Source: http://thefederalregister.com/2012/09/26/2012-23644.html
Timestamp: 2017-12-15 10:19:36
Document Index: 88516699

Matched Legal Cases: ['art 703', 'art 703', 'art 703', '§ 703', 'art 703', '§ 703']

SUMMARY: The NCUA Board (Board) proposes to amend its investment regulation to allow federal credit unions (FCUs) to purchase Treasury Inflation Protected Securities (TIPS). This proposed amendment adds TIPS to the list of permissible investments for FCUs in part 703. The Board believes TIPS will provide FCUs with an additional investment portfolio risk management tool that can be useful in an inflationary economic environment.
*Email:Address toregcomments@ncua.gov.Include "[Your name] Comments on Proposed Rule 703, Investment and Deposit Activities" in the email subject line.
Public Inspection: You may view all public comments on NCUA's Web site athttp://www.ncua.gov/Legal/Regs/Pages/PropRegs.aspxas submitted, except for those we cannot post for technical reasons. NCUA will not edit or remove any identifying or contact information from the public comments submitted. You may inspect paper copies of comments in NCUA's law library at 1775 Duke Street, Alexandria, Virginia 22314, by appointment weekdays between 9:00 a.m. and 3:00 p.m. To make an appointment, call (703) 518-6546 or send an email toOGCMail@ncua.gov.
FOR FURTHER INFORMATION CONTACT: Frank Kressman, Associate General Counsel, Office of General Counsel, at the above address or telephone (703) 518-6540, or J. Owen Cole, Jr., Director, Division of Capital Markets, Office of Examination and Insurance, at the above address or telephone (703) 518-6360.
SUPPLEMENTARY INFORMATION: I. Background II. Regulatory Procedures I. Background A. Why is the NCUA Board proposing this rule?
TIPS1 is a security issued by the U.S. Department of the Treasury, Bureau of Public Debt, which is readily available to investors. TIPS differ from other securities by providing protection against inflation. The principal of a TIPS increases with inflation and decreases with deflation, as measured by the Bureau of Labor Statistic's Consumer Price Index (CPI).2 When a TIPS matures, the holder is paid the adjusted principal or original principal, whichever is greater. TIPS pay interest twice a year at a fixed rate. The rate is applied to the adjusted principal, so, like the principal, interest payments rise with inflation and fall with deflation. In a deflationary period, it is possible to experience a contractual decline in the principal balance, which is not an event of default.
1To learn more about TIPS, see the U.S. Department of the Treasury, Bureau of Public Debt Web site at:http://www.treasurydirect.gov/indiv/research/indepth/tips/res_tips.htm.
2The CPI program produces monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services. To learn more about how the CPI is produced, see the Bureau of Labor Statistics “Frequently Asked Questions” on CPI, found at:http://www.bls.gov/cpi/cpifaq.htm.
C. Analysis of TIPS and Part 703 Overview
TIPS are currently a prohibited investment under part 703 because they reprice their value in response to changes in the CPI, and the CPI is a prohibited index for variable rateinstruments. Under § 703.14(a), an FCU is permitted to invest in a variable rate instrument as long as the rate is tied to a domestic interest rate.3 12 CFR 703.14(a).
3(a)Variable rate investment.A Federal credit union may invest in a variable rate investment, as long as the index is tied to domestic interest rates and not, for example, to foreign currencies, foreign interest rates, or domestic or foreign commodity prices, equity prices, or inflation rates. For purposes of this part, the U.S. dollar-denominated London Interbank Offered Rate (LIBOR) is a domestic interest rate.
The purpose of this provision is to reduce the basis risk between the interest earned on assets and the dividends paid on shares.4 Generally, deposit/share rates for financial institutions, including credit unions, are responsive to market interest rates. As market rates change, so do the deposit/share rates. Thus, if an FCU invests in a variable rate instrument with an index tied to market rates, the spread between the asset's income stream and the share dividends paid should remain relatively constant. This protects the FCU's earnings in times of rate volatility, especially in periods of rising rates.
4Basis risk is a common form of risk incurred by financial institutions, including credit unions. Basis risk is the variability between two or more indices (e.g.,equity barometers such as the S&P 500, and interest rate indices such as the 1-year Treasury rate) that serve as benchmarks for valuing financial institution assets and liabilities.
EP26SE12.000
II. Regulatory Procedures Regulatory Flexibility Act
List of Subjects 12 CFR Part 703
2. Revise § 703.14(a) to read as follows: