§ 703.101 - Purpose and scope.

§ 703.101 Definitions.

For purposes of this subpart:

Amortizing notional amount means a characteristic of a derivative, in which the notional amount declines on a predetermined fixed basis over the term of the contract, according to an amortization schedule to which the parties agree when executing the contract;

Basis swap means an agreement between two parties in which the parties make periodic payments to each other based on floating rate indices multiplied by a notional amount;

Cleared swap has the meaning as defined by the Commodity Futures Trading Commission in 17 CFR 22.1;

Counterparty means a swap dealer, derivatives clearing organization, or exchange that participates as the other party in a derivatives transaction with a Federal credit union;

Credit support annex means the terms or rules under which collateral is posted or transferred between a Federal credit union and a counterparty to mitigate credit risk that may result from changes in the fair value of derivatives positions;

Derivative means a financial contract which derives its value from the value and performance of some other underlying financial instrument or variable, such as an index or interest rate;

Derivatives clearing organization has the meaning as defined by the Commodity Futures Trading Commission in 17 CFR 1.3(d);

Economic effectiveness means the extent to which a derivatives transaction results in offsetting changes in the interest rate risk that the transaction was, and is, intended to provide;

Exchange means a central financial clearing market where end users can trade futures, as defined in this section of this subpart;

External service provider means any entity that provides services to assist a Federal credit union in carrying out its derivatives program and the requirements of this subpart;

Fair value has the meaning specified in § 703.2 of subpart A of this part;

Field director means an NCUA Regional Director or the Director of the Office of National Examinations and Supervision;

Forward start date means an agreement that delays the settlement date of a derivatives transaction for a specified period of time;

Futures means a U.S. Treasury note financial contract that obligates the buyer to take delivery of Treasury notes (or the seller to deliver Treasury notes) at a predetermined future date and price. Futures contracts are standardized to facilitate trading on an exchange;

Futures commission merchant (FCM) has the meaning as defined by the Commodity Futures Trading Commission in 17 CFR 1.3(p);

Hedge means to enter into a derivatives transaction to mitigate interest rate risk;

Interest rate cap means a contract, based on a reference interest rate, for payment to the purchaser when the reference interest rate rises above the level specified in the contract;

Interest rate floor means a contract, based on a reference interest rate, for payment to the purchaser when the reference interest rate falls below the level specified in the contract;

Interest rate risk means the vulnerability of a Federal credit union's earnings or economic value to movements in market interest rates;

Interest rate swap means an agreement to exchange future payments of interest on a notional amount at specific times and for a specified time period;

Introducing broker means a futures brokerage firm that deals directly with the client, while the trade execution is done by a futures commission merchant;

ISDA protocol means a multilateral contractual amendment mechanism that has been used to address changes to International Swap and Derivatives Association (ISDA) standard contracts since 1998;

Leveraged derivative means a derivative where the value of the transaction does not change in a one to one proportion with the contractual rate or index;

(x) Margin means the minimum amount of funds that must be deposited between parties to a derivatives transaction, as detailed in a credit support annex or clearing arrangement;

Master service agreement means a document agreed upon between two parties that sets out standard terms that apply to all derivatives transactions entered into between those parties. Each time the same two parties enter into a transaction, the terms of the master service agreement apply automatically and do not need to be re-negotiated. The most common form of a master service agreement is a master ISDA agreement;

Minimum transfer amount means the minimum amount of collateral that a party to a derivatives transaction will require, per transfer, to cover exposure in excess of the collateral threshold;

Net economic value means the economic value of assets minus the economic value of liabilities;

Net worth has the meaning specified in § 702.2 of this chapter;

Non-cleared means transactions that do not go through a derivatives clearing organization;

Notional amount means the contracted amount of a derivatives contract for swaps and options on which interest payments or other payments are based. For futures contracts, the notional amount is represented by the contract size;

Novation means the substitution of an old obligation with a new one that either replaces an existing obligation with a new obligation or replaces an original party with a new party;

Reference interest rate means the index or rate to be used as the variable rate for resetting derivatives transactions;

Reporting date means the end of the business day on the date used to report positions and fair values for limit compliance (e.g., daily, month-end, quarter-end and fiscal year-end);

Senior executive officer has the meaning specified in § 701.14 of this chapter and any other similar employee that is directly within the chain of command for the oversight of a Federal credit union's derivatives program, as identified in a Federal credit union's process and responsibility framework, as discussed in § 703.106(b)(1) of this subpart;

Structured liability offering means a share product created by a Federal credit union with contractual option features, such as periodic caps and calls, similar to those found in structured securities or structured notes;

Swap dealer has the meaning as defined by the Commodity Futures Trading Commission in 17 CFR 1.3(ggg);

Swap execution facility means a Commodities and Futures Trading Commission-registered facility that provides a system or platform for participants to execute cleared derivatives transactions;

Threshold amount means an unsecured credit exposure that a party to a derivatives transaction is prepared to accept before requesting additional collateral from the other party;

Trade date means the date that a derivatives order (new transactions, terminations, or assignments) is executed in the market; and

Unamortized premium means the balance of the upfront premium payment that has not been amortized

Purpose and scope.

(a) Purpose. This subpart grants Federal credit unions limited authority to enter into Derivatives only for the purpose of managing Interest Rate Risk.

(b) Scope. This subpart applies to all Federal credit unions. Except as provided in § 741.219, this rule does not apply to federally insured, state-chartered credit unions.

(c) Prior approvals. Any Federal credit union with an active approval, under the prior version of this subpart, on June 25, 2021 is subject to the provisions of this subpart and is no longer subject to the restrictions, limits, or terms contained in the Federal credit union's approved application.

(d) Pending Approvals. Any application for Derivatives authority pending on June 25, 2021, except for such applications submitted by a Federal credit union that would be subject to the requirements of § 703.108(b), is deemed to be withdrawn and such applicant is subject to the provisions of this subpart.