[Federal Register Volume 67, Number 126 (Monday, July 1, 2002)]
[Proposed Rules]
[Pages 44270-44292]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-16087]



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Part II





National Credit Union Administration





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12 CFR Parts 703 and 704



Investment and Deposit Activities; Corporate Credit Unions; Proposed 
Rule

  Federal Register / Vol. 67, No. 126 / Monday, July 1, 2002 / Proposed 
Rules  

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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: Proposed rule.

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SUMMARY: NCUA is issuing proposed revisions to the rule governing 
corporate credit unions (corporates). The major revisions to the rule 
are in the areas of capital, credit concentration limits and services. 
The proposed amendments enable corporates to remain competitive in the 
marketplace while retaining NCUA's historic focus on the safety and 
soundness of the corporate credit union system. The major changes to 
these areas necessitate some substantive changes to other provisions of 
the rule. Several other minor revisions are generally either a 
clarification or a modernization of the existing rule.

DATES: Comments must be received on or before August 30, 2002.

ADDRESSES: Direct comments to Becky Baker, Secretary of the Board. Mail 
or hand-deliver comments to: National Credit Union Administration, 1775 
Duke Street, Alexandria, Virginia 22314-3428. Fax comments to (703) 
518-6319. E-mail comments to [email protected]. Please send comments 
by one method only.

FOR FURTHER INFORMATION CONTACT: Kent Buckham, Director, Office of 
Corporate Credit Unions, 1775 Duke Street, Alexandria, Virginia 22314-
3428 or telephone (703) 518-6640; or Mary Rupp, Staff Attorney, Office 
of General Counsel, at the above address or telephone (703) 518-6540.

SUPPLEMENTARY INFORMATION:

A. Background

    On July 28, 1999, and November 22, 2000, NCUA issued advance 
notices of proposed rulemaking (ANPRs). 64 FR 40787, July 28, 1999; 65 
FR 70319, November 22, 2000. Based on the comments received in response 
to the ANPRs, the Board issued a proposed rule. 66 FR 48742, September 
21, 2001. The Board received 51 comments on the proposal, 28 from 
corporate credit unions, nine from natural person credit unions, four 
from credit union trade associations, one from a bank trade 
association, ten from state credit union leagues and three from 
miscellaneous sources. The majority of the commenters commended NCUA on 
the process leading up to the proposed rule. They expressed 
appreciation for NCUA's responsiveness to the comments on the ANPRs and 
the continuous dialogue NCUA has engaged in with the corporate 
community.
    In response to the comments received, particularly in the area of 
capital, the Board is issuing a revised proposed rule for another round 
of public comment. The comments to the initial proposed rule have 
greatly assisted the Board in drafting the revised proposed rule and 
will be discussed in the relevant section of the section-by-section 
analysis.

B. Section-by-Section Analysis

Natural Person Credit Union Investments Section 703.100

    The Board proposed increasing the limit on a natural person credit 
union's aggregate purchase of paid-in capital (PIC) and membership 
capital (MC) in one corporate to 2 percent of the credit union's assets 
measured at the time of purchase. The Board also proposed limiting a 
credit union's aggregate purchase of PIC and MC in all corporates to 4 
percent.
    Twenty-five commenters supported the proposal. Two commenters 
opposed the proposal. Those who supported the proposal indicated the 
ability of a natural person credit union to acquire a higher level of 
capital in a corporate will bring about the positive result of further 
capital redistribution in the credit union system. They indicated it 
would introduce a degree of moderation in the amount of capital a 
credit union could potentially invest in the corporate network. One 
commenter, a natural person credit union, opposed the proposal as being 
too restrictive because it limits credit unions' options. One 
commenter, a bank trade association, opposed the proposal as too 
permissive, contending it doubles the risk exposure a natural person 
credit union could have in a single corporate credit union.
    Additionally, fifteen commenters suggested a revision to the 
proposed wording. The proposal stated the percentage is based on ``the 
credit union's assets measured at the time of purchase.'' Id. at 48755. 
The commenters recommended changing ``at the time of purchase'' to ``at 
the time of investment or adjustment.'' This would take into account 
the adjusted balance feature of most existing MC accounts. One 
commenter suggested the limit in one corporate and the aggregate limit 
in all corporates be set at 25 percent and 50 percent respectively of a 
credit union's net worth, rather than as a percentage of assets.
    The revised proposed rule retains the increased investment limits 
in the proposed rule. Based on the comments, the Board has made some 
minor wording revisions. The term ``aggregate purchase'' in the 
proposal has been revised to ``aggregate amount'' and the term ``time 
of purchase'' in the proposal has been revised to ``time of investment 
or adjustment.''

Definitions Section 704.2

Daily Average Net Assets (DANA)
    Although not specifically addressed in the proposed rule, seventeen 
commenters requested that the Board exclude future dated ACH items and 
uncollected cash letters that are perfectly matched on both the asset 
and liability sides of the balance sheet from the definition of DANA. 
The issue is whether such transactions should be recorded on their 
settlement date (the date the funds are posted) or on the advice date 
(the date the corporate receives an advice indicating the funds will be 
posted on a specific future date).
    The Office of Corporate Credit Unions (OCCU) issued guidance in 
2000 to all corporates stating, ``[i]n order to provide for a 
consistent approach to reporting corporate financial information, we 
expect all corporates to record future-dated ACH transactions as assets 
and liabilities on their financial statements for both regulatory and 
5310 (Corporate Credit Union Call Report) reporting purposes. However, 
other external and internal financial statements can continue to be 
prepared based on the advice of your CPA.'' Corporate Credit Union 
Guidance Letter No. 2000-03, August 30, 2000. This guidance was 
provided because corporates were using different reporting practices 
and there was a lack of definitive guidance on the issue under 
Generally Accepted Accounting Principles (GAAP).
    The commenters stated that several corporates have obtained 
opinions from accounting firms indicating that accounting for such 
transactions as of the advice date is not in accordance with GAAP. 
Rather, these transactions (as well as uncollected cash letters) should 
be accounted for on a settlement date basis. The concern is that DANA 
is overstated by inclusion of these items and capital ratios are 
understated. Several commenters also noted that the definition of ``the 
fair value of assets'' should exclude these transactions from the Net 
Economic Value (NEV) definition.
    The Board does not agree with the commenters that accounting for 
such transactions as of the advice date is inconsistent with GAAP. 
Rather, there is a divergence of opinion in the accounting community on 
this issue. In order to ensure a consistent regulatory

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approach, the revised proposal does not exclude these items from the 
definition of DANA. Each corporate should continue to prepare its other 
internal and external financial statements based on the advice of its 
CPA.

Capital Section 704.3

Requirements for Membership Capital, Section 704.3(b)(3)
    The Board proposed revising the existing amortization of MC. 
Currently, the regulation requires a constant monthly amortization of 
MC placed on notice so that the full balance is amortized by the end of 
the notice period. The proposal required the full amortization of MC 
one year before the date of maturity or one year before the end of the 
notice period. The proposal also revised the requirements for adjusted 
balance MC accounts. These revisions included limiting the frequency of 
adjustments to no more than once every six months and, if the 
adjustment measure is anything other than assets, the corporate must 
address the measure's permanency characteristics in the capital plan.
    Fifteen commenters opposed the proposed change in the amortization 
of MC and one commenter supported the proposal. Those opposed stated 
that it fails to recognize any portion of the MC that is still 
available to cover losses during the last year. Further, several 
commenters suggested amortizing MC before the end of the notice period 
is contrary to GAAP. One commenter opposed the entire premise of 
amortizing MC stating MC that has been placed on notice should count in 
full as long as the full balance is available to cover losses.
    A few commenters commented on changes to adjusted balance MC 
accounts. One commenter suggested allowing MC to flow in and out of the 
corporate, with the corporate setting its own minimum limit based on 
its capital needs. One commenter suggested allowing a corporate to base 
the adjustment on a member's deposits in the corporate rather than on 
its assets. Another commenter did not object to the proposed changes in 
the adjusted balance MC accounts, but suggested grandfathering existing 
adjusted balance MC accounts.
    Several commenters took exception to the proposed wording in 
Sec. 704.3(b)(3) that states, ``[w]hen an MC account has been place on 
notice or has a remaining maturity of three years * * *'' (emphasis 
added). The commenters suggested replacing ``or'' with ``and.'' The 
commenters stated that the corporates issue adjusted balance accounts 
with no maturity. Several commenters suggested adding ``less than'' 
before ``three years'' to avoid the mistaken impression that a three-
year notice account could arguably be deemed to require amortization 
before being placed on notice.
    The Board remains convinced that MC placed on notice should be 
fully amortized one year before maturity or the end of the notice 
period. The Board does not believe a corporate should include capital 
that will be paid out in less than a year in risk capital measures. The 
Board is also cognizant that five-year subordinated debt allowed by 
other financial regulators is not counted in the last year. 12 CFR part 
3, App. A, Sec. 2(b). The Board views the change in amortization as a 
measure of consistency with other financial regulators.
    The revised proposal retains the limitation on the frequency of 
adjustment for adjusted balance MC accounts to no more than once every 
six months. The Board desires a greater degree of permanence for MC. 
The Board agrees with the commenter that existing MCs should be 
grandfathered from the change in the frequency of adjustment since 
corporates have already issued disclosures to their members, which 
should be adhered to. However, corporates that have tied their 
adjustments to a measure other than assets are not grandfathered from 
addressing the measure's permanency in their capital plans.
    The revised proposal adds the words ``less than'' in front of 
``three years'' to clarify that a three-year notice account is not 
subject to amortization if notice has not been given. The revised 
proposal retains the word ``or,'' rather than substituting the word 
``and'' as some commenters recommended, because the regulation does 
allow term MC accounts.
Requirements for Paid-in Capital, Section 704.3(c)(2).
    Although not proposed, based on the comments and the Board's desire 
to eliminate the proposed minimum RUDE ratio, the Board has revised the 
definition of PIC, so it is a perpetual, non-cumulative dividend 
account. This revision brings PIC in line with the GAAP definition of 
equity accounts. Existing PIC is grandfathered from this requirement 
but is subject to the proposed amortization schedule. Because new PIC 
must be perpetual, the amortization requirement only applies to 
grandfathered PIC.
    The proposal required an amortization schedule for PIC similar to 
that proposed for MC, full amortization one year before the date of 
maturity. Twelve commenters opposed the proposed amortization for PIC. 
The commenters reiterated the arguments raised in opposition to the 
proposed amortization of MC. One commenter supported the proposed 
change to the amortization schedule. The revised proposal retains the 
amortization requirement for grandfathered PIC. This position is 
consistent with that taken for MC.
    Additionally, the proposal eliminated the existing limitation on 
PIC, which limits PIC to 100 percent of RUDE. 12 CFR 704.2. Eight 
commenters supported removing the limitation on PIC, and three 
commenters opposed it. Of those in support, one suggested that only PIC 
up to 150 percent of RUDE should count towards any minimum regulatory 
capital ratio, but that all PIC should count towards a total capital 
ratio. One commenter opposed to eliminating the PIC limitation 
suggested limiting the aggregate amount of MC and PIC that counts 
towards a total capital requirement to100 percent of RUDE. The Board 
agrees with the majority of commenters and has retained the deletion in 
the revised proposed rule.
    Finally, the Board proposed eliminating the requirement in the 
current regulation that nonmember PIC requires NCUA Board approval. The 
proposal required Board approval if the terms and conditions of the 
nonmember PIC differed from member PIC. Because the revised proposed 
rule requires all PIC to be GAAP qualifying, the requirement for Board 
approval if the terms and conditions are different for nonmember PIC is 
deleted in the revised proposed rule.
Minimum RUDE Ratio Requirement, Section 704.3(e)
    The Board proposed a minimum RUDE to moving DANA ratio of 2 
percent. In addition, the proposal eliminated the reserve transfer 
requirements because it is unnecessary if all corporates must maintain 
a minimum RUDE ratio of 2 percent.
    Forty-six commenters objected to a minimum RUDE ratio. Two 
commenters, a bank trade association and an individual, supported the 
proposal. Many commenters indicated this requirement was the one they 
most vehemently opposed.
    Twenty commenters recommended the adoption of a credit-risk 
weighted capital requirement in lieu of a minimum RUDE ratio. Three 
commenters included with their comments draft credit-risk weighted 
guidelines for corporates. Twenty-five commenters recommended the 
adoption

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of a ``core capital ratio'' requirement alone or in conjunction with a 
credit-risk weighted capital requirement. The core capital ratio would 
include RUDE and PIC, with a few commenters indicating only a portion 
of PIC should qualify. Several commenters suggested there is no need 
for a minimum RUDE ratio since NCUA has the authority to supervise and 
ensure adequate capital in corporates through the requirement that 
corporates prepare a capital plan.
    Nearly all of those who objected to the minimum RUDE ratio 
indicated concern that the requirement would threaten the very purpose 
for which corporates exist. Commenters noted that, in their roles as 
the provider and absorber of credit union liquidity, corporates must be 
able to grow and contract in a prompt and fluid manner. The imposition 
of a mandatory RUDE ratio would force corporates to turn away credit 
union deposits. They noted that, not only would this affect the role of 
corporates in the credit union system, but it may increase risk to 
credit unions that seek other means for depositing or investing their 
excess liquidity. Commenters noted that corporates in 2000 and 2001 
successfully handled a period of unprecedented liquidity demand 
followed by a period of unprecedented excess liquidity in the credit 
union system. Many commenters expressed concern that the proposed 
capital requirements will introduce a new factor, which will negatively 
affect what risk managers may allow on their balance sheets.
    Commenters noted that corporates have consistently increased RUDE 
over the years. In fact, RUDE has grown at a higher rate than the 
minimum requirements under the regulation. Commenters suggested the 
proposal would force corporates to focus on the goal of building RUDE 
to the detriment of the products and services the corporates offer the 
credit union system. Further, commenters asserted that lessening the 
regulatory value of PIC may lead to an outflow of capital from the 
corporate system. Corporates trying to maximize earnings to build RUDE 
may call their PIC to reduce expenses. Commenters suggested it would 
take years to build the RUDE just to replace the called PIC. The 
commenters stated that NCUA's concern that corporates would not 
continue to strive to build RUDE, or would arbitrarily decide to return 
PIC to members, is baseless and not supported by past performance. 
Further, several commenters stated that RUDE levels in corporate credit 
unions are already adequate, based on the risks corporates take. 
Several commenters noted the 2 percent requirement appears arbitrary 
and NCUA has offered no findings to support that it is an appropriate 
level.
    Many commenters noted that, while the proposed preamble indicates a 
goal of instituting a RUDE ratio is to reach a level of capital 
comparability with other financial intuitions, the proposal is 
inconsistent with the capital structure of other financial depository 
institutions. The commenters noted some of the other financial 
regulators include common stock and noncumulative perpetual preferred 
stock in the determination of their core capital requirements. As such, 
the commenters noted that NCUA's core capital requirements for 
corporates should recognize PIC.
    In keeping with the concept of comparable capital measures with 
other federally-insured financial institutions, a number of commenters 
recommended the adoption of a credit-risk weighted capital structure. 
Many commenters suggested that the new Basel Capital Accord Proposal 
establishes a framework intended to more closely align regulatory 
capital requirements with underlying risk. The proposal noted that the 
Board was not considering a credit-risk weighted requirement due to the 
added burden on corporate credit unions. Several commenters suggested 
the proposed RUDE ratio was more burdensome to corporates than the 
adoption of a credit-risk weighted capital structure. Finally, several 
commenters suggested that, if the Board does not establish a credit-
risk weighted structure at this time, it should create a working group 
to study the issue and make a recommendation to the Board within the 
next two years.
    In addition to the suggestion of a credit-risk weighted approach to 
capital, several commenters suggested the use of a core capital 
requirement. Some commenters suggested the use of core capital as a 
single measure while others recommended its use in conjunction with a 
credit-risk weighted capital measure. As noted above, several 
commenters made reference to the recognition of common stock and 
noncumulative perpetual preferred stock in the determination of core 
capital in other financial institutions. The commenters noted that MC 
and PIC are available to absorb losses before any impact on the 
National Credit Union Share Insurance Fund (NCUSIF). They contend PIC 
is a long-term, stable component of capital because of its regulatory 
requirements. As such, commenters believe NCUA's core capital 
calculation should include PIC. Some commenters recommended that all 
PIC be counted as core capital, while others suggested a percentage 
limitation. Others suggested that only PIC that qualifies under GAAP 
should be included in core capital.
    Several commenters noted that PIC was introduced during the last 
regulatory revision. Many corporates solicited their members and were 
able to raise significant amounts of PIC. These commenters noted their 
concern for the reputation of the individual corporates, and the 
corporate system as a whole, if member credit unions are now told the 
PIC they committed to the corporate is not considered ``real'' capital. 
Further, many noted that the influx of funds into a corporate might not 
necessarily translate into an increase in risk. Under the proposal, the 
mere inflow of excess liquidity could trigger the need for a capital 
restoration plan. It is possible that a regulatory requirement could 
affect the opinion of the corporate's auditors or the rating issued by 
a nationally recognized statistical rating organization. The commenters 
noted the ripple effect of these occurrences on the reputation, as well 
as the safety and soundness, of the corporate could be severe, while no 
significant increase in risk has actually occurred.
    As noted above, some commenters stated the existing regulations 
provide NCUA with adequate authority to ensure the capital strength in 
the corporate system. Section 704.3(a) requires corporates to develop a 
written capital plan. The regulation requires the corporate to develop 
and implement short and long term capital goals, objectives, and 
strategies that provide for building capital consistent with regulatory 
requirements, and capital sufficient to support a corporate's current 
and projected business risks. The plans are subject to review by NCUA 
through the supervision process. The commenters believe this 
requirement provides NCUA the ongoing opportunity to monitor and exert 
regulatory oversight over a corporate's capital intentions.
    Only one commenter, a bank trade association, objected to the 
elimination of the reserve transfer requirement.
    The Board believes that a minimum RUDE ratio may have the 
unintended consequence of limiting the traditional role of corporates 
as depositors of excess liquidity for natural person credit unions. As 
such, the minimum RUDE ratio requirement has been eliminated from the 
revised proposal.
    The Board remains convinced of the need for corporates to continue 
to maintain an adequate level of retained earnings. To that end, the 
revised proposal adopts several of the commenters' suggestions, in 
addition to

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incorporating existing requirements in Sec. 704.3.
    Rather than the proposed minimum 2 percent RUDE ratio requirement, 
the revised proposal provides a mechanism for increasing retained 
earnings to 2 percent on an ongoing basis. The earnings retention 
requirement in Sec. 704.3(i) includes features of the existing reserve 
transfer requirement, in addition to a core capital measurement.
    As the current regulation does not define retained earnings, the 
revise proposal adds a definition. The definition specifically excludes 
GAAP recognized ``other comprehensive income accounts'' such as 
unrealized gains and losses on available for sale securities. These 
accounts may distort a corporate's capital position; so the Board is 
excluding these accounts from the definition. Additionally, the 
definition excludes the allowance for loan and lease losses. Although 
the allowance for loan and lease losses is nonexistent in most 
corporate credit unions, it may become more common in corporates that 
engage in loan participations with their members under the proposed 
Part V expanded authority. Since the allowance for loan and lease 
losses is funded to the amount of anticipated losses, the Board 
contends that amount should not be recognized for the purpose of 
determining retained earnings.
    Numerous commenters recommended, in lieu of a minimum RUDE ratio, 
retaining the reserve transfer requirement in the current regulation as 
a means of building capital. The Board agrees with the need to increase 
capital but believes the existing reserve transfer requirement may not 
result in the accumulation of retained earnings. Under the current 
regulation, a corporate can meet its reserve transfer requirement 
without an overall increase to retained earnings. Therefore, the 
revised proposal establishes an earnings retention requirement of 10 or 
15 basis points per annum based upon the corporate's retained earnings 
and core capital ratio. The earnings retention requirement is 
established at 10 and 15 basis points to provide for the building of 
retained earnings while also recognizing the value of PIC.
    Several commenters also recommended adopting a core capital 
measurement to recognize the value of PIC. In response, the Board has 
re-titled the existing definition of ``reserve ratio,'' which includes 
retained earnings and PIC, as ``core capital ratio.'' The core capital 
ratio, in conjunction with the retained earnings ratio, is used to 
determine the earnings retention factor. A number of commenters noted 
that PIC, a long-term capital account, is available to absorb losses. 
The Board agrees with the need to recognize the value of PIC in the 
capital structure of corporates; however, the Board also notes that the 
major disadvantage of using PIC rather than retained earnings to absorb 
losses is the potential for erosion of member confidence in the 
viability of the corporate. The Board is establishing an earnings 
retention factor to serve the dual purpose of building retained 
earnings while also providing value to PIC. As such, a corporate with a 
core capital ratio greater than 3 percent will have a lower earnings 
retention factor than a corporate with a core capital ratio less than 3 
percent.
    The Board notes the earnings retention requirement eases the 
regulatory burden on corporates from that in the proposal. Under the 
proposed regulation, a RUDE restoration plan was required if the RUDE 
ratio fell below 2 percent. Rather than requiring a corporate to submit 
a RUDE restoration plan if the retained earnings ratio falls below 2 
percent, the revised proposed rule establishes a specific restoration 
plan for retained earnings.
    The Board is cognizant that circumstances may arise where corporate 
management will have to make operational decisions that are in the best 
interest of the corporate, but may also result in an inability to meet 
the earnings retention requirement. To provide flexibility, the Board 
permits corporates to meet earnings retention requirements on a rolling 
three-month average. The regulation also allows a corporate to pay 
dividends without prior approval if its retained earnings ratio falls 
below 2 percent, if the retained earnings ratio was already below 2 
percent but the corporate has an increase in retained earnings for the 
current measurement period, or if the corporate experiences a loss on 
the sale of investments. In addition, the regulation provides the OCCU 
Director the authority to approve a lower earnings retention amount to 
avoid a significant adverse impact on the corporate.
    The Board believes it is imperative to the long-term safety and 
soundness of the corporate credit union system that a regulatory 
framework exist to facilitate the ongoing accumulation of retained 
earnings. An earnings retention requirement will provide certainty to 
corporates as to regulatory requirements, while permitting corporates 
the flexibility to continue the vital role they play in assisting 
natural person credit unions in serving their members.
    The Board is steadfast in its contention that a credit-risk 
weighted capital approach is not the best measure for risk in 
corporates. Further, there exists a divergence of opinion in the 
financial community as to the validity of some of the risk weights 
assigned to the various risk categories.
    Several outside studies of the corporate credit union system have 
been critical of using credit risk as a primary means of measuring 
overall risk in corporates. The report entitled ``Corporate Credit 
Union Network Investments: Risks and Risk Management,'' issued in 1994 
by a committee headed by Dr. Harold Black, indicated many corporates 
traditionally take very little credit risk, but instead assume a higher 
level of interest rate risk. The General Accounting Office (GAO) 
reports of 1991 and 1994 both noted that an over reliance on credit-
risk weighted capital failed to fully capture other risks (market, 
liquidity, and operational) in corporate credit unions. A December 1997 
study by the Department of the Treasury specifically stated that a 
credit-risk weighted capital approach ``is inappropriate given that 
corporate credit unions generally have little credit risk.''
Capital Directive, Section 704.3(h)(i)
    The proposal made the capital restoration requirement in current 
Sec. 704.3(f) applicable to a corporate failing to meet the minimum 
RUDE ratio. Since the revised proposal eliminates a RUDE ratio 
requirement, this issue is moot and there are no changes to the current 
rule.
    Eight commenters indicated there should be an appeal process in 
this section, similar to the procedures for prompt corrective action 
(PCA). 12 CFR part 702. Several commenters suggested that the public 
disclosure of the existence of a capital directive or capital 
restoration plan in a corporate credit union could be disastrous to the 
reputation of the institution. One commenter opposed the current 
inclusion of any kind of capital restoration plan in the regulation.
    Although the revised proposal does not add a specific appeal 
process to this section, the regulation continues to require NCUA Board 
approval of capital directives.

Board Responsibilities, Section 704.4

    The proposed rule changed the term ``operating policies'' to 
``policies'' throughout this section and changed the title of 
subsection (c) to ``Other requirements.'' The commenters supported this 
change and it has been retained as proposed.

[[Page 44274]]

Investments, Section 704.5

    The proposed rule deleted several investment-related definitions no 
longer used in the regulation and amended the definitions of: Asset-
backed security (ABS), Collateralized mortgage obligation (CMO), 
Forward settlement, Quoted market price, Mortgage related security, 
Regular-way settlement, Repurchase transaction, and Residual interest. 
The few comments received on these definitions supported the proposal, 
and they have been deleted or amended as proposed. As discussed below, 
the revised proposed rule includes a new definition of a limited 
liquidity investment.
Policies, Section 704.5(a).
    The proposed rule combined the policy requirements in this section 
and deleted ``if any'' from Sec. 704.5(a)(1) to clarify a corporate 
must have ``appropriate tests and criteria'' to evaluate investments it 
makes on an ongoing basis, as well as new investments. No comments were 
received on these provisions, and they have been retained as proposed.
    Section 704.5(a)(2). The proposed rule deleted the requirement that 
the investment policy address the marketing of liabilities to its 
members. No comments were received on this provision, and it is deleted 
in the revised proposed rule.
    The proposed rule added a requirement for a corporate to establish 
appropriate aggregate limits on limited liquidity investments, 
including private placements and funding agreements. A number of 
commenters observed many privately placed securities have active quoted 
markets or readily obtainable market quotes, with liquidity comparable 
to publicly registered securities. In response to those comments, the 
Board notes other private placements do not have readily obtainable 
market quotes. A corporate would have difficulty selling such 
investments with reasonable promptness at a price that corresponds 
reasonably to fair value. The Board also is concerned if there is only 
one active market purchaser for a private placement or a funding 
agreement. The revised proposed rule omits the examples of limited 
liquidity investments, defines a limited liquidity investment to mean a 
private placement or a funding agreement, requires a corporate to 
specify concentration limits in relation to capital and requires the 
investment policy to address reasonable and supportable concentration 
limits for limited liquidity investments. By reasonable, the Board 
means concentration limits should be economically reasonable. By 
supportable, the Board means the investment policy should address the 
prepurchase analysis a corporate should undertake before making a 
limited liquidity investment. For example, the investment policy may 
require a prepurchase analysis to include estimates of bid-asked 
spreads and, also, an estimate of the time necessary to sell a limited 
liquidity investment.
    Several commenters suggested addressing concentration limits for 
limited liquidity investments in the contingency funding plan required 
in Sec. 704.9. The Board notes the concentration limit requirement 
emphasizes the need to address risk tolerances for portfolios of 
limited liquidity investments. Articulated risk tolerances for 
portfolios with limited liquidity investments are separate and distinct 
from contingency funding plans. Contingency funding plans address 
successively deteriorating liquidity scenarios and focus on the most 
liquid sources of funds. Concentration limits for limited liquidity 
investments focus on investments with relatively lower levels of 
liquidity.
Authorized Activities, Section 704.5(c)(5)
    The proposed rule clarified an ABS must be domestically issued. 
Several commenters supported the proposal, agreeing that foreign 
exposure in a domestically-issued ABS should be handled as a 
supervisory matter. This section is retained as proposed.
    Section 704.5(c)(6). The proposal deleted this section, which 
provided specific authorization for CMOs. Two commenters supported the 
deletion, since these investments are still authorized under 
Sec. 704.5(c)(1) and (5). This provision is deleted in the revised 
proposal.
Repurchase Agreements, Section 704.5(d)
    The proposed rule made several changes to the requirements for 
repurchase agreements, generally to conform to current market 
practices. Many commenters objected to the change requiring a corporate 
to obtain a perfected first priority security interest in repurchase 
securities. The commenters noted a perfected first priority security 
interest is inconsistent with standard market practices for repurchase 
transactions. The Board agrees and that portion of the proposed rule is 
deleted. The commenters did not object to the other changes, and they 
are retained in the revised proposed rule.

Securities Lending, Section 704.5(e)

    The proposed rule made several nonsubstantive changes to the 
requirements for securities lending transactions to clarify the rule 
and conform it more closely to current market practices. There were no 
comments on the proposed changes; however, ten commenters viewed the 
existing requirement for a perfected first priority security interest 
as inconsistent with standard market practice for securities lending 
agreements. The Board agrees with the commenters and has removed the 
word ``perfected'' but will continue to require a first priority 
security interest through possession or control of the collateral. 
Often, under state law, possession or control constitutes a 
``perfected'' security interest. In addition, the Board has clarified 
in the revised proposal that ownership is an appropriate substitute for 
possession and control.
Investment Companies, Section 704.5(f)
    The proposed rule clarified the prospectus is the document 
restricting the portfolio of an investment company. A few commenters 
supported this clarification, and it has been retained as proposed.
Prohibitions, Section 704.5(h)
    The proposed rule prohibited trading securities. One commenter 
supported this prohibition. A few commenters opposed the prohibition, 
but supported the existing prohibitions on pair-off transactions, when-
issued trading, adjusted trading, and short sales. The revised 
proposal, like the current rule, permits trading securities but 
requires transactions to be accounted for on a trade date basis and, in 
addition, no longer prohibits engaging in pair-off transactions and 
when-issued trading. The Board agrees with the commenters that concerns 
with these investments should be handled as a supervisory matter. The 
Board notes corporates engaging in trading securities must have 
sufficient resources, knowledge, systems and procedures to handle the 
risks. The revised proposed rule retains the prohibitions on engaging 
in adjusted trading and short sales.
    The proposed rule prohibited investments in residual interests in 
ABS, deleted the prohibition on commercial mortgage related securities, 
and moved the prohibition on the purchase of mortgage servicing rights 
from the investments section to the permissible services section. A few 
commenters supported these proposed changes, and these provisions are 
unchanged in the revised proposed rule.

[[Page 44275]]

Credit Risk Management, Section 704.6

    The proposed rule defined ``obligor'' to mean the primary party 
obligated to repay an investment and excluded from the definition the 
originator of receivables underlying an asset-backed security, the 
servicer of such receivables, or an insurer of an investment. A few 
commenters supported this definition, and it is retained as proposed. 
One commenter proposed including any party obligated to make repayment, 
including secondary parties such as an insurer, in the definition of 
obligor and, therefore, within the rule's credit concentration limit. 
The Board declines to impose regulatory credit risk concentration 
limits on insurers of investments, but notes Sec. 704.6(a)(4) requires 
a corporate's credit risk management policy to address concentrations 
of credit risk exposure, which would include an insurer of an 
investment.
    Although not previously proposed, the revised proposal deletes the 
definitions of ``short-term investment'' and ``long-term investment'' 
since they are no longer used, as explained below. The revised proposed 
rule also deletes the definition of ``expected maturity,'' since that 
term was only used in the definitions of these deleted terms.
Policies, Section 704.6(a)
    The proposed rule amended the policy requirements to base credit 
limits on capital, rather than RUDE and PIC. The proposed rule deleted 
the requirement that the credit risk management policy address loan 
credit limits. The proposed rule added to the examples of 
concentrations of credit risk an ``originator of receivables'' and an 
``insurer.'' A few commenters supported the proposal to base credit 
limits on capital. While one commenter opposed adding examples of 
credit concentration risk, the commenter suggested all types of such 
risk should be adequately addressed in the policy. In response, the 
Board notes the revised proposal's examples of credit concentration are 
illustrative only. A corporate's credit risk management policy should 
address all material types of concentrations of credit risk, regardless 
of whether included in the examples. This section is retained as 
proposed.
Exemption, Section 704.6(b)
    The proposed rule required subordinated debt of government 
sponsored enterprises to meet the rule's credit risk management 
requirements. The few comments received supported the proposed rule, 
and it is unchanged in the revised proposed rule.
Concentration Limits, Section 704.6(c)
    The proposed rule set concentration limits in relation to capital. 
Likewise, the revised proposal establishes a general credit 
concentration limit of 50 percent of capital or a de minimis limit of 
$5 million for the aggregate of all investments in any single obligor, 
whichever is greater.
    A bank trade group that commented asserted these changes would 
permit larger investments by corporates. The Board notes that, based on 
current levels of capital, these changes have the overall effect of 
reducing credit concentration limits from the prior limits.
    Many commenters opposed the proposed general credit concentration 
limit as too restrictive. Some commenters noted the proposed limit 
would substantially restrict investments in certain AAA rated 
instruments from prior levels (e.g., the prior limit of 200 percent of 
RUDE and PIC on mortgage-backed and asset-backed securities). While 
observing that diversification is normally a desirable goal, a number 
of commenters noted the proposed limits could force increased aggregate 
exposure to lower quality credits. A number of these commenters 
suggested a general credit concentration limit of 100 percent of 
capital on investments rated no lower than AA-(or equivalent) or A-1 
(or equivalent). A few advocated increasing the proposed general credit 
concentration limit to 100 percent of capital, regardless of credit 
rating. A number of commenters advocated a risk-based capital framework 
to require higher levels of capital for lower rated investments in lieu 
of credit concentration limits.
    As the Board noted in the proposal, the 50 percent limit provides 
corporates with substantial flexibility compared to other depository 
institutions. Id. at 48746. The Board believes this limit is the most 
credit exposure a corporate should prudently take in investment-grade 
quality investments. The Board recognizes the corporate network has 
increased its due diligence capabilities. However, if the corporate 
network is to maintain and enhance its ability to withstand financial 
crises, it must exercise caution in placing membership capital at risk. 
Placing all capital at risk would substantially increase the likelihood 
of a crisis and decrease membership confidence if losses occurred.
    The Board also noted in the proposed rule that adoption of a 
credit-risk weighted capital requirement is not warranted. Id. at 
48743. The Board's long-standing opinion is that such a requirement 
would provide limited regulatory value where corporates are concerned. 
62 FR 12929, 12931, March 19, 1997. The Board again suggests to 
corporates choosing voluntarily to calculate a credit-risk weighted 
capital ratio that they adopt the same standards used by other 
financial institutions.
    The Board notes a credit-risk weighted capital requirement would 
impose a macro level restriction on aggregate credit exposure to the 
entire balance sheet. In contrast, the credit concentration limit in 
the revised proposed rule is a micro level restriction on credit 
exposure to a single obligor.
    Section 704.6(c)(2) of the proposed rule provides exceptions to the 
general credit concentration rule. For repurchase and securities 
lending transactions, the proposed limit was 200 percent of capital. 
Investments in corporate CUSOs are subject to the limitations in 
Sec. 704.11. Investments in wholesale corporates and aggregate 
investments in other corporates are exempt.
    A number of commenters requested that the proposed credit 
concentration limit of 200 percent of capital on repurchase 
transactions be increased to 250 percent of capital. The commenters 
contended 200 percent is too restrictive in periods of large liquidity 
inflows. One commenter expressed general support for excepting 
repurchase transactions from the general credit concentration limit. In 
response to comments, the Board notes greater concentration limits in 
repurchase transactions are available to corporates meeting the 
infrastructure requirements of Part I or Part II expanded authorities.
    One commenter supported the exception for CUSO investments. This 
provision is unchanged in the revised proposed rule.
    A few comments supported the proposal to exempt investments in 
corporates from concentration limits. Two commenters thought the 
exemption should be limited to wholesale corporates: one noted the 
proposal appeared to increase systemic risk, while the other suggested 
adding a requirement for a corporate to obtain at least one credit 
rating for other corporate investments. The Board continues to believe 
the capital requirements for the receiving corporate will serve to 
limit the amount of investment any corporate may place in another 
corporate. In addition, the Board weighed the potential for increased 
systemic risk against the potential benefits of allowing additional 
alternatives to moving liquidity within the corporate system. 
Therefore, the Board believes it is appropriate to

[[Page 44276]]

expand the exemption to include all corporates. The Board reiterates 
that a corporate's credit risk management policy must address 
investments in corporates that are not fully insured by the NCUSIF.
    Proposed Sec. 704.6(c)(3) applied the requirements for an 
investment action plan in Sec. 704.10 when a reduction in capital after 
the purchase of an investment resulted in a credit concentration that 
was higher than permitted by regulation. One commenter believes that 
noncompliance caused by a reduction in capital should not trigger the 
30-day notification period in Sec. 704.10. Rather, the commenter 
suggests calling the investment ``nonconfoming'' rather than ``failed'' 
and allowing a 90-day period to permit a corporate to bring the 
investment into compliance before triggering the requirements of 
Sec. 704.10. This is similar to the approach used by the Office of the 
Comptroller of the Currency. 23 CFR 1.8.
    The Board agrees with the commenter's suggestion, and the revised 
proposed rule deems an investment as ``nonconforming'' if it fails a 
requirement because of a reduction in capital. A corporate credit union 
is required to exercise reasonable efforts to bring nonconforming 
investments into conformity within 90 days. Investments that remain 
nonconforming for 90 days are deemed to ``fail'' a requirement and will 
require compliance with the requirements in Sec. 704.10. The Board 
cautions corporates to consider the permanence of capital before 
committing investment funds. Because corporate concentration limits 
provide for substantial flexibility in comparison to other depository 
institutions, the Board is adopting the specific time frame suggested 
by the commenter, rather than an open-ended time frame for 
nonconforming investments.
Credit Ratings, Section 704.6(d)
    This section reduced the applicable credit rating to AA-(or 
equivalent) for a long-term investment and A-1 (or equivalent) for a 
short-term investment. The proposed rule applied the investment action 
plan requirements of Sec. 704.10 if at least two ratings were 
downgraded and a corporate had relied on more than one rating to meet 
the minimum credit rating requirements at the time of purchase.
    A number of commenters generally supported the credit rating 
requirements. However, most of the commenters noted the regulation's 
definitions of ``short-term investment'' and ``long-term investment'' 
can be inconsistent with the market. For consistency, they suggested 
the rule reference investments with short-term or long-term ratings. 
The Board agrees and adopts the suggestion in the revised proposed 
rule.
    One commenter advocated permitting investment in any investment 
grade instrument, particularly for repurchase transactions. The 
commenter noted the typical cash market practice for repurchase 
transactions is to require investment grade securities. In contrast, 
another commenter expressed caution that prudent risk management skills 
and infrastructure should be required to take on more credit risk. In 
light of the substantial flexibility already provided to corporates, 
the Board remains convinced a base level corporate should not be 
permitted to acquire more than limited credit risk exposure. Expanded 
authority provisions allow for a broader spectrum of credit risk, and 
require increased due diligence by corporates that obtain such 
authority.
    Another commenter questioned whether ``or equivalent'' when 
referring to acceptable ratings such as ``A-1 (or equivalent)'' meant a 
rating of another NRSRO or an evaluation by credit staff at a 
corporate. The Board notes this continues to refer to a rating of 
another NRSRO, and not an evaluation by credit staff at a corporate. 
Because of the substantial flexibility provided to corporates in 
concentration limits, the Board declines to permit internal credit 
analysis of investments in lieu of a rating by an NRSRO. While an NRSRO 
rating is no substitute for due diligence, it is a useful tool for 
investors to evaluate credit risk. The Board also notes ``or 
equivalent'' does not refer to a rating of an issuer that is not 
directly applicable to the investment. For example, a corporate may not 
rely on a short-term issuer rating to comply with the minimum rating 
requirement for an investment with a long-term rating.
    To avoid confusion regarding the investment watch list requirements 
of Sec. 704.6(e)(1), the revised proposed rule clarifies in 
Sec. 704.6(d)(4) that it is applicable only when the corporate relied 
upon more than one rating to meet the minimum credit rating 
requirements at the time of purchase. If there is a subsequent 
downgrade below the minimum requirement, then the investment must be 
placed on the investment watch list. The revised proposed rule permits 
a board to decide under Sec. 704.6(e)(1) to what extent it will require 
management to report to the board its review of a downgrade that does 
not result in a rating lower than the minimum requirements of part 704. 
The Board notes it remains a sound business practice for a corporate to 
monitor the credit quality of all investments, including reviewing any 
downgrades of credit ratings.
Reporting and Documentation, Section 704.6(e)
    The proposed rule clarified that requirements for annual approval 
apply to each credit limit with each obligor or transaction 
counterparty. Those commenters who addressed this change supported the 
proposed clarification, and it is retained as proposed.

Lending, Section 704.7

    Section 704.7(c)(1) and (2). Currently, the aggregate secured and 
unsecured loan and line of credit limits to any one member credit union 
are based on the higher of a percentage of capital or a percentage of 
RUDE and PIC. The Board proposed basing the loan limits on a percentage 
of capital and eliminating the option of basing them on a percentage of 
RUDE and PIC. Several commenters objected to eliminating this option. 
These commenters indicated the proposed limits were too restrictive and 
would not provide corporates adequate flexibility to meet member 
liquidity needs. The Board considered the comments and concluded that 
the percentages of capital in the proposed rule provide sufficient 
flexibility when balanced against safety and soundness concerns 
associated with a higher loan to one borrower ratio.
    Section 704.7(c)(3). This section of the proposed rule stated the 
maximum aggregate amount of loans and lines of credit is limited to 15 
percent of the corporate's capital plus pledged shares for members that 
are not credit unions. This is identical to current Sec. 704.7(d). 
Several commenters indicated proposed Sec. 704.7(c)(3) conflicts with 
proposed Sec. 704.7(e)(3), which requires compliance with the aggregate 
limits in Sec. 723.16 of the member business loan rule.
    The Board notes that these two provisions do not conflict because 
Sec. 704.7(c)(3) is the individual limit and Sec. 704.7(e)(3) is the 
aggregate limit. To clarify this, the Board has placed the word ``one'' 
in front of ``member'' in revised proposed Sec. 704.7(c)(3).
    Currently, Sec. 704.7(c) and (d) reference ``irrevocable'' loans 
and lines of credit. The Board proposed clarifying its intent that 
these sections apply to both ``irrevocable'' and ``revocable'' loans 
and lines of credit. No commenter objected to the proposed 
clarification; therefore, the Board is deleting the modifier 
``irrevocable'' from these sections of the revised proposed rule.
    Proposed Sec. 704.7(e) attempted to clarify the applicability of 
the member business loan rule in part 723 to loans

[[Page 44277]]

granted by a corporate. Based on the comments, the Board realizes there 
is still some confusion and is amending the revised proposed rule to 
state that all loans exempt under Sec. 723.1 are exempt from compliance 
with the member business loan rule.
    Proposed Sec. 704.7(e)(3) expanded the partial exemption from the 
member business loan rule in current Sec. 704.7(d). The partial 
exemption requires compliance with the aggregate limits in Sec. 723.16 
but exempts a corporate from the other requirements in part 723. The 
Board proposed adding to the current, partial exemption for guaranteed 
loans, loans that are fully secured by U.S. Treasury or agency 
securities. No commenter objected and this change is retained in the 
revised proposed rule. The revised proposed rule also clarifies that 
the aggregate limits of Sec. 723.16 are statutory, and a corporate is 
not exempt from these limits unless the loan is not a business loan as 
defined in Sec. 723.1(b).
    Section 704.7(g). The Board proposed revising the provision 
governing loan participations between corporates to include a 
requirement that a corporate execute a master participation loan 
agreement before the purchase or the sale of a participation loan. In 
conjunction with this requirement, the Board deleted the language that 
a participation loan agreement may be executed at any time before, 
during, or after the disbursement. No comments were received on this 
section, and this requirement is retained in the revised proposed rule.
    Currently, a corporate is not permitted to participate in loans 
with natural person credit unions, although some corporates have 
obtained an NCUA Board waiver to do so. The Board proposed adding this 
authority as an expanded authority in Appendix B, Part V. No comments 
were received on the proposal to make it an expanded authority, and the 
Board is retaining it in the revised proposed rule.
    Finally, the Board proposed reorganizing the lending section to 
make it easier to read. No commenter objected to the reorganization; 
therefore, the revised proposal incorporates the proposed changes.

Asset and Liability Management, Section 704.8

    The proposed rule deleted the term ``net interest income'' because 
it is no longer used in the regulation and amended the definitions of 
``net economic value (NEV)'' and ``fair value.'' NEV means the fair 
value of assets minus the fair value of liabilities. The amended 
definition excluded from liabilities both PIC and MC, rather than 
excluding only PIC.
    Two commenters supported the amended definition of NEV, but one 
noted the exclusion of MC from liabilities may be contrary to market 
practice because others may not recognize three-year notice accounts as 
capital. The Board notes debt instruments with shorter maturities are 
recognized for certain regulatory capital purposes in other depository 
institutions. 12 CFR part 3, App. B.
    One commenter suggested including all off balance sheet financial 
derivatives in the definition of NEV. The Board does not agree and 
notes for purposes of NEV measurement, fair values are to be determined 
for all assets and liabilities that are balance sheet items under GAAP. 
NCUA acknowledges that GAAP does not require accounting for immaterial 
positions in financial derivatives on balance sheet. The Board notes 
corporates must have Part IV Expanded Authorities to engage in 
derivative transactions.
Policies, Section 704.8(a)(2)
    The proposed rule eliminated the redundancies with Sec. 704.5(a) 
and changed the term ``current NEV'' to ``base case NEV'' to provide 
uniform usage throughout the regulation. All commenters addressing this 
section were supportive, and the revised proposal adopts the proposed 
changes.
    Section 704.8(a)(5). The proposed rule deleted the requirement for 
a policy limit on decline in net income. The few commenters on this 
section supported this deletion, and the revised proposed rule retains 
the deletion.
    Section 704.8(a)(6). This section added a requirement for the asset 
and liability management policy to address the tests used to evaluate 
the impact of investments on the percentage decline in NEV, compared to 
the base case NEV. Many commenters opposed this requirement. Commenters 
noted tests are not appropriate for investments such as cash 
instruments, short-term investments, and pure floating-rate 
investments. Some noted it was impractical and untimely to run a 
complete NEV analysis to establish a base case at the time of each 
investment transaction. Others suggested reflecting the tests in 
operating procedures, rather than policies, and reviewing as a 
supervisory issue.
    NCUA does not intend to require corporate policies to specify tests 
for investments with minimal investment rate risk. In addition, the 
Board would not expect tests to evaluate the impact of an investment in 
a wholesale corporate credit union that is funded by a share 
certificate with identical characteristics. Rather, the rule requires 
the board to address tests, as appropriate, for investments expected to 
impact the percentage decline in NEV, compared to the base case NEV as 
most recently determined for the balance sheet. The revised proposal 
clarifies NCUA does not expect a corporate to run a complete NEV 
analysis to establish a base case at the time of each investment 
transaction. Indeed, NCUA notes that measuring risk is an imprecise 
business because of the multitude of assumptions that are required to 
evaluate potential outcomes. However, the revised proposed rule is 
intended to require each corporate to establish an ongoing process to 
identify, estimate, monitor and control interest rate risk between the 
periodic complete NEV analysis.
Penalty for Early Withdrawals, Section 704.8(c)
    The proposed rule required a corporate to impose a market-based 
penalty for early withdrawal, if early withdrawal is permitted. The 
proposed rule also required the penalty to equal the estimated 
replacement cost of the certificate or share redeemed. This change 
would have prohibited a corporate from imposing a penalty in excess of 
the replacement cost and would have required a penalty to be reasonably 
related to current offering rates of that corporate.
    Many commenters objected to the proposed provision, asserting that 
penalties should be market based, and not based on rates currently 
offered by a corporate. Some of these commenters observed rates offered 
by a corporate may reflect limited quantity ``specials'' or other 
certificate marketing programs and, therefore, not reflect market 
rates. One commenter suggested early withdrawal should be subject to a 
market gain or loss. Another commenter stated that a corporate is 
exposed to the asset side of the balance sheet when redeeming a 
liability. A commenter noted an early withdrawal penalty should be 
assessed using all liquidity factors including size, bid or offer 
spreads, certificate features, and market conditions. A number of 
commenters suggested that no changes to the current regulation are 
needed.
    The Board is persuaded that no substantive change is needed to this 
section and has withdrawn the proposed amendments. The Board notes the 
current rule requires a market based penalty sufficient to cover the 
estimated replacement cost of the liability redeemed. The Board 
proposes to clarify

[[Page 44278]]

that this means the minimum penalty must be reasonably related to the 
rate that the corporate would be required to offer to attract funds for 
a similar term with similar characteristics. NCUA agrees the minimum 
penalty was not intended to cover limited offerings of liabilities with 
above market rates. The minimum penalty also does not reflect the value 
of any specific asset of the corporate. A gain does not appear 
consistent with the notion of a penalty for early withdrawal. In the 
event a member needs liquidity in advance of maturity of a share 
certificate bearing an above market rate, the Board suggests the 
corporate offer a share secured loan, as appropriate. As the commenters 
suggest, the Board will leave to the marketplace the determination of 
penalties above the minimum penalty specified in the rule.
Interest Rate Sensitivity Analysis, Section 704.8(d)
    The proposal deleted the requirement to conduct net interest income 
simulations. Many commenters supported this elimination, and it is 
deleted in the revised proposed rule.
    The existing rule requires a corporate to evaluate the impact of 
shocks in the Treasury yield curve on its NEV and NEV ratio. One 
commenter suggested deleting the word ``Treasury,'' since the market 
has moved away from the Treasury yield curve as a benchmark. In 
response, the revised proposed rule omits the word ``Treasury.'' NCUA 
recognizes risk management practitioners often use a yield curve based 
on London Interbank Offered Rates (LIBOR).
    Section 704.8(d)(1)(i). The proposed rule increased from two to 
three percent the minimum base case NEV ratio that triggers monthly 
interest rate sensitivity analysis testing. A number of commenters 
supported this increased NEV ratio. One commenter observed it was a 
sound business practice to assess monthly the impact of interest rate 
shocks on NEV, NEV ratio, and net interest income. Another commenter 
suggested setting the trigger at four percent, rather than three 
percent, since the base case NEV ratio for most corporates will 
increase significantly because of the new definition of NEV. The Board 
believes it is a sound business practice to assess interest rate risk 
periodically, as appropriate, and continues to believe at least 
quarterly analysis is appropriate for base level corporates. The 
revised proposed rule is retained as proposed.
    Proposed Sec. 704.8(d)(1)(ii) limited a corporate's risk exposure 
to levels that do not result in any NEV ratio resulting from the 
specified parallel shock tests, or a base case NEV ratio, of less than 
two percent, rather than one percent. Some commenters supported the two 
percent minimum NEV ratio. One commenter advocated establishing the 
minimum NEV limit under the shock scenarios at one percent, rather than 
two percent. The Board notes the proposed definition of NEV is intended 
to estimate the reserve of capital available to manage all other risks 
of the corporate other than the risks associated with changes in 
interest rates. The section is retained as proposed.
    Section 704.8(d)(1)(iii). The proposal reduced the NEV decline 
limit for a base corporate from 18 to 10 percent. Numerous commenters 
opposed the proposed limit of 10 percent, since it may reduce the 
currently permissible amount of interest rate risk for some corporates. 
Many commenters requested the Board re-evaluate the limits to avoid 
diminishing the permitted amount of interest rate risk exposure. In 
contrast, one commenter suggested reducing the NEV decline limit 
further, to 8 percent, to maintain parity on average with the current 
rule, and one commenter supported the change. One commenter noted the 
reduction may have the unintended consequence of encouraging issuance 
of additional MC as a way of maintaining the dollar value of 
permissible at risk NEV.
    Based on the comments, the Board has re-evaluated the NEV decline 
limit for a base corporate. The revised proposed rule establishes a 
limit of 15 percent. This increases the amount of interest rate risk 
most base corporates may undertake compared to the existing regulation. 
The Board is comfortable with the increased risk because the corporate 
system has improved its ability to measure interest rate risk since the 
existing regulation was adopted. NCUA recognizes that taking prudently 
controlled risk is necessary to obtain reasonable returns. The Board 
declines to impose a limit that may reduce substantially the amount of 
interest rate risk a base corporate may undertake. However, the Board 
cautions against over reliance on MC as a way of increasing the amount 
of interest rate risk permitted.
    Section 704.8(d)(2). The proposed rule required all corporates to 
assess annually whether it is appropriate to conduct periodic, 
additional, interest rate risk tests. These additional tests formerly 
were triggered based on the level of unmatched embedded options. A 
number of commenters supported this change, and it is retained as 
proposed.
    Regulatory Violations, and Policy Violations, section 704.8(e) and 
(f). No comments were received on these sections. The proposed changes 
were non-substantive grammatical amendments. The revised proposal 
incorporates the proposed amendments and also designates the OCCU 
Director to respond to regulatory violations. There has been some 
confusion regarding when reports of violations must be made. The Board 
notes the 10-day time period runs from the date the corporate first 
produces or receives reports of its NEV. Revisions or reruns of reports 
do not delay the reporting requirement.

Divestiture, Section 704.10

    The Board did not propose any changes to this provision, however, 
because of confusion concerning this provision, the Board proposes 
retitling it ``Investment Action Plan.'' This change clarifies that 
divestiture is not the only remedy available under this section.

Corporate CUSOs, Section 704.11

    The proposed rule added new due diligence requirements for 
corporates' loans to corporate CUSOs. These requirements were taken 
from the member business loan rule. All six of the commenters that 
commented on this issue opposed the additional requirements. Commenters 
suggested underwriting is a supervision issue and should be addressed 
as part of the examination process and not in a regulation. One of the 
commenters noted that this requirement may limit a corporate's desire 
to provide necessary liquidity to key service providers.
    The Board believes these due diligence requirements are the minimum 
requirements necessary to insure the corporate is engaging in safe and 
sound lending practices. The requirements should not place a new burden 
on corporates because any corporate that makes a loan to a corporate 
CUSO should already be following these requirements.
    Six commenters requested that the current 15 percent aggregate 
limit for investments in and loans to corporate CUSOs be increased to 
30 percent and the additional 15 percent for loans that are fully 
secured be retained.
    The Board agrees that with respect to loans to corporate CUSOs. 
Because of the mandatory due diligence requirements, a corporate' 
lending limits should be increased to 30 percent. The Board has safety 
and soundness concerns with increasing the investment limits to 30 
percent. Therefore, the revised proposed rule maintains a limit of 15 
percent of capital for investments in corporate CUSOs, increases the 
aggregate limit for loans and

[[Page 44279]]

investments to 30 percent of capital, and retains the additional 15 
percent for loans that are fully secured.
    Six commenters requested that the current audit requirements in 
Sec. 704.11(d)(3) be modified to permit a consolidated CPA audit for 
wholly owned CUSOs. This modification would mirror the practice that is 
currently permissible for natural person CUSOs. 63 Fed. Reg. 10743, 
10747 (March 5, 1998). The Board agrees but does not believe it is 
necessary to state it in the regulations since this is a requirement 
under GAAP for wholly owned CUSOs.
    Six commenters supported revising Sec. 704.11(b) so that it mirrors 
Sec. 712.6 of the natural person CUSO rule. Section 704.11(b) prohibits 
a corporate from acquiring control directly or indirectly of another 
``financial institution'' and Sec. 712.6 prohibits a natural person 
credit union from acquiring control directly or indirectly of anther 
``depository financial institution.'' The Board agrees and has placed 
the modifier ``depository'' before ``financial institution.''
    The commenters generally supported clarifying in the CUSO rule that 
the aggregate limit of Sec. 723.16, the member business loan rule 
applies to loans to CUSOs. The commenters objected to the other 
provisions of part 723 applying to those loans and cited a Guidance 
letter issued by the OCCU as support for their position. The intent of 
the proposal, as well as the revised proposal, is not to have any 
additional requirements in part 723 apply except those listed as due 
diligence requirements.

Permissible Services, Section 704.12

    The Board proposed listing six broad categories of permissible 
financial services for corporate credit unions. They are: Credit and 
investment services; liquidity and asset liability management; payment 
systems; electronic financial services; sale or lease of excess 
physical or information system capacity; and operational services 
associated with administering or providing financial products or 
services. Currently, permissible services are not defined but are 
limited in the preamble to the final rule to ``traditional loan, 
deposit and payment services.'' 61 FR 28085, 28096 (June 4, 1996).
    Twenty of the 21 commenters that commented on this provision 
objected to the proposed list of services. Some of the reasons given in 
opposition were that: services should be the same as those listed in 
part 721; a corporate should be able to seek approval for additional 
services, as in parts 712 and 721; the services should be listed as 
broad categories; limiting services to those currently offered by 
corporates inhibits the possibility of future development and could 
force credit unions to go to competitor banks for services; and 
securities safekeeping, custodial and brokerage services should be 
added to the list of permissible services. Several commenters objected 
to changing the name from ``services'' to ``permissible services.'' One 
commenter objected to limiting services of federally-insured, state-
chartered credit unions (FISCUs). The commenter noted that prior to 
1998, this provision did not apply to FISCUs.
    The commenter that supported this provision commended NCUA for 
interpreting permissible services more broadly than the current 
interpretation. The commenter suggested listing the services as an 
appendix to the rule.
    The Board believes some commenters may have been confused even 
though the proposal specifically stated that the services listed were 
broad categories. To eliminate confusion, the Board is listing the 
permissible services in categories in the same manner they are listed 
in parts 712 and 721. In addition, like parts 712 and 721, examples of 
the service are set out under each category. The Board does not agree 
that the permissible services for a corporate credit union should be 
the same as for a natural person credit union. The mission of a 
corporate credit union is serving its natural person credit union 
members, whereas, the mission of a natural person credit union is 
serving natural persons. These two distinct missions lead to very 
different services for members. The Board is retaining the six broad 
categories in the proposed, adding the category of trustee or custodial 
services, and including examples under each category. The Board notes 
that trustee services are limited to those permitted in part 724. 
Custodial services include acting as custodian or safekeeper of 
securities or other investments for your members. When performing these 
services, you must comply with applicable laws, including securities 
laws.
    At the commenters' suggestion, the Board is adding a provision 
similar to the provisions in parts 712 and 721 concerning adding new 
permissible services. The new section permits corporates to petition 
the Board to add a new service to Sec. 704.12 and encourages them to 
seek an advisory opinion from the Office of General Counsel (OGC) on 
whether a proposed service is already covered by one of the authorized 
categories before filing a petition. The rule does not require a 
corporate to come to OGC for an opinion every time it wants to provide 
a service not specifically listed as an example under a broad category. 
An opinion from OGC is recommended if there is doubt as to whether a 
specific service falls within one of the broad categories. In those 
situations, a corporate that does not consult with OGC runs the risk of 
engaging in an impermissible activity and being subject to supervisory 
action.
    The proposal deleted the requirement that services to nonmember 
natural person credit unions through a correspondent services 
agreements could only be provided to those natural person credit 
unions' branch offices in the corporate's geographic field of 
membership. In addition, the proposal clarified that a correspondent 
services agreement is an agreement between two corporates for one of 
the corporates to provide services to the members of the other. Eleven 
of the 13 commenters that commented on this issue objected to the 
clarification.
    The negative commenters stated that the requirement: Ignores the 
reality that a credit union can join almost any corporate; is an 
antitrust violation and is in restraint of trade; Ignores the existing 
practice; creates a competitive edge for noncredit union competitors; 
and will hinder the process of establishing relationships that will 
lead to membership. Several commenters noted that, with national fields 
of membership, any credit union can join a corporate and NCUA needs to 
define member.
    The two commenters that supported this provision noted that 
corporates are still financial cooperatives formed to benefit members 
and that a national field of membership does not change that basic 
principle.
    The Board agrees with the two positive commenters that corporates, 
like natural person credit unions, are formed to serve their members. 
Natural person credit unions are permitted as part of correspondent 
services to provide services to other natural person credit unions, but 
are only permitted to serve, nonmember natural persons through an 
agreement with the nonmember's natural person credit union. 12 CFR 
721.3(b). The revised proposed rule for corporates, like that for 
natural person credit unions, requires an agreement between two 
corporates for one corporate to provide services to the members of the 
other. In addition, although not in the initial proposal, the revised 
proposal permits corporates to provide services to other nonmember 
corporates through a correspondent services agreement, just as natural 
person credit unions are permitted to provide services to other natural 
person credit unions through an

[[Page 44280]]

agreement. Finally, correspondent services are now listed under 
permissible services.
    The proposal also moved the current prohibition on the purchase of 
``mortgage servicing rights'' from the investment section to this 
section and renames it ``loan servicing rights.'' Three commenters 
objected to this current prohibition stating that it is arbitrary and 
contrary to the concept of business aggregation. The Board is not 
persuaded by these three commenters based on its safety and soundness 
concerns with corporates engaging in this type of activity. The Board 
will maintain the current prohibition in the revised proposed rule.

Fixed Assets, Section 704.13

    The proposal eliminated the existing regulatory limit on fixed 
assets of 15 percent of capital. The proposal noted the monitoring of 
fixed assets is best accomplished through ongoing supervision rather 
than through regulation.
    The few commenters that commented on this change supported the 
elimination. Therefore, the revised proposal reflects this change.

Representation, Section 704.14

    The proposal clarified that the term ``credit union trade 
association'' in Sec. 704.14(a) includes the term affiliates by adding 
to the regulation the definition of ``credit union trade association'' 
in the preamble to the prior final rule. 59 Fed. Reg. 59357, 59358, 
November 17, 1994. Thirteen of the 14 commenters that commented on this 
clarification objected to adding a definition of ``credit union trade 
association.'' The commenters erroneously perceived this as a change, 
stated that it unnecessarily limits the pool of qualified applicants, 
and it is not needed in light of the recusal provisions in 
Sec. 704.14(d). The one positive commenter supported the change because 
it clarifies the use of the terms ``affiliates'' and ``trade 
association.''
    The Board continues to believe that the chairman of the board of a 
corporate should not serve simultaneously as an officer, director or 
chair of a national credit union trade association or its affiliates. 
As the Board stated when this provision was originally drafted, ``the 
chair should be an individual whose loyalty is in no way divided 
between the corporate credit union and a trade association.'' 59 FR 
59357, 59358, November 17, 1994. (Emphasis added). If the Board were to 
exclude affiliates from the definition, the chair's loyalty could be 
divided between the corporate and the credit union trade association 
affiliate. Therefore, the revised proposal retains the definition of 
``credit union trade association'' in the initial proposal.
    The proposal amends the requirement in Sec. 704.14(a) that both 
federal and state-chartered corporates comply with federal corporate 
bylaws governing election procedures to require all corporates comply 
with Sec. 704.14(a) governing election procedures. All four commenters 
that commented on this amendment agreed with the proposed change. The 
Board is retaining these changes in the revised proposal.

Wholesale Corporate Credit Unions, Section 704.19

    The proposed rule eliminated separate wholesale corporate rules for 
minimum capital ratio, minimum NEV ratio, and maximum NEV volatility. 
In addition, it eliminated reserve transfer and annual validation of 
the asset and liability management modeling system requirements. A new 
provision was added that decreased the minimum RUDE ratio requirement 
for a wholesale corporate to 1 percent, as opposed to the 2 percent 
requirement for other corporates.
    Four commenters addressed capital. None of the commenters addressed 
the minimum capital ratio, but all four opposed establishing a 1 
percent minimum RUDE ratio requirement citing the same reasons they 
opposed the 2 percent minimum RUDE ratio for other corporates. Two 
commenters recommended adopting a credit-risk weighted capital approach 
for a wholesale corporate. Both commenters stated a credit-risk 
weighted capital system is a more appropriate measurement of capital 
adequacy than a RUDE ratio.
    As discussed in the section addressing capital, the Board is 
persuaded to eliminate a minimum RUDE ratio requirement but remains 
convinced retained earnings are a critical component of capital. 
Therefore, the Board is establishing an earnings retention requirement 
when the retained earnings ratio is below 1 percent. The Board believes 
implementing an earnings retention requirement, in lieu of a minimum 
RUDE ratio requirement, addresses both the need to maintain an 
appropriate level of retained earnings and eliminates concerns 
expressed about restricting a wholesale corporate credit union's 
ability to accept deposits. Recognizing the unique position of a 
wholesale corporate credit union in the two-tier corporate system, the 
Board is establishing a 1 percent, rather than a 2 percent, retained 
earnings ratio threshold before the earnings retention requirement is 
in effect. For reasons previously cited, the Board remains unconvinced 
that a credit-risk weighted capital system for corporate credit unions 
is a preferred method for determining capital adequacy.
    Several comments were received regarding eliminating 
Sec. 704.19(c)(1). This section addressed separate rules for minimum 
NEV ratio and maximum NEV volatility. Several commenters objected to 
eliminating this provision citing a wholesale corporate's need for 
greater flexibility in managing liquidity. One commenter supported the 
proposed rule stating there is no basis for maintaining different 
regulatory requirement for a wholesale corporate. The Board continues 
to believe exposures associated with interest rate risk are the same 
regardless of the type of corporate. Therefore, the Board has 
eliminated this section in the revised proposal.
    Two commenters supported the proposed elimination of 
Sec. 704.19(c)(2) that requires a wholesale corporate to obtain an 
annual third-party review of its asset and liability management 
modeling system. This section is eliminated in the revised proposed 
rule.

Appendix A to Part 704--Model Forms

    The proposal added language to the model forms to clarify the 
treatment of MC and PIC in the event of the merger, liquidation, or 
charter conversion of a member credit union or the corporate credit 
union. The proposal also noted that the model forms only set forth the 
minimum disclosure requirements and that there may be additional 
disclosures required that the Board has not considered. The Board 
proposed eliminating the wording that states corporates using the model 
forms are in compliance with all disclosure requirements.
    One commenter indicated full support for all the proposed changes 
in this section. Several commenters suggested a revision to allow 
either the corporate's chair or the CEO to sign the annual disclosure. 
Eight commenters objected only to the removal of the wording that 
indicates a corporate using the model forms will be in compliance with 
the disclosure requirements. They suggested the value of providing 
model forms is to assist the industry in complying with regulatory 
requirements and expressed concern with having compliance with the 
terms and conditions of MC and PIC accounts left to an examiner's 
discretion.
    The Board wants each corporate to have the ability to utilize MC 
and PIC to achieve the best results for its institution and its 
members. As such, a

[[Page 44281]]

corporate's officials may develop features in their MC or PIC offerings 
that the Board did not consider in adopting the model forms. The Board 
wants corporates to have the freedom to develop unique MC and PIC 
accounts, while ensuring member credit unions receive appropriate 
disclosure on these accounts. Therefore, in the revised proposed 
regulation, the Board has eliminated the wording that states corporate 
credit unions using the model forms are in compliance with all 
disclosure requirements.
    The revised proposal also places the signature requirements for the 
disclosures that are currently only found in the disclosures in the 
regulation in Sec. 704.3(b)(2) and (c)(1).

Appendix B to Part 704--Expanded Authorities and Requirements

    Appendix B provides corporates with incrementally greater 
authorities provided additional infrastructure and capital requirements 
are met. The proposed rule introduced a more flexible approach to 
expanded authorities. The Board proposed changes to this section to: 
incorporate base plus expanded authorities under this appendix; expand 
permissible credit ratings on investments; permit corporates that 
precommit to a higher level of capital the option of a higher level of 
interest rate risk; ease the requirements for corporates to participate 
in risk reducing derivative activities; and permit corporates to 
participate in loan participations with natural person credit unions.
    In addition, the proposed rule included minimum standards for any 
corporate credit union participating in expanded authorities. The 
minimum standards included requirements for monthly NEV modeling and 
annual updating of a corporate's self-assessment. No commenters 
objected to the NEV modeling requirement; however, twelve commenters 
opposed the establishment of a requirement to update the self-
assessment plan originally submitted in a request for expanded 
authority. The Board is persuaded that updating the self-assessment 
would be overly burdensome. Therefore, the Board has deleted that 
requirement from the revised proposed rule.
    The Board proposed allowing corporates to select the level of NEV 
volatility they choose given their level of capital. Recognizing that 
all corporates do not operate at or seek the same levels of risk, the 
Board proposed to reduce mandatory capital levels if NEV volatility is 
maintained at lower levels and to increase it as volatility increases. 
The Board believed this menu-driven approach would reduce burden on 
corporate credit unions, allowing them to better manage their risk 
taking activities in coordination with capital levels. No commenters 
opposed the approach; however, several commenters opposed the limits 
established in the proposed rule.
    In the proposed rule, the Board limited volatility for a base plus 
corporate to a maximum of 15 percent. For Part I, the Board proposed to 
limit volatility to a maximum of 15 and 20 percent when the corporate 
credit union had committed to a minimum capital requirement of four and 
five percent, respectively. For Part II the board proposed to limit 
volatility to 15, 20, and 30 percent when a corporate credit union had 
committed to a minimum capital requirement of four, five, or six 
percent, respectively. Several commenters objected to these volatility 
levels recommending that volatility levels remain at existing levels. 
One commenter recommended lowering the volatility levels even further.
    After reviewing the comments, the Board is persuaded to increase 
the proposed volatility levels as noted in Table 1. The Board is 
establishing NEV decline limits for a base-plus corporate credit union 
of 20 percent, as illustrated in Table 1. The Board is adopting the 
menu-driven approach proposed for only Part II expanded authority for 
corporates requesting both Part I and Part II expanded authorities. The 
NEV limits in Table 1 reflect reasonable levels of volatility given the 
infrastructure requirements imposed by this rule. A corporate can 
obtain greater levels of NEV volatility with Part I authority without 
incurring the infrastructure costs associated with the ability to 
assume the additional credit risk permitted in Part II. This 
flexibility is being provided to enable corporates to manage their 
balance sheets better.

                                          Table 1.--NEV Decline Limits
                                                  [in percent]
----------------------------------------------------------------------------------------------------------------
                                                                                                      Revised
                                                                      Minimum      Proposed rule   proposed rule
                  Level of expanded authorities                       capital       NEV decline     NEV decline
                                                                    requirement        limit           limit
----------------------------------------------------------------------------------------------------------------
Base plus.......................................................               4              15              20
Part I..........................................................               4              15              20
                                                                               5              20              28
                                                                               6             (1)              35
Part II.........................................................               4              15              20
                                                                               5              20              28
                                                                               6              30             35
----------------------------------------------------------------------------------------------------------------
1 Not proposed.

    The Board's estimates of the effect of the NEV decline limits on 
corporates with expanded authorities are summarized in Table 2. 
Although the estimated permitted NEV declines are smaller for some 
corporates with expanded authorities, no corporates reported NEV 
declines under adverse rate shocks will violate the new NEV decline 
limits.

[[Page 44282]]



   Table 2.--Estimates of Permitted Declines in NEV for Base-Plus, Part I, and Part II Corporate Credit Unions
                      Simple Averages for the Quarters Ending June 2000 Through March 2001
----------------------------------------------------------------------------------------------------------------
                                                                                                     Permitted
                                                                                    NEV decline    decline as %
                                                                     NEV ratio         limit         of FV of
                                                                                                      assets
----------------------------------------------------------------------------------------------------------------
                            Base plus
Current Rule....................................................            4.33              25            1.06
Proposed Rule...................................................            9.24              20            1.85
 
                             Part I
 
Current Rule....................................................            3.62              35            1.27
Proposed Rule 20................................................            8.44              20            1.69
Proposed Rule 28................................................            8.44              28            2.36
Proposed Rule 35................................................            8.44              35            2.95
 
                             Part II
 
Current Rule....................................................            3.53              50            1.76
Proposed Rule 20................................................            6.51              20            1.30
Proposed Rule 28................................................            6.51              28            1.82
Proposed Rule 35................................................            6.51              35            2.28
----------------------------------------------------------------------------------------------------------------

    The Board will permit any corporate currently approved for Part I 
or Part II Expanded Authorities to request to lower its NEV decline 
limit in conjunction with a request to lower its minimum capital 
requirement from 5 or 6 percent, respectively.
    As discussed in Sec. 704.8, asset and liability management, the 
Board proposed to establish limits for the aggregate credit exposure to 
a single obligor at 50 percent of capital. This limit provides 
corporates with substantial flexibility in comparison to other 
depository institutions. The Board believes this limit is the most 
credit exposure a corporate credit union should prudently take in 
investment quality investments. This 50 percent limit will apply to all 
corporates.
    The Board proposed expanding the exception from the general credit 
concentration rule for repurchase and securities lending transactions 
for corporate credit unions with Part I or II authority. Due to the 
increased infrastructure requirements for Part I and II, the Board 
proposed to establish a 300 percent limit for Part I, and 400 percent 
limit for Part II. Several commenters objected to the limits stating 
that the lower levels will significantly reduce their existing limits. 
The Board believes the proposed levels of risk are appropriate because 
of the increased requirements for credit analysis for Part I and II 
corporates; however, the Board believes increasing the limits beyond 
those proposed would not be prudent.

Part I

    Currently, corporates with Part I authority can purchase long-term 
investments rated no lower than AA-. The Board proposed lowering the 
minimum rating requirement for a long-term investment (including asset-
backed securities) to A-. One commenter objected to the lowering of the 
credit standards, since it believes that corporates should only invest 
in the highest rated instruments. The Board believes these proposed 
levels of risk are appropriate because of the credit risk analysis 
infrastructure requirements for Part I and has retained them in the 
revised proposed rule.
    Currently, corporates cannot purchase a short-term investment rated 
lower than A-1. For Part I corporates, the Board proposed lowering the 
minimum rating requirement for a short-term investment (including 
asset-backed securities) to A-2, provided the issuer had a long-term 
rating no lower than A-. Again, one commenter objected to the lowering 
of the credit standards, since it believes that corporates should only 
invest in the highest rated instruments. As stated above, the Board 
believes these proposed levels of risk are appropriate because of the 
credit risk analysis infrastructure requirements for Part I and has 
adopted them in the revised proposed rule. The revised proposed rule 
clarifies that an asset-backed security with a short-term rating of A-2 
is permissible.
    The Board proposed to delete authority for Part I corporates to 
enter into a repurchase transaction where the collateral securities are 
rated no lower than A (or equivalent). This authority is no longer 
necessary because the revised proposed rule permits Part I corporates 
to purchase long-term investments rated no lower than A- (or 
equivalent). No comments we received on this change and the Board has 
adopted it in the revised proposed rule.
    The current rule generally prohibits when-issued trading, but 
allows corporates with Part I and II authorities to engage in when-
issued trading when accounted for on a trade date basis. The revised 
proposed Sec. 704.5(h) would permit all corporates, including those 
with expanded authorities, to engage in when-issued trading when 
accounted for on a trade date basis. The reference to when-issued 
trading in Parts I and II is no longer necessary and is deleted in the 
revised proposal.
    In both Part I and II, the Board proposed clarifying that the 
aggregate loan limits apply to both revocable and irrevocable lines of 
credit. Currently, the rule only states ``irrevocable lines of 
credit.'' The Board deleted the modifier ``irrevocable'' to clarify 
this. No comments were received on this proposed change and it is 
adopted in the revised proposed rule.

Part II

    Currently, corporates with Part II authority can purchase long-term 
investments rated no lower than A- (or equivalent). The Board proposed 
lowering the minimum rating requirement for a long-term investment 
(including asset-backed securities) to BBB (flat). Several positive 
comments were received on this change. One commenter believed even 
lower rated instruments should be permitted. Given the additional 
credit risk analysis infrastructure requirements of a Part II 
corporate, the Board believes the proposed rating is appropriate and 
has adopted it in the revised proposed rule.
    Currently, corporates cannot purchase a short-term investment rated 
lower than A-1 (or equivalent). For Part II corporates, the Board 
proposed lowering the minimum rating requirement for a short-term 
investment (including asset-backed securities) to A-2 (or equivalent), 
provided the issuer has a long-term rating no lower than BBB

[[Page 44283]]

(flat). One commenter believed even lower rated instruments should be 
permitted. Given the additional credit risk analysis infrastructure 
requirements of a Part II corporate, the Board believes the proposed 
rating is appropriate and has adopted it in the revised proposed rule. 
The revised proposed rule clarifies that an asset-backed security with 
a short-term rating of A-2 is permissible.
    Currently, corporates with Part II authority must establish limits 
for secured and unsecured loans as a percentage of the corporate's 
capital plus pledged shares. The Board proposed to limit unsecured 
loans to 100 percent of capital. This proposed unsecured loan limit is 
the same as that for a Part I corporate. One commenter noted that 
corporates operating at this level of expanded authority are capable of 
making a credit decision and establishing limits utilizing their own 
expertise. The Board does not believe it is appropriate for any 
corporate to risk more than 100 percent of its capital to any one 
member credit union on an unsecured basis. The Board has adopted the 
proposed limit in the revised proposed rule.

Part III

    Corporates with Part III authority may purchase certain foreign 
investments. The current rule requires the foreign country to be rated 
no lower than AA (or equivalent) for political and economic stability. 
The Board proposed to replace this requirement with a requirement for a 
long-term foreign currency (non-local currency) debt rating no lower 
than AA- (or equivalent). No negative comments were received so the 
Board has adopted this change in the revised proposed rule
    The Board proposed to relax the bank issuer or guarantor rating 
from AA (or equivalent) to AA- (equivalent). This change represented 
only a minor increase in risk, and provided Part III corporates with 
additional investment alternatives. Five commenters noted that 
corporates should be allowed to take credit risk on foreign investments 
at the same level as permitted for domestic issuers. The Board was 
persuaded that a credit rating by an NRSRO is consistent between 
foreign and domestic issuers, so the revised proposed rule is modified 
to allow corporates the same credit rating levels for foreign and 
domestic issuers at their level of authority. In addition, several 
commenters noted that the rule favored banks over other foreign 
counterparties. The Board agrees this wording favored foreign banks and 
has modified the revised proposed rule to allow foreign counterparties, 
not just banks.
    The current rule limits non-secured obligations of any single 
foreign issuer to 150 percent of RUDE and PIC. The Board proposed to 
limit all obligations of any single foreign issuer or guarantor to 50 
percent of capital. The Board believes the limits for foreign issuers 
or guarantors should be parallel to those of domestic obligors and 
based on capital rather than RUDE and PIC. The current rule limits non-
secured obligations of any single foreign country to 500 percent of 
RUDE and PIC. The Board proposed to limit all obligations of any single 
foreign country to 250 percent of capital. This change equates the 
existing limit based on RUDE and PIC to a limit using the new 
definition of capital. The Board noted that sovereign risk is present 
in foreign debt obligation, whether secured or unsecured. No negative 
comments were received on these changes, and the Board is adopting them 
in the revised proposed rule.

Part IV

    Part IV expanded authorities have been restructured to provide more 
flexibility among corporates seeking to use derivatives to reduce risk.
    The current rule requires corporates to have either Part I or II 
expanded authorities to qualify for Part IV. The proposal removed this 
requirement. The Board believes that all corporates demonstrating and 
possessing the resources, knowledge, systems, and procedures necessary 
to measure, monitor, and control the risks associated with derivative 
transactions should be permitted to use these powers. As with all 
expanded authorities, the corporate in its application must detail the 
specific types of derivatives they may utilize. The Board believes that 
derivative transactions, used properly, reduce risk to the institution 
and its members.
    The current rule provides that a corporate may use such derivatives 
only for creating structured instruments and hedging its own balance 
sheet and the balance sheet of its members. The proposed rule 
delineated between the various permissible activities and clarified the 
Board's original intent, as it relates to hedging ``its own balance 
sheet and the balance sheet of its members.'' The Board believes 
corporates should be allowed to manage their own balance sheets, which 
may at times add risk. The Board's intent as it relates to ``its 
members'' is that the activities only be related to risk reduction. An 
example of this is to reduce a member's exposure to fixed rate mortgage 
loans by swapping a fixed rate for a floating rate. The Board is 
adopting this provision as proposed in the revised proposed rule.
    The current rule is silent as to counterparty ratings for 
derivative transactions with foreign and domestic counterparties. The 
Board proposed to clarify its intent by adding language in Part IV 
making the rating requirements parallel with the corporates other 
permissible activities. Several commenters noted that requiring the 
counterparty to be rated unintentionally limited a corporate's ability 
to enter into transactions with government sponsored enterprises, 
member credit unions, and special purpose entities fully guaranteed by 
an entity with a minimum rating for comparable term permissible 
investments. Based on these comments, the Board is adding clarifying 
language to the revised proposed rule excluding those specific entities 
from the Part IV rating requirements.

Part V

    As discussed in the lending section, new Part V gives corporates 
the authority to enter into loan participations with their member 
credit unions. Several commenters objected to the proposed individual 
and aggregate participation loan limits of 25 and 100 percent of 
capital, respectively. These commenters recommended the Board establish 
individual and aggregate participation loan limits on a case-by-case 
basis. The Board believes safety and soundness factors require 
retention of the 25 percent individual member credit union limit. A 
greater concentration of capital for an individual member credit union, 
particularly, for non-recourse participation loans, could jeopardize 
the future viability of a corporate because recovery on those loans is 
limited to the natural person borrower.
    The Board agrees with the commenters on the issue of establishing 
aggregate participation loan limits on a case-by-case basis. The 
revised proposed rule permits this; however, the Board only intends to 
permit aggregate participation loan limits above 100 percent of capital 
after a corporate demonstrates its ability to manage this activity 
soundly. Once a corporate has demonstrated its ability to soundly 
manage this activity, the OCCU Director may authorize greater aggregate 
participation loan limits.

Delegations of Authority

    Although not in the initial proposed rule, the Board, in an effort 
to streamline the regulatory approval process, has delegated to the 
OCCU Director in the revised proposal, the authority to act on its 
behalf in

[[Page 44284]]

Sec. Sec. 704.3(e), (g) and (i); 704.8(e); 704.10; 704.15; and 
704.19(b).

Regulatory Procedures

Regulatory Flexibility Act

    The Regulatory Flexibility Act requires NCUA to prepare an analysis 
to describe any significant economic impact any proposed regulation may 
have on a substantial number of small entities (those under $1 million 
in assets). The rule only applies to corporates, all of which have 
assets well in excess of $1 million. The proposed amendments will not 
have a significant economic impact on a substantial number of small 
credit unions and, therefore, a regulatory flexibility analysis is not 
required.

Paperwork Reduction Act

    NCUA has determined that the proposed regulation does not increase 
paperwork requirements under the Paperwork Reduction Act of 1995 and 
regulations of the Office of Management and Budget (OMB). NCUA 
currently has OMB clearance for part 704's collection requirements (OMB 
No. 3133-0129).

Executive Order 13132

    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their actions on state and local interests. In 
adherence to fundamental federalism principles, NCUA, an independent 
regulatory agency as defined in 44 U.S.C. 3502(5), voluntarily complies 
with the executive order. The executive order states that: ``National 
action limiting the policymaking discretion of the states shall be 
taken only where there is constitutional and statutory authority for 
the action and the national activity is appropriate in light of the 
presence of a problem of national significance.'' The risk of loss to 
federally-insured credit unions and the NCUSIF caused by actions of 
corporates are concerns of national scope. The proposed rule, if 
adopted, will help assure that proper safeguards are in place to ensure 
the safety and soundness of corporates.
    The proposed rule, if adopted, applies to all corporates that 
accept funds from federally-insured credit unions. NCUA believes that 
the protection of such credit unions, and ultimately the NCUSIF, 
warrants application of the proposed rule to all corporates, including 
nonfederally insured. The proposed rule does not impose additional 
costs or burdens on the states or affect the states' ability to 
discharge traditional state government functions. NCUA has determined 
that this proposal may have an occasional direct effect on the states, 
on the relationship between the national government and the states, or 
on the distribution of power and responsibilities among the various 
levels of government. However, the potential risk to the NCUSIF without 
the proposed changes justifies them.

The Treasury and General Government Appropriations Act, 1999---
Assessment of Federal Regulations and Policies on Families

    The NCUA has determined that this proposed rule will not affect 
family well-being within the meaning of section 654 of the Treasury and 
General Government Appropriations Act, 1999, Pub. L. 105-277, 112 Stat. 
2681 (1998).

Agency Regulatory Goal

    NCUA's goal is to promulgate clear and understandable regulations 
that impose minimal regulatory burden. We request your comments on 
whether the proposed rule is understandable and minimally intrusive if 
implemented as proposed.

List of Subjects

12 CFR Part 703

    Credit unions, Investments.

12 CFR Part 704

    Credit unions, Reporting and record keeping requirements, Surety 
bonds.

    By the National Credit Union Administration Board on June 20, 
2002.
Becky Baker,
Secretary of the Board.

    Accordingly, NCUA proposes to amend 12 CFR parts 703 and 704 as 
follows:

PART 703--INVESTMENT AND DEPOSIT ACTIVITIES

    1. The authority citation for part 703 will continue to read as 
follows:

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

    2. Amend Sec. 703.100 paragraph (c) by revising the second and 
third sentences and adding a fourth sentence to read as follows:


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

* * * * *
    (c) * * * Your aggregate amount of paid-in capital and membership 
capital in one corporate credit union is limited to two percent of your 
assets measured at the time of investment or adjustment. Your aggregate 
amount of paid-in capital and membership capital in all corporate 
credit unions is limited to four percent of your assets measured at the 
time of investment or adjustment. Paid-in capital and membership 
capital are defined in part 704 of this chapter.
* * * * *

PART 704--CORPORATE CREDIT UNIONS

    3. The authority citation for part 704 will continue to read as 
follows:

    Authority: 12 U.S.C. 1762, 1766(a), 1781, and 1789.

    4. Amend Sec. 704.2 as follows:
    a. Remove the definition of ``commercial mortgage related 
security'', ``correspondent services'', ``expected maturity'', ``long 
term investment'', `` market price'', ``member paid-in capital'', 
``mortgage servicing'', ``net interest income'', ``non member paid-in 
capital'', ``non secured obligation'', ``prepayment model'', ``real 
estate mortgage investment conduit (REMIC)'', ``reserve ratio'', 
``reserves and undivided earnings'', ``short-term investment'', and 
``trade association'';
    b. Revise the definitions of ``capital'', ``collateralized mortgage 
obligation (CMO)'', `` fair value'', ``forward settlement'', 
``membership capital'', ``mortgage related security'', ``paid-in 
capital'', ``regular-way settlement'', ``repurchase transaction'', and 
``residual interest'';
    c. Amend the definitions of ``asset-backed security'' by revising 
the last sentence, and ``net economic value (NEV)'' by revising the 
second and third sentences; and
    d. Add new definitions for ``core capital'', ``core capital 
ratio'', ``limited liquidity investment'', ``obligor'', ``quoted market 
price'', ``retained earnings'', and ``retained earnings ratio''.


Sec. 704.2  Definitions.

* * * * *
    Asset-backed security * * * This definition excludes mortgage 
related securities.
    Capital means the sum of a corporate credit union's retained 
earnings, paid-in capital, and membership capital.
* * * * *
    Collateralized mortgage obligation (CMO) means a multi-class 
mortgage related security.
    Core capital means the corporate credit union's retained earnings 
and paid-in capital.
    Core capital ratio means the corporate credit union's core capital 
divided by its moving daily average net assets.
* * * * *
    Fair value means the amount at which an instrument could be 
exchanged in a current, arms-length transaction

[[Page 44285]]

between willing parties, other than in a forced or liquidation sale. 
Quoted market prices in active markets are the best evidence of fair 
value. If a quoted market price in an active market is not available, 
fair value may be estimated using a valuation technique that is 
reasonable and supportable, a quoted market price in an active market 
for a similar instrument, or a current appraised value. Examples of 
valuation techniques include the present value of estimated future cash 
flows, option-pricing models, and option-adjusted spread models. 
Valuation techniques should incorporate assumptions that market 
participants would use in their estimates of values, future revenues, 
and future expenses, including assumptions about interest rates, 
default, prepayment, and volatility.
* * * * *
    Forward settlement of a transaction means settlement on a date 
later than regular-way settlement.
* * * * *
    Limited liquidity investment means an investment without a quoted 
market price.
* * * * *
    Membership capital means funds contributed by members that: are 
adjustable balance with a minimum withdrawal notice of 3 years or are 
term certificates with a minimum term of 3 years; are available to 
cover losses that exceed retained earnings and paid-in capital; are not 
insured by the NCUSIF or other share or deposit insurers; and cannot be 
pledged against borrowings.
    Mortgage related security means a security as defined in section 
3(a)(41) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(41)), 
e.g., a privately-issued security backed by mortgages secured by real 
estate upon which is located a dwelling, mixed residential and 
commercial structure, residential manufactured home, or commercial 
structure that is rated in one of the two highest rating categories by 
at least one nationally recognized statistical rating organization.
* * * * *
    Net economic value (NEV) * * * All fair value calculations must 
include the value of forward settlements and embedded options. The 
amortized portion of membership capital and paid-in capital, which do 
not qualify as capital, are treated as liabilities for purposes of this 
calculation. * * *
    Obligor means the primary party obligated to repay an investment, 
e.g., the issuer of a security, the taker of a deposit, or the borrower 
of funds in a federal funds transaction. Obligor does not include an 
originator of receivables underlying an asset-backed security, the 
servicer of such receivables, or an insurer of an investment.
* * * * *
    Paid-in capital means accounts or other interests of a corporate 
credit union that: are perpetual, non-cumulative dividend accounts; are 
available to cover losses that exceed retained earnings; are not 
insured by the NCUSIF or other share or deposit insurers; and cannot be 
pledged against borrowings.
* * * * *
    Quoted market price means a recent sales price or a price based on 
current bid and asked quotations.
    Regular-way settlement means delivery of a security from a seller 
to a buyer within the time frame that the securities industry has 
established for immediate delivery of that type of security. For 
example, regular-way settlement of a Treasury security includes 
settlement on the trade date (``cash''), the business day following the 
trade date (``regular way''), and the second business day following the 
trade date (``skip day'').
    Repurchase transaction means a transaction in which a corporate 
credit union agrees to purchase a security from a counterparty and to 
resell the same or any identical security to that counterparty at a 
specified future date and at a specified price.
* * * * *
    Residual interest means the remainder cash flows from a CMO or ABS 
transaction after payments due bondholders and trust administrative 
expenses have been satisfied.
    Retained earnings means the total of the corporate credit union's 
undivided earnings, reserves, and any other appropriations designated 
by management or regulatory authorities. For purposes of this 
regulation, retained earnings does not include the allowance for loan 
and lease losses account, accumulated unrealized gains and losses on 
available for sale securities, accumulated FASB adjustments, or other 
comprehensive income items.
    Retained earnings ratio means the corporate credit union's retained 
earnings divided by its moving daily average net assets.
* * * * *
    5. Amend Sec. 704.3 as follows:
    a. Amend paragraph (a) by revising the paragraph heading;
    b. Redesignate paragraphs (d) through (g) as paragraphs (e) through 
(h) and paragraph (b) as paragraph (d);
    c. Remove paragraph (c);
    d. Add paragraphs (b), (c), and (i); and
    e. Revise redesignated paragraphs (e) heading, (e)(1) introductory 
text, (e)(2) and (e)(3)(iii) and (f).


Sec. 704.3  Corporate credit union capital.

    (a) Capital plan. * * *
    (b) Requirements for membership capital--(1) Form. Membership 
capital funds may be in the form of a term certificate or an adjusted 
balance account.
    (2) Disclosure. The terms and conditions of a membership capital 
account must be disclosed to the recorded owner of the account at the 
time the account is opened and at least annually thereafter.
    (i) The initial must be signed by either all of the directors of 
the member credit union or, if authorized by board resolution, the 
chair and secretary of the board; and
    (ii) The annual disclosure notice must be signed by the chair of 
the corporate credit union. The chair must sign a statement that 
certifies that the notice has been sent to member credit unions with 
membership capital accounts. The certification must be maintained in 
the corporate credit union's files and be available for examiner 
review.
    (3) Three-year remaining maturity. When a membership capital 
account has been placed on notice or has a remaining maturity of less 
than three years, the amount of the account that can be considered 
membership capital is reduced by a constant monthly amortization that 
ensures membership capital is fully amortized one year before the date 
of maturity or one year before the end of the notice period. The full 
balance of a membership capital account being amortized, not just the 
remaining non-amortized portion, is available to absorb losses in 
excess of the sum of retained earnings and paid-in capital until the 
funds are released by the corporate credit union at the time of 
maturity or the conclusion of the notice period.
    (4) Release. Membership capital may not be released due solely to 
the merger, charter conversion or liquidation of a member credit union. 
In the event of a merger, the membership capital transfers to the 
continuing credit union. In the event of a charter conversion, the 
membership capital transfers to the new institution. In the event of 
liquidation, the membership capital may be released to facilitate the 
payout of shares with the prior written approval of the OCCU Director.
    (5) Sale. A member may sell its membership capital to a credit 
union in the corporate credit union's field of membership, subject to 
the corporate credit union's approval.

[[Page 44286]]

    (6) Liquidation. In the event of liquidation of a corporate credit 
union, membership capital is payable only after satisfaction of all 
liabilities of the liquidation estate, including uninsured share 
obligations to shareholders and the National Credit Union Share 
Insurance Fund (NCUSIF), but excluding paid-in capital.
    (7) Merger. In the event of a merger of a corporate credit union, 
membership capital transfers to the continuing corporate credit union. 
The minimum three-year notice period for withdrawal of membership 
capital remains in effect.
    (8) Adjusted balance accounts: (i) May be adjusted no more 
frequently than once every six months; and
    (ii) Must be adjusted in relation to a measure (e.g., one percent 
of a member credit union's assets) established and disclosed at the 
time the account is opened without regard to any minimum withdrawal 
period. If the measure is other than assets, the corporate credit union 
must address the measure's permanency characteristics in its capital 
plan.
    (iii) Notice of withdrawal. Upon written notice of intent to 
withdraw membership capital, the balance of the account will be frozen 
(no further adjustments) until the conclusion of the notice period.
    (9) Grandfathering. Membership capital issued before the effective 
date of this regulation is exempt from the limitation of 
Sec. 704.3(b)(8)(i).
    (c) Requirements for paid-in capital--(1) Disclosure. The terms and 
conditions of any paid-in capital instrument must be disclosed to the 
recorded owner of the instrument at the time the instrument is created 
and must be signed by either all of the directors of the member credit 
union or, if authorized by board resolution, the chair and secretary of 
the board.
    (2) Release. Paid-in capital may not be released due solely to the 
merger, charter conversion or liquidation of a member credit union. In 
the event of a merger, the paid-in capital transfers to the continuing 
credit union. In the event of a charter conversion, the paid-in capital 
transfers to the new institution. In the event of liquidation, the 
paid-in capital may be released to facilitate the payout of shares with 
the prior written approval of the OCCU Director.
    (3) Callability. Paid-in capital accounts are callable on a pro-
rata basis across an issuance class only at the option of the corporate 
credit union and only if the corporate credit union meets its minimum 
level of required capital and NEV ratios after the funds are called.
    (4) Liquidation. In the event of liquidation of the corporate 
credit union, paid-in capital is payable only after satisfaction of all 
liabilities of the liquidation estate, including uninsured share 
obligations to shareholders, the NCUSIF, and membership capital 
holders.
    (5) Merger. In the event of a merger of a corporate credit union, 
paid-in capital shall transfer to the continuing corporate credit 
union.
    (6) Paid-in capital includes both member and nonmember paid-in 
capital.
    (i) Member paid-in capital means paid-in capital that is held by 
the corporate credit union's members. A corporate credit union may not 
condition membership, services, or prices for services on a credit 
union's ownership of paid-in capital.
    (ii) Nonmember paid-in capital means paid-in capital that is not 
held by the corporate credit union's members.
    (7) Grandfathering. A corporate credit union's authority to include 
paid-in capital as a component of capital is governed by the regulation 
in effect at the time the paid-in capital was issued. When a 
grandfathered paid-in capital instrument has a remaining maturity of 
less than 3 years, the amount that may be considered paid-in capital is 
reduced by a constant monthly amortization that ensures the paid-in 
capital is fully amortized 1 year before the date of maturity. The full 
balance of grandfathered paid-in capital being amortized, not just the 
remaining non-amortized portion, is available to absorb losses in 
excess of retained earnings until the funds are released by the 
corporate credit union at maturity.
* * * * *
    (e) Individual capital ratio requirement--(1) When significant 
circumstances or events warrant, the OCCU Director may require a 
different minimum capital ratio for an individual corporate credit 
union based on its circumstances. Factors that may warrant a different 
minimum capital ratio include, but are not limited to, for example:
* * * * *
    (2) When the OCCU Director determines that a different minimum 
capital ratio is necessary or appropriate for a particular corporate 
credit union, he or she will notify the corporate credit union in 
writing of the proposed capital ratio and, if applicable, the date by 
which the capital ratio should be reached. The OCCU Director also will 
provide an explanation of why the proposed capital ratio is considered 
necessary or appropriate for the corporate credit union.
    (3) * * *
    (iii) After the close of the corporate credit union's response 
period, the OCCU Director will decide, based on a review of the 
corporate credit union's response and other information concerning the 
corporate credit union, whether a different minimum capital ratio 
should be established for the corporate credit union and, if so, the 
capital ratio and the date the requirement will become effective. The 
corporate credit union will be notified of the decision in writing. The 
notice will include an explanation of the decision, except for a 
decision not to establish a different minimum capital ratio for the 
corporate credit union.
    (f) Failure to maintain minimum capital ratio requirement. When a 
corporate credit union's capital ratio falls below the minimum required 
by paragraphs (d) or (e) of this section, or appendix B to this part, 
as applicable, operating management of the corporate credit union must 
notify its board of directors, supervisory committee, and the OCCU 
Director within 10 calendar days.
* * * * *
    (i) Earnings retention requirement. A corporate credit union must 
increase retained earnings if the prior month-end retained earnings 
ratio is less than 2 percent.
    (1) Its retained earnings must increase:
    (i) During the current month, by an amount equal to or greater than 
the monthly earnings retention amount; or
    (ii) During the current and prior two months, by an amount equal to 
or greater than the quarterly earnings retention amount.
    (2) Earnings retention amounts are calculated as follows:
    (i) The monthly earnings retention amount is determined by 
multiplying the earnings retention factor by the prior month-end moving 
daily average net assets; and
    (ii) The quarterly earnings retention amount is determined by 
multiplying the earnings retention factor by moving daily average net 
assets for each of the prior three month-ends.
    (3) The earnings retention factor is determined as follows:
    (i) If the prior month-end retained earnings ratio is less than 2 
percent and the core capital ratio is less than 3 percent, the earnings 
retention factor is .15 percent per annum; or
    (ii) If the prior month-end retained earnings ratio is less than 2 
percent and the core capital ratio is equal to or

[[Page 44287]]

greater than 3 percent, the earnings retention factor is .10 percent 
per annum.
    (4) The OCCU Director may approve a decrease to the earnings 
retention amount if it is determined a lesser amount is necessary to 
avoid a significant adverse impact upon a corporate credit union.
    (5) A corporate credit union may authorize the payment of dividends 
provided:
    (i) The payment will not cause the retained earnings ratio to fall 
below 2 percent;
    (ii) The payment will not cause the amount of retained earnings to 
decrease from the prior month-end, unless the decrease results from 
losses on the sale of investments; or
    (iii) The OCCU Director and, if applicable, state regulator have 
given prior written approval for the payment.
    6. Amend Sec. 704.4 by removing the word ``operating'' wherever it 
appears in paragraphs (a) and (b) and revising paragraph (c) 
introductory text to read as follows:


Sec. 704.4  Board responsibilities.

* * * * *
    (c) Other requirements. The board of directors of a corporate 
credit union must ensure:
* * * * *
    7. Amend Sec. 704.5 as follows:
    a. Revise paragraphs (a)(1) and (2), (c)(5), (d)(1), (e)(1), (3) 
and (4), (f), and (h)(2) and(3);
    b. Remove paragraphs (c)(6), (d)(3) and (d)(6);
    c. Redesignate paragraphs (d)(4) and (d)(5) as paragraphs (d)(3) 
and (d)(4);
    d. Revise redesignated paragraphs (d)(3) and the first sentence of 
(d)(4);
    e. Add paragraph (h)(4); and
    f. Add at the end of paragraph (c)(4) after the ``;'' an ``and.''


Sec. 704.5  Investments.

    (a) * * *
    (1) Appropriate tests and criteria for evaluating investments and 
investment transactions prior to purchase; and
    (2) Reasonable and supportable concentration limits for limited 
liquidity investments in relation to capital.
* * * * *
    (c) * * *
    (5) Domestically-issued asset-backed securities.
    (d) * * *
    (1) The corporate credit union, directly or through its agent, 
receives written confirmation of the transaction, and either takes 
physical possession or control of the repurchase securities or is 
recorded as owner of the repurchase securities through the Federal 
Reserve Book-Entry Securities Transfer System;
* * * * *
    (3) The corporate credit union, directly or through its agent, 
receives daily assessment of the market value of the repurchase 
securities and maintains adequate margin that reflects a risk 
assessment of the repurchase securities and the term of the 
transaction; and
    (4) The corporate credit union has entered into signed contracts 
with all approved counterparties and agents, and ensures compliance 
with the contracts. * * *
    (e) * * *
    (1) The corporate credit union, directly or through its agent, 
receives written confirmation of the loan, obtains a first priority 
security interest in the collateral by taking physical possession or 
control of the collateral, or is recorded as owner of the collateral 
through the Federal Reserve Book-Entry Securities Transfer System;
* * * * *
    (3) The corporate credit union, directly or through its agent, 
receives daily assessment of the market value of collateral and 
maintains adequate margin that reflects a risk assessment of the 
collateral and terms of the loan; and
    (4) The corporate credit union has entered into signed contracts 
with all agents and, directly or through its agent, has executed a 
written loan and security agreement with the borrower. The corporate or 
its agent ensures compliance with the agreements.
    (f) Investment companies. A corporate credit union may invest in an 
investment company registered with the Securities and Exchange 
Commission under the Investment Company Act of 1940 (15 U.S.C. 80a), 
provided that the prospectus of the company restricts the investment 
portfolio to investments and investment transactions that are 
permissible for that corporate credit union.
* * * * *
    (h) * * *
    (2) Engaging in trading securities unless accounted for on a trade 
date basis;
    (3) Engaging in adjusted trading or short sales; and
    (4) Purchasing stripped mortgage-backed securities, small business 
related securities, or residual interests in CMOs or asset-backed 
securities.
* * * * *
    8. Amend Sec. 704.6 by revising paragraphs (a) introductory text 
and paragraphs (a)(3), (a)(4) and (b) through (e) to read as follows:


Sec. 704.6  Credit risk management.

    (a) Policies. A corporate credit union must operate according to a 
credit risk management policy that is commensurate with the investment 
risks and activities it undertakes. The policy must address at a 
minimum:
* * * * *
    (3) Maximum credit limits with each obligor and transaction 
counterparty, set as a percentage of capital. In addition to addressing 
deposits and securities, limits with transaction counterparties must 
address aggregate exposures of all transactions, including, but not 
necessarily limited to, repurchase agreements, securities lending, and 
forward settlement of purchases or sales of investments; and
    (4) Concentrations of credit risk (e.g., originator of receivables, 
insurer, industry type, sector type, and geographic).
    (b) Exemption. The requirements of this section do not apply to 
investments that are issued or fully guaranteed as to principal and 
interest by the U.S. government or its agencies or enterprises 
(excluding subordinated debt) or are fully insured (including 
accumulated interest) by the National Credit Union Share Insurance Fund 
or Federal Deposit Insurance Corporation.
    (c) Concentration limits--(1) General rule. The aggregate of all 
investments in any single obligor is limited to 50 percent of capital 
or $5 million, whichever is greater.
    (2) Exceptions. Exceptions to the general rule are:
    (i) Aggregate investments in repurchase and securities lending 
agreements with any one counterparty are limited to 200 percent of 
capital;
    (ii) Investments in corporate CUSOs are subject to the limitations 
of Sec. 704.11; and
    (iii) Aggregate investments in corporate credit unions are not 
subject to the limitations of paragraph (c)(1) of this section.
    (3) For purposes of measurement, each new credit transaction must 
be evaluated in terms of the corporate credit union's capital at the 
time of the transaction. An investment that fails a requirement of this 
section because of a subsequent reduction in capital will be deemed 
nonconforming. A corporate credit union is required to exercise 
reasonable efforts to bring nonconforming investments into conformity 
within 90 days. Investments that remain nonconforming for 90 days will 
be deemed to fail a requirement of this section and will require 
compliance with Sec. 704.10.
    (d) Credit ratings--(1) All investments, other than in a corporate

[[Page 44288]]

credit union or CUSO, must have an applicable credit rating from at 
least one nationally recognized statistical rating organization 
(NRSRO).
    (2) At the time of purchase, investments with long-term ratings 
must be rated no lower than AA-(or equivalent) and investments with 
short-term ratings must be rated no lower than A-1 (or equivalent).
    (3) Any rating(s) relied upon to meet the requirements of this part 
must be identified at the time of purchase and must be monitored for as 
long as the corporate owns the investment.
    (4) When two or more ratings are relied upon to meet the 
requirements of this part at the time of purchase, the board or an 
appropriate committee must place on the Sec. 704.6(e)(1) investment 
watch list any rating that is downgraded below the minimum rating 
requirements of this part.
    (5) Investments are subject to the requirements of Sec. 704.10 if:
    (i) One rating was relied upon to meet the requirements of this 
part and that rating is downgraded below the minimum rating 
requirements of this part; or
    (ii) Two or more ratings were relied upon to meet the requirements 
of this part and at least two of those ratings are downgraded below the 
minimum rating requirements of this part.
    (e) Reporting and documentation. (1) A written evaluation of each 
credit limit with each obligor or transaction counterparty must be 
prepared at least annually and formally approved by the board or an 
appropriate committee. At least monthly, the board or an appropriate 
committee must receive an investment watch list of existing and/or 
potential credit problems and summary credit exposure reports, which 
demonstrate compliance with the corporate credit union's risk 
management policies.
    (2) At a minimum, the corporate credit union must maintain:
    (i) A justification for each approved credit limit;
    (ii) Disclosure documents, if any, for all instruments held in 
portfolio. Documents for an instrument that has been sold must be 
retained until completion of the next NCUA examination; and
    (iii) The latest available financial reports, industry analyses, 
internal and external analyst evaluations, and rating agency 
information sufficient to support each approved credit limit.
    9. Amend Sec. 704.7 by removing paragraphs (c) through (g), adding 
paragraphs (c) through (f) and redesignating paragraph (h) as paragraph 
(g) to read as follows:


Sec. 704.7  Lending.

* * * * *
    (c) Loans to members--(1) Credit unions. (i) The maximum aggregate 
amount in unsecured loans and lines of credit to any one member credit 
union, excluding pass-through and guaranteed loans from the CLF and the 
NCUSIF, must not exceed 50 percent of capital.
    (ii) The maximum aggregate amount in secured loans and lines of 
credit to any one member credit union, excluding those secured by 
shares or marketable securities and member reverse repurchase 
transactions, must not exceed 100 percent of capital.
    (2) Corporate CUSOs. Any loan or line of credit must comply with 
Sec. 704.11.
    (3) Other members. The maximum aggregate amount of loans and lines 
of credit to any other one member must not exceed 15 percent of the 
corporate credit union's capital plus pledged shares.
    (d) Loans to nonmembers--(1) Credit unions. A loan to a nonmember 
credit union, other than through a loan participation with another 
corporate credit union, is only permissible if the loan is for an 
overdraft related to the providing of correspondent services pursuant 
to Sec. 704.12. Generally, such a loan will have a maturity of one 
business day.
    (2) Corporate CUSOs. Any loan or line of credit must comply with 
Sec. 704.11.
    (e) Member business loan rule--Loans, lines of credit and letters 
of credit to:
    (1) Member credit unions are exempt from part 723 of this chapter;
    (2) Corporate CUSOs must comply with Sec. 704.11; and
    (3) Other members not excluded under Sec. 723.1(b) of this chapter 
must comply with part 723 of this chapter unless the loan or line of 
credit is fully guaranteed by a credit union or fully secured by US 
Treasury or agency securities. Those guaranteed and secured loans must 
comply with the aggregate limits of Sec. 723.16 but are exempt from the 
other requirements of part 723.
    (f) Participation loans with other corporate credit unions. A 
corporate credit union is permitted to participate in a loan with 
another corporate credit union provided the corporate retains an 
interest of at least 5 percent of the face amount of the loan and a 
master participation loan agreement is in place before the purchase or 
the sale of a participation. A participating corporate credit union 
must exercise the same due diligence as if it were the originating 
corporate credit union.
* * * * *
    10. Amend Sec. 704.8 as follows:
    a. Remove paragraphs (a)(2), (a)(5) and (e);
    b. Redesignate paragraphs (a)(3) and (a)(4) as (a)(2) and (a)(3), 
(a)(6) and (a)(7) as (a)(4) and (a)(5), and (f) and (g) as (e) and (f);
    c. Add paragraph (a)(6) and ``; and'' at the end of redesignated 
paragraph (a)(5) in place of the period;
    d. Revise redesignated paragraphs (a)(2), (e) and (f);
    e. Add a sentence to the end of the end of paragraph (c); and
    f. Revise paragraphs (d)(1)(i) through (iii) and (d)(2) 
introductory text.


Sec. 704.8  Asset and liability management.

    (a) * * *
    (2) The maximum allowable percentage decline in net economic value 
(NEV), compared to base case NEV;
* * * * *
    (6) The tests that will be used, prior to purchase, to estimate the 
impact of investments on the percentage decline in NEV, compared to 
base case NEV. The most recent NEV analysis, as determined under 
paragraph (d)(1)(i) of this section may be used as a basis of 
estimation.
* * * * *
    (c) * * * This means the minimum penalty must be reasonably related 
to the rate that the corporate credit union would be required to offer 
to attract funds for a similar term with similar characteristics.
    (d) * * *
    (1) * * *
    (i) Evaluate the risk in its balance sheet by measuring, at least 
quarterly, the impact of an instantaneous, permanent, and parallel 
shock in the yield curve of plus and minus 100, 200, and 300 basis 
points on its NEV and NEV ratio. If the base case NEV ratio falls below 
3 percent at the last testing date, these tests must be calculated at 
least monthly until the base case NEV ratio again exceeds 3 percent;
    (ii) Limit its risk exposure to levels that do not result in a base 
case NEV ratio or any NEV ratio resulting from the tests set forth in 
paragraph (d)(1)(i) of this section below 2 percent; and
    (iii) Limit its risk exposures to levels that do not result in a 
decline in NEV of more than 15 percent.
    (2) A corporate credit union must assess annually if it should 
conduct periodic additional tests to address market factors that may 
materially impact that corporate credit union's NEV. These factors 
should include, but are not limited to, the following:
* * * * *

[[Page 44289]]

    (e) Regulatory violations. If a corporate credit union's decline in 
NEV, base case NEV ratio or any NEV ratio resulting from the tests set 
forth in paragraph (d)(1)(i) of this section violates the limits 
established by this rule and is not brought into compliance within 10 
calendar days, operating management of the corporate credit union must 
immediately report the information to the board of directors, 
supervisory committee, and the OCCU Director. If any violation persists 
for 30 calendar days, the corporate credit union must submit a 
detailed, written action plan to the OCCU Director that sets forth the 
time needed and means by which it intends to correct the violation. If 
the OCCU Director determines that the plan is unacceptable, the 
corporate credit union must immediately restructure the balance sheet 
to bring the exposures back within compliance or adhere to an 
alternative course of action determined by the OCCU Director.
    (f) Policy violations. If a corporate credit union's decline in 
NEV, base case NEV ratio, or any NEV ratio resulting from the tests set 
forth in paragraph (d)(1)(i) of this section violates the limits 
established by its board, it must determine how it will bring the 
exposure within policy limits. The disclosure to the board of the 
violation must occur no later than its next regularly scheduled board 
meeting.
    10a. Amend Sec. 704.10 by revising the heading to read as follows:


Sec. 704.10  Investment action plan.

    11. Amend Sec. 704.11 by revising paragraph (b), redesignating 
paragraphs (c) through (e) as paragraphs (f) through (h) and adding 
paragraphs (c), (d) and (e) to read as follows:


Sec. 704.11  Corporate Credit Union Service Organizations (Corporate 
CUSOs).

* * * * *
    (b) Investment and loan limitations. (1) The aggregate of all 
investments in member and nonmember corporate CUSOs must not exceed 15 
percent of a corporate credit union's capital. (2) The aggregate of all 
investments in and loans to member and nonmember corporate CUSOs must 
not exceed 30 percent of a corporate credit union's capital. A 
corporate credit union may lend to member and nonmember corporate CUSOs 
an additional 15 percent of capital if the loan is collateralized by 
assets in which the corporate has a perfected security interest under 
state law.
    (3) If the limitations in paragraphs (b)(1) and (b)(2) of this 
section are reached or exceeded because of the profitability of the 
CUSO and the related GAAP valuation of the investment under the equity 
method without an additional cash outlay by the corporate, divestiture 
is not required. A corporate credit union may continue to invest up to 
the regulatory limit without regard to the increase in the GAAP 
valuation resulting from the corporate CUSO's profitability.
    (4) The aggregate of all loans to corporate CUSOs must comply with 
the aggregate limit of Sec. 723.16 of this chapter. This requirement 
does not apply to loans excluded under Sec. 723.1(b).
    (c) Due diligence. A corporate credit union must comply with the 
due diligence requirements of Secs. 723.5 and 723.6(f) through (l) of 
this chapter for all loans to corporate CUSOs. This requirement does 
not apply to loans excluded under Sec. 723.1(b).
    (d) Separate entity. (1) A corporate CUSO must be operated as an 
entity separate from a corporate credit union.
    (2) The corporate credit union investing in or lending to a 
corporate CUSO must obtain a written legal opinion that the corporate 
CUSO is organized and operated in a manner that the corporate credit 
union will not reasonably be held liable for the obligations of the 
corporate CUSO. This opinion must address factors that have led courts 
to ``pierce the corporate veil'' such as inadequate capitalization, 
lack of corporate identity, common boards of directors and employees, 
control of one entity over another, and lack of separate books and 
records.
    (e) Prohibited activities. A corporate credit union may not use 
this authority to acquire control, directly or indirectly, of another 
depository financial institution, or to invest in shares, stocks, or 
obligations of another depository financial institution, insurance 
company, trade association, liquidity facility, or similar 
organization.
* * * * *
    12. Revise Sec. 704.12 to read as follows:


Sec. 704.12  Permissible services.

    (a) Preapproved services. NCUA may at any time, based upon 
supervisory, legal, or safety and soundness reasons, limit or prohibit 
any preapproved service. The specific activities listed within each 
preapproved category are provided as illustrations of activities 
permissible under the particular category, not as an exclusive or 
exhaustive list. A corporate credit union may provide the following 
services to its members:
    (1) Correspondent services agreement. A corporate credit union may 
only provide financial services to nonmembers through a correspondent 
services agreement. A correspondent services agreement is an agreement 
between two corporate credit unions, whereby one of the corporate 
credit unions agrees to provide services to the other corporate credit 
union or its members.
    (2) Credit and investment services. Credit and investment services 
are advisory and consulting activities that assist the member in 
lending or investment management. These services may include loan 
reviews, investment portfolio reviews and investment advisory services.
    (3) Electronic financial services. Electronic financial services 
are any services, products, functions, or activities that a corporate 
credit union is otherwise authorized to perform, provide or deliver to 
its members but performed through electronic means. Electronic services 
may include automated teller machines, online transaction processing 
through a website, website hosting services, account aggregation 
services, and internet access services to perform or deliver products 
or services to members.
    (4) Excess capacity. Excess capacity is the excess use or capacity 
remaining in facilities, equipment or services that: a corporate credit 
union properly invested in or established, in good faith, with the 
intent of serving its members; and it reasonably anticipates will be 
taken up by the future expansion of services to its members. A 
corporate credit union may sell or lease the excess capacity in 
facilities, equipment or services, such as office space, employees and 
data processing.
    (5) Liquidity and asset and liability management. Liquidity and 
asset and liability management services are any services, functions or 
activities that assist the member in liquidity and balance sheet 
management. These services may include liquidity planning and balance 
sheet modeling and analysis.
    (6) Operational services. Operational services are services 
established to deliver financial products and services that enhance 
member service and promote safe and sound operations. Operational 
services may include tax payment, electronic fund transfers and 
providing coin and currency service.
    (7) Payment systems. Payment systems are any methods used to 
facilitate the movement of funds for transactional purposes. Payment 
systems may include Automated Clearing House, wire transfer, item 
processing and settlement services.
    (8) Trustee or custodial services. Trustee services are services in 
which

[[Page 44290]]

the corporate credit union is authorized to act under a written trust 
agreement to the extent permitted under part 724 of this chapter. 
Custodial and safekeeping services are services a corporate credit 
union performs on behalf of its member to act as custodian or 
safekeeper of investments.
    (b) Procedure for adding services that are not preapproved. To 
provide a service to its members that is not preapproved by NCUA, a 
corporate credit union must request approval from NCUA. The request 
must include a full explanation and complete documentation of the 
service and how the service relates to a corporate credit union's 
authority to provide services to its members. The request must be 
submitted jointly to the OCCU Director and the Secretary of the Board. 
The request will be treated as a petition to amend Sec. 704.12 and NCUA 
will request public comment or otherwise act on the petition within a 
reasonable period of time. Before engaging in the formal approval 
process, a corporate credit union should seek an advisory opinion from 
NCUA's Office of General Counsel as to whether a proposed service is 
already covered by one of the authorized categories without filing a 
petition to amend the regulation.
    (c) Prohibition. A corporate credit union is prohibited from 
purchasing loan servicing rights.


Sec. 704.13  [Removed and Reserved]

    13. Remove and reserve Sec. 704.13.
    14. Amend Sec. 704.14 by revising paragraph (a) introductory text, 
redesignating paragraphs (b) through (d) as (c) through (e) , and 
adding a new paragraph (b) to read as follows:


Sec. 704.14  Representation.

    (a) Board representation. The board will be determined as 
stipulated in its bylaws governing election procedures, provided that:
* * * * *
    (b) Credit union trade association. As used in this section, it 
includes but is not limited to, state credit union leagues and league 
service corporations, national credit union trade associations and 
their affiliates and service organizations, and local, state, and 
national special interest credit union associations and organizations.
* * * * *
    15. Amend Sec. 704.19 by revising paragraph (b) and removing 
paragraph (c) as follows:


Sec. 704.19  Wholesale corporate credit unions.

* * * * *
    (b) Earnings retention requirement. A wholesale corporate credit 
union must increase retained earnings if the prior month-end retained 
earnings ratio is less than 1 percent.
    (1) Its retained earnings must increase:
    (i) During the current month, by an amount equal to or greater than 
the monthly earnings retention amount; or
    (ii) During the current and prior two months, by an amount equal to 
or greater than the quarterly earnings retention amount.
    (2) Earnings retention amounts are calculated as follows:
    (i) The monthly earnings retention amount is determined by 
multiplying the earnings retention factor by the prior month-end moving 
daily average net assets; and
    (ii) The quarterly earnings retention amount is determined by 
multiplying the earnings retention factor by moving daily average net 
assets for each of the prior three month-ends.
    (3) The earnings retention factor is determined as follows:
    (i) If the prior month-end retained earnings ratio is less than 1 
percent and the core capital ratio is less than 3 percent, the earnings 
retention factor is .15 percent per annum; or
    (ii) If the prior month-end retained earnings ratio is less than 1 
percent and the core capital ratio is equal to or greater than 3 
percent, the earnings retention factor is .075 percent per annum.
    (4) The OCCU Director may approve a decrease to the earnings 
retention amount set forth in this section if it is determined a lesser 
amount is necessary to avoid a significant adverse impact upon a 
wholesale corporate credit union.
    (5) A corporate credit union may authorize the payment of dividends 
provided either:
    (i) The payment will not cause the retained earnings ratio to fall 
below 1 percent;
    (ii) The payment will not cause the amount of retained earnings to 
decrease from the prior month-end, unless the decrease results from 
losses on the sale of investments; or
    (iii) The OCCU Director and, if applicable, state regulator have 
given prior written approval for the payment.
    16. Revise appendix A to part 704 as follows:

Appendix A to Part 704--Model Forms

    This appendix contains sample forms intended for use by corporate 
credit unions to aid in compliance with the membership capital account 
and paid-in capital disclosure requirements of Sec. 704.3.

Sample Form 1

Terms and Conditions of Membership Capital Account

    (1) A membership capital account is not subject to share insurance 
coverage by the NCUSIF or other deposit insurer.
    (2) A membership capital account is not releasable due solely to 
the merger, charter conversion or liquidation of the member credit 
union. In the event of a merger, the membership capital account 
transfers to the continuing credit union. In the event of a charter 
conversion, the membership capital account transfers to the new 
institution. In the event of liquidation, the membership capital 
account may be released to facilitate the payout of shares with the 
prior written approval of NCUA.
    (3) A member credit union may withdraw membership capital with 
three years' notice.
    (4) Membership capital cannot be used to pledge borrowings.
    (5) Membership capital is available to cover losses that exceed 
retained earnings and paid-in capital.
    (6) Where the corporate credit union is liquidated, membership 
capital accounts are payable only after satisfaction of all liabilities 
of the liquidation estate including uninsured obligations to 
shareholders and the NCUSIF.
    (7) Where the corporate credit union is merged into another 
corporate credit union the membership capital account shall transfer to 
the continuing corporate credit union. The three-year notice period for 
withdrawal of the membership capital account will remain in effect.
    (8) {If an adjusted balance account{time} : The membership capital 
balance will be adjusted ----(1 or 2)---- time(s) annually in relation 
to the member credit union's ----(assets or other measure)---- as of --
--(date(s))----. {If a term certificate{time} : The membership capital 
account is a term certificate that will mature on ----(date)----.
    I have read the above terms and conditions and I understand them. I 
further agree to maintain in the credit union's files the annual notice 
of terms and conditions of the membership capital account.

    The notice form must be signed by either all of the directors of 
the member credit union or, if authorized by board resolution, the 
chair and secretary of the board of the credit union.
    The annual disclosure notice form must be signed by the chair of 
the corporate credit union. The chair must then sign a statement that 
certifies that the notice has been sent to member credit unions with 
membership capital

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accounts. The certification must be maintained in the corporate credit 
union's files and be available for examiner review.

Sample Form 2

Terms and Conditions of Paid-In Capital

    (1) A paid-in capital account is not subject to share insurance 
coverage by the NCUSIF or other deposit insurer.
    (2) A paid-in capital account is not releasable due solely to the 
merger, charter conversion or liquidation of the member credit union. 
In the event of a merger, the paid-in capital account transfers to the 
continuing credit union. In the event of a charter conversion, the 
paid-in capital account transfers to the new institution. In the event 
of liquidation, the paid-in capital account may be released to 
facilitate the payout of shares with the prior written approval of 
NCUA.
    (3) The funds are callable only at the option of the corporate 
credit union and only if the corporate credit union meets its minimum 
required capital and NEV ratios after the funds are called.
    (4) Paid-in capital cannot be used to pledge borrowings.
    (5) Paid-in capital is available to cover losses that exceed 
retained earnings.
    (6) Where the corporate credit union is liquidated, paid-in capital 
accounts are payable only after satisfaction of all liabilities of the 
liquidation estate including uninsured obligations to shareholders and 
the NCUSIF, and membership capital holders.
    (7) Where the corporate credit union is merged into another 
corporate credit union the paid-in capital account shall transfer to 
the continuing corporate credit union.
    (8) Paid-in capital is perpetual maturity and noncumulative 
dividend.
    I have read the above terms and conditions and I understand them. I 
further agree to maintain in the credit union's files the annual notice 
of terms and conditions of the paid-in capital instrument.


The notice form must be signed by either all of the directors of the 
credit union or, if authorized by board resolution, the chair and 
secretary of the board of the credit union.

    17. Revise appendix B to part 704 as follows:

Appendix B to Part 704--Expanded Authorities and Requirements

    A corporate credit union may obtain all or part of the expanded 
authorities contained in this appendix if it meets all of the 
requirements of this part 704 and the minimum requirement of this 
appendix, fulfills additional management, infrastructure, and asset and 
liability requirements, and receives NCUA's written approval. The 
additional requirements are set forth in the NCUA publication 
Guidelines for Submission of Requests for Expanded Authority.
    A corporate credit union seeking expanded authorities must submit 
to NCUA a self-assessment plan supporting its request. A corporate 
credit union may adopt expanded authorities when NCUA has provided 
final approval. If NCUA denies a request for expanded authorities, it 
will advise the corporate of the reason(s) for the denial and what it 
must do to resubmit its request. NCUA may revoke these expanded 
authorities at any time if an analysis indicates a significant 
deficiency. NCUA will notify the corporate credit union in writing of 
the identified deficiency. A corporate credit union may request, in 
writing, reinstatement of the revoked authorities by providing a self-
assessment plan detailing how it has corrected the deficiency.

Minimum Requirement

    In order to participate in any of the authorities set forth in 
Base-Plus, Part I, Part II, Part III, Part IV, and Part V of this 
appendix, a corporate credit union must evaluate monthly the changes in 
NEV and the NEV ratio for the tests set forth in Sec. 704.8(d)(1)(i).
Base-Plus
    A corporate which has met the requirements for this Base-plus 
authority may, in performing the rate stress tests set forth in 
Sec. 704.8(d)(1)(i), allow its NEV to decline as much as 20 percent.
Part I
    (a) A corporate credit union which has met the requirements for 
this Part I may:
    (1) Purchase investments with long-term ratings no lower than A- 
(or equivalent);
    (2) Purchase investments with short-term ratings no lower than A-2 
(or equivalent), provided that the issuer has a long-term rating no 
lower than A- (or equivalent) or the investment is a domestically-
issued asset-backed security;
    (3) Engage in short sales of permissible investments to reduce 
interest rate risk;
    (4) Purchase principal only (PO) stripped mortgage-backed 
securities to reduce interest rate risk; and
    (5) Enter into a dollar roll transaction.
    (b) Aggregate investments in repurchase and securities lending 
agreements with any one counterparty are limited to 300 percent of 
capital.
    (c) In performing the rate stress tests set forth in 
Sec. 704.8(d)(1)(i), the NEV of a corporate credit union which has met 
the requirements of this Part I may decline as much as:
    (1) 20 percent;
    (2) 28 percent if the corporate credit union has a 5 percent 
minimum capital ratio and is specifically approved by NCUA; or
    (3) 35 percent if the corporate credit union has a 6 percent 
minimum capital ratio and is specifically approved by NCUA.
    (d) The maximum aggregate amount in unsecured loans and lines of 
credit to any one member credit union, excluding pass-through and 
guaranteed loans from the CLF and the NCUSIF, shall not exceed 100 
percent of the corporate credit union's capital. The board of directors 
will establish the limit, as a percent of the corporate credit union's 
capital plus pledged shares, for secured loans and lines of credit.
Part II
    (a) A corporate credit union which has met the requirements for 
this Part II may:
    (1) Purchase investments with long-term ratings no lower than BBB 
(flat) (or equivalent);
    (2) Purchase investments with short-term ratings no lower than A-2 
(or equivalent), provided that the issuer has a long-term rating no 
lower than BBB (flat) (or equivalent) or the investment is a 
domestically issued asset-backed security;
    (3) Engage in short sales of permissible investments to reduce 
interest rate risk;
    (4) Purchase principal only (PO) stripped mortgage-backed 
securities to reduce interest rate risk; and
    (5) Enter into a dollar roll transaction.
    (b) Aggregate investments in repurchase and securities lending 
agreements with any one counterparty are limited to 400 percent of 
capital.
    (c) In performing the rate stress tests set forth in 
Sec. 704.8(d)(1)(i), the NEV of a corporate credit union which has met 
the requirements of this Part II may decline as much as:
    (1) 20 percent;
    (2) 28 percent if the corporate credit union has a 5 percent 
minimum capital ratio and is specifically approved by NCUA; or
    (3) 35 percent if the corporate credit union has a 6 percent 
minimum capital ratio and is specifically approved by NCUA.
    (d) The maximum aggregate amount in unsecured loans and lines of 
credit to

[[Page 44292]]

any one member credit union, excluding pass-through and guaranteed 
loans from the CLF and the NCUSIF, shall not exceed 100 percent of the 
corporate credit union's capital. The board of directors will establish 
the limit, as a percent of the corporate credit union's capital plus 
pledged shares, for secured loans and lines of credit.
Part III
    (a) A corporate credit union which has met the requirements of 
either Part I or Part II of this Appendix and the additional 
requirements for Part III may invest in:
    (1) Debt obligations of a foreign country;
    (2) Deposits and debt obligations of foreign banks or obligations 
guaranteed by these banks;
    (3) Marketable debt obligations of foreign corporations. This 
authority does not apply to debt obligations that are convertible into 
the stock of the corporation; and
    (4) Foreign issued asset-backed securities.
    (b) All foreign investments are subject to the following 
requirements:
    (1) Investments must be rated no lower than the minimum permissible 
domestic rating under the corporate credit union's Part I or Part II 
authority;
    (2) A sovereign issuer, and/or the country in which an obligor is 
organized, must have a long-term foreign currency (non-local currency) 
debt rating no lower than AA-(or equivalent);
    (3) For each approved foreign bank line, the corporate credit union 
must identify the specific banking centers and branches to which it 
will lend funds;
    (4) Obligations of any single foreign obligor may not exceed 50 
percent of capital; and
    (5) Obligations in any single foreign country may not exceed 250 
percent of capital.
Part IV
    (a) A corporate credit union which has met the requirements for 
this Part IV may enter into derivative transactions specifically 
approved by NCUA to:
    (1) Create structured products;
    (2) Manage its own balance sheet; and
    (3) Hedge the balance sheet of its members.
    (b) Credit Ratings:
    (1) All derivative transactions are subject to the following 
requirements:
    (i) If the counterparty is domestic, the counterparty rating can be 
no lower than the minimum permissible rating for comparable term 
permissible investments; and
    (ii) If the counterparty is foreign, the counterparty rating can be 
no lower that the minimum permissible rating for a comparable term 
investment under Part III Authority.
    (2) Exceptions. Credit ratings are not required for derivative 
transactions with:
    (i) Domestically chartered credit unions;
    (ii) U.S. Government sponsored enterprises; or
    (iii) Counterparties if the transaction is fully guaranteed by an 
entity with a minimum permissible rating for comparable term 
investments.
Part V
    A corporate credit union, which has met the requirements for this 
Part V, may participate in loans with member natural person credit 
unions as approved by the OCCU Director and subject to the following 
limitations:
    (a) The maximum aggregate amount of participation loans with any 
one member credit union shall not exceed 25 percent of capital; and
    (b) The maximum aggregate amount of participation loans with all 
member credit unions shall be determined on a case-by-case basis by the 
OCCU Director.


Secs. 704.3, 704.10, 704.15  [Amended]

    19. In addition to the amendments set forth above, in 12 CFR part 
704 remove the acronym ``NCUA'' wherever it appears and add in its 
place, the words ``the OCCU Director'' in the following places:
    a. Redesignated Sec. 704.3(e)(3)(i) and (ii), (g)(2)(v) and (g)(3).
    b. Section 704.10(a) introductory text, (b) and (c).
    c. Section 704.15(a) and (b).

[FR Doc. 02-16087 Filed 6-28-02; 8:45 am]
BILLING CODE 7535-01-P