**Standards for Credit Union Investment Pilot Program --**

**Short Sales of U.S. Treasury Securities**

A federal credit union may sell U.S. Treasury securities short under
this pilot program.

**[Financial Condition]{.underline}**

At the time of approval, the credit union must:

-   Be classified as Well Capitalized under Part 702 for at least the
    preceding four (4) quarters; and

-   Have positive, stable earnings for the preceding 12 months.

**[Board of Directors]{.underline}**

The credit union board of directors must adopt policies that address, at
a minimum:

-   Limitations on short sales activities, including at a minimum:

    -   *Investment pilot program limits.* An aggregate limit on the
        liability for short sales not to exceed 50 percent of net worth;

    -   *Risk limits*. Limits on price risk (e.g., duration, or value at
        risk) of the [gross]{.underline} short position; and

    -   *Stop-loss limits*. An aggregate loss limit covering a specified
        period of time (e.g., calendar month or calendar quarter) that
        triggers a halt in trading and a liquidation of short positions
        for the remainder of that period.

        -   [Illustrative Example]{.underline}: Assume a credit union
            has net worth of \$50 million. The credit union board may
            set a maximum limit of \$25 million on the liability for
            short sales, a gross portfolio duration of 5 years, and a
            stop loss policy stipulating that short sales will cease
            immediately for the remainder of the quarter if losses
            exceed \$1.25 million and short sales will cease for the
            remainder of the calendar year if cumulative losses for the
            year exceed \$2.5 million.

-   Daily measurement and monitoring of compliance with limitations on
    short sales activities; and

-   Monthly reports to the board on short sales activities.

**[Internal Controls]{.underline}**

Internal control procedures must be established that require, at a
minimum:

-   Review of all trades by the close of each business day by an
    authorized second party.

-   Segregation of duties between risk assessors and risk takers, e.g.,
    staff responsible for measuring compliance with board risk limits
    are not supervised by staff with short sale transaction authority.

-   Daily assessment (mark-to-market) and reporting of positions in
    relation to board approved limitations (see above).

A credit union may use a qualified agent to perform these functions. If
a credit union uses a qualified agent to perform the internal control
functions, the credit union must ensure that the agent has appropriate
internal segregation of duties between risk taking and risk assessment
and the credit union must check at least monthly that the position
reporting is accurate.

**[Broker-Dealer/Investment Advisor Due Diligence]{.underline}**

Before conducting a short sale through a broker-dealer or investment
advisor, a credit union must analyze and annually update the following:

-   The background of any sales representative or advisor with whom the
    credit union is doing business;

-   Information available from state or federal securities regulators
    and securities industry self-regulatory organizations such as the
    National Association of Securities Dealers and the North American
    Securities Administrators Association, about any enforcement actions
    against the broker-dealer, its affiliates, or associated personnel;
    and

-   Its capital strength, liquidity, and operating results and, for
    investment advisors, the amount under management.

**[Accounting]{.underline}**

The credit union must report all short positions in its financial
statements in accordance with GAAP, and identify the liability for short
positions as a supplement to the Call Report. The application must
include sample accounting entries for taking, maintaining, and closing
short positions.

**[Agreements and Contracts]{.underline}**

The credit union must provide agreements to sell short with required
limitations, if short sale activities are delegated to an investment
advisor. If short sale activities are conducted directly with a
broker-dealer, the credit union must provide margin requirements.

**[Termination of Authority]{.underline}**

If the credit union is classified as less than Well Capitalized, the
credit union will close out all short sales positions in a commercially
reasonable manner, report the disposition of all short sales positions
to the appropriate Regional Director within 30 days of the effective
date of net worth classification (in 702.101(b)) as less than Well
Capitalized, and the pilot program will be deemed terminated.

**[Reassessment of the Pilot Program]{.underline}**

No later than 5 years after the program is approved, the pilot program
will be reassessed and staff will provide a recommendation to the NCUA
Board.

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