Texas Insurance Code - Section 425.125. Risk Control Transactions: Definitions
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Texas Lawyer > Insurance Code > Texas Insurance Code - Section 425.125. Risk Control Transactions: Definitions
§ 425.125. RISK CONTROL TRANSACTIONS: DEFINITIONS. In
Sections 425.124-425.132:
(1) "Acceptable collateral" means cash, cash
equivalents, letters of credit, and direct obligations, or
securities that are fully guaranteed as to principal and interest
by the United States government.
(2) "Business entity" includes a sole proprietorship,
corporation, limited liability company, association, partnership,
joint stock company, joint venture, mutual fund, bank, trust, joint
tenancy, 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 425.123. 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 an option, cap, or floor and to make payments as the
seller of a different option, cap, or floor.
(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 insurance company; 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 jurisdiction outside the United States that
is 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 company 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 insurance company's fiscal
year and must be reduced by the market value of acceptable
collateral held by the company or a custodian on the company's
behalf.
(7) "Derivative instrument":
(A) means an agreement, option, or instrument, or
a series or combinations 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 instrument; 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 insurance company 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 a
company would otherwise be authorized to invest in or receive under
a provision of this subchapter other than Sections 425.124-425.132,
or a debt obligation of the company.
(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
rate or floor price exceeds a reference price, level, performance,
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 price,
level, performance, or value of those interests. The term does not
include a future, 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 price, level, performance, 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
insurance company 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 insurance
company, 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 price, spread, level, performance, 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 insurance company'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 other interests. The
term includes a security, currency, rate, index, commodity, or
derivative instrument.
(25) "Warrant" means an instrument that gives the
holder the right to purchase or sell the underlying interest at a
given price and time or at a series of prices and times outlined in
the warrant agreement.
Added by Acts 2005, 79th Leg., ch. 727, § 1, eff. April 1, 2007.
Section: 425.118 425.119 425.120 425.121 425.122 425.123 425.124 425.125 425.126 425.127 425.128 425.129 425.130 425.131 425.132
Last modified: August 11, 2007
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