At the NAIC Spring 2016 National Meeting, the Valuation of Securities Task Force (VOSTF) focused on upcoming money market fund reforms, loan-backed and structured securities, and Jumpstart exceptions.
Before the meeting, the VOSTF held several conference calls. During those calls, they received the American Council of Life Insurers (ACLI) report on changes in the derivative market and recommended to the Financial Condition Committee that the NAIC retain the Derivative Instruments Model Regulation.
Money market fund (MMF) reform is one of the most significant items that the VOSTF is addressing.
In response to the SEC’s requirement that institutional prime MMFs report a floating Net Asset Value (NAV), the VOSTF adopted an amendment to remove the Class 1 List from the Purposes and Procedures Manual (P&P Manual) of the NAIC Capital Markets & Investment Analysis Office. This will be effective September 30, 2016.
There are Industry concerns that if the list is removed, the affected funds would need to be reclassified to Schedule D Part 2, Section 2 (D-2.2). This reclassification would require a much higher RBC charge, even though nothing about the funds have actually changed. These funds are used by insurers for liquidity and to generate a small amount of interest on otherwise un-invested cash, while most D-2.2 assets are used for long-term capital appreciation and to hedge against inflation risk.
During the NAIC Spring 2016 National Meeting, the NAIC clarified that MMFs could still qualify for Schedule DA treatment and the corresponding RBC charge because MMFs are listed in SSAP 2 as an example of a short-term asset. NAIC staff suggested that MMFs be placed under the “Other Short-Term Assets” Category on Schedule DA. After this discussion, Industry was more receptive to the possible deletion of the Class 1 List. There is currently a referral to delete the category from the Annual Statement Blanks and to remove the category from Schedule DA.
The Securities Valuation Office (SVO) has undertaken several efforts to modernize their computer systems and update how securities are filed. These efforts will also help reduce Jumpstart exceptions, which are caused when securities are reported as filing exempt by an insurer but do not appear on the SVO’s credit rating provider feeds.
As the SVO redesigns their systems to make filing securities easier and more efficient, the SVO staff and Industry representatives have created a statement of guiding principles. The SVO has also been improving functionality in the AVS+ service to provide greater coverage and more information to Industry about securities. The SVO has already added Bank Loan ratings to AVS and their credit rating feeds. Additionally, they will include international securities identified by ISINs, as well as an indicator marking if a security is a structured note.
The SVO also detailed several other issues causing Jumpstart exceptions. The largest category of exceptions relates to private letter rating securities; in these cases, the SVO recommends that insurers file evidence of a private rating with the SVO. Other exceptions include: instances when an NRSRO displays a rating on its website but the SVO does not receive one; insurers using ratings not received directly from the NRSRO; pre-refunded securities; and government-guaranteed securities. In most cases, the SVO’s recommendation is that insurers should file these securities with the SVO.
Some in Industry objected to this report. They explained that it is not their responsibility to supply the SVO with ratings that they’ve obtained, that filing all of these securities would be cost-prohibitive, and that Jumpstart exceptions are not inherently an issue because in these cases the insurer simply presents their reasoning to the examiner and the issue is resolved. The report is exposed for a 30-day comment period. The VOSTF approved a motion to form a Working Group to address these issues in more detail.
The VOSTF also received a proposal from the SVO to amend the definition of “Loan-Backed and Structured Securities” in SSAP 43R. Industry had expressed concerns that the current definition is too inclusive and should be changed to be more precise, in order to avoid including assets that have fundamentally different economic characteristics than mortgage- and asset-backed securities (such as credit tenant loans). The proposed definition of “Loan-Backed and Structured Securities” is as follows:
1) The legal isolation and pooling of; 2) a finite number of cash generating assets; 3) each from a different obligor; 4) in a trust; where 5) the cash flow from the collateral assets is used to pay the holders of the securities.
The proposal was exposed for a 60-day comment period.
The VOSTF adopted an amendment to the P&P Manual to include Italian GAAP as a Standard that’s allowed to be presented without reconciliation to US GAAP or IFRS. The SVO will also study Belgium GAAP to determine if it can be added to the list of approved NFPS as well.