Federal Register / Vol. 63, No. 84 / Friday, May 1, 1998 /Rules and Regulations 24103

completely independent pricing may be

difficult to obtain. In such cases,

operational units may need to use prices

provided by the portfolio manager. For

unique instruments where the pricing is

being provided by a single source (e.g.,

the dealer providing the instrument),

the institution should review and

understand the assumptions used to

price the instrument.

Personnel. The increasingly complex

nature of securities available in the

marketplace makes it important that

operational personnel have strong

technical skills. This will enable them

to better understand the complex

financial structures of some investment

instruments.

Documentation. Institutions should

clearly define documentation

requirements for securities transactions,

saving and safeguarding important

documents, as well as maintaining

possession and control of instruments

purchased.

An institution’s policies should also

provide guidelines for conflicts of

interest for employees who are directly

involved in purchasing and selling

securities for the institution from

securities dealers. These guidelines

should ensure that all directors, officers,

and employees act in the best interest of

the institution. The board may wish to

adopt policies prohibiting these

employees from engaging in personal

securities transactions with these same

securities firms without specific prior

board approval. The board may also

wish to adopt a policy applicable to

directors, officers, and employees

restricting or prohibiting the receipt of

gifts, gratuities, or travel expenses from

approved securities dealer firms and

their representatives.

Legal Risk

Legal risk is the risk that contracts are

not legally enforceable or documented

correctly. Institutions should adequately

evaluate the enforceability of its

agreements before individual

transactions are consummated.

Institutions should also ensure that the

counterparty has authority to enter into

the transaction and that the terms of the

agreement are legally enforceable.

Institutions should further ascertain that

netting agreements are adequately

documented, executed properly, and are

enforceable in all relevant jurisdictions.

Institutions should have knowledge of

relevant tax laws and interpretations

governing the use of these instruments.

[FR Doc. 98–11451 Filed 4–30–98; 8:45 am]

BILLING CODE 7535–01–U

NATIONAL CREDIT UNION

ADMINISTRATION

12 CFR Parts 703 and 704

Investment and Deposit Activities;

Corporate Credit Unions

AGENCY: National Credit Union

Administration (NCUA).

ACTION: Final rule.

SUMMARY: NCUA is adopting as final the

interim final amendments to the

investment regulation as issued last

year. The final amendments revise the

broker-dealer and safekeeping

provisions. NCUA is also deleting the

references to the High Risk Securities

Test for CMOs/REMICs in its regulations

on investments and corporate credit

unions. These amendments will clarify

certain procedures related to credit

unions’ involvement with brokerdealers and safekeeping of securities.

DATES: The interim final amendments

published at 62 FR 64146 are adopted

as final effective May 1, 1998.

Amendments in this rule to part 703 are

effective October 1, 1998. Amendments

in this rule to part 704 are effective May

1, 1998.

ADDRESSES: National Credit Union

Administration, 1775 Duke Street,

Alexandria, Virginia 22314–3428.

FOR FURTHER INFORMATION CONTACT:

Daniel Gordon, Senior Investment

Officer, Office of Investment Services,

(703) 518–6620 or Kim Iverson (Program

Officer), Office of Examination and

Insurance (703) 518–6360, or at the

above address.

SUPPLEMENTARY INFORMATION:

A. Interim Final Rule

On November 24, 1997, NCUA issued

an interim final rule that made

substantive revisions and technical

changes to part 703. 62 FR 64146,

December 4, 1997. NCUA received

eleven comment letters, three from trade

associations, two from credit union

leagues, three from federal credit

unions, two from corporate credit

unions, and one from a state-chartered

credit union. Five commenters

supported the technical changes and

offered no other comments. The

remaining six had specific comments, as

discussed below.

The interim final rule amended

§ 703.50 to state that a federal credit

union may use a third party that is not

rregistered with the Securities and

Exchange Commission (SEC) or is not a

federally regulated depository

institution to purchase a certificate of

deposit (CD) as long as the credit union

purchases the CD directly from a bank,

credit union, or other depository

institution. One commenter requested

clarification that wiring funds to a

correspondent bank for further credit to

the issuing institution is an acceptable

practice. Another suggested that the rule

should simply state whether credit

unions are prohibited from using thirdparties, passing their funds through

third parties, or passing funds through

unregistered brokers. Another

commenter suggested the reason for the

amendment was that entities that sell

only CDs are not usually subject to

comprehensive regulatory oversight,

and NCUA should not inadvertently

force credit unions to stop buying CDs

from legitimate, regulated CD brokers

(banks and registered broker-dealers).

NCUA wishes to clarify that it is

permissible to send funds to an agent

depository institution either of the

credit union (credit union’s

correspondent) or of the issuing

depository institution (issuer’s

correspondent) for credit to an issuing

depository institution (issuer). For

example, a credit union can send its

funds directly to the issuer’s

correspondent. Alternatively, it is

permissible for a credit union to send

funds to its correspondent and this

correspondent can send those funds to

the issuer’s correspondent or the issuer.

A federal credit union may not wire, or

send in any manner, funds to an agent

depository institution of an unregistered

entity to purchase a CD. The account

relationship must be directly with the

issuer unless the credit union is using

a broker-dealer that is SEC-registered or

is a federally regulated depository

institution. NCUA believes that the

amendment made by the interim final

rule is sufficiently clear in this area and

is not making additional changes to the

provision in this final rule.

This interim final rule also

established that a credit union may

safekeep securities with a selling brokerdealer as long as the safekeeper used by

the broker-dealer is regulated by the

SEC. Two commenters suggested that

the preamble recommend that a

safekeeping agreement prohibit a third

party from pledging or lending the

credit union’s securities without notice

of each specific transaction. Without

notice of each specific transaction, the

credit union would have an unknown

counterparty exposure. The NCUA

Board agrees it is a sound business

practice for every credit union to

carefully read and understand the

details of any agreement it enters into

and encourages credit unions to do so.

In the absence of a delegation of

authority, a credit union must

specifically authorize any actions its
24104 Federal Register / Vol. 63, No. 84 / Friday, May 1, 1998 /Rules and Regulations

broker-dealer may take with its

securities (purchases, sales, pledges,

securities lending, etc.), and must not

sign an account agreement with a

broker-dealer that permits the brokerdealer to take any action with its

securities without the credit union’s

consent and knowledge. The credit

union must participate in the monetary

gains derived from such actions.

The interim final rule also clarified

that the requirement to obtain two price

quotes prior to purchasing a security

does not apply to new issues issued at

original issue discount, in addition to

those issued at par. Two commenters

suggested that the preamble encourage

credit unions to compare prices

regardless of whether new issue

securities are offered at par or at

discount. The commenters believe

securities purchase decisions should be

made within the context of how they

compare to similar Treasury securities.

In the interim final rule, the original

issue discount securities that NCUA was

primarily concerned with were Treasury

securities. Credit unions certainly

should consider whether other

securities sold at original issue discount

compare to similar Treasurys. NCUA

encourages price comparisons to

comparable Treasurys even for new

issues issued at original issue discount

or at par.

Two commenters requested that

NCUA clarify the applicability of

Section 703.60(d) to CDs. That provision

requires a credit union to obtain and

reconcile monthly a statement of

purchased investments and repurchase

collateral held in safekeeping. The

commenters were concerned about CD

investments, since monthly safekeeping

statements are generally not received

from depository institutions. The NCUA

Board wishes to clarify that this

requirement does not apply to CDs

where the credit union has made the

investment (deposit) directly with the

depository institution and where there

is no third party safekeeping of the CD.

In summary, the NCUA Board is

adopting the interim final amendments

in final, without any changes.

B. Deletion of MDP High Risk Tests

NCUA is deleting the requirements

regarding mortgage derivative product

(MDP) high risk tests in parts 703 and

704. NCUA no longer believes that the

pass/fail criteria of the high risk tests as

applied to specific instruments are

necessary to constitute effective

monitoring of investment activities. The

rescission of the high risk tests as a

constraint on a credit union’s

investment activities does not signal

that MDPs with high levels of price risk

are either appropriate or inappropriate

investments. NCUA continues to believe

that the stress testing of MDP

investments, as well as other

investments, is prudent and has

significant value for risk management

purposes.

An effective risk management process,

through which an institution identifies,

measures, monitors, and controls the

risks of all its investment activities,

provides a better framework. Whether a

security, MDP or others, is an

appropriate investment depends upon a

variety of factors, including the credit

union’s capital level, the security’s

impact on the aggregate risk of the

portfolio, and management’s ability to

measure and manage risk. Credit unions

should employ valuation methodologies

that take into account all of the risk

elements necessary to price these

investments.

For natural person federal credit

unions that purchase securities having

certain characteristics, as defined in

paragraph 703.90(b), in an amount

exceeding the credit union’s net capital,

part 703 requires a reasonable and

supportable estimate of the potential

impact of an immediate and sustained

parallel shift in market interest rates of

plus and minus 300 basis points.

Part 704 requires corporate credit

unions to subject all their assets and

liabilities to a 300 basis point

instantaneous, parallel, and sustained

shock in interest rates for purposes of

generating ‘‘net economic value’’ (NEV)

volatility measures. Proper NEV

calculations will capture the risk of the

underlying cash-flows and their

corresponding price sensitivity.

C. Corrections

Section 703.50(b)(2) of the current

rule refers to the North American State

Administrators Association. The correct

reference is the North American

Securities Administrators Association

and the final amendments reflect the

proper terminology.

Regulatory Procedures

Regulatory Flexibility Act

The Regulatory Flexibility Act

requires NCUA to prepare an analysis to

describe any significant economic

impact any final regulation may have on

a substantial number of small credit

unions, defined as those having less

than $1 million in assets. The NCUA

Board has determined and certifies that

the final rule will not have a significant

economic impact on a substantial

number of small credit unions.

Paperwork Reduction Act

NCUA has determined that the final

amendments do not increase paperwork

requirements under the Paperwork

Reduction Act of 1995 and regulations

of the Office of Management and Budget

(OMB).

Executive Order 12612

Executive Order 12612 requires

NCUA to consider the effect of its

actions on state interests. The final rule

applies directly only to federal credit

unions. NCUA has determined that the

final rule does not constitute a

‘‘significant regulatory action’’ for

purposes of the Executive Order.

Small Business Regulatory Enforcement

Fairness Act

The Small Business Regulatory

Enforcement Fairness Act of 1996 (Pub.

L. 104–121) provides generally for

congressional review of agency rules.

The reporting requirement is triggered

in instances where NCUA issues a final

rule as defined by Section 551 of the

Administrative Procedure Act, 5 U.S.C.

551. NCUA is currently awaiting the

Office of Management and Budget’s

decision on whether this is a major rule.

List of Subjects

12 CFR Part 703

Credit unions, Investments, Reporting

and recordkeeping requirements.

12 CFR Part 704

Credit union, Reporting and

recordkeeping requirements.

The National Credit Union

Administration Board approved the

final amendments to Part 703 and Part

704 on April 16, 1998 and approved as

final the interim final amendments to

Part 703 on April 22, 1998.

Becky Baker,

Secretary of the Board.

Accordingly NCUA adopts the interim

final rule amending 12 CFR part 703

which was published at 62 FR 64146 on

December 4, 1997, as a final rule

without change and amends 12 CFR

parts 703 and 704 as follows:

PART 703—INVESTMENT 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).

§ 703.30 [Amended]

2. Section 703.30 is amended by

removing paragraph (g) and

redesignating paragraphs (h), (i), (j), (k),
Federal Register / Vol. 63, No. 84 / Friday, May 1, 1998 /Rules and Regulations 24105

and (l) as paragraphs (g), (h), (i), (j), and

(k).

3. Section 703.50 is amended by

revising paragraph (b)(2) to read as

follows:

§ 703.50 What rules govern my dealings

with entities I use to purchase and sell

investments (‘‘broker-dealers’’)?

* * * * *

(b) * * *

(2) Information available from state or

federal securities regulators and

securities industry self-regulatory

organizations, such as the National

Association of Securities Dealers and

the North American Securities

Administrators Association, about any

enforcement actions against the brokerdealer, its affiliates, or associated

personnel.

* * * * *

4. Section 703.100 is amended by

revising paragraph (e) to read as follows:

§ 703.100 What investments and

investment activities are permissible for

me?

* * * * *

(e) You may invest in fixed or variable

rate CMOs/REMICs.

* * * * *

5. Section 703.130 is revised to read

as follows:

§ 703.130 May I continue to hold

investments purchased before January 1,

1998, that will be impermissible after that

date?

(a) Subject to safety and soundness

considerations, you may hold a CMO/

REMIC residual, SMBS, or zero coupon

security with a maturity greater than 10

years, if you purchased the investment:

(1) Before December 2, 1991; or

(2) On or after December 2, 1991, but

before January 1, 1998, if for the

purpose of reducing interest rate risk

and you meet the following:

(i) You have a monitoring and

reporting system in place that provides

the documentation necessary to evaluate

the expected and actual performance of

the investment under different interest

rate scenarios;

(ii) You use the monitoring and

reporting system to conduct and

document an analysis that shows, before

purchase, that the proposed investment

will reduce your interest rate risk;

(iii) After purchase, you evaluate the

investment at least quarterly to

determine whether or not it actually has

reduced your interest rate risk; and

(iv) You classify the investment as

either trading or available-for-sale.

(b) All grandfathered investments are

subject to the valuation and monitoring

requirements of §§ 703.70, 703.80, and

703.90.

PART 704—CORPORATE CREDIT

UNIONS

6. The authority citation for part 704

continues to read as follows:

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

1757(15).

7. Section 704.5 is amended by

revising paragraph (c)(6) to read as

follows:

§ 704.5 Investments.

* * * * *

(c) * * *

(6) CMOs/REMICs.

* * * * *

Appendix B to Part 704—[Amended]

8. Appendix B to part 704 is amended

as follows:

a. A heading is added to the beginning

of the Appendix; and

b. In Part I paragraph (c)(6) is removed

and paragraphs (c)(7) through (c)(9) are

redesignated as paragraphs (c)(6)

through (c)(8); and

c. In Part II paragraph (c)(6) is

removed and paragraphs (c)(7) and (c)(8)

are redesignated as paragraphs (c)(6)

and (c)(7).

The addition reads as follows:

Appendix B to Part 704—Expanded

Authorities and Requirements

Part I

* * * * *

[FR Doc. 98–11450 Filed 4–30–98; 8:45 am]

BILLING CODE 7535–01–P

DEPARTMENT OF HEALTH AND

HUMAN SERVICES

Food and Drug Administration

21 CFR Parts 510 and 529

Certain Other Dosage Form New

Animal Drugs; Isoflurane

AGENCY: Food and Drug Administration,

HHS.

ACTION: Final rule.

SUMMARY: The Food and Drug

Administration (FDA) is amending the

animal drug regulations to reflect

approval of an abbreviated new animal

drug application (ANADA) filed by

Marsam Pharmaceuticals, Inc. The

ANADA provides for inhalational use of

isoflurane USP for induction and

maintenance of general anesthesia in

horses and dogs.

EFFECTIVE DATE: May 1, 1998.

FOR FURTHER INFORMATION CONTACT:

Lonnie W. Luther, Center for Veterinary

Medicine (HFV–102), Food and Drug

Administration, 7500 Standish Pl.,

Rockville, MD 20855, 301–827–0209.

SUPPLEMENTARY INFORMATION: Marsam

Pharmaceuticals, Inc., Bldg. 31, 24

Olney Ave., Cherry Hill, NJ 08034, filed

ANADA 200–187 that provides for

inhalational use of isoflurane USP for

induction and maintenance of general

anesthesia in horses and dogs. The drug

is limited to use by or on the order of

a licensed veterinarian.

Approval of ANADA 200–187 for

Marsam Pharmaceuticals, Inc.’s,

isoflurane is as a generic copy of

Ohmeda Pharmaceutical Product’s

NADA 135–773 AErrane (isoflurane,

USP). The ANADA is approved as of

February 11, 1998, and the regulations

are amended in 21 CFR 529.1186(b) to

reflect the approval. The basis of

approval is discussed in the freedom of

information summary.

In addition, Marsam Pharmaceuticals,

Inc., has not been previously listed in

§ 510.600 (21 CFR 510.600) as sponsor

of an approved application. The

regulations are amended in

§ 510.600(c)(1) and (c)(2) to reflect the

new sponsor.

In accordance with the freedom of

information provisions of 21 CFR part

20 and 514.11(e)(2)(ii), a summary of

safety and effectiveness data and

information submitted to support

approval of this application may be seen

in the Dockets Management Branch

(HFA–305), Food and Drug

Administration, 12420 Parklawn Dr.,

rm. 1–23, Rockville, MD 20855, between

9 a.m. and 4 p.m., Monday through

Friday.

The agency has determined under 21

CFR 25.33(d)(1) that this action is of a

type that does not individually or

cumulatively have a significant effect on

the human environment. Therefore,

neither an environmental assessment

nor an environmental impact statement

is required.

List of Subjects

21 CFR Part 510

Administrative practice and

procedure, Animal drugs, Labeling,

Reporting and recordkeeping

requirements.

21 CFR Part 529

Animal drugs.

Therefore, under the Federal Food,

Drug, and Cosmetic Act and under

authority delegated to the Commissioner

of Food and Drugs and redelegated to

the Center for Veterinary Medicine, 21

CFR parts 510 and 529 are amended as

follows:

PART 510—NEW ANIMAL DRUGS

1. The authority citation for 21 CFR

part 510 continues to read as follows: