16570 Federal Register / Vol. 76, No. 57 / Thursday, March 24, 2011 / Proposed Rules
American Institute of Steel Construction- 5. A party to an adjudicatory proceeding B. Reporting
N690. for the issuance, amendment, or renewal of 1. An applicant or licensee who references
(3) Motor-operated valves. a license, or for operation under 10 CFR this appendix shall submit a report to the
(4) Equipment seismic qualification 52.103(a), who believes that an operational NRC containing a brief description of any
methods. requirement approved in the DCD or a TS plant-specific departures from the DCD,
(5) Piping design acceptance criteria. derived from the generic TS must be changed including a summary of the evaluation of
(6) Instrument setpoint methodology. may petition to admit such a contention into each. This report must be filed in accordance
(7) Safety-Related Distribution Control and the proceeding. The petition must comply with the filing requirements applicable to
Information System performance with the general requirements of 10 CFR reports in 10 CFR 52.3.
specification and architecture. 2.309 and must demonstrate why special 2. An applicant or licensee who references
(8) Safety System Logic and Control circumstances as defined in 10 CFR 2.335 are this appendix shall submit updates to its
hardware and software. present, or demonstrate compliance with the DCD, which reflect the generic changes to
(9) Human factors engineering design and Commission’s regulations in effect at the time and plant-specific departures from the
implementation. this appendix was approved, as set forth in generic DCD made under Section VIII of this
(10) First of a kind testing for reactor Section V of this appendix. Any other party appendix. These updates shall be filed under
stability (first plant only). may file a response to the petition. If, on the the filing requirements applicable to final
(11) Reactor precritical heatup with reactor basis of the petition and any response, the safety analysis report updates in 10 CFR 52.3
water cleanup/shutdown cooling (first plant presiding officer determines that a sufficient and 50.71(e).
only). showing has been made, the presiding officer 3. The reports and updates required by
(12) Isolation condenser system heatup and shall certify the matter directly to the paragraphs X.B.1 and X.B.2 of this appendix
steady state operation (first plant only). Commission for determination of the must be submitted as follows:
(13) Power maneuvering in the feedwater admissibility of the contention. All other a. On the date that an application for a
temperature operating domain (first plant issues with respect to the plant-specific TS license referencing this appendix is
only). or other operational requirements are subject submitted, the application must include the
(14) Load maneuvering capability (first to a hearing as part of the license proceeding. report and any updates to the generic DCD.
plant only). 6. After issuance of a license, the generic b. During the interval from the date of
(15) Defense-in-depth stability solution TS have no further effect on the plant- application for a license to the date the
evaluation test (first plant only). specific TS. Changes to the plant-specific TS Commission makes its finding required by 10
d. Departures from Tier 2* information that will be treated as license amendments under CFR 52.103(g), the report must be submitted
are made under paragraph B.6 of this section 10 CFR 50.90. semi-annually. Updates to the plant-specific
do not require an exemption from this IX. Inspections, Tests, Analyses, and DCD must be submitted annually and may be
appendix. Acceptance Criteria (ITAAC) submitted along with amendments to the
C. Operational Requirements application.
c. After the Commission makes the finding
1. Generic changes to generic TS and other X. Records and Reporting required by 10 CFR 52.103(g), the reports and
operational requirements that were updates to the plant-specific DCD must be
completely reviewed and approved in the A. Records submitted, along with updates to the site-
design certification rulemaking and do not 1. The applicant for this appendix shall specific portion of the final safety analysis
require a change to a design feature in the maintain a copy of the generic DCD that report for the facility, at the intervals
generic DCD are governed by the includes all generic changes it makes to Tier required by 10 CFR 50.59(d)(2) and
requirements in 10 CFR 50.109. Generic 1 and Tier 2, and the generic TS and other 50.71(e)(4), respectively, or at shorter
changes that require a change to a design operational requirements. The applicant shall intervals as specified in the license.
feature in the generic DCD are governed by maintain the SUNSI (including proprietary Dated at Rockville, Maryland, this 16th day
the requirements in paragraphs A or B of this information) and safeguards information of March 2011.
section. referenced in the generic DCD for the period
2. Generic changes to generic TS and other that this appendix may be referenced, as For the Nuclear Regulatory Commission.
operational requirements are applicable to all specified in Section VII of this appendix. Annette Vietti-Cook,
applicants who reference this appendix, 2. An applicant or licensee who references Secretary of the Commission.
except those for which the change has been this appendix shall maintain the plant-
rendered technically irrelevant by action specific DCD to accurately reflect both [FR Doc. 2011–6839 Filed 3–23–11; 8:45 am]
taken under paragraphs C.3 or C.4 of this generic changes to the generic DCD and BILLING CODE 7590–01–P
section. plant-specific departures made under Section
3. The Commission may require plant- VIII of this appendix throughout the period
specific departures on generic TS and other of application and for the term of the license
operational requirements that were (including any period of renewal).
NATIONAL CREDIT UNION
completely reviewed and approved, provided 3. An applicant or licensee who references ADMINISTRATION
a change to a design feature in the generic this appendix shall prepare and maintain
DCD is not required and special written evaluations which provide the bases 12 CFR Part 741
circumstances as defined in 10 CFR 2.335 are for the determinations required by Section RIN 3133–AD66
present. The Commission may modify or VIII of this appendix. These evaluations must
supplement generic TS and other operational be retained throughout the period of Interest Rate Risk
requirements that were not completely application and for the term of the license
reviewed and approved or require additional (including any period of renewal). AGENCY: National Credit Union
TS and other operational requirements on a 4.a. The applicant for the ESBWR design Administration (NCUA).
plant-specific basis, provided a change to a shall maintain a copy of the aircraft impact ACTION: Proposed rule.
design feature in the generic DCD is not assessment performed to comply with the
required. requirements of 10 CFR 50.150(a) for the term SUMMARY: NCUA proposes to amend its
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4. An applicant who references this of the certification (including any period of regulations to require Federally insured
appendix may request an exemption from the renewal). credit unions to have a written policy
generic TS or other operational requirements. b. An applicant or licensee who references
addressing interest rate risk (IRR)
The Commission may grant such a request this appendix shall maintain a copy of the
only if it determines that the exemption will aircraft impact assessment performed to management and an effective IRR
comply with the requirements of 10 CFR comply with the requirements of 10 CFR program as part of their asset liability
52.7. The grant of an exemption must be 50.150(a) throughout the pendency of the management. NCUA also is proposing
subject to litigation in the same manner as application and for the term of the license draft guidance in the form of an
other issues material to the license hearing. (including any period of renewal). appendix to its regulations to assist
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Federal Register / Vol. 76, No. 57 / Thursday, March 24, 2011 / Proposed Rules 16571
credit unions in meeting the proposed written policy to explicitly state the An effective IRR program allows a
regulatory requirement. NCUA believes credit union’s IRR tolerance. An credit union to serve member needs
a written IRR policy and an effective effective IRR program that identifies, without incurring unreasonable levels of
IRR program is key to maintaining safe measures, monitors, and controls IRR is risk and make informed decisions about
and sound operations. NCUA believes an essential component of safe and balance sheet composition, growth and
credit unions will find the guidance sound credit union operations. In the product mix, while remaining within its
helpful in addressing this important past, NCUA issued guidance on ALM defined tolerance level. An IRR program
area of their operations. and IRR management in Letters to Credit enables credit unions to meet their
DATES: Comments must be received on Unions and believes FICUs generally are liquidity needs and implement flexible
or before May 23, 2011. managing IRR adequately.1 NCUA’s IRR pricing strategies in response to changes
ADDRESSES: You may submit comments questionnaire is also available at the in market interest rates while
by any of the following methods (Please following location http:// maintaining adequate earnings and net
send comments by one method only): www.ncua.gov/Resources/ economic value.
• Federal Rulemaking Portal: http:// ALManagementInvest/Review NCUA recognizes it is impossible to
www.regulations.gov. Follow the Procedures.aspx. However, IRR has establish specific, regulatory
instructions for submitting comments. risen at credit unions due to changes in requirements for IRR that would be
• NCUA Web Site: http:// balance sheet compositions and appropriate for all FICUs. IRR
www.ncua.gov/ increased uncertainty in the financial management involves judgment by a
RegulationsOpinionsLaws/ markets. The Board therefore believes it FICU based on its own individual
proposed_regs/proposed_regs.html. is appropriate to create a regulatory mission, structure, and circumstances.
Follow the instructions for submitting requirement addressing the policy and Any rule must take into account the
comments. practice of interest rate risk management diversity of FICUs and avoid a one-size-
• E-mail: Address to at FICUs supported by clear and fits-all approach. Accordingly, FICUs
firstname.lastname@example.org. Include ‘‘[Your comprehensive guidance. The Board should devise a policy and risk
name] —Comments on Proposed believes the proposed regulatory management program appropriate to
Rulemaking for Part 741’’ in the e-mail requirement and guidance will assist their own situation.
subject line. FICUs in understanding and meeting The guidance in the Appendix does
• Fax: (703) 518–6319. Use the NCUA’s expectations regarding IRR not identify specific metrics because
subject line described above for e-mail. policy and implementing an effective NCUA recognizes IRR programs will
• Mail: Address to Mary Rupp, program. NCUA anticipates that it differ among credit unions. There are,
Secretary of the Board, National Credit would set a compliance date of three nevertheless, fundamental elements
Union Administration, 1775 Duke months after the rule becomes effective. applicable to all credit unions, as
Street, Alexandria, Virginia 22314– The term ‘‘interest rate risk’’ refers to explained in the appendix. Developing
3428. the vulnerability of a credit union’s a sound IRR program is the
• Hand Delivery/Courier: Same as financial condition to adverse responsibility of the board of directors,
mail address. movements in market interest rates. involving all relevant phases of
Public Inspection: All public Although some IRR is a normal part of operation, and NCUA believes the
comments are available on the agency’s financial intermediation, IRR may proposed guidance provides a helpful
Web site at http://www.ncua.gov/ negatively affect a credit union’s framework for directors. NCUA is
RegulationsOpinionsLaws/comments as earnings, or net economic value, which presenting guidance in the form of an
submitted, except as may not be is the difference between the market appendix to the rule to assist FICUs in
possible for technical reasons. Public value of assets and the market value of establishing a written policy and
comments will not be edited to remove liabilities. Changes in interest rates effective program as part of asset
any identifying or contact information. influence a credit union’s earnings by liability management.
Paper copies of comments may be altering interest-sensitive income and
inspected in NCUA’s law library at 1775 B. Proposed Rule
expenses (e.g. loan income and share
Duke Street, Alexandria, Virginia 22314, dividends). Changes in interest rates Section 741.3 generally addresses the
by appointment weekdays between 9 also affect the economic value of a criteria NCUA will consider in
a.m. and 3 p.m. To make an credit union’s assets and liabilities, determining and continuing the
appointment, call (703) 518–6546 or because the present value of future cash insurability of a credit union and
send an e-mail to OGCMail@ncua.gov. flows and, in some cases, the cash flows paragraph (b) lists various factors and
FOR FURTHER INFORMATION CONTACT: themselves may change when interest requirements for a credit union’s
Jeremy Taylor, Senior Capital Markets rates change.2 financial condition and its policies.
Specialist, Office of Capital Markets and Currently, § 741.3(b) includes
Planning, National Credit Union 1 Letters to Credit Unions: 99–CU–12 Real Estate requirements, among others, of written
Administration, 1775 Duke Street, Lending and Balance Sheet Management; 00–CU–10 lending and investment policies, 12 CFR
Alexandria, Virginia 22314, or Asset Liability Management Procedures; 00–CU–13,
Liquidity and Balance Sheet Management; 01–CU–
741.3(b)(2) and (3), and, therefore,
telephone: (703) 518–6620. 08, Liability Management—Rate-Sensitive and placement of the proposed amendment
SUPPLEMENTARY INFORMATION: Volatile Funding Sources; 01–CU–19 Managing within this provision is appropriate.
Share Inflows in Uncertain Times; 03–CU–11, Non- The Board proposes to amend § 741.3(b)
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A. Discussion maturity Shares and Balance Sheet Risk; 03–CU–15
Real Estate Concentrations and Interest Rate Risk
to add the requirement of a written
NCUA proposes to amend its Management for Credit Unions with Large Positions policy on IRR and an effective program.
regulations to require Federally insured in Fixed Rate Mortgages; 06–CU–16 Inter-Agency This is an additional factor to be
credit unions (FICUs) to have a written Guidance on Non-traditional Mortgage Product considered in determining whether a
policy and an effective program Risk. Interagency Advisory on Interest Rate Risk
Management, January 6, 2010.
credit union’s financial condition and
addressing interest rate risk (IRR) as part 2 Credit unions confront IRR from several sources.
of their asset liability management These include repricing risk, yield curve risk, glossary of terms in Appendix B for definitions of
(ALM). NCUA believes FICUs need a spread risk, basis risk, and options risk. See the these risks.
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16572 Federal Register / Vol. 76, No. 57 / Thursday, March 24, 2011 / Proposed Rules
policies are safe and sound. 12 CFR greater than five years is less than 100% equal to or greater than 100% of net
741.3(b). of its net worth. FICUs less than $10 worth. NCUA estimates, however, that
million in assets are not required by the approximately 75% of these credit
C. Regulatory Procedures
rule to have a written policy even if the unions already have interest rate risk
Regulatory Flexibility Act total of first mortgage loans held plus policies in place as part of their lending
total investments with maturities greater and asset management policies.
The Regulatory Flexibility Act
than five years is greater than 100% of Therefore, they will not have to
requires NCUA to prepare an analysis to
its net worth. undertake any significant additional
describe any significant economic A FICU is considered to hold a first burden as a result of this rulemaking.
impact a rule may have on a substantial mortgage loan for its own portfolio NCUA estimates that those credit
number of small entities, those credit when it has not demonstrated the intent unions with existing policies will only
unions with less than ten million and ability to sell the loan to an need to undertake a review of those
dollars in assets. The proposed rule independent third party within 120 policies to determine if they are in line
does not apply to credit unions with days. Investments with maturities with the guidance accompanying this
less than ten million dollars in assets. greater than five years are defined as rule change. While minor adjustments
Accordingly, the Board determines that those reported by the FICU to have to existing policies may be appropriate,
this proposed rule will not have a maturities of 5–10 years and greater NCUA estimates that approximately
significant economic impact on a than 10 years in the statement of only 25% of the credit unions will need
substantial number of small credit financial condition of its most recent to prepare a written policy. Therefore,
unions and that a Regulatory Flexibility call report. NCUA estimates that approximately 800
Analysis is not required. For example, Credit Union A has credit unions will need to develop a
Paperwork Reduction Act assets of $51 million. The percentage of written interest rate risk policy to meet
first mortgage loans held by Credit the requirement for a written policy;
The Paperwork Reduction Act of 1995 Union A plus its investments with
(PRA) applies to rulemakings in which NCUA notes that periodic review of the
maturities greater than five years is 75% policy, while included as part of the
an agency by rule creates a new of its net worth. It is required by the rule
paperwork burden on regulated entities guidance, may require no additional
to have a written interest rate policy paperwork burden or engender very
or modifies an existing burden. because of its asset size. Credit Union B
44 U.S.C. 3507(d). For purposes of the limited additional paperwork.
has $45 million in assets. The The proposed rule requiring a written
PRA, a paperwork burden may take the percentage of first mortgage loans held interest rate risk policy is accompanied
form of a either a reporting or a by Credit Union B plus its investments by guidance on how to establish this
recordkeeping requirement, both with maturities greater than five years is policy and the guidance essentially
referred to as information collections. 75% of its net worth. Credit Union B is provides a template or list of the eight
NCUA has determined that the therefore not required by the rule to points the written policy should
requirement to have a written interest have a written interest rate policy since address. As provided in the guidance,
rate policy creates a new information this percentage is less that 100%. Credit the points to be covered are:
collection requirement. NCUA is Union C has assets of $10 million and • Identify committees, persons or
applying to the Office of Management the percentage of first mortgage loans other parties responsible for review of
and Budget (OMB) for approval of the held by Credit Union C plus its the credit union’s IRR exposure;
proposed information collection investments with maturities greater than • Direct appropriate actions to ensure
requirement. five years is 125% of its net worth. It is management takes steps to manage IRR
As required by the PRA, NCUA is required to have a written interest rate so that IRR exposures are identified,
submitting a copy of this proposed policy because it has assets $10 million measured, monitored, and controlled;
regulation to the OMB for its review and or over and less than or equal to $50 • State the frequency with which
approval. Persons interested in million, and the percentage of first management will report on
submitting comments with respect to mortgage loans held by Credit Union C measurement results to the board to
the information collection aspects of the plus its investments with maturities ensure routine review of information
proposed rule should submit them to greater than five years is greater than that is timely (e.g. current and at least
the OMB at the address noted below. 100% of its net worth. Credit Union D quarterly) and in sufficient detail to
Written policy requirements has assets of $9 million and the assess the credit union’s IRR profile;
percentage of first mortgage loans held • Set risk limits for IRR exposures
The proposed rule would require a by Credit Union D plus its investments based on selected measures (e.g. limits
written interest rate policy and would with maturities greater than five years is for changes in repricing or duration
apply to all Federally insured credit 125% of its net worth. Credit Union D gaps, income simulation, asset
unions (FICUs) as follows. FICUs with is not required by the rule to have a valuation, or net economic value);
assets over $50 million must meet the written interest rate policy because its • Choose tests, such as interest rate
requirement for a written policy. FICUs asset size is below $10 million, even shocks, that the credit union will
with assets $10 million or over and less though the percentage of first mortgage perform using the selected measures;
than or equal to $50 million must meet loans held by Credit Union D plus its • Provide for periodic review of
the requirement for a written policy if investments with maturities greater than material changes in IRR exposures and
the total of first mortgage loans held five years is greater than 100% its net compliance with board approved policy
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plus total investments with maturities worth. and risk limits;
greater than five years is equal to or As of December 31, 2010, there were • Provide for assessment of the IRR
greater than 100% of its net worth. 7339 FICUs, of which 3184 had assets impact of any new business activities
FICUs with assets $10 million or over over $50 million, or had assets $10 prior to implementation (e.g. evaluate
and less than or equal to $50 million are million or over and less than or equal the IRR profile of introducing a new
not required to have a written policy if to $50 million, and total first mortgage product or service) ; and
the total of first mortgage loans held loans plus total investments with • Provide for annual evaluation of
plus total investments with maturities maturities greater than five years were policy to determine whether it is still
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Federal Register / Vol. 76, No. 57 / Thursday, March 24, 2011 / Proposed Rules 16573
commensurate with the size, appropriate automated, electronic, PART 741—REQUIREMENTS FOR
complexity, and risk profile of the credit mechanical, or other technological INSURANCE
union. collection techniques or other forms of
The actual length of a policy may vary information technology; e.g., permitting 1. The authority citation for part 741
significantly depending on the electronic submission of responses. continues to read:
complexity of the credit union’s The Paperwork Reduction Act Authority: 12 U.S.C. 1757, 1766(a), 1781–
activities. For example, a credit union requires OMB to make a decision 1790, and 1790d; 31 U.S.C, 3717.
that offers basic share accounts, only concerning the collection of information 2. In § 741.3, add paragraph (b)(5) to
short-term loans, i.e., no mortgage loans, contained in the proposed regulation read as follows:
and makes relatively simple between 30 and 60 days after § 741.3 Criteria
investments should be able to establish publication of this document in the
a written policy in one to two hours. Federal Register. Therefore, a comment * * * * *
The policy could establish maturity (b) * * *
to OMB is best assured of having its full
limits for loans, establish the minimum (5)(i) The existence of a written
effect if OMB receives it within 30 days interest rate risk policy and an effective
amount of short-term funds, and of publication. This does not affect the
basically restrict the types of interest rate risk management program
deadline for the public to comment to as part of asset liability management in
permissible investments (e.g. the NCUA on the proposed regulation.
Treasuries). More complex balance all Federally insured credit unions
Executive Order 13132 (FICUs) as follows. FICUs with assets
sheets, especially those containing
over $50 million must meet the
mortgage loans and complex Executive Order 13132 encourages
requirement for a written policy and an
investments, may warrant a independent regulatory agencies to
effective interest rate risk management
comprehensive IRR policy due to the consider the impact of their actions on program. FICUs with assets $10 million
uncertainty of cash flows. State and local interests. In adherence to or over and less than or equal to $50
Burden Calculation fundamental federalism principles, million must meet the requirement for
NCUA, an independent regulatory a written policy and an effective interest
While the burden will vary depending agency as defined in 44 U.S.C. 3502(5),
on the complexity of credit union rate risk management program if the
voluntarily complies with the executive total of first mortgage loans held plus
activities, for purposes of providing an order. This rule will not have
estimated average, NCUA estimates each total investments with maturities greater
substantial direct effects on the States, than five years is equal to or greater than
of the eight segments of policy will have on the relationship between the national
a burden of an equal weight of two 100% of its net worth. FICUs with assets
government and the States, or on the $10 million or over and less than or
hours. The maximum time for all distribution of power and
segments of the policy is therefore equal to $50 million are not required to
responsibilities among the various have a written policy and an effective
sixteen hours. NCUA estimates the levels of government. NCUA has
burden associated with this collection interest rate risk management program if
determined that this rule does not the total of first mortgage loans held
as follows: 800 × 16 hours = 12,800 constitute a policy that has federalism
hours. plus total investments with maturities
implications for purposes of the greater than five years is less than 100%
Organizations and individuals that executive order.
wish to submit comments on this of its net worth. FICUs less than $10
information collection requirement The Treasury and General Government million in assets are not required by the
should direct them to the Office of Appropriations Act, 1999—Assessment rule to have a written policy and an
Information and Regulatory Affairs, of Federal Regulations and Policies on effective interest rate risk management
OMB, Attn: Shagufta Ahmed, Room Families program even if the total of first
10226, New Executive Office Building, mortgage loans held plus total
The NCUA has determined that this
Washington, DC 20503, with a copy to investments with maturities greater than
rule will not affect family well-being
Mary Rupp, Secretary of the Board, five years is greater than 100% of its net
within the meaning of the Treasury and
National Credit Union Administration, worth.
General Government Appropriations (ii) A FICU is considered to hold a
1775 Duke Street, Alexandria, Virginia Act, 1999, Public Law 105–277, 112
22314–3428. first mortgage loan for its own portfolio
Stat. 2681 (1998). when it has not demonstrated the intent
The NCUA considers comments by
the public on this proposed collection of Agency Regulatory Goal and ability to sell the loan to an
information in: independent third party within 120
NCUA’s goal is to promulgate clear
• Evaluating whether the proposed and understandable regulations that
days. Investments with maturities
collection of information is necessary greater than five years are defined as
impose minimal regulatory burden. We
for the proper performance of the those reported by the FICU to have
request your comments on whether the
functions of the NCUA, including maturities of 5–10 years and greater
proposed rule is understandable and
whether the information will have a than 10 years in the statement of
practical use; financial condition of its most recent
• Evaluating the accuracy of the List of Subjects in 12 CFR Part 741 call report.
NCUA’s estimate of the burden of the (iii) For example, Credit Union A has
Credit unions, Requirements for
proposed collection of information, assets of $51 million. The percentage of
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including the validity of the first mortgage loans held by Credit
methodology and assumptions used; By the National Credit Union Union A plus its investments with
• Enhancing the quality, usefulness, Administration Board on March 17, 2011. maturities greater than five years is 75%
and clarity of the information to be Mary F. Rupp, of its net worth. It is required by the rule
collected; and Secretary of the Board. to have a written interest rate policy and
• Minimizing the burden of collection For the reasons set forth above, NCUA an effective interest rate risk
of information on those who are to proposes to amend 12 CFR part 741 as management program because of its
respond, including through the use of follows: asset size. Credit Union B has $45
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16574 Federal Register / Vol. 76, No. 57 / Thursday, March 24, 2011 / Proposed Rules
million in assets. The percentage of first VIII. Additional Guidance for Large Credit financial intermediation, a high degree of this
mortgage loans held by Credit Union B Unions With Complex or High Risk exposure may negatively affect a credit
plus its investments with maturities Balance Sheets union’s earnings and net economic value.
IX. Definitions Changes in interest rates influence a credit
greater than five years is 75% of its net union’s earnings by altering interest-sensitive
worth. Credit Union B is therefore not I. Introduction
income and expenses (e.g. loan income and
required by the rule to have a written This appendix gives guidance to FICUs in share dividends). Changes in interest rates
interest rate policy and an effective the implementation of an interest rate risk also affect the economic value of a credit
interest rate risk management program (IRR) policy and program as aspects to union’s assets and liabilities, because the
since this percentage is less that 100%. overall asset liability management. An present value of future cash flows and, in
Credit Union C has assets of $10 million effective IRR management program identifies, some cases, the cash flows themselves may
measures, monitors, and controls IRR and is change when interest rates change.
and the percentage of first mortgage central to safe and sound credit union Consequently, the management of a credit
loans held by Credit Union C plus its operations. Given the differences among union’s pricing strategy is critical to the
investments with maturities greater than credit unions, each credit union should control of IRR exposure.
five years is 125% of its net worth. It is formulate its own practices, metrics and All FICUs over $50 million, and all FICUs
required to have a written interest rate benchmarks appropriate to its operations. with assets $10 million or over and less than
policy and an effective interest rate risk These practices should be established in or equal to $50 million if the total of first
management program because it has light of the nature of the credit union’s mortgage loans held plus total investments
assets $10 million or over and less than operations and business, as well as its with maturities greater than five years is
complexity, risk exposure, and size. As these equal to or greater than 100% of its net
or equal to $50 million, and the elements increase, NCUA believes the IRR
percentage of first mortgage loans held worth, should incorporate the following five
practices should be implemented with elements into their IRR program:
by Credit Union C plus its investments increasing degrees of rigor and diligence to 1. Board-approved IRR policy;
with maturities greater than five years is maintain safe and sound operations in the 2. Oversight by the board of directors and
greater than 100% of its net worth. area of IRR management. In particular, rigor implementation by management;
Credit Union D has assets of $9 million and diligence are required to manage 3. Risk measurement systems assessing the
and the percentage of first mortgage complexity and risk exposure. Complexity IRR sensitivity of either or both:
loans held by Credit Union D plus its relates to the intricacy of financial a. Earnings;
instrument structure, and to the composition b. Asset and liability values;
investments with maturities greater than of assets and liabilities on the balance sheet.
five years is 125% of its net worth. 4. Internal controls to monitor adherence to
In the case of financial instruments, the IRR limits;
Credit Union D is not required by the structure can have numerous characteristics 5. Decision making that is informed and
rule to have a written interest rate that act simultaneously to affect the behavior guided by IRR measures.
policy and an effective interest rate risk of the instrument. In the case of the balance
management program because its asset sheet, which contains multiple instruments, II. IRR Policy
size is below $10 million, even though assets and liabilities can act in ways that are The board of directors is responsible for
the percentage of first mortgage loans compounding or can be offsetting because ensuring the adequacy of an IRR policy and
their impact on the IRR level may act in the its limits. The policy should be consistent
held by Credit Union D plus its same or opposite directions. High degrees of
investments with maturities greater than with the credit union’s business strategies
risk exposure require a credit union to be and should reflect the board’s risk tolerance,
five years is greater than 100% its net diligently aware of the potential earnings and taking into account the credit union’s
worth. net worth exposures under various interest financial condition and risk measurement
(iv) Appendix B to this part provides rate and business environments because the systems and methods commensurate with the
guidance on how to establish an interest margin for error is low. balance sheet structure. The policy should
rate risk policy and effective program. A. Complexity state actions and authorities required for
The guidance describes widely accepted exceptions to policy, limits, and
In influencing the behavior of instruments
best practices in the management of and balance sheet composition, complexity is authorizations.
interest rate risk and it may therefore be a function of the predictability of the cash Credit unions have the option of either
helpful to all FICUs. flows. As cash flows become less predictable, creating a separate IRR policy or
incorporating it into investment, ALM, funds
* * * * * the uncertainty of both instrument and
balance sheet behavior increases. For management, liquidity or other policies.
3. Part 741 is amended by adding
example, a residential mortgage is subject to Regardless of form, credit unions must
Appendix B to read as follows: clearly document their IRR policy in writing.
prepayments which will change at the option
Appendix B to Part 741—Guidance for of the borrower. Mortgage borrowers may pay The scope of the policy will vary
an Interest Rate Risk Policy and an off their mortgage loans due to geographical depending on the complexity of the credit
relocation, or may increase the amount of union’s balance sheet. For example, a credit
their monthly payment above the minimum union that offers short-term loans, invests in
Table of Contents contractual schedule due to other changes in non-complex or short-term bullet
I. Introduction the borrower’s circumstances. This cash flow investments (i.e. a debt security that returns
A. Complexity unpredictability is also found in investments, 100 percent of principal on the maturity
B. IRR Exposure such as collateralized mortgage obligations date), and offers basic share products may
II. IRR Policy because these are comprised of mortgage not need to create an elaborate policy. The
III. IRR Oversight and Management loans. Additionally, cash flow policy for these credit unions may limit the
A. Board of Directors Oversight unpredictability affects liabilities. For loan portfolio maturity, require a minimum
B. Management Responsibilities example, nonmaturity share balances vary at amount of short-term funds, and restrict the
IV. IRR Measurement and Monitoring the discretion of the depositor making types of permissible investments (e.g.
jdjones on DSK8KYBLC1PROD with PROPOSALS-1
A. Risk Measurement Systems deposits and withdrawals, and this may be Treasuries, bullet investments). More
B. Risk Measurement Methods influenced by a credit union’s pricing of its complex balance sheets, especially those
C. Components of IRR Measurement share accounts. containing mortgage loans and complex
Methods investments, may warrant a comprehensive
V. Internal Controls B. IRR Exposure IRR policy due to the uncertainty of cash
VI. Decision-Making Informed by IRR Exposure to IRR is the vulnerability of a flows.
Measurement Systems credit union’s financial condition to adverse The policy should establish
VII. Standards for Assessment of IRR Policy movements in market interest rates. Although responsibilities and procedures for
and Effectiveness of Program some IRR exposure is a normal part of identifying, measuring, monitoring,
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Federal Register / Vol. 76, No. 57 / Thursday, March 24, 2011 / Proposed Rules 16575
controlling, and reporting IRR, and establish order to implement the board’s IRR policy, different methods. Common examples of
risk limits. A written policy should: management should: methods available to credit unions are GAP
• Identify committees, persons or other • Develop and maintain adequate IRR analysis, income simulation, asset valuation,
parties responsible for review of the credit measurement systems; and net economic value. Any measurement
union’s IRR exposure; • Evaluate and understand IRR risk method(s) used by a credit union to analyze
• Direct appropriate actions to ensure exposures; IRR exposure should correspond with the
management takes steps to manage IRR so • Establish an appropriate system of complexity of the credit union’s balance
that IRR exposures are identified, measured, internal controls (e.g. separation between the sheet and display any material sources of
monitored, and controlled; risk taker and IRR measurement staff); IRR.
• State the frequency with which • Allocate sufficient resources for an GAP Analysis
management will report on measurement effective IRR program. For example, a
results to the board to ensure routine review complex credit union with an elevated IRR GAP analysis is a simple IRR measurement
of information that is timely (e.g. current and risk profile will likely necessitate a greater method that reports the mismatch between
at least quarterly) and in sufficient detail to allocation of resources to identify and focus rate sensitive assets and rate sensitive
assess the credit union’s IRR profile; on IRR exposures. liabilities over a given time period. GAP can
• Set risk limits for IRR exposures based • Develop and support competent staff suffice for simple balance sheets that
on selected measures (e.g. limits for changes with technical expertise commensurate with primarily consist of short-term bullet type
in repricing or duration gaps, income their IRR program; investments and non mortgage-related assets.
simulation, asset valuation, or net economic • Identify the procedures and assumptions GAP analysis can be static, behavioral, or
value); involved in implementing the IRR based on duration.
• Choose tests, such as interest rate shocks, measurement systems; and Income Simulation
that the credit union will perform using the • Establish clear lines of authority and Income simulation is an IRR measurement
selected measures; responsibility for managing IRR; and method used to estimate earnings exposure to
• Provide for periodic review of material • Provide a sufficient set of reports to changes in interest rates. An income
changes in IRR exposures and compliance ensure compliance with board approved simulation analysis projects interest cash
with board approved policy and risk limits; policies. flows of all assets, liabilities, and off-balance
• Provide for assessment of the IRR impact Where delegation of management authority sheet instruments in a credit union’s
of any new business activities prior to by the board occurs, this may be to portfolio to estimate future net interest
implementation (e.g. evaluate the IRR profile designated committees such as an asset
of introducing a new product or service); and income over a chosen timeframe. Generally,
liability committee or other equivalent. In income simulations focus on short-term time
• Provide for annual evaluation of policy credit unions with limited staff, these
to determine whether it is still commensurate horizons (e.g. one to three years). Forecasting
responsibilities may reside with the board or income is assumption sensitive and more
with the size, complexity, and risk profile of management. Significant changes in
the credit union. uncertain the longer the forecast period.
assumptions, measurement methods, tests Simulations typically include evaluations
IRR policy limits should maintain risk performed, or other aspects involved in the
exposures within prudent levels. Examples of under a base-case scenario, and
IRR process, should be documented and instantaneous parallel rate shocks, and may
limits are as follows. brought to the attention of those responsible.
GAP: Less than ± 10 percent change in any include alternate interest-rate scenarios. The
given period, or cumulatively over 12 IV. IRR Measurement and Monitoring alternate rate scenarios may involve ramped
months. changes in rates, twisting of the yield curve,
Income Simulation: Net interest income A. IRR Measurement Systems and/or stressed rate environments devised by
after shock change less than 20 percent over Generally, credit unions should have IRR the user or provided by the vendor.
any 12 month period. measurement systems that capture and NCUA Asset Valuation Tables
Asset Valuation or Net Economic Value: measure all material and identified sources of
For credit unions lacking advanced IRR
After shock change in book value net worth IRR. An IRR measurement system quantifies
methods that seek simple valuation
less than 25 percent or after shock value of the risk contained in the credit union’s
measures, the NCUA Asset Valuation Tables
net worth greater than 6 percent. balance sheet and integrates the important
are available and prepared quarterly by the
NCUA emphasizes these are only for sources of IRR faced by a credit union in
NCUA Office of Capital Markets (OCM).
illustrative purposes, and management order to facilitate management of its risk
These are located at http://www.ncua.gov/
should establish its own limits that are exposures. The selection and assessment of
reasonably supported. Where appropriate, appropriate IRR measurement systems is the
management may also set IRR limits for responsibility of credit union boards and
These measures provide an indication of a
individual portfolios, activities, and lines of management.
credit union’s potential interest rate risk,
business. Management should:
based on the risk associated with the asset
• Rely on assumptions that are reasonable categories of greatest concern—(e.g.,
III. IRR Oversight and Management
and supportable; mortgage loans and investment securities).
A. Board of Directors Oversight • Document any changes to assumptions The tables provide a simple measure of the
The board of directors is responsible for that should be based on observed potential devaluation of a credit union’s
oversight of their credit union and for information; mortgage loans and investment securities that
approving policy, major strategies, and • Ensure calculation techniques are occur during +/- 300 basis point parallel rate
prudent limits regarding IRR. To meet this appropriate in rigor and use accepted shocks, and report the resulting impact on
responsibility, understanding the level and financial concepts; net worth.
nature of IRR taken by the credit union is • Monitor positions with uncertain
maturities, rates and cash flows, such as Net Economic Value (NEV)
essential. Accordingly, the board should
ensure management executes an effective IRR nonmaturity shares, fixed rate mortgages NEV measures the effect of interest rates on
program. where prepayments may vary, adjustable rate the market value of net worth by calculating
Additionally, the board should annually mortgages, and instruments with embedded the present value of assets minus the present
assess if the IRR program sufficiently options, such as calls; and value of liabilities. This calculation measures
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identifies, measures, monitors, and controls • Require any interest rate measures and the credit union’s balance sheet long-term
the IRR exposure of the credit union. Where tests to be sufficiently rigorous to capture IRR at a fixed point in time. By capturing the
necessary, the board may consider obtaining risk. impact of interest rate changes on the value
professional advice and training to enhance of all future cash flows, NEV provides a
B. IRR Measurement Methods comprehensive measurement of IRR.
its understanding of IRR oversight.
The following discussion is intended only Generally, NEV computations demonstrate
B. Management Responsibilities as a general guide and should not be used by the economic value of net worth under
Management is responsible for the daily credit unions as a checklist. An IRR current interest rates and shocked interest
management of activities and operations. In measurement system may rely on a variety of rate scenarios.
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16576 Federal Register / Vol. 76, No. 57 / Thursday, March 24, 2011 / Proposed Rules
One NEV method is to discount cash flows static) and/or planned growth scenarios to separation of those responsible for the risk
by a single interest rate path. Credit unions capture IRR exposures. Under a flat scenario, taking and risk measuring functions should
with a significant exposure to assets or runoff amounts are reinvested in their occur at the credit union.
liabilities with embedded options should respective asset or liability account. Staff responsible for maintaining controls
consider alternative measurement methods Conducting planned growth scenarios allows should periodically assess the overall IRR
such as discounting along a yield curve (e.g. management to assess the IRR impact of the program as well as compliance with policy.
the U.S. Treasury curve, LIBOR curve) or projected change in volume and/or Internal audit staff would normally assume
using multiple interest rate paths. Credit composition of the balance sheet. this role; however, if there is no internal
unions should apply and document Example 2. Loans and mortgage related auditor, management, or a supervisory
appropriate methods, based on available data securities contain prepayment options that
committee that is independent of the IRR
(e.g. utilizing observed market values), when enable the borrower to prepay the obligation
prior to maturity. This prepayment option process, may perform this role. Where
valuing individual or groups of assets and
liabilities. makes it difficult to project the value and appropriate, management may also
earnings stream from these assets because the supplement the internal audit with outside
C. Components of IRR Measurement Methods future outstanding principal balance at any expertise to assess the IRR program. This
In the initial setup of IRR measurement, given time is unknown. A number of factors review should include policy compliance,
critical decisions are made regarding affect prepayments, including the refinancing timeliness, and accuracy of reports given to
numerous variables in the method. These incentive, seasonality (the particular time of management and the board.
variables include but are not limited to the year), seasoning (the age of the loan), member Audit findings should be reported to the
following. mobility, curtailments (additional principal board or supervisory committee with
1. Chart of Accounts payments), and burnout (borrowers who recommended corrective actions and
don’t respond to changes in the level of rates, timeframes. The individuals responsible for
Credit unions using an IRR measurement and pay as scheduled). Prepayment speeds maintaining internal controls should
method should define a sufficient number of may be estimated or derived from numerous periodically examine adherence to the policy
accounts to capture key IRR characteristics national or vendor data sources.
inherent within their product lines. For related to the IRR program.
Example 3. In the process of IRR
example, credit unions with significant measurement, the credit union must estimate VI. Decision-Making Informed by IRR
holdings of adjustable-rate mortgages should how each account will reprice in response to Measurement Systems
differentiate balances by periodic and market rate fluctuations. For example, when
lifetime caps and floors, the reset frequency, Management should utilize the results of
rates rise 300 basis points, the credit union the credit union’s IRR measurement systems
and the rate index used for rate resets. may raise its asset or liability rates in a like
Similarly, credit unions with significant in making operational decisions such as
amount or not, and may choose to lag the
holdings of fixed-rate mortgages should changing balance sheet structure, funding,
timing of its pricing change.
differentiate at least by original term, e.g., 30 Example 4. Nonmaturity shares include pricing strategies, and business planning.
or 15-year, and coupon level to reflect those accounts with no defined maturity This is particularly the case when measures
differences in prepayment behaviors. such as share drafts, regular shares, and show a high level of IRR or when
2. Aggregation of Data Input money market accounts. Measuring the IRR measurement results approach board-
associated with these accounts is difficult approved limits.
As the credit union’s complexity, risk because the risk measurement calculations NCUA recognizes each credit union has its
exposure, and size increases, the degree of require the user to define the principal cash own individual risk profile and tolerance
detail should be based on data that is flows and maturity. Credit unions may levels. However, when measures of fair value
increasingly disaggregated. Because assume that there is no value when indicate net worth is low, declining, or even
imprecision in the measurement process can measuring the associated IRR and carry these negative, or income simulations indicate
materially misstate risk levels, management values at book value or par. Many credit reduced earnings, management should be
should evaluate the potential loss of unions adopt this approach because it keeps
precision from aggregation and simplification prepared to identify steps, if necessary, to
the measurement method simple. bring risk within acceptable levels. In any
used in its measurement of IRR. Alternatively, a credit union may attribute case, management should understand and
3. Account Attributes value to these shares (i.e. premium) on the use their IRR measurement results, whether
Account attributes define a product, basis that these shares tend to be lower cost generated internally or externally, in the
including: principal type, rate type, rate funds that are core balances by virtue of normal course of business. Management
index, repricing interval, new volume being relatively insensitive to interest rates. should also use the results proactively as a
maturity distribution, accounting accrual This method generally results in nonmaturity
tool to adjust asset liability management for
basis, prepayment driver, discount rate. shares priced/valued in a way that will
changes in interest rate environments.
produce an increased net economic value.
4. Assumptions Therefore, the underlying assumptions of the VII. Standards for Assessment of IRR Policy
IRR measurement methods rely on shares require scrutiny. and Effectiveness of Program
assumptions made by management in order Credit unions that forecast share behavior
to identify IRR. The simplest example is of The following standards will assist credit
and incorporate those assumptions into their
future interest rate scenarios. The risk identification and measurement process unions in determining the adequacy of their
management of IRR will require other should perform sensitivity analysis. IRR policy and assess the effectiveness of
assumptions such as: projected balance sheet Guidance on the evaluation of nonmaturity their program to manage IRR. This section
volumes; prepayment rates for loans and shares is available in NCUA’s Letter to Credit provides examples of adequate and
investment securities; repricing sensitivity, Unions 03–CU–11. inadequate elements of IRR policies and
and decay rates of nonmaturity shares. programs based on the preceding sections.
Examples of these assumptions follow. V. Internal Controls Specific instances of inadequate policies and
Example 1. Credit unions should consider Internal controls are an essential part of a programs are in some cases identified for
evaluating the balance sheet under flat (i.e. safe and sound IRR program. If possible, purposes of illustration.
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Board oversight ........................................... Policy is consistent with credit union strategy, Policy is not consistent with credit union com-
and the board states actions required to ad- plexity. Board has not reviewed limits speci-
dress policy exceptions. fied in policy and does not require manage-
ment to take corrective action when policy
limitations are exceeded.
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Federal Register / Vol. 76, No. 57 / Thursday, March 24, 2011 / Proposed Rules 16577
Responsible parties identified ..................... A committee or management is designated to No committee or individual specified to review
review and monitor IRR. credit union’s IRR exposure.
Direct appropriate action to measure, mon- Policy states all actions that are sufficient to Omissions in policy cause material deficiency
itor, control IRR. manage IRR. in controlling risk (e.g. method of measuring
IRR is not identified or risk measurement
not required with stated frequency).
Reporting frequency specified ..................... Reporting of results is required with sufficient Reporting is infrequent and does not provide
frequency to alert management to emerging adequate detail to control IRR (e.g. semi-
IRR. annual reporting on an aggregate balance
Risk limits stated with appropriate meas- Risk limits are established and are appro- Key risk limit omitted from policy (e.g. NEV
ures. priate for the size and complexity of the ratio or volatility post shock, NII post shock,
credit union. or sensitivity gap at stated period), or limit
is not reasonable (e.g. limits allow IRR
measures to approach dangerously low lev-
els under plausible interest rate scenarios).
Tests for limits ............................................. Tests substantially display the level and range Tests do not indicate level or source of risk
of credit union IRR. (e.g. NEV @ only +/¥100 bps, or repricing
gap only at one month).
Review of material IRR changes ................ Any changes beyond a stated level are re- Review is required, but need for compliance
ported to management and, where appro- with policy limits and corrective action is un-
priate, the Board. clear.
Impact of new business .............................. IRR impact of all business initiatives is re- The credit union does not evaluate the impact
quired where these will affect future IRR. of new business on its IRR profile and is at
risk from new business booked.
Periodic policy review .................................. Review by Board required annually to ensure Policy review is required only if risks are un-
continued relevance and applicability of pol- changed, at the Board’s discretion.
icy to management of IRR.
IRR Oversight & Management:
Oversight ..................................................... Board approves policy and strategies and un- Board is aware of the types of IRR present to
derstands IRR faced by its own credit union. credit unions in general, but does not have
knowledge of the IRR risks associated with
the credit union.
Oversight assessment of program effec- Board periodically evaluates program effec- Board substantially relies on annual third
tiveness. tiveness by monitoring management’s IRR party review to determine the adequacy of
knowledge, using professional advice. oversight and governance.
Choice of IRR measurement systems ........ Management selects and maintains systems Systems used by the credit union do not cap-
which are able to capture the complexity of ture IRR (e.g. balance sheet contains mate-
IRR risks. rial options in investments, mortgage loans
or core deposits, which the system cannot
capture—calls, prepayments, or adminis-
Evaluation of IRR risk exposures ................ Credit union understands all material IRR ex- Management relies on outside parties to
posures and evaluates these accordingly evaluate credit union’s IRR and cannot ef-
relative to credit union strategy. fectively explain the IRR measurement
method or the results.
System of internal controls .......................... Internal controls encompass and effectively Internal audit has not identified or addressed
evaluate programs that manage elements the correction of IRR deficiencies (e.g.
of IRR at the credit union. processes for tracking changes in measure-
ment assumptions, such as gap repricing of
IRR resource management ......................... Credit union has allocated initial or additional Credit union IRR exposure has materially in-
qualified staff resources sufficient to man- creased without allocating additional, quali-
age IRR by means that address sources of fied staff, consequently IRR exposures are
risk. not identified or properly measured.
Expertise of IRR program staff ................... Staff responsible correctly identifies sources Credit union relies on staff who do not under-
of IRR and can quantify these risks. stand or are not familiar with IRR at the
credit union (e.g. management cannot ex-
plain the impact on IRR of overstating core
Procedures and assumptions of IRR meas- Credit union identifies reasonable procedures Management delegates assumptions to a third
urement systems. and supportable assumptions. party and has no procedure to review the
reasonableness of the assumptions.
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Accountability of IRR management ............. Responsibility for managing IRR is specific Responsibility for managing IRR is too broad,
and clearly delineated. or unclear, or not recognized by manage-
Transparency of changes in assumptions, Management requires clear disclosure of rel- Changes in assumptions are not tracked, or
methods and IRR tests. evant changes in all material assumptions monitored or transparent to those evalu-
and methods. ating efficacy of IRR system.
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16578 Federal Register / Vol. 76, No. 57 / Thursday, March 24, 2011 / Proposed Rules
IRR Measurement and Monitoring:
Reasonable and supportable assumptions Credit union carefully evaluates all assump- Results are highly dependent on key assump-
tions and assesses the sensitivity of results tions that have not been researched or
relative to each key assumption. demonstrated to be supportable (e.g. mort-
gage prepayments do not reflect extension
risk and core deposit premiums overstate or
do not indicate reasonable maturities).
Assumption changes from observed infor- All material changes in assumptions are Assumptions are not tested and changes are
mation. based on tested internal data or reliable in- not supported by any associated data on
dustry sources. which the credit union relies.
Rigor of calculations and conformity of con- Techniques used appropriately capture com- Methods to attribute cash flows, and rate sen-
cepts. plexity of balance sheet instruments. sitivities are based on incorrect techniques
(e.g. misuse of statistical correlations).
Positions with uncertain maturities, rates Activity is monitored on a regular basis in Actual behavior is not monitored or compared
and cash flows. order to validate reasonableness of mod- to projected behavior.
Rigor of interest rate measures and tests .. Measures and tests employed capture the Measures and tests employed do not capture
material risks embedded in the credit material risks embedded in the balance
union’s balance sheet. sheet (e.g. rate shocks do not trigger the
embedded options in some products).
Components of IRR Measurement Methods:
Chart of accounts ........................................ A sufficient number of accounts have been Accounts/products with different IRR charac-
defined to capture key IRR characteristics teristics are modeled as one account/prod-
inherent within each product. uct (e.g. 15- and 30-year fixed-rate mort-
gages, with various coupons and prepay-
Data aggregation ......................................... The level of data disaggregation is sufficient Data is combined for similar products with a
given the credit union’s complexity and risk wide range of variables, producing mis-
exposure (e.g. instrument level processing). leading weighted average terms (e.g. com-
bining fixed-rate mortgages with coupons
ranging from 4% to 8%, and modeling as a
Account attributes ....................................... Account set-up is appropriate to allow for the Account set-up fails to identify key IRR char-
capture of key IRR characteristics. acteristic (e.g. adjustable-rate mortgages
are modeled without periodic and lifetime
caps and floors).
Discounting methodology ............................ Methodology used properly calculates the Methodology used does not accurately value
value of the asset or liability being modeled. assets or liabilities (e.g. discount rates or
maturities or cash flows are incorrect in dis-
Assumptions ................................................ Credit union carefully evaluates all assump- Results are highly dependent on key assump-
tions and assesses the sensitivity of results tions that have not been researched or
relative to each key assumption. demonstrated to be supportable (e.g. mort-
gage prepayments do not reflect extension
risk and core deposit premiums overstate or
do not indicate reasonable maturities).
Internal assessment of IRR program .......... Staff are identified and have annually as- There is no specified review action for requir-
sessed policy and program to correct any ing periodic evaluation of IRR program ef-
Compliance with policy ................................ IRR program is evaluated semi-annually for Exceptions to policy occur occasionally and
any policy exceptions, including compliance these are not noted by the internal control
with approved limits. process.
Timeliness and accuracy of reports ............ Reports that are routinely provided to man- Reports fail to specify some material risks,
agement and the Board successfully com- and some scheduled reports are not pro-
municate material IRR exposure of the duced.
Audit findings reported to board or super- IRR program deficiencies and policy excep- IRR program effectiveness is not part of audit
visory committee. tions are reported to the Board in accord- review. No findings occur.
ance with the policy.
Decision-making and IRR:
Use of IRR measurement results in oper- Measured IRR results form part of the credit IRR exposure discussion occurs only as
ational decisions. union’s ongoing business decisions and are deemed relevant in the annual strategic
substantive considerations routinely in- process.
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cluded in the business decision process.
Escalated use of results when IRR expo- Procedure specifies review escalation at spe- IRR results are secondary in addressing IRR
sure is raised or approaching limits. cific levels with increasing contingency trig- contingencies. Credit union relies on ad hoc
gers close to limits. response driven by market and customer
Application to reduce elevated levels of Credit union utilizes IRR results to clearly de- IRR system results are not used to address
IRR. fine and formulate response to increased balance structure, funding or pricing strate-
IRR levels. gies.
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Federal Register / Vol. 76, No. 57 / Thursday, March 24, 2011 / Proposed Rules 16579
NCUA acknowledges both the range of IRR IX. Definitions warning level indicator lights on each of
exposures at credit unions, and the diverse the P1–3 and P3–1 instrument panels in
Glossary of terms
means that they may use to accomplish an the flight compartment. This proposed
effective program to manage this risk. NCUA Basis risk: The risk to earnings and/or
value due to a financial institution’s holdings AD would also require revising the
therefore does not stipulate specific airplane flight manual to remove certain
quantitative standards or limits for the of multiple instruments, based on different
indices that are imperfectly correlated. requirements of previous AD actions,
management of IRR applicable to all credit
Interest rate risk: The risk that changes in and to advise the flightcrew of the
unions, and does not rely solely on the
results of quantitative approaches to evaluate
market rates will adversely affect a credit following changes: Revised non-normal
union’s net economic value and/or earnings. procedures to use when a cabin altitude
the effectiveness of IRR programs. Interest rate risk generally arises from a
Assumptions, measures and methods used by warning or rapid depressurization
mismatch between the timing of cash flows occurs, and revised cabin pressurization
a credit union in light of its size, complexity from fixed rate instruments, and interest rate
and risk exposure determine the specific resets of variable rate instruments, on either procedures for normal operations. This
appropriate standard. However, NCUA side of the balance sheet. Thus, as interest proposed AD was prompted by a design
strongly affirms the need for adequate rates change, earnings or net economic value change in the cabin altitude warning
practices for a program to effectively manage may decline. system that would address the
IRR. For example, policy limits on IRR Option risk: The risk to earnings and/or identified unsafe condition. We are
exposure are not adequate if they allow a value due to the effect on financial proposing this AD to prevent failure of
credit union to operate with an exposure that instruments of options associated with these the flightcrew to recognize and react to
is unsafe or unsound, which means that the instruments. Options are embedded when a valid cabin altitude warning horn,
credit union may suffer material or they are contractual within, or directly
associated with, the instrument. An example
which could result in incapacitation of
significant losses under adverse the flightcrew due to hypoxia (lack of
circumstances as a result of this exposure. of a contractual embedded option is a call
option on an agency bond. An example of a oxygen in the body), and consequent
Credit unions that do not have a written IRR
behavioral embedded option is the right of a loss of control of the airplane.
policy or that do not have an effective IRR
program are out of compliance with § 741.3 residential mortgage holder to vary DATES: We must receive comments on
prepayments on the mortgage through time, this proposed AD by May 9, 2011.
of NCUA’s regulation.
either by making additional premium
ADDRESSES: You may send comments by
VIII. Additional Guidance for Large Credit payments, or by paying off the mortgage prior
Unions with Complex or High Risk Balance to maturity. any of the following methods:
Sheets Repricing risk: The repricing of assets or • Federal eRulemaking Portal: Go to
liabilities following market changes can http://www.regulations.gov. Follow the
FICUs with assets of $500 million or
greater must obtain an annual audit of their
occur in different amounts and/or at different instructions for submitting comments.
financial statements performed in accordance
times. This risk can cause returns to vary. • Fax: 202–493–2251.
with generally accepted accounting
Spread risk: The risk to earnings and/or • Mail: U.S. Department of
value resulting from variations through time Transportation, Docket Operations,
standards. 12 CFR 715.5, 715.6, 741.202. For of the spread between assets or liabilities to
purposes of data collection, NCUA also uses M–30, West Building Ground Floor,
an underlying index such as the Treasury
$500 million and above as its largest credit curve.
Room W12–140, 1200 New Jersey
union asset range. In order to gather Yield curve risk: The risk to earnings and/ Avenue, SE., Washington, DC 20590.
information and to monitor IRR exposure at or value due to changes in the level or slope • Hand Delivery: Deliver to Mail
larger credit unions as it relates to the NCUA of underlying yield curves. Financial address above between 9 a.m. and
insurance fund, NCUA will use this as the instruments can be sensitive to different 5 p.m., Monday through Friday, except
criterion for definition of large credit unions points on the curve. This can cause returns Federal holidays.
for purposes of the guidance. Given the to vary as yield curves change. For service information identified in
increased exposure to the share insurance [FR Doc. 2011–6752 Filed 3–23–11; 8:45 am] this proposed AD, contact Boeing
fund, NCUA encourages the following Commercial Airplanes, Attention: Data
BILLING CODE 7535–01–P
standards at large credit unions. & Services Management, P.O. Box 3707,
Responsible officials at large credit unions
MC 2H–65, Seattle, Washington 98124–
that are complex or high risk should fully
understand all aspects of interest rate risk, DEPARTMENT OF TRANSPORTATION 2207; telephone 206–544–5000,
including but not limited to the credit extension 1, fax 206–766–5680; e-mail
union’s IRR assessment and potential Federal Aviation Administration email@example.com; Internet
directional changes in IRR exposures. For https://www.myboeingfleet.com. You
example, the credit union should consider 14 CFR Part 39 may review copies of the referenced
the following: service information at the FAA,
[Docket No. FAA–2011–0258; Directorate
• Policy which provides for the use of Identifier 2010–NM–191–AD] Transport Airplane Directorate, 1601
outside parties to validate the tests and limits Lind Avenue, SW., Renton, Washington.
commensurate with the risk exposure and RIN 2120–AA64 For information on the availability of
complexity of the credit union; this material at the FAA, call 425–227–
• IRR measurements that provide Airworthiness Directives; The Boeing 1221.
compliance with policy limits as shown both Company Model 737–600, –700, –700C,
by risks to earnings and net economic value –800, –900, and –900ER Series Examining the AD Docket
of equity under a variety of defined and Airplanes You may examine the AD docket on
reasonable interest rate scenarios; the Internet at http://
AGENCY: Federal Aviation
jdjones on DSK8KYBLC1PROD with PROPOSALS-1
• The effect of changes in assumptions on
Administration (FAA), DOT. www.regulations.gov; or in person at the
IRR exposure results (e.g. the impact of
slower or faster prepayments on earnings and ACTION: Notice of proposed rulemaking Docket Management Facility between
economic value); or, (NPRM). 9 a.m. and 5 p.m., Monday through
• Enhanced levels of separation between Friday, except Federal holidays. The AD
risk taking and risk assessment (e.g. SUMMARY: We propose to adopt a new docket contains this proposed AD, the
assignment of resources to separate the airworthiness directive (AD) for the regulatory evaluation, any comments
investments function from IRR measurement, products listed above. This proposed received, and other information. The
and IRR monitoring and oversight). AD would require installing two street address for the Docket Office
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