Bank Insurance Fund or the Savings Association Insurance Fund (or any successor thereto), or, in the case of a bank, trust company, or other financial institution located outside the United States, deposits in which are insured by a national government-sponsored institution, such as the Bank Insurance Fund or the Savings Association Insurance Fund; and that:

i. A pool of assets has been conveyed, pledged or otherwise transferred to or is otherwise owned or acquired by the issuer;

ii. The pool of assets under (a)1i above backs the securities or other financial obligations issued; and

iii. No asset in the pool under (a)1i above, other than an asset directly payable by, guaranteed by or backed by the full faith and credit of the United States government (or in the case of an asset-backed security issued in a foreign country, backed by the full faith and credit of the national government or central bank of such foreign country) or that otherwise qualifies as collateral, has a value exceeding 20 percent of the pool's aggregate value; or

2. A pool of credit default swaps or credit default swaps referencing a pool of obligations, provided that:

i. The swap counterparty whose obligations are insured under the credit default swap is a special purpose corporation, special purpose trust or other special purpose legal entity;

ii. No reference obligation in the pool under (a)2 above, other than an obligation directly payable by, guaranteed by or backed by the full faith and credit of the United States government (or in the case of an asset-backed security issued in a foreign country, backed by the full faith and credit of the national government or central bank of such foreign country) or that otherwise qualifies as collateral as defined below in this section, has a notional amount exceeding 10 percent of the pool's aggregate notional amount; and

iii. The insurer has the benefit of a deductible or other first loss credit protection against claims under its insurance policy.

(b) For purposes of this subchapter, "collateral" means:

1. Cash;

2. The cash flow from specific obligations which are not callable and scheduled to be received based on expected prepayment speed on or prior to the date of scheduled debt service (including scheduled redemptions or prepayments) on the insured obligation, provided that:

i. Such specific obligations are directly payable by, guaranteed by or backed by the full faith and credit of the United States government;

ii. In the case of insured obligations denominated or payable in foreign currency, such specific obligations are directly payable by, guaranteed by, or backed by the full faith and credit of such foreign government or the central bank thereof, and provided such currency is that of a member country of the Organisation for Economic Co-operation and Development having a sovereign rating, or such other country whose sovereign rating is investment grade, or as shall not otherwise be disapproved by the Commissioner within 30 days following receipt of written notification. The Commissioner shall not disapprove such notification upon demonstration that there is no undue risk associated with insuring the timely payment of such instruments or obligations. In making such a determination, the Commissioner shall take into consideration the insurer's outstanding liabilities on non-investment grade instruments and obligations in relation to its outstanding liabilities on all instruments and obligations and in relation to the amount of its surplus to policyholders; or

iii. Such specific obligations are insured by the same insurer that insures the obligations being collateralized, and the cash flows from such specific obligations are sufficient to cover the insured's scheduled payments on the obligations being collateralized;

3. The market value of investment grade obligations, other than obligations evidencing an interest in the project or projects financed with the proceeds of the insured obligations;

4. The face amount of each letter of credit that satisfies the requirements set forth in N.J.A.C. 11:2-28.10(a) through (h); or

5. The amount of credit protection available to the insurer (or its nominee) under each credit default swap that:

i. May not be amended without the consent of the insurer and may only be terminated:

(1) At the option of the insurer;

(2) At the option of the counterparty to the insurer (or its nominee), if the credit default swap provides for the payment of a termination amount equal to the replacement cost of the terminated credit default swap determined with reference to standard documentation of the International Swaps and Derivatives Association, Inc., or otherwise acceptable to the Commissioner; or

(3) At the discretion of the Commissioner acting as a rehabilitator, liquidator or receiver of the insurer, upon payment by or on behalf of the insurer of any termination amount due from the insurer;

ii. Provides for payment under all instances in which payment under an insurance policy is required, except that payment under the credit default swap may be on a first loss, excess of loss or other non-pro-rata basis and may apply on an aggregate basis to more than one policy; and iii. Is provided by:

(1) A counterparty whose obligations under the credit default swap are insured by a licensed insurer or guaranteed by a financial institution referred to in this subparagraph;

(2) A financial institution satisfying the requirements referenced in (b)4 above, provided that obligations of such financial institution on parity with its obligations under the credit default swap are investment grade, and if such financial institution is not organized under, or acting through a branch or agency office licensed under, the laws of the United States or any state thereof, then such financial institution is required to collateralize the replacement cost of the credit default swap in the event that it shall fail to maintain such rating; or

(3) Any other financial institution that the Commissioner determines to be substantially similar to any of the foregoing set forth in this subparagraph.

(c) Collateral shall be deposited with the insurer; held in trust by a trustee or custodian that satisfies the requirements set forth in N.J.S.A. 17:24-12g(5)for the benefit of the insurer; or held in trust pursuant to the bond indenture or other trust arrangement, for the benefit of security holders in the form of funds for the payment of insured obligations, sinking funds or other reserves which may be used for the payment of insured obligations and trustee and other administrative fees on a first priority basis established and continually maintained pursuant to the bond indenture or other trust arrangement by a trustee that satisfies the requirements set forth in N.J.S.A. 17:24-12g(5).

(d) Consumer debt obligations guaranty policies shall contain a provision that all coverage under the policies terminates upon sale or transfer of the underlying consumer debt obligation to any transferee not insured by the same insurer under a similar policy.

(e) For the purpose of complying with the provisions of N.J.S.A. 17:18-9, an insurer's exposure to any loss on any one risk or hazard with respect to each issue of asset-backed securities issued by a single entity and for each pool of consumer debt obligations shall not exceed 10 percent of the aggregate of the insurer's surplus to policyholders and contingency reserve.

(f) For the purpose of (e) above, an insurer's exposure to any loss on any one risk or hazard, net of collateral and reinsurance, shall be the lesser of:

1. Insured average annual debt service; or

2. Insured unpaid principal (reduced by the extent to which the unpaid principal of the supporting assets and, provided the insured risk is investment grade, excess spread exceed the insured unpaid principal) divided by nine; provided that no asset in the pool supporting the asset-backed securities exceeds the single risk limit prescribed in N.J.S.A. 17:18-9, if such asset were directly guaranteed; and provided further that, if the issuer of such insured asset-backed securities is a special purpose corporation, trust or other entity and such issuer shall have indebtedness outstanding with respect to any other pool of assets, either such other indebtedness shall be entitled to the benefits of an insurance policy of the same insurer, or such other indebtedness shall:

i. Be fully subordinated to the insured obligation, with respect to, or be non-recourse with respect to, the pool of assets that supports the insured obligation;

ii. Be non-recourse to the issuer other than with respect to the asset pool securing such other indebtedness and proceeds in excess of the proceeds necessary to pay the insured obligation (excess proceeds); and

iii. Not constitute a claim against the issuer to the extent that the asset pool securing such other indebtedness or excess proceeds are insufficient to pay such other indebtedness.

N.J. Admin. Code § 11:7-1.5

New Rule, R.2008 d.37, effective 2/19/2008.
See: 39 N.J.R. 1985(a), 40 N.J.R. 881(a).
Former N.J.A.C. 11:7-1.5, Conflicts of interest prohibited, recodified to N.J.A.C. 11:7-1.7.

Amended by 54 N.J.R. 780(b), effective 5/2/2022