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Delaware General AssemblyDelaware RegulationsMonthly Register of RegulationsNovember 2014

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Proposed Regulation 404 relating to Derivative Instruments was published in the Delaware Register of Regulations on September 1, 2014. The comment period remained open until September 30, 2014. There was no public hearing on proposed Regulation 404. Public notice of the proposed Regulation 404 in the Register of Regulations was in conformity with Delaware law.
1. 18 Del.C. §§311 and 1333 of the Insurance Code requires a regulation to set forth rules and procedural requirements which the Commissioner deems necessary to carry out the provisions of the Code.
Based on the provisions of 18 Del.C. §§311 and 1333, and of 29 Del.C. Ch. 101, and the record in this docket, I hereby adopt proposed Regulation 404 as may more fully and at large appear in the version attached hereto to be effective 10 days after being published as final.
The text of proposed Regulation 404 last appeared in the Register of Regulations Vol. 18, Issue 3, pages 195-201.
IT IS SO ORDERED this 15th day of October, 2014.
This regulation is adopted by the Commissioner pursuant to the authority granted by 18 Del.C. §§311 and 1333 and is promulgated in accordance with 29 Del.C. Ch. 101.
"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.
"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, sometimes called the strike rate or strike price.
"Collar" means an agreement to receive payments as the buyer of an option, cap or floor and to make payments as the seller of a different option, cap or floor.
"Counterparty exposure" means the net amount of credit risk attributable to an over-the-counter derivative instrument determined as follows:
"Credit rating" means with respect to a party or entity, the rating currently assigned to its unsecured and unsubordinated long-term debt, an issuer rating, financial strength rating or other similar rating which assesses the creditworthiness of a party to meet its financial or deposit obligations.
"Derivative instrument" means an agreement, instrument or a series or combination thereof: (a) 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 thereof; or (b) that has a price, 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 or is dependent on the occurrence or nonoccurrence of any event associated with one or more potential financial, economic, or commercial consequences. The term "derivative instrument" includes, without limitation, options, warrants used in a hedging transaction and not attached to another financial instrument, caps, floors, collars, swaps, swaptions, forwards, futures and any other agreements or instruments substantially similar thereto or any series or combination thereof. The term "derivative instrument" does not include other categories of investments specifically authorized under 18 Del.C. Chapter 13.
"Derivative transaction" means a transaction involving the use of one or more derivative instruments.
"Derivatives clearinghouse" means a derivatives clearing organization registered with the Commodity Futures Trading Commission or the Securities Exchange Commission or regulated, supervised and examined by a foreign regulatory authority.
"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 reference price, level, performance or value of one or more underlying interests.
"Foreign regulatory authority" means any foreign (non-United States) government, or any department, agency, governmental body, or regulatory organization empowered by a foreign government to administer or enforce a law, rule, or regulation as it relates to a derivative instrument matter, or any department or agency of a political subdivision of a foreign government empowered to administer or enforce a law, rule, or regulation as it relates to a derivative instrument matter.
"Forward" means an agreement (other than a future) to make or take delivery in the future of one or more underlying interests, or effect a cash settlement, based on the actual or expected price, level, performance or value of such underlying interests, but shall not mean or include spot transactions effected within customary settlement periods, when-issued purchases, or other similar cash market transactions.
"Future" means an agreement traded on a futures exchange, to make or take delivery of, or effect a cash settlement based on the actual or expected price, level, performance or value of, one or more underlying interests.
"Hedging transaction" is a derivative transaction which is entered into and maintained to manage or reduce:
"Income generation transaction" is a transaction involving a derivative instrument set forth in Section 6.0 of this regulation that is intended to generate income or enhance return. Other types of derivative instruments may not be used in income generation transactions.
"Option" means an agreement giving the buyer the right but not the obligation 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, spread, level, performance or value of one or more underlying interests.
"Over-the-counter derivative instrument" means a derivative instrument the use of which is authorized under this regulation other than a derivative instrument (i) cleared through a U.S. or foreign derivatives clearinghouse or (ii) traded on or through a U.S. or foreign exchange.
"Potential exposure" means 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).
"Qualified counterparty" means a counterparty:
"Replication (synthetic asset) transaction" means a derivative transaction entered into in conjunction with other permissible investments under 18 Del.C. Chapter 13 in order to reproduce the investment characteristics of investments otherwise permissible under 18 Del.C. Chapter 13. A derivative transaction entered into by an insurer as a hedging transaction or income generation transaction shall not be considered a replication (synthetic asset) transaction.
"SVO" means the Securities Valuation Office of the National Association of Insurance Commissioners or any successor office established by the National Association of Insurance Commissioners.
"Swap" means an agreement to exchange or to net payments at one or more times based on the actual or expected price, yield, level, performance or value of one or more underlying interests.
"Swaption" means an option to purchase or sell a swap at a given price and time or at a series of prices and times. A swaption does not mean a swap with an embedded option.
"Underlying interest" means the assets, liabilities, other interests or a combination thereof underlying a derivative instrument, such as any one or more securities, currencies, rates, indices, commodities or derivative instruments.
4.2 A derivative instrument that complies with this regulation is an eligible investment and does not need to otherwise qualify under another provision of 18 Del.C. Chapter 13. Derivative instruments shall not be included as miscellaneous investments for purposes of 18 Del.C. §1320.
7.1 Any asset being replicated is subject to all of the provisions and limitations on the making thereof specified in 18 Del.C. Chapter 13 with respect to investments by the insurer as if the replication (synthetic asset) transaction constituted a direct investment by the insurer in the replicated asset.
8.2.3 A counterparty that is an affiliate of the insurer, if (a) the Commissioner has approved of the application of 18 Del.C. §5933 to such affiliate, in accordance with subsection (h) thereof, or (b) the Commissioner has approved of over-the-counter transactions with such affiliate in accordance with 18 Del.C. §5005.
Last Updated: December 31 1969 19:00:00.
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