Texas Insurance Code - Section 424.201. Definitions
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§ 424.201. DEFINITIONS. In this subchapter:
(1) "Acceptable collateral" means:
(A) cash;
(B) cash equivalents;
(C) letters of credit and direct obligations; or
(D) securities that are fully guaranteed as to
principal and interest by the United States.
(2) "Business entity" includes an association, bank,
corporation, joint stock company, joint tenancy, joint venture,
limited liability company, mutual fund, partnership, sole
proprietorship, trust, or other similar form of business
organization, regardless of whether organized for profit.
(3) "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 that is
sometimes called the strike rate or strike price.
(4) "Cash equivalent" means an investment or security
that is short-term, highly rated, highly liquid, and readily
marketable. The term includes a money market fund described by
Section 424.106. For purposes of this subdivision, an investment
or security is:
(A) short-term if it has a remaining term to
maturity of one year or less; and
(B) highly rated if it has:
(i) a rating of "P-1" by Moody's Investors
Service, Inc.;
(ii) a rating of "A-1" by the Standard and
Poor's Division of the McGraw Hill Companies, Inc.; or
(iii) an equivalent rating by a nationally
recognized statistical rating organization recognized by the
securities valuation office.
(5) "Collar" means an agreement to receive payments as
the buyer of a cap, floor, or option and to make payments as the
seller of a different cap, floor, or option.
(6)(A) "Counterparty exposure amount" means:
(i) for an over-the-counter derivative
instrument not entered into under a written master agreement that
provides for netting of payments owed by the respective parties,
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 zero, if the liquidation of
the derivative instrument would not result in a final cash payment
to the insurer; or
(ii) for an over-the-counter derivative
instrument entered into under a written master agreement that
provides for netting of payments owed by the respective parties and
for which the counterparty's domiciliary jurisdiction is within the
United States or a foreign jurisdiction listed in the Purposes and
Procedures Manual of the securities valuation office 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 on the liquidation of the instruments
in the event of the counterparty's default under the master
agreement, if there is no condition precedent to the counterparty's
obligation to make the payment and if there is no setoff of amounts
payable under another instrument or agreement.
(B) For purposes of this subdivision, market
value or the net sum payable, as applicable, must be determined at
the end of the most recent quarter of the insurer's fiscal year and
must be reduced by the market value of acceptable collateral held by
the insurer or a custodian on the insurer's behalf.
(7) "Derivative instrument":
(A) means an agreement, option, or 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 instead of making or taking
delivery of, or assuming or relinquishing, a specified amount of an
underlying interest; or
(ii) that has a price, performance, value,
or cash flow based primarily on the actual or expected price, yield,
level, performance, value, or cash flow of one or more underlying
interests;
(B) includes an option, a warrant not otherwise
permitted to be held by the insurer under this subchapter, a cap, a
floor, a collar, a swap, a swaption, a forward, a future, any other
substantially similar agreement, option, or instrument, and a
series or combination of those agreements, options, or instruments;
and
(C) does not include a collateralized mortgage
obligation, another asset-backed security, a principal-protected
structured security, a floating rate security, an instrument that
an insurer would otherwise be authorized to invest in or receive
under a provision of this subchapter other than this subdivision,
or a debt obligation of the insurer.
(8) "Derivative transaction" means a transaction
involving the use of one or more derivative instruments. The term
does not include a dollar roll transaction, repurchase transaction,
reverse repurchase transaction, or securities lending transaction.
(9) "Floor" means an agreement obligating the seller
to make payments to the buyer, each of which is based on the amount
by which a predetermined number that is sometimes called the floor
price or floor rate exceeds a reference level, performance, price,
or value of one or more underlying interests.
(10) "Forward" means an agreement to make or take
delivery in the future of one or more underlying interests, or to
effect a cash settlement, based on the actual or expected level,
performance, price, or value of those interests. The term does not
include a future or a spot transaction effected within a customary
settlement period, a when-issued purchase, or another similar cash
market transaction.
(11) "Future" means an agreement traded on a futures
exchange to make or take delivery of one or more underlying
interests, or to effect a cash settlement, based on the actual or
expected level, performance, price, or value of those interests.
(12) "Futures exchange" means a foreign or domestic
exchange, contract market, or board of trade on which trading in
futures is conducted and that, in the United States, is authorized
to conduct that trading by the Commodity Futures Trading Commission
or a successor to that agency.
(13) "Hedging transaction" means a derivative
transaction entered into and maintained to manage, with respect to
an asset, liability, or portfolio of assets or liabilities, that an
insurer has acquired or incurred or anticipates acquiring or
incurring:
(A) the risk of a change in value, yield, price,
cash flow, or quantity; or
(B) the currency exchange rate risk.
(14) "Income generation transaction" means a
derivative transaction entered into to generate income. The term
does not include a hedging transaction or a replication
transaction.
(15) "Market value" means the price for a security or
derivative instrument obtained from a generally recognized source,
the most recent quotation from a generally recognized source, or if
a generally recognized source does not exist, the price determined
under the terms of the instrument or in good faith by the insurer,
as can be reasonably demonstrated to the commissioner on request,
plus the amount of accrued but unpaid income on the security or
instrument to the extent that amount is not included in the price as
of the date the security or instrument is valued.
(16) "Option" means an agreement giving the buyer the
right to buy or receive, referred to as a "call option," to sell or
deliver, referred to as a "put option," to enter into, extend, or
terminate, or to effect a cash settlement based on the actual or
expected level, performance, price, spread, or value of, one or
more underlying interests.
(17) "Over-the-counter derivative instrument" means a
derivative instrument entered into with a business entity in a
manner other than through a securities exchange or futures exchange
or cleared through a qualified clearinghouse.
(18) "Potential exposure" means:
(A) as to a futures position, the amount of
initial margin required for that position; or
(B) as to a swap, collar, or forward, one-half of
one percent multiplied by the notional amount multiplied by the
square root of the remaining years to maturity.
(19) "Qualified clearinghouse" means a clearinghouse
that:
(A) is subject to the rules of a securities
exchange or a futures exchange; and
(B) provides clearing services, including acting
as a counterparty to each of the parties to a transaction in a
manner that eliminates the parties' credit risk to each other.
(20) "Replication transaction" means a derivative
transaction or a combination of derivative transactions effected
separately or in conjunction with cash market investments included
in the insurer's investment portfolio to replicate the risks and
returns of another authorized transaction, investment, or
instrument or to operate as a substitute for cash market
transactions. The term does not include a hedging transaction.
(21) "Securities exchange" means:
(A) an exchange registered as a national
securities exchange or a securities market registered under the
Securities Exchange Act of 1934 (15 U. S.C. Section 78a et seq.), as
amended;
(B) the Private Offerings, Resales and Trading
through Automated Linkages system; or
(C) a designated offshore securities market as
defined by 17 C.F.R. Section 230.902, as amended.
(22) "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.
(23) "Swaption" means an option to purchase or sell a
swap at a given price and time or at a series of prices and times.
The term does not include a swap with an embedded option.
(24) "Underlying interest" means an asset, liability,
or other interest underlying a derivative instrument or a
combination of those assets, liabilities, or interests. The term
includes a security, currency, rate, index, commodity, or
derivative instrument.
(25) "Warrant" means an instrument under which the
holder has the right to purchase or sell the underlying interest at
a given price and time or at a series of prices and times stated in
the warrant.
Added by Acts 2005, 79th Leg., ch. 727, § 1, eff. April 1, 2007.
Section: 424.151 424.152 424.153 424.154 424.155 424.156 424.157 424.201 424.202 424.203 424.204 424.205 424.206 424.207 424.208
Last modified: August 10, 2007
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