§ 703.103 - Requirements related to the characteristics of permissible Interest Rate Risk Derivatives.

§ 703.103 Derivative authorityRequirements related to the characteristics of permissible Interest Rate Risk Derivatives.

(a) General authority. A Under this subpart, a Federal credit union that is approved for derivatives authority under § 703.111 of this subpart may use any of the products and characteristics, described in § 703.102(a), subject to the following limits, which are described in more detail in appendix A to this subpart:

(1) Entry limits authority. Unless a Federal credit union is permitted to use standard limits authority under this subpart, the aggregate fair value loss (as defined in appendix A) on all of a Federal credit union's derivatives positions may not exceed 15 percent of net worth, and a Federal credit union's weighted average remaining maturity notional (as defined in appendix A), may not exceed 65 percent of net worth.

(2) Standard limits authority. A Federal credit union that is permitted to use standard limits authority may not exceed an aggregate fair value loss on all of the Federal credit union's derivatives positions of 25 percent of net worth, and a weighted average remaining maturity notional of 100 percent of net worth, provided:

(i) The Federal credit union has engaged in derivatives at the entry limits authority for a continuous period of one year (beginning on the trade date of its first derivatives transaction); and

(ii) The Federal credit union has not been notified in writing by NCUA of any relevant safety and soundness concerns while engaged in derivatives at the entry limits authority.

(b) Limit description -

(1) Fair value limit. The fair value limit is calculated by aggregating the fair values for all derivatives positions at the reporting date. If an aggregate loss exists, it must be less than the limit set forth in this subpart. A further description of this limit and example calculations are detailed in appendix A to this subpart.

(2) Weighted average remaining maturity notional limit. The weighted average remaining maturity notional limit is calculated by aggregating the notional amount for all derivatives positions based on each derivative's pricing sensitivity and maturity. A further description of this limit and example calculations are detailed in appendix A to this subpart.

may only enter into Derivatives that have the following characteristics:

(1) Are for the purpose of managing Interest Rate Risk;

(2) Denominated in U.S. dollars;

(3) Based on Domestic Interest Rates or the U.S. dollar-denominated London Interbank Offered Rate (LIBOR);

(4) A contract maturity equal to or less than 15 years, as of the Trade Date; and

(5) Not used to create Structured Liability Offerings for members or nonmembers.

(b) A Federal credit union may not engage in embedded options required under U.S. Generally Accepted Accounting Principles (GAAP) to be accounted for separately from the host contract.