                                 CODE OF VIRGINIA

DERIVATIVE INSTRUMENTS (§ 38.2-1428)

A. A domestic insurer may engage in derivative transactions under this section
subject to the following general conditions:

   1. A domestic insurer may use derivative instruments under this section to
   engage in hedging transactions and replication transactions.

   2. Each domestic insurer utilizing derivative instruments shall establish
   written guidelines with respect to derivative transactions stating the
   insurer&#8217;s objectives for engaging in derivative transactions and
   derivative strategies, permissible derivative strategies and the relationship
   of those strategies to the insurer&#8217;s operations, and such other details
   as the Commission may from time to time require. The insurer&#8217;s board of
   directors or committee thereof charged with the responsibility of overseeing
   investments shall approve the written guidelines and any amendment thereto and
   shall establish a procedure to determine, at least annually, that all
   derivative transactions were made in accordance with such guidelines. The
   guidelines established pursuant to this section, and any amendment thereto,
   shall be submitted to the Commission for prior approval. The Commission shall,
   in writing, either approve the guidelines or amendment, request any additional
   information needed to approve the guidelines or amendment, or deny the
   guidelines or amendment within (i) 90 days of receipt of the guidelines or
   (ii) 60 days of receipt of any amendment; otherwise the guidelines or
   amendment shall be deemed approved.

   3. The Commission may adopt reasonable rules and regulations for derivative
   transactions including, but not limited to, rules and regulations that impose
   financial solvency standards, valuation standards, and reporting requirements.

B. A domestic insurer may enter into hedging transactions if:

   1. The domestic insurer is able to demonstrate to the Commission the intended
   hedging characteristics and the ongoing effectiveness of the derivative
   transaction or combination of the transactions through cash flow testing or
   other appropriate analyses; and

   2. As a result of and after giving effect to the hedging transaction:
   				a. The aggregate statement value of options, caps, floors, and warrants
   not attached to another financial instrument purchased and used in hedging
   transactions then engaged in by the domestic insurer does not exceed 7.5
   percent of its admitted assets;
   				b. The aggregate statement value of options, caps, and floors written in
   hedging transactions then engaged in by the domestic insurer does not exceed 3
   percent of its admitted assets; and
   				c. The aggregate potential exposure of collars, swaps, forwards, and
   futures used in hedging transactions then engaged in by the domestic insurer
   does not exceed 6.5 percent of its admitted assets.

C. A domestic insurer may enter into replication transactions if the asset being
replicated shall comply with all of the provisions and limitations specified in
this article with respect to investments by the insurer, as if such replicated
asset constituted a direct investment by the insurer in the asset being
replicated. The aggregate statement value of all assets being replicated shall
not exceed 10 percent of the insurer&#8217;s admitted assets.

D. The counterparty exposure amount under a derivative instrument entered into
pursuant to this section shall be deemed an obligation of a business entity to
which the insurer is exposed to credit risk for the purpose of determining
compliance with the limitations of &#xA7;&#xA7; 38.2-1411.2 and 38.2-1413.

E. Pursuant to rules promulgated under &#xA7; 38.2-223, the Commission may
approve additional transactions involving the use of derivative instruments in
excess of the limits set forth in this section or for other risk management
purposes.

HISTORY: 1983, c. 457, § 38.1-217.31; 1985, c. 36; 1986, c. 562; 2001, c. 387;
2011, c. 198.