Montana Code 33-12-210. Derivative transactions
33-12-210. Derivative transactions. An insurer may, directly or indirectly through an investment subsidiary, engage in derivative transactions under this section under the following conditions:
Terms Used In Montana Code 33-12-210
- Admitted assets: means , subject to subsection (5)(b), assets determined in accordance with the requirements of 33-2-501. See Montana Code 33-12-102
- Assets: (1) The property comprising the estate of a deceased person, or (2) the property in a trust account.
- 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. See Montana Code 33-12-102
- Cash equivalents: means short-term, highly rated, and highly liquid investments or securities readily convertible to known amounts of cash without penalty and so near maturity that they present insignificant risk of change in value. See Montana Code 33-12-102
- Covered: means that an insurer:
(a)owns or can immediately acquire, through the exercise of options, warrants, or already-owned conversion rights, the underlying interest in order to fulfill or secure its obligations under a call option, cap, or floor it has written; or
(b)has set aside, under a custodial or escrow agreement, cash or cash equivalents with a market value equal to the amount required to fulfill its obligations under a put option it has written in an income generation transaction. See Montana Code 33-12-102
- Derivative instrument: means an agreement, an option, an instrument, or a series or combination of agreements, options, or instruments:
(i)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 of delivery; or
(ii)that has a price, level, 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. See Montana Code 33-12-102
- Derivative transaction: means a transaction involving the use of one or more derivative instruments. See Montana Code 33-12-102
- directly: when used in connection with an obligation, means that the designated obligor is primarily liable on the instrument representing the obligation. See Montana Code 33-12-102
- Escrow: Money given to a third party to be held for payment until certain conditions are met.
- 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 price, level, performance, or value of one or more underlying interests. See Montana Code 33-12-102
- Income: means , as to a security, interest, accrual of discount, dividends, or other distributions, such as rights, tax or assessment credits, warrants, and distributions in kind. See Montana Code 33-12-102
- Investment subsidiary: means a subsidiary of an insurer engaged or organized to engage exclusively in the ownership and management of assets authorized as investments for the insurer if each subsidiary agrees to limit its investment in any asset so that its investments will not cause the amount of the total investment of the insurer to exceed any of the investment limitations or avoid any other provisions of this chapter applicable to the insurer. See Montana Code 33-12-102
- Market value: means :
(a)as to cash and letters of credit, the amounts of cash or a letter of credit; and
(b)as to a security, as of any date, the price for the security on that date obtained from a generally recognized source or the most recent quotation from a generally recognized source or, to the extent that a generally recognized source does not exist, the price for the security as determined in good faith by the parties to a transaction, plus accrued but unpaid income on a security to the extent not included in the price as of that date. See Montana Code 33-12-102
- Option: means an agreement giving the buyer the right 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, level, performance, or value of one or more underlying interests. See Montana Code 33-12-102
- Potential exposure: means the amount determined in accordance with the NAIC Annual Statement Instructions. See Montana Code 33-12-102
(1)(a) An insurer may use derivative instruments under this section to engage in hedging transactions and certain income-generation transactions as provided in rules adopted by the commissioner.
(b)An insurer must be able to demonstrate to the commissioner the intended hedging characteristics and the ongoing effectiveness of the derivative transaction or combination of the transactions through cash flow testing or other appropriate analyses.
(2)An insurer may enter into hedging transactions under this section if, as a result of and after giving effect to the transaction:
(a)the aggregate statement value of options, caps, floors, and warrants not attached to another financial instrument purchased and used in hedging transactions does not exceed 5% of its admitted assets;
(b)the aggregate statement value of options, caps, and floors written in hedging transactions does not exceed 3% of its admitted assets; and
(c)the aggregate potential exposure of collars, swaps, forwards, and futures used in hedging transactions does not exceed 6.5% of its admitted assets.
(3)An insurer may enter into the following types of income-generation transactions only if, as a result of and after giving effect to the transactions, the aggregate statement value of the fixed-income assets that are subject to call or that generate the cash flows for payments under the caps or floors, plus the face value of fixed income securities underlying a derivative instrument subject to call, plus the amount of the purchase obligations under the put options does not exceed 10% of its admitted assets:
(a)sales of covered call options on noncallable, fixed-income securities, callable fixed-income securities if the option expires by its terms prior to the end of the noncallable period, or derivative instruments based on fixed-income securities;
(b)sales of covered call options on equity securities if the insurer holds in its portfolio or can immediately acquire, through the exercise of options, warrants, or conversion rights already owned, the equity securities subject to call during the complete term of the call option sold;
(c)sales of covered put options on investments that the insurer is permitted to acquire under this chapter if the insurer has placed in escrow or entered into a custodian agreement segregating cash or cash equivalents with a market value equal to the amount of its purchase obligations under the put option during the complete term of the put option sold; or
(d)sales of covered caps or floors if the insurer holds in its portfolio the investments generating the cash flow to make the required payments under the caps or floors during the complete term that the cap or floor is outstanding.
(4)An insurer shall include all counterparty exposure amounts in determining compliance with the limitations of 33-12-202.
(5)Pursuant to rules adopted under 33-12-111, the commissioner may approve additional transactions involving the use of derivative instruments in excess of the limits of subsection (2) or for other risk management purposes under rules adopted by the commissioner, but replication transactions may not be permitted for other than risk management purposes.