[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