[Federal Register Volume 68, Number 210 (Thursday, October 30, 2003)]
[Rules and Regulations]
[Pages 61735-61736]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-27311]


=======================================================================
-----------------------------------------------------------------------

NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 709


Interpretive Ruling and Policy Statement No. 03-3; Qualified 
Financial Contracts

AGENCY: National Credit Union Administration (NCUA).

ACTION: Notice of interpretive ruling and policy statement No. 03-3.

-----------------------------------------------------------------------

SUMMARY: Interpretive Ruling and Policy Statement (IRPS) No. 03-3 
provides guidance on NCUA's treatment of qualified financial contracts 
(QFCs) and federal funds (fed funds) transactions if NCUA becomes 
liquidating agent or conservator of a credit union. The guidance covers 
the timing, form, authority, and maintenance of written agreements 
documenting QFC and fed funds transactions.

DATES: This IRPS will become effective October 30, 2003.

FOR FURTHER INFORMATION CONTACT: Kim Iverson, Program Officer, Office 
of Examination and Insurance, at (703) 518-6360; or Paul Peterson, 
Staff Attorney, Office of General Counsel, at (703) 518-6540.

SUPPLEMENTARY INFORMATION:  Qualified financial contracts are defined 
by the Federal Credit Union Act (Act) as any securities contract, 
forward contract, repurchase agreement, and any similar agreement the 
NCUA Board (Board) determines by regulation. 12 U.S.C. 1787(c)(8)(D). 
The Board designated swap agreements (swaps) as QFCs effective June 30, 
2003. 68 FR 32355 (May 30, 2003).
    The Act provides that any agreement purporting to form the basis of 
a claim against the liquidating agent or the NCUA Board must be in 
writing and executed contemporaneously with the acquisition of the 
asset by the credit union, be approved by the credit union's board, and 
be maintained continuously as an official record of the credit union. 
12 U.S.C. 1787(b)(9), 1788(a)(3). Standard market practices for the 
creation and documentation of QFC and federal funds (fed funds) 
transactions, however, are often relatively informal. Representatives 
of potential QFC and fed funds counterparties have expressed concern to 
NCUA about how it might interpret the Act's formality requirements in 
the event of a credit union liquidation or conservatorship.
    The Federal Deposit Insurance Corporation (FDIC) has previously 
adopted policy guidance that addresses counterparty concerns about 
similar formality provisions in the Federal Deposit Insurance Act 
applicable to bank transactions. FDIC Statement of Policy on Qualified 
Financial Contracts, December 12, 1989, at http://www.fdic.gov/regulations/laws/rules/5000-1100.html. This IRPS adopts a similar 
policy on the formality provisions in the Federal Credit Union Act as 
applied to credit union transactions.

Interpretive Ruling and Policy Statement No. 03-3--Qualified Financial 
Contracts

    This Interpretive Ruling and Policy Statement (``IRPS'') provides 
guidance to the financial markets with regard to the treatment of 
qualified financial contracts (QFCs) in the event NCUA is appointed 
liquidating agent or conservator of a credit union. The guidance covers 
the timing, form, authority, and maintenance of written agreements 
documenting QFCs and provides a safe harbor for bona fide transactions 
between credit unions and nonaffiliated counterparties. For purposes of 
the requirements set out in sections 207(b)(9) and 208(a)(3) of the 
Federal Credit Union Act (the Act), the Board intends that this policy 
statement apply to federal funds (fed funds) transactions as well as 
QFCs. 12 U.S.C. 1787(b)(9) and 1788(a)(3).
    The NCUA Board specifically intends that counterparties to QFCs and 
fed funds transactions may rely on this policy statement. The NCUA 
Board does not, however, intend to provide in this policy statement any 
indication or guidance of the treatment by a liquidating agent or 
conservator of any other type of contract other than fed funds or those 
specifically defined as QFCs in the Act or by the Board pursuant to the 
Act. Also, nothing in this policy statement is intended to apply to 
transactions between a credit union and a counterparty that is an 
affiliate of the credit union.
    This policy statement will be effective unless revoked or otherwise 
withdrawn upon 45 days notice provided in the Federal Register. Any 
such revocation or withdrawal will only operate prospectively.

Written Agreement Requirements

    Any QFC (including any ancillary agreements, such as a master 
agreement or security arrangements) that complies with the following 
criteria will be deemed to satisfy the requirements in sections 
207(b)(9) and 208(a)(3) of the Act. 12 U.S.C. 1787(b)(9) and 
1788(a)(3).
    1. The QFC is evidenced by a writing (including a confirmation) 
that either is sent by the credit union to the

[[Page 61736]]

counterparty or by the counterparty to the credit union. In either 
case, the writing must be sent reasonably contemporaneously with the 
parties' agreement to enter into the specific QFC transaction. The 
writing need not be signed unless otherwise required by applicable non-
insolvency law;
    2. The credit union, by corporate action, was authorized under 
applicable non-insolvency law to enter into the QFC. A credit union 
will be deemed to have taken such corporate action if the counterparty 
has relied in good faith either on a resolution (or extract thereof) 
provided by the credit union's board of director's secretary or on a 
written representation (whether in a master agreement or otherwise) 
from an officer of the level of vice president or higher, as to the 
credit union's authority; and
    3. The writing (or a copy thereof) evidencing the QFC and the 
evidence of authority must be maintained by the credit union in its 
official books and records. However, the counterparty may, by 
appropriate evidence (including the production of copies maintained by 
the counterparty) establish the existence of the writing and the 
evidence of authority.
    The NCUA will apply the above criteria and the Act's requirements 
in a manner generally consistent with reasonable business trading 
practices in the QFC markets, in view of Congress's recognition in the 
Financial Institutions Reform, Recovery, and Enforcement Act of 1989 
(FIRREA) of the important role QFCs play in providing liquidity and 
portfolio and risk management to depository institutions. Without 
limiting the criteria set forth above, NCUA will look to the totality 
of the circumstances surrounding such transactions including the 
counterparty's good faith attempt to comply with all reasonable trading 
practices and requirements, any non-insolvency law requirements, and 
the requirements stated herein.

    By the National Credit Union Administration Board on October 23, 
2003.
Becky Baker,
Secretary of the Board.
[FR Doc. 03-27311 Filed 10-29-03; 8:45 am]
BILLING CODE 7535-01-P