Newsletter
Issuing Subparagraph 8 of Paragraph 1 of Article 3 of the Regulations Governing Foreign Investments by Insurance Companies
The Financial Supervisory Commission (FSC) amended certain provisions of "Other projects approved by the competent authority to use the fund of the insurer" in subparagraph 8 of paragraph 1 of Article 3 of the Regulations Governing Foreign Investments by Insurance Companies (the "Regulations") as per the letter Ref. No. Jin-Guan-Bao-Cai-Zi No. 10704967151 dated December 24, 2018. The main points are as follows:
A. Insurers are allowed to use their funds in other projects approved by the competent authority according to subparagraph 8 of paragraph 1 of Article 3 of the Regulations and allocate funds to trade government bonds or treasury bills issued by foreign central government in repurchase (RP) and reverse repurchase (RS) transactions as stipulated in Article 5 of the Regulations and in accordance with the following conditions and limits:
1. The sovereign credit rating of foreign central governments shall be at least BBB+ or the equivalent.
2. The agreed period of the transaction shall not exceed 6 months.
3. The counterparty shall be a domestic bond dealer or a foreign financial institution whose long-term debt rating in the most recent year is at least BBB+ or the equivalent rated by a foreign credit rating institution listed in subparagraph 3 of paragraph 1 of Article 2 of the Regulations. The collateral value for repo and reverse repo transactions with counterparties shall meet the following requirements:
(1)If the counterparty is a domestic bond dealer, the collateral value must be at least 90% (inclusive) of the nominal value of the transaction.
(2)If the counterparty is a foreign financial institution, the total collateral value must exceed the nominal value of the transaction.
4. For reverse repo transaction, it is required to prepare a written analysis report on the purpose of "meeting short-term funding need for providing foreign currency-denominated collateral to counterparties to derivatives trading for hedging purposes"; "liquidity needs for insurance payments for foreign-currency denominated insurance products" or "temporary foreign currency funds for daily foreign currency receipts and payments for foreign investment". Such report shall be kept for at least five years.
5. The procedures for handling repo and reverse repo transactions shall be updated in accordance with the foreign investment processing procedures specified in paragraph 1 of Article 15 of the Regulations, the content of which shall include at least the following items:
(1)Establish transaction limits based on the credit positions of individual counterparties and subsequent control mechanisms.
(2)Collateral management process such as collateral valuation, collection, substitution, interest settlement, dispute resolution, collection, margin calls and associated collateral movements.
(3)Insurers which entrust financial institutions to handle the collateral management process shall replace the previous requirements with the following procedures:
i. Criteria for selection and evaluation of collateral management institutions: should include the qualifications of management institutions, selection and evaluation items, selection and evaluation procedures; the qualifications of the management institutions should at least include "among the world's top 500 banks ranked by assets in the most recent year", and "long-term debt rating at A- or above in the past year rated by foreign credit rating institutions."
ii. The collateral management contract with the collateral management institution: should include the contents of the services provided by the management institution, the responsibility and duty of care, confidentiality obligation, calculation and payment method of the management fee, the termination of the contract, dispute resolution, events of and liability for breach of contract, litigation jurisdiction and governing law, and when necessary the competent authority may send a staff member or request the insurer to engage an accountant or other professionals to check the management institution's collateral management process relating to the contract. The management institution may not refuse to cooperate on the relevant audit matters without justified reasons.
iii. Independent and effective risk management mechanism: should include the verification procedures for information provided by the collateral management institution such as collateral valuation, collection and payment, substitution, dispute resolution and interest settlement.
6. The total amount of foreign central government bonds and treasury bills as collateral in reverse repo transactions should still count toward the total foreign investment as stipulated in paragraph 2 of Article 146-4 of the Insurance Law; the total amount of foreign central government bonds and treasury bills as collateral from the counterparty in repo transactions need not count toward the aforesaid limit.
7. The total amount an insurer delivers to and receives from counterparties to repo and reverse repo transactions of foreign central government bonds and treasury bills shall not exceed 2% of the insurer’s approved foreign investment limit.
B. The conditional transactions by insurers of foreign central government bonds or treasury bills listed or traded over-the-counter on the domestic securities exchange shall be handled in accordance with the letter Ref. No. Jin-Guan-Bao-Cai-Zi No. 10302503571 dated May 7, 2014.