Montana Code Annotated 2013

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     33-12-110. Special rated credit instrument. (1) (a) Subject to subsection (1)(b), a rated credit instrument is a special rated credit instrument if it is an instrument that is:
     (i) structured so that if it is held until retired by or on behalf of the issuer, its rate of return, based on its purchase cost and any cash flow stream possible under the structure of the transaction, may become negative because of reasons other than the credit risk associated with the issuer of the instrument; or
     (ii) an asset-backed security that:
     (A) relies on cash flows from assets that are prepayable at par at any time;
     (B) does not make payments of par that are fixed as to amount and timing; and
     (C) has a negative rate of return at the time of acquisition if a prepayment threshold assumption is used with the prepayment threshold assumption defined as either:
     (I) two times the prepayment expectation reported by a recognized, publicly available source as being the median of expectations contributed by broker dealers or other entities, except insurers, engaged in the business of selling or evaluating the securities or assets. The prepayment expectation used in this calculation must be, at the insurer's election, the prepayment expectation for passthrough securities of the federal national mortgage association, the federal home loan mortgage corporation, or the government national mortgage association or for other assets of the same type as the assets that underlie the asset-backed security, in either case with a gross weighted average coupon comparable to the gross weighted average coupon of the assets that underlie the asset-backed security.
     (II) another prepayment threshold assumption specified by the commissioner by rule adopted under 33-12-111.
     (b) A rated credit instrument may not be a special rated credit instrument under this section if it is:
     (i) a share in a class one bond mutual fund;
     (ii) an instrument, other than an asset-backed security, with payments of par value fixed as to amount and timing or callable but in any event payable only at par or greater and with interest or dividend cash flows that are based on either a fixed or variable rate determined by reference to a specified rate or index;
     (iii) an instrument, other than an asset-backed security, that has a par value and is purchased at a price no greater than 110% of par;
     (iv) an instrument, including an asset-backed security, with a rate of return that would become negative only as a result of a prepayment due to casualty, condemnation, economic obsolescence of collateral, or change of law;
     (v) an asset-backed security that relies on collateral that meets the requirements of subsection (1)(b)(ii), the par value of which collateral:
     (A) is not permitted to be paid sooner than one-half of the remaining term to maturity from the date of acquisition;
     (B) is permitted to be paid prior to maturity only at a premium sufficient to provide a yield to maturity for the investment, considering the amount prepaid and reinvestment rates at the time of early repayment, at least equal to the yield to maturity of the initial investment; or
     (C) is permitted to be paid prior to maturity at a premium at least equal to the yield of a treasury issue of comparable remaining life; or
     (vi) an asset-backed security that relies on cash flows from assets that are not prepayable at any time at par, but is not otherwise governed by subsection (1)(b)(v), if the asset-backed security has a par value reflecting principal payments to be received if held until retired by or on behalf of the issuer and is purchased at a price no greater than 105% of the par amount.
     (2) For purposes of subsection (1), if the asset-backed security is purchased in combination with one or more other asset-backed securities that are supported by identical underlying collateral, the insurer may calculate the rate of return for these specific combined asset-backed securities in combination. The insurer shall maintain documentation demonstrating that the securities were acquired and are continuing to be held in combination.

     History: En. Sec. 10, Ch. 304, L. 1999.

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