NCUA Board Expands CU Investment Opportunities, Enhances Swap Agreements

ALEXANDRIA, Va.-The NCUA Board dispatched with four final regulations to enhance and modernize credit unions’ dealings with the agency at this month’s board meeting, which drew a standing room only crowd. While the agenda items were uncontroversial within the credit union community, several credit union leagues were in town for Hike the Hills and stopped in across the river in Alexandria to catch a glimpse of the regulatory side. The NCUA Board’s most substantial order of business during May’s meeting was a rule expanding investment authorities for credit unions. All federal credit unions were provided broader investment authorities concerning the purchase of equity-linked options for certain purposes as tested in a pilot program. In addition, RegFlex eligible credit unions were granted exemptions from several investment restrictions, including commercial mortgage-related securities. Federal credit unions are capped to 50% of their net worth for this type of investment. RegFlex eligible credit unions are also exempt from the 100% of net worth cap on delegating discretionary control over purchase and sale of investments to a third-party provider. RegFlex credit unions may also purchase securities with maturities exceeding the maturity of the borrowing repurchase transaction up to 100% of net worth, which is prohibited for other credit unions. Regarding broker-dealers, in the wake of the Bentley brokered certificates of deposit debacle, NCUA determined that continued guidance for federal credit unions and due diligence, not regulation, is the best way to handle them. NCUA’s final rule reads that other investment options remain prohibited for federal credit unions due to the complexity and required risk management. “However,” it reads, “NCUA encourages FCUs that believe they possess the skills and resources to manage such investments to apply for a pilot program.” NCUA Board Member Deborah Matz asked the staff presenting the item how the agency is ensuring that examiners understand the changes being made to the investment rules. The investment chapter in the examiners guide is being updated and two courses in investments and two courses in asset liability management are being offered as part of the examiner training program, according to NCUA staff. Additionally, the June 30 call reports will include information about brokered CDs. The NCUA Board also approved a final regulation to allow swap agreements to be treated as qualified financial contracts to allow a counterparty to exercise its rights to terminate and net swaps upon involuntary liquidation of a federally-insured credit union. The one key amendment to the proposed rule was that master agreements in combination with supplements will be considered as one swap. NCUA Chairman Dennis Dollar noted that rating agencies, such as Moody’s, were considering lowering credit unions’ ratings, which prompted the agency’s action. All three board members commented on how the change would aid the stability of the swaps market. Two other changes to rules were approved that were long overdue many agreed. The definition of a small credit union-set at less than $1 million in assets since 1981-was increased to less than $10 million. Small credit unions are given special consideration under the Regulatory Flexibility Act on certain compliance issues. In addition, the rule states that NCUA will release a list of regulations up for consideration in a given year to enhance credit union participation and public comment in the process. Each year, NCUA reviews one-third of its regulations. Finally, the NCUA Board also approved the adoption of updated corporate federal credit union bylaws. The former ones had been in place since 1983. [email protected]