[Federal Register: August 1, 2007 (Volume 72, Number 147)]
[Proposed Rules]
[Page 41956-41958]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01au07-25]
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NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Parts 703 and 704
RIN 3133-AD34
Permissible Foreign Currency Investments for Federal Credit
Unions and Corporate Credit Unions
AGENCY: National Credit Union Administration (NCUA).
ACTION: Advance notice of proposed rulemaking.
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SUMMARY: NCUA is considering whether to amend its investment rules to
permit natural person federal credit unions (FCUs) and corporate credit
unions (corporates) to make certain investments denominated in foreign
currency. NCUA seeks comment on whether FCUs and corporates should be
permitted to make these investments and the safety and soundness
considerations related to such authority.
DATES: Comments must be received on or before October 30, 2007.
ADDRESSES: You may submit comments by any of the following methods
(Please send comments by one method only):
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
NCUA Web Site: http://www.ncua.gov/RegulationsOpinionsLaws/proposed_regs/proposed_regs.html.
Follow the
instructions for submitting comments.
E-mail: Address to regcomments@ncua.gov. Include ``[Your
name]--Comments on Advanced Notice of Proposed Rule for Parts 703 and
704'' in the e-mail subject line.
Fax: (703) 518-6319. Use the subject line described above
for e-mail.
Mail: Address to Mary Rupp, Secretary of the Board,
National Credit Union Administration, 1775 Duke Street, Alexandria,
Virginia 22314-3428.
Hand Delivery/Courier: Same as mail address.
FOR FURTHER INFORMATION CONTACT: Technical Information: Kimberly A.
Iverson, Senior Investment Officer, Office of Capital Markets and
Planning, at the above address or telephone: (703) 518-6620; or Legal
Information: Moisette I. Green, Staff Attorney, Office of General
Counsel, at the above address or telephone: (703) 518-6540.
SUPPLEMENTARY INFORMATION:
A. Background
The Federal Credit Union Act (Act) permits federal credit unions
(FCUs) to make investments denominated in foreign currency under the
Act's authority permitting FCUs to invest or deposit their funds in
shares or accounts of federally insured banks and corporates. 12 U.S.C.
1757(7), (8). In addition, the Board has authority under the Act to
permit corporates to invest in foreign currency. 12 U.S.C. 1766. While
the Act does not explicitly restrict FCUs and corporates to making
investments only in U.S. dollars, NCUA has imposed this limitation by
regulation.
NCUA regulations implement the authority in the Act and establish
requirements and limitations under which FCUs and corporates,
respectively under Parts 703 and 704, can make investments. 12 CFR
parts 703, 704. The corporate regulation expressly states corporates
may only make investments denominated in U.S. dollars. 12 CFR 704.5(b).
For FCUs, the general investment rule does not expressly prohibit
foreign currency denominated investments, but ties variable rate
investments to a domestic interest rate and, consequently, limits FCU
investment authority to U.S. dollars. 12 CFR 703.14(a).
Part of the impetus for this advance notice of proposed rulemaking
(ANPR) is that, in 2006, the Board amended NCUA's share insurance rule
to permit federally insured credit unions to accept member shares
denominated in foreign currency. 12 CFR 745.7; 71 FR 14631 (March 23,
2006) (interim final rule); 71 FR 56001 (September 26, 2006) (final
rule). That rulemaking, however, did not address lending or investment
in foreign denominated currencies. The Board recognizes that, for some
credit unions, the ability to accept member shares denominated in
foreign currency--without authority to make investments in foreign
denominated currencies--may place them at a competitive disadvantage.
Commenters should note that this ANPR's scope is limited to investment
in foreign denominated currencies; the Board may consider issues
associated with lending in foreign denominated currencies at another
time but is not inclined to do so as part of this ANPR.
The Board is considering whether to permit FCUs and corporates to
make limited investments denominated in foreign currency as a
complementary authority to the change in the share insurance rule and
allow FCUs and corporates to invest funds from the now-permissible
foreign denominated share accounts. Comments from interested parties on
the issues associated with investments denominated in foreign currency
will assist the Board in determining whether to permit these kinds of
investments and, if so, the kinds of appropriate limitations and
requirements for the activity to address safety and soundness concerns.
B. Discussion
U.S. Domiciled Issuers
The Board is considering whether to permit FCUs and corporates to
invest foreign currency in deposits and instruments issued by federally
insured banks, corporates, and government-sponsored enterprises (GSEs)
domiciled in the U.S. or its territories. The Board believes
restricting foreign currency investments to shares and deposits in
federally insured banks, corporates, and GSEs domiciled in the U.S. or
its territories would substantially mitigate exposure to the potential
instability of a foreign country. Changes in the political and economic
environment of a particular country may adversely affect the exchange
rate for that currency, as well as the ability of a foreign domiciled
entity to repay an obligation. By limiting investments to shares and
deposits in U.S. domiciled depositories or the debt obligations of
GSEs, a credit union could avoid settlement risks arising from
international payment systems.
While the Board recognizes other investments in foreign currency
may be permissible under the Act, it believes safety and soundness
concerns
[[Page 41957]]
outweigh their utility. The Board requests comments on whether FCUs or
corporates should be permitted to invest foreign currency in vehicles
other than deposits and instruments issued by federally insured banks,
corporates, and GSEs domiciled in the U.S. or its territories
permissible under the Act. If a commenter supports additional
authority, the Board requests that commenters specify the statutory
authority for the investment and include a description of how the
authority would be used and additional risks would be controlled.
Exchange Rate Risk
Credit unions would have to establish an appropriate process to
measure, monitor, and control foreign exchange risk associated with
investments denominated in foreign currency and foreign currency
denominated shares, and the Board specifically requests comments on
appropriate foreign exchange risk limits. Commenters should address how
an FCU or corporate would measure, monitor, and control the foreign
exchange risk of each currency in which it invests and accepts
deposits. An FCU or corporate should be able to evaluate the volatility
of each currency in which it invests and takes deposits and the Board
requests comments on appropriate limits per foreign currency and
aggregate limits across all foreign currencies. Additionally, the Board
requests comments on whether it should limit the currencies in which
investments may be denominated.
Foreign exchange risk may be mitigated, for example, by maintaining
a balance between foreign currency denominated assets and the member
shares denominated in foreign currencies. To control the risk arising
when assets and liabilities denominated in a particular foreign
currency are not in balance, NCUA is considering establishing a maximum
limit on the out-of-balance amount. For example, NCUA could establish
an out-of-balance limit of 10 percent of an FCU's net worth or a
corporate's capital between foreign currency denominated assets and
liabilities. That limit would require an FCU with $10 million in net
worth to maintain an amount of foreign currency denominated assets in a
given foreign currency within $1 million of the amount of liabilities
in that same foreign currency.
Credit and Other Risks
While foreign currency denominated investments might be in
partially or fully insured accounts, FCUs and corporates must manage
the other risks these investments pose. NCUA expects credit unions
would have to establish appropriate processes for controlling credit
risk, interest rate risk, liquidity risk, transaction risk, compliance
risk, strategic risk, and reputation risk associated with investments
denominated in foreign currency. Comment is invited on provisions a
regulation should contain to control these various risks.
Regarding credit risk, NCUA believes a regulation permitting
investments denominated in foreign currency would need to address
obligor or concentration limits. Any limit on credit risk may include
requirements for a counterparty and the instrument or investment type.
The Board requests comments on whether it should impose a limit on
credit ratings or other requirements to control credit risk.
The Board is particularly concerned about a credit union's ability
to liquidate foreign currency denominated investments. Liquidity risk
relates to the available market for the instruments or activities in
which FCUs and corporates invest with foreign currency. The Board
requests comments generally on liquidity risk and what requirements or
limits would reasonably constrain it.
Exit Strategy
NCUA may also require credit unions to develop an exit strategy to
facilitate divestiture of all investments in a particular currency. An
exit strategy would provide for stress testing and the means to
evaluate the performance of foreign currency investments. An exit
strategy should be commensurate with the level of risk exposure and
identify triggering events or scenarios that would alert credit unions
as to when divestiture would be appropriate or necessary. The Board
requests comments on potential investment policy and exit strategy
requirements and the availability of bond coverage to absorb potential
losses.
As an integral part of an exit strategy, the Board is considering a
requirement that members must be notified of any conversion of their
shares from foreign currency denominated to U.S. dollar denominated.
The Board requests comments on the appropriate notice that members
should be given in such an event.
Information Systems and Technology Risks
The Board believes it is likely that a regulation would need to
address information systems and technology risks. For example, a
regulation would likely require FCUs and corporates to demonstrate they
can effectively manage the inherent risks of running multiple balance
sheets in various denominations while simultaneously presenting
consolidated information to NCUA.
The Board requests comments on FCU and corporate ability to manage
this risk, the data NCUA should collect regarding their information
systems and investments denominated in foreign currency, and how often
NCUA should collect the data. The Board believes additional reporting
would be required to monitor foreign currency exposure adequately both
on an individual credit union basis and an industry-wide basis. Call
reports would likely need to be revised to capture necessary data
regarding foreign currency exposures. Additional interim reporting for
supervision purposes may also be required of individual credit unions
engaging in the activity.
Internal Controls
A regulation would likely address the need to establish certain
internal controls, policies, and procedures to manage investments
denominated in foreign currency as well as staff qualifications and
potential conflict of interest issues. FCUs and corporates would be
expected to have knowledgeable, experienced staff to manage foreign
currency investment portfolios. The Board requests comments on whether
it should regulate the qualifications of credit union employees
involved in foreign currency investment activities. Additionally, the
Board requests comments on whether a rule should permit the employment
of third parties to meet experience requirements for credit union staff
in conducting foreign currency investments and, if so, whether the
conflict of interest provision in the member business loan would be an
appropriate model for a provision in a rule governing foreign currency
investments. 12 CFR 723.5.
NCUA Approval
The Board believes is it likely that a regulation on this activity
would include an approval process for an FCU or corporate to engage in
foreign currency denominated investments and deposits. This would be
primarily because of the staff expertise and internal systems required
for the activity. An approval process could be patterned on the
requirements for corporates to obtain expanded authorities under part
704 or by some other method. The NCUA Board is interested in comments
regarding an appropriate mechanism for an approval process.
[[Page 41958]]
C. Request for Comments
In addition to the areas of interest noted above, the Board invites
comments from all interested parties on any aspects it should consider
concerning foreign currency investments by FCUs and corporates.
By the National Credit Union Administration Board on July 26,
2007.
Mary F. Rupp,
Secretary of the Board.
[FR Doc. E7-14849 Filed 7-31-07; 8:45 am]
BILLING CODE 7535-01-P