Ohio Administrative Code
Title 3901 - Department of Insurance
Chapter 3901-3 - Acquisitions and Mergers; Insurance Holding Company Systems
Section 3901-3-12 - Derivative use plan
Universal Citation: OH Admin Code 3901-3-12
Current through all regulations passed and filed through September 16, 2024
(A) Purpose
The purpose of this rule is to establish the content of the derivative use plans to be filed with the superintendent as required by sections 3906.12, 3907.14, and 3925.08 of the Revised Code.
(B) Authority
This rule is promulgated pursuant to the authority vested in the superintendent under sections 3901.041, 3906.12, 3907.14 and 3925.08 of the Revised Code.
(C) Derivative use plan
(1)
The insurer
shall submit a derivative use plan, or amendment thereto, to the
superintendent. The derivative use plan or the amendment thereto will be
referred to as "the plan" hereinafter. The filing shall include a certified
copy of the authorization by the insurer's board of directors, or a committee
thereof charged with the responsibility for supervising investments, pursuant
to sections 3906.12,
3907.14 and
3925.08 of the Revised Code.
When submitting its plan, the insurer shall also provide to the
superintendent:
(a)
In the event the plan is adopted by a committee of the
insurer's board of directors, information with respect to the composition, in
terms of title and position, of such committee; and
(b)
The name and
title of the senior most investment person responsible for derivative
transactions; a description of his or her duties and responsibilities, as well
as a curriculum vitae or equivalent document. Such information shall be updated
and provided to the superintendent as changes occur.
(2)
The
plan shall contain written guidelines to be followed in engaging in derivative
transactions. The guidelines shall include or address:
(a)
The type,
maturity and diversification of derivative instruments;
(b)
The limitation
on counterparty exposures, including limitations based on credit
ratings;
(c)
The limitations on the use of
derivatives;
(d)
Asset/liability management practices with respect to
derivative transactions;
(e)
The liquidity needs and the company's capital and
surplus as it relates to the derivative use plan;
(f)
The policy
objectives of management specific enough to outline permissible derivative
strategies;
(g)
The relationship of the derivative strategies to the
insurer's operations;
(h)
A requirement that management establishes and executes
management oversight standards as required by paragraph (D) of this rule and a
description of these standards;
(i)
A requirement
that management establishes and executes internal controls and reporting
standards as required by paragraph (E) of this rule and a description of these
standards; and
(j)
A requirement that management establishes and executes
documentation and reporting standards as required by paragraph (F) of this rule
and a description of these standards.
(3)
The plan shall
contain, to the extent applicable to the specific derivative transactions
authorized, guidelines for the insurer's acceptable levels of basis risk,
credit risk, foreign currency risk, interest rate risk, market risk,
operational risk and option risk. The plan shall also provide that the board of
directors, or a committee thereof charged with the responsibility for
supervising investments, and senior management shall comply with risk oversight
functions and adhere to laws, rules, regulations, prescribed practices or
ethical standards.
(D) Management oversight standards
(1)
In order to address the need for appropriate oversight
by senior management and by the board of directors, or a committee thereof
charged with the responsibility for supervising investments, and to provide for
a comprehensive risk management process for derivative instruments, an insurer
shall establish the following with respect to derivative transactions:
(a)
Appropriate
limits for various identified risks relevant to the derivative transactions
used by the insurer;
(b)
Procedures and practices that control the nature and
amount of such risks;
(c)
Adequate systems or processes for identifying and
measuring such risks;
(d)
Systems or processes for documenting, monitoring and
reporting risk exposures on a timely basis; and
(e)
Systems or
processes of internal review and audit to ensure the integrity of the overall
risk management process.
(2)
The board of
directors, or a committee thereof charged with the responsibility for
supervising investments, shall receive and review quarterly reports which shall
include:
(a)
Information to ascertain that all derivative transactions have been made in
accordance with delegations, standards, limitations and investment objectives
contained in the derivative use plan;
(b)
The outstanding
derivative positions; the unrealized gains or losses thereon;
(c)
The derivative
transactions closed during the report period;
(d)
A performance
review of the derivative transactions;
(e)
An evaluation of
the risks and benefits of the derivative transactions; and
(f)
Other
information necessary to ensure that the internal control procedures are being
followed.
(3)
The board of directors, or a committee thereof charged
with the responsibility for supervising investments, shall establish the
following management oversight standards for derivative transactions:
(a)
The board of
directors, or a committee thereof charged with the responsibility for
supervising investments, has an affirmative obligation to prior approve its
desired risk tolerance levels. Management shall appropriately translate these
risk tolerance levels into effective policies and procedures that address both
individual transactions and entire portfolios;
(b)
Management and
the board of directors, or a committee thereof charged with the responsibility
for supervising investments, shall receive sufficient information to assess the
strengths and limitations of the insurer's risk measurement systems in order to
determine appropriate risk limits. The board of directors, or a committee
thereof charged with the responsibility for supervising investments, shall also
review management's response to strengths and limitations identified through
oversight processes such as stress testing, independent validation and
back-testing of risk measurement models. Management and the board of directors,
or a committee thereof charged with the responsibility for supervising
investments, shall consider the information identified by the oversight
processes, including the potential for indirect effects of downside performance
beyond the insurer's finances, when they determine and communicate their risk
profile;
(c)
When management or the board of directors, or a
committee thereof charged with the responsibility for supervising investments,
identifies weaknesses in the risk management process, they shall consider
alternatives and take steps to strengthen that process;
(d)
Actions shall be
taken to correct any deficiencies in internal controls relative to derivative
transactions, including any deficiencies determined by the independent
certified public accountant in the evaluation of accounting procedures and
internal controls;
(e)
Risk oversight functions shall possess independence,
authority, and expertise; and
(f)
Issuer and
counterparty credit decisions for each transaction shall be consistent with the
overall credit standards of the insurer.
(E) Internal controls and reporting
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.
(F) Documentation and reporting requirements:
The insurer shall maintain documentation and records relating to each derivative transaction including:
(1)
The purpose or purposes of the
transaction;
(2)
The assets or liabilities (or portfolios thereof) to
which the transaction relates;
(3)
The specific
derivative instruments used in the transaction;
(4)
For
over-the-counter derivative transactions, the name of the counterparty, and
counterparty exposure amount; and
(5)
For
exchange-traded derivative instruments, the name of the exchange and the name
of the firm handling the trade.
(G) Severability
If any paragraph, term or provision of this rule is adjudged invalid for any reason, the judgment shall not affect, impair or invalidate any other paragraph, term or provision of this rule, but the remaining paragraphs, terms and provisions shall be and continue in full force and effect.
Effective: 11/27/2014
Five Year
Review (FYR) Dates: 08/26/2019
Promulgated Under: 119.03
Statutory Authority: 3901.041,
3906.12, 3907.14 and 3925.08
Rule Amplifies: 3901.041, 3906.12,
3907.14 and 3925.08
Disclaimer: These regulations may not be the most recent version. Ohio may have more current or accurate information. We make no warranties or guarantees about the accuracy, completeness, or adequacy of the information contained on this site or the information linked to on the state site. Please check official sources.
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