New York Codes, Rules and Regulations
Title 11 - INSURANCE
Chapter VI - AUTHORIZED INVESTMENTS
Part 178 - DERIVATIVE TRANSACTIONS
Section 178.2 - Definitions

Universal Citation: 11 NY Comp Codes Rules and Regs ยง 178.2

Current through Register Vol. 46, No. 39, September 25, 2024

(a) Admitted assets means the assets, as shown on the insurer's last annual statement filed with the superintendent, which conform to the requirements of section 1301 of the Insurance Law, except that a life insurer shall include assets held in separate accounts established under section 4240 of the Insurance Law to the extent of amounts allocated to such separate accounts pursuant to section 4240 (a)(3) of the Insurance Law, and shall exclude investments in subsidiaries referred to in section 1704 (c) of the Insurance Law.

(b) 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.

(c) Basis risk means the exposure to loss from imperfectly matched offsetting positions in related but not identical markets.

(d) Credit risk means the exposure to loss as a result of default or a decline in market value stemming from a credit downgrade of a counterparty.

(e) Counterparty exposure amount means the net amount of credit risk attributable to a derivative instrument entered into with a business entity other than a national securities exchange or board of trade regulated under the laws of the United States:

(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 superintendent 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.

(f) Foreign currency risk means the exposure to loss due to fluctuations in foreign exchange rates.

(g) Interest rate risk means the exposure to loss due to the potential adverse impact of interest rate movements.

(h) Market risk means exposure to loss due to price changes.

(i) Notional amount means the nominal face value of the underlying security, currency, index or other instrument used as the basis for calculating payment or settlement under the derivative instrument.

(j) Operational risk means the risk of loss occurring as a result of inadequate systems and controls, human error, or mismanagement.

(k) Option risk means the exposure to loss due to the uncertainty of cash flows resulting from another party having the right but not the obligation to alter the level and/or timing of cash flows of an asset, liability or off-balance sheet instrument.

(l) Potential exposure is 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).

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