Texas Register
(25 TexReg 823) for the purpose of
accepting public comment. No comments were received. However, the Commission
determined from its initial review of Chapter 91 that a need continues to
exist for this rule as amended for safety and soundness purposes.
Two comment letters were received on the proposal's second publication
for comment by Dallas Teachers Credit Union and EECU. Dr. Charles Idol, a
credit union consultant, commented on the rule at the Legislative Advisory
Committee's public meeting held on December 12, 2000. His comments were also
provided in writing. Based on the nature of those comments, the Commission
has determined that substantive modifications to subsection (b) are necessary
and should be put out for comment.
Lynette Pool, Deputy Commissioner, has determined that there will be no
fiscal implications for state or local government as a result of enforcing
or administering the proposed amended rule.
Ms. Pool has also determined that for each year of the first five years
the proposed amended rule is in effect, the public benefits anticipated as
a result of enforcing the rule will be increased flexibility for credit unions
in dealing with their primary repository institution without compromising
the safety and soundness of those investments. Credit union management will
also have a comprehensive list of prohibited investments for easier reference.
There is no anticipated effect on small businesses as a result of adopting
the proposal. There is no economic cost anticipated to entities that are required
to comply with the amendment as a result of its future adoption.
Written comments on the proposal must be submitted within 30 days after
its publication in the
Texas Register
to Lynette
Pool, Deputy Commissioner, Credit Union Department, 914 East Anderson Lane,
Austin, Texas 78752-1699.
The amendments are proposed under the provisions of §124.351
of the Texas Finance Code that are interpreted to authorize the Credit Union
Commission to adopt rules authorizing other investments permissible for credit
unions that are responsive to changes in economic conditions or competitive
practices and to the need for safety and soundness of credit union investments.
The specific section affected by this proposed amendments is Texas Finance
Code §124.351.
§91.803.Investment Limits and Prohibitions [ in Other Financial Institutions ].
(a)
Limitations. A credit union may not invest
an amount that is greater than 50% of its reserves and undivided earnings
with any obligor or related obligors except for investments issued by or fully
guaranteed as to principal and interest by the United States or an agency,
enterprise, corporation, or instrumentality of the United States, or in any
trust or trusts established for investing directly or collectively in such
securities, obligations, or instruments, or the purposes of this section,
obligor is defined as an issuer, trust, or originator of an investment, including
the seller of a loan participation.
[
A credit union may invest
in certificates of deposit and passbook type accounts issued by an insured
state or national bank or other similar institution, provided that the total
investments in any one institution shall not exceed 10% of the capital and
surplus of that institution, unless such investments are 100% secured by securities
issued or guaranteed by the United States or any agency or instrumentality
thereof.
]
(b)
Notwithstanding subsection (a) of this
section:
(1)
A credit union's board of directors, as a single exception
to this section, will be allowed to establish the aggregate credit-risk exposure
to a single financial institution approved by the board as the credit union's
designated depository based on the credit union's liquidity trends and funding
needs as documented by its asset/liability management policy, provided that
the credit union has appropriately documented its due diligence to demonstrate
that the investments in this designated depository do not pose a safety and
soundness concern.
(2)
A credit union may invest in loan participations purchased
from other credit unions provided the loan complies with the purchasing credit
union's loan policy and credit risk standards.
(c)
Prohibited Activities.
(1)
Definitions.
(A)
Adjusted trading--selling an investment to a counterparty
at a price above its current fair value and simultaneously purchasing or committing
to purchase from the counterparty another investment at a price above its
current fair value.
(B)
Collateralized mortgage obligation (CMO)--a multi-class
bond issue collateralized by mortgages or mortgage-backed securities.
(C)
Fair value--the price at which a security can be bought
or sold in a current, arms length transaction between willing parties, other
than in a forced or liquidation sale.
(D)
Real estate mortgage investment conduit (REMIC) --a nontaxable
entity formed for the sole purpose of holding a fixed pool of mortgages secured
by an interest in real property and issuing multiple classes of interests
in the underlying mortgages.
(E)
Residual interest--the remainder cash flows from a CMO/REMIC,
or other mortgage-backed security transaction, after payments due bondholders
and trust administrative expenses have been satisfied.
(F)
Short sale--the sale of a security not owned by the seller.
(G)
Stripped mortgage-backed security (SMBS)--a security that
represents either the principal-only or the interest-only portion of the cash
flows of an underlying pool of mortgages or mortgage-backed securities. Some
mortgage-backed securities represent essentially principal-only cash flows
with nominal interest cash flows or essentially interest-only cash flows with
nominal principal cash flows. These securities are considered SMBSs for the
purposes of this rule.
(H)
Zero coupon investment--an investment that makes no periodic
interest payments but instead is sold at a discount from its face value. The
holder of a zero coupon investment realizes the rate of return through the
gradual appreciation of the investment, which is redeemed at face value on
a specified maturity date.
(2)
A credit union may not:
(A)
Purchase or sell financial derivatives, such as futures,
options, interest rate swaps, or forward rate agreements;
(B)
Engage in adjusted trading or short sales;
(C)
Purchase stripped mortgage backed securities, residual
interests in CMOs/REMICs, mortgage servicing rights, commercial mortgage related
securities, or small business related securities;
(D)
Purchase a zero coupon investment with a maturity date
that is more than 10 years from the settlement date;
(E)
Purchase investments whereby the underlying collateral
consists of foreign receivables or foreign deposits; or
(F)
Purchase securities used as collateral by a safekeeping
concern.
(d)
Investment pilot program. The commissioner
may authorize a credit union to engage in other types of investment activities
under an investment pilot program. In approving a credit union's request to
participate in a pilot program, the commissioner, in the exercise of discretion,
may condition or limit the investment activity to be conducted. A credit union
wishing to participate in an investment pilot program shall submit a request
that addresses the following items:
(1)
Board policies approving the activities and establishing
limits on them;
(2)
A complete description of the activities, with specific
examples of how the credit union will conduct them and how they will benefit
the credit union;
(3)
A demonstration of how the activities will affect the credit
union's financial performance, risk profile, and asset-liability management
strategies;
(4)
Examples of reports the credit union will generate to monitor
the activities;
(5)
A projection of the associated costs of the activities,
including personnel, computer, audit, etc.;
(6)
A description of the internal systems to measure, monitor,
and report the activities, and the qualifications of the staff and/or official(s)
responsible for implementing and overseeing the activities; and
(7)
The internal control procedures that will be implemented,
including audit requirements.
This agency hereby certifies that the proposal has been
reviewed by legal counsel and found to be within the agency's legal authority
to adopt.
Filed with the Office of
the Secretary of State, on January 19, 2001.
TRD-200100371
Harold E. Feeney
Commissioner
Credit Union Department
Earliest possible date of adoption: March 4, 2001
For further information, please call: (512) 837-9236