Regulatory Compliance for Investments

NCUA’s investment regulations will address ‘standards of creditworthiness.’

July 31, 2013
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Board of directors involvement

The current investment regulation details NCUA’s requirements on what a board of directors must include in its written investment policies—and requires that the board reviews the policies at least annually. Several parts of NCUA’s current investment regulation require that counterparties have a particular credit rating. But the Dodd-Frank Act no longer permits this.

Section 703.14(g)(9) of the new regulation instead requires the “counterparty to the transaction meets the minimum credit quality standards as approved by the federal credit union’s board of directors.” Commenters during the proposal stage requested NCUA provide more guidance on how a credit union’s board should establish credit quality standards for counterparties.

In the supplemental information accompanying the revised regulation, NCUA only added that, “appropriate to the size, nature, and complexity of a credit union’s counterparty credit risk profile”:

► “A credit union board should clearly articulate the institution’s risk tolerance for counterparty credit risk by approving relevant policies, including a framework for establishing limits on individual counterparty exposures and concentrations of exposures.”

► “[S]enior management should establish and implement a comprehensive risk measurement and management framework consistent with this risk tolerance that provides for the ongoing monitoring, reporting, and control of counterparty credit risk exposures.”

Permissible investment limits

Because NCUA eliminated the “bright line” of credit ratings standards and has concerns about risk exposure, it has added or tightened concentration limits on three permissible investments:

► Municipal securities (Section 703.14(e)). Under the current investment regulation, a federal credit union can hold a municipal security that has one of the four highest credit ratings.

Effective June 11, 2013, in addition to replacing the cited credit ratings with the “investment grade” standard explained previously, NCUA will limit a federal credit union’s aggregate holdings of municipal securities to no more than 75% of net worth and its holdings of municipal securities issued by any single issuer to no more than 25% of net worth.

► European financial options contracts (Section 703.14(g)(11). These are permissible investments for the purpose of hedging the risk associated with issuing share certificates with dividends tied to an equity index.

Because the Dodd-Frank Act requires NCUA to remove references to credit ratings and substitute the counterparty standards approved by the federal credit union’s board of directors, NCUA tightened the concentration limit from the current 100% of net worth to 50% of net worth, starting in June.

► Mortgage note repurchase transactions (Section 703.14(h)). Similarly, NCUA wants to address its risk concerns with these permissible transactions, so starting in June the agency will limit the aggregate of a federal credit union’s investments for all counterparties to 50% of net worth (down from 100% of net worth).

Credit unions must review the revised investment regulation thoroughly, and assure they follow the safekeeping requirements.

And credit unions buying commercial mortgage-related securities must revise their assessment to conform to the new “investment grade” standard.

What NCUA won’t do

NCUA was unwilling to do two things requested by commenters during the proposal:

1. It won’t simply grandfather investments purchased under existing credit rating requirements, saying: “As a matter of sound practice, federal credit unions must manage the credit risk inherent in their investment securities and transactions by taking into account the risk of deterioration. Federal credit unions have an ongoing obligation to re-evaluate creditworthiness and address deterioration as appropriate. A federal credit union’s initial evaluation of credit quality is not a permanent justification for asset retention.”

2. It wouldn’t simply publish a listing of acceptable investments as a “safe harbor,” saying “that establishing such a list would effectively transfer credit union risk management to NCUA.… A safe harbor provision exempts an investor from due diligence responsibility and could be viewed as NCUA’s tacit endorsement of the suitability of certain investments.”

Credit unions that now rely on credit ratings in their investment program must review these amendments to Section 703 and make the needed changes.

Watch for NCUA’s further guidance on how it expects to implement these requirements.

Visit CUNA’s eGuide to Federal Laws and Regulations topic on “investments” (visit and select “compliance”).

KATHY THOMPSON is CUNA’s senior vice president for compliance and legislative analysis. Contact her and CUNA’s compliance team at

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