11164 Federal Register / Vol. 76, No. 40 / Tuesday, March 1, 2011 / Proposed Rules 

review its existing regulations and to 

identify whether any of its existing 

regulations should be modified, 

streamlined, expanded, or repealed. We 

will also be working with the 

Department’s rulemaking components 

on a preliminary plan for the periodic 

review of its existing regulations, 

including ways to institutionalize, 

within the Department, the ongoing 

review of the Department’s regulations, 

in an open dialog with the public. 

Through this process, the Department 

will consider the elimination of rules 

that are no longer warranted, and will 

also consider strengthening, 

complementing, or modernizing rules 

where necessary or appropriate— 

including, as appropriate, undertaking 

new rulemaking actions. 

Consistent with the Department’s 

commitment to public participation in 

the rulemaking process, the Department 

is beginning this process by soliciting 

views from the public on how best to 

conduct its analysis of existing Justice 

rules and how best to identify those 

rules that might be modified, 

streamlined, expanded, or repealed. It is 

also seeking views from the public on 

specific rules or obligations that should 

be altered or eliminated. While the 

Department promulgates rules in 

accordance with the law and to the best 

of its ability, we recognize that the best 

information as to the consequences of a 

rule, including its costs and benefits, 

comes from practical, real-world 

experience (both on the part of the 

public and on the part of the 

Department) after the rule has been 

implemented. Members of the public 

and of entities affected by Department’s 

regulations are likely to have useful 

information and perspectives on the 

benefits and burdens of existing 

requirements beyond the information 

that was available to the Department at 

the time a regulation was issued. 

Interested parties may also be wellpositioned to identify those rules that 

are most in need of review and, thus, 

assist the Department in prioritizing and 

properly tailoring its retrospective 

review process. In short, engaging the 

public in an open, transparent process 

is a crucial first step in the Department’s 

review of its existing regulations. 

Questions for Commenters 

The following list of questions 

represents a preliminary attempt to 

identify issues raised by the 

Department’s efforts to develop a 

preliminary plan for the retrospective 

analysis of its regulations and to 

identify rules/obligations on which it 

should immediately focus. This 

nonexhaustive list is meant to assist in 

the formulation of comments and is not 

intended to restrict the issues that may 

be addressed. In addressing these 

questions or others, we request that 

commenters identify with specificity the 

regulation or reporting requirement at 

issue, providing the legal citation and 

providing where possible empirical 

information on the impact of the rule on 

those subject to it. We also request that 

the submitter explain, in as much detail 

as possible, why a regulation or 

reporting requirement should be 

modified, streamlined, expanded, or 

repealed, as well as suggest specific 

alternative means for the Department to 

better achieve the statutory or regulatory 

objectives. 

(1) How can the Department best 

promote meaningful periodic reviews of 

its existing rules and how can it best 

identify those rules that might be 

modified, streamlined, expanded, or 

repealed? 

(2) What factors should the agency 

consider in selecting and prioritizing 

rules for review? 

(3) Are there regulations that have 

become ineffective or been overtaken by 

technological or other change and, if so, 

what are they? How can they be 

modernized to accomplish the statutory 

or regulatory objectives better? 

(4) Are there rules that can simply be 

revoked without impairing the 

Department’s statutory obligations and 

policy objectives and, if so, what are 

they? 

(5) Are there rules that are still 

necessary, but have not operated as well 

as expected such that a modified, 

stronger, or different approach is 

justified? 

(6) How can the Department best 

obtain and consider accurate, objective 

information and data about the costs, 

burdens, and benefits of existing 

regulations consistent with the 

Paperwork Reduction Act and without 

imposing information collection 

burdens on the public? Are there 

existing sources of data the Department 

can use to evaluate the postpromulgation effects of regulations over 

time? We invite interested parties to 

provide data that may be in their 

possession that documents the costs, 

burdens, and benefits of existing 

requirements. 

The Department notes that this 

Request for Information is issued solely 

for information and program-planning 

purposes. The Department will give 

careful consideration to the responses, 

and may use them as appropriate during 

the retrospective review, but we do not 

anticipate providing a point-by-point 

response to each comment submitted. 

While responses to this RFI do not bind 

the Department to any further actions 

related to the response, all submissions 

will be made publically available on 

http://www.regulations.gov. 

Dated: February 22, 2011. 

Christopher H. Schroeder, 

Assistant Attorney General, Office of Legal 

Policy. 

[FR Doc. 2011–4513 Filed 2–28–11; 8:45 am] 

BILLING CODE P 

NATIONAL CREDIT UNION 

ADMINISTRATION 

12 CFR Parts 703, 704, 709, and 742 

RIN 3133–AD86 

Removing References to Credit 

Ratings in Regulations; Proposing 

Alternatives to the Use of Credit 

Ratings 

AGENCY: National Credit Union 

Administration (NCUA). 

ACTION: Notice of proposed rulemaking. 

SUMMARY: NCUA is proposing rules to 

implement certain statutory provisions 

in Title IX of the Dodd-Frank Wall 

Street Reform and Consumer Protection 

Act (the Dodd-Frank Act). The proposed 

rules replace or remove references to 

credit ratings in NCUA regulations. 

DATES: Comments must be received on 

or before May 2, 2011. 

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/Resources/ 

RegulationsOpinionsLaws/ 

ProposedRegulations.aspx. Follow the 

instructions for submitting comments. 

E-mail: Address to 

regcomments@ncua.gov. Include ‘‘[Your 

name] Comments on ‘‘Notice of 

Proposed Rulemaking—Removing 

References to Credit Ratings’’ in the email 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. 

Public Inspection: All public 

comments are available on the agency’s 

Web site at http://www.ncua.gov/ 

Resources/RegulationsOpinionsLaws/ 

ProposedRegulations.aspx as submitted, 

except as may not be possible for 


jlentini on DSKJ8SOYB1PROD with PROPOSALS
Federal Register / Vol. 76, No. 40 / Tuesday, March 1, 2011 / Proposed Rules 11165 

1 Dodd-Frank Wall Street Reform and Consumer 

Protection Act, Public Law 111–203, § 939A (2010). 

2 Id. 

3An NRSRO is an entity registered with the U.S. 

Securities and Exchange Commission (SEC) under 

section 15E of the Securities Exchange Act of 1934. 

See 15 U.S.C. 78o–7, as implemented by 17 CFR 

240.17g–1. 

4With respect to the financial crisis, the Senate 

Report stated that ‘‘erroneous credit ratings’’ caused 

serious and far reaching problems. See S. Rep. No. 

111–176, p. 36 (2010). Report of the Committee on 

Banking, Housing, and Urban Affairs. The Senate 

Report attributed the errors to the overreliance by 

the NRSROs on mathematical risk models and to 

conflicts of interest in the ratings process, not to 

incorrect standards. See Dodd-Frank Wall Street 

Reform: Conference Report Summary. Similarly, the 

House Report on H.R. 3890, the rating agency 

reform legislation later incorporated into H.R. 4173 

as passed by the House, notes that NRSROs issued 

ratings based upon unsatisfactory credit analyses. 

See H. Rep. No. 111–685, Part I, p. 19 (2010). Report 

of the Committee on Financial Services. 

5http://banking.senate.gov/public/_files/070110_

Dodd_Frank_Wall_Street_Reform_

comprehensive_summary_Final.pdf. 

technical reasons. Public comments will 

not be edited to remove any identifying 

or contact information. Paper copies of 

comments may be inspected in NCUA’s 

law library at 1775 Duke Street, 

Alexandria, Virginia 22314, by 

appointment weekdays between 9 a.m. 

and 3 p.m. To make an appointment, 

call (703) 518–6546 or send an e-mail to 

OGCMail@ncua.gov. 

FOR FURTHER INFORMATION CONTACT: 

Mark Vaughan, Director, Division of 

Capital Markets, or Dale Klein, Senior 

Capital Markets Specialist, at the 

address above or telephone (703) 518– 

6620; or Lisa Henderson, Staff Attorney, 

or Frank Kressman, Staff Attorney, at 

the address above or telephone (703) 

518–6540. 

SUPPLEMENTARY INFORMATION: 

I. Background 

Section 939A of the Dodd-Frank Act 

requires each Federal agency to review 

(1) any regulation issued by such agency 

that requires the use of an assessment of 

the creditworthiness of a security or 

money market instrument; and (2) any 

references to or requirements in such 

regulations regarding credit ratings.1

Section 939A further requires each 

agency to modify any such regulations 

identified by the review to remove any 

reference to or requirement of reliance 

on credit ratings and to substitute in 

such regulations such standards of 

creditworthiness as each respective 

agency shall determine as appropriate 

for such regulations. In developing 

substitute standards of creditworthiness, 

an agency shall seek to establish, to the 

extent feasible, uniform standards of 

creditworthiness for use by the agency, 

taking into account the entities it 

regulates that would be subject to such 

standards.2

NCUA has identified 24 general areas 

of its regulations that contain references 

to nationally recognized statistical 

rating organization (NRSRO) 3 credit 

ratings. Eight are found in part 703 of 

the regulations governing the 

investment activities of natural person 

Federal credit unions (FCUs). 12 CFR 

part 703. Fourteen are found in part 704 

of the regulations governing the 

operations, investment activities, and 

capital risk-weighting of corporate 

credit unions. 12 CFR part 704. There is 

also one reference to credit ratings in 

part 709 of the regulations governing the 

involuntary liquidation of Federal credit 

unions and one reference in part 742 of 

the regulations governing NCUA’s 

regulatory flexibility program. 12 CFR 

parts 709 and 742. 

II. General Approach 

The proposed rule generally handles 

NRSRO ratings three different ways, 

depending on the manner in which the 

rating is used in the regulations. For 

investments, the proposal generally 

replaces the minimum credit rating 

requirement with a requirement that the 

credit union do an internal credit 

analysis of the investment pursuant to a 

particular narrative standard. For 

counterparty transactions, the proposal 

generally replaces the minimum credit 

rating requirement with a requirement 

that the credit union do an internal 

credit analysis of the counterparty 

pursuant to an internal standard set by 

the credit union’s board. For ratings 

usage outside of investment and 

counterparty suitability, the proposal 

generally removes the ratings reference 

without requiring some substitute 

analysis. These three approaches are 

discussed in more detail below and in 

Section III. 

a. Investment Authority 

Where the regulations require that a 

security have particular rating in order 

for it to be a permissible investment for 

a credit union, the proposed rule 

replaces the minimum rating with a 

narrative standard that is focused 

primarily on credit quality. The 

proposal generally requires a credit 

union to conduct and document an 

internal analysis demonstrating that the 

issue or issuer of a security has a 

certain, specified capacity to meet its 

financial commitments. 

For each section of the rule, the 

necessary capacity to meet financial 

commitments is correlated to narrative 

descriptions provided by the NRSRO 

rating agencies. For example, two of the 

larger NRSROs, Standard and Poor’s and 

Fitch, state that a AA issuer rating (e.g., 

‘‘in one of the two highest ratings 

categories’’) means the obligor has a very 

strong capacity to meet its financial 

commitments. Accordingly, where the 

NCUA regulations currently require an 

investment to have a AA rating or 

equivalent, the proposal generally 

requires the credit union to determine 

that the issuer of the security has a very 

strong capacity to meet its financial 

commitments. The proposal contains 

similar translations for other ratings 

(e.g., a rating of BBB is equivalent to 

adequate capacity, and a rating of A is 

equivalent to strong capacity). 

The Board believes that this approach 

to replacing credit ratings is consistent 

with both the letter and spirit of the 

Dodd-Frank Act. The legislative history 

of Dodd-Frank indicates that Congress 

was concerned not with any particular 

rating level, or associated narrative 

standard, but rather, with the NRSROs’ 

failure to apply the narrative standard 

accurately and consistently to certain 

securities.4 The Dodd-Frank Act was 

intended to reduce over-reliance on 

ratings and encourage investors to 

conduct their own analyses.5 This 

proposal furthers those aims by 

requiring that credit unions conduct 

their own analyses using long-standing, 

and accepted, narrative standards. 

The Board believes that this approach 

does not present a significant change for 

most credit unions. NCUA already 

requires natural person FCUs and 

corporates to have credit risk 

management policies that go beyond 

simple reliance on credit ratings. 

Section 703.6 requires an FCU to 

conduct and document a credit analysis 

on any non-guaranteed or insured 

investment. 12 CFR 703.6. Section 704.6 

requires a corporate to operate 

according to a credit risk management 

policy that is commensurate with the 

investment risks and activities it 

undertakes, and the corporate’s policy 

must address credit limit approval 

processes, due diligence analysis 

requirements, maximum credit limits 

with each obligor and transaction 

counterparty, and concentrations of 

credit risk. 12 CFR 704.6. Accordingly, 

credit unions that purchase investments 

with some credit risk should already 

have in place robust processes— 

including internal testing and 

assessment and/or reviewing reports, 

analyses, opinions, and other 

assessments issued by third parties— 

analyzing the risk that an issue or issuer 

will fail to perform on its obligation. 

NCUA will provide additional 

supervisory guidance on the indicators 

that support a determination that an 


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11166 Federal Register / Vol. 76, No. 40 / Tuesday, March 1, 2011 / Proposed Rules 

6 Dodd-Frank Act, § 939. 

7 Id. 8 Id. 

issue or issuer has the necessary 

capacity (e.g., adequate, strong, very 

strong, etc.) to meet its financial 

commitments. 

b. Counterparties 

Where the regulations require that a 

transaction counterparty have a 

particular rating, the proposed rule 

substitutes a requirement that the 

counterparty meet minimum credit 

quality standards as established by the 

credit union’s board of directors. In 

developing and applying credit quality 

standards, the board of directors may 

incorporate external ratings, reports, 

analyses, opinions, and other 

assessments issued by third-parties. 

Since counterparty risk is more akin to 

loan than investment risk, a credit 

union would be expected to document 

its credit assessment and analysis using 

a system similar to its internal loan 

grading system. These internal 

processes would be subject to examiner 

review and classification, similar to the 

process used for credit union loan 

classification. 

Sections 703.6 and 704.6, noted 

above, also require credit unions to 

establish appropriate processes to 

evaluate the creditworthiness of 

securities counterparties. Any credit 

union doing business with a 

counterparty should already consider a 

counterparty’s financial statements, its 

general reputation, and whether there 

have been any formal enforcement 

actions against the counterparty or its 

affiliates by State or Federal securities 

regulators. A credit union should know 

the counterparty’s character, integrity of 

management, activities, and financial 

markets in which it deals. 

c. Removal Without Replacement 

Where NCUA has determined that a 

provision that references NRSRO ratings 

is no longer necessary, the proposed 

rule deletes or substantially modifies 

the provision. 

d. Other Approaches 

As discussed below, in Section IV, the 

Board is not wedded to these proposed 

alternatives to credit ratings in the 

investment and counterparty contexts. 

Commenters who believe a different 

approach (or approaches) is warranted 

should describe their alternatives and 

give a supporting justification. 

III. Specific Proposed Amendments 

a. Part 703—Investment and Deposit 

Activities 

Definitions 

Section 703.2 contains definitions of 

terms related to the investment 

activities of natural person FCUs. Three 

of the definitions make reference to 

credit ratings. 

Section 703.2 defines ‘‘deposit note’’ 

as an obligation of a bank that is similar 

to a certificate of deposit ‘‘but is rated.’’ 

The NCUA Board is proposing to delete 

the definition of ‘‘deposit note’’ entirely, 

as the term is standard in the securities 

industry. 

Part 703 permits FCUs to invest in 

Collateralized Mortgage Obligations 

(CMOs), and CMOs are defined in 

§ 703.2 as multiclass mortgage related 

securities. An FCU’s authority to 

purchase mortgage related securities 

comes from § 107(15)(b) of the Act, 12 

U.S.C. 1757(15)(b), which defines 

mortgage related security by cross 

reference to the same phrase in 

§ 3(a)(41) of the Securities Exchange Act 

of 1934, 15 U.S.C. 78c(a)(41) (Exchange 

Act). The pre-Dodd-Frank Exchange Act 

definition included a reference to 

NRSRO ratings, but Dodd-Frank Act 

eliminated the NRSRO reference in 

§ 3(a)(41) of the Exchange Act, 

substituting the language: ‘‘meets 

standards of creditworthiness as 

established by the [Securities and 

Exchange] Commission (SEC).’’ 6 The 

Dodd-Frank Act requires the SEC to 

establish those standards by July 21, 

2012.7

Section 703.2 defines mortgage 

related security by using the language 

found in the pre-Dodd Frank Act 

definition in § 3(a)(41) of the Exchange 

Act, including the reference to NRSRO 

ratings. This proposal removes the 

reference to NRSRO ratings from 

§ 703.2, and replaces it with a short 

cross reference to § 3(a)(41). Under the 

proposal, FCUs that wish to purchase 

mortgage related securities, including 

CMOs, must determine and document 

that the security is, in fact, a mortgage 

related security as defined by the SEC. 

In the time period before the SEC moves 

to specify ‘‘standards of 

creditworthiness’’ for mortgage related 

securities, an FCU is prohibited from 

purchasing a CMO or other mortgage 

related security unless the FCU has 

specific evidence that the SEC considers 

that security to meet the requirements of 

§ 3(a)(41). 

Similarly, § 703.2 cross-references the 

definition of ‘‘small business related 

security’’ with its definition in § 3(a)(53) 

of the Exchange Act, 15 U.S.C. 

78c(a)(53), and then repeats that 

definition verbatim. Again, this flows 

from the authority in the FCU Act, 12 

U.S.C. 1757(15)(C), and its cross 

reference to the definition of small 

business security in the Exchange Act. 

As with the definition of ‘‘mortgage 

related security,’’ discussed above, the 

definition of ‘‘small business related 

security’’ prior to the Dodd-Frank Act 

included a reference to NRSRO ratings. 

The Dodd-Frank Act eliminated that 

reference, substituting instead 

creditworthiness standards to be 

established by the SEC, and providing 

the SEC with two years to establish such 

standards.8 This proposed rule removes 

the language of the former Exchange Act 

definition and redefines ‘‘small business 

related security’’ by a short crossreference to the Exchange Act provision. 

An FCU wishing to purchase a small 

business related security must 

demonstrate that it meets the § 3(a)(53) 

requirements, as determined by the SEC. 

The proposed rule retains the 

exemption for Small Business 

Administration securities permissible 

under § 107(7) of the Federal Credit 

Union Act, 12 U.S.C. 1757(7). 

Broker-Dealers and Safekeepers 

Sections 703.8(b)(3) and 703.9(d) list 

a number of factors that FCUs should 

consider when evaluating the reliability 

of broker-dealers and investment 

safekeepers, respectively. One factor is 

NRSRO reports. The proposed rule 

replaces the NRSRO reference with 

‘‘external assessments of 

creditworthiness.’’ FCUs may obtain 

these assessments from various sources. 

Permissible Investments 

Section 703.14 establishes standards 

for permissible investments for FCUs. 

Section 703.14(e) provides that an 

FCU may purchase a municipal security 

(muni) that an NRSRO has rated in one 

of the four highest rating categories. The 

proposed rule removes the minimum 

rating requirements, providing instead 

that for an investment to be permissible, 

it must be originated by an issuer that 

has at least an adequate capacity to meet 

its financial obligations, even under 

adverse conditions, for the projected life 

of the security. As noted above, an FCU 

may evaluate the financial strength of an 

issuer by conducting internal 

assessments and/or reviewing 

assessments issued by third-parties. 

To further limit the risk associated 

with the purchase of munis, the 

proposal adds new concentration limits 

on such holdings. Specifically, an FCU 

must limit its aggregate muni holdings 

to no more than 75 percent of the credit 

union’s net worth and limit its holdings 

of munis issued by any single issuer to 

no more than 25 percent of net worth. 

Since most munis are exempt from 


jlentini on DSKJ8SOYB1PROD with PROPOSALS
Federal Register / Vol. 76, No. 40 / Tuesday, March 1, 2011 / Proposed Rules 11167 

9 75 FR 64786, 64789 (Oct. 20, 2010). 

10Prior to the Dodd-Frank Act, Section 3(a)(53) of 

the Exchange Act defined a ‘‘small business related 

security’’ as ‘‘a security that is rated in 1 of the 4 

highest rating categories by at least one nationally 

recognized statistical rating organization and 

represents an interest in one or more promissory 

notes or leases of personal property evidencing the 

obligation of a small business concern and 

originated by an insured depository institution, 

insured credit union, insurance company, or similar 

institution which is supervised and examined by a 

Federal or State authority, or a finance company or 

leasing company.’’ 

income taxation, and FCUs are tax 

exempt entities that cannot take full 

advantage of the tax exempt status of 

munis, it is unlikely that any particular 

FCU would desire to purchase or hold 

municipal securities in amounts that 

would exceed these proposed limits. 

Section 703.14(g) permits an FCU to 

purchase a European financial options 

contract for the purpose of hedging the 

risk associated with issuing share 

certificates with dividends tied to an 

equity index. Two of the requirements 

of the current 703.14(g) are that the 

counterparty meets certain NRSRO 

ratings requirements and that the 

aggregate amount of such index-linked 

certificates not exceed the credit union’s 

net worth. The proposal removes the 

reference to the NRSRO ratings and 

instead requires that the counterparty 

meet credit standards set by the board. 

To mitigate any risk associated with the 

removal of credit ratings in this context, 

the proposal tightens the concentration 

limit in equity indexed certificates from 

100 percent of the credit union’s net 

worth to 50 percent of the credit union’s 

net worth. 

Section 703.14(h) permits an FCU to 

invest in Mortgage note repurchase 

transactions. Three of the requirements 

of the current § 703.14(h) are that (1) the 

counterparty meets certain NRSRO 

ratings requirements, (2) the aggregate 

amount of the investments with any one 

counterparty be limited to 25 percent of 

the credit union’s net worth, and (3) the 

aggregate amount of the investments 

with all counterparties be limited to 100 

percent of net worth. The proposal 

removes the reference to the NRSRO 

ratings and instead requires that the 

counterparty meet credit standards set 

by the board. To mitigate any risk 

associated with the removal of credit 

ratings in this context, the proposal 

tightens the aggregate concentration 

limit from 100 percent of net worth to 

50 percent of net worth. 

b. Part 704—Corporate Credit Unions 

Definitions 

Section 704.2 contains definitions of 

terms related to the investment 

activities of corporate credit unions. 

Four of the definitions refer to credit 

ratings. 

The proposed rule eliminates the 

definition of ‘‘NRSRO’’ as irrelevant, 

given that the proposed rule eliminates 

references to NRSROs. 

The definition of ‘‘asset-backed 

commercial paper (ABCP) program’’ 

states that it is a program that has 

received a credit rating from an NRSRO. 

The proposed rule deletes that element 

of the definition as unnecessary. A 

corporate that is authorized to invest in 

ABCPs is expected to conduct due 

diligence on an ABCP investment just as 

any other investment. 

The definition of ‘‘eligible ABCP 

liquidity facility’’ provides that if the 

assets that the facility is required to 

fund against have received an NRSRO 

rating at the time of the inception of the 

facility, the facility can be used to fund 

only those assets that are rated 

investment grade by an NRSRO at the 

time of funding. The proposed rule 

removes the NRSRO references, 

providing instead that a facility can be 

used to fund only those assets or 

exposures that demonstrate adequate 

capacity to meet their financial 

obligations, even under adverse 

economic conditions, for the projected 

life of the asset or exposure. A corporate 

may base its evaluation of the financial 

strength of an asset or exposure on 

internal and external assessments. 

The definition of ‘‘small business 

related security’’ in § 704.2 is different 

from that in § 703.2, discussed above. 

When NCUA comprehensively revised 

part 704 in September 2010, the Board 

noted that Congress had already passed 

the Dodd-Frank Act, amending the 

Exchange Act’s definition of small 

business related security.9 The Board 

stated that it wanted to continue to use 

the old Exchange Act definition and 

therefore retained the description of the 

security10 while removing the reference 

to the Exchange Act. The definition 

retained an NRSRO reference, however, 

and the proposed rule removes that 

reference. As is the case with § 703.2, 

the proposed rule retains the exemption 

for Small Business Administration 

securities permissible under § 107(7) of 

the Federal Credit Union Act, 12 U.S.C. 

1757(7). 

Credit Risk Management 

Section 704.6(f) establishes minimum 

credit quality standards for corporate 

credit union investments. 12 CFR 

704.6(f). The standards include that 

each investment must have an NRSRO 

rating and that at least 90 percent of a 

corporate’s investment portfolio must 

have at least two such ratings. The 

standards further require that long-term 

investments be rated at least AA- (or 

equivalent) and short-term investments 

be rated at least A- (or equivalent). 

Finally, § 704.6(f) requires a corporate to 

monitor NRSRO ratings as long as it 

holds a rated investment and to develop 

an action plan, pursuant to § 704.10, for 

any investment subject to a ratings 

downgrade below AA- for a long-term 

investment or A- for a short-term 

investment. 

The proposed rule removes the 

minimum rating requirements, 

providing instead that for an investment 

to be permissible, it must be originated 

by an issuer that has at least a very 

strong capacity to meet its financial 

obligations, even under adverse 

conditions, for the projected life of the 

security. This standard would apply to 

both long-term and short-term 

investments. As discussed above, a 

corporate may base its evaluation of the 

financial strength of an issuer on 

internal and external assessments. 

Under the proposed rule, a corporate 

must monitor any changes in credit 

quality of the investment as long as it 

owns the investment and develop an 

action plan, under § 704.10, if there is 

reason to believe that the obligor no 

longer has a very strong capacity to meet 

its financial obligations for the 

remaining projected life of the security. 

Section 704.6(g) requires a corporate 

credit union to maintain documentation 

for each credit limit with each obligor 

or transaction counterparty, including 

rating agency information. The 

proposed rule deletes the reference to 

rating agency information. 

Expanded Authorities 

Appendix B to Part 704 sets out 

expanded authorities for corporates that 

have met certain requirements. 

Part I of Appendix B authorizes 

corporates to purchase investments with 

long-term ratings no lower than A- (or 

equivalent) and short-term ratings no 

lower than A–2 (or equivalent). The 

proposed rule removes the rating 

requirements, providing instead that for 

an investment to be permissible, it must 

be originated by an issuer that has at 

least a strong capacity to meet its 

financial obligations, even under 

adverse economic conditions, for the 

projected life of the security. Again, this 

standard would apply to both long-term 

and short-term investments. As in other 

parts of the proposed rule that substitute 

ratings with multi-faceted issuer 

evaluations, a corporate may consider a 

variety of sources in making that 

evaluation. 

Part II of Appendix B authorizes a 

corporate to purchase a foreign 


jlentini on DSKJ8SOYB1PROD with PROPOSALS
11168 Federal Register / Vol. 76, No. 40 / Tuesday, March 1, 2011 / Proposed Rules 

11Acceptable internal credit risk rating systems 

typically: (1) Are an integral part of the corporate’s 

risk management system that explicitly incorporates 

the full range of risks arising from the corporate’s 

participation in securitization activities; (2) link 

internal credit ratings to measurable outcomes; 

(3) separately consider the risk associated with the 

underlying loans or borrowers and the risk 

associated with the structure of the particular 

securitization transaction; (4) identify gradations of 

risk; (5) use clear, explicit criteria to classify assets 

into each internal rating grade; (6) employ 

independent credit risk management or loan review 

personnel to assign or review the credit risk ratings; 

(7) include an internal audit procedure to 

periodically verify that internal risk ratings are 

assigned in accordance with the corporate’s 

established criteria; (8) monitor the performance of 

the assigned internal credit risk ratings over time 

to determine the appropriateness of the initial 

credit risk rating assignment, and adjust individual 

credit risk ratings or the overall internal credit risk 

rating system, as needed; and (9) make credit risk 

rating assumptions that are consistent with, or more 

conservative than, the credit risk rating 

assumptions and methodologies of NRSROs. 

investment provided, among other 

things, that the sovereign issuer, and/or 

the country in which the obligor is 

organized, has a long-term foreign 

currency debt rating no lower than AA- 

(or equivalent). The proposed rule 

deletes the NRSRO reference, providing 

instead that a corporate may purchase a 

foreign investment only pursuant to an 

explicit policy established by the board 

of directors. Further, any foreign issue 

or issuer must have a very strong 

capacity to meet its financial 

obligations, even under adverse 

economic conditions, for the projected 

life of the security. 

Part III of Appendix B provides that, 

for derivative transactions, domestic 

counterparties must be rated at least A- 

(or equivalent). Part III also requires a 

corporate to monitor the ratings as long 

as a contract remains open and to 

develop an action plan, pursuant to 

§ 704.10, for any counterparty 

downgraded below the minimum rating 

requirements. The proposed rule 

removes the rating requirements, 

mandating instead that the counterparty 

meet minimum credit quality standards 

as established by the corporate’s board 

of directors. A corporate must identify 

the criteria relied upon to determine 

that the standards are met at the time 

the transaction is entered into and 

monitor those criteria for as long as the 

contract remains open. Finally, a 

corporate must develop a § 704.10 

action plan if the credit quality of the 

counterparty deteriorates below the 

standards established by the corporate’s 

board. 

Risk-Based Capital 

Appendix C to Part 704 explains how 

a corporate must compute its riskweighted assets for purposes of 

determining its capital ratios. Appendix 

C contains several references to NRSRO 

ratings. 

In the definitions section of Appendix 

C, ‘‘traded position’’ is defined with 

reference to an NRSRO rating. The 

proposed rule removes the definition of 

‘‘traded position,’’ as the term is used 

only in paragraphs II(c)(3) and (4), 

which are proposed to be deleted, as 

discussed below. 

Paragraph II(a)(2)(viii) provides that 

claims on qualifying securities firms, if 

rated in one of the three highest 

investment grade categories by an 

NRSRO, may be risk-weighted at 20 

percent. The proposed rule removes the 

ratings references, requiring instead 

that, for a 20 percent risk weighting, a 

qualifying securities firm must either 

meet minimum credit quality standards 

as established by the corporate credit 

union’s board of directors or 

demonstrate at least a strong capacity to 

meet its financial obligations, even 

under adverse economic conditions, for 

the projected life of the exposure. The 

corporate will use whichever 

requirement is more stringent. The 

board of directors must explicitly accept 

the regulatory minimum credit quality 

standard or establish a higher standard 

to be applied by management. 

Paragraph II(a)(2)(viii) also provides 

that a qualifying securities firm may rely 

on the rating of its parent consolidated 

company if the parent consolidated 

company guarantees the claim. The 

proposed rule removes the rating 

reference, providing instead that a 

qualifying securities firm may rely on 

the creditworthiness of its parent 

consolidated company if the parent 

consolidated company guarantees the 

claim. The parent company’s 

creditworthiness is measured by the 

same standards as that of the qualifying 

securities firm. 

Paragraph II(b) addresses the riskweighting of off-balance sheet assets. 

Certain assets relating to asset backed 

commercial paper (ABCP) facilities are 

weighted ‘‘based on the assets of the 

obligor, after considering any collateral 

or guarantees, or external credit ratings 

under paragraph II(c)(3).’’ See 

paragraphs II(b)(1)(iv), II(b)(2)(ii), and 

II(b)(4). The proposed rule also deletes 

the phrase ‘‘or external credit ratings 

under paragraph II(c)(3)’’ for each of 

these three paragraphs, as paragraph 

II(c)(3) itself will be deleted under this 

proposal. 

Paragraphs II(c)(1) and (c)(2) provide 

a general approach to risk-weighting 

recourse obligations, direct credit 

substitutes, and residual interests. 

Paragraphs II(c)(3) and (c)(4) provide 

alternative methods for calculating the 

risk weights of certain recourse 

obligations, direct credit substitutes, 

and residual interests. Since these 

alternative methods involve reliance on 

NRSRO ratings, the proposed rule 

deletes these paragraphs. The proposed 

rule adds a new paragraph II(c)(3) which 

allows a corporate with advanced risk 

management and reporting systems to 

seek NCUA approval to use an internal 

ratings-based approach to risk-weight 

those positions.11

c. Part 709—Involuntary Liquidation of 

Federal Credit Unions and Adjudication 

of Creditor Claims Involving Federally 

Insured Credit Unions in Liquidation 

Part 709 governs the involuntary 

liquidation of FCUs and the 

adjudication of creditor claims 

involving federally insured credit 

unions (FICUs). Section 709.10(b) 

provides that NCUA will not use its 

authority to repudiate contracts under 

12 U.S.C. 1787(c) to reclaim, recover, or 

recharacterize financial assets 

transferred by a FICU in connection 

with a securitization or in the form of 

a participation. Section 709.10(f) 

provides that NCUA will not attempt to 

avoid an otherwise legally enforceable 

securitization or participation 

agreement solely because the agreement 

does not meet the contemporaneous 

requirement of sections 207(b)(9) and 

208(a)(3) of the FCU Act. 

Section 709.10(a)(5) includes a 

definition of ‘‘securitization’’ that 

includes a reference to NRSRO ratings. 

The proposed rule deletes the definition 

of securitization in paragraph (a)(5) and 

the references to securitization in 

paragraphs (b), (f), and (g), as credit 

unions do not securitize assets within 

the meaning of Part 709. In addition, the 

proposal deletes the definition of 

‘‘special purpose entity’’ in paragraph 

(a)(6), as this phrase is only used in the 

definition of ‘‘securitization.’’ 

d. Part 742—Regulatory Flexibility 

Program 

Part 742 provides an exemption from 

certain regulatory restrictions for credit 

unions that have demonstrated 

sustained superior performance. 

Pursuant to § 742.4(a)(9) a credit union 

is exempt from the prohibition in 

§ 703.13(d)(3) against the purchase of a 

commercial mortgage related security 

provided, among other things, that the 

security is rated in one of the two 

highest rating categories by at least one 

NRSRO. The proposed rule removes the 

NRSRO requirement, replacing it with 

the requirement that the issuer have 

very strong capacity to meet its financial 

obligations, even under adverse 


jlentini on DSKJ8SOYB1PROD with PROPOSALS
Federal Register / Vol. 76, No. 40 / Tuesday, March 1, 2011 / Proposed Rules 11169 

12See Advanced Notice of Proposed Rulemaking 

on Alternatives to the Use of External Credit Ratings 

in the Regulations of the OCC, issued by the Office 

of the Comptroller of the Currency, 75 FR 49423 

(Aug. 13, 2010); Advanced Notice of Proposed 

Rulemaking on Alternatives to the Use of External 

Credit Ratings in the Regulations of the OTS, issued 

by the Office of Thrift Supervision, 75 FR 63107 

(Oct. 14, 2010);http://www.regulations.gov/#!search

Results;dct=PS;rpp=10;so=DESC;sb=postedDate;

po=0;s=OCC-2010-0017; http:// 

www.regulations.gov/#!searchResults;

dct=PS;rpp=10;so=DESC;sb=postedDate;po=0;s=

OTS-2010-0029 

economic conditions, for the projected 

life of the security. 

IV. Request for Comment 

As discussed above, this proposal 

removes the references to NRSRO credit 

ratings from NCUA regulations. In some 

places, the proposal replaces these 

references with alternative standards of 

creditworthiness. In other places, the 

Board believes that no alternative is 

necessary. 

The Board realizes there are many 

possible alternative standards of 

creditworthiness, including some 

alternatives not used by the Board in 

this proposal. For example, some other 

banking regulators, and third-party 

commenters on proposals published by 

those regulators, have suggested 

alternatives based on criteria such as 

macro-economic factors, minimum 

probabilities of defaults, permitting the 

purchase of only high quality and 

highly liquid investments, and other 

criteria.12

NCUA is open to the use of 

alternatives other than those contained 

in this proposal. Accordingly, 

commenters are encouraged to address 

the specific questions set forth below in 

addition to providing general 

comments. 

Are there some other alternative 

standards of creditworthiness that are 

better, or more appropriate, than those 

proposed by NCUA? If so, please 

specify: 

What the alternative standards are; 

The sections(s) of NCUA regulations 

in which the alternative(s) should be 

employed; and Why the alternative(s) 

are better than the standards used in 

this proposal. 

In proposing alternative standards of 

creditworthiness, please specifically 

address whether and how the standards: 

Provide for a reasonable and objective 

assessment of the likelihood of full 

repayment of principal and interest over 

the life of the security and in stressed 

market and economic scenarios; 

Foster prudent risk management; 

Are transparent, replicable, and well 

defined; 

Allow for supervisory review; 

Differentiate among investments in 

the same asset class with different credit 

risk; 

Provide for the timely and accurate 

measurement of negative and positive 

changes in investment quality over time, 

to the extent practicable; 

Strike the appropriate balance 

between the cost of the credit risk 

assessment, the risk of an incorrect 

assessment, and the burden of the 

assessment; and 

Provide for a lesser burden (if 

appropriate), on smaller credit unions. 

V. Regulatory Procedures 

a. Regulatory Flexibility Act 

The Regulatory Flexibility Act 

requires NCUA to prepare an analysis to 

describe any significant economic 

impact any proposed regulation may 

have on a substantial number of small 

entities (those under $10 million in 

assets). The proposed rule would 

remove NRSRO ratings from NCUA’s 

regulations. Generally, credit unions 

with under $10 million in assets do not 

engage in investment activities that are 

affected by those portions of the NCUA 

rules that refer to NRSRO ratings. 

Accordingly, the proposed amendments 

will not have a significant economic 

impact on a substantial number of small 

credit unions and, therefore, a 

regulatory flexibility analysis is not 

required. 

b. Paperwork Reduction Act 

The Paperwork Reduction Act of 1995 

(PRA) applies to rulemakings in which 

an agency by rule creates a new 

paperwork burden on regulated entities 

or modifies an existing burden. 44 

U.S.C. 3507(d); 5 CFR part 1320. For 

purposes of the PRA, a paperwork 

burden may take the form of a reporting, 

recordkeeping, or disclosure 

requirement, each referred to as an 

information collection. The Office of 

Management and Budget (OMB) has 

approved the current information 

collection requirements in part 703 and 

assigned them control number 3133– 

0133. OMB has approved the current 

information collection requirements in 

part 704 and assigned them control 

number 3133–0129. 

The proposed rule would potentially 

modify credit unions’ existing practices 

to impose record-keeping burdens. The 

proposed amendments would replace 

NRSRO ratings-based criteria for 

evaluating creditworthiness with new 

subjective standards based on the credit 

union’s own evaluation of 

creditworthiness. The credit union 

would have to be able to explain how 

the securities it purchased or 

counterparties with which it did 

business meet the standards set forth in 

the proposed amendments. As such, we 

believe that some credit unions may be 

required to develop additional criteria 

for assessing the creditworthiness of 

securities and counterparties and apply 

those criteria. 

We believe that all of the corporate 

credit unions already have policies and 

procedures in place for evaluating the 

credit risk of securities activities, but 

the proposed amendments may require 

additional analysis of credit risk and 

thus result in additional burdens on 

some natural person FCUs. We estimate 

that approximately 750 natural person 

FCUs may need to develop or augment 

a system for evaluating 

creditworthiness. We estimate that, on 

average, the FCUs will spend 20 hours 

on such a system, resulting in an initial 

aggregate burden of 15,000 hours. This 

estimate is based on our belief that 

many of these FCUs already have some 

criteria in place for evaluating 

creditworthiness. 

We further estimate that, on average, 

each of those FCUs will spend an 

additional 10 hours each year 

reviewing, adjusting, and applying its 

system for evaluating creditworthiness, 

for a total of 7,500 hours across the 

industry. Once again, this estimate 

reflects our belief that many of these 

FCUs already are applying a system of 

evaluating creditworthiness. 

As required by the PRA, NCUA is 

submitting a copy of this proposal to 

OMB for its review and approval. 

Persons interested in submitting 

comments with respect to the 

information collection aspects of the 

proposed rule should submit them to 

OMB at the address noted below. 

The NCUA considers comments by 

the public on this proposed collection of 

information in: 

Evaluating whether the proposed 

collection of information is necessary 

for the proper performance of the 

functions of the NCUA, including 

whether the information will have a 

practical use; 

Evaluating the accuracy of the 

NCUA’s estimate of the burden of the 

proposed collection of information, 

including the validity of the 

methodology and assumptions used; 

Enhancing the quality, usefulness, 

and clarity of the information to be 

collected; and 

Minimizing the burden of collection 

of information on those who are to 

respond, including through the use of 

appropriate automated, electronic, 

mechanical, or other technological 

collection techniques or other forms of 


jlentini on DSKJ8SOYB1PROD with PROPOSALS
11170 Federal Register / Vol. 76, No. 40 / Tuesday, March 1, 2011 / Proposed Rules 

information technology; e.g., permitting 

electronic submission of responses. 

The Paperwork Reduction Act 

requires OMB to make a decision 

concerning the collection of information 

contained in the proposed regulation 

between 30 and 60 days after 

publication of this document in the 

Federal Register. Therefore, a comment 

to OMB is best assured of having its full 

effect if OMB receives it within 30 days 

of publication. This does not affect the 

deadline for the public to comment to 

the NCUA on the proposed regulation. 

Comments on the proposed 

information collection requirements 

should be sent to: Office of Information 

and Regulatory Affairs, OMB, New 

Executive Office Building, Washington, 

DC 20503; Attention: NCUA Desk 

Officer, with a copy to Mary Rupp, 

Secretary of the Board, National Credit 

Union Administration, 1775 Duke 

Street, Alexandria, Virginia 22314– 

3428. 

c. Executive Order 13132 

Executive Order 13132 encourages 

independent regulatory agencies to 

consider the impact of their actions on 

State and local interests. In adherence to 

fundamental federalism principles, 

NCUA, an independent regulatory 

agency as defined in 44 U.S.C. 3502(5), 

voluntarily complies with the executive 

order. 

The proposed rule would not have 

substantial direct effects on the States, 

on the connection between the national 

government and the States, or on the 

distribution of power and 

responsibilities among the various 

levels of government. NCUA has 

determined that this proposal does not 

constitute a policy that has federalism 

implications for purposes of the 

executive order. 

d. The Treasury and General 

Government Appropriations Act, 1999— 

Assessment of Federal Regulations and 

Policies on Families 

The NCUA has determined that this 

proposed rule will not affect family 

well-being within the meaning of § 654 

of the Treasury and General 

Government Appropriations Act, 1999, 

Public Law 105–277, 112 Stat. 2681 

(1998). 

List of Subjects 

12 CFR Part 703 

Credit unions, Investments, Reporting 

and recordkeeping requirements. 

12 CFR Part 704 

Credit unions, Investments, Reporting 

and recordkeeping requirements. 

12 CFR Part 709 

Bank deposit insurance, Credit 

unions. 

12 CFR Part 742 

Credit unions, Investments, Reporting 

and recordkeeping requirements. 

By the National Credit Union 

Administration Board on February 17, 2011. 

Mary F. Rupp, 

Secretary of the Board. 

For the reasons stated in the 

preamble, the National Credit Union 

Administration proposes to amend 12 

CFR parts 703, 704, 709, and 742 as set 

forth below: 

PART 703—INVESTMENTS AND 

DEPOSIT ACTIVITIES 

1. The authority citation for part 703 

continues to read as follows: 

Authority: 12 U.S.C. 1757(7), 1757(8), 

1757(15). 

2. In § 703.2 remove the definition of 

Deposit note, and revise the definitions 

of Mortgage related security and Small 

business related security to read as 

follows: 

§ 703.2 Definitions. 

* * * * * 

Mortgage related security means a 

security as defined in Section 3(a)(41) of 

the Securities Exchange Act of 1934 (15 

U.S.C. 78c(a)(41)). 

* * * * * 

Small business related security means 

a security as defined in Section 3(a)(53) 

of the Securities Exchange Act of 1934 

(15 U.S.C. 78c(a)(53)). This definition 

does not include Small Business 

Administration securities permissible 

under § 107(7) of the Act. 

* * * * * 

3. In § 703.8, revise paragraph (b)(3) to 

read as follows: 

§ 703.8 Broker-dealers. 

* * * * * 

(b) * * * 

(3) If the broker-dealer is acting as the 

Federal credit union’s counterparty, the 

ability of the broker-dealer and its 

subsidiaries or affiliates to fulfill 

commitments, as evidenced by capital 

strength, liquidity, and operating 

results. The Federal credit union should 

consider current financial data, annual 

reports, external assessments of 

creditworthiness, relevant disclosure 

documents, and other sources of 

financial information. 

* * * * * 

4. In § 703.9, revise paragraph (d) to 

read as follows: 

§ 703.9 Safekeeping of investments. 

* * * * * 

(d) Annually, the Federal credit union 

must analyze the ability of the 

safekeeper to fulfill its custodial 

responsibilities, as evidenced by capital 

strength, liquidity, and operating 

results. The Federal credit union should 

consider current financial data, annual 

reports, external assessments of 

creditworthiness, relevant disclosure 

documents, and other sources of 

financial information. 

5. In § 703.14, revise paragraphs (e), 

(g)(9), (g)(11), (h)(1) and (h)(2) to read as 

follows: 

§ 703.14 Permissible investments. 

* * * * * 

(e) Municipal security. A Federal 

credit union may purchase and hold a 

municipal security, as defined in 

Section 107(7)(K) of the Act, only if the 

issuer has at least adequate capacity to 

meet its financial obligations, even 

under adverse economic conditions, for 

the projected life of the security. The 

credit union must prepare and 

document an internal analysis that 

evaluates the capacity of the issuer to 

meet its financial obligations, assuming 

adverse conditions, for the projected life 

of the security. The credit union must 

also limit its aggregate municipal 

securities holdings to no more than 75 

percent of the credit union’s net worth 

and limit its holdings of municipal 

securities issued by any single issuer to 

no more than 25 percent of the credit 

union’s net worth. 

* * * * * 

(g) * * * 

(9) The counterparty to the 

transaction meets the minimum credit 

quality standards as established by the 

Federal credit union’s board of 

directors. 

* * * * * 

(11) The aggregate amount of equitylinked member share certificates does 

not exceed 50 percent of the credit 

union’s net worth; 

* * * * * 

(h) * * * 

(1) The aggregate of the investments 

with any one counterparty is limited to 

25 percent of the credit union’s net 

worth and 50 percent of its net worth 

with all counterparties; 

(2) At the time the Federal credit 

union purchases the securities, the 

counterparty, or a party fully 

guaranteeing the counterparty, must 

meet the minimum credit quality 

standards as established by the Federal 

credit union’s board of directors. 

* * * * * 


jlentini on DSKJ8SOYB1PROD with PROPOSALS
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PART 704—CORPORATE CREDIT 

UNIONS 

6. The authority citation for part 704 

continues to read as follows: 

Authority: 12 U.S.C. 1762, 1766(a), 1772a, 

1781, 1789, and 1795e. 

7. In § 704.2: 

a. Remove the definition of Nationally 

Recognized Statistical Rating 

Organization; 

b. Revise the definition of Assetbacked commercial paper program as 

revised on October 20, 2010, at 75 FR 

64829, effective October 20, 2011; and 

c. Revise the definitions for Eligible 

ABCP liquidity facility, and Small 

business related security as added and 

revised, respectively, on October 20, 

2010, at 75 FR 64829, effective October 

20, 2011. 

The additions and revisions read as 

follows: 

§ 704.2 Definitions. 

* * * * * 

Asset-backed commercial paper 

program (ABCP program) means a 

program that primarily issues 

commercial paper and that is backed by 

assets or other exposures held in a 

bankruptcy-remote special purpose 

entity. The term sponsor of an ABCP 

program means a corporate credit union 

that: 

(1) Establishes an ABCP program; 

(2) Approves the sellers permitted to 

participate in an ABCP program; 

(3) Approves the asset pools to be 

purchased by an ABCP program; or 

(4) Administers the ABCP program by 

monitoring the assets, arranging for debt 

placement, compiling monthly reports, 

or ensuring compliance with the 

program documents and with the 

program’s credit and investment policy. 

* * * * * 

Eligible ABCP liquidity facility means 

a legally binding commitment to 

provide liquidity support to assetbacked commercial paper by lending to, 

or purchasing assets from any structure, 

program or conduit in the event that 

funds are required to repay maturing 

asset-backed commercial paper and that 

meets the following criteria: 

(1)(i) At the time of the draw, the 

liquidity facility must be subject to an 

asset quality test that precludes funding 

against assets that are 90 days or more 

past due or in default; and 

(ii) The facility can be used to fund 

only those assets or exposures that 

demonstrate adequate capacity to meet 

their financial obligations, even under 

adverse economic conditions, for the 

projected life of the asset or exposure; 

or 

(2) If the assets that are funded under 

the liquidity facility do not meet the 

criteria described in paragraph (1) of 

this definition, the assets must be 

guaranteed, conditionally or 

unconditionally, by the United States 

Government, its agencies, or the central 

government of an Organization for 

Economic Cooperation and 

Development (OECD) country. 

* * * * * 

Small business related security means 

a security that represents an interest in 

one or more promissory notes or leases 

of personal property evidencing the 

obligation of a small business concern 

and originated by an insured depository 

institution, insured credit union, 

insurance company, or similar 

institution which is supervised and 

examined by a Federal or State 

authority, or a finance company or 

leasing company. This definition does 

not include Small Business 

Administration securities permissible 

under § 107(7) of the Act. 

* * * * * 

8. In § 704.6, revise paragraphs (f) and 

(g)(2)(iii), to read as follows: 

§ 704.6 Credit risk management. 

* * * * * 

(f) Credit ratings—(1) At the time of 

purchase, each investment must be 

originated by an issuer that has at least 

a very strong capacity to meet its 

financial obligations, even under 

adverse economic conditions, for the 

projected life of the security. 

(2) A corporate credit union must 

obtain and retain appropriate 

documentation supporting the purchase 

of an investment. This documentation 

must include the criteria, information, 

and analysis relied upon to determine 

the credit quality of the investment, 

including the capacity of the issuer to 

meet its obligations under adverse 

economic conditions. A corporate credit 

union must identify and monitor any 

changes in credit quality of the 

investment and retain appropriate 

supporting documentation as long as the 

corporate owns the investment. 

(3) An investment is subject to the 

requirements of § 704.10 if: 

(i) There is reason to believe that the 

obligor no longer has a very strong 

capacity to meet its financial obligations 

for the remaining projected life of the 

security; or 

(ii) The investment is part of an asset 

class or group of investments that 

exceeds the sector or obligor 

concentration limits of this section. 

(g) * * * 

(2) * * * 

(iii) The latest available financial 

reports, industry analyses, and internal 

and external analyst evaluations 

sufficient to support each approved 

credit limit. 

9. In Appendix B: 

a. Remove Part I(a)(2); 

b. Redesignate Part I(a)(3), (4), and (5) 

as Part I(a)(2), (3), and (4), respectively; 

c. Remove Part II(b)(2); 

d. Redesignate Part II(b)(3), (4), and 

(5) as Part II(b)(2), (3), and (4), 

respectively; and 

e. Revise Part I(a)(1), Part II(b)(1), and 

Part III(b) as follows: 

Appendix B to Part 704—Expanded 

Authorities and Requirements 

* * * * * 

Part I 

* * * * * 

(a) * * * 

(1) Purchase investments originated by an 

issuer that has at least a strong capacity to 

meet its financial obligations, even under 

adverse economic conditions, for the 

projected life of the security; 

* * * * * 

Part II 

* * * * * 

(b) * * * 

(1) Investments must be made pursuant to 

an explicit policy established by the 

corporate credit union’s board of directors. 

Any foreign issue or issuer must have at least 

a very strong capacity to meet its financial 

obligations, even under adverse economic 

conditions, for the projected life of the 

security. 

* * * * * 

Part III 

* * * * * 

(b) Credit Quality: 

(1) All derivative transactions are subject to 

the following requirements: 

(i) If the intended counterparty is domestic, 

the counterparty must meet minimum credit 

quality standards as established by the 

corporate’s board of directors; 

(ii) If the intended counterparty is foreign, 

the corporate must have Part II expanded 

authority and the counterparty must meet 

minimum credit quality standards as 

established by the corporate’s board of 

directors; 

(iii) The corporate must identify the 

criteria relied upon to determine that the 

counterparty meets the credit quality 

requirements of this part at the time the 

transaction is entered into and monitor those 

criteria for as long as the contract remains 

open; and 

(iv) The corporate must comply with 

§ 704.10 of this part if the credit quality of 

the counterparty deteriorates below the 

minimum credit quality standards 

established by the corporate’s board of 

directors. 

* * * * * 

10. In Appendix C: 

a. Remove the definition of Traded 

position from paragraph I(b); 


jlentini on DSKJ8SOYB1PROD with PROPOSALS
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b. Revise paragraphs II(a)(2)(viii)(A), 

II(a)(2)(viii)(B) introductory text, 

II(b)(1)(iv), II(b)(2)(ii), and II(b)(4); 

b. Remove paragraph II(c)(3) and 

remove and reserve paragraph II(c)(4); 

and 

c. Add new paragraph II(c)(3). 

The revisions and addition read as 

follows: 

Appendix C to Part 704—Risk-Based 

Capital Credit Risk-Weight Categories 

* * * * * 

Part II: Risk-Weightings 

(a) * * * 

(2) * * * 

(viii) * * * 

(A) A qualifying securities firm must meet 

the minimum credit quality standards as 

established by the corporate credit union’s 

board of directors or demonstrate at least a 

strong capacity to meet its financial 

obligations, even under adverse economic 

conditions, for the projected life of the 

exposure, whichever requirement is more 

stringent. Alternatively, a qualifying 

securities firm may rely on the 

creditworthiness of its parent consolidated 

company, if the parent consolidated 

company guarantees the claim. 

(B) A collateralized claim on a qualifying 

securities firm does not have to comply with 

the requirements of paragraph (a) if the claim 

arises under a contract that: 

* * * * * 

(b) * * * 

(1) * * * 

(iv) Unused portions of ABCP liquidity 

facilities that do not meet the definition of an 

eligible ABCP liquidity facility. The resulting 

credit equivalent amount is assigned to the 

risk category appropriate to the assets to be 

funded by the liquidity facility based on the 

assets or the obligor, after considering any 

collateral or guarantees. 

* * * * * 

(2) * * * 

(ii) Unused portions of commitments 

(including home equity lines of credit and 

eligible ABCP liquidity facilities) with an 

original maturity exceeding one year except 

those listed in paragraph II(b)(5) of this 

Appendix. For eligible ABCP liquidity 

facilities, the resulting credit equivalent 

amount is assigned to the risk category 

appropriate to the assets to be funded by the 

liquidity facility based on the assets or the 

obligor, after considering any collateral or 

guarantees. 

* * * * * 

(4) 10 percent credit conversion factor 

(Group D). Unused portions of eligible ABCP 

liquidity facilities with an original maturity 

of one year or less. The resulting credit 

equivalent amount is assigned to the risk 

category appropriate to the assets to be 

funded by the liquidity facility based on the 

assets or the obligor, after considering any 

collateral or guarantees. 

* * * * * 

(c) * * * 

(3) Internal ratings-based approach— 

(i) Calculation. Corporate credit unions 

with advanced risk management and 

reporting systems may seek NCUA approval 

to use credit risk models to calculate riskweighted asset amounts for positions 

described in paragraphs II(c)(1) and (2) of this 

section. In determining whether to grant 

approval, NCUA will consider the financial 

condition and risk management 

sophistication of the corporate credit union 

and the adequacy of the corporate’s risk 

models and supporting management 

information systems. 

(ii) Consistent use of internal ratings-based 

approach. A corporate credit union that has 

been granted NCUA approval to use an 

internal ratings-based approach and that has 

determined to use such an approach must do 

so in a consistent manner for all securities so 

rated. 

PART 709—INVOLUNTARY 

LIQUIDATION OF FEDERAL CREDIT 

UNIONS AND ADJUDICATION OF 

CREDITOR CLAIMS INVOLVING 

FEDERALLY INSURED CREDIT 

UNIONS IN LIQUIDATIONS 

11. The authority citation for part 709 

continues to read as follows: 

Authority: 12 U.S.C. 1757, 1766, 1767, 

1786(h), 1787, 1788, 1789, 1789a. 

12. In § 709.10, remove paragraphs 

(a)(5) and (a)(6), and revise the section 

heading and paragraphs (b), (f), and (g) 

to read as follows: 

§ 709.10 Treatment by conservator or 

liquidating agent of financial assets 

transferred in connection with a 

participation. 

* * * * * 

(b) The Board, by exercise of its 

authority to disaffirm or repudiate 

contracts under 12 U.S.C. 1787(c), will 

not reclaim, recover, or recharacterize as 

property of the credit union or the 

liquidation estate any financial assets 

transferred to another party by a 

federally-insured credit union in 

connection with a participation, 

provided that the transfer meets all the 

conditions for sale accounting treatment 

under generally accepted accounting 

principles, other than the ‘‘legal 

isolation’’ condition addressed by this 

section. 

* * * * * 

(f) The Board will not seek to avoid 

an otherwise legally enforceable 

participation agreement executed by a 

federally-insured credit union solely 

because such agreement does not meet 

the ‘‘contemporaneous’’ requirement of 

sections 207(b)(9) and 208(a)(3) of the 

Federal Credit Union Act. 

(g) This section may be repealed by 

the NCUA upon 30 days notice and 

opportunity for comment provided in 

the Federal Register, but any such 

repeal or amendment will not apply to 

any transfers of financial assets made in 

connection with a participation that was 

in effect before such repeal or 

modification. For purposes of this 

paragraph, a participation would be in 

effect on the date that the parties 

executed the participation agreement. 

PART 742—REGULATORY 

FLEXIBILITY PROGRAM 

13. The authority citation for part 742 

continues to read as follows: 

Authority: 12 U.S.C. 1756, 1766. 

14. In § 742.4, revise paragraph 

(a)(6)(i) to read as follows: 

§ 742.4 RegFlex relief. 

(a) * * * 

(6) * * * 

(i) The issuer has at least a very strong 

capacity to meet its financial 

obligations, even under adverse 

economic conditions, for the projected 

life of the security; 

* * * * * 

[FR Doc. 2011–4070 Filed 2–28–11; 8:45 am] 

BILLING CODE 7535–01–P 

DEPARTMENT OF TRANSPORTATION 

Federal Aviation Administration 

14 CFR Part 33 

[Docket No. NE131; Notice No. 33–10–02– 

SC] 

Special Conditions: Pratt and Whitney 

Canada Model PW210S Turboshaft 

Engine 

AGENCY: Federal Aviation 

Administration (FAA), DOT. 

ACTION: Notice of proposed special 

conditions. 

SUMMARY: This action proposes special 

conditions for Pratt and Whitney 

Canada (PWC) model PW210S engines. 

The engine model will have a novel or 

unusual design feature which is a 30– 

Minute All Engines Operating (AEO) 

power rating. This rating is intended to 

be used for hovering at increased power 

for search and rescue missions. The 

applicable airworthiness regulations do 

not contain adequate or appropriate 

safety standards for this design feature. 

These proposed special conditions 

contain the added safety standards that 

the Administrator considers necessary 

to establish a level of safety equivalent 

to that established by the existing 

airworthiness standards. 

DATES: We must receive your comments 

by March 31, 2011. 

ADDRESSES: You must mail two copies 

of your comments to: Federal Aviation 

Administration, Engine and Propeller 


jlentini on DSKJ8SOYB1PROD with PROPOSALS