40-2b21. Securities lending, repurchase and reverse repurchase transactions; requirements; definitions.

40-2b21

Chapter 40.--INSURANCE Article 2b.--INVESTMENTS BY LIFE INSURANCE COMPANIES

      40-2b21.   Securities lending, repurchase and reverse repurchasetransactions; requirements; definitions.(a)   As used in this section:

      (1)   "Acceptable collateral" means:

      (A)   With respect to securities lending transactions: Cash, cash equivalents,letters of credit, direct obligations of, or securities that are fullyguaranteed as to principal and interest by, the government of the United Statesor any agency of the United States, specifically including the federal nationalmortgage association and the federal home loan mortgage corporation, and withrespect to lending foreign securities, sovereign debt rated 1 by the SVO, allto the extent authorized by K.S.A. 40-2b01 et seq. and amendments thereto;

      (B)   with respect to repurchase transactions: Cash, cash equivalents, anddirect obligations of, or securities that are fully guaranteed as to principaland interest by, the government of the United States or any agency of theUnited States, specifically including the federal national mortgage associationand the federal home loan mortgage corporation, all to the extent authorized byK.S.A. 40-2b01 et seq. and amendments thereto; and

      (C)   with respect to reverse repurchase transactions: Cash and cashequivalents to the extent authorized by K.S.A. 40-2b01 et seq. and amendmentsthereto.

      (2)   "Cash equivalents" mean short-term, highly rated, and highly liquidinvestments or securities readily convertible to known amounts of cash withoutpenalty and so near maturity that they present insignificant risk of change invalue. For purposes of this definition:

      (A)   "Short-term" means investments with a remaining term to maturity of90 days or less;

      (B)   "highly rated" means an investment rated "P-1" by Moody's Investor'sService, Inc. or "A-1" by Standard and Poor's, or its equivalent rating by anationally recognized statistical rating organization recognized by the SVO;and

      (C)   cash equivalents include government money market mutual funds and moneymarket mutual funds rated 1 by the SVO.

      (3)   "Equivalent securities" mean:

      (A)   In a securities lending transaction, securities that are identical tothe loaned securities including the amount thereof, except as to certificatenumber if held in physical form, except if any different security isexchanged for any loaned security by recapitalization, merger, consolidationor other corporate action, such different security shall be deemed to be theloaned security.

      (B)   In a repurchase transaction, securities that are identical to thepurchased securities including the amount of the purchased securities, exceptas to certificate number if held in physical form.

      (C)   In a reverse repurchase transaction, securities that are identical tothe sold securitiesincluding the amount of the sold securities, except as to certificate number ifheld in physical form.

      (4)   "Letters of credit" means clean, irrevocable and unconditional lettersof credit issued or confirmed by, and payable and presentable at, financialinstitutions on the list of financial institutions meeting the standards forissuing letters of credit pursuant to the purposes and procedures of thesecurities valuation office or any successor publication. To constituteacceptable collateral for the purposes of this section, a letter of credit musthave an expiration date beyond the term of the subject transaction.

      (5)   "Market value" means for the purpose of this section:

      (A)   With respect to cash and letters of credit, the amounts thereof; and

      (B)   with respect to any security as of any date, the price for the securityon that date obtained from a generally recognized source, or the most recentquotation from such a source, plus accrued but unpaid income thereon to theextent not included in such price as of that date.

      (6)   "Qualified business entity" means a business entity which is, or is asubsidiary or affiliate of:

      (A)   An issuer of obligations or preferred stock which are rated 1 or 2 bythe SVO or an issuer of obligations, preferred stock, or derivative instrumentswhich are rated the equivalent of 1 or 2 by the SVO or by a nationallyrecognized statistical rating organization recognized by the SVO; or

      (B)   A primary dealer in United States government securities, as recognizedby the federal reserve bank of New York.

      (7)   "Repurchase transaction" means a transaction in which an insurerpurchases securities from a business entity which is obligated to repurchasethe purchased securities or equivalent securities from the insurer at aspecified price, and either within a specified period of time or upon demand.

      (8)   "Reverse repurchase transaction" means a transaction in which an insurersells securities to a business entity and is obligated to repurchase the soldsecurities or equivalent securities from the business entity at a specifiedprice and either within a specified period of time or upon demand.

      (9)   "Securities lending transaction" means a transaction in whichsecurities are loaned by an insurer to a business entity which is obligated toreturn the loaned securities or equivalent securities to the insurer, within aspecified period of time or upon demand.

      (10)   "Substantially similar securities" mean securities that meet all thecriteria for substantially similar securities specified in the NAIC accountingpractices and procedures manual, as amended, and in an amount that constitutesgood delivery form.

      (11)   "SVO" means the securities valuation office of the National Associationof Insurance Commissioners or any successor office established by the NationalAssociation of Insurance Commissioners.

      (b)   Any life insurance company organized under any law of this state mayenter into securities lending, repurchase and reverse repurchasetransactions, subject to the following requirements:

      (1)   The insurer's board of directors shall adopt a resolution authorizinginvestments under this section and a written plan which specifies guidelinesand objectives to be followed, such as:

      (A)   A description of how cash received will be invested or used for generalcorporate purposes of the insurer;

      (B)   operational procedures to manage interest rate risk, counterpartydefault risk and the use of acceptable collateral in a manner that reflects theliquidity needs of the transaction; and

      (C)   the extent to which an insurer may engage in these transactions.

      (2)   The insurer shall enter into a written agreement for all transactionsauthorized in this section. Such agreementshall adequately identify each security to which the agreement applies andshall require that each transaction terminate on a specified date no more thanone year from its inception or upon earlier demand of the insurer. In arepurchase transaction, the agreement must also state that in the event ofdefault by the party agreeing to repurchase the securities described in theagreement at the terms contained in the agreement, title to the describedsecurities must pass immediately to the insurance company without recourse.Such agreement shall be with the counterparty business entity, except forsecurities lending transactions the agreement may be with an agentacting on behalf of the insurer, if such agent is a qualified business entity,and if such agreement:

      (A)   Requires the agent to enter into separate agreements with eachcounterparty that are consistent with the requirements of this section; and

      (B)   prohibits securities lending transactions under the agreement with theagent or its affiliates.

      (3)   Cash received in a transaction under this section shall be invested inaccordance with K.S.A. 40-2b01 et seq. and amendments thereto, and in a mannerthat recognizes the liquidity needs of the transaction, or shall be used by theinsurer for its general corporate purposes. For so long as the transactionremains outstanding, the insurer, its agent or custodian shall maintain in theUnited States, as acceptable collateral received in a transaction under thissection, either physically or through book entry systemsof the federalreserve or through clearing corporations as permitted by K.S.A. 40-2b20 andamendments thereto, (A) possession of theacceptable collateral; or (B) a perfected security interest in theacceptable collateral.

      (4)   For purposes of calculating the limitations of K.S.A. 40-2b01 et seq.and amendments thereto, securities lending, repurchase and reverse repurchasetransactions shall not be considered investments in thecounterparty, or in any issue of securities issued by the counterparty, or inthe jurisdiction in which the counterparty is located. For purposes ofcalculations made to determine compliance with this subpart (4), no effectwill be given to the insurer's futureobligation to resell securities in the case of a repurchase transaction, or torepurchase securities in the case of a reverse repurchase transaction. Aninsurer may not enter into a transaction under this section if, as a result ofand after giving effect to the transaction:

      (A)   The aggregate amount of all securities then loaned or sold to, orpurchased from, any one business entity pursuant to this section would exceed5% of its admitted assets. In calculating the amount sold to orpurchased from a business entity pursuant to repurchase or reverse repurchasetransactions, effect may be given to netting provisions under a master writtenagreement; or

      (B)   the aggregate amount of all securities then loaned or sold to, orpurchased from, all business entities under this section, without the effect ofnetting referred to in subpart (A), would exceed 40% of its admitted assets.

      (5)   In a securities lending transaction, the insurer shall receiveacceptable collateral having a market value as of the transaction date at leastequal to 102% of the market value of the securitiesloaned by the insurer in such transaction as of that date. If at any time themarket value of such acceptable collateral is less than the market value of theloaned securities, the business entity to which the securities are loaned shallbe obligated to deliver additional acceptable collateral, the market value ofwhich, together with the market value of all acceptable collateral then held inconnection with the transaction, equals at least 102% of the market value ofthe loaned securities.

      (6)   In a reverse repurchase transaction (other than a dollar rolltransaction), the insurer shall receive acceptable collateral having a marketvalue as of the transaction date at least equal to95% of the market value of the securities transferred by the insurer in suchtransactionas of that date. If at any time the market value of such acceptable collateralis less than 95% of the market value of the securities so transferred, thebusiness entity shall be obligated to deliver additional acceptable collateral,the market value of which, together with the market value of all acceptablecollateral then held in connection with the transaction, equals at least95% of the market value of the transferred securities.

      (7)   In a dollar roll transaction, the insurer shall receive cash in anamount at least equal to the market value of the securities transferred by theinsurer in such transaction as of the transaction date.

      (8)   In a repurchase transaction, the insurer shall receive as acceptablecollateral transferred securities having a market value equal at least to 102%of the purchase price paid by the insurer for suchsecurities. If at any time the market value of such acceptable collateral isless than 100% of the purchase price paid by the insurer,the business entity shall be obligated to provide additional acceptablecollateral, the market value of which, together with the market value of allacceptable collateral then held in connection with the transaction, equals atleast 102% of such purchase price. Securities acquired by an insurer in arepurchase transaction shall not be sold in areverse repurchase transaction, loaned in a securities lending transaction orotherwise pledged.

      (c)   Unless otherwise specified, an investment limitation computed on thebasis of an insurer's admitted assets or capital and surplus shall relate tothe amount as shown on the insurer's last annual report as filedwith the commissioner of insurance or a more recent quarterly financialstatement as filed with the commissioner, on a form prescribed by the NationalAssociation of Insurance Commissioners, within 45 days following the end of thecalendar quarter to which the interim statement pertains. For purposes ofcomputing any limitation based upon admitted assets, the insurer shall deductfrom the amount of its admitted assets the amount of the liabilityrecorded on such statutory balance sheet for:

      (1)   The return of acceptable collateral received in a reverse repurchase ora securities lending transaction; and

      (2)   the amount reported as borrowed money in the most recently filedfinancial statement to the extent not included in subpart (1).

      History:   L. 1982, ch. 201, § 4;L. 1996, ch. 28, § 1; July 1.