[Federal Register Volume 77, Number 187 (Wednesday, September 26, 2012)]
[Proposed Rules]
[Pages 59144-59146]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-23644]
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NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 703
RIN 3133-AE06
Investment and Deposit Activities
AGENCY: National Credit Union Administration (NCUA).
ACTION: Proposed rule with request for comments.
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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.
DATES: Comments must be received on or before November 26, 2012.
ADDRESSES: You may submit comments by any of the following methods
(Please send comments by one method only):
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
NCUA Web Site: http://www.ncua.gov/Legal/Regs/Pages/PropRegs.aspx. Follow the instructions for submitting comments.
Email: Address to [email protected]. Include ``[Your
name] Comments on Proposed Rule 703, Investment and Deposit
Activities'' in the email subject line.
Fax: (703) 518-6319. Use the subject line described above
for email.
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: You may view all public comments on NCUA's Web
site at http://www.ncua.gov/Legal/Regs/Pages/PropRegs.aspx as
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 to [email protected].
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?
The Board is proposing this rule because, after extensive research
and analysis as discussed more fully below, it believes TIPS can be a
valuable risk management tool for FCUs. The Board also believes FCUs
have the ability to manage the risks associated with TIPS and can
benefit from including them in their overall investment portfolio. In
addition to analyzing the nature and performance of TIPS in the
marketplace, NCUA has monitored FCU usage of TIPS through a long-term
investment pilot program. The results of the pilot program are
consistent with the Board's opinion that TIPS are an appropriate
investment for FCUs and can be a valuable portfolio management tool
when there are inflationary risks in the economy.
Accordingly, for the reasons discussed above, NCUA proposes to make
TIPS permissible under part 703.
B. What is a TIPS?
TIPS \1\ 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.
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\1\ To 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.
\2\ The 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.
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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 rate
[[Page 59145]]
instruments. Under Sec. 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).
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\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.
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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.
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\4\ Basis 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.
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However, there is not always a perfect correlation between market
interest rates and deposit/share rates. This can result in greater
volatility for an FCU if it does not take action to manage this basis
risk.
Why TIPS Should Be Permissible
As noted, FCUs are permitted to invest in variable rate instruments
where the index is tied to a domestic interest rate. Common domestic
interest rates include the Fed Funds rate, Treasury rates, and LIBOR.
Despite the common label ``domestic interest rate,'' each of these
rates is not perfectly correlated with the others. There is certainly
some measure of correlation, but an FCU can be exposed to earnings
variability if it invests in variable rate assets tied to one rate,
LIBOR rates for example, and prices its shares on another, Treasury
rates for example.
Historically, the Board has prohibited variable rate instruments
tied to non-domestic rate indices because of the basis risk for FCUs.
While the Board remains concerned about basis risk, it recognizes that
FCUs now have greater access to advanced asset-liability management
tools that can identify and measure basis risk, and are therefore
better equipped to manage such risk associated with adding CPI as a
permissible index.
[GRAPHIC] [TIFF OMITTED] TP26SE12.000
Allowing FCUs to hold TIPS in their investment portfolios adds no
credit risk and allows them the option of minimizing the need for
accurate inflation forecasting as a way to maintain the real value of
their investment portfolios.
D. Caution in Investing in TIPS
The Board believes the authority to invest in TIPS for the purpose
of protecting against inflation risk can be a valuable part of an
effective risk management program for FCUs that understand the risks.
TIPS may not be appropriate for all FCUs. As with any investment, the
decision to purchase TIPS should be based upon sound due diligence and
a demonstrated effectiveness in managing risk. This proposal authorizes
FCUs to purchase TIPS only. Other similar securities based on inflation
indices currently available or available in the future that are not
issued by the United States Treasury Department are not authorized by
this rule. The current TIPS pilot program will expire in the event this
proposal is eventually finalized by the Board.
II. Regulatory Procedures
Regulatory Flexibility Act
The Regulatory Flexibility Act requires NCUA to prepare an analysis
to describe any significant economic impact a proposed rule may have on
a substantial number of small entities (primarily those under ten
million dollars in assets). This proposed rule reduces compliance
burden and extends regulatory relief while maintaining existing safety
and soundness standards. NCUA has determined this proposed rule will
not have a significant economic impact on a substantial number of small
credit unions.
[[Page 59146]]
Paperwork Reduction Act
NCUA has determined that the requirements of this rule do not
increase the paperwork requirements under the Paperwork Reduction Act
of 1995 and regulations of the Office of Management and Budget.
Executive Order 13132
Executive Order 13132 encourages independent regulatory agencies to
consider the impact of their actions on state and local interests.
NCUA, an independent regulatory agency as defined in 44 U.S.C. 3502(5),
voluntarily complies with the executive order to adhere to fundamental
federalism principles. This proposed rule would not have a substantial
direct effect 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 proposed rule does not constitute a policy that
has federalism implications for purposes of the executive order.
List of Subjects
12 CFR Part 703
Credit unions, Investments.
By the National Credit Union Administration Board on September
20, 2012.
Mary Rupp,
Secretary of the Board.
For the reasons discussed above, NCUA proposes to amend 12 CFR part
703 as follows:
PART 703--INVESTMENT AND DEPOSIT ACTIVITES
1. The authority citation for part 703 continues to read as
follows:
Authority: 12 U.S.C. 1757(7), 1757(8), 1757(15).
2. Revise Sec. 703.14(a) to read as follows:
Sec. 703.14 Permissible investments.
(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 with the exception of Treasury Inflation Protected
Securities. For purposes of this part, the U.S. dollar-denominated
London Interbank Offered Rate (LIBOR) is a domestic interest rate.
[FR Doc. 2012-23644 Filed 9-25-12; 8:45 am]
BILLING CODE 7535-01-P