[Federal Register Volume 78, Number 39 (Wednesday, February 27, 2013)]
[Rules and Regulations]
[Pages 13212-13213]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-04619]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 703

RIN 3133-AE06


Investment and Deposit Activities

AGENCY: National Credit Union Administration (NCUA).

ACTION: Final rule.

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SUMMARY: The NCUA Board (Board) is amending its investment regulation 
to allow federal credit unions (FCUs) to purchase Treasury Inflation 
Protected Securities (TIPS). This final rule adds TIPS to the list of 
permissible investments for FCUs in part 703. TIPS will provide FCUs 
with an additional investment portfolio risk management tool that can 
be useful in an inflationary economic environment.

DATES: The final rule is effective on March 29, 2013.

FOR FURTHER INFORMATION CONTACT: John H. Brolin, Staff Attorney, or 
Frank Kressman, Associate General Counsel, Office of General Counsel, 
at 1775 Duke Street, Alexandria, VA 22314 or telephone: (703) 518-6438; 
or J. Owen Cole, Jr., Director, Division of Capital Markets, Office of 
Examination and Insurance, at the above address or telephone: (703) 
518-6360.

SUPPLEMENTARY INFORMATION:

I. Background
II. September 2012 Proposal
III. Final Rule
IV. Regulatory Procedures

I. Background

    TIPS are securities issued by the U.S. Department of the Treasury, 
Bureau of Public Debt, and are readily available to investors. TIPS 
differ from other securities by providing protection against inflation. 
The principal amount of TIPS increases with inflation and decreases 
with deflation, as measured by the Bureau of Labor Statistic's Consumer 
Price Index (CPI). When TIPS mature, holders are paid the adjusted 
principal or original principal, whichever is greater. TIPS pay 
interest twice a year at a fixed rate. The rate is applied to the 
adjusted principal, so, like the principal, interest payments rise with 
inflation and fall with deflation. In a deflationary period, it is 
possible to experience a contractual decline in the principal balance, 
which is not an event of default.\1\
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    \1\ To learn more about TIPS, see the U.S. Department of the 
Treasury, Bureau of Public Debt Web site at: http://www.treasurydirect.gov/indiv/research/indepth/tips/res_tips.htm.
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    TIPS are currently a prohibited investment under part 703 because 
they reprice their value in response to changes in the CPI, and the CPI 
is a prohibited index for variable rate instruments. Under Sec.  
703.14(a), an FCU is permitted to invest in a variable rate instrument 
as long as the rate is tied to a domestic interest rate.\2\ The purpose 
of this provision is to reduce the basis risk between the interest 
earned on assets and the dividends paid on shares.\3\ Generally, 
deposit/share rates for financial institutions, including credit 
unions, are responsive to market interest rates. As market rates 
change, so do the deposit/share rates. Thus, if an FCU invests in a 
variable rate instrument with an index tied to market rates, the spread 
between the asset's income stream and the share dividends paid should 
remain relatively constant. This protects the FCU's earnings in times 
of rate volatility, especially in periods of rising rates. However, 
there is not always a perfect correlation between market interest rates 
and deposit/share rates. This can result in greater volatility for an 
FCU if it does not take action to manage this basis risk.
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    \2\ 12 CFR 703.14(a) states that an FCU may invest in a variable 
rate investment, as long as the index is tied to domestic interest 
rates and not, for example, to foreign currencies, foreign interest 
rates, or domestic or foreign commodity prices, equity prices, or 
inflation rates. For purposes of part 703, the U.S. dollar-
denominated London Interbank Offered Rate (LIBOR) is a domestic 
interest rate.
    \3\ Basis risk is a common form of risk incurred by financial 
institutions, including credit unions. Basis risk is the variability 
between two or more indices (e.g., equity barometers such as the S&P 
500 and interest rate indices such as the 1 year Treasury rate) that 
serve as benchmarks for valuing financial institution assets and 
liabilities.
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II. September 2012 Proposal

A. Summary of the September 2012 Proposal

    The Board issued a proposed rule in September 2012 to amend Sec.  
703.14(a) to add TIPS to the list of permissible investments for FCUs 
in part 703.\4\ The Board issued the proposal after research and 
analysis demonstrated that TIPS would be a valuable risk management 
tool for FCUs. In addition to analyzing the nature and performance of 
TIPS in the marketplace, NCUA also monitored FCU usage of TIPS through 
a long-term investment pilot program. The results of the pilot program 
are consistent with the Board's research demonstrating that TIPS are an 
appropriate investment for FCUs and can be a valuable portfolio 
management tool when there are inflationary risks in the economy.
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    \4\ 77 FR 59144 (Sept. 26, 2012).
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B. Summary of Comments on the September 2012 Proposal

    The NCUA received eight comment letters on the September 2012 
proposal: two from FCU trade associations and six from state credit 
union leagues. The Board has considered these comments in adopting this 
final rule.
    All of the commenters agreed that the authority to invest in TIPS 
will help FCUs manage inflation risk. Several commenters noted that 
TIPS are guaranteed by the U.S. Government, and the benefits to TIPS 
investors are widely recognized. One state credit union league noted 
that certain state-chartered institutions already have the authority to 
invest in TIPS, which they argued demonstrates that such securities can 
be utilized safely. Moreover, several commenters noted that FCUs now 
have greater access to advanced asset-liability management tools that 
can help identify and measure basis risk.
    In addition to supporting the proposal, several commenters also 
made other recommendations that were outside the scope of the proposal. 
In general, the commenters asked the Board to take additional steps in 
the future to provide increased flexibility and additional investment 
powers to FCUs. Several commenters also urged NCUA to work closely with 
state regulators to facilitate the ability of well-managed state credit 
unions to invest in TIPS, where permissible under state law.

III. Final Rule

A. Why is the board adopting this rule?

    As discussed, the Board is adopting this final rule to provide FCUs 
with an additional investment portfolio risk management tool that can 
be useful in an inflationary economic environment.
    Historically, the Board has prohibited FCUs from investing in 
variable rate instruments tied to non-domestic rate indices, such as 
TIPS, because of the basis risk for FCUs. The Board remains concerned 
about basis risk. However, the Board generally agrees with commenters 
who noted that FCUs now have greater access to advanced asset-liability 
management tools that can identify and measure basis risk, and are, 
therefore, better equipped to manage the risks associated with 
investing in TIPS. Moreover, the Board agrees with commenters that 
allowing FCUs to hold TIPs in their investment portfolios adds no 
credit risk and allows them the option of minimizing the need for

[[Page 13213]]

accurate inflation forecasting as a way to maintain the real value of 
their investment portfolios. Accordingly, the Board is adopting the 
September 2012 proposal without substantive change. However, the Board 
has amended the language of the section slightly to better incorporate 
the amendment into the existing language of the rule.

B. Does this rule impose any new regulatory burdens on FCUs?

    While the Board believes the authority to invest in TIPS can be a 
valuable part of an effective risk management program for those FCUs 
that understand the risks, TIPS may not be appropriate for all FCUs. As 
with any investment, the decision to purchase TIPS should be based on 
sound due diligence and a demonstrated effectiveness in managing risk. 
However, other than the due diligence and risk management requirements 
already required by NCUA for investments under Sec.  703.14(a), this 
final rule does not impose any new TIPS-specific due diligence or risk 
management requirements on FCUs.
    This final rule authorizes FCUs to purchase TIPS only. Other 
similar securities based on inflation indices currently available or 
available in the future that are not issued by the United States 
Treasury Department are not authorized by this rule. While several 
commenters requested the Board provide increased flexibility and 
additional investment powers to qualified FCUs, such requests are 
outside the scope of this rulemaking and will be considered separately 
by the Board.

C. What happens to the TIPS pilot program?

    The TIPS pilot program will be terminated as of the effective date 
of this final rule.

IV. Regulatory Procedures

Regulatory Flexibility Act

    The Regulatory Flexibility Act requires NCUA to prepare an analysis 
to describe any significant economic impact a rule may have on a 
substantial number of small entities (primarily those under $50 million 
in assets). This final rule extends regulatory relief while maintaining 
existing safety and soundness standards. NCUA has determined this final 
rule will not have a significant economic impact on a substantial 
number of small credit unions.

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.\5\ For purposes of the PRA, a 
paperwork burden may take the form of either a reporting or a 
recordkeeping requirement, both referred to as information collections. 
As noted above, this final rule extends regulatory relief while 
maintaining existing safety and soundness standards. NCUA has 
determined that the requirements of this rule do not increase the 
paperwork requirements under the Paperwork Reduction Act of 1995 and 
regulations of the Office of Management and Budget.
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    \5\ 44 U.S.C. 3507(d); 5 CFR part 1320.
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Executive Order 13132

    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their actions on state and local interests. 
NCUA, an independent regulatory agency as defined in 44 U.S.C. 3502(5), 
voluntarily complies with the executive order to adhere to fundamental 
federalism principles. This final rule will not have a substantial 
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. The rule only 
adds to the list of permissible investments for FCUs. NCUA has 
determined that this final rule does not constitute a policy that has 
federalism implications for purposes of the executive order.

Assessment of Federal Regulations and Policies on Families

    NCUA has determined that this final rule will not affect family 
well-being within the meaning of Section 654 of the Treasury and 
General Government Appropriations Act, 1999.\6\
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    \6\ Public Law 105-277, 112 Stat. 2681 (1998).
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Small Business Regulatory Enforcement Fairness Act

    The Small Business Regulatory Enforcement Fairness Act of 1996 \7\ 
(SBREFA) provides generally for congressional review of agency rules. A 
reporting requirement is triggered in instances where NCUA issues a 
final rule as defined by Section 551 of the Administrative Procedure 
Act.\8\ The Office of Management and Budget has determined that the 
final rule is not a ``major rule'' for purposes of SBREFA.
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    \7\ Public Law 104-121, 110 Stat. 857 (1996).
    \8\ 5 U.S.C. 551.
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List of Subjects in 12 CFR Part 703

    Credit unions, Investments.

    By the National Credit Union Administration Board on February 
21, 2013.
Mary Rupp,
Secretary of the Board.

    For the reasons discussed above, the Board amends 12 CFR part 703 
as follows:

PART 703--INVESTMENT AND DEPOSIT ACTIVITES

0
1. The authority citation for part 703 continues to read as follows:

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


0
2. Revise Sec.  703.14(a) to read as follows:


Sec.  703.14  Permissible investments.

    (a) Variable rate investment. A federal credit union may invest in 
a variable rate investment, as long as the index is tied to domestic 
interest rates. Except in the case of Treasury Inflation Protected 
Securities, the variable rate investment cannot, for example, be tied 
to foreign currencies, foreign interest rates, domestic or foreign 
commodity prices, equity prices, or inflation rates. For purposes of 
this part, the U.S. dollar-denominated London Interbank Offered Rate 
(LIBOR) is a domestic interest rate.
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[FR Doc. 2013-04619 Filed 2-26-13; 8:45 am]
BILLING CODE 7535-01-P