[Federal Register Volume 68, Number 38 (Wednesday, February 26, 2003)]
[Proposed Rules]
[Pages 8860-8862]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-4444]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 709


Treatment of Swap Agreements in Liquidation or Conservatorship

AGENCY: National Credit Union Administration.

ACTION: Proposed rule.

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SUMMARY: The National Credit Union Administration (NCUA) is proposing 
to amend its involuntary liquidation regulation to designate swap 
agreements (swaps) as qualified financial contracts (QFCs). Treatment 
of swaps as QFCs will limit swap counterparty exposure when a 
Federally-insured credit union is placed into involuntary liquidation 
or a conservatorship and thereby encourage entities to engage in swaps 
with Federally-insured credit unions. Treatment of swaps as QFCs will 
also help preserve market stability.

DATES: Comments must be received on or before March 28, 2003.

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. You are encouraged to fax 
comments to (703) 518-6319 or e-mail comments to [email protected] 
instead of mailing or hand-delivering them. Whatever method you choose, 
please send comments by one method only.

FOR FURTHER INFORMATION CONTACT: Paul Peterson, Staff Attorney, Office 
of

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General Counsel, at the above address or telephone: (703) 518-6540.

SUPPLEMENTARY INFORMATION:

A. Background

    Swaps are financial derivative transactions. NCUA's corporate rule 
permits corporate credit unions to engage in derivative transactions, 
including swaps, if specifically approved for such activity by the 
Board. 12 CFR part 704, Appendix B, part IV. NCUA's investment 
regulation generally prohibits natural person Federal credit unions 
from engaging in financial derivatives activities, but NCUA may approve 
a credit union for participation in an investment pilot program 
involving swaps and other derivatives. 12 CFR 703.110(a), 703.140. 
State chartered natural person credit unions that are Federally-insured 
may engage in swaps if permitted under their chartering statutes.
    In 1989, Congress amended both the Federal Deposit Insurance Act 
(FDIA) and the Federal Credit Union Act (FCU Act) to add provisions 
concerning the treatment of QFCs in liquidation, receivership, or 
conservatorship. 12 U.S.C. 1821(e)(3), (8); 1787(c)(3), (8). Generally, 
these QFC provisions enable a QFC counterparty to exercise its 
contractual rights to terminate and net QFCs and protect itself against 
the selective assumption of QFCs by a liquidating agent, receiver, or 
conservator. QFC treatment limits counterparty exposure and preserves 
market stability when a bank or credit union with QFCs enters 
liquidation, receivership, or conservatorship.
    The FDIA provides that ``the term `qualified financial contract' 
means any securities contract, commodities contract, forward contract, 
repurchase agreement, swap agreement, and any similar agreement that 
the [Federal Deposit Insurance] Corporation (FDIC) determines by 
regulation to be a qualified financial contract for purposes of this 
paragraph.'' 12 U.S.C. 1821(e)(8)(D)(i)(emphasis added). The FCU Act's 
QFC definition is very similar to the FDIA's definition and includes 
securities contracts, forward contracts, and repurchase agreements but 
omits swaps and commodities contracts. The FCU Act authorizes the NCUA 
Board, like the FDIA authorizes the FDIC, to add similar agreements to 
the definition of QFC by regulation. 12 U.S.C. 1787(c)(8)(D)(i).
    The Board believes swaps are similar to those agreements enumerated 
in the FCU Act's definition and should be recognized as QFCs. See H.R. 
Rep. No. 101-484 at 1 (recognizing that swaps are ``similar'' to 
forward contracts, securities contracts, and repurchase agreements), to 
accompany Pub. L. 101-311 (Bankruptcy: Swap Agreements and Forward 
Contracts), reprinted in 1990 U.S.C.C.A.N. 223. A Board determination 
that swaps receive QFC treatment will provide greater certainty about 
the treatment of swaps if a Federally-insured credit union is placed 
into involuntary liquidation or a conservatorship, will encourage 
counterparties to engage in swaps with credit unions, and will parallel 
the FDIA treatment of swaps involving banks.
    Generally, NCUA provides a 60-day comment period on proposed rules. 
NCUA Interpretative Ruling and Policy Statement 87-2, Developing and 
Reviewing Government Regulations, III. The Board has determined that a 
30-day comment period, rather than a 60-day comment period, is 
appropriate for this proposed rule. The proposed rule should not be 
controversial. Few credit unions are currently authorized to engage in 
swaps, and the treatment of swaps as QFCs would be beneficial to both 
credit unions and counterparties, including banks, that engage in swaps 
with credit unions.
    Until a final rule is effective, the Board has determined that it 
will exercise its discretion as liquidating agent or conservator and 
provide swaps with QFC treatment if there is a liquidation or 
conservatorship involving swaps.

Regulatory Procedures

Regulatory Flexibility Act

    The Regulatory Flexibility Act requires NCUA to prepare an analysis 
to describe any significant economic impact a proposed rule may have on 
a substantial number of small credit unions (those under one million 
dollars in assets). The Board believes it unlikely that any small 
Federally-insured credit unions engage in swaps. Accordingly, the Board 
believes that the proposed rule would 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 rule would not increase 
paperwork requirements under the Paperwork Reduction Act of 1995 and 
regulations of the Office of Management and Budget.

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 proposed rule would not have substantial 
direct effects on the States, on the connection between the national 
government and the States, or on the distribution of power and 
responsibilities among the various levels of government. NCUA has 
determined that this proposed rule does not constitute a policy that 
has federalism implications for purposes of the executive order.

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

    The NCUA has determined that this proposed rule would 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.

List of Subjects in 12 CFR Part 709

    Credit unions, Liquidations.

    By the National Credit Union Administration Board on February 
20, 2003.
Becky Baker,
Secretary of the Board.
    Accordingly, NCUA proposes to amend 12 CFR part 709 as follows:

PART 709--INVOLUNTARY LIQUIDATION OF FEDERAL CREDIT UNIONS AND 
ADJUDICATION OF CREDITOR CLAIMS INVOLVING FEDERALLY INSURED CREDIT 
UNIONS IN LIQUIDATION

    1. The authority citation for part 709 continues to read as 
follows:

    Authority: 12 U.S.C. 1757, 12 U.S.C. 1766, 12 U.S.C. 1767, 12 
U.S.C. 1786(h), 12 U.S.C. 1787, 12 U.S.C. 1788, 12 U.S.C. 1789, 12 
U.S.C. 1789a.

    2. Add Sec.  709.13 to read as follows:


Sec.  709.13  Treatment of swap agreements in liquidation or 
conservatorship.

    The Board has determined that a swap agreement, as defined in the 
Federal Deposit Insurance Act at 12 U.S.C. 1821(e)(8)(D)(vi), is a 
qualified financial contract for purposes of the special

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treatment for qualified financial contracts provided in 12 U.S.C. 
1787(c).

[FR Doc. 03-4444 Filed 2-25-03; 8:45 am]
BILLING CODE 7535-01-P