Derivatives
| Published date | 26 May 2021 |
| Citation | 86 FR 28241 |
| Record Number | 2021-11055 |
| Section | Rules and Regulations |
| Court | National Credit Union Administration |
Federal Register, Volume 86 Issue 100 (Wednesday, May 26, 2021)
[Federal Register Volume 86, Number 100 (Wednesday, May 26, 2021)]
[Rules and Regulations]
[Pages 28241-28250]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-11055]
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NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Parts 701, 703, 741 and 746
RIN 3133-AF29
Derivatives
AGENCY: National Credit Union Administration (NCUA).
ACTION: Final rule.
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SUMMARY: The NCUA Board (Board) is amending the NCUA's Derivatives
rule. The Board issued a proposed Derivatives rule at its October 2020
meeting. This final rule will modernize the NCUA's Derivatives rule and
make it more principles-based, while retaining key safety and soundness
components. The changes contained herein will provide more flexibility
for federal credit unions (FCUs) to manage Interest Rate Risk (IRR)
through the use of Derivatives. The Board is finalizing the rule
largely as proposed, except for a few changes to various sections based
on comments received. Such changes include permitting written options
that comply with this final rule and amending the collateral
requirements for cleared Derivatives. In addition, the Board is not
finalizing a proposed change that would have required all
Counterparties to be domiciled in the United States.
DATES: This rule is effective June 25, 2021.
FOR FURTHER INFORMATION CONTACT: Policy: Tom Fay, Director of Capital
Markets, Office of Examination and Insurance or Rick Mayfield, Senior
Capital Markets Specialist, Office of Examination and Insurance. Legal:
Justin M. Anderson, Senior Staff Attorney, Office of General Counsel,
1775 Duke Street, Alexandria, VA 22314-3428. Tom Fay can be reached at
(703) 518-1179, Rick Mayfield can be reached at (703) 518-6501, and
Justin Anderson can be reached at (703) 518-6540.
SUPPLEMENTARY INFORMATION:
I. Proposed Rule
At its October 2020 meeting, the Board issued a proposed rule
intended to modernize the NCUA's Derivatives rule at subpart B to 12
CFR part 703 by moving to a principles-based approach.\1\ The proposed
rule included, among other things, amendments to:
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\1\ 85 FR 68487, 68495 (Oct. 29, 2020).
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Streamline the application process and exempt certain FCUs
from the requirement to submit an application;
remove regulatory limits on the amount of Derivatives an
FCU can enter into;
remove permissible Derivatives types in favor of a
characteristic-based approach; and
reorganize rules related to loan pipeline management.
As discussed later in this preamble, the Board is finalizing the
rule largely as proposed. However, in response to comments received,
the Board is making a few regulatory changes and clarifying several
items.
II. Final Rule and Public Comments on the Proposed Rule
The Board received 17 comments from a variety of sources,
including: Natural person credit unions, a financial advisor, credit
union trade associations and leagues, brokers and introducing agents,
and one anonymous source. All of the comments received by the Board
supported the proposal and the NCUA's proposed principles-based
approach to Derivatives. Most commenters, however, did request at least
one change or clarification. The following is a summary of the
requested changes and clarifications, organized by topic, and responses
to the same.
A. Requirement To Submit an Application
Eight commenters addressed various aspects of the proposed
application and notification structure. For ease of reference, each
topic is discussed separately.
1. Asset Threshold
Three commenters disagreed with the proposed $500 million asset
size threshold required to qualify for an exemption from the
requirement to submit an application for Derivatives authority. These
commenters argued that an asset threshold is an arbitrary number that
does not accurately reflect an FCU's ability to safely engage in
Derivatives. One commenter stated that it is possible that FCUs below
the NCUA's proposed threshold may have the requisite infrastructure to
safely engage in Derivatives. Two of the
[[Page 28242]]
commenters sought an outright removal of the proposed asset threshold;
the third commenter sought removal or a reduction of the amount of the
threshold.
The Board is not making any changes to the requirements related to
the asset threshold that determines which FCUs must submit an
application for Derivatives authority. As stated in the proposal, the
asset threshold aligns with the definition of ``complex credit union''
in the NCUA's risk-based capital (RBC) rule.\2\ The Board chose an
asset threshold of $500 million for the RBC rule after careful
consideration of the activities and volume of activities of credit
unions at certain asset thresholds. As such, the Board believes the RBC
asset threshold is a valuable demarcation line above which it is
reasonable to expect FCUs will have the required infrastructure to
safely engage in Derivatives. This is further supported by the Board's
experience in reviewing FCU applications since the inception of the
current Derivatives rule. A review of Derivatives applications under
the current rule confirms that FCUs greater than $500 million in assets
generally possess the management expertise and required infrastructure
to support a Derivatives program.
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\2\ 83 FR 55467 (Nov. 6, 2018).
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The Board notes that it did receive a small number of applications,
under the current rule, from FCUs with assets under $500 million. While
these FCUs met the requirements of the current rule, the Board believes
this small group of FCUs may not be representative of the capabilities
of all FCU's under $500 million in assets. As such, the Board does not
believe this small number of FCUs supports lowering the $500 million
threshold. In addition, the Board notes that this final rule does not
bar FCUs under the asset threshold from receiving Derivatives
authority. As discussed in the next paragraph, such an FCU may receive
Derivatives authority after completing an application that demonstrates
it can safely manage a Derivatives program.
As commenters stated, it is possible that an FCU under $500 million
may have the requisite infrastructure to safely engage in Derivatives.
While the Board agrees with the commenters that an FCU with total
assets under $500 million may have the requisite infrastructure to
support Derivatives, those FCUs may not be representative of all FCUs
with total assets under $500 million. However, this final rule provides
all FCUs with total assets under $500 million the ability to use
Derivatives by retaining the provisions of the proposed rule, which
require that these FCUs apply for Derivatives authority consistent with
Sec. 703.108(b) and demonstrate the requisite infrastructure to safely
engage in Derivatives.
2. Change in Condition
One commenter raised a concern and a question with the proposed
requirement that an FCU have a Management CAMEL component rating of 1
or 2 to forego submitting an application for Derivatives authority.
This commenter's concern and question focused on a scenario where an
FCU receives approval for Derivatives authority, but its management
component later falls below the required management rating.
Specifically, the commenter stated that it:
. . . disagrees with the proposal to require that a credit union,
previously meeting the requirements to engage in derivatives, cease
entering into new derivatives in the event the Management CAMEL
component rating is downgraded below 2. The Management CAMEL
component rating can be downgraded for reasons not related to the
credit union's management of its derivative program. Prohibiting the
use of an effective tool to manage interest rate risk would have a
destabilizing impact to the credit union especially when the
derivative activity is subject to the existing derivative
restrictions ensuring safety and soundness.
Separately, but related, this commenter also questioned how the
aforementioned scenario would be applied in the case of an FCU that
received approval under the current Derivatives rule and is
grandfathered under this final rule (Grandfathered FCU). Specifically,
this commenter asked:
Is the NCUA's intent that said credit unions, if downgraded to a
Management CAMEL component rating below 2, are also required to
cease further derivative transactions until receiving approval to a
newly submitted application? Said credit unions have already taken
the step of demonstrating the quality of their derivative programs,
and those programs are reviewed on a regular basis by the NCUA.
The Board appreciates these comments and in the following part of
this document will clarify several different scenarios related to an
FCU failing to comply with the requirements to forgo an initial
application. In addition to the ensuing clarifying discussion, the
Board, as discussed later in this section, is also making changes to
Sec. 703.108(d) of this final rule to ensure the regulatory text is
clear and transparent.
As discussed in the preamble to the proposed rule \3\ and the
accompanying rule text, Sec. 703.108(a) states that an FCU is not
required to apply for Derivatives authority if it has assets of at
least $500 million and its most recent Management CAMEL component
rating is a 1 or 2. The Board believes clarification is warranted on
how these requirements relate to Sec. 703.108(d). Specifically, Sec.
703.108(d) requires an FCU to immediately cease entering into any new
Derivatives and notify the applicable Regional Director if the FCU
experiences a negative change in condition such that it no longer meets
the requirements discussed above or, if applicable, renders its
approved application inaccurate.
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\3\ 85 FR 68487, 68495 (Oct. 29, 2020).
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The Board notes that in any instance in which an FCU, not subject
to an active application under Sec. 703.108(b), no longer meets the
requirements in Sec. 703.108(a), such FCU would need to immediately
cease entering into new Derivatives transactions and notify the
applicable Regional Director. An FCU required to cease entering into
Derivatives may not continue entering into Derivatives transactions
until it receives written notification from the applicable Regional
Director that it is permitted to do so. For clarification, the
cessation and notification discussed in the prior sentences would apply
in any of the following circumstances:
1. A Grandfathered FCU's Management CAMEL component rating drops
to a 3, 4, or 5, or is a 3, 4, or 5 as of the effective date of this
final rule; and/or the FCU's assets drop below $500 million or are
below $500 million as of the effective date of this final rule;
2. An FCU that was not required to submit an application for
Derivatives authority under this final rule, and no longer meets
either or both of the requirements in Sec. 703.108(a); and
3. An FCU that was required to submit an application under Sec.
701.108(b), but later meets the requirements in Sec. 703.108(a) and
then subsequently fails to meet the requirements in Sec.
703.108(a).
Under the first scenario above, a Grandfathered FCU would, under
the current Derivatives rule, already be prohibited from entering into
new Derivatives transactions if its Management CAMEL component rating
is a 3, 4, or 5. Under this final rule, such FCU would be remain
prohibited from entering into new Derivatives transactions. Unlike the
current rule, however, such FCU would not be automatically barred from
continuing to use Derivatives until its management rating met the
regulatory standard. Rather, this final rule provides the
[[Page 28243]]
Regional Director with discretion to evaluate the reasons for the lower
management rating and determine if the FCU can safely continue to use
Derivatives. The Board notes that this flexibility will aid FCUs that
have a Management CAMEL component rating of 3, 4, or 5 for reasons
unrelated to the FCU's ability to safely use Derivatives.
Scenario one, described above, would also apply to any
Grandfathered FCU that, as of the effective date of this final rule,
has assets below the $500 million threshold required in Sec.
703.108(a) of this final rule.
Under scenario two above, any FCU that obtains Derivatives
authority without applying, because the FCU met the requirement in
Sec. 703.108(a), would be required to cease entering into new
Derivatives transactions and notify the applicable Regional Director if
such FCU ever failed to continue meeting the aforementioned
requirements. The required cease and notify procedures would apply to
any instance in which the FCU fails to meet the requirements of Sec.
703.108(a), including a situation where the FCU fails to meet one or
both requirements, subsequently meets those requirements, and later
falls out of compliance again. The Board notes that the cease and
notify procedures in Sec. 703.108(d) are not an absolute bar to
continuation of Derivatives transactions. Rather, the procedures
provide an opportunity for the Regional Director to evaluate the
condition of the FCU and determine if it is safe and sound for the FCU
to continue using Derivatives. To that end, the Board notes that this
final rule provides for more flexibility than the current rule.
Finally, in scenario three the Board seeks to clarify two distinct
points:
First, an FCU that is required to apply for Derivatives
authority under this final rule that subsequently meets the
requirements of Sec. 703.108(a) will, as of the date of meeting such
requirements, no longer be bound by the terms of its application.
Instead, such FCU will be subject only to the terms of this final rule
and any future amendments made thereto. To ensure the final rule
reflects this clarification, as further discussed later in this
section, the Board is making minor clarifications in the final rule
regulatory text.
Second, the Board notes that such FCU, discussed in the
preceding sentences, that fails to continue to meet the requirements in
Sec. 703.108(a) will be required to undertake the same cease and
notify procedures as outlined above. Such FCUs will not automatically
be required to reapply. However, as for all three scenarios, the
Regional Director may exercise any remedy he or she sees fit for an FCU
that is no longer in compliance with Sec. 703.108(a) or its approved
and still in force application. Such action could include, but is not
limited to, revocation of authority or a required application for
continued authority.
To effectuate the clarifications discussed in this section of the
preamble, the Board has reorganized and amended the rule text in Sec.
703.108(d). Specifically, the Board has divided this section into two
types of changes in condition: (1) A negative change in condition that
may require remedial action by the applicable Regional Director; and
(2) a positive change in condition such that an FCU that applied for
Derivatives authority is no longer subject to such application. The
Board believes this reorganization will make this section of the rule
clearer and more user friendly without introducing any substantive
amendments. In addition, the Board is also clarifying when, after a
negative change in condition, an FCU may begin entering into
Derivatives transactions again. Specifically, as discussed earlier in
this section of the preamble, this change will clarify that an FCU may
not continue entering into Derivatives transactions until notified in
writing by the applicable Regional Director. In the proposed rule, the
Board stated that an FCU subject to these cease and notify procedures
could choose to apply for Derivatives authority under 703.108(b). While
the Board was clear that applying was something an FCU could do, the
Board intended this to be but one option for the continued use of
Derivatives. The Board's intention in the proposed rule was that if an
FCU chose not to apply for Derivatives authority, after being subject
to the cease and notify procedures, such FCU would not be permitted to
resume using Derivatives until notified by its Regional Director. This
is further supported by the notion that the cease and notify procedures
also apply to an FCU that is in violation of its approved application,
and the fact that the proposed rule provided the Regional Director with
remedial actions. As such, it was always the Board's intention that
there would be notification back to an FCU subject to the cease and
notify procedures. The Board, however, believes it could have been
clearer with respect to this notification from the Regional Director.
As such, the Board is taking this opportunity to be more clear and
fully transparent. Such change is not intended to be substantive in any
way.
3. Timing of Approval
One commenter requested a time limit for approval if an FCU is
required to submit an application. This commenter stated that:
A regulation with no time bar and an open-ended invitation to
request additional information could needlessly slow credit unions
seeking to gain access to derivatives responsibly and as part of a
risk reducing strategy. In our experience, such a review without a
time limit can be frustrating to a credit union's proper planning.
The Board is retaining the provisions of the proposed rule without
any time limit in approving an FCU's Derivatives application. The Board
notes that the current rule does not include any time limit for the
NCUA's approval. The Board believes that NCUA staff should have
adequate time to review an FCU's Derivatives application to ensure the
FCU has the requisite infrastructure and can safely manage a
Derivatives program. The Board's experience with the current rule is
that the timing of approvals for FCU applications was on average less
than 100 days from the receipt of the application and believes that,
given the changes to the asset threshold for notifications and the
expected modifications to improve the application requirements, the
timing of approval would be similar, if not shorter.
4. Timing of Notification
Finally, two commenters addressed the proposed requirement for a
credit union to submit notification to the NCUA within five business
days of entering into its first Derivatives transaction. One commenter
requested an extension of the time-period to submit notification from 5
days to 7-10 days. This commenter stated that a longer notification
period would provide flexibility for uncontrollable and unforeseen
operational or marketplace delays. The other commenter requested that
the NCUA not apply the notification requirement to federally insured,
state-chartered credit unions (FISCUs) that are chartered in states
that require preapproval by, or notification to, the state regulator.
This commenter stated that requiring notification to the NCUA for these
FISCUs would create an inefficient redundancy. To further streamline
the application process, this commenter requested an exemption from the
notification requirement for the aforementioned FISCUs.
The Board believes that replacing the application requirements for
a qualified FCU with a required notification within five days after
entering into its first
[[Page 28244]]
Derivative transaction is a reasonable compromise. Derivatives can be
complex and risky transactions, and a prompt notification will allow
the applicable Regional Director to efficiently manage examination
resources.
The Board also believes that the current burden to a FISCU is
unchanged as the FISCU is only notifying the applicable Regional
Director after entering into its first Derivative transaction compared
to the current requirement of notifying the Regional Director at least
30 days before it begins engaging in Derivatives.
The Board therefore is retaining the provisions of the proposed
rule for the timing of notification to five days after entering into
its first Derivative transaction.
B. Collateral Requirements
Three commenters addressed the proposed collateral requirements for
cleared Derivatives. All three commenters disagreed with the NCUA
specifying acceptable collateral for cleared Derivatives. One commenter
stated that the current Derivatives rule does not have collateral
requirements; rather, the current rule relies on the FCU to have
systems in place to effectively manage collateral. Further, this
commenter stated that for cleared Derivatives, having collateral
requirements would create a parallel structure with the collateral
requirements of the clearinghouse. This commenter argued that this
parallel structure may lead to confusion and/or unnecessary reviews to
ensure the FCU's transaction is compliant with both the clearinghouse's
requirements and the NCUA's regulation. The other two commenters that
addressed this topic echoed the previous statements regarding the
inefficiency and unintended consequences that may occur if the NCUA
mandates specific collateral, particularly for cleared Derivatives.
In the proposal, the Board noted the rule could be simplified by
creating one collateral requirement for both cleared and Non-cleared
Derivatives. The Board asked if this approach could cause unintended
consequences. Commenters indicated that one collateral standard for
cleared Derivatives and Non-cleared Derivatives could create problems
for FCUs using cleared Derivatives. Based on comments and further
analysis, the Board will not implement collateral requirements for
cleared Derivatives. Rather, the final rule only requires specific
collateral types for Non-cleared Derivatives, otherwise collateral
requirements for cleared derivatives are subject to the clearinghouse
requirements. The Board notes that the collateral requirements for Non-
cleared Derivatives are the same requirements included in the proposed
rule. As such, the Board is only changing which transactions are
subject to those requirements.
The Board believes that the distinction between cleared versus Non-
cleared for collateral requirements is consistent with safety and
soundness and will prevent any inefficiencies and unintended
consequences that could be caused by mandating specific collateral
requirements for cleared Derivatives.
C. Counterparties
Two commenters addressed the requirement that all Counterparties be
domestic entities (domiciled in the United States). One commenter
disagreed with the NCUA limiting permissible Counterparties to those
that are domestic. This commenter stated that there is no comparable
limitation by the Commodity Futures Trading Commission (CFTC). The
commenter went on to point out that ``there are dozens of authorized
swap dealers that are not U.S. domiciled.'' This commenter agreed that
all FCU Derivatives transactions should be subject to U.S. law, but
argued that this can be accomplished through the legal terms of the
Derivatives agreement, requiring the transaction be tied to Domestic
Interest Rates, denominated in dollars, and subject to U.S. regulation
and law. The second commenter stated that the term ``domiciled'' could
lead to confusion, as there are multiple interpretations of this term.
This commenter stated that, alternatively, the NCUA ``should consider
expanding the definition to include `U.S. Branch Offices of foreign-
based Swap Dealers' or `any U.S. registered Swap Dealer,' or explicitly
addressing the prohibition to transactions with these entities in the
final rule's commentary.''
After consideration of the comments, the Board is declining to
finalize the proposed change that would require all Counterparties to
be domiciled in the United States. As such, the current Counterparty
requirements will be effective for the final rule. In this final rule,
the Board has included the current Counterparty requirements and
associated definitions. The current rule allows for Swap Dealers,
Introducing Brokers, and/or Futures Commission Merchants that are
current registrants of the CFTC to be Counterparties for exchange-
traded and cleared Derivatives. For Non-cleared Derivatives, the
current rule allows for registered CFTC Swap Dealers to be the
Counterparty.
As part of retaining the current rule's Counterparty requirement
for cleared/exchange-traded and Non-cleared Derivatives, the Board will
retain the following definitions from the current rule:
Counterparty;
Derivatives Clearing Organization;
Futures Commission Merchant;
Introducing Broker;
Non-cleared; and,
Swap Dealer.
In retaining the Counterparty requirements of the current rule, the
Board is deleting the definition of Domestic Counterparty as proposed.
D. Liquidity Review
Three commenters requested clarification on the liquidity review
required in the proposed rule. These commenters suggested that the NCUA
should allow the aforementioned review to be part of the FCU's overall
liquidity review, rather than requiring a separate liquidity review for
an individual product type. While the Board is not making any rule text
changes related to an FCU's liquidity review, the Board does believe it
is necessary to clarify its expectations related to the same. The
requirement to conduct a liquidity review as part of the operational
support requirements in Sec. 703.106(b)(5) is not intended to require
a separate liquidity analysis for Derivatives. Rather, it is
permissible for Derivatives be part of the more comprehensive liquidity
risk management processes required in part 741 of the NCUA's
regulations.\4\
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\4\ 12 CFR part 741.
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E. Maturity
Three commenters requested that the NCUA remove the 15-year
maturity limit on Derivatives. Commenters stated that removing this
limit would provide additional flexibility and not subject FCUs to a
one-sized fits all approach.
For the reasons stated in the proposal,\5\ the Board continues to
believe that the 15-year maturity limit allows FCUs to effectively
hedge various points of the yield curve for longer-term assets like
mortgages, while preventing an excessive exposure to very long
Derivative maturities. As such, the Board is not making any amendments
to this section of the rule.
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\5\ 85 FR 68487, 68491 (Oct. 29, 2020).
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F. Written Options
While the proposed rule moved toward a principles-based approach,
the Board explicitly proposed to prohibit an FCU from using written
options. This
[[Page 28245]]
prohibition is included in the current rule, where FCUs are only
permitted to purchase Derivatives. In continuing this prohibition, the
Board was concerned with the asymmetric return profile of written
options and was also was not aware of any safe uses of written options
for managing IRR. To garner more information on the use and risk of
written options, the proposed rule included a specific request for
comments on the possibility of the Board permitting written options in
a final Derivatives rule. Specifically, the Board asked for comments on
whether FCUs should be able to engage in written options to manage IRR,
and specific scenarios where a written option could be used to manage
IRR.\6\ In response, five commenters stated that the Board should not
prohibit an FCU from engaging in written options. Of these commenters,
one requested clarification on the NCUA's definition of a written
option, and two others provided detailed examples of transactions where
a written option could be both beneficial and safe and sound.
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\6\ Id. at 68492.
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After consideration of the comments and further analysis, the Board
is removing the proposed prohibition on written options. As such, this
final rule permits an FCU to enter into written options, but only if
such options are used to manage IRR. As a result of removing the
prohibition on written options and for increased clarity in the rule
text, the Board is adding a new Sec. 703.103(a)(1) restating a
mandatory characteristic in that Derivatives can only be used for the
purpose of managing IRR. The Board is adding this characteristic to
reinforce the principle that all Derivatives, including written
options, must only be used for the management of IRR.
As part of the Board's analysis in considering written options as a
permissible Derivative for FCUs, the Board reviewed the risk profile
and potential uses of written options. An option contract entitles the
option purchaser the right, but not the obligation, to buy, sell, or
enter into a commitment with a Counterparty including specific terms on
interest rates or prices at a specified date, depending on the form of
the option. The option purchaser will pay a premium upfront for this
right. The seller or writer of an option, when not offsetting an
existing purchased option, is the originator of an option contract
exposure who, in exchange for receiving the premium, is subject to the
right afforded to the purchaser in exercising the terms of the
contract.
The risk profile of an interest rate option, whether purchased or
written, is asymmetric. This means the payment(s) on the option can
exceed the premium paid or received for the option. With a written
option, the seller of the written option would receive a premium and
would generally be obligated to make payments to the purchaser if
conditions are met. For example, the seller of a written interest rate
cap would be required to make payments to the purchaser if the
reference rate is greater than the rate on the interest rate cap
contract. With interest rate options, this payment generally behaves
similar to the required payments on other interest rate Derivatives.
For example, the cashflow payment profile of a sold interest rate cap
can be compared to a receive-fixed, pay-floating interest rate swap
with the same notional and strike/swap rate, which is permissible
transaction types for FCUs. One commenter pointed out that a sold
interest rate cap, combined with a purchased interest rate floor, would
behave almost identical to an interest rate swap with the same strike/
swap rates and the same maturities. By permitting written options for
managing IRR, FCUs could enter into an exposure similar to a receive-
fixed, pay-floating swap transaction more customized to the FCUs
balance sheet needs.
The Board notes that written options can also be used to reduce the
costs associated with managing IRR. Such cost reduction can be achieved
by, among other things, offsetting the purchase of another Derivative
or reducing its exposure to such Derivative.
In summary, the Board has determined that the use of written
options provides additional flexibility for FCUs for the purpose of
managing IRR. However, the Board would like to emphasize that any
written option by an FCU would need to be for the purpose of managing
IRR. The FCU must be able to demonstrate how the written option, on its
own or combined with other Derivatives, is being used to manage
interest rate risk.
Related to the removal of the prohibition of written options, the
Board is removing the definitions of Interest rate cap, Interest rate
floor and Written options from the final rule. The Board notes the
specific product definitions for options are not needed given the
prohibition on written options has been removed from the final rule.
G. Pipeline Management
The Board proposed to streamline sections of current part 703 on
when an FCU may enter into transactions to manage interest rate
exposure in its loan pipeline. The proposed rule removed the reference
to specific product types for loan pipeline management and expanded
pipeline management to all loans. Both of these changes are consistent
with the principals-based approach the Board implemented in this rule.
In making this change in the proposal, the Board asked if loan pipeline
management should be limited to mortgage loans. The Board asked this to
allow stakeholders the opportunity to provide input on this expansion
of the loan pipeline authority. Both commenters on this question stated
NCUA should not restrict pipeline management to only mortgage loans.
These commenters stated that pipeline management has value for managing
IRR for all types of loans, not just mortgages.
The Board agrees and is retaining this portion of the rule as
proposed.
H. Regional Director Authority
Three commenters addressed the ability of a Regional Director to
prohibit an FCU from continuing to enter into Derivatives transactions.
All three commenters found the proposed authority to be overly broad.
One commenter noted that under the proposed rule, a Regional Director
could, for any reason, prohibit an FCU from continuing to use
Derivatives. This commenter requested that a Regional Director's
authority to prohibit the use of Derivatives be directly related to
Derivatives activity. Further, one commenter requested that any
prohibition on the continued use of Derivatives be accompanied by a
written statement to that effect and the ability to appeal such
decision, under part 746 of the NCUA's regulations.\7\
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\7\ 12 CFR part 746.
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The Board believes the level of Regional Director authority is
appropriate. The Board notes, given the complexity of Derivatives, it
is necessary to provide the Regional Director with broad discretion to
allow him or her to evaluate an FCU and, if necessary, take remedial
actions to address unsafe or unsound conditions that are caused by,
related to, or could be exacerbated by the continued use of
Derivatives.
The Board notes that such discretion will make this final rule more
flexible than the current Derivatives rule. As discussed previously in
this document, under the current rule, if an FCU falls
[[Page 28246]]
out of compliance with the rule or its approved application, then the
FCU must cease all Derivatives activity until it comes back into
compliance. In some instances, an FCU may fall out of compliance with
the current rule for reasons completely unrelated to its Derivatives
activity; for example, an FCU that has its management rating lowered to
a 3 for reasons unrelated to its ability to manage Derivatives. In this
example, under the current rule, this FCU would be required to achieve
a management rating of at least 2 before it could begin entering into
Derivatives again. Conversely, under this final rule, the Regional
Director could evaluate the FCU's change in condition, and might allow
it to continue utilizing Derivatives if he or she determines that the
change in condition has not impacted the FCU's ability to manage its
Derivatives program. As such, the Board is not making any changes in
response to these comments.
I. Monthly Reporting
Three commenters addressed the requirement that an FCU engaging in
Derivatives submit monthly reports to the FCU's senior management and,
if applicable, asset liability committee. One commenter requested
clarification on the level of specificity in the required reporting.
Two other commenters recommended that the NCUA explore the sufficiency
of less frequent reporting.
As stated in the preamble to the proposed rule,\8\ the Board
believes that retaining these reporting requirements is essential to
FCUs maintaining strong internal controls related to Derivatives, given
the principles-based approach of this proposed rule. The Board also
believes that the proposed reporting requirements are less burdensome
to FCUs, because they are less prescriptive, while ensuring the proper
FCU officials receive reports that are necessary to oversee an FCU's
Derivatives program. Therefore, the Board is retaining the reporting
requirements included in the proposed rule.
---------------------------------------------------------------------------
\8\ 85 FR 68487, 68490 (Oct. 29, 2020).
---------------------------------------------------------------------------
J. Derivative Transactions With Commercial Borrowers
Two commenters encouraged the Board to permit FCUs to enter into
interest rate swaps with commercial borrowers. These commenters stated
that these transactions would help both the FCU and commercial
borrowers while addressing the Federal Credit Union Act's (FCU Act)
prohibition on prepayment penalties. The Board is declining to permit
this type of transaction for two reasons.
First, the Board believes it is highly unlikely that a commercial
borrower an FCU does business with will be regulated by the CFTC
consistent with the Counterparty requirement in Sec. 703.104(b) of
this final rule. The Board intentionally included the Counterparty
requirement in Sec. 703.104(b) of the rule to ensure all Derivative
counterparties are CFTC-regulated. The Board believes allowing non-CFTC
regulated counterparties would increase the risk of Derivatives and
potentially create safety and soundness issues for the FCU.
Second, the Board believes that allowing FCUs to enter into an
interest rate swap with commercial borrows would equate to a
circumvention of the FCU Act. The FCU Act prohibits prepayment
penalties,\9\ and allowing an FCU to enter into interest rate swap may
require the commercial borrower to make a payment on the interest rate
swap if they prepay the commercial loan. This payment on the interest
rate swap would behave similar, if not identical, to a prepayment
penalty. As such, the Board is retaining the prohibition on these types
of transactions.
---------------------------------------------------------------------------
\9\ 12 U.S.C. 1757(5)(A)(viii).
---------------------------------------------------------------------------
K. USD LIBOR
The Board is retaining the proposed provisions of Sec. 703.103 for
requirements related to the characteristics of permissible IRR
Derivatives, including the provision that a Derivative contract must be
based on Domestic Interest Rates or the USD London Interbank Offered
Rate (LIBOR). The Board acknowledges the March 5, 2021, announcement by
the Intercontinental Exchange Benchmark Administration, which publishes
the USD LIBOR rate settings, that it will cease the publication of all
USD LIBOR rate settings by June 30, 2023. Accordingly, the Board will
consider revisions to this subpart after the cessation of the USD
LIBOR.
III. Regulatory Procedures
A. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 3501 et seq.)
requires that the Office of Management and Budget (OMB) approve all
collections of information by a Federal agency from the public before
they can be implemented. Respondents are not required to respond to any
collection of information unless it displays a valid OMB control
number. In accordance with the PRA, the information collection
requirements included in this final rule have been submitted to OMB for
approval under control number 3133-0133.
B. Executive Order 13132
Executive Order 13132 encourages independent regulatory agencies to
consider the impact of their actions on state and local interests. The
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 does not have substantial direct effects 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 NCUA has, therefore, determined that
this final rule does not constitute a policy that has federalism
implications for purposes of the executive order.
C. Assessment of Federal Regulations and Policies on Families
The NCUA has determined that this 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).
D. Small Business Regulatory Enforcement Fairness Act
The Small Business Regulatory Enforcement Fairness Act of 1996
(Pub. L. 104-121) (SBREFA) generally provides for congressional review
of agency rules. A reporting requirement is triggered in instances
where the NCUA issues a final rule as defined by Sec. 551 of the
Administrative Procedure Act. An agency rule, in addition to being
subject to congressional oversight, may also be subject to a delayed
effective date if the rule is a ``major rule.'' The NCUA does not
believe this rule is a ``major rule'' within the meaning of the
relevant sections of SBREFA. As required by SBREFA, the NCUA submitted
this final rule to the Office of Management and Budget for it to
determine if the final rule is a ``major rule'' for purposes of SBREFA.
The Office of Management and Budget determined the final rule was not a
major rule. The NCUA also will file all appropriate reports.
E. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) generally requires that, in
connection with a notice of proposed rulemaking, an agency prepare and
make available for public comment an initial regulatory
[[Page 28247]]
flexibility analysis that describes the impact of a proposed rule on
small entities (defined for purposes of the RFA to include credit
unions with assets less than $100 million).\10\ A regulatory
flexibility analysis is not required, however, if the agency certifies
that the rule will not have a significant economic impact on a
substantial number of small entities and publishes its certification
and a short, explanatory statement in the Federal Register together
with the rule.
---------------------------------------------------------------------------
\10\ See NCUA Interpretive Ruling and Policy Statement 87-2, as
amended by IRPS 03-2 and IRPS 15-1, 80 FR 57512 (Sept. 24, 2015).
---------------------------------------------------------------------------
The NCUA certified that the proposed rule would not have a
significant economic impact on a substantial number of small credit
unions. The Board did not receive any comments on this section.
List of Subjects
12 CFR Part 701
Advertising, Aged, Civil rights, Credit, Credit unions, Fair
housing, Individuals with disabilities, Insurance, Marital status
discrimination, Mortgages, Religious discrimination, Reporting and
recordkeeping requirements, Sex discrimination, Signs and symbols,
Surety bonds.
12 CFR Part 703
Credit unions, Investments, Reporting and recordkeeping
requirements.
12 CFR Part 741
Bank deposit insurance, Credit unions, Reporting and recordkeeping
requirements.
12 CFR Part 746
Administrative practice and procedure, Claims, Credit unions,
Investigations.
By the NCUA Board on May 20, 2021.
Melane Conyers-Ausbrooks,
Secretary of the Board.
For the reasons discussed in the preamble, the Board is amending 12
CFR parts 701, 703, 741, and 746 as follows:
PART 701--ORGANIZATION AND OPERATION OF FEDERAL CREDIT UNIONS
0
1. The authority citation for part 701 continues to read as follows:
Authority: 12 U.S.C. 1752(5), 1755, 1756, 1757, 1758, 1759,
1761a, 1761b, 1766, 1767, 1782, 1784, 1786, 1787, 1789. Section
701.6 is also authorized by 15 U.S.C. 3717. Section 701.31 is also
authorized by 15 U.S.C. 1601 et seq.; 42 U.S.C. 1981 and 3601-3610.
Section 701.35 is also authorized by 42 U.S.C. 4311-4312.
Sec. 701.21 [Amended]
0
2. Amend Sec. 701.21 by removing paragraph (i).
PART 703--INVESTMENT AND DEPOSIT ACTIVITIES
0
3. The authority citation for part 703 continues to read as follows:
Authority: 12 U.S.C. 1757(7), 1757(8), 1757(15).
Sec. 703.2 [Amended]
0
4. Amend Sec. 703.2 by removing the definition of ``Derivative''.
0
5. Amend Sec. 703.14 by revising paragraph (k) and adding paragraph
(l) to read as follows:
Sec. 703.14 Permissible investments.
* * * * *
(k) Loan pipeline management. A Federal credit union may enter into
the following transactions related to the management of its loan
pipeline:
(1) Interest rate lock commitments and forward sales commitments;
and
(2) Transactions to manage Interest Rate Risk, as defined in
subpart B of this part.
(l) Embedded options. A Federal credit union may enter into
embedded options not required under generally accepted accounting
principles adopted in the United States (GAAP) to be accounted for
separately from the host contract. Embedded options that are required,
under GAAP, to be accounted for separately from the host contract, are
addressed in Sec. 703.103(b) of this part.
0
6. Revise subpart B to read as follows:
Subpart B--Derivatives
Sec.
703.101 Purpose and scope.
703.102 Definitions.
703.103 Requirements related to the characteristics of permissible
Interest Rate Risk Derivatives.
703.104 Requirements for Counterparty agreements, collateral and
Margining.
703.105 Reporting requirements.
703.106 Operational support requirements.
703.107 External service providers.
703.108 Notification and application requirements.
703.109 Regulatory violation or unsafe and unsound condition.
Subpart B--Derivatives.
Sec. 703.101 Purpose and scope.
(a) Purpose. This subpart grants Federal credit unions limited
authority to enter into Derivatives only for the purpose of managing
Interest Rate Risk.
(b) Scope. This subpart applies to all Federal credit unions.
Except as provided in Sec. 741.219, this rule does not apply to
federally insured, state-chartered credit unions.
(c) Prior approvals. Any Federal credit union with an active
approval, under the prior version of this subpart, on June 25, 2021 is
subject to the provisions of this subpart and is no longer subject to
the restrictions, limits, or terms contained in the Federal credit
union's approved application.
(d) Pending Approvals. Any application for Derivatives authority
pending on June 25, 2021, except for such applications submitted by a
Federal credit union that would be subject to the requirements of Sec.
703.108(b), is deemed to be withdrawn and such applicant is subject to
the provisions of this subpart.
Sec. 703.102 Definitions.
For purposes of this subpart:
Counterparty means a Swap Dealer, Derivatives Clearing
Organization, or exchange that participates as the other party in a
derivatives transaction with a Federal credit union.
Derivative means a financial contract that derives its value from
the value and performance of some other underlying financial instrument
or variable, such as an index or interest rate.
Derivatives Clearing Organization has the meaning as defined by the
Commodity Futures Trading Commission (CFTC) in 17 CFR 1.3.
Domestic interest rates means interest rates derived in the United
States and are U.S. dollar-denominated.
Earnings at Risk means the changes to earnings, typically in the
short term (for example, 12 to 36 months), caused by changes in
interest rates.
Economic Effectiveness means the extent to which a Derivatives
transaction results in offsetting changes in the Interest Rate Risk
that the transaction was, and is, intended to provide.
External Service Provider means any entity that provides services
to assist a Federal credit union in carrying out its Derivatives
program and the requirements of this subpart.
Futures Commission Merchant (FCM) has the meaning as defined by the
CFTC in 17 CFR 1.3.
Interest Rate Risk means the current and prospective risk to a
credit union's capital and earnings arising from movements in interest
rates.
Introducing Broker means a futures brokerage firm that deals
directly with the client, while the trade execution is done by an FCM.
Margin means the minimum amount of eligible collateral, as defined
in Sec. 703.104(c), that must be deposited
[[Page 28248]]
between parties to a Derivatives transaction, as detailed in a Master
Services Agreement.
Master Services Agreement means a document agreed upon between two
parties that sets out standard terms that apply to all transactions
entered into between those parties. The most common form of a Master
Services Agreement for Derivatives is an International Swap Dealer
Association Master Agreement.
Net Economic Value means the measurement of changes in the economic
value of Net Worth caused by changes in interest rates.
Net Worth has the meaning specified in part 702 of this chapter.
Non-cleared means transactions that do not go through a Derivatives
Clearing Organization
Regional Director means an NCUA Regional Director or the Director
of the Office of National Examinations and Supervision.
Senior Executive Officer has the meaning specified in Sec. 701.14
of this chapter and includes any other similar employee that is
directly within the chain of command for the oversight of a Federal
credit union's Derivatives program.
Structured Liability Offering means a share product created by a
Federal credit union with contractual option features, such as periodic
caps and calls, similar to those found in structured securities or
structured notes.
Swap Dealer has the meaning as defined by the CFTC in 17 CFR 1.3.
Threshold Amount means an unsecured credit exposure that a party to
a Derivatives transaction is prepared to accept before requesting
additional eligible collateral, as defined in Sec. 703.104(c), from
the other party.
Trade Date means the date that a Derivatives order (new
transactions, terminations, or assignments) is executed with a
Counterparty.
Sec. 703.103 Requirements related to the characteristics of
permissible Interest Rate Risk Derivatives.
(a) Under this subpart, a Federal credit union may only enter into
Derivatives that have the following characteristics:
(1) Are for the purpose of managing Interest Rate Risk;
(2) Denominated in U.S. dollars;
(3) Based on Domestic Interest Rates or the U.S. dollar-denominated
London Interbank Offered Rate (LIBOR);
(4) A contract maturity equal to or less than 15 years, as of the
Trade Date; and
(5) Not used to create Structured Liability Offerings for members
or nonmembers.
(b) A Federal credit union may not engage in embedded options
required under U.S. Generally Accepted Accounting Principles (GAAP) to
be accounted for separately from the host contract.
Sec. 703.104 Requirements for Counterparty agreements, collateral
and Margining.
To enter into Derivative transactions under this subpart, a Federal
credit union must:
(a) Have an executed Master Services Agreement with a Counterparty.
Such agreement must be reviewed by counsel with expertise in similar
types of transactions to ensure the agreement reasonably protects the
interests of the Federal credit union;
(b) Use only the following Counterparties:
(1) For exchange-traded and cleared Derivatives: Swap Dealers,
Introducing Brokers, and/or FCMs that are current registrants of the
CFTC; or
(2) For Non-cleared Derivative transactions: Swap Dealers that are
current registrants of the CFTC.
(c) Utilize contracted Margin requirements with a maximum Margin
threshold amount of $250,000; and
(d) For Non-cleared Derivative transactions, accept as eligible
collateral, for Margin requirements, only the following: Cash (U.S.
dollars), U.S. Treasuries, government-sponsored enterprise debt, U.S.
government agency debt, government-sponsored enterprise residential
mortgage-backed security pass-through securities, and U.S. government
agency residential mortgage-backed security pass-through securities.
Sec. 703.105 Reporting requirements.
(a) Board reporting. At least quarterly, a Federal credit union's
Senior Executive Officers must deliver a comprehensive Derivatives
report, as described in paragraph (c) of this section to the Federal
credit union's board of directors.
(b) Senior Executive Officer and asset liability or similarly
functioning committee. At least monthly, Federal credit union staff
must deliver a comprehensive Derivatives report, as described in
paragraph (c) of this section to the Federal credit union's Senior
Executive Officers and, if applicable, the Federal credit union's asset
liability or similarly functioning committee.
(c) Comprehensive Derivatives management report. At a minimum, the
reports required in paragraphs (a) and (b) of this section must
include:
(1) Identification of any areas of noncompliance with any provision
of this subpart or the Federal credit union's policies, and the planned
remediation of such noncompliance;
(2) An itemization of the Federal credit union's individual
transactions subject to this subpart, the current values of such
transactions, and each individual transaction's intended use for
Interest Rate Risk mitigation; and
(3) A comprehensive view of the Federal credit union's risk
reports, including, but not limited to, Interest Rate Risk calculations
with details of the transactions subject to this subpart.
(d) Retention requirement. Reports required by this section must,
at a minimum, be retained in accordance with the requirements in
Appendix A to part 749.
(e) Notification of noncompliance. Notification of any
noncompliance as part of the Derivatives management report required in
paragraph (c)(1) of this section must be submitted to the applicable
Regional Director immediately after it has been submitted to the
Federal credit union's board of directors.
(f) NCUA request. The NCUA may, at any time, request the
Derivatives management report required by paragraph (c) of this
section.
Sec. 703.106 Operational support requirements.
(a) Required experience and competencies. A Federal credit union
using Derivative transactions subject to this subpart must internally
possess the following experience and competencies:
(1) Board. (i) Before entering into the initial Derivatives
transaction, a Federal credit union's board members must receive
training that provides a general understanding of Derivative
transactions, and the knowledge required to provide strategic oversight
of the Federal credit union's Derivatives program.
(ii) Any person that becomes a board member after the initial
Derivatives transaction must receive the same training, updated if
necessary, as required by paragraph (a)(1)(i) of this section.
(iii) At least annually after the initial Derivatives transaction,
as part of the Derivatives reporting requirement in Sec. 703.105(a),
the Federal credit union's Senior Executive Officers must brief the
board members on the Federal credit union's use of Derivatives to
manage Interest Rate Risk.
(2) Senior Executive Officers. A Federal credit union's Senior
Executive Officers must be able to understand, approve, and provide
oversight for the Derivatives program. These individuals must have a
comprehensive
[[Page 28249]]
understanding of how the Derivative transactions fit into the Federal
credit union's Interest Rate Risk management process.
(3) Qualified Derivatives personnel. To engage in the Derivative
transactions, a Federal credit union must employ staff with experience
in the following areas:
(i) Asset/liability risk management. Staff must be qualified to
understand and oversee asset/liability risk management, including the
appropriate role of the transactions subject to this subpart. Staff
must also be qualified to understand and undertake or oversee the
appropriate modeling and analytics related to Net Economic Value and
Earnings at Risk;
(ii) Accounting and financial reporting. Staff must be qualified to
understand and oversee appropriate accounting and financial reporting
for Derivatives in accordance GAAP;
(iii) Derivatives execution and oversight. Staff must be qualified
to undertake or oversee Derivative trade executions; and
(iv) Counterparty, collateral, and Margin management. Staff must be
qualified to evaluate Counterparty, collateral, and Margin risk as
described in Sec. 703.104 of this subpart.
(b) Required review and internal controls structure. To effectively
manage the transactions subject to this subpart, a Federal credit union
must assess the effectiveness of its management and internal controls
structure. At a minimum, the internal controls structure must include:
(1) Transaction review. Before executing any Derivatives
transaction, a Federal credit union must identify and document the
circumstances that lead to the decision to execute the Derivatives
transaction, specify the strategy the Federal credit union will employ,
and demonstrate the economic effectiveness of the transaction;
(2) Internal controls review. Within the first year after
commencing its first Derivatives transaction, a Federal credit union
must have an internal controls review that is focused on the
integration and introduction of the program, and ensure the timely
identification of weaknesses in internal controls, accounting, and all
operational and oversight processes. This review must be performed by
an independent external unit or, if applicable, the Federal credit
union's internal auditor;
(3) Financial statement audit. Any Federal credit union engaging in
Derivative transactions pursuant to this subpart must obtain an annual
financial statement audit, as defined in Sec. 715.2(d) of this
chapter, and be compliant with GAAP for all Derivatives-related
accounting and reporting;
(4) Collateral management review. Before executing its first
Derivative transaction, a Federal credit union must establish a
collateral management process that monitors the Federal credit union's
collateral and Margining requirements and ensures that its transactions
are collateralized in accordance with the collateral requirements of
this subpart and the Federal credit union's Master Services Agreement
with its Counterparty;
(5) Liquidity review. Before executing its first Derivative
transaction, a Federal credit union must establish a liquidity review
process to analyze and measure potential liquidity needs related to its
Derivatives program and the additional collateral requirements due to
changes in interest rates. The Federal credit union must, as part of
its liquidity risk management, calculate and track contingent liquidity
needs in the event a transaction needs to be novated or terminated, and
must establish effective controls for liquidity exposures arising from
both market or product liquidity and instrument cash flows; and
(6) Separation of duties. A Federal credit union's process, whether
conducted internally or by an External Service Provider, must have
appropriate separation of duties for the following functions defined in
subsection (a)(3) of this section:
(i) Asset/liability risk management;
(ii) Accounting and financial reporting;
(iii) Derivatives execution and oversight; and
(iv) Counterparty, collateral and Margin management.
(c) Policies and procedures. A Federal credit union using
Derivatives, permitted under this subpart, must operate according to
comprehensive written policies and procedures for control, measurement,
and management of Derivative transactions. At a minimum, the policies
and procedures must address the requirements of this subpart and any
additional limitations imposed by the Federal credit union's board of
directors. A Federal credit union's board of directors must review the
policies and procedures described in this section at least annually and
update them when necessary.
Sec. 703.107 External service providers.
(a) General. A Federal credit union using Derivatives may use
External Service Providers to support or conduct aspects of its
Derivative management program, provided:
(1) The External Service Provider, including affiliates, does not:
(i) Act as a Counterparty to any Derivative transactions that
involve the Federal credit union;
(ii) Act as a principal or agent in any Derivative transactions
that involve the Federal credit union; or
(iii) Have discretionary authority to execute any of the Federal
credit union's Derivative transactions.
(2) The Federal credit union has the internal capacity, experience,
and skills to oversee and manage any External Service Providers it
uses; and
(3) The Federal credit union documents the specific uses of
External Service Providers in its policies and procedures, as described
in Sec. 703.106(c) of this subpart.
(b) Relation to Sec. 703.106. This section does not alleviate the
responsibility of the Federal credit union to employ qualified staff in
accordance with Sec. 703.106 of this subpart.
Sec. 703.108 Notification and application requirements.
(a) Notification. A Federal credit union that meets the following
requirements must notify the applicable Regional Director in writing or
via electronic mail within five business days after entering into its
first Derivatives transaction:
(1) The Federal credit union's most recent NCUA Management CAMEL
component is a rating of 1 or 2; and
(2) The Federal credit union has assets of at least $500 million as
of its most recent call report.
(b) Application. A Federal credit union that does not meet the
requirements of paragraphs (a)(1) and/or (2) of this section must
obtain approval before engaging in Derivatives under this subpart from
its applicable Regional Director, by submitting an application, that,
at a minimum, includes the following:
(1) An Interest Rate Risk mitigation plan that shows how
Derivatives are one aspect of the Federal credit union's overall
Interest Rate Risk mitigation strategy, and an analysis showing how the
Federal credit union will use Derivatives in conjunction with other on-
balance sheet instruments and strategies to effectively manage its
Interest Rate Risk;
(2) A list of the Derivatives products and characteristics of such
products the Federal credit union is planning to use;
(3) Draft policies and procedures that the Federal credit union has
prepared in accordance with Sec. 703.106;
(4) A description of how the Federal credit union plans to acquire,
employ, and/or create the resources, policies, processes, systems,
internal controls, modeling, experience, and
[[Page 28250]]
competencies to meet the requirements of this subpart. This includes a
description of how the Federal credit union will ensure that Senior
Executive Officers, the board of directors, and personnel have the
knowledge and experience in accordance with the requirements of this
subpart;
(5) A description of how the Federal credit union intends to use
External Service Providers as part of its Derivatives program, and a
list of the name(s) of and service(s) provided by the External Service
Providers, as described in Sec. 703.107 of this subpart, it intends to
use;
(6) A description of how the Federal credit union will support the
operations of Margining and collateral, as described in Sec. 703.104
of this subpart;
(7) A description of how the Federal credit union will comply with
the accounting and financial reporting in GAAP; and
(8) Any additional information requested by the Regional Director.
(c) Application review. (1) After the applicable Regional Director
has completed his or her review, including any requests for additional
information, the Regional Director will notify the Federal credit union
in writing of his or her decision. Any denials will include the
reason(s) for such denial. A Federal credit union subject to paragraph
(b) of this section may not enter into any Derivative transactions
under this subpart until it receives approval from the applicable
Regional Director. At a Regional Director's discretion, a Federal
credit union may reapply if its initial application is denied.
(2) A Federal credit union that receives a denial of its
application may appeal such decision in accordance with part 746 of
this chapter.
(d) Change in condition--(1) Negative change in condition. A
Federal credit union that at any time, experiences a change in negative
condition such that it no longer meets the requirements of paragraph
(a) of this section or renders its approved application inaccurate must
immediately:
(i) Cease entering into any new Derivatives; and
(ii) Notify the applicable Regional Director.
(2) Remedial action for a Federal credit union that experiences a
negative change in condition. The applicable Regional Director may take
all necessary actions, including, but not limited to, revoking a
Federal credit union's authority to engage in Derivatives and/or
requiring divesture of current Derivatives. A Federal credit union
subject to this paragraph may not enter into new Derivatives unless
notified in writing by the applicable Regional Director of its
authority to do so.
(3) Positive change in condition for a Federal credit union subject
to paragraph (b) of this section. A Federal credit union that is
required to submit an application under paragraph (b) of this section
that, at any time after approval of such application, meets the
requirements of paragraph (a) of this section shall no longer be
subject to the requirements included in its approved application, but
will continue to be subject to the requirements of this subpart.
Sec. 703.109 Regulatory violation or unsafe and unsound condition.
(a) Upon determination by the applicable Regional Director, and
written notice by the same, a Federal credit union that no longer meets
the requirements of this subpart; if applicable, fails to comply with
its approved application; or is operating in an unsafe or unsound
condition must immediately stop entering into any new Derivative
transactions until the Federal credit union is notified by the
applicable Regional Director in writing that it is permitted to resume
engaging in Derivative transactions under this subpart.
(b) If the applicable Regional Director determines a Federal credit
union must take any action under paragraph (a) of this section, he or
she will provide the Federal credit union with written notice including
the reason(s) for such determination and the remedial actions that are
required.
(c) During this period, however, the Federal credit union may
terminate existing Derivative transactions. A Regional Director may
permit a Federal credit union to enter into offsetting transactions if
he or she determines such transactions are part of a corrective action
strategy; and
(d) A Federal credit union that receives written notice under this
section may appeal such determination in accordance with part 746 of
the NCUA's regulations.
PART 741--REQUIREMENTS FOR INSURANCE
0
7. The authority citation for part 741 continues to read as follows:
Authority: 12 U.S.C. 1757, 1766(a), 1781-1790, and 1790d; 31
U.S.C. 3717.
0
8. Amend Sec. 741.219 by revising paragraph (b) to read as follows:
Sec. 741.219 Investment requirements.
* * * * *
(b) Any credit union that is insured pursuant to title II of the
Act must notify the applicable NCUA Regional Director in writing within
five business days after entering into its first Derivatives
transaction. Such transactions do not include those included in Sec.
703.14 of this chapter.
PART 746--APPEALS PROCEDURES
0
9. The authority citation for part 746 continues to read as follows:
Authority: 12 U.S.C. 1766, 1787, and 1789.
0
10. Amend Sec. 746.201 by revising paragraph (c) to read as follows:
Sec. 746.201 Authority, purpose, and scope.
* * * * *
(c) Scope. This subpart covers the appeal of initial agency
determinations by a program office which the petitioner has a right to
appeal to the NCUA Board under the following regulations: Sec. Sec.
701.14(e), 701.21(h)(3), 701.22(c), 701.23(h)(3), 701.32(b)(5), and
701.34(a)(4), appendix A to part 701 of this chapter, appendix B to
part 701 of this chapter, Chapters 1-4, Sec. Sec. 703.20(d),
703.108(b), 705.10(a), 708a.108(d), 708a.304(h), 708a.308(d), 709.7,
741.11(d), and 745.201(c), subpart J to part 747 of this chapter, and
Sec. 750.6(b).
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[FR Doc. 2021-11055 Filed 5-25-21; 8:45 am]
BILLING CODE 7535-01-P
