Derivatives

  • Commodity Futures Modernization of 2000
  • 1984 - SOA - Options and Futures -- A Teaching Session, Society of Actuaries - 26p
  • 1994 0518 - GAO - Financial Derivatives: Actions Needed to Protect the Financial System - GGD-94-133 - 200p
  • 1994 - SOA - NAIC Model Investment Law Update, Society of Actuaries - 24p
  • 2005 - SOA - Credit Derivatives, Society of Actuaries - 20p
  • 2009 - SOA - A Primer on Credit Derivatives, Society of Actuaries - 62p
  • (p3-4) - Life insurers, for example, have become significant end-users of derivatives as they prudently manage the commercial risks associated with both their obligations to policyholders and the investment portfolios designed to meet those liabilities.
    • Although they are financial entities, life insurers' use of derivatives is not unlike use by manufacturers seeking to ensure that they can lock in a fixed future price of key production input or to protect themselves from the risk of a promise to deliver a product at today's prices over a period of years.
    • Efficient and cost-effective access to the derivatives markets is fundamental to life insurers' ability to responsibly manage these risks.
    • Given that life insurers' core commercial activity is creating liabilities to policyholders and purchasing assets to cover those liabilities, the definition of commercial risk adopted by the Commissions should be broad enough to encompass these types of risks, rather than be based upon an entity's industry classification.

2010 0920 - ACLI to SEC / CFTC - Re: Request for Comment on Core Definitions in Title Vll of the Dodd-Frank Act; Release No. 34- 62717; File No. S7-16-10 - 72p

  • 70 FR 39672 - Technical and Clarifying Amendments to Rules for Exempt Markets, Derivatives Transaction Execution Facilities and Designated Contract Markets, and Procedural Changes for Derivatives Clearing Organization Registration Applications
  • Our goals are basically the same: We want a model investment law to promote solvency. 
  • Board
  • Another key decision point that's controversial from many different perspectives is, how much discretionary authority should commissioners have? 
  • You sort of implied that we have a company that's a heavy user of derivative instruments for hedging purposes.
    • Currently the annual statement, its statutory statement, may not even indicate that.
    • Many of the derivatives are over-the-counter instruments, so there's no real reporting in the annual statement
  • When I first started reviewing memorandums three years ago, the typical response I would get from an actuary is that there's no need to model the company's derivatives because it uses them for hedging purposes, and if the company doesn't incorporate them in its modeling, it is obviously being conservative.
    • Well, that argument really didn't buy much time with me.
  • The next go around, I saw much better treatment of derivative instruments, but I only look at 35 or 40 memorandums a year, so obviously I have not touched the full range of industry uses of derivatives.
  • I expect Schedule DB for 1994 is going to open my eyes, but the answer to your question is, I do expect a valuation actuary doing an analysis for a company that is a user of derivatives to fully incorporate those instruments and the performance of those instruments in the cash-flow modeling.
    • To me it's ridiculous not to because many of these instruments, while they may perform one way in one environment, could blow up in another environment.
  • There may be some hidden bombshells in those instruments, so the actuary needs to think about that and incorporate it in the modeling.

-- Larry Gorski

  • (a recent Fellow of the Society of Actuaries, a member of the American Academy of Actuaries, and has been employed by the state of Illinois since 1973. He's very active in the NAIC. He's chairperson of the life risk-based capital (RBC) working group, chairperson of the invested asset working group, a member of the NAIC life and health actuarial task force, and a member of the NAIC asset valuation reserve (AVR) interest maintenance reserve (IMR) working group. As most of you might know, he's a frequent speaker at many professional meetings.)

1994 - SOA - NAIC Model Investment Law Update, Society of Actuaries - 24p

  •  I'm reminded of a story about an investment banker who subsequently became chairman of his firm.
    • About 20 years ago he was flying to Washington, chatting with a financial regulator about the financial innovation of the day and the topic of options came up.
    • The banker said, "Oh, options. No, we'll never do that in investment banking. That's an insurance product."
  • Imagine what the typical actuary might have been paid today, if he had been right!

--  Charles R. Taylor, (Executive Director of The Group of Thirty)

1994 - SOA - What Are Derivatives? How To Make Money With Them And Why Governments Care, Society of Actuaries - 12p

  • 2009 0123 - Phil Gramm / AEI - Deregulation and the Financial Crisis
    • [VIDEO-CSPAN]
    • Former Senator Phil Gramm talked about the role of deregulation in the current economic crisis.
      • As chairman of the Senate Banking Committee he sponsored deregulatory legislation, supported by the Clinton administration.
      • The Gramm-Leach-Bliley Act of 1999 (GLBA) repealed the provisions of the Glass-Steagall Act of 1933 that prevented affiliations between commercial and investment banks.
      • The Commodity Futures Modernization Act of 2000 (CFMA) exempted credit default swaps and other derivatives from regulation by the Commodity Futures Trading Commission..