Relates to treatment of qualified financial contracts in an insurance insolvency proceeding affecting a domestic, foreign or alien insurer.
TITLE OF BILL: An act to amend the insurance law, in relation to the treatment of qualified financial contracts in an insurance insolvency proceeding affecting a domestic, foreign or alien insurer
PURPOSE: The purpose of this bill is to increase the certainty of insurers and their creditors with respect to the enforceability of certain financial market transactions and related netting agreements in the event of insurer insolvency. Insurance companies are significant users of these financial market contracts (called "qualified financial contracts" in the Bill), including derivatives, securities lending, repurchase agreements, futures contracts and other financial instruments. These contracts are typically documented under master agreements providing for netting of obligations between the parties. The agreements also establish a right of the non-defaulting party to close out, liquidate and terminate the agreements immediately upon the insolvency of the other party and provide for collateralization of obligations on a net, rather than gross, basis. The importance of maintaining certainty among the participants in these markets has been acknowledged and addressed through changes in the Federal Bankruptcy Code, the Federal Deposit Insurance Act, governing the bankruptcy of banks and other federal legislation and regulatory orders, as well as in the New York State Banking Law and in the laws of major non-U.S. jurisdictions applicable to the insurers' trading counterparties. All of these legal structures recognize and enforce the netting and closeout provisions of financial contract master agreements.
The only major category of financial and business institutions in the U.S. which lack such certainty are insurance companies. This lack of certainty threatens the ability of New York insurers to continue to use these investment tools to manage their risks and remain financially strong. Recent changes in the international capital rules for banks under the Base II accords, events in the financial markets over the past year and the increasingly sophisticated risk control methods of financial institutions have placed a spotlight on the lack of protections for these contracts under the insurance laws of New York and most other states. While a framework (or such protection was adopted by the NAIC in its Insurer Receivership Model Law (and a predecessor model), only (i states have thus far taken action to adopt legislation validating these netting arrangements for insurers. This bill, if adopted, will reduce uncertainty and risk to NY insurance companies, as well as the banks, broker-dealers and other financial institutions with which they deal and will also reduce systemic risks to the financial markets. The bill will also redress the competitive disadvantage of New York insurers vis-a-vis their competitors in Connecticut and elsewhere where netting legislation has been adopted.
SUMMARY OF PROVISIONS:
This Bill would add a new §7437 to Article 74 of the Insurance Law in regard to the following:
*Subsection (a) provides, for the purposes of Article 74 of the insurance law, definitions of specific types of financial contracts commonly used in the financial markets, including swap contracts, repurchase agreements, forward contracts, commodity contracts and security contracts as "qualified financial contracts" and the related "netting contracts". These definitions are intended to be consistent with those used under the Federal Deposit Insurance Act, applicable to bank insolvencies, and are similar to those contained in §619 of the New York banking law.
*Subsection (b) provides for the enforcement and recognition of the contractual rights of the insurer's counterparties under qualified financial contracts, netting agreements and related security arrangements to terminate, accelerate and close out such contracts, to offset and net all obligations owing under such contracts, and to enforce any security rights under such agreements, free of any stay or prohibition which might otherwise apply under Article 74.
*Subsection (c) provides for the transfer of any net or settlement amount owing under a qualified financial contract by the non-defaulting counterparty to the insurer to the superintendent as liquidator, conservator or rehabilitator of the insurer. If netting results in an amount owing to the insurer, this provision confirms that the superintendent steps into the insurer's shoes with respect to that net amount.
*Subsections (d) and (e) provide for the transfer of all financial contracts between an insurer and a single counterparty and its affiliates together if a bulk transfer of insurer liabilities or contracts is made by the superintendent
*Subsection (f) provides for validation of payments and transfers of money and property under netting agreements and qualified financial contracts made prior to the commencement of a rehabilitation, insolvency or conservation proceeding, unless such transfers were made with actual intent to hinder, delay or defraud the insurer, the superintendent or other creditors Parties to "qualified financial contracts" make payments and transfer collateral continually through the life of the agreements, Subsection (f) protects the creditor from the risk of "claw-back" of normal payment and collateral transfers under these agreements during the statutory preference period.
*Subsection (g) provides that, likewise, if the superintendent disaffirms or repudiates any qualified financial contracts or netting agreements with a counterparty, it must disaffirm or repudiate all such contracts, The Bill also establishes the amount of the counterparty's claim in the event of disaffirmance or repudiation, These provisions secure the integrity of the netting provisions under qualified financial contracts by protect the insurer's counterparties from "selective enforcement," the practice of keeping favorable contracts and rejecting unfavorable contracts.
This new section of the law would apply to contracts of both general and separate accounts of insurers, and would be effective immediately, except that it would not apply to any liquidation, receivership or conservatorship proceedings that have previously been commenced under Article 74.
JUSTIFICATION: Recent turmoil in the financial markets have heightened scrutiny, in the markets and among financial institutions about identifying, managing and limiting risk, the need for adequate capitalization and for understanding the interdependency of the different financial sectors. One source of risk to financial market participants has arisen due the lack of certainty in the treatment of financial intermediaries in the event of the insolvency of state regulated insurers, Under the patchwork of state laws, only a handful attempt to address the issue of certainty, This bill attempts to correct this lack of clarity in New York insurance law by specifying the status of "qualified financial contracts" in an insurance insolvency proceeding, This amendment brings New York's insurance law into conformRnce with similar provisions of the state banking code, the Federal bankruptcy law and the NAIC Insurance Receivership Model Act (IRMA).
As defined in this Bill, "Qualified Financial Contracts" encompass a range of commonly traded financial market contracts, including over-the counter and exchange traded derivatives, such as swaps, forwards and futures contracts, securities contracts, including securities lending arrangements and options, repurchase (repo) and reverse repurchase agreements. What these transactions have in common is that they are time sensitive, normally valued based on current market prices and traded repetitively and continuously between financial market participants Trading in these contracts frequently involves chains of transactions, with intermediary institutions aggregating and transferring risk and providing liquidity to financial institutions and markets,
Because of the key role played by these transactions in facilitating financial market functioning, the Federal Bankruptcy Code and other laws regulating market participants have been revised to provide special treatment for these transactions. For example, the legislative history of the Bankruptcy Code states that these obligations warranted a degree of finality at the outset of bankruptcy in order to prevent uncertainty in a marketplace where trading is continuous and often transactional. Other regulators have noted the important liquidity function in the financial markets played by these contracts and their providers and the financial systemic risks that a lack of certainty in these contracts could cause, including the potential for chain insolvencies, The use of netting agreements for financial market contracts has evolved from common law setoff and recoupment law. Netting reduces the credit risk between two parties by offsetting of mutual obligations and liabilities. Qualified transactions are typically entered into under master agreements, which allow the execution of multiple individual transactions and the close-out or termination of all of these transactions upon the occurrence of an event of default, including insolvency. Following the termination of the transactions, the close-out amount, representing the total lost value to one of the
parties for terminating the transactions prior to their stated maturity is calculated for each individual transaction. Since a party may be "in the money" on some transactions and "out of the money" on others, such amount are then netted against one another, creating a single net amount owing from one party to another.
The power of netting agreements to reduce credit exposure and risk from these financial market contracts can be illustrated with a simple example:
Under a single netting agreement, Party A and Party B have entered into 10 contracts. There are 5 contracts under which Party A owes money to Party B - worth 51000. There are 5 contracts under which Party Bowes Party A money - worth $800. If this contract is terminated, a net amount owing is calculated: Party A owes Party B a net amount of $200.
Collateral arrangements normally included in the netting agreements further reduce exposure of market participants under these contracts, collateral is computed and collected, based on the "net" exposure. If enforceable these agreements potentially dramatically reduce the credit exposure of financial institutions to each other that are inherent to these financial market transactions and the risk that the default or insolvency of an institution could have on the financial system. Therefore, the importance of clarifying enforceability of these agreements is great.
Netting can also involve the setoff of securities, whether as a true setoff (as in the case of repurchase or securities lending agreements) or as foreclosure on collateral (as in the case of cash or securities held to secure derivative transactions.) The ability of an institution to set off or to sell securities to immediately satisfy a claim against an insolvent counterparty is critical not only to reduce the parties' credit risk but to maintain liquidity in the securities markets, since many of these transactions are part of a whole chain of interlocking trades. The imposition of a stay on the liquidation of these securities, as is normally the case in a New York insurer insolvency proceeding, could result in uncertainty, gridlock or a chain of insolvencies.
Finally, financial market transactions are usually valued, collateralized and traded based 011 current market prices, and credit exposures are calculated or managed on this basis. Any legal uncertainty which affects the ability to make exposure calculations, any delay or uncertainty around the time of payment or any subsequent legal determinations in an insolvency proceeding which might overturn the previously calculated credit exposures undermine the effectiveness of these contractual provisions and procedures and the certainty they provide in the market.
This bill would substitute the needed certainty and reliability to enforcement of these important contractual protections for the current state of doubt and unpredictability which currently prevails under the New York insolvency laws.
Qualified financial contracts are widely used by insurers, largely for hedging purposes. They have proven to be of great assistance to
insurers during the recent market downturn Derivative instruments are used for hedging risks, for asset/liability management and for creation of synthetic asset exposures in the insurer's investment operations. The Legislature recognized the importance of this activity in granting New York insurers' derivative authority in 1998 under . 1410 of the insurance law and making that law permanent just last year, in 2008. Pursuant to that law, insurers use of these types of instruments are largely limited to hedging purposes and are strictly governed by derivative use plans that are filed with and approved by the New York State Insurance Department. These Plans must be re-filed with the Insurance Department when updated and are required to be audited annually by an independent auditing firm.
The New York insurance industry's continued access to these instruments, on favorable tern1s, is threatened by recent developments in the financial markets. In particular, implementation of the Basel II accords intensifies the pressure on insurers and their major counterparties. Basel II has currently been implemented in Europe and is in the process of implementation for major US banks through their regulation by the Federal Reserve and Office of Comptroller of the currency, and for major investment banking organizations through consolidated regulation by the Securities Exchange Commission. Under Basel II, regulated institutions will be required to maintain significant additional capital for its derivatives transactions and other financial contracts with parties with which it does not have a legally enforceable netting agreement, including the ability to close out upon insolvency without being effected by any stay.
Without the certainty sought through the amendment of New York law proposed in the Bill it will become difficult for the counterparties of NY insurers to obtain the necessary legal comfort to transact business with New York insurers. The consequence for the domestic companies will be increasingly poor pricing for their transactions, and potentially, lack of equal access to these financial markets. An inability to continue to trade or a deterioration of the prices at which insurers can transact potentially threatens the competitiveness and financial strength of New York companies.
By providing for the enforcement of netting and closeout rights for "qualified financial contracts" in an insurer insolvency, New York will be bringing its insurer insolvency law into harmony with federal law as well as the New York banking law and will give both insurers and their creditors the certainty and safety they need to continue to transact business
LEGISLATIVE HISTORY: S.4772 of 2009-10
FISCAL IMPLICATIONS: None to the state.
EFFECTIVE DATE: This act will take effect immediately, except that section one will only apply to a liquidation, rehabilitation or conservation proceeding that commences under article 74 of the insurance law on or after the effective date.
STATE OF NEW YORK ________________________________________________________________________ 2713 2011-2012 Regular Sessions IN SENATE January 31, 2011 ___________Introduced by Sen. SEWARD -- read twice and ordered printed, and when printed to be committed to the Committee on Insurance AN ACT to amend the insurance law, in relation to the treatment of qual- ified financial contracts in an insurance insolvency proceeding affecting a domestic, foreign or alien insurer THE PEOPLE OF THE STATE OF NEW YORK, REPRESENTED IN SENATE AND ASSEM- BLY, DO ENACT AS FOLLOWS: Section 1. The insurance law is amended by adding a new section 7437 to read as follows: S 7437. QUALIFIED FINANCIAL CONTRACTS. (A) AS USED IN THIS SECTION: (1) "ACTUAL DIRECT COMPENSATORY DAMAGES" MEANS AND INCLUDES NORMAL AND REASONABLE COSTS OF COVER OR OTHER REASONABLE MEASURES OF DAMAGES UTILIZED IN THE DERIVATIVES, SECURITIES OR OTHER MARKET FOR THE CONTRACT AND AGREEMENT CLAIMS BUT DOES NOT INCLUDE PUNITIVE OR EXEMPLARY DAMAGES, DAMAGES FOR LOST PROFIT OR LOST OPPORTUNITY OR DAMAGES FOR PAIN AND SUFFERING. (2) "BUSINESS DAY" MEANS A DAY OTHER THAN A SATURDAY, A SUNDAY OR ANY DAY ON WHICH EITHER THE NEW YORK STOCK EXCHANGE OR THE FEDERAL RESERVE BANK OF NEW YORK IS CLOSED. (3) "COMMODITY CONTRACT" MEANS: (A) A CONTRACT FOR THE PURCHASE OR SALE OF A COMMODITY FOR FUTURE DELIVERY ON, OR SUBJECT TO THE RULES OF, A BOARD OF TRADE OR CONTRACT MARKET UNDER THE COMMODITY EXCHANGE ACT (7 U.S.C. S 1, ET SEQ.) OR A BOARD OF TRADE OUTSIDE THE UNITED STATES; (B) AN AGREEMENT THAT IS SUBJECT TO REGULATION UNDER SECTION 19 OF THE COMMODITY EXCHANGE ACT (7 U.S.C. S 1, ET SEQ.) AND THAT IS COMMONLY KNOWN TO THE COMMODITIES TRADE AS A MARGIN ACCOUNT, MARGIN CONTRACT, LEVERAGE ACCOUNT OR LEVERAGE CONTRACT; (C) AN AGREEMENT OR TRANSACTION THAT IS SUBJECT TO REGULATION UNDER SECTION 4C(B) OF THE COMMODITY EXCHANGE ACT (7 U.S.C. S 1, ET SEQ.) AND THAT IS COMMONLY KNOWN TO THE COMMODITIES TRADE AS A COMMODITY OPTION; (D) ANY COMBINATION OF THE AGREEMENTS OR TRANSACTIONS REFERRED TO IN THIS PARAGRAPH; (E) ANY OPTIONEXPLANATION--Matter in ITALICS (underscored) is new; matter in brackets [ ] is old law to be omitted. LBD05498-02-1 S. 2713 2
TO ENTER INTO AN AGREEMENT OR TRANSACTION REFERRED TO IN THIS PARAGRAPH; OR (F) ANY OTHER CONTRACT THAT IS INCLUDED FROM TIME TO TIME AS A COMMODITY CONTRACT AS DEFINED IN THE FEDERAL DEPOSIT INSURANCE ACT, 12 U.S.C. S 1821(E)(8)(D). (4) "CONTRACTUAL RIGHT" MEANS AND INCLUDES ANY RIGHT SET FORTH IN A RULE OR BYLAW OF A DERIVATIVES CLEARING ORGANIZATION (AS DEFINED IN THE COMMODITY EXCHANGE ACT), A MULTILATERAL CLEARING ORGANIZATION (AS DEFINED IN THE FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991), A NATIONAL SECURITIES EXCHANGE, A NATIONAL SECURITIES ASSOCI- ATION, A SECURITIES CLEARING AGENCY, A CONTRACT MARKET DESIGNATED UNDER THE COMMODITY EXCHANGE ACT, A DERIVATIVES TRANSACTION EXECUTION FACILITY REGISTERED UNDER THE COMMODITY EXCHANGE ACT, OR A BOARD OF TRADE (AS DEFINED IN THE COMMODITY EXCHANGE ACT) OR IN A RESOLUTION OF THE GOVERN- ING BOARD THEREOF AND ANY RIGHT, WHETHER OR NOT EVIDENCED IN WRITING, ARISING UNDER STATUTORY OR COMMON LAW, OR UNDER LAW MERCHANT, OR BY REASON OF NORMAL BUSINESS PRACTICE. (5) "FORWARD CONTRACT" SHALL HAVE THE MEANING SET FORTH IN THE FEDERAL DEPOSIT INSURANCE ACT, 12 U.S.C. S 1821(E)(8)(D). (6) "NETTING AGREEMENT" MEANS: (A) A CONTRACT OR AGREEMENT (INCLUDING THE TERMS AND CONDITIONS INCORPORATED BY REFERENCE IN SUCH AGREEMENT), INCLUDING A MASTER AGREEMENT (WHICH MASTER AGREEMENT, TOGETHER WITH ALL SCHEDULES, CONFIRMATIONS, DEFINITIONS AND ADDENDA THERETO AND TRANS- ACTIONS UNDER ANY THEREOF, SHALL BE TREATED AS ONE NETTING AGREEMENT), THAT DOCUMENTS ONE OR MORE TRANSACTIONS BETWEEN THE PARTIES TO THE AGREEMENT FOR OR INVOLVING ONE OR MORE QUALIFIED FINANCIAL CONTRACTS AND THAT PROVIDES FOR THE NETTING, OFFSET, LIQUIDATION, TERMINATION, ACCEL- ERATION OR CLOSE OUT, UNDER OR IN CONNECTION WITH ONE OR MORE QUALIFIED FINANCIAL CONTRACTS OR PRESENT OR FUTURE PAYMENT OR DELIVERY OBLIGATIONS OR PAYMENT OR DELIVERY ENTITLEMENTS THEREUNDER (INCLUDING LIQUIDATION OR CLOSE-OUT VALUES RELATING TO SUCH OBLIGATIONS OR ENTITLEMENTS) AMONG THE PARTIES TO THE NETTING AGREEMENT; (B) ANY MASTER AGREEMENT OR BRIDGE AGREEMENT FOR ONE OR MORE MASTER AGREEMENTS DESCRIBED IN SUBPARAGRAPH (A) OF THIS PARAGRAPH; OR (C) ANY SECURITY ARRANGEMENT RELATED TO ONE OR MORE CONTRACTS OR AGREEMENTS DESCRIBED IN SUBPARAGRAPH (A) OR (B) OF THIS PARAGRAPH; PROVIDED THAT ANY CONTRACT OR AGREEMENT DESCRIBED IN SUBPARAGRAPH (A) OR (B) OF THIS PARAGRAPH RELATING TO AGREEMENTS OR TRANSACTIONS THAT ARE NOT QUALIFIED FINANCIAL CONTRACTS SHALL BE DEEMED TO BE A NETTING AGREEMENT ONLY WITH RESPECT TO THOSE AGREEMENTS OR TRAN- SACTIONS THAT ARE QUALIFIED FINANCIAL CONTRACTS. (7) "QUALIFIED FINANCIAL CONTRACT" MEANS ANY COMMODITY CONTRACT, FORWARD CONTRACT, REPURCHASE AGREEMENT, SECURITIES CONTRACT, SWAP AGREE- MENT AND ANY SIMILAR AGREEMENT THAT THE SUPERINTENDENT DETERMINES BY REGULATION TO BE A QUALIFIED FINANCIAL CONTRACT FOR THE PURPOSES OF THIS ARTICLE. (8) "REPURCHASE AGREEMENT" SHALL HAVE THE MEANING SET FORTH IN THE FEDERAL DEPOSIT INSURANCE ACT, 12 U.S.C. S 1821(E)(8)(D). (9) "SECURITIES CONTRACT" SHALL HAVE THE MEANING SET FORTH IN THE FEDERAL DEPOSIT INSURANCE ACT, 12 U.S.C. S 1821(E)(8)(D). (10) "SECURITY ARRANGEMENT" MEANS ANY SECURITY AGREEMENT OR ARRANGE- MENT OR OTHER CREDIT ENHANCEMENT OR GUARANTEE OR REIMBURSEMENT OBLI- GATION, INCLUDING A PLEDGE, SECURITY, COLLATERAL OR GUARANTEE AGREEMENT OR CREDIT SUPPORT DOCUMENT. (11) "SEPARATE ACCOUNT" MEANS AN ACCOUNT ESTABLISHED PURSUANT TO SECTION FOUR THOUSAND TWO HUNDRED FORTY OF THIS CHAPTER. (12) "SWAP AGREEMENT" SHALL HAVE THE MEANING SET FORTH IN THE FEDERAL DEPOSIT INSURANCE ACT, 12 U.S.C. S 1821(E)(8)(D).S. 2713 3
(13) "WALKAWAY CLAUSE" MEANS A PROVISION IN A NETTING AGREEMENT OR A QUALIFIED FINANCIAL CONTRACT THAT, AFTER CALCULATION OF A VALUE OF A PARTY'S POSITION OR AN AMOUNT DUE TO OR FROM ONE OF THE PARTIES IN ACCORDANCE WITH ITS TERMS UPON TERMINATION, LIQUIDATION OR ACCELERATION OF THE NETTING AGREEMENT OR QUALIFIED FINANCIAL CONTRACT, EITHER DOES NOT CREATE A PAYMENT OBLIGATION OF A PARTY OR EXTINGUISHES A PAYMENT OBLIGATION OF A PARTY IN WHOLE OR IN PART SOLELY BECAUSE OF THE PARTY'S STATUS AS A NON-DEFAULTING PARTY. (B)(1) NOTWITHSTANDING ANY OTHER PROVISION OF THIS ARTICLE, INCLUDING ANY OTHER PROVISION OF THIS ARTICLE PERMITTING THE MODIFICATION OF CONTRACTS, OR OTHER LAW OF THIS STATE, NO PERSON SHALL BE STAYED OR PROHIBITED FROM EXERCISING: (A) A CONTRACTUAL RIGHT TO CAUSE THE TERMI- NATION, LIQUIDATION, ACCELERATION OR CLOSE OUT OF ANY OBLIGATION UNDER OR IN CONNECTION WITH A NETTING AGREEMENT OR QUALIFIED FINANCIAL CONTRACT WITH AN INSURER BECAUSE OF: (I) THE INSOLVENCY, FINANCIAL CONDITION OR DEFAULT OF THE INSURER AT ANY TIME, PROVIDED THAT THE RIGHT IS ENFORCEABLE UNDER APPLICABLE LAW OTHER THAN THIS ARTICLE; OR (II) THE COMMENCEMENT OF ANY PROCEEDING UNDER THIS ARTICLE; (B) ANY RIGHT UNDER A SECURITY ARRANGEMENT RELATING TO ONE OR MORE NETTING AGREEMENTS OR QUAL- IFIED FINANCIAL CONTRACTS; OR (C) SUBJECT TO ANY PROVISION OF SUBSECTION (B) OF SECTION SEVEN THOUSAND FOUR HUNDRED TWENTY-SEVEN OF THIS CHAPTER, ANY RIGHT TO OFFSET OR NET OUT ANY TERMINATION VALUE, PAYMENT AMOUNT, OR OTHER TRANSFER OBLIGATION ARISING UNDER OR IN CONNECTION WITH ONE OR MORE QUALIFIED FINANCIAL CONTRACTS WHERE THE COUNTERPARTY OR ITS GUARAN- TOR IS ORGANIZED UNDER THE LAWS OF THE UNITED STATES, A STATE, OR A FOREIGN JURISDICTION APPROVED BY THE SECURITIES VALUATION OFFICE OF THE NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS AS ELIGIBLE FOR NETTING. (2) IF A COUNTERPARTY TO A MASTER NETTING AGREEMENT OR A QUALIFIED FINANCIAL CONTRACT WITH AN INSURER SUBJECT TO A PROCEEDING UNDER THIS ARTICLE TERMINATES, LIQUIDATES, CLOSES OUT OR ACCELERATES THE AGREEMENT OR CONTRACT, DAMAGES SHALL BE MEASURED AS OF THE DATE OR DATES OF TERMI- NATION, LIQUIDATION, CLOSE OUT OR ACCELERATION. THE AMOUNT OF A CLAIM FOR DAMAGES SHALL BE ACTUAL DIRECT COMPENSATORY DAMAGES. (C) UPON TERMINATION OF A NETTING AGREEMENT OR QUALIFIED FINANCIAL CONTRACT, THE NET OR SETTLEMENT AMOUNT, IF ANY, OWED BY A NONDEFAULTING PARTY TO AN INSURER AGAINST WHICH AN APPLICATION HAS BEEN FILED UNDER THIS ARTICLE SHALL BE TRANSFERRED TO OR ON THE ORDER OF THE SUPERINTEN- DENT, AS LIQUIDATOR, REHABILITATOR OR CONSERVATOR FOR THE INSURER, EVEN IF THE INSURER IS THE DEFAULTING PARTY, NOTWITHSTANDING ANY WALKAWAY CLAUSE IN THE NETTING AGREEMENT OR QUALIFIED FINANCIAL CONTRACT. ANY LIMITED TWO-WAY PAYMENT OR FIRST METHOD PROVISION IN A NETTING AGREEMENT OR QUALIFIED FINANCIAL CONTRACT WITH AN INSURER THAT HAS DEFAULTED SHALL BE DEEMED TO BE A FULL TWO-WAY PAYMENT OR SECOND METHOD PROVISION AS AGAINST THE DEFAULTING INSURER. ANY SUCH PROPERTY OR AMOUNT SHALL, EXCEPT TO THE EXTENT IT IS SUBJECT TO ONE OR MORE SECONDARY LIENS OR ENCUMBRANCES OR RIGHTS OF NETTING OR SETOFF, BE AN ASSET OF THE INSURER. (D) IN MAKING ANY TRANSFER OF A NETTING AGREEMENT OR QUALIFIED FINAN- CIAL CONTRACT OF AN INSURER SUBJECT TO A PROCEEDING UNDER THIS ARTICLE, THE SUPERINTENDENT, AS LIQUIDATOR, REHABILITATOR OR CONSERVATOR FOR THE INSURER, SHALL EITHER: (1) TRANSFER TO ONE PARTY (OTHER THAN AN INSURER SUBJECT TO A PROCEED- ING UNDER THIS ARTICLE) ALL NETTING AGREEMENTS AND QUALIFIED FINANCIAL CONTRACTS BETWEEN A COUNTERPARTY OR ANY AFFILIATE OF SUCH COUNTERPARTY AND THE INSURER THAT IS THE SUBJECT OF THE PROCEEDING, INCLUDING: (A) ALL RIGHTS AND OBLIGATIONS OF EACH PARTY UNDER EACH SUCH NETTING AGREE- MENT AND QUALIFIED FINANCIAL CONTRACT; AND (B) ALL PROPERTY, INCLUDINGS. 2713 4
ANY GUARANTEES OR OTHER CREDIT ENHANCEMENT, SECURING ANY CLAIMS OF EACH PARTY UNDER EACH SUCH NETTING AGREEMENT AND QUALIFIED FINANCIAL CONTRACT; OR (2) TRANSFER NONE OF THE NETTING AGREEMENTS, QUALIFIED FINANCIAL CONTRACTS, RIGHTS, OBLIGATIONS OR PROPERTY REFERRED TO IN PARAGRAPH ONE OF THIS SUBSECTION (WITH RESPECT TO SUCH COUNTERPARTY AND ANY AFFILIATE OF SUCH COUNTERPARTY). (E) IF THE SUPERINTENDENT, AS LIQUIDATOR, REHABILITATOR OR CONSERVATOR FOR AN INSURER, MAKES A TRANSFER OF ONE OR MORE NETTING AGREEMENTS OR QUALIFIED FINANCIAL CONTRACTS, THEN THE SUPERINTENDENT SHALL USE HIS OR HER BEST EFFORTS TO NOTIFY ANY PERSON WHO IS PARTY TO THE NETTING AGREE- MENTS OR QUALIFIED FINANCIAL CONTRACTS OF THE TRANSFER BY 12:00 NOON, NEW YORK TIME, ON THE BUSINESS DAY FOLLOWING THE TRANSFER. (F) NOTWITHSTANDING ANY OTHER PROVISION OF THIS ARTICLE, THE SUPER- INTENDENT, AS LIQUIDATOR, REHABILITATOR OR CONSERVATOR FOR AN INSURER, MAY NOT AVOID A TRANSFER OF MONEY OR OTHER PROPERTY ARISING UNDER OR IN CONNECTION WITH A NETTING AGREEMENT OR QUALIFIED FINANCIAL CONTRACT, OR ANY SECURITY ARRANGEMENT RELATING TO A NETTING AGREEMENT OR QUALIFIED FINANCIAL CONTRACT, THAT IS MADE BEFORE THE COMMENCEMENT OF A LIQUI- DATION, REHABILITATION OR CONSERVATION PROCEEDING UNDER THIS ARTICLE, EXCEPT THAT A TRANSFER MAY BE AVOIDED UNDER SECTION SEVEN THOUSAND FOUR HUNDRED TWENTY-FIVE OF THIS CHAPTER IF THE TRANSFER WAS MADE WITH ACTUAL INTENT TO HINDER, DELAY OR DEFRAUD THE INSURER, THE SUPERINTENDENT, AS LIQUIDATOR, REHABILITATOR OR CONSERVATOR OF THE INSURER, ANY OTHER RECEIVER APPOINTED FOR THE INSURER, OR EXISTING OR FUTURE CREDITORS. (G)(1) IN EXERCISING ANY RIGHTS OF DISAFFIRMANCE OR REPUDIATION OF A LIQUIDATOR, REHABILITATOR OR CONSERVATOR WITH RESPECT TO ANY NETTING AGREEMENT OR QUALIFIED FINANCIAL CONTRACT TO WHICH AN INSURER IS A PARTY, THE SUPERINTENDENT, AS LIQUIDATOR, REHABILITATOR OR CONSERVATOR FOR THE INSURER SHALL EITHER: (A) DISAFFIRM OR REPUDIATE ALL NETTING AGREEMENTS AND QUALIFIED FINANCIAL CONTRACTS BETWEEN A COUNTERPARTY OR ANY AFFILIATE OF SUCH COUNTERPARTY AND THE INSURER THAT IS THE SUBJECT OF THE PROCEEDING; OR (B) DISAFFIRM OR REPUDIATE NONE OF THE NETTING AGREEMENTS AND QUALIFIED FINANCIAL CONTRACTS REFERRED TO IN SUBPARAGRAPH (A) OF THIS PARAGRAPH (WITH RESPECT TO SUCH PERSON OR ANY AFFILIATE OF SUCH PERSON). (2) NOTWITHSTANDING ANY OTHER PROVISION OF THIS ARTICLE, ANY CLAIM OF A COUNTERPARTY AGAINST THE ESTATE ARISING FROM THE SUPERINTENDENT'S DISAFFIRMANCE OR REPUDIATION OF A NETTING AGREEMENT OR QUALIFIED FINAN- CIAL CONTRACT THAT HAS NOT BEEN PREVIOUSLY AFFIRMED IN THE LIQUIDATION PROCEEDING OR IN THE IMMEDIATELY PRECEDING REHABILITATION PROCEEDING SHALL BE DETERMINED AND SHALL BE ALLOWED OR DISALLOWED: (A) AS IF THE CLAIM HAD ARISEN BEFORE THE DATE OF THE FILING OF THE APPLICATION FOR LIQUIDATION; OR (B) IF A REHABILITATION PROCEEDING IS CONVERTED TO A LIQUIDATION PROCEEDING, AS IF THE CLAIM HAD ARISEN BEFORE THE DATE OF THE FILING OF THE APPLICATION FOR REHABILITATION. (3) THE AMOUNT OF THE CLAIM IDENTIFIED IN PARAGRAPH TWO OF THIS SUBSECTION SHALL BE THE ACTUAL DIRECT COMPENSATORY DAMAGES DETERMINED AS OF THE DATE OF THE DISAFFIRMANCE OR REPUDIATION OF THE NETTING AGREEMENT OR QUALIFIED FINANCIAL CONTRACT. (H) ALL RIGHTS OF A COUNTERPARTY UNDER THIS ARTICLE SHALL APPLY TO A NETTING AGREEMENT AND A QUALIFIED FINANCIAL CONTRACT ENTERED INTO ON BEHALF OF OR ALLOCATED TO: (1) THE GENERAL ACCOUNT OF THE INSURER; OR (2) A SEPARATE ACCOUNT OF THE INSURER IF THE ASSETS OF THE SEPARATE ACCOUNT ARE AVAILABLE ONLY TO A COUNTERPARTY TO A NETTING AGREEMENT ANDS. 2713 5
A QUALIFIED FINANCIAL CONTRACT ENTERED INTO ON BEHALF OF, OR ALLOCATED TO, THAT SEPARATE ACCOUNT. S 2. This act shall take effect immediately; provided, however, the provisions of section 7437 of the insurance law, as added by section one of this act shall only apply to a liquidation, rehabilitation or conser- vation proceeding that commences under article 74 of the insurance law on or after such effective date.