§ 703.2 12 CFR Ch. VII (1–1–14 Edition)

real estate-secured loans purchased as chase the same or an identical a part of an investment repurchase from that counterparty at a specified transaction, which is governed by future date and at a specified price. §§ 703.13 and 703.14 of this chapter; Call means an that gives the (3) Investment in credit union service holder the right to buy a specified organizations, which is governed by quantity of a security at a specified part 712 of this chapter; price during a fixed time period. (4) Investment in fixed assets, which Collateralized Mortgage Obligation is governed by § 701.36 of this chapter; (CMO) means a multi-class mortgage (5) Investment by corporate credit related security. unions, which is governed by part 704 of Collective investment fund means a this chapter. fund maintained by a national bank (6) Investment activity by State- under 12 CFR part 9 (Comptroller of the chartered credit unions, except as pro- Currency’s regulations). vided in § 741.3(a)(2) and § 741.219 of this Commercial mortgage related security chapter; or means a mortgage related security, as (7) Funding a Charitable Donation defined below, except that it is Account pursuant to § 721.3(b) of this collateralized entirely by commercial chapter. real estate, such as a warehouse or of- [68 FR 32960, June 3, 2003, as amended at 69 fice building, or a multi-family dwell- FR 27828, May 17, 2004; 71 FR 76124, Dec. 20, ing consisting of more than four units. 2006; 78 FR 76730, Dec. 19, 2013] Counterparty means the party on the other side of the transaction. § 703.2 Definitions. Custodial Agreement means a contract The following definitions apply to this in which one party agrees to hold secu- part: rities in safekeeping for others. Adjusted trading means selling an in- Delivery versus payment means pay- vestment to a counterparty at a price ment for an investment must occur si- above its current fair value and simul- multaneously with its delivery. taneously purchasing or committing to Derivatives means any derivative in- purchase from the counterparty an- strument as defined under generally other investment at a price above its accepted accounting principles current fair value. (GAAP). Associated personnel means a person Embedded option means a char- engaged in the investment banking or acteristic of an investment that gives securities business who is directly or the issuer or holder the right to alter indirectly controlled by a National As- the level and timing of the cash flows sociation of Securities Dealers (NASD) of the investment. Embedded options member, whether or not this person is include call and put provisions and in- registered or exempt from registration terest rate caps and floors. Since a pre- with NASD. Associated personnel in- payment option in a mortgage is a type cludes every sole proprietor, partner, of call provision, a mortgage-backed officer, director, or branch manager of security composed of mortgages that any NASD member. may be prepaid is an example of an in- Banker’s acceptance means a time vestment with an embedded option. draft that is drawn on and accepted by Eurodollar deposit means a U.S. dol- a bank and that represents an irrev- lar-denominated deposit in a foreign ocable obligation of the bank. branch of a United States depository Bank note means a direct, uncondi- institution. tional, and unsecured general obliga- European financial options contract tion of a bank that ranks equally with means an option that can be exercised all other senior unsecured indebtedness only on its expiration date. of the bank, except deposit liabilities Exchangeable Collateralized Mortgage and other obligations that are subject Obligation means a class of a to any priorities or preferences. collateralized mortgage obligation Borrowing repurchase transaction (CMO) that, at the time of purchase, means a transaction in which the Fed- represents beneficial ownership inter- eral credit union agrees to sell a secu- ests in a combination of two or more rity to a counterparty and to repur- underlying classes of the same CMO

560

VerDate Mar<15>2010 13:29 Apr 22, 2014 Jkt 232041 PO 00000 Frm 00570 Fmt 8010 Sfmt 8010 Y:\SGML\232041.XXX 232041 ehiers on DSK2VPTVN1PROD with CFR National Credit Union Administration § 703.2

structure. The holder of an exchange- Investment repurchase transaction able CMO may pay a fee and take deliv- means a transaction in which an inves- ery of the underlying classes of the tor agrees to purchase a security from CMO. a counterparty and to resell the same Fair value means the amount at or an identical security to that which an instrument could be ex- counterparty at a specified future date changed in a current, arms-length and at a specified price. transaction between willing parties, as means the date the last opposed to a forced or liquidation sale. principal amount of a security is sched- Financial options contract means an uled to come due and does not mean agreement to make or take delivery of the call date or the weighted average a standardized financial instrument life of a security. upon demand by the holder of the con- Mortgage related security means a se- tract as specified in the agreement. curity as defined in section 3(a)(41) of Immediate family member means a the Securities Exchange Act of 1934 (15 spouse or other family member living U.S.C. 78c(a)(41)). in the same household. Mortgage servicing rights means a con- Independent qualified agent means an tractual obligation to perform mort- agent independent of an investment re- gage servicing and the right to receive purchase counterparty that does not compensation for performing those receive a transaction fee from the services. Mortgage servicing is the ad- counterparty and has at least two ministration of a mortgage loan, in- years experience assessing the value of cluding collecting monthly payments mortgage loans. and fees, providing recordkeeping and Industry-recognized information pro- escrow functions, and, if necessary cur- vider means an organization that ob- ing defaults and foreclosing. tains compensation by providing infor- mation to investors and receives no Negotiable instrument means an in- compensation for the purchase or sale strument that may be freely trans- of investments. ferred from the purchaser to another person or entity by delivery, or en- Investment means any security, obli- gation, account, deposit, or other item dorsement and delivery, with full legal authorized for purchase by a Federal title becoming vested in the transferee. credit union under Sections 107(7), Net worth means the retained earn- 107(8), or 107(15) of the Act, or this part, ings balance of the credit union at other than loans to members. quarter end as determined under gen- Investment grade means the issuer of a erally accepted accounting principles security has an adequate capacity to and as further defined in § 702.2(f) of meet the financial commitments under this chapter. the security for the projected life of Official means any member of a Fed- the asset or exposure, even under ad- eral credit union’s board of directors, verse economic conditions. An issuer credit committee, supervisory com- has an adequate capacity to meet fi- mittee, or investment-related com- nancial commitments if the risk of de- mittee. fault by the obligor is low and the full Ordinary care means the degree of and timely repayment of principal and care, which an ordinarily prudent and interest on the security is expected. A competent person engaged in the same Federal credit union may consider any line of business or endeavor should ex- or all of the following factors, to the ercise under similar circumstances. extent appropriate, with respect to the Pair-off transaction means an invest- credit risk of a security: Credit ment purchase transaction that is spreads; securities-related research; in- closed or sold on, or before the settle- ternal or external credit risk assess- ment date. In a pair-off, an investor ments; default statistics; inclusion on commits to purchase an investment, an index; priorities and enhancements; but then pairs-off the purchase with a price, yield, and/or volume; and asset sale of the same investment before or class-specific factors. This list of fac- on the settlement date. tors is not meant to be exhaustive or Put means an option that gives the mutually exclusive. holder the right to sell a specified

561

VerDate Mar<15>2010 13:29 Apr 22, 2014 Jkt 232041 PO 00000 Frm 00571 Fmt 8010 Sfmt 8010 Y:\SGML\232041.XXX 232041 ehiers on DSK2VPTVN1PROD with CFR § 703.3 12 CFR Ch. VII (1–1–14 Edition)

quantity of a security at a specified Small business related security means a price during a fixed time period. security as defined in section 3(a)(53) of Registered investment company means the securities Exchange Act of 1934 (15 an investment company that is reg- U.S.C. 78c(a)(53)). This definition does istered with the Securities and Ex- not include Small Business Adminis- change Commission under the Invest- tration securities permissible under ment Company Act of 1940 (15 U.S.C. section 107(7) of the Federal Credit 80a). Examples of registered invest- Union Act. ment companies are mutual funds and Weighted average life means the unit investment trusts. weighted-average time to the return of Regular way settlement means delivery a dollar of principal, calculated by of a security from a seller to a buyer multiplying each portion of principal within the time frame that the securi- received by the time at which it is ex- ties industry has established for imme- pected to be received (based on a rea- diate delivery of that type of security. sonable and supportable estimate of For example, regular way settlement of that time) and then summing and di- a Treasury security includes settle- viding by the total amount of prin- ment on the trade date (cash), the busi- cipal. ness day following the trade date (reg- When-issued trading of securities ular way), and the second business day means the buying and selling of securi- following the trade date (skip day). ties in the period between the an- Residual interest means the remainder nouncement of an offering and the cash flows from collateralized mort- issuance and payment date of the secu- gage obligations/real estate mortgage rities. investment conduits (CMOs/REMICs), Yankee dollar deposit means a deposit or other mortgage-backed security in a United States branch of a foreign transaction, after payments due - bank licensed to do business in the holders and trust administrative ex- State in which it is located, or a de- penses have been satisfied. posit in a State-chartered, foreign con- Securities lending means lending a se- trolled bank. curity to a counterparty, either di- Zero investment means an in- rectly or through an agent, and accept- vestment that makes no periodic inter- ing collateral in return. est payments but instead is sold at a Security means a share, participation, discount from its face value. The hold- or other interest in property or in an er of a zero coupon investment realizes enterprise of the issuer or an obliga- the rate of return through the gradual tion of the issuer that: appreciation of the investment, which (1) Either is represented by an instru- is redeemed at face value on a specified ment issued in bearer or registered maturity date. form or, if not represented by an in- [68 FR 32960, June 3, 2003, as amended at 69 strument, is registered in books main- FR 39831, July 1, 2004; 71 FR 76124, Dec. 20, tained to record transfers by or on be- 2006; 77 FR 74109, Dec. 13, 2012] half of the issuer; (2) Is of a type commonly dealt in on § 703.3 Investment policies. securities exchanges or markets or, A Federal credit union’s board of di- when represented by an instrument, is rectors must establish written invest- commonly recognized in any area in ment policies consistent with the Act, which it is issued or dealt in as a me- this part, and other applicable laws and dium for investment; and regulations and must review the policy (3) Either is one of a class or series or at least annually. These policies may by its terms is divisible into a class or be part of a broader, asset-liability series of shares, participations, inter- management policy. Written invest- ests, or obligations. ment policies must address the fol- Senior management employee means a lowing: Federal credit union’s chief executive (a) The purposes and objectives of the officer (typically this individual holds Federal credit union’s investment ac- the title of President or Treasurer/ tivities; Manager), an assistant chief executive (b) The characteristics of the invest- officer, and the chief financial officer. ments the Federal credit union may

562

VerDate Mar<15>2010 13:29 Apr 22, 2014 Jkt 232041 PO 00000 Frm 00572 Fmt 8010 Sfmt 8010 Y:\SGML\232041.XXX 232041 ehiers on DSK2VPTVN1PROD with CFR