16570 Federal Register / Vol. 76, No. 57 / Thursday, March 24, 2011 / Proposed Rules 

American Institute of Steel ConstructionN690. 

(3) Motor-operated valves. 

(4) Equipment seismic qualification 

methods. 

(5) Piping design acceptance criteria. 

(6) Instrument setpoint methodology. 

(7) Safety-Related Distribution Control and 

Information System performance 

specification and architecture. 

(8) Safety System Logic and Control 

hardware and software. 

(9) Human factors engineering design and 

implementation. 

(10) First of a kind testing for reactor 

stability (first plant only). 

(11) Reactor precritical heatup with reactor 

water cleanup/shutdown cooling (first plant 

only). 

(12) Isolation condenser system heatup and 

steady state operation (first plant only). 

(13) Power maneuvering in the feedwater 

temperature operating domain (first plant 

only). 

(14) Load maneuvering capability (first 

plant only). 

(15) Defense-in-depth stability solution 

evaluation test (first plant only). 

d. Departures from Tier 2* information that 

are made under paragraph B.6 of this section 

do not require an exemption from this 

appendix. 

C. Operational Requirements 

1. Generic changes to generic TS and other 

operational requirements that were 

completely reviewed and approved in the 

design certification rulemaking and do not 

require a change to a design feature in the 

generic DCD are governed by the 

requirements in 10 CFR 50.109. Generic 

changes that require a change to a design 

feature in the generic DCD are governed by 

the requirements in paragraphs A or B of this 

section. 

2. Generic changes to generic TS and other 

operational requirements are applicable to all 

applicants who reference this appendix, 

except those for which the change has been 

rendered technically irrelevant by action 

taken under paragraphs C.3 or C.4 of this 

section. 

3. The Commission may require plantspecific departures on generic TS and other 

operational requirements that were 

completely reviewed and approved, provided 

a change to a design feature in the generic 

DCD is not required and special 

circumstances as defined in 10 CFR 2.335 are 

present. The Commission may modify or 

supplement generic TS and other operational 

requirements that were not completely 

reviewed and approved or require additional 

TS and other operational requirements on a 

plant-specific basis, provided a change to a 

design feature in the generic DCD is not 

required. 

4. An applicant who references this 

appendix may request an exemption from the 

generic TS or other operational requirements. 

The Commission may grant such a request 

only if it determines that the exemption will 

comply with the requirements of 10 CFR 

52.7. The grant of an exemption must be 

subject to litigation in the same manner as 

other issues material to the license hearing. 

5. A party to an adjudicatory proceeding 

for the issuance, amendment, or renewal of 

a license, or for operation under 10 CFR 

52.103(a), who believes that an operational 

requirement approved in the DCD or a TS 

derived from the generic TS must be changed 

may petition to admit such a contention into 

the proceeding. The petition must comply 

with the general requirements of 10 CFR 

2.309 and must demonstrate why special 

circumstances as defined in 10 CFR 2.335 are 

present, or demonstrate compliance with the 

Commission’s regulations in effect at the time 

this appendix was approved, as set forth in 

Section V of this appendix. Any other party 

may file a response to the petition. If, on the 

basis of the petition and any response, the 

presiding officer determines that a sufficient 

showing has been made, the presiding officer 

shall certify the matter directly to the 

Commission for determination of the 

admissibility of the contention. All other 

issues with respect to the plant-specific TS 

or other operational requirements are subject 

to a hearing as part of the license proceeding. 

6. After issuance of a license, the generic 

TS have no further effect on the plantspecific TS. Changes to the plant-specific TS 

will be treated as license amendments under 

10 CFR 50.90. 

IX. Inspections, Tests, Analyses, and 

Acceptance Criteria (ITAAC) 

[Reserved] 

X. Records and Reporting 

A. Records 

1. The applicant for this appendix shall 

maintain a copy of the generic DCD that 

includes all generic changes it makes to Tier 

1 and Tier 2, and the generic TS and other 

operational requirements. The applicant shall 

maintain the SUNSI (including proprietary 

information) and safeguards information 

referenced in the generic DCD for the period 

that this appendix may be referenced, as 

specified in Section VII of this appendix. 

2. An applicant or licensee who references 

this appendix shall maintain the plantspecific DCD to accurately reflect both 

generic changes to the generic DCD and 

plant-specific departures made under Section 

VIII of this appendix throughout the period 

of application and for the term of the license 

(including any period of renewal). 

3. An applicant or licensee who references 

this appendix shall prepare and maintain 

written evaluations which provide the bases 

for the determinations required by Section 

VIII of this appendix. These evaluations must 

be retained throughout the period of 

application and for the term of the license 

(including any period of renewal). 

4.a. The applicant for the ESBWR design 

shall maintain a copy of the aircraft impact 

assessment performed to comply with the 

requirements of 10 CFR 50.150(a) for the term 

of the certification (including any period of 

renewal). 

b. An applicant or licensee who references 

this appendix shall maintain a copy of the 

aircraft impact assessment performed to 

comply with the requirements of 10 CFR 

50.150(a) throughout the pendency of the 

application and for the term of the license 

(including any period of renewal). 

B. Reporting 

1. An applicant or licensee who references 

this appendix shall submit a report to the 

NRC containing a brief description of any 

plant-specific departures from the DCD, 

including a summary of the evaluation of 

each. This report must be filed in accordance 

with the filing requirements applicable to 

reports in 10 CFR 52.3. 

2. An applicant or licensee who references 

this appendix shall submit updates to its 

DCD, which reflect the generic changes to 

and plant-specific departures from the 

generic DCD made under Section VIII of this 

appendix. These updates shall be filed under 

the filing requirements applicable to final 

safety analysis report updates in 10 CFR 52.3 

and 50.71(e). 

3. The reports and updates required by 

paragraphs X.B.1 and X.B.2 of this appendix 

must be submitted as follows: 

a. On the date that an application for a 

license referencing this appendix is 

submitted, the application must include the 

report and any updates to the generic DCD. 

b. During the interval from the date of 

application for a license to the date the 

Commission makes its finding required by 10 

CFR 52.103(g), the report must be submitted 

semi-annually. Updates to the plant-specific 

DCD must be submitted annually and may be 

submitted along with amendments to the 

application. 

c. After the Commission makes the finding 

required by 10 CFR 52.103(g), the reports and 

updates to the plant-specific DCD must be 

submitted, along with updates to the sitespecific portion of the final safety analysis 

report for the facility, at the intervals 

required by 10 CFR 50.59(d)(2) and 

50.71(e)(4), respectively, or at shorter 

intervals as specified in the license. 

Dated at Rockville, Maryland, this 16th day 

of March 2011. 

For the Nuclear Regulatory Commission. 

Annette Vietti-Cook, 

Secretary of the Commission. 

[FR Doc. 2011–6839 Filed 3–23–11; 8:45 am] 

BILLING CODE 7590–01–P 

NATIONAL CREDIT UNION 

ADMINISTRATION 

12 CFR Part 741 

RIN 3133–AD66 

Interest Rate Risk 

AGENCY: National Credit Union 

Administration (NCUA). 

ACTION: Proposed rule. 

SUMMARY: NCUA proposes to amend its 

regulations to require Federally insured 

credit unions to have a written policy 

addressing interest rate risk (IRR) 

management and an effective IRR 

program as part of their asset liability 

management. NCUA also is proposing 

draft guidance in the form of an 

appendix to its regulations to assist 


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Federal Register / Vol. 76, No. 57 / Thursday, March 24, 2011 / Proposed Rules 16571 

1 Letters to Credit Unions: 99–CU–12 Real Estate 

Lending and Balance Sheet Management; 00–CU–10 

Asset Liability Management Procedures; 00–CU–13, 

Liquidity and Balance Sheet Management; 01–CU– 

08, Liability Management—Rate-Sensitive and 

Volatile Funding Sources; 01–CU–19 Managing 

Share Inflows in Uncertain Times; 03–CU–11, Nonmaturity Shares and Balance Sheet Risk; 03–CU–15 

Real Estate Concentrations and Interest Rate Risk 

Management for Credit Unions with Large Positions 

in Fixed Rate Mortgages; 06–CU–16 Inter-Agency 

Guidance on Non-traditional Mortgage Product 

Risk. Interagency Advisory on Interest Rate Risk 

Management, January 6, 2010. 

2Credit unions confront IRR from several sources. 

These include repricing risk, yield curve risk, 

spread risk, basis risk, and options risk. See the 

glossary of terms in Appendix B for definitions of 

these risks. 

credit unions in meeting the proposed 

regulatory requirement. NCUA believes 

a written IRR policy and an effective 

IRR program is key to maintaining safe 

and sound operations. NCUA believes 

credit unions will find the guidance 

helpful in addressing this important 

area of their operations. 

DATES: Comments must be received on 

or before May 23, 2011. 

ADDRESSES: You may submit comments 

by any of the following methods (Please 

send comments by one method only): 

• Federal Rulemaking 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 Proposed 

Rulemaking for Part 741’’ 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. 

Public Inspection: All public 

comments are available on the agency’s 

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

RegulationsOpinionsLaws/comments as 

submitted, except as may not be 

possible for 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: 

Jeremy Taylor, Senior Capital Markets 

Specialist, Office of Capital Markets and 

Planning, National Credit Union 

Administration, 1775 Duke Street, 

Alexandria, Virginia 22314, or 

telephone: (703) 518–6620. 

SUPPLEMENTARY INFORMATION: 

A. Discussion 

NCUA proposes to amend its 

regulations to require Federally insured 

credit unions (FICUs) to have a written 

policy and an effective program 

addressing interest rate risk (IRR) as part 

of their asset liability management 

(ALM). NCUA believes FICUs need a 

written policy to explicitly state the 

credit union’s IRR tolerance. An 

effective IRR program that identifies, 

measures, monitors, and controls IRR is 

an essential component of safe and 

sound credit union operations. In the 

past, NCUA issued guidance on ALM 

and IRR management in Letters to Credit 

Unions and believes FICUs generally are 

managing IRR adequately.1 NCUA’s IRR 

questionnaire is also available at the 

following location http:// 

www.ncua.gov/Resources/ 

ALManagementInvest/Review 

Procedures.aspx. However, IRR has 

risen at credit unions due to changes in 

balance sheet compositions and 

increased uncertainty in the financial 

markets. The Board therefore believes it 

is appropriate to create a regulatory 

requirement addressing the policy and 

practice of interest rate risk management 

at FICUs supported by clear and 

comprehensive guidance. The Board 

believes the proposed regulatory 

requirement and guidance will assist 

FICUs in understanding and meeting 

NCUA’s expectations regarding IRR 

policy and implementing an effective 

program. NCUA anticipates that it 

would set a compliance date of three 

months after the rule becomes effective. 

The term ‘‘interest rate risk’’ refers to 

the vulnerability of a credit union’s 

financial condition to adverse 

movements in market interest rates. 

Although some IRR is a normal part of 

financial intermediation, IRR may 

negatively affect a credit union’s 

earnings, or net economic value, which 

is the difference between the market 

value of assets and the market value of 

liabilities. Changes in interest rates 

influence a credit union’s earnings by 

altering interest-sensitive income and 

expenses (e.g. loan income and share 

dividends). Changes in interest rates 

also affect the economic value of a 

credit union’s assets and liabilities, 

because the present value of future cash 

flows and, in some cases, the cash flows 

themselves may change when interest 

rates change.2

An effective IRR program allows a 

credit union to serve member needs 

without incurring unreasonable levels of 

risk and make informed decisions about 

balance sheet composition, growth and 

product mix, while remaining within its 

defined tolerance level. An IRR program 

enables credit unions to meet their 

liquidity needs and implement flexible 

pricing strategies in response to changes 

in market interest rates while 

maintaining adequate earnings and net 

economic value. 

NCUA recognizes it is impossible to 

establish specific, regulatory 

requirements for IRR that would be 

appropriate for all FICUs. IRR 

management involves judgment by a 

FICU based on its own individual 

mission, structure, and circumstances. 

Any rule must take into account the 

diversity of FICUs and avoid a one-sizefits-all approach. Accordingly, FICUs 

should devise a policy and risk 

management program appropriate to 

their own situation. 

The guidance in the Appendix does 

not identify specific metrics because 

NCUA recognizes IRR programs will 

differ among credit unions. There are, 

nevertheless, fundamental elements 

applicable to all credit unions, as 

explained in the appendix. Developing 

a sound IRR program is the 

responsibility of the board of directors, 

involving all relevant phases of 

operation, and NCUA believes the 

proposed guidance provides a helpful 

framework for directors. NCUA is 

presenting guidance in the form of an 

appendix to the rule to assist FICUs in 

establishing a written policy and 

effective program as part of asset 

liability management. 

B. Proposed Rule 

Section 741.3 generally addresses the 

criteria NCUA will consider in 

determining and continuing the 

insurability of a credit union and 

paragraph (b) lists various factors and 

requirements for a credit union’s 

financial condition and its policies. 

Currently, § 741.3(b) includes 

requirements, among others, of written 

lending and investment policies, 12 CFR 

741.3(b)(2) and (3), and, therefore, 

placement of the proposed amendment 

within this provision is appropriate. 

The Board proposes to amend § 741.3(b) 

to add the requirement of a written 

policy on IRR and an effective program. 

This is an additional factor to be 

considered in determining whether a 

credit union’s financial condition and 


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16572 Federal Register / Vol. 76, No. 57 / Thursday, March 24, 2011 / Proposed Rules 

policies are safe and sound. 12 CFR 

741.3(b). 

C. Regulatory Procedures 

Regulatory Flexibility Act 

The Regulatory Flexibility Act 

requires NCUA to prepare an analysis to 

describe any significant economic 

impact a rule may have on a substantial 

number of small entities, those credit 

unions with less than ten million 

dollars in assets. The proposed rule 

does not apply to credit unions with 

less than ten million dollars in assets. 

Accordingly, the Board determines that 

this proposed rule will not have a 

significant economic impact on a 

substantial number of small credit 

unions and that a Regulatory Flexibility 

Analysis is not required. 

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). For purposes of the 

PRA, a paperwork burden may take the 

form of a either a reporting or a 

recordkeeping requirement, both 

referred to as information collections. 

NCUA has determined that the 

requirement to have a written interest 

rate policy creates a new information 

collection requirement. NCUA is 

applying to the Office of Management 

and Budget (OMB) for approval of the 

proposed information collection 

requirement. 

As required by the PRA, NCUA is 

submitting a copy of this proposed 

regulation to the 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 

the OMB at the address noted below. 

Written policy requirements 

The proposed rule would require a 

written interest rate policy and would 

apply to all Federally insured credit 

unions (FICUs) as follows. FICUs with 

assets over $50 million must meet the 

requirement for a written policy. FICUs 

with assets $10 million or over and less 

than or equal to $50 million must meet 

the requirement for a written policy if 

the total of first mortgage loans held 

plus total investments with maturities 

greater than five years is equal to or 

greater than 100% of its net worth. 

FICUs with assets $10 million or over 

and less than or equal to $50 million are 

not required to have a written policy if 

the total of first mortgage loans held 

plus total investments with maturities 

greater than five years is less than 100% 

of its net worth. FICUs less than $10 

million in assets are not required by the 

rule to have a written policy even if the 

total of first mortgage loans held plus 

total investments with maturities greater 

than five years is greater than 100% of 

its net worth. 

A FICU is considered to hold a first 

mortgage loan for its own portfolio 

when it has not demonstrated the intent 

and ability to sell the loan to an 

independent third party within 120 

days. Investments with maturities 

greater than five years are defined as 

those reported by the FICU to have 

maturities of 5–10 years and greater 

than 10 years in the statement of 

financial condition of its most recent 

call report. 

For example, Credit Union A has 

assets of $51 million. The percentage of 

first mortgage loans held by Credit 

Union A plus its investments with 

maturities greater than five years is 75% 

of its net worth. It is required by the rule 

to have a written interest rate policy 

because of its asset size. Credit Union B 

has $45 million in assets. The 

percentage of first mortgage loans held 

by Credit Union B plus its investments 

with maturities greater than five years is 

75% of its net worth. Credit Union B is 

therefore not required by the rule to 

have a written interest rate policy since 

this percentage is less that 100%. Credit 

Union C has assets of $10 million and 

the percentage of first mortgage loans 

held by Credit Union C plus its 

investments with maturities greater than 

five years is 125% of its net worth. It is 

required to have a written interest rate 

policy because it has assets $10 million 

or over and less than or equal to $50 

million, and the percentage of first 

mortgage loans held by Credit Union C 

plus its investments with maturities 

greater than five years is greater than 

100% of its net worth. Credit Union D 

has assets of $9 million and the 

percentage of first mortgage loans held 

by Credit Union D plus its investments 

with maturities greater than five years is 

125% of its net worth. Credit Union D 

is not required by the rule to have a 

written interest rate policy because its 

asset size is below $10 million, even 

though the percentage of first mortgage 

loans held by Credit Union D plus its 

investments with maturities greater than 

five years is greater than 100% its net 

worth. 

As of December 31, 2010, there were 

7339 FICUs, of which 3184 had assets 

over $50 million, or had assets $10 

million or over and less than or equal 

to $50 million, and total first mortgage 

loans plus total investments with 

maturities greater than five years were 

equal to or greater than 100% of net 

worth. NCUA estimates, however, that 

approximately 75% of these credit 

unions already have interest rate risk 

policies in place as part of their lending 

and asset management policies. 

Therefore, they will not have to 

undertake any significant additional 

burden as a result of this rulemaking. 

NCUA estimates that those credit 

unions with existing policies will only 

need to undertake a review of those 

policies to determine if they are in line 

with the guidance accompanying this 

rule change. While minor adjustments 

to existing policies may be appropriate, 

NCUA estimates that approximately 

only 25% of the credit unions will need 

to prepare a written policy. Therefore, 

NCUA estimates that approximately 800 

credit unions will need to develop a 

written interest rate risk policy to meet 

the requirement for a written policy; 

NCUA notes that periodic review of the 

policy, while included as part of the 

guidance, may require no additional 

paperwork burden or engender very 

limited additional paperwork. 

The proposed rule requiring a written 

interest rate risk policy is accompanied 

by guidance on how to establish this 

policy and the guidance essentially 

provides a template or list of the eight 

points the written policy should 

address. As provided in the guidance, 

the points to be covered are: 

• Identify committees, persons or 

other parties responsible for review of 

the credit union’s IRR exposure; 

• Direct appropriate actions to ensure 

management takes steps to manage IRR 

so that IRR exposures are identified, 

measured, monitored, and controlled; 

• State the frequency with which 

management will report on 

measurement results to the board to 

ensure routine review of information 

that is timely (e.g. current and at least 

quarterly) and in sufficient detail to 

assess the credit union’s IRR profile; 

• Set risk limits for IRR exposures 

based on selected measures (e.g. limits 

for changes in repricing or duration 

gaps, income simulation, asset 

valuation, or net economic value); 

• Choose tests, such as interest rate 

shocks, that the credit union will 

perform using the selected measures; 

• Provide for periodic review of 

material changes in IRR exposures and 

compliance with board approved policy 

and risk limits; 

• Provide for assessment of the IRR 

impact of any new business activities 

prior to implementation (e.g. evaluate 

the IRR profile of introducing a new 

product or service) ; and 

• Provide for annual evaluation of 

policy to determine whether it is still 


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Federal Register / Vol. 76, No. 57 / Thursday, March 24, 2011 / Proposed Rules 16573 

commensurate with the size, 

complexity, and risk profile of the credit 

union. 

The actual length of a policy may vary 

significantly depending on the 

complexity of the credit union’s 

activities. For example, a credit union 

that offers basic share accounts, only 

short-term loans, i.e., no mortgage loans, 

and makes relatively simple 

investments should be able to establish 

a written policy in one to two hours. 

The policy could establish maturity 

limits for loans, establish the minimum 

amount of short-term funds, and 

basically restrict the types of 

permissible investments (e.g. 

Treasuries). More complex balance 

sheets, especially those containing 

mortgage loans and complex 

investments, may warrant a 

comprehensive IRR policy due to the 

uncertainty of cash flows. 

Burden Calculation 

While the burden will vary depending 

on the complexity of credit union 

activities, for purposes of providing an 

estimated average, NCUA estimates each 

of the eight segments of policy will have 

a burden of an equal weight of two 

hours. The maximum time for all 

segments of the policy is therefore 

sixteen hours. NCUA estimates the 

burden associated with this collection 

as follows: 800 × 16 hours = 12,800 

hours. 

Organizations and individuals that 

wish to submit comments on this 

information collection requirement 

should direct them to the Office of 

Information and Regulatory Affairs, 

OMB, Attn: Shagufta Ahmed, Room 

10226, New Executive Office Building, 

Washington, DC 20503, with a copy to 

Mary Rupp, Secretary of the Board, 

National Credit Union Administration, 

1775 Duke Street, Alexandria, Virginia 

22314–3428. 

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 

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. 

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. This rule will not have 

substantial direct effects on the States, 

on the relationship 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 rule does not 

constitute a policy that has federalism 

implications for purposes of the 

executive order. 

The Treasury and General Government 

Appropriations Act, 1999—Assessment 

of Federal Regulations and Policies on 

Families 

The NCUA has determined that this 

rule will not affect family well-being 

within the meaning of the Treasury and 

General Government Appropriations 

Act, 1999, Public Law 105–277, 112 

Stat. 2681 (1998). 

Agency Regulatory Goal 

NCUA’s goal is to promulgate clear 

and understandable regulations that 

impose minimal regulatory burden. We 

request your comments on whether the 

proposed rule is understandable and 

minimally intrusive. 

List of Subjects in 12 CFR Part 741 

Credit unions, Requirements for 

insurance. 

By the National Credit Union 

Administration Board on March 17, 2011. 

Mary F. Rupp, 

Secretary of the Board. 

For the reasons set forth above, NCUA 

proposes to amend 12 CFR part 741 as 

follows: 

PART 741—REQUIREMENTS FOR 

INSURANCE 

1. The authority citation for part 741 

continues to read: 

Authority: 12 U.S.C. 1757, 1766(a), 1781– 

1790, and 1790d; 31 U.S.C, 3717. 

2. In § 741.3, add paragraph (b)(5) to 

read as follows: 

§ 741.3 Criteria 

* * * * * 

(b) * * * 

(5)(i) The existence of a written 

interest rate risk policy and an effective 

interest rate risk management program 

as part of asset liability management in 

all Federally insured credit unions 

(FICUs) as follows. FICUs with assets 

over $50 million must meet the 

requirement for a written policy and an 

effective interest rate risk management 

program. FICUs with assets $10 million 

or over and less than or equal to $50 

million must meet the requirement for 

a written policy and an effective interest 

rate risk management program if the 

total of first mortgage loans held plus 

total investments with maturities greater 

than five years is equal to or greater than 

100% of its net worth. FICUs with assets 

$10 million or over and less than or 

equal to $50 million are not required to 

have a written policy and an effective 

interest rate risk management program if 

the total of first mortgage loans held 

plus total investments with maturities 

greater than five years is less than 100% 

of its net worth. FICUs less than $10 

million in assets are not required by the 

rule to have a written policy and an 

effective interest rate risk management 

program even if the total of first 

mortgage loans held plus total 

investments with maturities greater than 

five years is greater than 100% of its net 

worth. 

(ii) A FICU is considered to hold a 

first mortgage loan for its own portfolio 

when it has not demonstrated the intent 

and ability to sell the loan to an 

independent third party within 120 

days. Investments with maturities 

greater than five years are defined as 

those reported by the FICU to have 

maturities of 5–10 years and greater 

than 10 years in the statement of 

financial condition of its most recent 

call report. 

(iii) For example, Credit Union A has 

assets of $51 million. The percentage of 

first mortgage loans held by Credit 

Union A plus its investments with 

maturities greater than five years is 75% 

of its net worth. It is required by the rule 

to have a written interest rate policy and 

an effective interest rate risk 

management program because of its 

asset size. Credit Union B has $45 


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16574 Federal Register / Vol. 76, No. 57 / Thursday, March 24, 2011 / Proposed Rules 

million in assets. The percentage of first 

mortgage loans held by Credit Union B 

plus its investments with maturities 

greater than five years is 75% of its net 

worth. Credit Union B is therefore not 

required by the rule to have a written 

interest rate policy and an effective 

interest rate risk management program 

since this percentage is less that 100%. 

Credit Union C has assets of $10 million 

and the percentage of first mortgage 

loans held by Credit Union C plus its 

investments with maturities greater than 

five years is 125% of its net worth. It is 

required to have a written interest rate 

policy and an effective interest rate risk 

management program because it has 

assets $10 million or over and less than 

or equal to $50 million, and the 

percentage of first mortgage loans held 

by Credit Union C plus its investments 

with maturities greater than five years is 

greater than 100% of its net worth. 

Credit Union D has assets of $9 million 

and the percentage of first mortgage 

loans held by Credit Union D plus its 

investments with maturities greater than 

five years is 125% of its net worth. 

Credit Union D is not required by the 

rule to have a written interest rate 

policy and an effective interest rate risk 

management program because its asset 

size is below $10 million, even though 

the percentage of first mortgage loans 

held by Credit Union D plus its 

investments with maturities greater than 

five years is greater than 100% its net 

worth. 

(iv) Appendix B to this part provides 

guidance on how to establish an interest 

rate risk policy and effective program. 

The guidance describes widely accepted 

best practices in the management of 

interest rate risk and it may therefore be 

helpful to all FICUs. 

* * * * * 

3. Part 741 is amended by adding 

Appendix B to read as follows: 

Appendix B to Part 741—Guidance for 

an Interest Rate Risk Policy and an 

Effective Program 

Table of Contents 

I. Introduction 

A. Complexity 

B. IRR Exposure 

II. IRR Policy 

III. IRR Oversight and Management 

A. Board of Directors Oversight 

B. Management Responsibilities 

IV. IRR Measurement and Monitoring 

A. Risk Measurement Systems 

B. Risk Measurement Methods 

C. Components of IRR Measurement 

Methods 

V. Internal Controls 

VI. Decision-Making Informed by IRR 

Measurement Systems 

VII. Standards for Assessment of IRR Policy 

and Effectiveness of Program 

VIII. Additional Guidance for Large Credit 

Unions With Complex or High Risk 

Balance Sheets 

IX. Definitions 

I. Introduction 

This appendix gives guidance to FICUs in 

the implementation of an interest rate risk 

(IRR) policy and program as aspects to 

overall asset liability management. An 

effective IRR management program identifies, 

measures, monitors, and controls IRR and is 

central to safe and sound credit union 

operations. Given the differences among 

credit unions, each credit union should 

formulate its own practices, metrics and 

benchmarks appropriate to its operations. 

These practices should be established in 

light of the nature of the credit union’s 

operations and business, as well as its 

complexity, risk exposure, and size. As these 

elements increase, NCUA believes the IRR 

practices should be implemented with 

increasing degrees of rigor and diligence to 

maintain safe and sound operations in the 

area of IRR management. In particular, rigor 

and diligence are required to manage 

complexity and risk exposure. Complexity 

relates to the intricacy of financial 

instrument structure, and to the composition 

of assets and liabilities on the balance sheet. 

In the case of financial instruments, the 

structure can have numerous characteristics 

that act simultaneously to affect the behavior 

of the instrument. In the case of the balance 

sheet, which contains multiple instruments, 

assets and liabilities can act in ways that are 

compounding or can be offsetting because 

their impact on the IRR level may act in the 

same or opposite directions. High degrees of 

risk exposure require a credit union to be 

diligently aware of the potential earnings and 

net worth exposures under various interest 

rate and business environments because the 

margin for error is low. 

A. Complexity 

In influencing the behavior of instruments 

and balance sheet composition, complexity is 

a function of the predictability of the cash 

flows. As cash flows become less predictable, 

the uncertainty of both instrument and 

balance sheet behavior increases. For 

example, a residential mortgage is subject to 

prepayments which will change at the option 

of the borrower. Mortgage borrowers may pay 

off their mortgage loans due to geographical 

relocation, or may increase the amount of 

their monthly payment above the minimum 

contractual schedule due to other changes in 

the borrower’s circumstances. This cash flow 

unpredictability is also found in investments, 

such as collateralized mortgage obligations 

because these are comprised of mortgage 

loans. Additionally, cash flow 

unpredictability affects liabilities. For 

example, nonmaturity share balances vary at 

the discretion of the depositor making 

deposits and withdrawals, and this may be 

influenced by a credit union’s pricing of its 

share accounts. 

B. IRR Exposure 

Exposure to IRR is the vulnerability of a 

credit union’s financial condition to adverse 

movements in market interest rates. Although 

some IRR exposure is a normal part of 

financial intermediation, a high degree of this 

exposure may negatively affect a credit 

union’s earnings and net economic value. 

Changes in interest rates influence a credit 

union’s earnings by altering interest-sensitive 

income and expenses (e.g. loan income and 

share dividends). Changes in interest rates 

also affect the economic value of a credit 

union’s assets and liabilities, because the 

present value of future cash flows and, in 

some cases, the cash flows themselves may 

change when interest rates change. 

Consequently, the management of a credit 

union’s pricing strategy is critical to the 

control of IRR exposure. 

All FICUs over $50 million, and all FICUs 

with assets $10 million or over and less than 

or equal to $50 million if the total of first 

mortgage loans held plus total investments 

with maturities greater than five years is 

equal to or greater than 100% of its net 

worth, should incorporate the following five 

elements into their IRR program: 

1. Board-approved IRR policy; 

2. Oversight by the board of directors and 

implementation by management; 

3. Risk measurement systems assessing the 

IRR sensitivity of either or both: 

a. Earnings; 

b. Asset and liability values; 

4. Internal controls to monitor adherence to 

IRR limits; 

5. Decision making that is informed and 

guided by IRR measures. 

II. IRR Policy 

The board of directors is responsible for 

ensuring the adequacy of an IRR policy and 

its limits. The policy should be consistent 

with the credit union’s business strategies 

and should reflect the board’s risk tolerance, 

taking into account the credit union’s 

financial condition and risk measurement 

systems and methods commensurate with the 

balance sheet structure. The policy should 

state actions and authorities required for 

exceptions to policy, limits, and 

authorizations. 

Credit unions have the option of either 

creating a separate IRR policy or 

incorporating it into investment, ALM, funds 

management, liquidity or other policies. 

Regardless of form, credit unions must 

clearly document their IRR policy in writing. 

The scope of the policy will vary 

depending on the complexity of the credit 

union’s balance sheet. For example, a credit 

union that offers short-term loans, invests in 

non-complex or short-term bullet 

investments (i.e. a debt security that returns 

100 percent of principal on the maturity 

date), and offers basic share products may 

not need to create an elaborate policy. The 

policy for these credit unions may limit the 

loan portfolio maturity, require a minimum 

amount of short-term funds, and restrict the 

types of permissible investments (e.g. 

Treasuries, bullet investments). More 

complex balance sheets, especially those 

containing mortgage loans and complex 

investments, may warrant a comprehensive 

IRR policy due to the uncertainty of cash 

flows. 

The policy should establish 

responsibilities and procedures for 

identifying, measuring, monitoring, 


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controlling, and reporting IRR, and establish 

risk limits. A written policy should: 

• Identify committees, persons or other 

parties responsible for review of the credit 

union’s IRR exposure; 

• Direct appropriate actions to ensure 

management takes steps to manage IRR so 

that IRR exposures are identified, measured, 

monitored, and controlled; 

• State the frequency with which 

management will report on measurement 

results to the board to ensure routine review 

of information that is timely (e.g. current and 

at least quarterly) and in sufficient detail to 

assess the credit union’s IRR profile; 

• Set risk limits for IRR exposures based 

on selected measures (e.g. limits for changes 

in repricing or duration gaps, income 

simulation, asset valuation, or net economic 

value); 

• Choose tests, such as interest rate shocks, 

that the credit union will perform using the 

selected measures; 

• Provide for periodic review of material 

changes in IRR exposures and compliance 

with board approved policy and risk limits; 

• Provide for assessment of the IRR impact 

of any new business activities prior to 

implementation (e.g. evaluate the IRR profile 

of introducing a new product or service); and 

• Provide for annual evaluation of policy 

to determine whether it is still commensurate 

with the size, complexity, and risk profile of 

the credit union. 

IRR policy limits should maintain risk 

exposures within prudent levels. Examples of 

limits are as follows. 

GAP: Less than ± 10 percent change in any 

given period, or cumulatively over 12 

months. 

Income Simulation: Net interest income 

after shock change less than 20 percent over 

any 12 month period. 

Asset Valuation or Net Economic Value: 

After shock change in book value net worth 

less than 25 percent or after shock value of 

net worth greater than 6 percent. 

NCUA emphasizes these are only for 

illustrative purposes, and management 

should establish its own limits that are 

reasonably supported. Where appropriate, 

management may also set IRR limits for 

individual portfolios, activities, and lines of 

business. 

III. IRR Oversight and Management 

A. Board of Directors Oversight 

The board of directors is responsible for 

oversight of their credit union and for 

approving policy, major strategies, and 

prudent limits regarding IRR. To meet this 

responsibility, understanding the level and 

nature of IRR taken by the credit union is 

essential. Accordingly, the board should 

ensure management executes an effective IRR 

program. 

Additionally, the board should annually 

assess if the IRR program sufficiently 

identifies, measures, monitors, and controls 

the IRR exposure of the credit union. Where 

necessary, the board may consider obtaining 

professional advice and training to enhance 

its understanding of IRR oversight. 

B. Management Responsibilities 

Management is responsible for the daily 

management of activities and operations. In 

order to implement the board’s IRR policy, 

management should: 

• Develop and maintain adequate IRR 

measurement systems; 

• Evaluate and understand IRR risk 

exposures; 

• Establish an appropriate system of 

internal controls (e.g. separation between the 

risk taker and IRR measurement staff); 

• Allocate sufficient resources for an 

effective IRR program. For example, a 

complex credit union with an elevated IRR 

risk profile will likely necessitate a greater 

allocation of resources to identify and focus 

on IRR exposures. 

• Develop and support competent staff 

with technical expertise commensurate with 

their IRR program; 

• Identify the procedures and assumptions 

involved in implementing the IRR 

measurement systems; and 

• Establish clear lines of authority and 

responsibility for managing IRR; and 

• Provide a sufficient set of reports to 

ensure compliance with board approved 

policies. 

Where delegation of management authority 

by the board occurs, this may be to 

designated committees such as an asset 

liability committee or other equivalent. In 

credit unions with limited staff, these 

responsibilities may reside with the board or 

management. Significant changes in 

assumptions, measurement methods, tests 

performed, or other aspects involved in the 

IRR process, should be documented and 

brought to the attention of those responsible. 

IV. IRR Measurement and Monitoring 

A. IRR Measurement Systems 

Generally, credit unions should have IRR 

measurement systems that capture and 

measure all material and identified sources of 

IRR. An IRR measurement system quantifies 

the risk contained in the credit union’s 

balance sheet and integrates the important 

sources of IRR faced by a credit union in 

order to facilitate management of its risk 

exposures. The selection and assessment of 

appropriate IRR measurement systems is the 

responsibility of credit union boards and 

management. 

Management should: 

• Rely on assumptions that are reasonable 

and supportable; 

• Document any changes to assumptions 

that should be based on observed 

information; 

• Ensure calculation techniques are 

appropriate in rigor and use accepted 

financial concepts; 

• Monitor positions with uncertain 

maturities, rates and cash flows, such as 

nonmaturity shares, fixed rate mortgages 

where prepayments may vary, adjustable rate 

mortgages, and instruments with embedded 

options, such as calls; and 

• Require any interest rate measures and 

tests to be sufficiently rigorous to capture 

risk. 

B. IRR Measurement Methods 

The following discussion is intended only 

as a general guide and should not be used by 

credit unions as a checklist. An IRR 

measurement system may rely on a variety of 

different methods. Common examples of 

methods available to credit unions are GAP 

analysis, income simulation, asset valuation, 

and net economic value. Any measurement 

method(s) used by a credit union to analyze 

IRR exposure should correspond with the 

complexity of the credit union’s balance 

sheet and display any material sources of 

IRR. 

GAP Analysis 

GAP analysis is a simple IRR measurement 

method that reports the mismatch between 

rate sensitive assets and rate sensitive 

liabilities over a given time period. GAP can 

suffice for simple balance sheets that 

primarily consist of short-term bullet type 

investments and non mortgage-related assets. 

GAP analysis can be static, behavioral, or 

based on duration. 

Income Simulation 

Income simulation is an IRR measurement 

method used to estimate earnings exposure to 

changes in interest rates. An income 

simulation analysis projects interest cash 

flows of all assets, liabilities, and off-balance 

sheet instruments in a credit union’s 

portfolio to estimate future net interest 

income over a chosen timeframe. Generally, 

income simulations focus on short-term time 

horizons (e.g. one to three years). Forecasting 

income is assumption sensitive and more 

uncertain the longer the forecast period. 

Simulations typically include evaluations 

under a base-case scenario, and 

instantaneous parallel rate shocks, and may 

include alternate interest-rate scenarios. The 

alternate rate scenarios may involve ramped 

changes in rates, twisting of the yield curve, 

and/or stressed rate environments devised by 

the user or provided by the vendor. 

NCUA Asset Valuation Tables 

For credit unions lacking advanced IRR 

methods that seek simple valuation 

measures, the NCUA Asset Valuation Tables 

are available and prepared quarterly by the 

NCUA Office of Capital Markets (OCM). 

These are located at http://www.ncua.gov/ 

Resources/ALManagementInvest/Review 

Procedures.aspx. 

These measures provide an indication of a 

credit union’s potential interest rate risk, 

based on the risk associated with the asset 

categories of greatest concern—(e.g., 

mortgage loans and investment securities). 

The tables provide a simple measure of the 

potential devaluation of a credit union’s 

mortgage loans and investment securities that 

occur during +/- 300 basis point parallel rate 

shocks, and report the resulting impact on 

net worth. 

Net Economic Value (NEV) 

NEV measures the effect of interest rates on 

the market value of net worth by calculating 

the present value of assets minus the present 

value of liabilities. This calculation measures 

the credit union’s balance sheet long-term 

IRR at a fixed point in time. By capturing the 

impact of interest rate changes on the value 

of all future cash flows, NEV provides a 

comprehensive measurement of IRR. 

Generally, NEV computations demonstrate 

the economic value of net worth under 

current interest rates and shocked interest 

rate scenarios. 


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One NEV method is to discount cash flows 

by a single interest rate path. Credit unions 

with a significant exposure to assets or 

liabilities with embedded options should 

consider alternative measurement methods 

such as discounting along a yield curve (e.g. 

the U.S. Treasury curve, LIBOR curve) or 

using multiple interest rate paths. Credit 

unions should apply and document 

appropriate methods, based on available data 

(e.g. utilizing observed market values), when 

valuing individual or groups of assets and 

liabilities. 

C. Components of IRR Measurement Methods 

In the initial setup of IRR measurement, 

critical decisions are made regarding 

numerous variables in the method. These 

variables include but are not limited to the 

following. 

1. Chart of Accounts 

Credit unions using an IRR measurement 

method should define a sufficient number of 

accounts to capture key IRR characteristics 

inherent within their product lines. For 

example, credit unions with significant 

holdings of adjustable-rate mortgages should 

differentiate balances by periodic and 

lifetime caps and floors, the reset frequency, 

and the rate index used for rate resets. 

Similarly, credit unions with significant 

holdings of fixed-rate mortgages should 

differentiate at least by original term, e.g., 30 

or 15-year, and coupon level to reflect 

differences in prepayment behaviors. 

2. Aggregation of Data Input 

As the credit union’s complexity, risk 

exposure, and size increases, the degree of 

detail should be based on data that is 

increasingly disaggregated. Because 

imprecision in the measurement process can 

materially misstate risk levels, management 

should evaluate the potential loss of 

precision from aggregation and simplification 

used in its measurement of IRR. 

3. Account Attributes 

Account attributes define a product, 

including: principal type, rate type, rate 

index, repricing interval, new volume 

maturity distribution, accounting accrual 

basis, prepayment driver, discount rate. 

4. Assumptions 

IRR measurement methods rely on 

assumptions made by management in order 

to identify IRR. The simplest example is of 

future interest rate scenarios. The 

management of IRR will require other 

assumptions such as: projected balance sheet 

volumes; prepayment rates for loans and 

investment securities; repricing sensitivity, 

and decay rates of nonmaturity shares. 

Examples of these assumptions follow. 

Example 1. Credit unions should consider 

evaluating the balance sheet under flat (i.e. 

static) and/or planned growth scenarios to 

capture IRR exposures. Under a flat scenario, 

runoff amounts are reinvested in their 

respective asset or liability account. 

Conducting planned growth scenarios allows 

management to assess the IRR impact of the 

projected change in volume and/or 

composition of the balance sheet. 

Example 2. Loans and mortgage related 

securities contain prepayment options that 

enable the borrower to prepay the obligation 

prior to maturity. This prepayment option 

makes it difficult to project the value and 

earnings stream from these assets because the 

future outstanding principal balance at any 

given time is unknown. A number of factors 

affect prepayments, including the refinancing 

incentive, seasonality (the particular time of 

year), seasoning (the age of the loan), member 

mobility, curtailments (additional principal 

payments), and burnout (borrowers who 

don’t respond to changes in the level of rates, 

and pay as scheduled). Prepayment speeds 

may be estimated or derived from numerous 

national or vendor data sources. 

Example 3. In the process of IRR 

measurement, the credit union must estimate 

how each account will reprice in response to 

market rate fluctuations. For example, when 

rates rise 300 basis points, the credit union 

may raise its asset or liability rates in a like 

amount or not, and may choose to lag the 

timing of its pricing change. 

Example 4. Nonmaturity shares include 

those accounts with no defined maturity 

such as share drafts, regular shares, and 

money market accounts. Measuring the IRR 

associated with these accounts is difficult 

because the risk measurement calculations 

require the user to define the principal cash 

flows and maturity. Credit unions may 

assume that there is no value when 

measuring the associated IRR and carry these 

values at book value or par. Many credit 

unions adopt this approach because it keeps 

the measurement method simple. 

Alternatively, a credit union may attribute 

value to these shares (i.e. premium) on the 

basis that these shares tend to be lower cost 

funds that are core balances by virtue of 

being relatively insensitive to interest rates. 

This method generally results in nonmaturity 

shares priced/valued in a way that will 

produce an increased net economic value. 

Therefore, the underlying assumptions of the 

shares require scrutiny. 

Credit unions that forecast share behavior 

and incorporate those assumptions into their 

risk identification and measurement process 

should perform sensitivity analysis. 

Guidance on the evaluation of nonmaturity 

shares is available in NCUA’s Letter to Credit 

Unions 03–CU–11. 

V. Internal Controls 

Internal controls are an essential part of a 

safe and sound IRR program. If possible, 

separation of those responsible for the risk 

taking and risk measuring functions should 

occur at the credit union. 

Staff responsible for maintaining controls 

should periodically assess the overall IRR 

program as well as compliance with policy. 

Internal audit staff would normally assume 

this role; however, if there is no internal 

auditor, management, or a supervisory 

committee that is independent of the IRR 

process, may perform this role. Where 

appropriate, management may also 

supplement the internal audit with outside 

expertise to assess the IRR program. This 

review should include policy compliance, 

timeliness, and accuracy of reports given to 

management and the board. 

Audit findings should be reported to the 

board or supervisory committee with 

recommended corrective actions and 

timeframes. The individuals responsible for 

maintaining internal controls should 

periodically examine adherence to the policy 

related to the IRR program. 

VI. Decision-Making Informed by IRR 

Measurement Systems 

Management should utilize the results of 

the credit union’s IRR measurement systems 

in making operational decisions such as 

changing balance sheet structure, funding, 

pricing strategies, and business planning. 

This is particularly the case when measures 

show a high level of IRR or when 

measurement results approach boardapproved limits. 

NCUA recognizes each credit union has its 

own individual risk profile and tolerance 

levels. However, when measures of fair value 

indicate net worth is low, declining, or even 

negative, or income simulations indicate 

reduced earnings, management should be 

prepared to identify steps, if necessary, to 

bring risk within acceptable levels. In any 

case, management should understand and 

use their IRR measurement results, whether 

generated internally or externally, in the 

normal course of business. Management 

should also use the results proactively as a 

tool to adjust asset liability management for 

changes in interest rate environments. 

VII. Standards for Assessment of IRR Policy 

and Effectiveness of Program 

The following standards will assist credit 

unions in determining the adequacy of their 

IRR policy and assess the effectiveness of 

their program to manage IRR. This section 

provides examples of adequate and 

inadequate elements of IRR policies and 

programs based on the preceding sections. 

Specific instances of inadequate policies and 

programs are in some cases identified for 

purposes of illustration. 

Adequate Inadequate 

Policy: 

Board oversight ........................................... Policy is consistent with credit union strategy, 

and the board states actions required to address policy exceptions.

Policy is not consistent with credit union complexity. Board has not reviewed limits specified in policy and does not require management to take corrective action when policy 

limitations are exceeded. 


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Adequate Inadequate 

Responsible parties identified ..................... A committee or management is designated to 

review and monitor IRR.

No committee or individual specified to review 

credit union’s IRR exposure. 

Direct appropriate action to measure, monitor, control IRR.Policy states all actions that are sufficient to 

manage IRR.

Omissions in policy cause material deficiency 

in controlling risk (e.g. method of measuring 

IRR is not identified or risk measurement 

not required with stated frequency). 

Reporting frequency specified ..................... Reporting of results is required with sufficient 

frequency to alert management to emerging 

IRR.

Reporting is infrequent and does not provide 

adequate detail to control IRR (e.g. semiannual reporting on an aggregate balance 

sheet). 

Risk limits stated with appropriate measures.Risk limits are established and are appropriate for the size and complexity of the 

credit union.

Key risk limit omitted from policy (e.g. NEV 

ratio or volatility post shock, NII post shock, 

or sensitivity gap at stated period), or limit 

is not reasonable (e.g. limits allow IRR 

measures to approach dangerously low levels under plausible interest rate scenarios). 

Tests for limits ............................................. Tests substantially display the level and range 

of credit union IRR.

Tests do not indicate level or source of risk 

(e.g. NEV @ only +/¥100 bps, or repricing 

gap only at one month). 

Review of material IRR changes ................ Any changes beyond a stated level are reported to management and, where appropriate, the Board.Review is required, but need for compliance 

with policy limits and corrective action is unclear. 

Impact of new business .............................. IRR impact of all business initiatives is required where these will affect future IRR.The credit union does not evaluate the impact 

of new business on its IRR profile and is at 

risk from new business booked. 

Periodic policy review .................................. Review by Board required annually to ensure 

continued relevance and applicability of policy to management of IRR.

Policy review is required only if risks are unchanged, at the Board’s discretion. 

IRR Oversight & Management: 

Oversight ..................................................... Board approves policy and strategies and understands IRR faced by its own credit union.Board is aware of the types of IRR present to 

credit unions in general, but does not have 

knowledge of the IRR risks associated with 

the credit union. 

Oversight assessment of program effectiveness.Board periodically evaluates program effectiveness by monitoring management’s IRR 

knowledge, using professional advice.

Board substantially relies on annual third 

party review to determine the adequacy of 

oversight and governance. 

Choice of IRR measurement systems ........ Management selects and maintains systems 

which are able to capture the complexity of 

IRR risks.

Systems used by the credit union do not capture IRR (e.g. balance sheet contains material options in investments, mortgage loans 

or core deposits, which the system cannot 

capture—calls, prepayments, or administered rates). 

Evaluation of IRR risk exposures ................ Credit union understands all material IRR exposures and evaluates these accordingly 

relative to credit union strategy.

Management relies on outside parties to 

evaluate credit union’s IRR and cannot effectively explain the IRR measurement 

method or the results. 

System of internal controls .......................... Internal controls encompass and effectively 

evaluate programs that manage elements 

of IRR at the credit union.

Internal audit has not identified or addressed 

the correction of IRR deficiencies (e.g. 

processes for tracking changes in measurement assumptions, such as gap repricing of 

core deposits). 

IRR resource management ......................... Credit union has allocated initial or additional 

qualified staff resources sufficient to manage IRR by means that address sources of 

risk.

Credit union IRR exposure has materially increased without allocating additional, qualified staff, consequently IRR exposures are 

not identified or properly measured. 

Expertise of IRR program staff ................... Staff responsible correctly identifies sources 

of IRR and can quantify these risks.

Credit union relies on staff who do not understand or are not familiar with IRR at the 

credit union (e.g. management cannot explain the impact on IRR of overstating core 

deposit premiums). 

Procedures and assumptions of IRR measurement systems.Credit union identifies reasonable procedures 

and supportable assumptions.

Management delegates assumptions to a third 

party and has no procedure to review the 

reasonableness of the assumptions. 

Accountability of IRR management ............. Responsibility for managing IRR is specific 

and clearly delineated.

Responsibility for managing IRR is too broad, 

or unclear, or not recognized by management. 

Transparency of changes in assumptions, 

methods and IRR tests.

Management requires clear disclosure of relevant changes in all material assumptions 

and methods.

Changes in assumptions are not tracked, or 

monitored or transparent to those evaluating efficacy of IRR system. 


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Adequate Inadequate 

IRR Measurement and Monitoring: 

Reasonable and supportable assumptions Credit union carefully evaluates all assumptions and assesses the sensitivity of results 

relative to each key assumption.

Results are highly dependent on key assumptions that have not been researched or 

demonstrated to be supportable (e.g. mortgage prepayments do not reflect extension 

risk and core deposit premiums overstate or 

do not indicate reasonable maturities). 

Assumption changes from observed information.All material changes in assumptions are 

based on tested internal data or reliable industry sources.

Assumptions are not tested and changes are 

not supported by any associated data on 

which the credit union relies. 

Rigor of calculations and conformity of concepts.Techniques used appropriately capture complexity of balance sheet instruments.Methods to attribute cash flows, and rate sensitivities are based on incorrect techniques 

(e.g. misuse of statistical correlations). 

Positions with uncertain maturities, rates 

and cash flows.

Activity is monitored on a regular basis in 

order to validate reasonableness of modeling assumptions.

Actual behavior is not monitored or compared 

to projected behavior. 

Rigor of interest rate measures and tests .. Measures and tests employed capture the 

material risks embedded in the credit 

union’s balance sheet.

Measures and tests employed do not capture 

material risks embedded in the balance 

sheet (e.g. rate shocks do not trigger the 

embedded options in some products). 

Components of IRR Measurement Methods: 

Chart of accounts ........................................ A sufficient number of accounts have been 

defined to capture key IRR characteristics 

inherent within each product.

Accounts/products with different IRR characteristics are modeled as one account/product (e.g. 15- and 30-year fixed-rate mortgages, with various coupons and prepayment behaviors). 

Data aggregation ......................................... The level of data disaggregation is sufficient 

given the credit union’s complexity and risk 

exposure (e.g. instrument level processing).

Data is combined for similar products with a 

wide range of variables, producing misleading weighted average terms (e.g. combining fixed-rate mortgages with coupons 

ranging from 4% to 8%, and modeling as a 

6% mortgage). 

Account attributes ....................................... Account set-up is appropriate to allow for the 

capture of key IRR characteristics.

Account set-up fails to identify key IRR characteristic (e.g. adjustable-rate mortgages 

are modeled without periodic and lifetime 

caps and floors). 

Discounting methodology ............................ Methodology used properly calculates the 

value of the asset or liability being modeled.

Methodology used does not accurately value 

assets or liabilities (e.g. discount rates or 

maturities or cash flows are incorrect in discounting calculations). 

Assumptions ................................................ Credit union carefully evaluates all assumptions and assesses the sensitivity of results 

relative to each key assumption.

Results are highly dependent on key assumptions that have not been researched or 

demonstrated to be supportable (e.g. mortgage prepayments do not reflect extension 

risk and core deposit premiums overstate or 

do not indicate reasonable maturities). 

Internal Controls: 

Internal assessment of IRR program .......... Staff are identified and have annually assessed policy and program to correct any 

weaknesses.

There is no specified review action for requiring periodic evaluation of IRR program effectiveness. 

Compliance with policy ................................ IRR program is evaluated semi-annually for 

any policy exceptions, including compliance 

with approved limits.

Exceptions to policy occur occasionally and 

these are not noted by the internal control 

process. 

Timeliness and accuracy of reports ............ Reports that are routinely provided to management and the Board successfully communicate material IRR exposure of the 

credit union.

Reports fail to specify some material risks, 

and some scheduled reports are not produced. 

Audit findings reported to board or supervisory committee.IRR program deficiencies and policy exceptions are reported to the Board in accordance with the policy.IRR program effectiveness is not part of audit 

review. No findings occur. 

Decision-making and IRR: 

Use of IRR measurement results in operational decisions.Measured IRR results form part of the credit 

union’s ongoing business decisions and are 

substantive considerations routinely included in the business decision process.

IRR exposure discussion occurs only as 

deemed relevant in the annual strategic 

process. 

Escalated use of results when IRR exposure is raised or approaching limits.Procedure specifies review escalation at specific levels with increasing contingency triggers close to limits.IRR results are secondary in addressing IRR 

contingencies. Credit union relies on ad hoc 

response driven by market and customer 

perceptions. 

Application to reduce elevated levels of 

IRR.

Credit union utilizes IRR results to clearly define and formulate response to increased 

IRR levels.

IRR system results are not used to address 

balance structure, funding or pricing strategies. 


jdjones on DSK8KYBLC1PROD with PROPOSALS-1
Federal Register / Vol. 76, No. 57 / Thursday, March 24, 2011 / Proposed Rules 16579 

NCUA acknowledges both the range of IRR 

exposures at credit unions, and the diverse 

means that they may use to accomplish an 

effective program to manage this risk. NCUA 

therefore does not stipulate specific 

quantitative standards or limits for the 

management of IRR applicable to all credit 

unions, and does not rely solely on the 

results of quantitative approaches to evaluate 

the effectiveness of IRR programs. 

Assumptions, measures and methods used by 

a credit union in light of its size, complexity 

and risk exposure determine the specific 

appropriate standard. However, NCUA 

strongly affirms the need for adequate 

practices for a program to effectively manage 

IRR. For example, policy limits on IRR 

exposure are not adequate if they allow a 

credit union to operate with an exposure that 

is unsafe or unsound, which means that the 

credit union may suffer material or 

significant losses under adverse 

circumstances as a result of this exposure. 

Credit unions that do not have a written IRR 

policy or that do not have an effective IRR 

program are out of compliance with § 741.3 

of NCUA’s regulation. 

VIII. Additional Guidance for Large Credit 

Unions with Complex or High Risk Balance 

Sheets 

FICUs with assets of $500 million or 

greater must obtain an annual audit of their 

financial statements performed in accordance 

with generally accepted accounting 

standards. 12 CFR 715.5, 715.6, 741.202. For 

purposes of data collection, NCUA also uses 

$500 million and above as its largest credit 

union asset range. In order to gather 

information and to monitor IRR exposure at 

larger credit unions as it relates to the NCUA 

insurance fund, NCUA will use this as the 

criterion for definition of large credit unions 

for purposes of the guidance. Given the 

increased exposure to the share insurance 

fund, NCUA encourages the following 

standards at large credit unions. 

Responsible officials at large credit unions 

that are complex or high risk should fully 

understand all aspects of interest rate risk, 

including but not limited to the credit 

union’s IRR assessment and potential 

directional changes in IRR exposures. For 

example, the credit union should consider 

the following: 

• Policy which provides for the use of 

outside parties to validate the tests and limits 

commensurate with the risk exposure and 

complexity of the credit union; 

• IRR measurements that provide 

compliance with policy limits as shown both 

by risks to earnings and net economic value 

of equity under a variety of defined and 

reasonable interest rate scenarios; 

• The effect of changes in assumptions on 

IRR exposure results (e.g. the impact of 

slower or faster prepayments on earnings and 

economic value); or, 

• Enhanced levels of separation between 

risk taking and risk assessment (e.g. 

assignment of resources to separate the 

investments function from IRR measurement, 

and IRR monitoring and oversight). 

IX. Definitions 

Glossary of terms 

Basis risk: The risk to earnings and/or 

value due to a financial institution’s holdings 

of multiple instruments, based on different 

indices that are imperfectly correlated. 

Interest rate risk: The risk that changes in 

market rates will adversely affect a credit 

union’s net economic value and/or earnings. 

Interest rate risk generally arises from a 

mismatch between the timing of cash flows 

from fixed rate instruments, and interest rate 

resets of variable rate instruments, on either 

side of the balance sheet. Thus, as interest 

rates change, earnings or net economic value 

may decline. 

Option risk: The risk to earnings and/or 

value due to the effect on financial 

instruments of options associated with these 

instruments. Options are embedded when 

they are contractual within, or directly 

associated with, the instrument. An example 

of a contractual embedded option is a call 

option on an agency bond. An example of a 

behavioral embedded option is the right of a 

residential mortgage holder to vary 

prepayments on the mortgage through time, 

either by making additional premium 

payments, or by paying off the mortgage prior 

to maturity. 

Repricing risk: The repricing of assets or 

liabilities following market changes can 

occur in different amounts and/or at different 

times. This risk can cause returns to vary. 

Spread risk: The risk to earnings and/or 

value resulting from variations through time 

of the spread between assets or liabilities to 

an underlying index such as the Treasury 

curve. 

Yield curve risk: The risk to earnings and/ 

or value due to changes in the level or slope 

of underlying yield curves. Financial 

instruments can be sensitive to different 

points on the curve. This can cause returns 

to vary as yield curves change. 

[FR Doc. 2011–6752 Filed 3–23–11; 8:45 am] 

BILLING CODE 7535–01–P 

DEPARTMENT OF TRANSPORTATION 

Federal Aviation Administration 

14 CFR Part 39 

[Docket No. FAA–2011–0258; Directorate 

Identifier 2010–NM–191–AD] 

RIN 2120–AA64 

Airworthiness Directives; The Boeing 

Company Model 737–600, –700, –700C, 

–800, –900, and –900ER Series 

Airplanes 

AGENCY: Federal Aviation 

Administration (FAA), DOT. 

ACTION: Notice of proposed rulemaking 

(NPRM). 

SUMMARY: We propose to adopt a new 

airworthiness directive (AD) for the 

products listed above. This proposed 

AD would require installing two 

warning level indicator lights on each of 

the P1–3 and P3–1 instrument panels in 

the flight compartment. This proposed 

AD would also require revising the 

airplane flight manual to remove certain 

requirements of previous AD actions, 

and to advise the flightcrew of the 

following changes: Revised non-normal 

procedures to use when a cabin altitude 

warning or rapid depressurization 

occurs, and revised cabin pressurization 

procedures for normal operations. This 

proposed AD was prompted by a design 

change in the cabin altitude warning 

system that would address the 

identified unsafe condition. We are 

proposing this AD to prevent failure of 

the flightcrew to recognize and react to 

a valid cabin altitude warning horn, 

which could result in incapacitation of 

the flightcrew due to hypoxia (lack of 

oxygen in the body), and consequent 

loss of control of the airplane. 

DATES: We must receive comments on 

this proposed AD by May 9, 2011. 

ADDRESSES: You may send comments by 

any of the following methods: 

• Federal eRulemaking Portal: Go to 

http://www.regulations.gov. Follow the 

instructions for submitting comments. 

• Fax: 202–493–2251. 

• Mail: U.S. Department of 

Transportation, Docket Operations, 

M–30, West Building Ground Floor, 

Room W12–140, 1200 New Jersey 

Avenue, SE., Washington, DC 20590. 

• Hand Delivery: Deliver to Mail 

address above between 9 a.m. and 

5 p.m., Monday through Friday, except 

Federal holidays. 

For service information identified in 

this proposed AD, contact Boeing 

Commercial Airplanes, Attention: Data 

& Services Management, P.O. Box 3707, 

MC 2H–65, Seattle, Washington 98124– 

2207; telephone 206–544–5000, 

extension 1, fax 206–766–5680; e-mail 

me.boecom@boeing.com; Internet 

https://www.myboeingfleet.com. You 

may review copies of the referenced 

service information at the FAA, 

Transport Airplane Directorate, 1601 

Lind Avenue, SW., Renton, Washington. 

For information on the availability of 

this material at the FAA, call 425–227– 

1221. 

Examining the AD Docket 

You may examine the AD docket on 

the Internet at http://

www.regulations.gov; or in person at the 

Docket Management Facility between 

9 a.m. and 5 p.m., Monday through 

Friday, except Federal holidays. The AD 

docket contains this proposed AD, the 

regulatory evaluation, any comments 

received, and other information. The 

street address for the Docket Office 


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