R590.  Insurance, Administration.
[R590-78.  Exchange-Traded Options.
R590-78-1.  Authority.
            Section 31A-2-201 empowers the Commissioner of Insurance to make reasonable rules necessary for, or as an aid to, the effectuation of any provisions of the Insurance Code.  Subsection 31A-18-105(13) gives the commissioner authority to write a rule listing other investments than those listed as authorized investments in the Insurance Code.
            It is the purpose of this rule to establish procedures and guidelines for all domestic insurance companies with respect to the sale and purchase of exchange-traded call options.  

R590-78-2.  Definitions.
            The following words and terms, when used in this rule, shall have the following meanings, unless the context clearly indicates otherwise.
            1.  "Call Option" means an option contract or contracts, under which the holder of the option has the right, under the terms of the option, to purchase a specified number of shares or other units of the underlying security covered by the option at a specified price per share or unit prior to the fixed expiration time of the option.
            2.  "Exchange" means a national securities exchange registered under the Securities Exchange Act of 1934, as amended, whose rules respecting transactions in options have been approved pursuant to Section 19(b) of this Act.
            3.  "Exchange-Traded" means traded on the floor of an exchange.
            4.  "Security or Securities" means a security or securities authorized to be acquired and owned by a domestic insurance company under the applicable provisions of the Utah Insurance Code.
            5.  "Exercise Price" means the price per share or unit for which the holder of a call option may purchase the underlying security upon exercise of the option.
            6.  "Escrow Receipt" means a receipt issued to the Options Clearing Corporation with respect to the escrowed security held on deposit by a bank, trust company or other custodian approved by The Options Clearing Corporation for that purpose.
            7.  "Escrowed Security" means a security with respect to which an escrow receipt has been issued.
            8.  "Closing Purchase Transaction" means the purchase on an exchange, but not otherwise, of an exchange-traded call option of the same series as an option previously sold, the effect of which is to reduce or terminate the obligation of an exchange-traded call option seller with respect to the option previously sold.
            9.  "Class of Options" means options covering the same underlying security.
            10. "Series of Options" means options of the same class having the same exercise price and expiration time.  

R590-78-3.  Transactions in Exchange-Traded Call Options.
            A domestic insurance company can engage in the following transactions in call options on an exchange but not otherwise, and solely in accordance with the rules of the exchange on which these transactions take place:
            1.  the sale of exchange-traded call options solely with respect to securities owned by it; and
            2.  the purchase of exchange-traded call options solely in closing purchase transactions.
            A domestic insurance company cannot engage in any other exchange-traded options transactions.

R590-78-4.  Procedure for Selling Call Options.
            The following procedures shall be followed with respect to the sale of exchange-traded call options by domestic insurers:
            Any domestic insurance company selling or intending to sell a call option shall enter into an agreement with the bank, trust company or other custodian with which the security underlying any such call option is or is to be deposited for issuance of an escrow receipt and a copy of the escrow receipt identifying the deposited securities with particularity and setting forth the terms of the option with respect to which the escrow receipt is issued shall be maintained by the insurance company and the escrow receipt shall be produced for inspection upon the request of the Insurance Commissioner.

R590-78-5.  Accounting for Transactions.
            A domestic insurance company which engages in exchange-traded options transactions shall keep its books and records on a basis which clearly shows the nature and amount of each transaction and is consistent with the provisions of the Internal Revenue Code as amended from time to time, and the tax regulations and rulings issued from time to time by the Internal Revenue Service of the United States, relating to the exchange-traded options transactions.

R590-78-6.  Valuation.
            Securities against which an exchange-traded call option has been sold shall be valued at the lesser of the exercise price specified in the option contract or the market value of the securities at the date of valuation.

R590-78-7.  Specific Requirements.
            1.  Each option transaction shall reflect prudent judgment and shall have a rationale related to conservative management of assets rather than speculation.
            2.  The domestic insurance company shall establish and maintain records as to each transaction.

R590-78-8.  Severability.
            If any provision of this rule or its application to any person or situation is held invalid, this invalidity may not affect any other provision or application of the rule which can be given effect without the invalid provision or application and to this end the provisions of this rule are declared to be severable.

KEY:  insurance law
1994
Notice of Continuation March 19, 1997                                                        31A-2-201
                                                                                                                       31A-18-105]

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