OGC Opinion No. 08-10-09

The Office of General Counsel issued the following Opinion on October 27, 2008 representing the position of the New York State Insurance Department.

RE: Regulation 114 Trust Assets

Question Presented:

May the assets placed in a Regulation 114 Trust be denominated in a currency other than the United States dollar?


No. The assets placed in a Regulation 114 Trust must be United States dollar denominated.


The inquiry is of a general nature, without reference to particular facts.


One of the methods by which a ceding insurer may claim credit for reinsurance placed with an unauthorized reinsurer is by placing sufficient assets into trust for the benefit of the ceding insurer. See 11 NYCRR § 125 (Regulation 20) at §§125.5(b)(2) and 125.6(b)(3). The required terms for such a trust are set forth in 11 NYCRR § 126.1 et seq. (Regulation 114). The inquiry asks whether, under the New York Insurance Law, the assets held by a Regulation 114 Trust may be denominated in currencies other than the United States dollar.

Regulation 114 specifies the types of assets that may be held in a credit for reinsurance trust. Specifically, 11 NYCRR § 126.5(a)(2) provides:

[A]ssets deposited in the trust account … shall consist only of cash (United States legal tender), certificates of deposit (issued by a United States bank and payable in United States legal tender), and investments of the types specified in paragraphs (1),(2),(3),(8) and (10) of subsection (a) of section 1404 of the New York Insurance Law provided that such investments are issued by an institution that is not the parent, subsidiary or affiliate of either the grantor or the beneficiary.

The types of assets described in the above-cited provisions of Insurance Law §1404(a) are enumerated in the statute in relevant part as follows:

1. Government obligations. Obligations which are not in default as to principal or interest, which are valid and legally authorized, and which are issued, assumed, guaranteed or insured by:
(A) the United States or by any agency or instrumentality thereof,
(B) any state of the United States,
(C) any territory or possession of the United States, or
(D) any other governmental unit in the United States, or any agency or instrumentality of any governmental unit referred to in subparagraphs (B) and (C) of this paragraph …

2. Obligations of American institutions.
(A) Obligations which are issued by any solvent American institution or which are assumed or guaranteed by any solvent American institution (other than an insurance company) and which are not in default as to principal or interest provided such obligations: (i) are adequately secured by collateral security having a market value not less than the principal amount thereof and have investment qualities and characteristics wherein the speculative elements are not predominant, or (ii) are rated A or higher (or the equivalent thereto) by a securities rating agency recognized by the superintendent, or if not so rated, are similar in structure and in all material respects to other obligations of the same institution which are so rated, or (iii) are insured by one or more authorized insurance companies (other than the investing insurer or any parent, subsidiary or affiliate of such insurer) who are licensed to insure obligations in this state and, after considering such insurance, are rated Aaa (or the equivalent thereto) by a securities rating agency recognized by the superintendent, or (iv) have been given the highest quality designation by the Securities Valuation Office of the National Association of Insurance Commissioners….

3. Preferred or guaranteed shares of American institutions. …

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8. Equity interests. (A) Investments in common shares or partnership
interests of any solvent American institution, if
(i) all its obligations and preferred shares, if any, are eligible as investments under this subsection and
(ii) such equity interests of any such institution except an insurance company are registered on a national securities exchange … and … price quotations therefor are furnished through a nationwide automated quotations system approved by the National Association of Securities Dealers… .

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10. Investment companies. Securities of any investment company registered pursuant to the federal Investment Company Act of 1940… .

As noted above, Regulation 114 specifically requires that any cash or certificates of deposit (CDs) used to fund a Regulation 114 trust account be “United States legal tender”. Apart from cash and CDs, the regulation is silent as to the currency in which assets in the other permissible categories may be denominated. Nevertheless, it is the Department’s view that any assets contributed to a Regulation 114 Trust must be denominated in U.S. dollars. This position is supported by the regulatory aim of Regulation 114, and is consistent with a previously expressed opinion from the Insurance Department’s Office of General Counsel (OGC) with respect to the treatment of foreign currency denominated obligations.

Regulation 114 is intended to protect domestic insurers that have ceded business to unauthorized reinsurers by affording to cedants unfettered access to readily liquidatable collateral. For this reason, the regulation prohibits any trust features that could possibly impair the use of the proceeds of an investment by the ceding company. See, e.g., 11 NYCRR § 126.3 (d) (requiring the trust agreement be clean and unconditional, and not subject to any conditions or qualifications outside of the trust agreement itself). Denomination of an asset in a foreign currency introduces the risk of exchange rate fluctuation (and possibly the imposition of exchange controls). Accordingly, to allow the use of foreign currency denominated assets would run counter to the intent and purpose of Regulation 114.

Further, in addressing an earlier inquiry seeking an interpretation of Insurance Law § 1404(a), OGC concluded that an obligation of a U.S. issuer denominated in a foreign currency would not qualify as an “obligation of an American institution” under Insurance Law § 1404(a)(2) because of the exchange rate fluctuation and currency blockage risks inherent in foreign currency denominated assets. See Office of General Counsel Opinion No. 86-94 (NILS October 23, 1986). While that opinion specifically addressed the status of a foreign currency denominated obligation of an American institution, its rationale would apply to any type of asset eligible for contribution to a Regulation 114 Trust. Accordingly, only U.S. dollar denominated assets may be used to fund a Regulation 114 Trust.

Simply put, cash and CDs are the most liquid of assets. Given that even those assets are required to be denominated in U.S. dollars to qualify for contribution to a Regulation 114 Trust, it necessarily follows that any other obligations or equities so contributed should, as a matter of consistency, also be U.S. dollar denominated.

For further information you may contact Supervising Attorney Michael Campanelli at the New York City office.