California Code of Regulations › Title 10 - Investment › Chapter 2 - Savings and Loan Commissioner › Subchapter 8 - Operations-Investments and Borrowings › Article 3 - Investments and Borrowings › Section 108.306 - Authorized Investments Pursuant to CFC Section 6702(g)

Current through Register 2024 Notice Reg. No. 28, July 12, 2024
(a) The securities in which an association
				  may invest under subsection (g) of Section
				  6702 of the
				  California Financial Code in addition to the securities stated therein are the
				  following:
(1) With approval of the
				  commissioner preferred stock of any corporation.
(2) Futures transactions.
(a) Definitions. As used in this section, the
				  following definitions apply unless the context otherwise requires:
(1) Interest-rate futures contract. A
				  transferable agreement to make or take delivery of a standardized amount of an
				  interest-bearing security, of standardized minimum quality grade, during a
				  month specified in the agreement, under terms and conditions established by an
				  exchange designated and regulated by the Commodity Futures Trading
				  Commission.
(2) Interest-rate
				  futures transaction. Purchase or sale of an interest-rate futures
				  contract.
(3) Long position. The
				  holding of a futures contract to take delivery of securities.
(4) Mortgage-related securities. Securities
				  based on and backed by mortgages, including GNMA-guaranteed mortgage-backed
				  securities, Mortgage Participation Certificates of the Federal Home Loan
				  Mortgage Corporation, and similar obligations issued by the association or in
				  which the association is authorized to invest.
(5) Offset. To close out an obligation to
				  make or take delivery of securities under a futures contract. A futures
				  contract to purchase securities is offset by a futures contract to sell
				  securities of the same type for the same delivery month. A futures contract to
				  sell securities is offset by a futures contract to purchase securities of the
				  same type for the same delivery month.
(6) Short position. The holding of a futures
				  contract to make delivery of securities.
(b) Permitted transactions. To the extent
				  that it has legal power to do so, an association may engage in interest-rate
				  futures transactions to reduce its net interest-rate exposure. For purposes of
				  this section, net interest-rate risk exposure is the volatility in an
				  association's earnings that can arise from the mismatching of the effective
				  maturities of assets and liabilities. An association may enter into short
				  positions that are appropriate for reducing its net interest-rate risk
				  exposure. Long positions, other than those that offset short positions, may be
				  entered into only under the following conditions:
(1) The futures position must be matched
				  against a firm forward commitment to sell mortgages not yet originated or to
				  issue mortgage-related securities based on mortgages not yet originated. For
				  purposes of this paragraph (B), a firm forward commitment is a written
				  commitment obligating the seller to make delivery, and the buyer to take
				  delivery, of mortgage loans not yet originated or mortgage-related securities
				  based on mortgages not yet originated, at a price and on or before a date
				  specified in the commitment; and
(2) An association may enter into and
				  maintain long futures positions only to the extent that its firm forward
				  commitments exceed 10 percent of long-term assets with fixed interest rates.
				  For purposes of this section, long-term assets are those having remaining terms
				  to maturity in excess of five years.
Until February 6, 1982, associations may continue to engage
					 in mortgage rate futures transactions as authorized immediately prior to
					 January 23, 1982. Associations with interest-rate futures positions entered
					 into before February 6, 1982, that are not permitted under this paragraph (B),
					 will be permitted to continue to hold those futures contracts; provided that
					 the mortgage-rate futures transactions were authorized when entered into and
					 the contracts are not renewed.
(c) Authorized contracts. An association may
				  engage in interest-rate futures transactions using any interest-rate futures
				  contracts designated by the Commodity Futures Trading Commission and based upon
				  a security in which the association has authority to invest.
(d) Board of directors' authorization. Prior
				  to engaging in interest-rate futures transactions, an association's board of
				  directors must authorize such activity. In authorizing futures trading, the
				  board of directors shall consider any plan to engage in interest-rate futures
				  transactions, shall endorse specific written policies, and shall require the
				  establishment of internal control procedures. Policy objectives must be
				  specific enough to outline permissible contract strategies taking into account
				  price and yield correlations between the assets or liabilities and the futures
				  contracts with which they are matched, their relationship to the association's
				  operations and how such strategies reduce the association's net interest-rate
				  risk exposure. Internal control procedures shall include, at a minimum,
				  periodic reports to management, segregation of duties and internal review
				  procedures. In addition, the minutes of the meeting of the board of directors
				  shall set forth limits applicable to futures transactions, identify personnel
				  authorized to engage in futures transactions, and set forth the duties,
				  responsibilities and limits of authority of such personnel. The board of
				  directors shall review the position limit, all outstanding contract positions,
				  and the unrealized gains or losses on those positions at each regular meeting
				  of the board.
(e) Notification.
				  Each association engaging in interest-rate futures transactions shall notify
				  the commissioner at the inception of such activity and thereafter on a monthly
				  basis shall report such information as the commissioner shall
				  require.
(f) Recordkeeping
				  requirements. An association engaging in futures transactions shall maintain
				  records of such transactions sufficient to document how the transactions reduce
				  the net interest-rate risk exposure of the association in accordance with the
				  following requirements:
(1) Contract register.
				  The association shall maintain a contract register adequate to identify and
				  control all interest-rate futures contracts and including, at a minimum, the
				  type and amount of each contract, the maturity date of each contract, the cost
				  of each contract, the dollar amount and description of the asset or liability
				  with which the futures contract is matched, and the date and manner in which a
				  contract is closed out. Such register shall be prepared in a manner sufficient
				  to indicate at any time the association's total outstanding long and short
				  interest-rate futures positions.
(2) Other documentation. The association
				  shall maintain, as part of the documentation of its interest-rate futures
				  strategy, a schedule of the assets and liabilities for which net interest-rate
				  risk exposure is being reduced and the purpose of each contract entered
				  into.
(3) Maintenance of records.
				  The records designated in this paragraph (F) shall be maintained for all
				  futures transactions closed out during the past two years.
(4) Forward commitments to purchase
				  securities, subject to all the requirements and limitations set forth below:
(A) Definitions.
1. Forward Commitment. An oral or written
				  contract to buy securities 30 or more days after the contract date; such a
				  commitment is a standby commitment if delivery is optional with the seller and
				  a firm commitment if both buyer and seller are obligated to perform on the
				  agreed date.
2. Securities. Assets
				  which are legal investments for an association under Section
				  6702 of the law and implementing
				  regulations issued (except mortgage futures under Section
				  108.306(a)(4) of
				  the regulations).
3. Commitment
				  Fee. Any consideration received directly or indirectly by an association for a
				  forward commitment.
(B)
				  Authorized Personnel. The minutes of the board of directors of the association
				  shall set out the names, duties, responsibilities, and current limits of
				  authority of the association's personnel authorized to engage in forward
				  commitment transactions for the association; the brokerage firms through which
				  authorized personnel may conduct forwards activity; and the dollar limit on
				  transactions with each such firm.
(C) Limitations.
1. General. An association may make forward
				  commitments to purchase securities, subject to the limits in paragraph 2 below,
				  if that activity is conducted in a safe and sound manner. An example of an
				  unsafe and unsound practice which may preclude further investment under this
				  regulation is an inability to fund commitments when due. No association may
				  sell a forward commitment or security under agreement to purchase another
				  forward commitment or security at a price other than actual market
				  value.
2. Percent of Assets. An
				  association's outstanding forward commitments to purchase securities may not
				  exceed an amount equal to ten percent of its total assets if statutory net
				  worth is less than five percent of total assets, or 15 percent of total assets
				  if statutory net worth is five percent or more of total
				  assets.
(D) Disposal
				  Before Settlement. All profit or loss related to disposal or modification of a
				  forward commitment before settlement shall be recognized on the association's
				  books at the time of disposal or modification.
(E) Recordkeeping Requirements. An
				  association engaging in forward commitments shall establish and maintain the
				  following:
1. A current register of all
				  outstanding forward commitments, including the type (firm or standby),
				  commitment date, amount, rate, price to be paid at settlement, market price at
				  date of commitment, settlement date, commitment fees received, date and manner
				  of disposal, sales price and market value at disposal if disposition is made on
				  or prior to settlement date other than through funding, and seller's identify
				  and confirmation; and
2.
				  Documentation of the association's ability to fund all outstanding forward
				  commitments when due.
(F)
				  Commitment Fees Received. A fee received for a forward commitment shall be
				  recorded according to generally accepted accounting principles for loan
				  commitment fees. If the commitment period is less than 30 days, a fee shall be
				  deferred as provided in Section
				  113.