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Legislative Memo

Ken Pokalsky
Director of Government Affairs
T 518.465.7517 x205
www.bcnys.org

BILL:

S.2998 (Seward)

  Support

SUBJECT:

Derivatives

 

S.2998 (Seward)

DATE:

May 2, 2005

 

This bill would make permanent the current law allowing domestic insurers to enter into derivative
and replication transactions in accordance with written derivative use plans approved by the New
York State Insurance Department, which otherwise shall expire and be deemed repealed on June
30, 2005.

Section 1 of the bill would amend the Insurance Law to adjust the definition of “qualified
counterparty” by including subsidiaries or affiliates of otherwise qualified counterparties, as long
as the obligation is guaranteed by the qualified entity or its parent company. This section also
expands the definition of “qualified bank” to include foreign banks, as long as they are organized
and subject to banking supervision under the laws of any foreign jurisdiction rated AA-/Aa3 or
better.

The market has evolved since the law was first enacted in that broker/dealers are now transacting
derivatives out of subsidiary entities that do not meet the definition provided for in the current
law. As long as the transactions performed by these subsidiaries are guaranteed by an otherwise
qualified entity, it should by permissible for a subsidiary or affiliate company to enter into these
transactions.

Derivative instruments have been successfully utilized by insurers, banks, other financial
institutions and business corporations as hedges against risk loss on underlying securities. They
allow investment risk to be segregated, such that movements in interest rates, currency exchange
rates, stock prices or commodity prices will not have an inordinate effect on an insurer's value.

It is vital that Section 1410 be made permanent to allow insurers to continue to employ the use of
derivative and replication transactions to hedge against domestic and foreign market and credit
risks.

For the abovementioned reasons, The Business Council strongly supports this legislation and
urges its enactment.