12 Cfr 703 (1-1-18 Ed)

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Pt. 703

12 CFR Ch. VII (1–1–18 Edition)

under the gross-up approach, a credit union
must apply the risk weight required under
paragraph (a)(2) of this appendix to the credit equivalent amount calculated in paragraph (a)(3) of this appendix.
(5) Securitization exposure defined. For purposes
of
this
this
paragraph
(a),
‘‘securitization exposure’’ means:
(i) A credit exposure that arises from a
securitization; or
(ii) An exposure that directly or indirectly
references a securitization exposure described in paragraph (a)(5)(i) of this appendix.
(6) Securitization defined. For purposes of
this paragraph (a), ‘‘securitization’’ means a
transaction in which:
(i) The credit risk associated with the underlying exposures has been separated into
at least two tranches reflecting different levels of seniority;
(ii) Performance of the securitization exposures depends upon the performance of the
underlying exposures; and
(iii) All or substantially all of the underlying exposures are financial exposures (such
as loans, receivables, asset-backed securities, mortgage-backed securities, or other
debt securities).
(b) Look-through approaches.—(1) Applicability. Section 702.104(c)(3)(iii)(B) provides
that, a credit union may use one of the lookthrough approaches in this appendix to determine the risk weight of the exposure
amount of any investment fund, or the holding of separate account insurance.
(2) Full look-through approach. (i) General. A
credit union that is able to calculate a riskweighted asset amount for its proportional
ownership share of each exposure held by the
investment fund may set the risk-weighted
asset amount of the credit union’s exposure
to the fund equal to the product of:
(A) The aggregate risk-weighted asset
amounts of the exposures held by the fund as
if they were held directly by the credit
union; and
(B) The credit union’s proportional ownership share of the fund.
(ii) Holding report. To calculate the riskweighted amount under paragraph (b)(2)(i) of
this appendix, a credit union should:
(A) Use the most recently issued investment fund holding report; and
(B) Use an investment fund holding report
that reflects holding that are not older than
6-months from the quarter-end effective date
(as defined in § 702.101(c)(1).
(3) Simple modified look-through approach.
Under the simple modified look-through approach, the risk-weighted asset amount for a
credit union’s exposure to an investment
fund equals the exposure amount multiplied
by the highest risk weight that applies to
any exposure the fund is permitted to hold
under the prospectus, partnership agreement, or similar agreement that defines the

fund’s permissible investments (excluding
derivative contracts that are used for hedging rather than speculative purposes and
that do not constitute a material portion of
the fund’s exposures).
(4) Alternative modified look-through approach. Under the alternative modified lookthrough approach, a credit union may assign
the credit union’s exposure amount to an investment fund on a pro rata basis to different risk weight categories under subpart
A of this part based on the investment limits
in the fund’s prospectus, partnership agreement, or similar contract that defines the
fund’s permissible investments. The riskweighted asset amount for the credit union’s
exposure to the investment fund equals the
sum of each portion of the exposure amount
assigned to an exposure type multiplied by
the applicable risk weight under subpart A of
this part. If the sum of the investment limits
for all exposure types within the fund exceeds 100 percent, the credit union must assume that the fund invests to the maximum
extent permitted under its investment limits
in the exposure type with the highest applicable risk weight under subpart A of this
part and continues to make investments in
order of the exposure type with the next
highest applicable risk weight under subpart
A of this part until the maximum total investment level is reached. If more than one
exposure type applies to an exposure, the
credit union must use the highest applicable
risk weight. A credit union may exclude derivative contracts held by the fund that are
used for hedging rather than for speculative
purposes and do not constitute a material
portion of the fund’s exposures.
EFFECTIVE DATE NOTE: At 80 FR 66722, Oct.
29, 2015, appendix A to part 702 was added, effective Jan. 1, 2019.

PART 703—INVESTMENT AND
DEPOSIT ACTIVITIES
Subpart A—General Investment and
Deposit Activities
Sec.
703.1 Purpose and scope.
703.2 Definitions.
703.3 Investment policies.
703.4 Recordkeeping and documentation requirements.
703.5 Discretionary control over investments and investment advisers.
703.6 Credit analysis.
703.7 Notice of non-compliant investments.
703.8 Broker-dealers.
703.9 Safekeeping of investments.
703.10 Monitoring non-security investments.
703.11 Valuing securities.
703.12 Monitoring securities.
703.13 Permissible investment activities.

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National Credit Union Administration

§ 703.2

703.14 Permissible investments.
703.15 Prohibited investment activities.
703.16 Prohibited investments.
703.17 Conflicts of interest.
703.18 Grandfathered investments.
703.19 Investment pilot program.
703.20 Request for additional authority.

Subpart B—Derivatives Authority
703.100 Purpose and scope.
703.101 Definitions.
703.102 Permissible derivatives.
703.103 Derivative authority.
703.104 Requirements
for
derivative
counterparty agreements, collateral and
margining.
703.105 Reporting requirements.
703.106 Operational support requirements.
703.107 External service providers.
703.108 Eligibility.
703.109 Applying for derivatives authority.
703.110 Application content.
703.111 NCUA approval.
703.112 Applying for additional products or
characteristics.
703.113 Pilot program participants with active derivatives positions.
703.114 Regulatory violation.
APPENDIX TO SUBPART B OF PART 703—EXAMPLES OF DERIVATIVE LIMIT AUTHORITY
CALCULATIONS
AUTHORITY:
1757(15).

12

U.S.C.

1757(7),

1757(8),

SOURCE: 68 FR 32960, June 3, 2003, unless
otherwise noted.

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Subpart A—General Investment
and Deposit Activities
§ 703.1 Purpose and scope.
(a) This part interprets several of the
provisions of Sections 107(7), 107(8), and
107(15) of the Federal Credit Union Act
(Act), 12 U.S.C. 1757(7), 1757(8), 1757(15),
which list those securities, deposits,
and other obligations in which a Federal credit union may invest. Part 703
identifies certain investments and deposit activities permissible under the
Act and prescribes regulations governing those investments and deposit
activities on the basis of safety and
soundness concerns. Additionally, part
703 identifies and prohibits certain investments and deposit activities. Investments and deposit activities that
are permissible under the Act and not
prohibited or otherwise regulated by
part 703 remain permissible for Federal
credit unions.
(b) This part does not apply to:

(1) Investment in loans to members
and related activities, which is governed by §§ 701.21, 701.22, 701.23, and part
723 of this chapter;
(2) The purchase of real estate-secured loans pursuant to Section
107(15)(A) of the Act, which is governed
by § 701.23 of this chapter, except those
real estate-secured loans purchased as
a part of an investment repurchase
transaction, which is governed by
§§ 703.13 and 703.14 of this chapter;
(3) Investment in credit union service
organizations, which is governed by
part 712 of this chapter;
(4) Investment in fixed assets, which
is governed by § 701.36 of this chapter;
(5) Investment by corporate credit
unions, which is governed by part 704 of
this chapter.
(6) Investment activity by Statechartered credit unions, except as provided in §§ 741.3(a)(2) and 741.219 of this
chapter; or
(7) Funding a Charitable Donation
Account pursuant to § 721.3(b) of this
chapter.
[68 FR 32960, June 3, 2003, as amended at 69
FR 27828, May 17, 2004; 71 FR 76124, Dec. 20,
2006; 78 FR 76730, Dec. 19, 2013]

§ 703.2 Definitions.
The following definitions apply to this
part:
Adjusted trading means selling an investment to a counterparty at a price
above its current fair value and simultaneously purchasing or committing to
purchase from the counterparty another investment at a price above its
current fair value.
Associated personnel means a person
engaged in the investment banking or
securities business who is directly or
indirectly controlled by a National Association of Securities Dealers (NASD)
member, whether or not this person is
registered or exempt from registration
with NASD. Associated personnel includes every sole proprietor, partner,
officer, director, or branch manager of
any NASD member.
Banker’s acceptance means a time
draft that is drawn on and accepted by
a bank and that represents an irrevocable obligation of the bank.
Bank note means a direct, unconditional, and unsecured general obligation of a bank that ranks equally with

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§ 703.2

12 CFR Ch. VII (1–1–18 Edition)

all other senior unsecured indebtedness
of the bank, except deposit liabilities
and other obligations that are subject
to any priorities or preferences.
Borrowing
repurchase
transaction
means a transaction in which the Federal credit union agrees to sell a security to a counterparty and to repurchase the same or an identical security
from that counterparty at a specified
future date and at a specified price.
Call means an option that gives the
holder the right to buy a specified
quantity of a security at a specified
price during a fixed time period.
Collateralized
Mortgage
Obligation
(CMO) means a multi-class mortgage
related security.
Collective investment fund means a
fund maintained by a national bank
under 12 CFR part 9 (Comptroller of the
Currency’s regulations).
Commercial mortgage related security
means a mortgage related security, as
defined below, except that it is
collateralized entirely by commercial
real estate, such as a warehouse or office building, or a multi-family dwelling consisting of more than four units.
Counterparty means the party on the
other side of the transaction.
Custodial Agreement means a contract
in which one party agrees to hold securities in safekeeping for others.
Delivery versus payment means payment for an investment must occur simultaneously with its delivery.
Derivative means a financial contract
which derives its value from the value
and performance of some other underlying financial instrument or variable,
such as an index or interest rate.
Embedded option means a characteristic of an investment that gives
the issuer or holder the right to alter
the level and timing of the cash flows
of the investment. Embedded options
include call and put provisions and interest rate caps and floors. Since a prepayment option in a mortgage is a type
of call provision, a mortgage-backed
security composed of mortgages that
may be prepaid is an example of an investment with an embedded option.
Eurodollar deposit means a U.S. dollar-denominated deposit in a foreign
branch of a United States depository
institution.

European financial options contract
means an option that can be exercised
only on its expiration date.
Exchangeable Collateralized Mortgage
Obligation
means
a
class
of
a
collateralized
mortgage
obligation
(CMO) that, at the time of purchase,
represents beneficial ownership interests in a combination of two or more
underlying classes of the same CMO
structure. The holder of an exchangeable CMO may pay a fee and take delivery of the underlying classes of the
CMO.
Fair value means the price that would
be received to sell an asset, or paid to
transfer a liability, in an orderly transaction between market participants at
the measurement date, as defined by
GAAP.
Financial options contract means an
agreement to make or take delivery of
a standardized financial instrument
upon demand by the holder of the contract as specified in the agreement.
Forward sales commitment means an
agreement to sell an asset at a price
and future date specified in the agreement.
Immediate family member means a
spouse or other family member living
in the same household.
Independent qualified agent means an
agent independent of an investment repurchase counterparty that does not
receive a transaction fee from the
counterparty and has at least two
years experience assessing the value of
mortgage loans.
Industry-recognized information provider means an organization that obtains compensation by providing information to investors and receives no
compensation for the purchase or sale
of investments.
Interest rate lock commitment means an
agreement by a credit union to hold a
certain interest rate and points for a
specified amount of time while a prospective borrower’s application is processed.
Investment means any security, obligation, account, deposit, or other item
authorized for purchase by a Federal
credit union under Sections 107(7),
107(8), or 107(15) of the Act, or this part,
other than loans to members.
Investment grade means the issuer of a
security has an adequate capacity to

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National Credit Union Administration

§ 703.2

meet the financial commitments under
the security for the projected life of
the asset or exposure, even under adverse economic conditions. An issuer
has an adequate capacity to meet financial commitments if the risk of default by the obligor is low and the full
and timely repayment of principal and
interest on the security is expected. A
Federal credit union may consider any
or all of the following factors, to the
extent appropriate, with respect to the
credit risk of a security: Credit
spreads; securities-related research; internal or external credit risk assessments; default statistics; inclusion on
an index; priorities and enhancements;
price, yield, and/or volume; and asset
class-specific factors. This list of factors is not meant to be exhaustive or
mutually exclusive.
Investment
repurchase
transaction
means a transaction in which an investor agrees to purchase a security from
a counterparty and to resell the same
or an identical security to that
counterparty at a specified future date
and at a specified price.
Maturity means the date the last
principal amount of a security is scheduled to come due and does not mean
the call date or the weighted average
life of a security.
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)).
Mortgage servicing rights means a contractual obligation to perform mortgage servicing and the right to receive
compensation for performing those
services. Mortgage servicing is the administration of a mortgage loan, including collecting monthly payments
and fees, providing recordkeeping and
escrow functions, and, if necessary curing defaults and foreclosing.
Negotiable instrument means an instrument that may be freely transferred from the purchaser to another
person or entity by delivery, or endorsement and delivery, with full legal
title becoming vested in the transferee.
Net worth means the retained earnings balance of the credit union at
quarter end as determined under generally accepted accounting principles
and as further defined in § 702.2(f) of
this chapter.

Official means any member of a Federal credit union’s board of directors,
credit committee, supervisory committee, or investment-related committee.
Ordinary care means the degree of
care, which an ordinarily prudent and
competent person engaged in the same
line of business or endeavor should exercise under similar circumstances.
Pair-off transaction means an investment purchase transaction that is
closed or sold on, or before the settlement date. In a pair-off, an investor
commits to purchase an investment,
but then pairs-off the purchase with a
sale of the same investment before or
on the settlement date.
Put means an option that gives the
holder the right to sell a specified
quantity of a security at a specified
price during a fixed time period.
Registered investment company means
an investment company that is registered with the Securities and Exchange Commission under the Investment Company Act of 1940 (15 U.S.C.
80a). Examples of registered investment companies are mutual funds and
unit investment trusts.
Regular way settlement means delivery
of a security from a seller to a buyer
within the time frame that the securities industry has established for immediate delivery of that type of security.
For example, regular way settlement of
a Treasury security includes settlement on the trade date (cash), the business day following the trade date (regular way), and the second business day
following the trade date (skip day).
Residual interest means the remainder
cash flows from collateralized mortgage obligations/real estate mortgage
investment conduits (CMOs/REMICs),
or other mortgage-backed security
transaction, after payments due bondholders and trust administrative expenses have been satisfied.
Securities lending means lending a security to a counterparty, either directly or through an agent, and accepting collateral in return.
Security means a share, participation,
or other interest in property or in an
enterprise of the issuer or an obligation of the issuer that:
(1) Either is represented by an instrument issued in bearer or registered

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§ 703.3

12 CFR Ch. VII (1–1–18 Edition)

form or, if not represented by an instrument, is registered in books maintained to record transfers by or on behalf of the issuer;
(2) Is of a type commonly dealt in on
securities exchanges or markets or,
when represented by an instrument, is
commonly recognized in any area in
which it is issued or dealt in as a medium for investment; and
(3) Either is one of a class or series or
by its terms is divisible into a class or
series of shares, participations, interests, or obligations.
Senior management employee means a
Federal credit union’s chief executive
officer (typically this individual holds
the title of President or Treasurer/
Manager), an assistant chief executive
officer, and the chief financial officer.
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
section 107(7) of the Federal Credit
Union Act.
Weighted average life means the
weighted-average time to the return of
a dollar of principal, calculated by
multiplying each portion of principal
received by the time at which it is expected to be received (based on a reasonable and supportable estimate of
that time) and then summing and dividing by the total amount of principal.
When-issued
trading
of
securities
means the buying and selling of securities in the period between the announcement of an offering and the
issuance and payment date of the securities.
Yankee dollar deposit means a deposit
in a United States branch of a foreign
bank licensed to do business in the
State in which it is located, or a deposit in a State-chartered, foreign controlled bank.
Zero coupon investment means an investment that makes no periodic interest payments but instead is sold at a
discount from its face value. The holder of a zero coupon investment realizes
the rate of return through the gradual
appreciation of the investment, which

is redeemed at face value on a specified
maturity date.
[68 FR 32960, June 3, 2003, as amended at 69
FR 39831, July 1, 2004; 71 FR 76124, Dec. 20,
2006; 77 FR 74109, Dec. 13, 2012; 79 FR 5241,
Jan. 31, 2014]

§ 703.3 Investment policies.
A Federal credit union’s board of directors must establish written investment policies consistent with the Act,
this part, and other applicable laws and
regulations and must review the policy
at least annually. These policies may
be part of a broader, asset-liability
management policy. Written investment policies must address the following:
(a) The purposes and objectives of the
Federal credit union’s investment activities;
(b) The characteristics of the investments the Federal credit union may
make including the issuer, maturity,
index, cap, floor, coupon rate, coupon
formula, call provision, average life,
and interest rate risk;
(c) How the Federal credit union will
manage interest rate risk;
(d) How the Federal credit union will
manage liquidity risk;
(e) How the Federal credit union will
manage credit risk including specifically listing institutions, issuers, and
counterparties that may be used, or
criteria for their selection, and limits
on the amounts that may be invested
with each;
(f) How the Federal credit union will
manage concentration risk, which can
result from dealing with a single or related issuers, lack of geographic distribution, holding obligations with
similar characteristics like maturities
and indexes, holding bonds having the
same trustee, and holding securitized
loans having the same originator,
packager, or guarantor;
(g) Who has investment authority
and the extent of that authority. Those
with authority must be qualified by
education or experience to assess the
risk characteristics of investments and
investment transactions. Only officials
or employees of the Federal credit
union may be voting members of an investment-related committee;
(h) The broker-dealers the Federal
credit union may use;

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§ 703.5

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(i) The safekeepers the Federal credit
union may use;
(j) How the Federal credit union will
handle an investment that, after purchase, is outside of board policy or fails
a requirement of this part; and
(k) How the Federal credit union will
conduct investment trading activities,
if applicable, including addressing:
(1) Who has purchase and sale authority;
(2) Limits on trading account size;
(3) Allocation of cash flow to trading
accounts;
(4) Stop loss or sale provisions;
(5) Dollar size limitations of specific
types, quantity and maturity to be
purchased;
(6) Limits on the length of time an
investment may be inventoried in a
trading account; and
(7) Internal controls, including segregation of duties.
§ 703.4 Recordkeeping and documentation requirements.
(a) Federal credit unions with assets
of $10,000,000 or greater must comply
with all generally accepted accounting
principles applicable to reports or
statements required to be filed with
NCUA. Federal credit unions with assets less than $10,000,000 are encouraged
to do the same, but are not required to
do so.
(b) A Federal credit union must
maintain documentation for each investment transaction for as long as it
holds the investment and until the documentation has been audited in accordance with § 715.4 of this chapter and examined by NCUA. The documentation
should include, where applicable, bids
and prices at purchase and sale and for
periodic updates, relevant disclosure
documents or a description of the security from an industry-recognized information provider, financial data, and
tests and reports required by the Federal credit union’s investment policy
and this part.
(c) A Federal credit union must
maintain documentation its board of
directors used to approve a brokerdealer or a safekeeper for as long as the
broker-dealer or safekeeper is approved
and until the documentation has been
audited in accordance with § 715.4 of
this chapter and examined by NCUA.

(d) A Federal credit union must obtain an individual confirmation statement from each broker-dealer for each
investment purchased or sold.
[68 FR 32960, June 3, 2003, as amended at 69
FR 27828, May 17, 2004; 72 FR 30246, May 31,
2007]

§ 703.5 Discretionary control over investments and investment advisers.
(a) Except as provided in paragraph
(b) of this section, a Federal credit
union must retain discretionary control over its purchase and sale of investments. A Federal credit union has
not delegated discretionary control to
an investment adviser when the Federal credit union reviews all recommendations from investment advisers and is required to authorize a recommended purchase or sale transaction
before its execution.
(b)(1) A Federal credit union may delegate discretionary control over the
purchase and sale of investments to a
person other than a Federal credit
union official or employee:
(i) Provided the person is an investment adviser registered with the Securities and Exchange Commission under
the Investment Advisers Act of 1940 (15
U.S.C. 80b); and
(ii) In an amount up to 100 percent of
its net worth in the aggregate at the
time of delegation.
(2) At least annually, the Federal
credit union must adjust the amount of
funds held under discretionary control
to comply with the 100 percent of net
worth cap. The Federal credit union’s
board of directors must receive notice
as soon as possible, but no later than
the next regularly scheduled board
meeting, of the amount exceeding the
net worth cap and notify in writing the
appropriate regional director within 5
days after the board meeting. The credit union must develop a plan to comply
with the cap within a reasonable period
of time.
(3) Before transacting business with
an investment adviser, a Federal credit
union must analyze his or her background and information available from
State or Federal securities regulators,
including any enforcement actions
against the adviser, associated personnel, and the firm for which the adviser works.

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§ 703.6

12 CFR Ch. VII (1–1–18 Edition)

(c) A Federal credit union may not
compensate an investment adviser with
discretionary control over the purchase
and sale of investments on a per transaction basis or based on capital gains,
capital appreciation, net income, performance relative to an index, or any
other incentive basis.
(d) A Federal credit union must obtain a report from its investment adviser at least monthly that details the
investments under the adviser’s control and their performance.
§ 703.6 Credit analysis.
A Federal credit union must conduct
and document a credit analysis on an
investment and the issuing entity before purchasing it, except for investments issued or fully guaranteed as to
principal and interest by the U.S. government or its agencies, enterprises, or
corporations or fully insured (including
accumulated interest) by the National
Credit Union Administration or the
Federal Deposit Insurance Corporation.
A Federal credit union must update
this analysis at least annually for as
long as it holds the investment.

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§ 703.7 Notice of non-compliant investments.
A Federal credit union’s board of directors must receive notice as soon as
possible, but no later than the next
regularly scheduled board meeting, of
any investment that either is outside
of board policy after purchase or has
failed a requirement of this part. The
board of directors must document its
action regarding the investment in the
minutes of the board meeting, including a detailed explanation of any decision not to sell it. The Federal credit
union must notify in writing the appropriate regional director of an investment that has failed a requirement of
this part within 5 days after the board
meeting.
§ 703.8 Broker-dealers.
(a) A Federal credit union may purchase and sell investments through a
broker-dealer as long as the brokerdealer is registered as a broker-dealer
with the Securities and Exchange Commission under the Securities Exchange
Act of 1934 (15 U.S.C. 78a et seq.) or is a
depository institution whose broker-

dealer activities are regulated by a
Federal or State regulatory agency.
(b) Before purchasing an investment
through a broker-dealer, a Federal
credit union must analyze and annually update the following:
(1) The background of any sales representative with whom the Federal
credit union is doing business;
(2) Information available from State
or Federal securities regulators and securities industry self-regulatory organizations, such as the National Association of Securities Dealers and the
North American Securities Administrators Association, about any enforcement actions against the broker-dealer, its affiliates, or associated personnel; and
(3) If the broker-dealer is acting as
the
Federal
credit
union’s
counterparty, the ability of the brokerdealer 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.
(c) The requirements of paragraph (a)
of this section do not apply when the
Federal credit union purchases a certificate of deposit or share certificate
directly from a bank, credit union, or
other depository institution.
[68 FR 32960, June 3, 2003, as amended at 69
FR 39831, July 1, 2004; 77 FR 74109, Dec. 13,
2012]

§ 703.9 Safekeeping of investments.
(a) A Federal credit union’s purchased investments and repurchase collateral must be in the Federal credit
union’s possession, recorded as owned
by the Federal credit union through
the Federal Reserve Book-Entry System, or held by a board-approved
safekeeper under a written custodial
agreement that requires the safekeeper
to exercise, at least, ordinary care.
(b) Any safekeeper used by a Federal
credit union must be regulated and supervised by either the Securities and
Exchange Commission, a Federal or
State depository institution regulatory
agency, or a State trust company regulatory agency.

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§ 703.12

(c) A Federal credit union must obtain and reconcile monthly a statement of purchased investments and repurchase collateral held in safekeeping.
(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.
[68 FR 32960, June 3, 2003, as amended at 69
FR 39831, July 1, 2004; 77 FR 74109, Dec. 13,
2012]

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§ 703.10 Monitoring non-security investments.
(a) At least quarterly, a Federal credit union must prepare a written report
listing all of its shares and deposits in
banks, credit unions, and other depository institutions, that have one or
more of the following features:
(1) Embedded options;
(2) Remaining maturities greater
than 3 years; or
(3) Coupon formulas that are related
to more than one index or are inversely
related to, or multiples of, an index.
(b) The requirement of paragraph (a)
of this section does not apply to shares
and deposits that are securities.
(c) If a Federal credit union does not
have an investment-related committee,
then each member of its board of directors must receive a copy of the report
described in paragraph (a) of this section. If a Federal credit union has an
investment-related committee, then
each member of the committee must
receive a copy of the report, and each
member of the board must receive a
summary of the information in the report.
§ 703.11 Valuing securities.
(a) Before purchasing or selling a security, a Federal credit union must obtain either price quotations on the security from at least two broker-dealers
or a price quotation on the security
from an industry-recognized information provider. This requirement to obtain price quotations does not apply to

new issues purchased at par or at original issue discount.
(b) At least monthly, a Federal credit
union must determine the fair value of
each security it holds. It may determine fair value by obtaining a price
quotation on the security from an industry-recognized
information
provider, a broker-dealer, or a safekeeper.
(c) At least annually, the Federal
credit union’s supervisory committee
or its external auditor must independently assess the reliability of monthly
price quotations received from a
broker-dealer or safekeeper. The Federal credit union’s supervisory committee or external auditor must follow
generally accepted auditing standards,
which require either re-computation or
reference to market quotations.
(d) If a Federal credit union is unable
to obtain a price quotation required by
this section for a particular security,
then it may obtain a quotation for a
security with substantially similar
characteristics.
§ 703.12

Monitoring securities.

(a) At least monthly, a Federal credit
union must prepare a written report
setting forth, for each security held,
the fair value and dollar change since
the prior month-end, with summary information for the entire portfolio.
(b) At least quarterly, a Federal credit union must prepare a written report
setting forth the sum of the fair values
of all fixed and variable rate securities
held that have one or more of the following features:
(1) Embedded options;
(2) Remaining maturities greater
than 3 years; or
(3) Coupon formulas that are related
to more than one index or are inversely
related to, or multiples of, an index.
(c) Where the amount calculated in
paragraph (b) of this section is greater
than a Federal credit union’s net
worth, the report described in that
paragraph must provide a reasonable
and supportable estimate of the potential impact, in percentage and dollar
terms, of an immediate and sustained
parallel shift in market interest rates
of plus and minus 300 basis points on:
(1) The fair value of each security in
the Federal credit union’s portfolio;

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§ 703.13

12 CFR Ch. VII (1–1–18 Edition)

(2) The fair value of the Federal credit union’s portfolio as a whole; and
(3) The Federal credit union’s net
worth.
(d) If the Federal credit union does
not have an investment-related committee, then each member of its board
of directors must receive a copy of the
reports described in paragraphs (a)
through (c) of this section. If the Federal credit union has an investment-related committee, then each member of
the committee must receive copies of
the reports, and each member of the
board of directors must receive a summary of the information in the reports.

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§ 703.13 Permissible investment activities.
(a) Regular way settlement and delivery
versus payment basis. A Federal credit
union may only contract for the purchase or sale of a security as long as
the delivery of the security is by regular way settlement and the transaction is accomplished on a delivery
versus payment basis.
(b) Federal funds. A Federal credit
union may sell Federal funds to an institution described in Section 107(8) of
the Act and credit unions, as long as
the interest or other consideration received from the financial institution is
at the market rate for Federal funds
transactions.
(c) Investment repurchase transaction.
A Federal credit union may enter into
an investment repurchase transaction
so long as:
(1) Any securities the Federal credit
union receives are permissible investments for Federal credit unions, the
Federal credit union, or its agent, either takes physical possession or control of the repurchase securities or is
recorded as owner of them through the
Federal Reserve Book Entry Securities
Transfer System, the Federal credit
union, or its agent, receives a daily assessment of their market value, including accrued interest, and the Federal
credit union maintains adequate margins that reflect a risk assessment of
the securities and the term of the
transaction; and
(2) The Federal credit union has entered into signed contracts with all approved counterparties.

(d) Borrowing repurchase transaction.
A Federal credit union may enter into
a borrowing repurchase transaction so
long as:
(1) The transaction meets the requirements of paragraph (c) of this section;
(2) Any cash the Federal credit union
receives is subject to the borrowing
limit specified in Section 107(9) of the
Act, and any investments the Federal
credit union purchases with that cash
are permissible for Federal credit
unions; and
(3) The investments referenced in
paragraph (d)(2) of this section must
mature under the following conditions:
(i) No later than the maturity of the
borrowing repurchase transaction;
(ii) No later than thirty days after
the borrowing repurchase transaction,
unless authorized under § 703.20, provided the value of all investments purchased with maturities later than borrowing repurchase transactions does
not exceed 100 percent of the federal
credit union’s net worth; or
(iii) At any time later than the maturity of the borrowing repurchase transaction, provided the value of all investments purchased with maturities later
than borrowing repurchase transactions does not exceed 100 percent of
the federal credit union’s net worth
and the credit union received a composite CAMEL rating of ‘‘1’’ or ‘‘2’’ for
the last two (2) full examinations and
maintained a net worth classification
of ‘‘well capitalized’’ under part 702 of
this chapter for the six (6) immediately
preceding quarters or, if subject to a
risk-based net worth (RBNW) requirement under part 702 of this chapter, has
remained ‘‘well capitalized’’ for the six
(6) immediately preceding quarters
after applying the applicable RBNW requirement.
(e) Securities lending transaction. A
Federal credit union may enter into a
securities lending transaction so long
as:
(1) The Federal credit union receives
written confirmation of the loan;
(2) Any collateral the Federal credit
union receives is a legal investment for
Federal credit unions, the Federal
credit union, or its agent, obtains a
first priority security interest in the

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National Credit Union Administration

§ 703.14

collateral by taking physical possession or control of the collateral, or is
recorded as owner of the collateral
through the Federal Reserve Book
Entry Securities Transfer System; and
the Federal credit union, or its agent,
receives a daily assessment of the market value of the collateral, including
accrued interest, and maintains adequate margin that reflects a risk assessment of the collateral and the term
of the loan;
(3) Any cash the Federal credit union
receives is subject to the borrowing
limit specified in Section 107(9) of the
Act, and any investments the Federal
credit union purchases with that cash
are permissible for Federal credit
unions and mature no later than the
maturity of the transaction; and
(4) The Federal credit union has executed a written loan and security
agreement with the borrower.
(f)(1) Trading securities. A Federal
credit union may trade securities, including engaging in when-issued trading and pair-off transactions, so long as
the Federal credit union can show that
it has sufficient resources, knowledge,
systems, and procedures to handle the
risks.
(2) A Federal credit union must
record any security it purchases or
sells for trading purposes at fair value
on the trade date. The trade date is the
date the Federal credit union commits,
orally or in writing, to purchase or sell
a security.
(3) At least monthly, the Federal
credit union must give its board of directors or investment-related committee a written report listing all purchase and sale transactions of trading
securities and the resulting gain or loss
on an individual basis.

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[68 FR 32960, June 3, 2003, as amended at 77
FR 31991, May 31, 2012]

§ 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.
(b) Corporate credit union shares or deposits. A Federal credit union may purchase shares or deposits in a corporate
credit union, except where the NCUA
Board has notified it that the corporate credit union is not operating in
compliance with part 704 of this chapter. A Federal credit union’s aggregate
amount of perpetual and nonperpetual
capital, as defined in part 704 of this
chapter, in one corporate credit union
is limited to two percent of the federal
credit union’s assets measured at the
time of investment or adjustment. A
Federal
credit
union’s
aggregate
amount of contributed capital in all
corporate credit unions is limited to
four percent of assets measured at the
time of investment or adjustment.
(c) Registered investment company. A
Federal credit union may invest in a
registered investment company or collective investment fund, as long as the
prospectus of the company or fund restricts the investment portfolio to investments and investment transactions
that are permissible for Federal credit
unions.
(d) Collateralized mortgage obligation/
real estate mortgage investment conduit.
A Federal credit union may invest in a
fixed or variable rate collateralized
mortgage obligation/real estate mortgage investment conduit.
(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 it conducts
and documents an analysis that reasonably concludes the security is at
least investment grade. The Federal
credit union must also limit its aggregate municipal securities holdings to
no more than 75 percent of the Federal
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 Federal credit union’s
net worth.
(f) Instruments issued by institutions
described in Section 107(8) of the Act. A
Federal credit union may invest in the
following instruments issued by an institution described in Section 107(8) of
the Act:

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§ 703.14

12 CFR Ch. VII (1–1–18 Edition)

(1) Yankee dollar deposits;
(2) Eurodollar deposits;
(3) Banker’s acceptances;
(4) Deposit notes; and
(5) Bank notes with weighted average
maturities of less than 5 years.
(g) European financial options contract.
A Federal credit union may purchase a
European financial options contract or
a series of European financial options
contracts only to fund the payment of
dividends on member share certificates
where the dividend rate is tied to an
equity index provided:
(1) The option and dividend rate are
based on a domestic equity index;
(2) Proceeds from the options are
used only to fund dividends on the equity-linked share certificates;
(3) Dividends on the share certificates are derived solely from the
change in the domestic equity index
over a specified period;
(4) The options’ expiration dates are
no later than the maturity date of the
share certificate.
(5) The certificate may be redeemed
prior to the maturity date only upon
the member’s death or termination of
the corresponding option;
(6) The total costs associated with
the purchase of the option is known by
the Federal credit union prior to effecting the transaction;
(7) The options are purchased at the
same time the certificate is issued to
the member.
(8) The counterparty to the transaction is a domestic counterparty and
has been approved by the Federal credit union’s board of directors;
(9) The counterparty to the transaction meets the minimum credit quality standards as approved by the Federal credit union’s board of directors.
(10) Any collateral posted by the
counterparty is a permissible investment for Federal credit unions and is
valued daily by an independent third
party along with the value of the option;
(11) The aggregate amount of equitylinked member share certificates does
not exceed 50 percent of the Federal
credit union’s net worth;
(12) The terms of the share certificate
include a guarantee that there can be
no loss of principal to the member regardless of changes in the value of the

option unless the certificate is redeemed prior to maturity; and
(13) The Federal credit union provides its board of directors with a
monthly report detailing at a minimum:
(i) The dollar amount of outstanding
equity-linked share certificates;
(ii) Their maturities; and
(iii) The fair value of the options as
determined by an independent third
party.
(h) Mortgage note repurchase transactions. A federal credit union may invest in securities that are offered and
sold pursuant to section 4(5) of the Securities Act of 1933, 15 U.S.C. 77d(5),
only as a part of an investment repurchase agreement under § 703.13(c), subject to the following conditions:
(1) The aggregate of the investments
with any one counterparty is limited
to 25 percent of the Federal 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 approved by the Federal credit
union’s board of directors.
(3) The federal credit union must obtain a daily assessment of the market
value
of
the
securities
under
§ 703.13(c)(1) using an independent
qualified agent;
(4) The mortgage note repurchase
transaction is limited to a maximum
term of 90 days;
(5) All mortgage note repurchase
transactions will be conducted under
tri-party custodial agreements; and
(6) A federal credit union must obtain
an undivided interest in the securities.
(i) Zero-coupon investments. A federal
credit union may only purchase a zerocoupon investment with a maturity
date that is no greater than 10 years
from the related settlement date, unless authorized under § 703.20 or otherwise provided in this paragraph. A federal credit union that received a composite CAMEL rating of ‘‘1’’ or ‘‘2’’ for
the last two (2) full examinations and
maintained a net worth classification
of ‘‘well capitalized’’ under part 702 of
this chapter for the six (6) immediately
preceding quarters or, if subject to a

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National Credit Union Administration

§ 703.16

risk-based net worth (RBNW) requirement under part 702 of this chapter, has
remained ‘‘well capitalized’’ for the six
(6) immediately preceding quarters
after applying the applicable RBNW requirement, may purchase a zero-coupon investment with a maturity date
that is no greater than 30 years from
the related settlement date.
(j) Commercial mortgage related security
(CMRS). A federal credit union may
purchase a CMRS permitted by Section
107(7)(E) of the Act; and, pursuant to
Section 107(15)(B) of the Act, a CMRS
of an issuer other than a governmentsponsored enterprise enumerated in
Section 107(7)(E) of the Act, provided:
(1) The Federal credit union conducts
and documents a credit analysis that
reasonably concludes the CMRS is at
least investment grade.
(2) The CMRS meets the definition of
mortgage related security as defined in
15 U.S.C. 78c(a)(41) and the definition of
commercial mortgage related security
as defined in § 703.2 of this part;
(3) The CMRS’s underlying pool of
loans contains more than 50 loans with
no one loan representing more than 10
percent of the pool; and
(4) The aggregate amount of private
label CMRS purchased by the federal
credit union does not exceed 25 percent
of its net worth, unless authorized
under § 703.20 or as otherwise provided
in this subparagraph. A federal credit
union that has received a composite
CAMEL rating of ‘‘1’’ or ‘‘2’’ for the
last two (2) full examinations and
maintained a net worth classification
of ‘‘well capitalized’’ under part 702 of
this chapter for the six (6) immediately
preceding quarters or, if subject to a
risk-based net worth (RBNW) requirement under part 702 of this chapter, has
remained ‘‘well capitalized’’ for the six
(6) immediately preceding quarters
after applying the applicable RBNW requirement, may hold private label
CMRS in an aggregate amount not to
exceed 50% of its net worth.
(k) Derivatives. A Federal credit
union may only enter into in the following derivatives transactions:
(1) Any derivatives permitted under
§ 701.21(i) of this chapter, § 703.14(g), or
subpart B of this part;
(2) Embedded options not required
under generally accepted accounting

principles (GAAP) adopted in the
United States to be accounted for separately from the host contract; and
(3) Interest rate lock commitments
or forward sales commitments made in
connection with a loan originated by a
Federal credit union.
[68 FR 32960, June 3, 2003, as amended at 69
FR 39831, July 1, 2004; 71 FR 76124, Dec. 20,
2006; 75 FR 64826, Oct. 20, 2010; 77 FR 31991,
May 31, 2012; 77 FR 74110, Dec. 13, 2012; 78 FR
13213 Feb. 27, 2013; 79 FR 5241, Jan. 31, 2014; 81
FR 17602, Mar. 30, 2016]
EFFECTIVE DATE NOTE: At 80 FR 66722, Oct.
29, 2015, § 703.14 was amended by: 1. in paragraph (i), removing the words ‘‘net worth
classification’’ and adding in their place the
words ‘‘capital classification’’, and removing
the words ‘‘or, if subject to a risk-based net
worth (RBNW) requirement under part 702 of
this chapter, has remained ’well capitalized’
for the six (6) immediately preceding quarters after applying the applicable RBNW requirement,’’, and 2. in paragraph (j)(4), removing the words ‘‘net worth classification’’
and adding in their place the words ‘‘capital
classification’’, and removing the words ‘‘or,
if subject to a risk-based net worth (RBNW)
requirement under part 702 of this chapter,
has remained ’well capitalized’ for the six (6)
immediately preceding quarters after applying the applicable RBNW requirement,’’, effective Jan. 1, 2019.

§ 703.15 Prohibited investment activities.
Adjusted trading or short sales. A Federal credit union may not engage in adjusted trading or short sales.
§ 703.16

Prohibited investments.

(a) Mortgage servicing rights. A Federal credit union may not purchase
mortgage servicing rights as an investment but may perform mortgage servicing functions as a financial service
for a member as long as the mortgage
loan is owned by a member;
(b) Stripped mortgage backed securities
(SMBS). A Federal credit union may
not invest in SMBS or securities that
represent interests in SMBS except as
described in paragraphs (1) and (3)
below.
(1) A Federal credit union may invest
in and hold exchangeable collateralized
mortgage obligations (exchangeable
CMOs) representing beneficial ownership interests in one or more interestonly classes of a CMO (IO CMOs) or

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§ 703.17

12 CFR Ch. VII (1–1–18 Edition)

principal-only classes of a CMO (PO
CMOs), but only if:
(i) At the time of purchase, the ratio
of the market price to the remaining
principal balance is between .8 and 1.2,
meaning that the discount or premium
of the market price to par must be less
than 20 points;
(ii) The offering circular or other official information available at the time
of purchase indicates that the notional
principal on each underlying IO CMO
should decline at the same rate as the
principal on one or more of the underlying non-IO CMOs, and that the principal on each underlying PO CMO
should decline at the same rate as the
principal, or notional principal, on one
or more of the underlying non-PO
CMOs; and
(iii) The credit union staff has the expertise dealing with exchangeable
CMOs to apply the conditions in paragraphs (e)(1)(i) and (e)(1)(ii) of this section.
(2) A Federal credit union that invests in an exchangeable CMO may exercise the exchange option only if all of
the underlying CMOs are permissible
investments for that credit union.
(3) A Federal credit union may accept
an exchangeable CMO representing
beneficial ownership interests in one or
more IO CMOs or PO CMOs as an asset
associated with an investment repurchase transaction or as collateral in a
securities lending transaction. When
the exchangeable CMO is associated
with one of these two transactions, it
need not conform to the conditions in
paragraphs (e)(1)(i) and (ii) of this section.
(c) Other prohibited investments. A
Federal credit union may not purchase
residual interests in collateralized
mortgage obligations, real estate mortgage investment conduits, or small
business related securities.

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[68 FR 32960, June 3, 2003, as amended at 69
FR 39832, July 1, 2004; 77 FR 31991, May 31,
2012; 79 FR 5241, Jan. 31, 2014]

§ 703.17 Conflicts of interest.
(a) A Federal credit union’s officials
and senior management employees, and
their immediate family members, may
not receive anything of value in connection with its investment transactions. This prohibition also applies

to any other employee, such as an investment officer, if the employee is directly involved in investments, unless
the Federal credit union’s board of directors determines that the employee’s
involvement does not present a conflict
of interest. This prohibition does not
include compensation for employees.
(b) A Federal credit union’s officials
and employees must conduct all transactions with business associates or
family members that are not specifically prohibited by paragraph (a) of
this section at arm’s length and in the
Federal credit union’s best interest.
§ 703.18 Grandfathered investments.
(a) Subject to safety and soundness
considerations, a Federal credit union
may hold a CMO/REMIC residual,
stripped mortgage-backed securities,
or zero coupon security with a maturity greater than 10 years, if it purchased the investment:
(1) Before December 2, 1991; or
(2) On or after December 2, 1991, but
before January 1, 1998, if for the purpose of reducing interest rate risk and
if the Federal credit union meets the
following:
(i) The Federal credit union has a
monitoring and reporting system in
place that provides the documentation
necessary to evaluate the expected and
actual performance of the investment
under different interest rate scenarios;
(ii) The Federal credit union uses the
monitoring and reporting system to
conduct and document an analysis that
shows, before purchase, that the proposed investment will reduce its interest rate risk;
(iii) After purchase, the Federal credit union evaluates the investment at
least quarterly to determine whether
or not it actually has reduced the interest rate risk; and
(iv) The Federal credit union accounts for the investment consistent
with generally accepted accounting
principles.
(b) A federal credit union may hold a
zero-coupon investment with a maturity greater than 10 years, a borrowing
repurchase transaction in which the investment matures at any time later
than the maturity of the borrowing, or
CMRS that cause the credit union’s aggregate amount of CMRS from issuers

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National Credit Union Administration

§ 703.20

other than government-sponsored enterprises to exceed 25% of its net
worth, in each case if it purchased the
investment or entered the transaction
under the Regulatory Flexibility Program before July 2, 2012.
(c) All grandfathered investments are
subject to the valuation and monitoring requirements of §§ 703.10, 703.11,
and 703.12 of this part.
[68 FR 32960, June 3, 2003, as amended at 77
FR 31991, May 31, 2012]

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§ 703.19

Investment pilot program.

(a) Under the investment pilot program, NCUA will permit a limited
number of Federal credit unions to engage in investment activities prohibited by this part but permitted by the
Act.
(b) Except as provided in paragraph
(c) of this section, before a Federal
credit union may engage in additional
activities it must obtain written approval from NCUA. To obtain approval,
a Federal credit union must submit a
request to its regional director that addresses the following items:
(1) Certification that the Federal
credit union is ‘‘well-capitalized’’
under part 702 of this chapter;
(2) Board policies approving the activities and establishing limits on
them;
(3) A complete description of the activities, with specific examples of how
they will benefit the Federal credit
union and how they will be conducted;
(4) A demonstration of how the activities will affect the Federal credit
union’s financial performance, risk
profile, and asset-liability management
strategies;
(5) Examples of reports the Federal
credit union will generate to monitor
the activities;
(6) Projections of the associated costs
of the activities, including personnel,
computer, audit, and so forth;
(7) Descriptions of the internal systems that will measure, monitor, and
report the activities;
(8) Qualifications of the staff and officials responsible for implementing
and overseeing the activities; and
(9) Internal control procedures that
will be implemented, including audit
requirements.

(c) A third-party seeking approval of
an investment pilot program must submit a request to the Director of the Office of Capital Markets and Planning
that addresses the following items:
(1) A complete description of the activities with specific examples of how a
credit union will conduct and account
for them, and how they will benefit a
Federal credit union;
(2) A description of any risks to a
Federal credit union from participating in the program; and
(3) Contracts that must be executed
by the Federal credit union.
(d) A Federal credit union need not
obtain individual written approval to
engage in investment activities prohibited by this part but permitted by statute where the activities are part of a
third-party investment program that
NCUA has approved under this section.
[68 FR 32960, June 3, 2003, as amended at 69
FR 39832, July 1, 2004; 70 FR 55517, Sept. 22,
2005]

§ 703.20 Request for additional authority.
(a) Additional authority. A federal
credit union may submit a written request to its regional director seeking
expanded authority above the following
limits in this part:
(1) Borrowing repurchase transaction
maximum maturity mismatch of 30
days under § 703.13(d)(3)(ii).
(2) Zero-coupon investment 10-year
maximum maturity under § 703.14(i), up
to a maturity of no more than 30 years.
(3) CMRS aggregate limit of 25% of
net worth under § 703.14(j), up to no
more than 50% of net worth. To obtain
approval for additional authority, the
federal credit union must demonstrate
three consecutive years of effective
CMRS portfolio management and the
ability to evaluate key risk factors.
(b) Written request. A federal credit
union desiring additional authority
must submit a written request to the
NCUA regional office having jurisdiction over the geographical area in
which the credit union’s main office is
located, that includes the following:
(1) A copy of the credit union’s investment policy;
(2) The higher limit sought;
(3) An explanation of the need for additional authority;

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§ 703.100

12 CFR Ch. VII (1–1–18 Edition)

(4) Documentation supporting the
credit union’s ability to manage the investment or activity; and
(5) An analysis of the credit union’s
prior experience with the investment
or activity.
(c) Approval process. A regional director will provide a written determination on a request for expanded authority within 60 calendar days after receipt of the request; however, the 60day period will not begin until the requesting credit union has submitted all
necessary information to the regional
director. The regional director will inform the requesting credit union, in
writing, of the date the request was received and of any additional documentation that the regional director
requires in support of the request. If
the regional director approves the request, the regional director will establish a limit on the investment or activity as appropriate and subject to the
limitations in this part. If the regional
director does not notify the credit
union of the action taken on its request within 60 calendar days of the receipt of the request or the receipt of
additional requested supporting information, whichever occurs later, the
credit union may proceed with its proposed investment or investment activity.
(d) Appeal to NCUA Board. A Federal
credit union may request the regional
director to reconsider any part of the
determination made under paragraph
(c) of this section and/or file an appeal
with the NCUA Board in accordance
with the procedures set forth in subpart B to part 746 of this chapter.
[77 FR 31991, May 31, 2012, as amended at 82
FR 50293, Oct. 30, 2017]

Subpart B—Derivatives Authority
SOURCE: 79 FR 5241, Jan. 31, 2014, unless
otherwise noted.

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§ 703.100

Purpose and scope.

(a) Purpose. This subpart allows Federal credit unions to enter into certain
derivatives transactions exclusively for
the purpose of reducing interest rate
risk exposure.
(b) Scope. (1) This subpart applies to
all Federal credit unions. Except as

provided in § 741.219, this rule does not
apply to federally insured, state-chartered credit unions.
(2) Mutual funds. This subpart does
not permit a Federal credit union to
invest in registered investment companies or collective investment funds
under § 703.14(c) of this part, where the
prospectus of the company or fund permit the investment portfolio to contain derivatives.
§ 703.101 Definitions.
For purposes of this subpart:
Amortizing notional amount means a
characteristic of a derivative, in which
the notional amount declines on a predetermined fixed basis over the term of
the contract, according to an amortization schedule to which the parties
agree when executing the contract;
Basis swap means an agreement between two parties in which the parties
make periodic payments to each other
based on floating rate indices multiplied by a notional amount;
Cleared swap has the meaning as defined by the Commodity Futures Trading Commission in 17 CFR 22.1;
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;
Credit support annex means the terms
or rules under which collateral is posted or transferred between a Federal
credit union and a counterparty to
mitigate credit risk that may result
from changes in the fair value of derivatives positions;
Derivative means a financial contract
which 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 in
17 CFR 1.3(d);
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;
Exchange means a central financial
clearing market where end users can
trade futures, as defined in this section
of this subpart;

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National Credit Union Administration

§ 703.101

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;
Fair value has the meaning specified
in § 703.2 of subpart A of this part;
Field director means an NCUA Regional Director or the Director of the
Office of National Examinations and
Supervision;
Forward start date means an agreement that delays the settlement date
of a derivatives transaction for a specified period of time;
Futures means a U.S. Treasury note
financial contract that obligates the
buyer to take delivery of Treasury
notes (or the seller to deliver Treasury
notes) at a predetermined future date
and price. Futures contracts are standardized to facilitate trading on an exchange;
Futures commission merchant (FCM)
has the meaning as defined by the
Commodity Futures Trading Commission in 17 CFR 1.3(p);
Hedge means to enter into a derivatives transaction to mitigate interest
rate risk;
Interest rate cap means a contract,
based on a reference interest rate, for
payment to the purchaser when the reference interest rate rises above the
level specified in the contract;
Interest rate floor means a contract,
based on a reference interest rate, for
payment to the purchaser when the reference interest rate falls below the
level specified in the contract;
Interest rate risk means the vulnerability of a Federal credit union’s earnings or economic value to movements
in market interest rates;
Interest rate swap means an agreement to exchange future payments of
interest on a notional amount at specific times and for a specified time period;
Introducing broker means a futures
brokerage firm that deals directly with
the client, while the trade execution is
done by a futures commission merchant;
ISDA protocol means a multilateral
contractual amendment mechanism
that has been used to address changes
to International Swap and Derivatives

Association (ISDA) standard contracts
since 1998;
Leveraged derivative means a derivative where the value of the transaction
does not change in a one to one proportion with the contractual rate or index;
(x) Margin means the minimum
amount of funds that must be deposited between parties to a derivatives
transaction, as detailed in a credit support annex or clearing arrangement;
Master service agreement means a document agreed upon between two parties that sets out standard terms that
apply to all derivatives transactions
entered into between those parties.
Each time the same two parties enter
into a transaction, the terms of the
master service agreement apply automatically and do not need to be re-negotiated. The most common form of a
master service agreement is a master
ISDA agreement;
Minimum transfer amount means the
minimum amount of collateral that a
party to a derivatives transaction will
require, per transfer, to cover exposure
in excess of the collateral threshold;
Net economic value means the economic value of assets minus the economic value of liabilities;
Net worth has the meaning specified
in § 702.2 of this chapter;
Non-cleared means transactions that
do not go through a derivatives clearing organization;
Notional amount means the contracted amount of a derivatives contract for swaps and options on which
interest payments or other payments
are based. For futures contracts, the
notional amount is represented by the
contract size;
Novation means the substitution of
an old obligation with a new one that
either replaces an existing obligation
with a new obligation or replaces an
original party with a new party;
Reference interest rate means the
index or rate to be used as the variable
rate for resetting derivatives transactions;
Reporting date means the end of the
business day on the date used to report
positions and fair values for limit compliance (e.g., daily, month-end, quarter-end and fiscal year-end);
Senior executive officer has the meaning specified in § 701.14 of this chapter

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§ 703.102

12 CFR Ch. VII (1–1–18 Edition)

and any other similar employee that is
directly within the chain of command
for the oversight of a Federal credit
union’s derivatives program, as identified in a Federal credit union’s process
and responsibility framework, as discussed in § 703.106(b)(1) of this subpart;
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 Commodity Futures Trading Commission in 17 CFR 1.3(ggg);
Swap execution facility means a Commodities and Futures Trading Commission-registered facility that provides a
system or platform for participants to
execute cleared derivatives transactions;
Threshold amount means an unsecured
credit exposure that a party to a derivatives transaction is prepared to accept before requesting additional collateral from the other party;
Trade date means the date that a derivatives order (new transactions, terminations, or assignments) is executed
in the market; and
Unamortized premium means the balance of the upfront premium payment
that has not been amortized.

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§ 703.102

Permissible derivatives.

(a) Products and characteristics. A Federal credit union with derivatives authority may apply to use each of the
following products and characteristics,
subject to the limits in § 703.103 of this
subpart:
(1) Interest rate swaps with the following characteristics:
(i) Settle within three business days,
unless the Federal credit union is approved for a forward start date of no
more than 90 days from the trade date;
and
(ii) Do not have fluctuating notional
amounts, unless the Federal credit
union is approved to use derivatives
with amortizing notional amounts.
(2) Basis swaps with the following
characteristics:
(i) Settle within three business days,
unless the Federal credit union is approved for a forward start date of no

more than 90 days from the trade date;
and
(ii) Do not have fluctuating notional
amounts, unless the Federal credit
union is approved to use derivatives
with amortizing notional amounts.
(3) Purchased interest rate caps with
no fluctuating notional amounts, unless the Federal credit union is approved to use derivatives with amortizing notional amounts.
(4) Purchased interest rate floors
with no fluctuating notional amounts,
unless the Federal credit union is approved to use derivatives with amortizing notional amounts.
(5) U.S. Treasury note futures (2-, 3-,
5-, and 10-year contracts).
(b) Overall program characteristics. A
Federal credit union may only enter
into derivatives, as identified and described in paragraph (a) of this section,
that have the following characteristics:
(1) Not leveraged;
(2) Based on domestic rates, as defined in § 703.14(a) of subpart A of this
part;
(3) Denominated in U.S. dollars;
(4) Except as provided in § 703.14(g) of
subpart A of this part, not used to create structured liability offerings for
members or nonmembers;
(5) Have contract maturity terms of
equal to or less than 15 years, at the
trade date; and
(6) Meet the definition of a derivative
under GAAP.
§ 703.103 Derivative authority.
(a) General authority. A Federal credit
union that is approved for derivatives
authority under § 703.111 of this subpart
may use any of the products and characteristics, described in § 703.102(a),
subject to the following limits, which
are described in more detail in appendix A to this subpart:
(1) Entry limits authority. Unless a
Federal credit union is permitted to
use standard limits authority under
this subpart, the aggregate fair value
loss (as defined in appendix A) on all of
a Federal credit union’s derivatives positions may not exceed 15 percent of
net worth, and a Federal credit union’s
weighted average remaining maturity
notional (as defined in appendix A),
may not exceed 65 percent of net
worth.

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National Credit Union Administration

§ 703.105

(2) Standard limits authority. A Federal credit union that is permitted to
use standard limits authority may not
exceed an aggregate fair value loss on
all of the Federal credit union’s derivatives positions of 25 percent of net
worth, and a weighted average remaining maturity notional of 100 percent of
net worth, provided:
(i) The Federal credit union has engaged in derivatives at the entry limits
authority for a continuous period of
one year (beginning on the trade date
of its first derivatives transaction); and
(ii) The Federal credit union has not
been notified in writing by NCUA of
any relevant safety and soundness concerns while engaged in derivatives at
the entry limits authority.
(b) Limit description—(1) Fair value
limit. The fair value limit is calculated
by aggregating the fair values for all
derivatives positions at the reporting
date. If an aggregate loss exists, it
must be less than the limit set forth in
this subpart. A further description of
this limit and example calculations are
detailed in appendix A to this subpart.
(2) Weighted average remaining maturity notional limit. The weighted average
remaining maturity notional limit is
calculated by aggregating the notional
amount for all derivatives positions
based on each derivative’s pricing sensitivity and maturity. A further description of this limit and example calculations are detailed in appendix A to
this subpart.

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§ 703.104 Requirements for derivative
counterparty agreements, collateral
and margining.
(a) A Federal credit union may have
exchange-traded, centrally cleared, or
non-cleared derivatives, in accordance
with the following:
(1) Exchange-traded and cleared derivatives. A Federal credit union with derivatives that are exchange-traded or
centrally cleared must:
(i) Comply with the Commodity Futures Trading Commission’s rules;
(ii) Use only swap dealers, introducing brokers, and/or futures commission merchants that are current registrants of the Commodity Futures
Trading Commission; and

(iii) Comply with the margining requirements required by the futures
commission merchant.
(2) Non-cleared derivative transactions.
A Federal credit union with derivatives
that are non-cleared must:
(i) Have a master service agreement
and credit support annex with a registered swap dealer that are in accordance with ISDA protocol for standard
bilateral agreements;
(ii) Utilize margining requirements
contracted through a credit support
annex and have a minimum transfer
amount of $250,000 for daily margining
requirements; and
(iii) Accept as collateral, for margin
requirements, only cash (U.S. dollars),
U.S. Treasuries, government-sponsored
enterprise debt, and government-sponsored enterprise residential mortgagebacked security pass-through securities.
(b) Counterparty, collateral, and margining management. A Federal credit
union must:
(1) Have systems in place to effectively manage collateral and margining requirements;
(2) Have a collateral management
process that monitors the Federal credit union’s collateral and margining requirements daily and ensures that its
derivatives positions are collateralized
at all times and in accordance with the
collateral requirements of this subpart
and the Federal credit union’s agreement with its counterparty. This includes the posting, tracking, valuation,
and reporting of collateral using fair
value; and
(3) Analyze and measure potential liquidity needs related to its derivatives
program and stemming from additional
collateral requirements due to changes
in interest rates. The Federal credit
union must calculate and track contingent liquidity needs in the event a derivatives 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.
§ 703.105

Reporting requirements.

(a) Board reporting. At least quarterly, a Federal credit union’s senior

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not PRA

§ 703.106

12 CFR Ch. VII (1–1–18 Edition)

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executive officers must deliver a comprehensive derivatives report to the
Federal credit union’s board of directors. The report may be delivered separately or as part of the standard funds
management or asset/liability report.
(b) Senior executive officer and asset liability committee. At least monthly,
Federal credit union staff must deliver
a comprehensive derivatives report to
the Federal credit union’s senior executive officers and, if applicable, the Federal credit union’s asset liability committee.
(c) Comprehensive derivatives 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;
(2) Utilization of the limits in
§ 703.103 and any additional limits in
the Federal credit union’s policies;
(3) An itemization of the Federal
credit union’s individual positions and
aggregate current fair values, and a
comparison with the Federal credit
union’s fair value loss and notional
limit authority, as described in appendix A to this subpart;
(4) A comprehensive view of the Federal credit union’s statement of financial condition, including, but not limited to, net economic value calculations for the Federal credit union’s
statement of financial condition done
with derivatives included and excluded;
(5) An evaluation of the effectiveness
of the derivatives transactions in mitigating interest rate risk; and
(6) An evaluation of effectiveness of
the hedge relationship and reporting
for derivatives in compliance with
GAAP.
§ 703.106 Operational support requirements.
(a) Required experience and competencies. A Federal credit union operating with derivatives authority must
internally possess the following experience and competencies:
(1) Board. Before entering into any
derivatives transactions, and annually
thereafter, a Federal credit union’s
board members must receive training
that provides a general understanding

of derivatives and the knowledge required to provide strategic oversight of
the Federal credit union’s derivatives
program. This requirement includes
understanding how derivatives fit into
the Federal credit union’s business
model and risk management process.
The Federal credit union must maintain evidence of this training, in accordance with its document retention
policy, until its next NCUA examination.
(2) Senior executive officers. A Federal
credit union’s senior executive officers
must be able to understand, approve,
and provide oversight for the derivatives activities. These individuals must
have a comprehensive understanding of
how derivatives fit into the Federal
credit union’s business model and risk
management process.
(3) Qualified derivatives personnel. To
engage in derivatives 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 derivatives. This requirement
includes identifying and assessing risk
in transactions, developing asset/liability risk management strategies, testing the effectiveness of asset/liability
risk management, determining the effectiveness of managing interest rate
risk under a range of stressed rates and
statement of financial condition scenarios, and evaluating the relative effectiveness of alternative strategies.
Staff must also be qualified to understand and undertake or oversee the appropriate modeling and analytics related to scope of risk to earnings and
economic value over the expected maturity of derivatives positions;
(ii) Accounting and financial reporting.
Staff must be qualified to understand
and oversee appropriate accounting
and financial reporting for derivatives
transactions in accordance with GAAP;
(iii) Derivatives execution and oversight. Staff must be qualified to undertake or oversee trade executions; and
(iv) Counterparty, collateral, and margining management. Staff must be qualified to evaluate counterparty, collateral, and margining risk as described in
§ 703.104 of this subpart.

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National Credit Union Administration

§ 703.107

(b) Required management and internal
controls structure. To effectively manage its derivatives activities, 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 support. Before executing any derivatives transaction, a
Federal credit union must identify and
document the circumstances that lead
to the decision to hedge, specify the derivatives strategy the Federal credit
union will employ, and demonstrate
the economic effectiveness of the
hedge;
(2) Internal controls review. For the
first two years after commencing its
derivatives program, a Federal credit
union must have an internal controls
review that is focused on the integration and introduction of derivatives
functions. This review must be performed by an independent external unit
or, if applicable, the Federal credit
union’s internal auditor. The review
must ensure the timely identification
of weaknesses in internal controls,
modeling methodologies, risk, and all
operational and oversight processes;
(3) Financial statement audit. Any Federal credit union engaging in derivatives transactions pursuant to this subpart must obtain an annual financial
statement audit, as defined in § 715.2(d)
of this chapter, and be compliant with
GAAP for all derivatives-related accounting and reporting;
(4) Process and responsibility framework. A Federal credit union must
maintain a written and schematic description (e.g., flow chart or organizational chart) of the derivatives management process in its derivatives policies and procedures. The description
must include the roles of staff, qualified personnel, external service providers, senior executive officers, the
board of directors, and any others involved in the derivatives program;
(5) 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 paragraph
(a)(3) of this section:
(i) Asset/liability risk management;

(ii) Accounting and financial reporting;
(iii) Derivatives execution and oversight; and
(iv) Collateral, counterparty, and
margining management.
(c) Legal review. A Federal credit
union with derivatives authority must
hire or engage legal counsel to reasonably ensure that all derivatives contracts adequately protect the legal and
business interests of the Federal credit
union. The Federal credit union’s counsel must have legal expertise with derivatives contracts and related matters.
(d) Policies and procedures. A Federal
credit union with derivatives authority
must operate according to comprehensive written policies and procedures for
control, measurement, and management of derivatives transactions. At a
minimum, the policies and procedures
must address the requirements of this
subpart, except for those in §§ 703.108
through 703.114, 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 annually and update them when necessary.
§ 703.107

External service providers.

(a) General. A Federal credit union
with derivatives authority may use external service providers to support or
conduct aspects of its derivatives program, provided:
(1) The external service provider, including affiliates, does not:
(i) Act as a counterparty to any derivatives transactions that involve the
Federal credit union;
(ii) Act as a principal or agent in any
derivatives transactions that involve
the Federal credit union; or
(iii) Have discretionary authority to
execute any of the Federal credit
union’s derivatives 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 process and responsibility framework, as described in

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§ 703.108

12 CFR Ch. VII (1–1–18 Edition)

§ 703.106(b)(1) of this subpart and the application.
(b) Support functions. A Federal credit
union must perform the following functions internally and independently. A
Federal credit union may have assistance and input from an external service provider, provided the external
service provider does not conduct the
following functions in lieu of the Federal credit union:
(1) Asset/liability risk management;
and
(2) Liquidity risk management.
§ 703.108 Eligibility.
(a) A Federal credit union may apply
for derivatives authority under this
subpart if it meets the following criteria:
(1) The Federal credit union’s most
recent
NCUA-assigned
composite
CAMEL code rating is 1, 2, or 3, with a
management component of 1 or 2; and
(2) The Federal credit union has assets of at least $250 million as of its
most recent call report.
(b) Notwithstanding paragraph (a)(2)
of this section, a Federal credit union
may request permission from the appropriate field director to apply for derivatives authority, subject to requirements imposed by the field director. If
the field director grants such permission, the application will be subject to
§§ 703.109 through 703.111.

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§ 703.109 Applying for derivatives authority.
An eligible Federal credit union must
receive written approval to use derivatives by submitting a detailed application, consistent with this subpart and
any guidance issued by NCUA. A Federal credit union must submit its application to the applicable field director.
§ 703.110 Application content.
A Federal credit union applying for
derivatives authority must document
how it will comply with the requirements of this subpart and any guidance
issued by NCUA, and must include all
of the following in its application:
(a) 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 onbalance sheet instruments and strategies to effectively manage its interest
rate risk;
(b) A list of the products and characteristics the Federal credit union is
seeking approval to use, a description
of how it intends to use the products
and characteristics listed, an analysis
of how the products and characteristics
fit within its interest rate risk mitigation plan, and a justification for each
product and characteristic listed;
(c) Draft policies and procedures that
the Federal credit union has prepared
in accordance with § 703.106(d) of this
subpart;
(d) How the Federal credit union
plans to acquire, employ, and/or create
the resources, policies, processes, systems, internal controls, modeling, experience, and competencies to meet the
requirements of this subpart. This includes a description of how the Federal
credit union will ensure that senior executive officers, board of directors, and
personnel have the knowledge and experience in accordance with the requirements of this subpart;
(e) 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 it intends to use;
(f) A description of how the Federal
credit union will support the operations of margining and collateral; and
(g) A description of how the Federal
credit union will comply with GAAP.
§ 703.111

NCUA approval.

(a) Interim approval. The field director will notify the Federal credit union
in writing if the field director has approved or denied its application and, if
applicable, the reason(s) for any denial.
A Federal credit union approved for derivatives authority may not enter into
any derivatives transactions until it
receives final approval from NCUA
under paragraph (c) of this section.
(b) Notice of readiness. A Federal credit union approved under paragraph (a)
of this section must provide written
notification to NCUA when it is ready
to begin using derivatives.

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National Credit Union Administration

§ 703.114

(c) Final approval. NCUA will review
every approved Federal credit union’s
derivatives program to ensure compliance with this subpart and evaluate
the Federal credit union’s implementation of the items in its application.
This supervisory review may be conducted on site. After NCUA has completed its review, the field director will
notify the Federal credit union in writing if the field director has granted
final approval and the Federal credit
union may begin entering into derivatives transactions. If applicable, the
notification will include the reason(s)
for any denial. A Federal credit union
may not enter into any derivatives
transactions under this subpart until it
receives this determination from the
applicable field director. At a field director’s discretion, a Federal credit
union may reapply under this subsection if the field director has determined that the Federal credit union
has demonstrated compliance with this
subpart and its application.
(d) Right to appeal. A Federal credit
union may request the field director to
reconsider a determination made under
paragraph (a) or (c) of this section and/
or file an appeal with the NCUA Board
in accordance with the procedures set
forth in subpart B to part 746 of this
chapter.

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[79 FR 5241, Jan. 31, 2014, as amended at 82
FR 50293, Oct. 30, 2017]

§ 703.112 Applying for additional products or characteristics.
(a) A Federal credit union with derivatives authority may subsequently
apply for approval to use additional
products and characteristics, fescribed
in § 703.102 of this subpart, that it did
not request in its initial application,
subject to the following:
(1) A Federal credit union must submit an application to NCUA;
(2) A Federal credit union’s application must include a list of the products
and/or characteristics for which it is
applying; and
(3) A Federal credit union must include a justification for each product
and/or characteristic requested in the
application and an explanation of how
the Federal credit union will use each
product
and/or
characteristic
requested.

(b) The field director will notify the
Federal credit union in writing if the
field director has approved or denied
its application for additional products
or characteristics. If applicable, the
notification will include the reason(s)
for denial.
(c) A Federal credit union may request the regional director to reconsider a denial of an application for additional products or characteristics
and/or file an appeal with the NCUA
Board in accordance with the procedures set forth in subpart B to part 746
of this chapter.
[79 FR 5241, Jan. 31, 2014, as amended at 82
FR 50293, Oct. 30, 2017]

§ 703.113 Pilot program participants
with active derivatives positions.
(a) A Federal credit union with outstanding derivatives positions under
NCUA’s derivatives pilot program as of
January 1, 2013, must comply with the
requirements of this subpart within 12
months of the effective date of this
subpart, including the requirement to
submit an application for derivatives
authority. During the 12-month interim period, the Federal credit union
may continue to operate its derivatives
program in accordance with its pilot
program terms and conditions.
(b) A Federal credit union with outstanding derivatives positions under
NCUA’s derivatives pilot program as of
January 1, 2013, that does not comply
with the requirements of this subpart
within 12 months of the effective date
of this subpart, or does not want to
continue engaging in derivatives transactions, must:
(1) Stop entering into new derivatives
transactions; and
(2) Within 30 days, present a corrective action plan to NCUA describing
how the Federal credit union will cure
any deficiencies or wind down its derivatives program.
§ 703.114 Regulatory violation.
(a) A Federal credit union with derivatives authority that no longer
meets the requirements of this subpart
or fails to comply with its approved
strategy (including employing the resources, policies, procedures, accounting, and competencies that formed the
basis for the approval) must:

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Pt. 703, Subpt. B, App.

12 CFR Ch. VII (1–1–18 Edition)

(1) Immediately stop entering into
any new derivatives transactions until
the Federal credit union is in compliance with this subpart. During this period, however, the Federal credit union
may terminate existing derivatives
transactions. NCUA may permit a Federal credit union to enter into offsetting transactions if NCUA determines
these transactions are part of a corrective action strategy.
(2) Within three business days from
the regulatory violation, provide the
appropriate field director notification
of the regulatory violation, which must
include a description of the violation
and the immediate corrective action
the Federal credit union is taking; and
(3) Within 15 business days after notifying the appropriate field director,
submit a written corrective action plan
to the appropriate field director.
(b) NCUA may revoke a Federal credit union’s derivatives authority at any
time if a Federal credit union fails to
comply with the requirements of this
subpart. Revocation will prohibit a
Federal credit union from executing
any new derivatives transactions under
this subpart, and may require the Federal credit union to terminate existing
derivatives transactions if, in the discretion of the applicable field director,
doing so would not pose a safety and
soundness concern.
(c) A Federal credit union may request the regional director to recon-

sider a revocation of derivatives authority or an order to terminate existing derivatives positions and/or file an
appeal with the NCUA Board in accordance with the procedures set forth in
subpart B to part 746 of this chapter.
(d) With respect to an appeal regarding revocation of a Federal credit
union’s derivatives authority, the Federal credit union may not enter into
any new derivatives transactions until
the NCUA Board renders a final decision on the appeal. The Federal credit
union may, however, elect to terminate
existing derivatives positions. With respect to an appeal regarding an order
to terminate a Federal credit union’s
existing derivatives positions, the Federal credit union is not required to terminate any existing positions until the
NCUA Board renders a final decision on
the appeal.
(3) Through the originator’s initial
written communication with a consumer, if any, whether on paper or
electronically.
[79 FR 5241, Jan. 31, 2014, as amended at 82
FR 50293, Oct. 30, 2017]

APPENDIX TO SUBPART B—EXAMPLES OF
DERIVATIVE LIMIT AUTHORITY CALCULATIONS

Limit authority. A Federal credit union that
is approved for derivatives authority under
§ 703.111 may use any of the products and
characteristics described in § 703.102(a), subject to the following position and risk limits:

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TABLE 1—AUTHORITY LIMITS
Limit authority

Entry limits (first 12 months of
transactions)

Fair Value Loss (See (a) below) ..............................................
Weighted Average Remaining Maturity Notional (WARMN)
(See (b) below).

15% of net worth ........................
65% of net worth ........................

(a) Calculating the fair value loss limit for
compliance with this subpart. To demonstrate
compliance with the fair value loss limit authority of this subpart, a Federal credit
union must combine the total fair value (as
defined by product group below) of all derivatives transactions. The fair value loss
limit is exclusive to the derivatives positions
(not net of offsetting gains and losses in the
hedged item).
(1) The resulting figure, if a loss, must not
exceed the Federal credit union’s authorized
fair value loss limit:

Standard limits
25% of net worth.
100% of net worth.

(i) Options—the gain or loss is the difference between the fair value and the
unamortized premium at the reporting date;
(ii) Swaps—the gain or loss is the fair value
at the reporting date; and
(iii) Futures—the gain or loss is the difference between the exchange closing price
at the reporting date and the purchase or
sales price.
(2) Example calculations for compliance with
this subpart: fair value loss limit. The table
below provides an example of the fair value
loss limit calculations for a sample Federal
credit union that has entry level authority.

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National Credit Union Administration

Pt. 703, Subpt. B, App.

The sample Federal credit union has a net
worth of $100 million and total assets of $1

billion; its fair value loss limit is ¥$15 million (15 percent of net worth).

TABLE 2—EXAMPLE FAIR VALUE LOSS CALCULATIONS
Fair value gains (losses)
Options
Scenario
Scenario
Scenario
Scenario
Scenario

A .................
B .................
C ................
D ................
E .................

Swaps

$1,000,000
5,000,000
1,000,000
1,000,000
(2,000,000)

Futures

$2,000,000
10,000,000
(3,000,000)
(20,000,000)
(10,000,000)

(b) Calculating the WARMN exposure for
compliance with this subpart. The WARMN
calculation adjusts the gross notional of a
derivative to take into account its price sensitivity and remaining maturity. The
WARMN limit is correlated to the fair value
loss limit, as described in paragraph (a) of

% of Net
worth
(percent)

Total

$200,000
2,000,000
250,000
(2,000,000)
1,000,000

$3,200,000
17,000,000
(1,750,000)
(21,000,000)
(11,000,000)

3
17
(2)
(21)
(11)

Limit
violation
No.
No.
No.
Yes.
No.

this appendix, for a 300 basis point parallel
shift in interest rates. To demonstrate compliance with the WARMN limit authority of
this subpart, a Federal credit union must
calculate the WARMN using the following
reference table, definitions, and calculation
steps:

TABLE 3—SUMMARY OF WARMN CALCULATION
Step #1 gross
notional

Product
Options (Caps) ................................
Options (Floors) ...............................
Swaps ..............................................
Futures .............................................

Adjustment
factor
(percent)

Current
notional
Current
notional
Current
notional
Contract size

33

Step #2
adjusted notional

Step #3
WARM

33% of current notional ..

Time remaining to maturity.

33

33% of current notional ..

Time remaining to maturity.

100

100% of current notional

Time remaining to maturity.

100

100% of contract size ....
Sum = Total Adjusted
Notional.

Underlying contract.
Sum = Overall WARM

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Step #4 WARMN = Adjusted Notional x (WARM/10)

(1) Step #1—Calculate the gross notional of all
outstanding derivative transactions. (i) For options and swaps, all gross notional amounts
must be absolute, with no netting (i.e., offsetting a pay-fixed transaction with a receive-fixed transaction). The gross notional
for derivatives transactions with amortizing
notional amounts is the current contracted
notional amount, in accordance with the amortization schedule.
(ii) For futures, the gross notional is the
underlying contract size as designated by the
Chicago Mercantile Exchange (CME) product
specifications (e.g., a five-year Treasury note
futures contract will use $100,000 for each
contract purchased or sold and reported here
on a gross basis for limit purposes.)
(2) Step #2—Convert each gross notional by its
derivative adjustment factor to produce an adjusted gross notional. The derivative adjustment factor approximates the price sensitivity for each of the product groups in order
to weight the notional amount by sensitivity
before weighting for maturity.
(i) For cap and floor options, the derivative
adjustment factor is 33 percent. For example,

an interest rate cap with a $1 million notional amount has an adjusted gross notional
of $330,000 ($1,000,000 × 0.33 + $330,000).
(ii) For interest rate swaps and Treasury
futures, the derivative adjustment factor is
100 percent. For example, an interest rate
swap with a $1 million notional amount has
an adjusted gross notional of $1,000,000
($1,000,000 × 1.00 = $1,000,000).
(iii) The total adjusted notional for all derivatives positions is the sum of (i) and (ii)
above.
(3) Step #3—Produce the weighted average remaining time to maturity (WARM) for all derivatives positions. (i) For interest rate caps,
interest rate floors, and interest rate swaps,
the remaining maturity is the time left between the reporting date and the contracted
maturity date, expressed in years (round up
to two decimals);
(ii) For Treasury futures, the remaining
maturity is the underlying deliverable
Treasury note’s maximum maturity (e.g., a
five-year Treasury note future has a fiveyear remaining maturity); and

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31

Pt. 704

12 CFR Ch. VII (1–1–18 Edition)

(iii) Determine the WARM using the adjusted gross notional, as set forth in subsection (2) of this section, and the remaining
time to maturity as defined for each product
group above in paragraphs (b)(3)(i) and (ii) of
this appendix.
(4) Step #4—Produce the WARMN by converting the WARM to a percentage and then
multiplying the percentage by the total adjusted
gross notional. (i) Divide the WARM, as calculated in paragraph (b)(3) of this appendix,
by ten to convert it to a percentage (e.g., 7.75
WARMN is translated to 77.5 percent); and
(ii) Multiply the WARM converted to a percentage, as described in paragraph (c)(4)(i) of
this appendix, by total adjusted gross no-

tional, described in paragraph (c)(2) of this
appendix.
(5) Compare WARMN calculation to the
WARNM limit for compliance. The total in step
four (4) must be less than the limit in paragraph (a)(1)(ii) or (a)(2)(ii) of this appendix,
as applicable.
(6) Example calculations for compliance with
this subpart: WARMN. The table below provides an illustrative example of the WARMN
limit calculations for a sample Federal credit union that has entry level authority. The
sample Federal credit union has a net worth
of $100 million and total assets of $1 billion;
its notional limit authority is $65 million (65
percent of net worth).

TABLE 4—EXAMPLE WARMN LIMIT CALCULATION
Options
Gross Notional (Step #1) ......................................
Adjustment Factor .................................................
Adjusted Notional (Step #2) ..................................
Weighted Average Remaining Maturity (WARM)
(Step #3) ............................................................

1 (77.4%

Swaps

$100,000,000
33%
$33,000,000

Futures

Total

$50,000,000
100%
$50,000,000

$5,000,000
100%
$5,000,000

8.50

5.00

7.74

Weighted Average Remaining Maturity Notional (WARMN) (Step #4):
Notional Limit Authority (65% of net
worth)
Under/(Over) Notional Limit Authority

1 $68,100,000

7.00

$155,000,000
$88,000,000

$65,000,000
($3,100,000)

of Step #3.)

APPENDIX C TO PART 704—RISK-BASED CAPITAL CREDIT RISK-WEIGHT CATEGORIES

PART 704—CORPORATE CREDIT
UNIONS

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AUTHORITY: 12 U.S.C. 1766(a), 1781, 1789.
Sec.
704.1 Scope.
704.2 Definitions.
704.3 Corporate credit union capital.
704.4 Prompt corrective action
704.5 Investments.
704.6 Credit risk management.
704.7 Lending.
704.8 Asset and liability management.
704.9 Liquidity management.
704.10 Investment action plan.
704.11 Corporate Credit Union Service Organizations (Corporate CUSOs).
704.12 Permissible services.
704.13 Board responsibilities.
704.14 Representation.
704.15 Audit and reporting requirements.
704.16 Contracts/written agreements.
704.17 State-chartered
corporate
credit
unions.
704.18 Fidelity bond coverage.
704.19 Disclosure of executive compensation.
704.21 Enterprise risk management.
704.22 Membership fees.
A
TO
PART
704—CAPITAL
APPENDIX
PRIORITIZATION AND MODEL FORMS
APPENDIX B TO PART 704—EXPANDED AUTHORITIES AND REQUIREMENTS

SOURCE: 62 FR 12938, Mar. 19, 1997, unless
otherwise noted.

§ 704.1

Scope.

(a) This part establishes special rules
for all federally insured corporate credit unions. Non federally insured corporate credit unions must agree, by
written contract, to both adhere to the
requirements of this part and submit
to examinations, as determined by
NCUA, as a condition of receiving
shares or deposits from federally insured credit unions. This part grants
certain additional authorities to federal corporate credit unions. Except to
the extent that they are inconsistent
with this part, other provisions of
NCUA’s Rules and Regulations (12 CFR
chapter VII) and the Federal Credit
Union Act apply to federally chartered
corporate credit unions and federally
insured state-chartered corporate credit unions to the same extent that they
apply to other federally chartered and

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