New York Codes, Rules and Regulations
Title 11 - INSURANCE
Chapter VI - AUTHORIZED INVESTMENTS
Part 178 - DERIVATIVE TRANSACTIONS
Section 178.5 - Internal controls and reporting

Universal Citation: 11 NY Comp Codes Rules and Regs ยง 178.5

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

(a) Before engaging in derivative transactions, an insurer shall establish adequate internal control procedures to deal with derivatives, which shall include but not be limited to:

(1) systems or processes for periodic valuation of derivative transactions including mechanisms for compensating for any lack of independence in valuing trading positions;

(2) systems or processes for determining whether a derivative instrument used for hedging has been effective;

(3) credit risk management systems or processes for over-the-counter derivative transactions that measure credit risk exposure using the counterparty exposure amount and clearly articulated policies for the establishment of collateral arrangements with counterparties;

(4) a determination of whether the insurer has adequate professional personnel, technical expertise and systems to implement and control investment practices involving derivatives;

(5) systems or processes for regular reports to management, segregation of duties and internal review procedures; and

(6) systems or procedures for conducting initial and ongoing legal review of derivative transactions including assessments of contract enforceability.

(b) As set forth in section 1410 (b)(5) of the Insurance Law, an insurer engaging in derivative transactions shall be required to include, as part of the evaluation of accounting procedures and internal controls required to be filed pursuant to section 307 of the Insurance Law, a statement describing the assessment by the independent certified public accountant of the internal controls relative to derivative transactions. The purpose of this Part of the evaluation is to assess the adequacy of the internal controls relative to the derivative transactions being conducted by the insurer. Such an assessment shall be made whether or not the derivative transactions are material in relation to the insurer's financial statements. The independent certified public accountant shall issue a report regarding internal controls relative to derivative transactions, whether or not deficiencies in internal controls would lead to a "reportable condition", as that term is used in auditing standards adhered to by certified public accountants. An assessment in the form of an "agreed upon procedures engagement" or an "attestation engagement", as those terms are used in auditing standards adhered to by certified public accountants, may be used to meet this requirement. If an "agreed upon procedures engagement" is performed, the procedures used shall be those that management and the independent certified public accountant determine are appropriate to meet the purpose of the assessment as set forth above.

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