[Federal Register Volume 76, Number 40 (Tuesday, March 1, 2011)]
[Proposed Rules]
[Pages 11164-11172]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-4070]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 703, 704, 709, and 742

RIN 3133-AD86


Removing References to Credit Ratings in Regulations; Proposing 
Alternatives to the Use of Credit Ratings

AGENCY: National Credit Union Administration (NCUA).

ACTION: Notice of proposed rulemaking.

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SUMMARY: NCUA is proposing rules to implement certain statutory 
provisions in Title IX of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (the Dodd-Frank Act). The proposed rules 
replace or remove references to credit ratings in NCUA regulations.

DATES: Comments must be received on or before May 2, 2011.

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/Resources/RegulationsOpinionsLaws/ProposedRegulations.aspx. Follow the 
instructions for submitting comments.
    E-mail: Address to [email protected]. Include ``[Your name] 
Comments on ``Notice of Proposed Rulemaking--Removing References to 
Credit Ratings'' 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.
    Public Inspection: All public comments are available on the 
agency's Web site at http://www.ncua.gov/Resources/RegulationsOpinionsLaws/ProposedRegulations.aspx as submitted, except 
as may not be possible for

[[Page 11165]]

technical reasons. Public comments will not be edited to remove any 
identifying or contact information. Paper copies of comments may be 
inspected in NCUA's law library at 1775 Duke Street, Alexandria, 
Virginia 22314, by appointment weekdays between 9 a.m. and 3 p.m. To 
make an appointment, call (703) 518-6546 or send an e-mail to 
[email protected].

FOR FURTHER INFORMATION CONTACT: Mark Vaughan, Director, Division of 
Capital Markets, or Dale Klein, Senior Capital Markets Specialist, at 
the address above or telephone (703) 518-6620; or Lisa Henderson, Staff 
Attorney, or Frank Kressman, Staff Attorney, at the address above or 
telephone (703) 518-6540.

SUPPLEMENTARY INFORMATION: 

I. Background

    Section 939A of the Dodd-Frank Act requires each Federal agency to 
review (1) any regulation issued by such agency that requires the use 
of an assessment of the creditworthiness of a security or money market 
instrument; and (2) any references to or requirements in such 
regulations regarding credit ratings.\1\ Section 939A further requires 
each agency to modify any such regulations identified by the review to 
remove any reference to or requirement of reliance on credit ratings 
and to substitute in such regulations such standards of 
creditworthiness as each respective agency shall determine as 
appropriate for such regulations. In developing substitute standards of 
creditworthiness, an agency shall seek to establish, to the extent 
feasible, uniform standards of creditworthiness for use by the agency, 
taking into account the entities it regulates that would be subject to 
such standards.\2\
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    \1\ Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Public Law 111-203, Sec.  939A (2010).
    \2\ Id.
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    NCUA has identified 24 general areas of its regulations that 
contain references to nationally recognized statistical rating 
organization (NRSRO) \3\ credit ratings. Eight are found in part 703 of 
the regulations governing the investment activities of natural person 
Federal credit unions (FCUs). 12 CFR part 703. Fourteen are found in 
part 704 of the regulations governing the operations, investment 
activities, and capital risk-weighting of corporate credit unions. 12 
CFR part 704. There is also one reference to credit ratings in part 709 
of the regulations governing the involuntary liquidation of Federal 
credit unions and one reference in part 742 of the regulations 
governing NCUA's regulatory flexibility program. 12 CFR parts 709 and 
742.
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    \3\ An NRSRO is an entity registered with the U.S. Securities 
and Exchange Commission (SEC) under section 15E of the Securities 
Exchange Act of 1934. See 15 U.S.C. 78o-7, as implemented by 17 CFR 
240.17g-1.
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II. General Approach

    The proposed rule generally handles NRSRO ratings three different 
ways, depending on the manner in which the rating is used in the 
regulations. For investments, the proposal generally replaces the 
minimum credit rating requirement with a requirement that the credit 
union do an internal credit analysis of the investment pursuant to a 
particular narrative standard. For counterparty transactions, the 
proposal generally replaces the minimum credit rating requirement with 
a requirement that the credit union do an internal credit analysis of 
the counterparty pursuant to an internal standard set by the credit 
union's board. For ratings usage outside of investment and counterparty 
suitability, the proposal generally removes the ratings reference 
without requiring some substitute analysis. These three approaches are 
discussed in more detail below and in Section III.

a. Investment Authority

    Where the regulations require that a security have particular 
rating in order for it to be a permissible investment for a credit 
union, the proposed rule replaces the minimum rating with a narrative 
standard that is focused primarily on credit quality. The proposal 
generally requires a credit union to conduct and document an internal 
analysis demonstrating that the issue or issuer of a security has a 
certain, specified capacity to meet its financial commitments.
    For each section of the rule, the necessary capacity to meet 
financial commitments is correlated to narrative descriptions provided 
by the NRSRO rating agencies. For example, two of the larger NRSROs, 
Standard and Poor's and Fitch, state that a AA issuer rating (e.g., 
``in one of the two highest ratings categories'') means the obligor has 
a very strong capacity to meet its financial commitments. Accordingly, 
where the NCUA regulations currently require an investment to have a AA 
rating or equivalent, the proposal generally requires the credit union 
to determine that the issuer of the security has a very strong capacity 
to meet its financial commitments. The proposal contains similar 
translations for other ratings (e.g., a rating of BBB is equivalent to 
adequate capacity, and a rating of A is equivalent to strong capacity).
    The Board believes that this approach to replacing credit ratings 
is consistent with both the letter and spirit of the Dodd-Frank Act. 
The legislative history of Dodd-Frank indicates that Congress was 
concerned not with any particular rating level, or associated narrative 
standard, but rather, with the NRSROs' failure to apply the narrative 
standard accurately and consistently to certain securities.\4\ The 
Dodd-Frank Act was intended to reduce over-reliance on ratings and 
encourage investors to conduct their own analyses.\5\ This proposal 
furthers those aims by requiring that credit unions conduct their own 
analyses using long-standing, and accepted, narrative standards.
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    \4\ With respect to the financial crisis, the Senate Report 
stated that ``erroneous credit ratings'' caused serious and far 
reaching problems. See S. Rep. No. 111-176, p. 36 (2010). Report of 
the Committee on Banking, Housing, and Urban Affairs. The Senate 
Report attributed the errors to the overreliance by the NRSROs on 
mathematical risk models and to conflicts of interest in the ratings 
process, not to incorrect standards. See Dodd-Frank Wall Street 
Reform: Conference Report Summary. Similarly, the House Report on 
H.R. 3890, the rating agency reform legislation later incorporated 
into H.R. 4173 as passed by the House, notes that NRSROs issued 
ratings based upon unsatisfactory credit analyses. See H. Rep. No. 
111-685, Part I, p. 19 (2010). Report of the Committee on Financial 
Services.
    \5\ http://banking.senate.gov/public/_files/070110_Dodd_Frank_Wall_Street_Reform_comprehensive_summary_Final.pdf.
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    The Board believes that this approach does not present a 
significant change for most credit unions. NCUA already requires 
natural person FCUs and corporates to have credit risk management 
policies that go beyond simple reliance on credit ratings. Section 
703.6 requires an FCU to conduct and document a credit analysis on any 
non-guaranteed or insured investment. 12 CFR 703.6. Section 704.6 
requires a corporate to operate according to a credit risk management 
policy that is commensurate with the investment risks and activities it 
undertakes, and the corporate's policy must address credit limit 
approval processes, due diligence analysis requirements, maximum credit 
limits with each obligor and transaction counterparty, and 
concentrations of credit risk. 12 CFR 704.6. Accordingly, credit unions 
that purchase investments with some credit risk should already have in 
place robust processes--including internal testing and assessment and/
or reviewing reports, analyses, opinions, and other assessments issued 
by third parties--analyzing the risk that an issue or issuer will fail 
to perform on its obligation. NCUA will provide additional supervisory 
guidance on the indicators that support a determination that an

[[Page 11166]]

issue or issuer has the necessary capacity (e.g., adequate, strong, 
very strong, etc.) to meet its financial commitments.

b. Counterparties

    Where the regulations require that a transaction counterparty have 
a particular rating, the proposed rule substitutes a requirement that 
the counterparty meet minimum credit quality standards as established 
by the credit union's board of directors. In developing and applying 
credit quality standards, the board of directors may incorporate 
external ratings, reports, analyses, opinions, and other assessments 
issued by third-parties. Since counterparty risk is more akin to loan 
than investment risk, a credit union would be expected to document its 
credit assessment and analysis using a system similar to its internal 
loan grading system. These internal processes would be subject to 
examiner review and classification, similar to the process used for 
credit union loan classification.
    Sections 703.6 and 704.6, noted above, also require credit unions 
to establish appropriate processes to evaluate the creditworthiness of 
securities counterparties. Any credit union doing business with a 
counterparty should already consider a counterparty's financial 
statements, its general reputation, and whether there have been any 
formal enforcement actions against the counterparty or its affiliates 
by State or Federal securities regulators. A credit union should know 
the counterparty's character, integrity of management, activities, and 
financial markets in which it deals.

c. Removal Without Replacement

    Where NCUA has determined that a provision that references NRSRO 
ratings is no longer necessary, the proposed rule deletes or 
substantially modifies the provision.

d. Other Approaches

    As discussed below, in Section IV, the Board is not wedded to these 
proposed alternatives to credit ratings in the investment and 
counterparty contexts. Commenters who believe a different approach (or 
approaches) is warranted should describe their alternatives and give a 
supporting justification.

III. Specific Proposed Amendments

a. Part 703--Investment and Deposit Activities

Definitions
    Section 703.2 contains definitions of terms related to the 
investment activities of natural person FCUs. Three of the definitions 
make reference to credit ratings.
    Section 703.2 defines ``deposit note'' as an obligation of a bank 
that is similar to a certificate of deposit ``but is rated.'' The NCUA 
Board is proposing to delete the definition of ``deposit note'' 
entirely, as the term is standard in the securities industry.
    Part 703 permits FCUs to invest in Collateralized Mortgage 
Obligations (CMOs), and CMOs are defined in Sec.  703.2 as multiclass 
mortgage related securities. An FCU's authority to purchase mortgage 
related securities comes from Sec.  107(15)(b) of the Act, 12 U.S.C. 
1757(15)(b), which defines mortgage related security by cross reference 
to the same phrase in Sec.  3(a)(41) of the Securities Exchange Act of 
1934, 15 U.S.C. 78c(a)(41) (Exchange Act). The pre-Dodd-Frank Exchange 
Act definition included a reference to NRSRO ratings, but Dodd-Frank 
Act eliminated the NRSRO reference in Sec.  3(a)(41) of the Exchange 
Act, substituting the language: ``meets standards of creditworthiness 
as established by the [Securities and Exchange] Commission (SEC).'' \6\ 
The Dodd-Frank Act requires the SEC to establish those standards by 
July 21, 2012.\7\
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    \6\ Dodd-Frank Act, Sec.  939.
    \7\ Id.
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    Section 703.2 defines mortgage related security by using the 
language found in the pre-Dodd Frank Act definition in Sec.  3(a)(41) 
of the Exchange Act, including the reference to NRSRO ratings. This 
proposal removes the reference to NRSRO ratings from Sec.  703.2, and 
replaces it with a short cross reference to Sec.  3(a)(41). Under the 
proposal, FCUs that wish to purchase mortgage related securities, 
including CMOs, must determine and document that the security is, in 
fact, a mortgage related security as defined by the SEC. In the time 
period before the SEC moves to specify ``standards of 
creditworthiness'' for mortgage related securities, an FCU is 
prohibited from purchasing a CMO or other mortgage related security 
unless the FCU has specific evidence that the SEC considers that 
security to meet the requirements of Sec.  3(a)(41).
    Similarly, Sec.  703.2 cross-references the definition of ``small 
business related security'' with its definition in Sec.  3(a)(53) of 
the Exchange Act, 15 U.S.C. 78c(a)(53), and then repeats that 
definition verbatim. Again, this flows from the authority in the FCU 
Act, 12 U.S.C. 1757(15)(C), and its cross reference to the definition 
of small business security in the Exchange Act. As with the definition 
of ``mortgage related security,'' discussed above, the definition of 
``small business related security'' prior to the Dodd-Frank Act 
included a reference to NRSRO ratings. The Dodd-Frank Act eliminated 
that reference, substituting instead creditworthiness standards to be 
established by the SEC, and providing the SEC with two years to 
establish such standards.\8\ This proposed rule removes the language of 
the former Exchange Act definition and redefines ``small business 
related security'' by a short cross-reference to the Exchange Act 
provision. An FCU wishing to purchase a small business related security 
must demonstrate that it meets the Sec.  3(a)(53) requirements, as 
determined by the SEC. The proposed rule retains the exemption for 
Small Business Administration securities permissible under Sec.  107(7) 
of the Federal Credit Union Act, 12 U.S.C. 1757(7).
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    \8\ Id.
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Broker-Dealers and Safekeepers
    Sections 703.8(b)(3) and 703.9(d) list a number of factors that 
FCUs should consider when evaluating the reliability of broker-dealers 
and investment safekeepers, respectively. One factor is NRSRO reports. 
The proposed rule replaces the NRSRO reference with ``external 
assessments of creditworthiness.'' FCUs may obtain these assessments 
from various sources.
Permissible Investments
    Section 703.14 establishes standards for permissible investments 
for FCUs.
    Section 703.14(e) provides that an FCU may purchase a municipal 
security (muni) that an NRSRO has rated in one of the four highest 
rating categories. The proposed rule removes the minimum rating 
requirements, providing instead that for an investment to be 
permissible, it must be originated by an issuer that has at least an 
adequate capacity to meet its financial obligations, even under adverse 
conditions, for the projected life of the security. As noted above, an 
FCU may evaluate the financial strength of an issuer by conducting 
internal assessments and/or reviewing assessments issued by third-
parties.
    To further limit the risk associated with the purchase of munis, 
the proposal adds new concentration limits on such holdings. 
Specifically, an FCU must limit its aggregate muni holdings to no more 
than 75 percent of the credit union's net worth and limit its holdings 
of munis issued by any single issuer to no more than 25 percent of net 
worth. Since most munis are exempt from

[[Page 11167]]

income taxation, and FCUs are tax exempt entities that cannot take full 
advantage of the tax exempt status of munis, it is unlikely that any 
particular FCU would desire to purchase or hold municipal securities in 
amounts that would exceed these proposed limits.
    Section 703.14(g) permits an FCU to purchase a European financial 
options contract for the purpose of hedging the risk associated with 
issuing share certificates with dividends tied to an equity index. Two 
of the requirements of the current 703.14(g) are that the counterparty 
meets certain NRSRO ratings requirements and that the aggregate amount 
of such index-linked certificates not exceed the credit union's net 
worth. The proposal removes the reference to the NRSRO ratings and 
instead requires that the counterparty meet credit standards set by the 
board. To mitigate any risk associated with the removal of credit 
ratings in this context, the proposal tightens the concentration limit 
in equity indexed certificates from 100 percent of the credit union's 
net worth to 50 percent of the credit union's net worth.
    Section 703.14(h) permits an FCU to invest in Mortgage note 
repurchase transactions. Three of the requirements of the current Sec.  
703.14(h) are that (1) the counterparty meets certain NRSRO ratings 
requirements, (2) the aggregate amount of the investments with any one 
counterparty be limited to 25 percent of the credit union's net worth, 
and (3) the aggregate amount of the investments with all counterparties 
be limited to 100 percent of net worth. The proposal removes the 
reference to the NRSRO ratings and instead requires that the 
counterparty meet credit standards set by the board. To mitigate any 
risk associated with the removal of credit ratings in this context, the 
proposal tightens the aggregate concentration limit from 100 percent of 
net worth to 50 percent of net worth.

b. Part 704--Corporate Credit Unions

Definitions
    Section 704.2 contains definitions of terms related to the 
investment activities of corporate credit unions. Four of the 
definitions refer to credit ratings.
    The proposed rule eliminates the definition of ``NRSRO'' as 
irrelevant, given that the proposed rule eliminates references to 
NRSROs.
    The definition of ``asset-backed commercial paper (ABCP) program'' 
states that it is a program that has received a credit rating from an 
NRSRO. The proposed rule deletes that element of the definition as 
unnecessary. A corporate that is authorized to invest in ABCPs is 
expected to conduct due diligence on an ABCP investment just as any 
other investment.
    The definition of ``eligible ABCP liquidity facility'' provides 
that if the assets that the facility is required to fund against have 
received an NRSRO rating at the time of the inception of the facility, 
the facility can be used to fund only those assets that are rated 
investment grade by an NRSRO at the time of funding. The proposed rule 
removes the NRSRO references, providing instead that a facility can be 
used to fund only those assets or exposures that demonstrate adequate 
capacity to meet their financial obligations, even under adverse 
economic conditions, for the projected life of the asset or exposure. A 
corporate may base its evaluation of the financial strength of an asset 
or exposure on internal and external assessments.
    The definition of ``small business related security'' in Sec.  
704.2 is different from that in Sec.  703.2, discussed above. When NCUA 
comprehensively revised part 704 in September 2010, the Board noted 
that Congress had already passed the Dodd-Frank Act, amending the 
Exchange Act's definition of small business related security.\9\ The 
Board stated that it wanted to continue to use the old Exchange Act 
definition and therefore retained the description of the security\10\ 
while removing the reference to the Exchange Act. The definition 
retained an NRSRO reference, however, and the proposed rule removes 
that reference. As is the case with Sec.  703.2, the proposed rule 
retains the exemption for Small Business Administration securities 
permissible under Sec.  107(7) of the Federal Credit Union Act, 12 
U.S.C. 1757(7).
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    \9\ 75 FR 64786, 64789 (Oct. 20, 2010).
    \10\ Prior to the Dodd-Frank Act, Section 3(a)(53) of the 
Exchange Act defined a ``small business related security'' as ``a 
security that is rated in 1 of the 4 highest rating categories by at 
least one nationally recognized statistical rating organization and 
represents an interest in one or more promissory notes or leases of 
personal property evidencing the obligation of a small business 
concern and originated by an insured depository institution, insured 
credit union, insurance company, or similar institution which is 
supervised and examined by a Federal or State authority, or a 
finance company or leasing company.''
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Credit Risk Management
    Section 704.6(f) establishes minimum credit quality standards for 
corporate credit union investments. 12 CFR 704.6(f). The standards 
include that each investment must have an NRSRO rating and that at 
least 90 percent of a corporate's investment portfolio must have at 
least two such ratings. The standards further require that long-term 
investments be rated at least AA- (or equivalent) and short-term 
investments be rated at least A- (or equivalent). Finally, Sec.  
704.6(f) requires a corporate to monitor NRSRO ratings as long as it 
holds a rated investment and to develop an action plan, pursuant to 
Sec.  704.10, for any investment subject to a ratings downgrade below 
AA- for a long-term investment or A- for a short-term investment.
    The proposed rule removes the minimum rating requirements, 
providing instead that for an investment to be permissible, it must be 
originated by an issuer that has at least a very strong capacity to 
meet its financial obligations, even under adverse conditions, for the 
projected life of the security. This standard would apply to both long-
term and short-term investments. As discussed above, a corporate may 
base its evaluation of the financial strength of an issuer on internal 
and external assessments. Under the proposed rule, a corporate must 
monitor any changes in credit quality of the investment as long as it 
owns the investment and develop an action plan, under Sec.  704.10, if 
there is reason to believe that the obligor no longer has a very strong 
capacity to meet its financial obligations for the remaining projected 
life of the security.
    Section 704.6(g) requires a corporate credit union to maintain 
documentation for each credit limit with each obligor or transaction 
counterparty, including rating agency information. The proposed rule 
deletes the reference to rating agency information.
Expanded Authorities
    Appendix B to Part 704 sets out expanded authorities for corporates 
that have met certain requirements.
    Part I of Appendix B authorizes corporates to purchase investments 
with long-term ratings no lower than A- (or equivalent) and short-term 
ratings no lower than A-2 (or equivalent). The proposed rule removes 
the rating requirements, providing instead that for an investment to be 
permissible, it must be originated by an issuer that has at least a 
strong capacity to meet its financial obligations, even under adverse 
economic conditions, for the projected life of the security. Again, 
this standard would apply to both long-term and short-term investments. 
As in other parts of the proposed rule that substitute ratings with 
multi-faceted issuer evaluations, a corporate may consider a variety of 
sources in making that evaluation.
    Part II of Appendix B authorizes a corporate to purchase a foreign

[[Page 11168]]

investment provided, among other things, that the sovereign issuer, 
and/or the country in which the obligor is organized, has a long-term 
foreign currency debt rating no lower than AA- (or equivalent). The 
proposed rule deletes the NRSRO reference, providing instead that a 
corporate may purchase a foreign investment only pursuant to an 
explicit policy established by the board of directors. Further, any 
foreign issue or issuer must have a very strong capacity to meet its 
financial obligations, even under adverse economic conditions, for the 
projected life of the security.
    Part III of Appendix B provides that, for derivative transactions, 
domestic counterparties must be rated at least A- (or equivalent). Part 
III also requires a corporate to monitor the ratings as long as a 
contract remains open and to develop an action plan, pursuant to Sec.  
704.10, for any counterparty downgraded below the minimum rating 
requirements. The proposed rule removes the rating requirements, 
mandating instead that the counterparty meet minimum credit quality 
standards as established by the corporate's board of directors. A 
corporate must identify the criteria relied upon to determine that the 
standards are met at the time the transaction is entered into and 
monitor those criteria for as long as the contract remains open. 
Finally, a corporate must develop a Sec.  704.10 action plan if the 
credit quality of the counterparty deteriorates below the standards 
established by the corporate's board.
Risk-Based Capital
    Appendix C to Part 704 explains how a corporate must compute its 
risk-weighted assets for purposes of determining its capital ratios. 
Appendix C contains several references to NRSRO ratings.
    In the definitions section of Appendix C, ``traded position'' is 
defined with reference to an NRSRO rating. The proposed rule removes 
the definition of ``traded position,'' as the term is used only in 
paragraphs II(c)(3) and (4), which are proposed to be deleted, as 
discussed below.
    Paragraph II(a)(2)(viii) provides that claims on qualifying 
securities firms, if rated in one of the three highest investment grade 
categories by an NRSRO, may be risk-weighted at 20 percent. The 
proposed rule removes the ratings references, requiring instead that, 
for a 20 percent risk weighting, a qualifying securities firm must 
either meet minimum credit quality standards as established by the 
corporate credit union's board of directors or demonstrate at least a 
strong capacity to meet its financial obligations, even under adverse 
economic conditions, for the projected life of the exposure. The 
corporate will use whichever requirement is more stringent. The board 
of directors must explicitly accept the regulatory minimum credit 
quality standard or establish a higher standard to be applied by 
management.
    Paragraph II(a)(2)(viii) also provides that a qualifying securities 
firm may rely on the rating of its parent consolidated company if the 
parent consolidated company guarantees the claim. The proposed rule 
removes the rating reference, providing instead that a qualifying 
securities firm may rely on the creditworthiness of its parent 
consolidated company if the parent consolidated company guarantees the 
claim. The parent company's creditworthiness is measured by the same 
standards as that of the qualifying securities firm.
    Paragraph II(b) addresses the risk-weighting of off-balance sheet 
assets. Certain assets relating to asset backed commercial paper (ABCP) 
facilities are weighted ``based on the assets of the obligor, after 
considering any collateral or guarantees, or external credit ratings 
under paragraph II(c)(3).'' See paragraphs II(b)(1)(iv), II(b)(2)(ii), 
and II(b)(4). The proposed rule also deletes the phrase ``or external 
credit ratings under paragraph II(c)(3)'' for each of these three 
paragraphs, as paragraph II(c)(3) itself will be deleted under this 
proposal.
    Paragraphs II(c)(1) and (c)(2) provide a general approach to risk-
weighting recourse obligations, direct credit substitutes, and residual 
interests. Paragraphs II(c)(3) and (c)(4) provide alternative methods 
for calculating the risk weights of certain recourse obligations, 
direct credit substitutes, and residual interests. Since these 
alternative methods involve reliance on NRSRO ratings, the proposed 
rule deletes these paragraphs. The proposed rule adds a new paragraph 
II(c)(3) which allows a corporate with advanced risk management and 
reporting systems to seek NCUA approval to use an internal ratings-
based approach to risk-weight those positions.\11\
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    \11\ Acceptable internal credit risk rating systems typically: 
(1) Are an integral part of the corporate's risk management system 
that explicitly incorporates the full range of risks arising from 
the corporate's participation in securitization activities; (2) link 
internal credit ratings to measurable outcomes; (3) separately 
consider the risk associated with the underlying loans or borrowers 
and the risk associated with the structure of the particular 
securitization transaction; (4) identify gradations of risk; (5) use 
clear, explicit criteria to classify assets into each internal 
rating grade; (6) employ independent credit risk management or loan 
review personnel to assign or review the credit risk ratings; (7) 
include an internal audit procedure to periodically verify that 
internal risk ratings are assigned in accordance with the 
corporate's established criteria; (8) monitor the performance of the 
assigned internal credit risk ratings over time to determine the 
appropriateness of the initial credit risk rating assignment, and 
adjust individual credit risk ratings or the overall internal credit 
risk rating system, as needed; and (9) make credit risk rating 
assumptions that are consistent with, or more conservative than, the 
credit risk rating assumptions and methodologies of NRSROs.
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c. Part 709--Involuntary Liquidation of Federal Credit Unions and 
Adjudication of Creditor Claims Involving Federally Insured Credit 
Unions in Liquidation

    Part 709 governs the involuntary liquidation of FCUs and the 
adjudication of creditor claims involving federally insured credit 
unions (FICUs). Section 709.10(b) provides that NCUA will not use its 
authority to repudiate contracts under 12 U.S.C. 1787(c) to reclaim, 
recover, or recharacterize financial assets transferred by a FICU in 
connection with a securitization or in the form of a participation. 
Section 709.10(f) provides that NCUA will not attempt to avoid an 
otherwise legally enforceable securitization or participation agreement 
solely because the agreement does not meet the contemporaneous 
requirement of sections 207(b)(9) and 208(a)(3) of the FCU Act.
    Section 709.10(a)(5) includes a definition of ``securitization'' 
that includes a reference to NRSRO ratings. The proposed rule deletes 
the definition of securitization in paragraph (a)(5) and the references 
to securitization in paragraphs (b), (f), and (g), as credit unions do 
not securitize assets within the meaning of Part 709. In addition, the 
proposal deletes the definition of ``special purpose entity'' in 
paragraph (a)(6), as this phrase is only used in the definition of 
``securitization.''

d. Part 742--Regulatory Flexibility Program

    Part 742 provides an exemption from certain regulatory restrictions 
for credit unions that have demonstrated sustained superior 
performance. Pursuant to Sec.  742.4(a)(9) a credit union is exempt 
from the prohibition in Sec.  703.13(d)(3) against the purchase of a 
commercial mortgage related security provided, among other things, that 
the security is rated in one of the two highest rating categories by at 
least one NRSRO. The proposed rule removes the NRSRO requirement, 
replacing it with the requirement that the issuer have very strong 
capacity to meet its financial obligations, even under adverse

[[Page 11169]]

economic conditions, for the projected life of the security.

IV. Request for Comment

    As discussed above, this proposal removes the references to NRSRO 
credit ratings from NCUA regulations. In some places, the proposal 
replaces these references with alternative standards of 
creditworthiness. In other places, the Board believes that no 
alternative is necessary.
    The Board realizes there are many possible alternative standards of 
creditworthiness, including some alternatives not used by the Board in 
this proposal. For example, some other banking regulators, and third-
party commenters on proposals published by those regulators, have 
suggested alternatives based on criteria such as macro-economic 
factors, minimum probabilities of defaults, permitting the purchase of 
only high quality and highly liquid investments, and other 
criteria.\12\
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    \12\ See Advanced Notice of Proposed Rulemaking on Alternatives 
to the Use of External Credit Ratings in the Regulations of the OCC, 
issued by the Office of the Comptroller of the Currency, 75 FR 49423 
(Aug. 13, 2010); Advanced Notice of Proposed Rulemaking on 
Alternatives to the Use of External Credit Ratings in the 
Regulations of the OTS, issued by the Office of Thrift Supervision, 
75 FR 63107 (Oct. 14, 2010);http://www.regulations.gov/#!searchResults;dct=PS;rpp=10;so=DESC;sb=postedDate;po=0;s=OCC-2010-
0017; http://www.regulations.gov/#!searchResults;dct=PS;rpp=10;so=DESC;sb=postedDate;po=0;s=OTS-2010-
0029
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    NCUA is open to the use of alternatives other than those contained 
in this proposal. Accordingly, commenters are encouraged to address the 
specific questions set forth below in addition to providing general 
comments.
    Are there some other alternative standards of creditworthiness that 
are better, or more appropriate, than those proposed by NCUA? If so, 
please specify:
    What the alternative standards are;
    The sections(s) of NCUA regulations in which the alternative(s) 
should be employed; and Why the alternative(s) are better than the 
standards used in this proposal.
    In proposing alternative standards of creditworthiness, please 
specifically address whether and how the standards:
    Provide for a reasonable and objective assessment of the likelihood 
of full repayment of principal and interest over the life of the 
security and in stressed market and economic scenarios;
    Foster prudent risk management;
    Are transparent, replicable, and well defined;
    Allow for supervisory review;
    Differentiate among investments in the same asset class with 
different credit risk;
    Provide for the timely and accurate measurement of negative and 
positive changes in investment quality over time, to the extent 
practicable;
    Strike the appropriate balance between the cost of the credit risk 
assessment, the risk of an incorrect assessment, and the burden of the 
assessment; and
    Provide for a lesser burden (if appropriate), on smaller credit 
unions.

V. Regulatory Procedures

a. 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 $10 million 
in assets). The proposed rule would remove NRSRO ratings from NCUA's 
regulations. Generally, credit unions with under $10 million in assets 
do not engage in investment activities that are affected by those 
portions of the NCUA rules that refer to NRSRO ratings. Accordingly, 
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.

b. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) applies to rulemakings in 
which an agency by rule creates a new paperwork burden on regulated 
entities or modifies an existing burden. 44 U.S.C. 3507(d); 5 CFR part 
1320. For purposes of the PRA, a paperwork burden may take the form of 
a reporting, recordkeeping, or disclosure requirement, each referred to 
as an information collection. The Office of Management and Budget (OMB) 
has approved the current information collection requirements in part 
703 and assigned them control number 3133-0133. OMB has approved the 
current information collection requirements in part 704 and assigned 
them control number 3133-0129.
    The proposed rule would potentially modify credit unions' existing 
practices to impose record-keeping burdens. The proposed amendments 
would replace NRSRO ratings-based criteria for evaluating 
creditworthiness with new subjective standards based on the credit 
union's own evaluation of creditworthiness. The credit union would have 
to be able to explain how the securities it purchased or counterparties 
with which it did business meet the standards set forth in the proposed 
amendments. As such, we believe that some credit unions may be required 
to develop additional criteria for assessing the creditworthiness of 
securities and counterparties and apply those criteria.
    We believe that all of the corporate credit unions already have 
policies and procedures in place for evaluating the credit risk of 
securities activities, but the proposed amendments may require 
additional analysis of credit risk and thus result in additional 
burdens on some natural person FCUs. We estimate that approximately 750 
natural person FCUs may need to develop or augment a system for 
evaluating creditworthiness. We estimate that, on average, the FCUs 
will spend 20 hours on such a system, resulting in an initial aggregate 
burden of 15,000 hours. This estimate is based on our belief that many 
of these FCUs already have some criteria in place for evaluating 
creditworthiness.
    We further estimate that, on average, each of those FCUs will spend 
an additional 10 hours each year reviewing, adjusting, and applying its 
system for evaluating creditworthiness, for a total of 7,500 hours 
across the industry. Once again, this estimate reflects our belief that 
many of these FCUs already are applying a system of evaluating 
creditworthiness.
    As required by the PRA, NCUA is submitting a copy of this proposal 
to OMB for its review and approval. Persons interested in submitting 
comments with respect to the information collection aspects of the 
proposed rule should submit them to OMB at the address noted below.
    The NCUA considers comments by the public on this proposed 
collection of information in:
    Evaluating whether the proposed collection of information is 
necessary for the proper performance of the functions of the NCUA, 
including whether the information will have a practical use;
    Evaluating the accuracy of the NCUA's estimate of the burden of the 
proposed collection of information, including the validity of the 
methodology and assumptions used;
    Enhancing the quality, usefulness, and clarity of the information 
to be collected; and
    Minimizing the burden of collection of information on those who are 
to respond, including through the use of appropriate automated, 
electronic, mechanical, or other technological collection techniques or 
other forms of

[[Page 11170]]

information technology; e.g., permitting electronic submission of 
responses.
    The Paperwork Reduction Act requires OMB to make a decision 
concerning the collection of information contained in the proposed 
regulation between 30 and 60 days after publication of this document in 
the Federal Register. Therefore, a comment to OMB is best assured of 
having its full effect if OMB receives it within 30 days of 
publication. This does not affect the deadline for the public to 
comment to the NCUA on the proposed regulation.
    Comments on the proposed information collection requirements should 
be sent to: Office of Information and Regulatory Affairs, OMB, New 
Executive Office Building, Washington, DC 20503; Attention: NCUA Desk 
Officer, with a copy to Mary Rupp, Secretary of the Board, National 
Credit Union Administration, 1775 Duke Street, Alexandria, Virginia 
22314-3428.

c. 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 proposal 
does not constitute a policy that has federalism implications for 
purposes of the executive order.

d. 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 Sec.  654 of the Treasury and 
General Government Appropriations Act, 1999, Public Law 105-277, 112 
Stat. 2681 (1998).

List of Subjects

12 CFR Part 703

    Credit unions, Investments, Reporting and recordkeeping 
requirements.

12 CFR Part 704

    Credit unions, Investments, Reporting and recordkeeping 
requirements.

12 CFR Part 709

    Bank deposit insurance, Credit unions.

12 CFR Part 742

    Credit unions, Investments, Reporting and recordkeeping 
requirements.

    By the National Credit Union Administration Board on February 
17, 2011.
Mary F. Rupp,
Secretary of the Board.
    For the reasons stated in the preamble, the National Credit Union 
Administration proposes to amend 12 CFR parts 703, 704, 709, and 742 as 
set forth below:

PART 703--INVESTMENTS AND DEPOSIT ACTIVITIES

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

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

    2. In Sec.  703.2 remove the definition of Deposit note, and revise 
the definitions of Mortgage related security and Small business related 
security to read as follows:


Sec.  703.2  Definitions.

* * * * *
    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)).
* * * * *
    Small business related security means a security as defined in 
Section 3(a)(53) of the Securities Exchange Act of 1934 (15 U.S.C. 
78c(a)(53)). This definition does not include Small Business 
Administration securities permissible under Sec.  107(7) of the Act.
* * * * *
    3. In Sec.  703.8, revise paragraph (b)(3) to read as follows:


Sec.  703.8  Broker-dealers.

* * * * *
    (b) * * *
    (3) If the broker-dealer is acting as the Federal credit union's 
counterparty, the ability of the broker-dealer and its subsidiaries or 
affiliates to fulfill commitments, as evidenced by capital strength, 
liquidity, and operating results. The Federal credit union should 
consider current financial data, annual reports, external assessments 
of creditworthiness, relevant disclosure documents, and other sources 
of financial information.
* * * * *
    4. In Sec.  703.9, revise paragraph (d) to read as follows:


Sec.  703.9  Safekeeping of investments.

* * * * *
    (d) Annually, the Federal credit union must analyze the ability of 
the safekeeper to fulfill its custodial responsibilities, as evidenced 
by capital strength, liquidity, and operating results. The Federal 
credit union should consider current financial data, annual reports, 
external assessments of creditworthiness, relevant disclosure 
documents, and other sources of financial information.
    5. In Sec.  703.14, revise paragraphs (e), (g)(9), (g)(11), (h)(1) 
and (h)(2) to read as follows:


Sec.  703.14  Permissible investments.

* * * * *
    (e) Municipal security. A Federal credit union may purchase and 
hold a municipal security, as defined in Section 107(7)(K) of the Act, 
only if the issuer has at least adequate capacity to meet its financial 
obligations, even under adverse economic conditions, for the projected 
life of the security. The credit union must prepare and document an 
internal analysis that evaluates the capacity of the issuer to meet its 
financial obligations, assuming adverse conditions, for the projected 
life of the security. The credit union must also limit its aggregate 
municipal securities holdings to no more than 75 percent of the credit 
union's net worth and limit its holdings of municipal securities issued 
by any single issuer to no more than 25 percent of the credit union's 
net worth.
* * * * *
    (g) * * *
    (9) The counterparty to the transaction meets the minimum credit 
quality standards as established by the Federal credit union's board of 
directors.
* * * * *
    (11) The aggregate amount of equity-linked member share 
certificates does not exceed 50 percent of the credit union's net 
worth;
* * * * *
    (h) * * *
    (1) The aggregate of the investments with any one counterparty is 
limited to 25 percent of the credit union's net worth and 50 percent of 
its net worth with all counterparties;
    (2) At the time the Federal credit union purchases the securities, 
the counterparty, or a party fully guaranteeing the counterparty, must 
meet the minimum credit quality standards as established by the Federal 
credit union's board of directors.
* * * * *

[[Page 11171]]

PART 704--CORPORATE CREDIT UNIONS

    6. The authority citation for part 704 continues to read as 
follows:

    Authority:  12 U.S.C. 1762, 1766(a), 1772a, 1781, 1789, and 
1795e.

    7. In Sec.  704.2:
    a. Remove the definition of Nationally Recognized Statistical 
Rating Organization;
    b. Revise the definition of Asset-backed commercial paper program 
as revised on October 20, 2010, at 75 FR 64829, effective October 20, 
2011; and
    c. Revise the definitions for Eligible ABCP liquidity facility, and 
Small business related security as added and revised, respectively, on 
October 20, 2010, at 75 FR 64829, effective October 20, 2011.
    The additions and revisions read as follows:


Sec.  704.2  Definitions.

* * * * *
    Asset-backed commercial paper program (ABCP program) means a 
program that primarily issues commercial paper and that is backed by 
assets or other exposures held in a bankruptcy-remote special purpose 
entity. The term sponsor of an ABCP program means a corporate credit 
union that:
    (1) Establishes an ABCP program;
    (2) Approves the sellers permitted to participate in an ABCP 
program;
    (3) Approves the asset pools to be purchased by an ABCP program; or
    (4) Administers the ABCP program by monitoring the assets, 
arranging for debt placement, compiling monthly reports, or ensuring 
compliance with the program documents and with the program's credit and 
investment policy.
* * * * *
    Eligible ABCP liquidity facility means a legally binding commitment 
to provide liquidity support to asset-backed commercial paper by 
lending to, or purchasing assets from any structure, program or conduit 
in the event that funds are required to repay maturing asset-backed 
commercial paper and that meets the following criteria:
    (1)(i) At the time of the draw, the liquidity facility must be 
subject to an asset quality test that precludes funding against assets 
that are 90 days or more past due or in default; and
    (ii) The facility can be used to fund only those assets or 
exposures that demonstrate adequate capacity to meet their financial 
obligations, even under adverse economic conditions, for the projected 
life of the asset or exposure; or
    (2) If the assets that are funded under the liquidity facility do 
not meet the criteria described in paragraph (1) of this definition, 
the assets must be guaranteed, conditionally or unconditionally, by the 
United States Government, its agencies, or the central government of an 
Organization for Economic Cooperation and Development (OECD) country.
* * * * *
    Small business related security means a security that represents an 
interest in one or more promissory notes or leases of personal property 
evidencing the obligation of a small business concern and originated by 
an insured depository institution, insured credit union, insurance 
company, or similar institution which is supervised and examined by a 
Federal or State authority, or a finance company or leasing company. 
This definition does not include Small Business Administration 
securities permissible under Sec.  107(7) of the Act.
* * * * *
    8. In Sec.  704.6, revise paragraphs (f) and (g)(2)(iii), to read 
as follows:


Sec.  704.6  Credit risk management.

* * * * *
    (f) Credit ratings--(1) At the time of purchase, each investment 
must be originated by an issuer that has at least a very strong 
capacity to meet its financial obligations, even under adverse economic 
conditions, for the projected life of the security.
    (2) A corporate credit union must obtain and retain appropriate 
documentation supporting the purchase of an investment. This 
documentation must include the criteria, information, and analysis 
relied upon to determine the credit quality of the investment, 
including the capacity of the issuer to meet its obligations under 
adverse economic conditions. A corporate credit union must identify and 
monitor any changes in credit quality of the investment and retain 
appropriate supporting documentation as long as the corporate owns the 
investment.
    (3) An investment is subject to the requirements of Sec.  704.10 
if:
    (i) There is reason to believe that the obligor no longer has a 
very strong capacity to meet its financial obligations for the 
remaining projected life of the security; or
    (ii) The investment is part of an asset class or group of 
investments that exceeds the sector or obligor concentration limits of 
this section.
    (g) * * *
    (2) * * *
    (iii) The latest available financial reports, industry analyses, 
and internal and external analyst evaluations sufficient to support 
each approved credit limit.
    9. In Appendix B:
    a. Remove Part I(a)(2);
    b. Redesignate Part I(a)(3), (4), and (5) as Part I(a)(2), (3), and 
(4), respectively;
    c. Remove Part II(b)(2);
    d. Redesignate Part II(b)(3), (4), and (5) as Part II(b)(2), (3), 
and (4), respectively; and
    e. Revise Part I(a)(1), Part II(b)(1), and Part III(b) as follows:

Appendix B to Part 704--Expanded Authorities and Requirements

* * * * *

Part I

* * * * *
    (a) * * *
    (1) Purchase investments originated by an issuer that has at 
least a strong capacity to meet its financial obligations, even 
under adverse economic conditions, for the projected life of the 
security;
* * * * *

Part II

* * * * *
    (b) * * *
    (1) Investments must be made pursuant to an explicit policy 
established by the corporate credit union's board of directors. Any 
foreign issue or issuer must have at least a very strong capacity to 
meet its financial obligations, even under adverse economic 
conditions, for the projected life of the security.
* * * * *

Part III

* * * * *
    (b) Credit Quality:
    (1) All derivative transactions are subject to the following 
requirements:
    (i) If the intended counterparty is domestic, the counterparty 
must meet minimum credit quality standards as established by the 
corporate's board of directors;
    (ii) If the intended counterparty is foreign, the corporate must 
have Part II expanded authority and the counterparty must meet 
minimum credit quality standards as established by the corporate's 
board of directors;
    (iii) The corporate must identify the criteria relied upon to 
determine that the counterparty meets the credit quality 
requirements of this part at the time the transaction is entered 
into and monitor those criteria for as long as the contract remains 
open; and
    (iv) The corporate must comply with Sec.  704.10 of this part if 
the credit quality of the counterparty deteriorates below the 
minimum credit quality standards established by the corporate's 
board of directors.
* * * * *
    10. In Appendix C:
    a. Remove the definition of Traded position from paragraph I(b);

[[Page 11172]]

    b. Revise paragraphs II(a)(2)(viii)(A), II(a)(2)(viii)(B) 
introductory text, II(b)(1)(iv), II(b)(2)(ii), and II(b)(4);
    b. Remove paragraph II(c)(3) and remove and reserve paragraph 
II(c)(4); and
    c. Add new paragraph II(c)(3).
    The revisions and addition read as follows:

Appendix C to Part 704--Risk-Based Capital Credit Risk-Weight 
Categories

* * * * *
    Part II: Risk-Weightings
    (a) * * *
    (2) * * *
    (viii) * * *
    (A) A qualifying securities firm must meet the minimum credit 
quality standards as established by the corporate credit union's 
board of directors or demonstrate at least a strong capacity to meet 
its financial obligations, even under adverse economic conditions, 
for the projected life of the exposure, whichever requirement is 
more stringent. Alternatively, a qualifying securities firm may rely 
on the creditworthiness of its parent consolidated company, if the 
parent consolidated company guarantees the claim.
    (B) A collateralized claim on a qualifying securities firm does 
not have to comply with the requirements of paragraph (a) if the 
claim arises under a contract that:
* * * * *
    (b) * * *
    (1) * * *
    (iv) Unused portions of ABCP liquidity facilities that do not 
meet the definition of an eligible ABCP liquidity facility. The 
resulting credit equivalent amount is assigned to the risk category 
appropriate to the assets to be funded by the liquidity facility 
based on the assets or the obligor, after considering any collateral 
or guarantees.
* * * * *
    (2) * * *
    (ii) Unused portions of commitments (including home equity lines 
of credit and eligible ABCP liquidity facilities) with an original 
maturity exceeding one year except those listed in paragraph 
II(b)(5) of this Appendix. For eligible ABCP liquidity facilities, 
the resulting credit equivalent amount is assigned to the risk 
category appropriate to the assets to be funded by the liquidity 
facility based on the assets or the obligor, after considering any 
collateral or guarantees.
* * * * *
    (4) 10 percent credit conversion factor (Group D). Unused 
portions of eligible ABCP liquidity facilities with an original 
maturity of one year or less. The resulting credit equivalent amount 
is assigned to the risk category appropriate to the assets to be 
funded by the liquidity facility based on the assets or the obligor, 
after considering any collateral or guarantees.
* * * * *
    (c) * * *
    (3) Internal ratings-based approach--
    (i) Calculation. Corporate credit unions with advanced risk 
management and reporting systems may seek NCUA approval to use 
credit risk models to calculate risk-weighted asset amounts for 
positions described in paragraphs II(c)(1) and (2) of this section. 
In determining whether to grant approval, NCUA will consider the 
financial condition and risk management sophistication of the 
corporate credit union and the adequacy of the corporate's risk 
models and supporting management information systems.
    (ii) Consistent use of internal ratings-based approach. A 
corporate credit union that has been granted NCUA approval to use an 
internal ratings-based approach and that has determined to use such 
an approach must do so in a consistent manner for all securities so 
rated.

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

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

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

    12. In Sec.  709.10, remove paragraphs (a)(5) and (a)(6), and 
revise the section heading and paragraphs (b), (f), and (g) to read as 
follows:


Sec.  709.10  Treatment by conservator or liquidating agent of 
financial assets transferred in connection with a participation.

* * * * *
    (b) The Board, by exercise of its authority to disaffirm or 
repudiate contracts under 12 U.S.C. 1787(c), will not reclaim, recover, 
or recharacterize as property of the credit union or the liquidation 
estate any financial assets transferred to another party by a 
federally-insured credit union in connection with a participation, 
provided that the transfer meets all the conditions for sale accounting 
treatment under generally accepted accounting principles, other than 
the ``legal isolation'' condition addressed by this section.
* * * * *
    (f) The Board will not seek to avoid an otherwise legally 
enforceable participation agreement executed by a federally-insured 
credit union solely because such agreement does not meet the 
``contemporaneous'' requirement of sections 207(b)(9) and 208(a)(3) of 
the Federal Credit Union Act.
    (g) This section may be repealed by the NCUA upon 30 days notice 
and opportunity for comment provided in the Federal Register, but any 
such repeal or amendment will not apply to any transfers of financial 
assets made in connection with a participation that was in effect 
before such repeal or modification. For purposes of this paragraph, a 
participation would be in effect on the date that the parties executed 
the participation agreement.

PART 742--REGULATORY FLEXIBILITY PROGRAM

    13. The authority citation for part 742 continues to read as 
follows:

    Authority: 12 U.S.C. 1756, 1766.

    14. In Sec.  742.4, revise paragraph (a)(6)(i) to read as follows:


Sec.  742.4  RegFlex relief.

    (a) * * *
    (6) * * *
    (i) The issuer has at least a very strong capacity to meet its 
financial obligations, even under adverse economic conditions, for the 
projected life of the security;
* * * * *
[FR Doc. 2011-4070 Filed 2-28-11; 8:45 am]
BILLING CODE 7535-01-P