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					                                                  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.
                                                                                                            [Reserved]
                                                                                                                                                                   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
                                                  regcomments@ncua.gov. 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
                                                                                                          minimally intrusive.
                                                  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
jdjones on DSK8KYBLC1PROD with PROPOSALS-1




                                                                                                          insurance.
                                                  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
                                                  Effective Program
                                                                                                          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.
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                                                     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
                                                                                                                                                                Resources/ALManagementInvest/Review
                                                  reasonably supported. Where appropriate,                appropriate IRR measurement systems is the
                                                                                                                                                                Procedures.aspx.
                                                  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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                                                                                                                                        Adequate                                          Inadequate

                                                  Policy:
                                                      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

                                                                                                                                            Adequate                                          Inadequate

                                                        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
                                                                                                                                                                              sheet).
                                                        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-
                                                                                                                                                                            tered rates).
                                                        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
                                                                                                                                                                            core deposits).
                                                        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
                                                                                                                                                                            deposit premiums).
                                                        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.
jdjones on DSK8KYBLC1PROD with PROPOSALS-1




                                                        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-
                                                                                                                                                                            ment.
                                                        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

                                                                                                                                         Adequate                                          Inadequate

                                                  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.
                                                                                                                        eling assumptions.
                                                       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-
                                                                                                                                                                           ment behaviors).
                                                       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
                                                                                                                                                                           6% mortgage).
                                                       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-
                                                                                                                                                                           counting calculations).
                                                       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 Controls:
                                                       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-
                                                                                                                        weaknesses.                                        fectiveness.
                                                       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.
                                                                                                                        credit union.
                                                       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.
jdjones on DSK8KYBLC1PROD with PROPOSALS-1




                                                                                                                        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
                                                                                                                                                                           perceptions.
                                                       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                       me.boecom@boeing.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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