The New York State Insurance Development is continuing to develop advice for insurers that lend securities to other parties.
Insurers and other financial services companies make money by lending the securities in their portfolios to other investors.
The New York department first sent a circular letter about the topic of securities lending in the summer of 2008, shortly before the financial crisis escalated.
"At that time, the department had become aware that some insurers had experienced significant losses resulting from their securities lending programs," department officials write in the proposed circular letter. "The economic environment of the past 2 years has exacerbated the risk to insurers when they both loan securities and make investment decisions with any cash received as collateral for the loaned security."
The department is proposing that an insurer that engages in securities lending:
- Limit the size of its securities lending program to less than 5% of admitted assets.
- Refrain from making loans to any single borrower, together with the borrower's subsidiaries and affiliates, that would exceed 10% of an insurer's assets available to be lent.
- Comply with existing rules that require it to hold cash collateral equal to at least 102% of the fair value of the lent security for a domestic security, and 105% of the fair value of the lent security for a foreign security.
- Invest the cash received as collateral conservatively, in instruments such as government bonds and commercial paper, and in a diversified fashion, with no more than 40% of cash collateral in corporate debt securities or asset-backed securities, and no more than 25% of cash collateral in floating-rate asset-backed securities.
- Match the maturity date of an investment made with cash collateral closely with the date that the cash collateral must be returned in exchange for the lent securities. "Any mismatch may adversely affect an insurer's balance sheet, and negatively impact its surplus," officials say.
The New York department will continue to monitor insurers' securities lending practices, and it might establish new regulations or seek legislation, officials say.
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