[Federal Register Volume 63, Number 84 (Friday, May 1, 1998)]
[Rules and Regulations]
[Pages 24103-24105]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-11450]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 703 and 704


Investment and Deposit Activities; Corporate Credit Unions

AGENCY: National Credit Union Administration (NCUA).

ACTION: Final rule.

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SUMMARY: NCUA is adopting as final the interim final amendments to the 
investment regulation as issued last year. The final amendments revise 
the broker-dealer and safekeeping provisions. NCUA is also deleting the 
references to the High Risk Securities Test for CMOs/REMICs in its 
regulations on investments and corporate credit unions. These 
amendments will clarify certain procedures related to credit unions' 
involvement with broker-dealers and safekeeping of securities.

DATES: The interim final amendments published at 62 FR 64146 are 
adopted as final effective May 1, 1998. Amendments in this rule to part 
703 are effective October 1, 1998. Amendments in this rule to part 704 
are effective May 1, 1998.

ADDRESSES: National Credit Union Administration, 1775 Duke Street, 
Alexandria, Virginia 22314-3428.

FOR FURTHER INFORMATION CONTACT: Daniel Gordon, Senior Investment 
Officer, Office of Investment Services, (703) 518-6620 or Kim Iverson 
(Program Officer), Office of Examination and Insurance (703) 518-6360, 
or at the above address.

SUPPLEMENTARY INFORMATION:

A. Interim Final Rule

    On November 24, 1997, NCUA issued an interim final rule that made 
substantive revisions and technical changes to part 703. 62 FR 64146, 
December 4, 1997. NCUA received eleven comment letters, three from 
trade associations, two from credit union leagues, three from federal 
credit unions, two from corporate credit unions, and one from a state-
chartered credit union. Five commenters supported the technical changes 
and offered no other comments. The remaining six had specific comments, 
as discussed below.
    The interim final rule amended Sec. 703.50 to state that a federal 
credit union may use a third party that is not rregistered with the 
Securities and Exchange Commission (SEC) or is not a federally 
regulated depository institution to purchase a certificate of deposit 
(CD) as long as the credit union purchases the CD directly from a bank, 
credit union, or other depository institution. One commenter requested 
clarification that wiring funds to a correspondent bank for further 
credit to the issuing institution is an acceptable practice. Another 
suggested that the rule should simply state whether credit unions are 
prohibited from using third-parties, passing their funds through third 
parties, or passing funds through unregistered brokers. Another 
commenter suggested the reason for the amendment was that entities that 
sell only CDs are not usually subject to comprehensive regulatory 
oversight, and NCUA should not inadvertently force credit unions to 
stop buying CDs from legitimate, regulated CD brokers (banks and 
registered broker-dealers).
    NCUA wishes to clarify that it is permissible to send funds to an 
agent depository institution either of the credit union (credit union's 
correspondent) or of the issuing depository institution (issuer's 
correspondent) for credit to an issuing depository institution 
(issuer). For example, a credit union can send its funds directly to 
the issuer's correspondent. Alternatively, it is permissible for a 
credit union to send funds to its correspondent and this correspondent 
can send those funds to the issuer's correspondent or the issuer. A 
federal credit union may not wire, or send in any manner, funds to an 
agent depository institution of an unregistered entity to purchase a 
CD. The account relationship must be directly with the issuer unless 
the credit union is using a broker-dealer that is SEC-registered or is 
a federally regulated depository institution. NCUA believes that the 
amendment made by the interim final rule is sufficiently clear in this 
area and is not making additional changes to the provision in this 
final rule.
    This interim final rule also established that a credit union may 
safekeep securities with a selling broker-dealer as long as the 
safekeeper used by the broker-dealer is regulated by the SEC. Two 
commenters suggested that the preamble recommend that a safekeeping 
agreement prohibit a third party from pledging or lending the credit 
union's securities without notice of each specific transaction. Without 
notice of each specific transaction, the credit union would have an 
unknown counterparty exposure. The NCUA Board agrees it is a sound 
business practice for every credit union to carefully read and 
understand the details of any agreement it enters into and encourages 
credit unions to do so. In the absence of a delegation of authority, a 
credit union must specifically authorize any actions its

[[Page 24104]]

broker-dealer may take with its securities (purchases, sales, pledges, 
securities lending, etc.), and must not sign an account agreement with 
a broker-dealer that permits the broker-dealer to take any action with 
its securities without the credit union's consent and knowledge. The 
credit union must participate in the monetary gains derived from such 
actions.
    The interim final rule also clarified that the requirement to 
obtain two price quotes prior to purchasing a security does not apply 
to new issues issued at original issue discount, in addition to those 
issued at par. Two commenters suggested that the preamble encourage 
credit unions to compare prices regardless of whether new issue 
securities are offered at par or at discount. The commenters believe 
securities purchase decisions should be made within the context of how 
they compare to similar Treasury securities.
    In the interim final rule, the original issue discount securities 
that NCUA was primarily concerned with were Treasury securities. Credit 
unions certainly should consider whether other securities sold at 
original issue discount compare to similar Treasurys. NCUA encourages 
price comparisons to comparable Treasurys even for new issues issued at 
original issue discount or at par.
    Two commenters requested that NCUA clarify the applicability of 
Section 703.60(d) to CDs. That provision requires a credit union to 
obtain and reconcile monthly a statement of purchased investments and 
repurchase collateral held in safekeeping. The commenters were 
concerned about CD investments, since monthly safekeeping statements 
are generally not received from depository institutions. The NCUA Board 
wishes to clarify that this requirement does not apply to CDs where the 
credit union has made the investment (deposit) directly with the 
depository institution and where there is no third party safekeeping of 
the CD.
    In summary, the NCUA Board is adopting the interim final amendments 
in final, without any changes.

B. Deletion of MDP High Risk Tests

    NCUA is deleting the requirements regarding mortgage derivative 
product (MDP) high risk tests in parts 703 and 704. NCUA no longer 
believes that the pass/fail criteria of the high risk tests as applied 
to specific instruments are necessary to constitute effective 
monitoring of investment activities. The rescission of the high risk 
tests as a constraint on a credit union's investment activities does 
not signal that MDPs with high levels of price risk are either 
appropriate or inappropriate investments. NCUA continues to believe 
that the stress testing of MDP investments, as well as other 
investments, is prudent and has significant value for risk management 
purposes.
    An effective risk management process, through which an institution 
identifies, measures, monitors, and controls the risks of all its 
investment activities, provides a better framework. Whether a security, 
MDP or others, is an appropriate investment depends upon a variety of 
factors, including the credit union's capital level, the security's 
impact on the aggregate risk of the portfolio, and management's ability 
to measure and manage risk. Credit unions should employ valuation 
methodologies that take into account all of the risk elements necessary 
to price these investments.
    For natural person federal credit unions that purchase securities 
having certain characteristics, as defined in paragraph 703.90(b), in 
an amount exceeding the credit union's net capital, part 703 requires a 
reasonable and supportable estimate of the potential impact of an 
immediate and sustained parallel shift in market interest rates of plus 
and minus 300 basis points.
    Part 704 requires corporate credit unions to subject all their 
assets and liabilities to a 300 basis point instantaneous, parallel, 
and sustained shock in interest rates for purposes of generating ``net 
economic value'' (NEV) volatility measures. Proper NEV calculations 
will capture the risk of the underlying cash-flows and their 
corresponding price sensitivity.

C. Corrections

    Section 703.50(b)(2) of the current rule refers to the North 
American State Administrators Association. The correct reference is the 
North American Securities Administrators Association and the final 
amendments reflect the proper terminology.

Regulatory Procedures

Regulatory Flexibility Act

    The Regulatory Flexibility Act requires NCUA to prepare an analysis 
to describe any significant economic impact any final regulation may 
have on a substantial number of small credit unions, defined as those 
having less than $1 million in assets. The NCUA Board has determined 
and certifies that the final rule will not have a significant economic 
impact on a substantial number of small credit unions.

Paperwork Reduction Act

    NCUA has determined that the final amendments do not increase 
paperwork requirements under the Paperwork Reduction Act of 1995 and 
regulations of the Office of Management and Budget (OMB).

Executive Order 12612

    Executive Order 12612 requires NCUA to consider the effect of its 
actions on state interests. The final rule applies directly only to 
federal credit unions. NCUA has determined that the final rule does not 
constitute a ``significant regulatory action'' for purposes of the 
Executive Order.

Small Business Regulatory Enforcement Fairness Act

    The Small Business Regulatory Enforcement Fairness Act of 1996 
(Pub. L. 104-121) provides generally for congressional review of agency 
rules. The reporting requirement is triggered in instances where NCUA 
issues a final rule as defined by Section 551 of the Administrative 
Procedure Act, 5 U.S.C. 551. NCUA is currently awaiting the Office of 
Management and Budget's decision on whether this is a major rule.

List of Subjects

12 CFR Part 703

    Credit unions, Investments, Reporting and recordkeeping 
requirements.

12 CFR Part 704

    Credit union, Reporting and recordkeeping requirements.

    The National Credit Union Administration Board approved the final 
amendments to Part 703 and Part 704 on April 16, 1998 and approved as 
final the interim final amendments to Part 703 on April 22, 1998.
Becky Baker,
Secretary of the Board.

    Accordingly NCUA adopts the interim final rule amending 12 CFR part 
703 which was published at 62 FR 64146 on December 4, 1997, as a final 
rule without change and amends 12 CFR parts 703 and 704 as follows:

PART 703--INVESTMENT AND DEPOSIT ACTIVITIES

    1. The authority citation for part 703 continues to read as 
follows:
    Authority: 12 U.S.C. 1757(7), 1757(8), 1757(15).

Sec. 703.30  [Amended]

    2. Section 703.30 is amended by removing paragraph (g) and 
redesignating paragraphs (h), (i), (j), (k),

[[Page 24105]]

and (l) as paragraphs (g), (h), (i), (j), and (k).
    3. Section 703.50 is amended by revising paragraph (b)(2) to read 
as follows:


Sec. 703.50  What rules govern my dealings with entities I use to 
purchase and sell investments (``broker-dealers'')?

* * * * *
    (b) * * *
    (2) Information available from state or federal securities 
regulators and securities industry self-regulatory organizations, such 
as the National Association of Securities Dealers and the North 
American Securities Administrators Association, about any enforcement 
actions against the broker-dealer, its affiliates, or associated 
personnel.
* * * * *
    4. Section 703.100 is amended by revising paragraph (e) to read as 
follows:


Sec. 703.100  What investments and investment activities are 
permissible for me?

* * * * *
    (e) You may invest in fixed or variable rate CMOs/REMICs.
* * * * *
    5. Section 703.130 is revised to read as follows:


Sec. 703.130  May I continue to hold investments purchased before 
January 1, 1998, that will be impermissible after that date?

    (a) Subject to safety and soundness considerations, you may hold a 
CMO/REMIC residual, SMBS, or zero coupon security with a maturity 
greater than 10 years, if you purchased the investment:
    (1) Before December 2, 1991; or
    (2) On or after December 2, 1991, but before January 1, 1998, if 
for the purpose of reducing interest rate risk and you meet the 
following:
    (i) You have a monitoring and reporting system in place that 
provides the documentation necessary to evaluate the expected and 
actual performance of the investment under different interest rate 
scenarios;
    (ii) You use the monitoring and reporting system to conduct and 
document an analysis that shows, before purchase, that the proposed 
investment will reduce your interest rate risk;
    (iii) After purchase, you evaluate the investment at least 
quarterly to determine whether or not it actually has reduced your 
interest rate risk; and
    (iv) You classify the investment as either trading or available-
for-sale.
    (b) All grandfathered investments are subject to the valuation and 
monitoring requirements of Secs. 703.70, 703.80, and 703.90.

PART 704--CORPORATE CREDIT UNIONS

    6. The authority citation for part 704 continues to read as 
follows:

    Authority: 12 U.S.C. 1757(7), 1757(8), 1757(15).

    7. Section 704.5 is amended by revising paragraph (c)(6) to read as 
follows:


Sec. 704.5  Investments.

* * * * *
    (c) * *  *
    (6) CMOs/REMICs.
* * * * *

Appendix B to Part 704--[Amended]

    8. Appendix B to part 704 is amended as follows:
    a. A heading is added to the beginning of the Appendix; and
    b. In Part I paragraph (c)(6) is removed and paragraphs (c)(7) 
through (c)(9) are redesignated as paragraphs (c)(6) through (c)(8); 
and
    c. In Part II paragraph (c)(6) is removed and paragraphs (c)(7) and 
(c)(8) are redesignated as paragraphs (c)(6) and (c)(7).
    The addition reads as follows:

Appendix B to Part 704--Expanded Authorities and Requirements

Part I

* * * * *
[FR Doc. 98-11450 Filed 4-30-98; 8:45 am]
BILLING CODE 7535-01-P