[Federal Register Volume 72, Number 147 (Wednesday, August 1, 2007)]
[Proposed Rules]
[Pages 41956-41958]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-14849]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 703 and 704

RIN 3133-AD34


Permissible Foreign Currency Investments for Federal Credit 
Unions and Corporate Credit Unions

AGENCY: National Credit Union Administration (NCUA).

ACTION: Advance notice of proposed rulemaking.

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SUMMARY: NCUA is considering whether to amend its investment rules to 
permit natural person federal credit unions (FCUs) and corporate credit 
unions (corporates) to make certain investments denominated in foreign 
currency. NCUA seeks comment on whether FCUs and corporates should be 
permitted to make these investments and the safety and soundness 
considerations related to such authority.

DATES: Comments must be received on or before October 30, 2007.

ADDRESSES: You may submit comments by any of the following methods 
(Please send comments by one method only):
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     NCUA Web Site: http://www.ncua.gov/RegulationsOpinionsLaws/proposed_regs/proposed_regs.html. Follow the 
instructions for submitting comments.
     E-mail: Address to [email protected]. Include ``[Your 
name]--Comments on Advanced Notice of Proposed Rule for Parts 703 and 
704'' in the e-mail subject line.
     Fax: (703) 518-6319. Use the subject line described above 
for e-mail.
     Mail: Address to Mary Rupp, Secretary of the Board, 
National Credit Union Administration, 1775 Duke Street, Alexandria, 
Virginia 22314-3428.
     Hand Delivery/Courier: Same as mail address.

FOR FURTHER INFORMATION CONTACT: Technical Information: Kimberly A. 
Iverson, Senior Investment Officer, Office of Capital Markets and 
Planning, at the above address or telephone: (703) 518-6620; or Legal 
Information: Moisette I. Green, Staff Attorney, Office of General 
Counsel, at the above address or telephone: (703) 518-6540.

SUPPLEMENTARY INFORMATION: 

A. Background

    The Federal Credit Union Act (Act) permits federal credit unions 
(FCUs) to make investments denominated in foreign currency under the 
Act's authority permitting FCUs to invest or deposit their funds in 
shares or accounts of federally insured banks and corporates. 12 U.S.C. 
1757(7), (8). In addition, the Board has authority under the Act to 
permit corporates to invest in foreign currency. 12 U.S.C. 1766. While 
the Act does not explicitly restrict FCUs and corporates to making 
investments only in U.S. dollars, NCUA has imposed this limitation by 
regulation.
    NCUA regulations implement the authority in the Act and establish 
requirements and limitations under which FCUs and corporates, 
respectively under Parts 703 and 704, can make investments. 12 CFR 
parts 703, 704. The corporate regulation expressly states corporates 
may only make investments denominated in U.S. dollars. 12 CFR 704.5(b). 
For FCUs, the general investment rule does not expressly prohibit 
foreign currency denominated investments, but ties variable rate 
investments to a domestic interest rate and, consequently, limits FCU 
investment authority to U.S. dollars. 12 CFR 703.14(a).
    Part of the impetus for this advance notice of proposed rulemaking 
(ANPR) is that, in 2006, the Board amended NCUA's share insurance rule 
to permit federally insured credit unions to accept member shares 
denominated in foreign currency. 12 CFR 745.7; 71 FR 14631 (March 23, 
2006) (interim final rule); 71 FR 56001 (September 26, 2006) (final 
rule). That rulemaking, however, did not address lending or investment 
in foreign denominated currencies. The Board recognizes that, for some 
credit unions, the ability to accept member shares denominated in 
foreign currency--without authority to make investments in foreign 
denominated currencies--may place them at a competitive disadvantage. 
Commenters should note that this ANPR's scope is limited to investment 
in foreign denominated currencies; the Board may consider issues 
associated with lending in foreign denominated currencies at another 
time but is not inclined to do so as part of this ANPR.
    The Board is considering whether to permit FCUs and corporates to 
make limited investments denominated in foreign currency as a 
complementary authority to the change in the share insurance rule and 
allow FCUs and corporates to invest funds from the now-permissible 
foreign denominated share accounts. Comments from interested parties on 
the issues associated with investments denominated in foreign currency 
will assist the Board in determining whether to permit these kinds of 
investments and, if so, the kinds of appropriate limitations and 
requirements for the activity to address safety and soundness concerns.

B. Discussion

U.S. Domiciled Issuers

    The Board is considering whether to permit FCUs and corporates to 
invest foreign currency in deposits and instruments issued by federally 
insured banks, corporates, and government-sponsored enterprises (GSEs) 
domiciled in the U.S. or its territories. The Board believes 
restricting foreign currency investments to shares and deposits in 
federally insured banks, corporates, and GSEs domiciled in the U.S. or 
its territories would substantially mitigate exposure to the potential 
instability of a foreign country. Changes in the political and economic 
environment of a particular country may adversely affect the exchange 
rate for that currency, as well as the ability of a foreign domiciled 
entity to repay an obligation. By limiting investments to shares and 
deposits in U.S. domiciled depositories or the debt obligations of 
GSEs, a credit union could avoid settlement risks arising from 
international payment systems.
    While the Board recognizes other investments in foreign currency 
may be permissible under the Act, it believes safety and soundness 
concerns

[[Page 41957]]

outweigh their utility. The Board requests comments on whether FCUs or 
corporates should be permitted to invest foreign currency in vehicles 
other than deposits and instruments issued by federally insured banks, 
corporates, and GSEs domiciled in the U.S. or its territories 
permissible under the Act. If a commenter supports additional 
authority, the Board requests that commenters specify the statutory 
authority for the investment and include a description of how the 
authority would be used and additional risks would be controlled.

Exchange Rate Risk

    Credit unions would have to establish an appropriate process to 
measure, monitor, and control foreign exchange risk associated with 
investments denominated in foreign currency and foreign currency 
denominated shares, and the Board specifically requests comments on 
appropriate foreign exchange risk limits. Commenters should address how 
an FCU or corporate would measure, monitor, and control the foreign 
exchange risk of each currency in which it invests and accepts 
deposits. An FCU or corporate should be able to evaluate the volatility 
of each currency in which it invests and takes deposits and the Board 
requests comments on appropriate limits per foreign currency and 
aggregate limits across all foreign currencies. Additionally, the Board 
requests comments on whether it should limit the currencies in which 
investments may be denominated.
    Foreign exchange risk may be mitigated, for example, by maintaining 
a balance between foreign currency denominated assets and the member 
shares denominated in foreign currencies. To control the risk arising 
when assets and liabilities denominated in a particular foreign 
currency are not in balance, NCUA is considering establishing a maximum 
limit on the out-of-balance amount. For example, NCUA could establish 
an out-of-balance limit of 10 percent of an FCU's net worth or a 
corporate's capital between foreign currency denominated assets and 
liabilities. That limit would require an FCU with $10 million in net 
worth to maintain an amount of foreign currency denominated assets in a 
given foreign currency within $1 million of the amount of liabilities 
in that same foreign currency.

Credit and Other Risks

    While foreign currency denominated investments might be in 
partially or fully insured accounts, FCUs and corporates must manage 
the other risks these investments pose. NCUA expects credit unions 
would have to establish appropriate processes for controlling credit 
risk, interest rate risk, liquidity risk, transaction risk, compliance 
risk, strategic risk, and reputation risk associated with investments 
denominated in foreign currency. Comment is invited on provisions a 
regulation should contain to control these various risks.
    Regarding credit risk, NCUA believes a regulation permitting 
investments denominated in foreign currency would need to address 
obligor or concentration limits. Any limit on credit risk may include 
requirements for a counterparty and the instrument or investment type. 
The Board requests comments on whether it should impose a limit on 
credit ratings or other requirements to control credit risk.
    The Board is particularly concerned about a credit union's ability 
to liquidate foreign currency denominated investments. Liquidity risk 
relates to the available market for the instruments or activities in 
which FCUs and corporates invest with foreign currency. The Board 
requests comments generally on liquidity risk and what requirements or 
limits would reasonably constrain it.

Exit Strategy

    NCUA may also require credit unions to develop an exit strategy to 
facilitate divestiture of all investments in a particular currency. An 
exit strategy would provide for stress testing and the means to 
evaluate the performance of foreign currency investments. An exit 
strategy should be commensurate with the level of risk exposure and 
identify triggering events or scenarios that would alert credit unions 
as to when divestiture would be appropriate or necessary. The Board 
requests comments on potential investment policy and exit strategy 
requirements and the availability of bond coverage to absorb potential 
losses.
    As an integral part of an exit strategy, the Board is considering a 
requirement that members must be notified of any conversion of their 
shares from foreign currency denominated to U.S. dollar denominated. 
The Board requests comments on the appropriate notice that members 
should be given in such an event.

Information Systems and Technology Risks

    The Board believes it is likely that a regulation would need to 
address information systems and technology risks. For example, a 
regulation would likely require FCUs and corporates to demonstrate they 
can effectively manage the inherent risks of running multiple balance 
sheets in various denominations while simultaneously presenting 
consolidated information to NCUA.
    The Board requests comments on FCU and corporate ability to manage 
this risk, the data NCUA should collect regarding their information 
systems and investments denominated in foreign currency, and how often 
NCUA should collect the data. The Board believes additional reporting 
would be required to monitor foreign currency exposure adequately both 
on an individual credit union basis and an industry-wide basis. Call 
reports would likely need to be revised to capture necessary data 
regarding foreign currency exposures. Additional interim reporting for 
supervision purposes may also be required of individual credit unions 
engaging in the activity.

Internal Controls

    A regulation would likely address the need to establish certain 
internal controls, policies, and procedures to manage investments 
denominated in foreign currency as well as staff qualifications and 
potential conflict of interest issues. FCUs and corporates would be 
expected to have knowledgeable, experienced staff to manage foreign 
currency investment portfolios. The Board requests comments on whether 
it should regulate the qualifications of credit union employees 
involved in foreign currency investment activities. Additionally, the 
Board requests comments on whether a rule should permit the employment 
of third parties to meet experience requirements for credit union staff 
in conducting foreign currency investments and, if so, whether the 
conflict of interest provision in the member business loan would be an 
appropriate model for a provision in a rule governing foreign currency 
investments. 12 CFR 723.5.

NCUA Approval

    The Board believes is it likely that a regulation on this activity 
would include an approval process for an FCU or corporate to engage in 
foreign currency denominated investments and deposits. This would be 
primarily because of the staff expertise and internal systems required 
for the activity. An approval process could be patterned on the 
requirements for corporates to obtain expanded authorities under part 
704 or by some other method. The NCUA Board is interested in comments 
regarding an appropriate mechanism for an approval process.

[[Page 41958]]

C. Request for Comments

    In addition to the areas of interest noted above, the Board invites 
comments from all interested parties on any aspects it should consider 
concerning foreign currency investments by FCUs and corporates.

    By the National Credit Union Administration Board on July 26, 
2007.
Mary F. Rupp,
Secretary of the Board.
 [FR Doc. E7-14849 Filed 7-31-07; 8:45 am]
BILLING CODE 7535-01-P