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670 Part 703—Investment and Deposit Activities

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670 Part 703—Investment and Deposit Activities Pt. 703 12 CFR Ch. VII (1–1–18 Edition) under the gross-up approach, a credit union fund’s permissible investments (excluding must apply the risk weight required under derivative contracts that are used for hedg- paragraph (a)(2) of this appendix to the cred- ing rather than speculative purposes and it equivalent amount calculated in para- that do not constitute a material portion of graph (a)(3) of this appendix. the fund’s exposures). (5) Securitization exposure defined. For pur- (4) Alternative modified look-through ap- poses of this this paragraph (a), proach. Under the alternative modified look- ‘‘securitization exposure’’ means: through approach, a credit union may assign (i) A credit exposure that arises from a the credit union’s exposure amount to an in- securitization; or vestment fund on a pro rata basis to dif- (ii) An exposure that directly or indirectly ferent risk weight categories under subpart references a securitization exposure de- A of this part based on the investment limits scribed in paragraph (a)(5)(i) of this appen- in the fund’s prospectus, partnership agree- dix. ment, or similar contract that defines the (6) Securitization defined. For purposes of fund’s permissible investments. The risk- this paragraph (a), ‘‘securitization’’ means a weighted asset amount for the credit union’s transaction in which: exposure to the investment fund equals the (i) The credit risk associated with the un- sum of each portion of the exposure amount derlying exposures has been separated into assigned to an exposure type multiplied by at least two tranches reflecting different lev- the applicable risk weight under subpart A of els of seniority; this part. If the sum of the investment limits (ii) Performance of the securitization expo- for all exposure types within the fund ex- sures depends upon the performance of the ceeds 100 percent, the credit union must as- underlying exposures; and sume that the fund invests to the maximum (iii) All or substantially all of the under- extent permitted under its investment limits lying exposures are financial exposures (such in the exposure type with the highest appli- as loans, receivables, asset-backed securi- cable risk weight under subpart A of this ties, mortgage-backed securities, or other part and continues to make investments in debt securities). order of the exposure type with the next (b) Look-through approaches.—(1) Applica- highest applicable risk weight under subpart bility. Section 702.104(c)(3)(iii)(B) provides A of this part until the maximum total in- that, a credit union may use one of the look- vestment level is reached. If more than one through approaches in this appendix to de- exposure type applies to an exposure, the termine the risk weight of the exposure credit union must use the highest applicable amount of any investment fund, or the hold- risk weight. A credit union may exclude de- ing of separate account insurance. rivative contracts held by the fund that are (2) Full look-through approach. (i) General. A used for hedging rather than for speculative credit union that is able to calculate a risk- purposes and do not constitute a material weighted asset amount for its proportional portion of the fund’s exposures. ownership share of each exposure held by the investment fund may set the risk-weighted EFFECTIVE DATE NOTE: At 80 FR 66722, Oct. asset amount of the credit union’s exposure 29, 2015, appendix A to part 702 was added, ef- to the fund equal to the product of: fective Jan. 1, 2019. (A) The aggregate risk-weighted asset amounts of the exposures held by the fund as if they were held directly by the credit PART 703—INVESTMENT AND union; and DEPOSIT ACTIVITIES (B) The credit union’s proportional owner- ship share of the fund. Subpart A—General Investment and (ii) Holding report. To calculate the risk- Deposit Activities weighted amount under paragraph (b)(2)(i) of this appendix, a credit union should: Sec. (A) Use the most recently issued invest- 703.1 Purpose and scope. ment fund holding report; and 703.2 Definitions. (B) Use an investment fund holding report 703.3 Investment policies. that reflects holding that are not older than 703.4 Recordkeeping and documentation re- 6-months from the quarter-end effective date quirements. (as defined in § 702.101(c)(1). 703.5 Discretionary control over invest- (3) Simple modified look-through approach. ments and investment advisers. Under the simple modified look-through ap- 703.6 Credit analysis. proach, the risk-weighted asset amount for a 703.7 Notice of non-compliant investments. credit union’s exposure to an investment 703.8 Broker-dealers. fund equals the exposure amount multiplied 703.9 Safekeeping of investments. by the highest risk weight that applies to 703.10 Monitoring non-security investments. any exposure the fund is permitted to hold 703.11 Valuing securities. under the prospectus, partnership agree- 703.12 Monitoring securities. ment, or similar agreement that defines the 703.13 Permissible investment activities. 670 VerDate Sep<11>2014 12:31 Feb 09, 2018 Jkt 244041 PO 00000 Frm 00680 Fmt 8010 Sfmt 8010 Q:\12\12V7.TXT 31 kpayne on DSK54DXVN1OFR with $$_JOB National Credit Union Administration § 703.2 703.14 Permissible investments. (1) Investment in loans to members 703.15 Prohibited investment activities. and related activities, which is gov- 703.16 Prohibited investments. erned by §§ 701.21, 701.22, 701.23, and part 703.17 Conflicts of interest. 723 of this chapter; 703.18 Grandfathered investments. 703.19 Investment pilot program. (2) The purchase of real estate-se- 703.20 Request for additional authority. cured loans pursuant to Section 107(15)(A) of the Act, which is governed Subpart B—Derivatives Authority by § 701.23 of this chapter, except those real estate-secured loans purchased as 703.100 Purpose and scope. 703.101 Definitions. a part of an investment repurchase 703.102 Permissible derivatives. transaction, which is governed by 703.103 Derivative authority. §§ 703.13 and 703.14 of this chapter; 703.104 Requirements for derivative (3) Investment in credit union service counterparty agreements, collateral and organizations, which is governed by margining. part 712 of this chapter; 703.105 Reporting requirements. (4) Investment in fixed assets, which 703.106 Operational support requirements. is governed by § 701.36 of this chapter; 703.107 External service providers. 703.108 Eligibility. (5) Investment by corporate credit 703.109 Applying for derivatives authority. unions, which is governed by part 704 of 703.110 Application content. this chapter. 703.111 NCUA approval. (6) Investment activity by State- 703.112 Applying for additional products or chartered credit unions, except as pro- characteristics. vided in §§ 741.3(a)(2) and 741.219 of this 703.113 Pilot program participants with ac- chapter; or tive derivatives positions. (7) Funding a Charitable Donation 703.114 Regulatory violation. Account pursuant to § 721.3(b) of this APPENDIX TO SUBPART B OF PART 703—EXAM- chapter. PLES OF DERIVATIVE LIMIT AUTHORITY CALCULATIONS [68 FR 32960, June 3, 2003, as amended at 69 FR 27828, May 17, 2004; 71 FR 76124, Dec. 20, AUTHORITY: 12 U.S.C. 1757(7), 1757(8), 1757(15). 2006; 78 FR 76730, Dec. 19, 2013] SOURCE: 68 FR 32960, June 3, 2003, unless § 703.2 Definitions. otherwise noted. The following definitions apply to this part: Subpart A—General Investment Adjusted trading means selling an in- and Deposit Activities vestment to a counterparty at a price above its current fair value and simul- § 703.1 Purpose and scope. taneously purchasing or committing to (a) This part interprets several of the purchase from the counterparty an- provisions of Sections 107(7), 107(8), and other investment at a price above its 107(15) of the Federal Credit Union Act current fair value. (Act), 12 U.S.C. 1757(7), 1757(8), 1757(15), Associated personnel means a person which list those securities, deposits, engaged in the investment banking or and other obligations in which a Fed- securities business who is directly or eral credit union may invest. Part 703 indirectly controlled by a National As- identifies certain investments and de- sociation of Securities Dealers (NASD) posit activities permissible under the member, whether or not this person is Act and prescribes regulations gov- registered or exempt from registration erning those investments and deposit with NASD. Associated personnel in- activities on the basis of safety and cludes every sole proprietor, partner, soundness concerns. Additionally, part officer, director, or branch manager of 703 identifies and prohibits certain in- any NASD member. vestments and deposit activities. In- Banker’s acceptance means a time vestments and deposit activities that draft that is drawn on and accepted by are permissible under the Act and not a bank and that represents an irrev- prohibited or otherwise regulated by ocable obligation of the bank. part 703 remain permissible for Federal Bank note means a direct, uncondi- credit unions. tional, and unsecured general obliga- (b) This part does not apply to: tion of a bank that ranks equally with 671 VerDate Sep<11>2014 12:31 Feb 09, 2018 Jkt 244041 PO 00000 Frm 00681 Fmt 8010 Sfmt 8010 Q:\12\12V7.TXT 31 kpayne on DSK54DXVN1OFR with $$_JOB § 703.2 12 CFR Ch. VII (1–1–18 Edition) all other senior unsecured indebtedness European financial options contract of the bank, except deposit liabilities means an option that can be exercised and other obligations that are subject only on its expiration date. to any priorities or preferences. Exchangeable Collateralized Mortgage Borrowing repurchase transaction Obligation means a class of a means a transaction in which the Fed- collateralized mortgage obligation eral credit union agrees to sell a secu- (CMO) that, at the time of purchase, rity to a counterparty and to repur- represents beneficial ownership inter- chase the same or an identical security ests in a combination of two or more from that counterparty at a specified underlying classes of the same CMO future date and at a specified price.
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