§ 703.104 - Requirements for Counterparty agreements, collateral and Margining.

§ 703.104 Requirements for derivative counterparty Counterparty agreements, collateral and margining.

(a) A Federal credit union may have exchange-traded, centrally cleared, or non-cleared derivatives, in accordance with the following:

(1) Exchange-traded and cleared derivatives. A Federal credit union with derivatives that are exchange-traded or centrally cleared must:

(i) Comply with the Commodity Futures Trading Commission's rules;

(ii) Use only swap dealers, introducing brokers, and/or futures commission merchants

Margining.

To enter into Derivative transactions under this subpart, a Federal credit union must:

(a) Have an executed Master Services Agreement with a Counterparty. Such agreement must be reviewed by counsel with expertise in similar types of transactions to ensure the agreement reasonably protects the interests of the Federal credit union;

(b) Use only the following Counterparties:

(1) For exchange-traded and cleared Derivatives: Swap Dealers, Introducing Brokers, and/or FCMs that are current registrants of the

Commodity Futures Trading Commission; and

(iii) Comply with the margining requirements required by the futures commission merchant.

(2)

CFTC; or

(2) For Non-cleared

derivative transactions. A Federal credit union with derivatives that are non-cleared must:

(i) Have a master service agreement and credit support annex with a registered swap dealer that are in accordance with ISDA protocol for standard bilateral agreements;

(ii) Utilize margining requirements contracted through a credit support annex and have a minimum transfer

Derivative transactions: Swap Dealers that are current registrants of the CFTC.

(c) Utilize contracted Margin requirements with a maximum Margin threshold amount of $250,000

for daily margining requirements

; and

(

iii) Accept as

d) For Non-cleared Derivative transactions, accept as eligible collateral, for

margin

Margin requirements, only

cash

the following: Cash (U.S. dollars), U.S. Treasuries, government-sponsored enterprise debt,

and government

U.S. government agency debt, government-sponsored enterprise residential mortgage-backed security pass-through securities

. (b) Counterparty

,

collateral,

and

margining management. A Federal credit union must:

(1) Have systems in place to effectively manage collateral and margining requirements;

(2) Have a collateral management process that monitors the Federal credit union's collateral and margining requirements daily and ensures that its derivatives positions are collateralized at all times and in accordance with the collateral requirements of this subpart and the Federal credit union's agreement with its counterparty. This includes the posting, tracking, valuation, and reporting of collateral using fair value; and

(3) Analyze and measure potential liquidity needs related to its derivatives program and stemming from additional collateral requirements due to changes in interest rates. The Federal credit union must calculate and track contingent liquidity needs in the event a derivatives transaction needs to be novated or terminated, and must establish effective controls for liquidity exposures arising from both market or product liquidity and instrument cash flows.

U.S. government agency residential mortgage-backed security pass-through securities.