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Federal Register / Vol. 86, No. 155 / Monday, August 16, 2021 / Proposed Rules
collateral or on an uncollateralized basis.51
Each element of the off-balance sheet definition is discussed in more detail below.
Unfunded Commitments The current definition of off-balance sheet exposures in the 2015 Final Rule includes all unfunded commitments.
The proposed definition, however, would not include commitments that are unconditionally cancellable. Under the proposed rule, an unconditionally cancellable commitment would mean a commitment that a credit union may, at any time, with or without cause, refuse to extend credit under to the extent permitted under applicable law. The Board notes that for an exposure to be treated as unconditionally cancellable, the contractual agreement must explicitly state that the credit union can unconditionally refuse to extend credit under the commitment. A provision stating the credit union can cancel the commitment for good cause would be insufficient.
Loans Transferred With Limited Recourse The current definition of off-balance sheet exposures in the 2015 Final Rule includes all other loans transferred with limited recourse or other seller-provided credit enhancements and that qualify for true sales accounting. The proposed rule would make no substantive changes to this prong of the off-balance sheet exposure definition. The exposure amount for loans transferred with limited recourse is the maximum contractual amount the credit union is exposed to according to the agreement, net of any related valuation allowance.

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Loans Transferred Under the Federal Home Loan Bank FHLB Mortgage Partnership Finance Program Loans The current definition of off-balance sheet exposures in the 2015 Final Rule includes loans transferred under the FHLB mortgage partnership finance program. The proposed rule would clarify the language of this item in the off-balance sheet exposure definition but would make no other substantive change. The exposure amount for loans that meet the definition of mortgage partnership finance program and are transferred under the FHLB mortgage 51 New exposure categories may require changes to the Call Report. For example, unconditionally cancellable commitments, off-balance sheet securitization exposures, forward agreements, sold credit protection through guarantees and credit derivatives, and securities borrowing and lending transactions may require additional Call Report fields.

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partnership finance program is the outstanding loan balance as of the reporting date, net of any related valuation allowance.
Financial Standby Letters of Credit The proposed rule would include financial standby letters of credit in the definition of off-balance sheet exposures. These exposures are not explicitly included in the current definition of off-balance sheet exposure in the 2015 Final Rule; however, they are included as off-balance sheet items.
Under the proposed rule, the exposure amount for financial standby letters of credit would be the total potential exposure of the credit union under the contractual agreement.
Forward Agreements The proposed definition of off-balance exposures would also include forward agreements that are not derivative contracts. Forward agreements are not explicitly included in the current definition of off-balance sheet exposure in the 2015 Final Rule; however, forward agreements are included as offbalance sheet items. A forward agreement would mean a legally binding contractual obligation to purchase assets with certain drawdown at a specified future date, not including commitments to make residential mortgage loans or forward foreign exchange contracts. The exposure amount of a forward agreement that is not a derivative contract would be the future contractual obligation amount.
Similar to the other banking agencies, the Board is also clarifying that typical mortgage lending activities such as forward loan delivery commitments between credit unions and investors are typically derivative contracts, and therefore, would be excluded from the off-balance sheet exposure definition.52
The Board also notes that put and call options on mortgage-backed securities are also typically derivatives and would be excluded from the definition of offbalance sheet exposure. A contractual obligation for the future purchase of a to be announced that is, whenissued mortgage securities contract that does not meet the definition of a 52 Derivative contract means a financial contract whose value is derived from the values of one or more underlying assets, reference rates, or indices of asset values or reference rates. Derivative contracts include interest rate derivative contracts, exchange rate derivative contracts, equity derivative contracts, commodity derivative contracts, and credit derivative contracts. Derivative contracts also include unsettled securities, commodities, and foreign exchange transactions with a contractual settlement or delivery lag that is longer than the lesser of the market standard for the particular instrument or five business days. 12 CFR 702.2
effective Jan. 1, 2022.

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derivative contract, however, would be captured by the off-balance sheet exposure definition as it would be considered a forward agreement. In contrast, a contractual obligation for the future sale rather than purchase of a to be announced mortgage securities contract that does not meet the definition of a derivative contract would not be captured in the off-balance sheet qualifying criterion, as it would not be considered a forward agreement.
Sold Credit Protection Through Guarantees and Credit Derivatives The proposed definition of off-balance sheet exposure would also include sold credit protection through guarantees 53
and credit derivatives. These exposures are not explicitly included in the definition of off-balance sheet exposure in the 2015 Final Rule; however, guarantees are included as off-balance sheet items. Credit derivatives are included in the other banking agencies CBLR framework as part of the offbalance sheet threshold. Under the proposed definition, the exposure amount for sold credit protection through guarantees and credit derivatives would be the total potential exposure of the credit union under the contractual agreement. A credit derivative would mean a financial contract executed under standard industry credit derivative documentation that allows one party the protection purchaser to transfer the credit risk of one or more exposures reference exposures to another party the protection provider for a certain period of time. At this time, FCUs are not permitted to have credit derivatives and the Board is unaware of any statechartered credit unions engaging in credit derivatives. The Board is including this provision for consistency with the other banking agencies and to ensure that the proposed rule is flexible should credit unions hold credit derivatives in the future.
Off-Balance Sheet Securitizations Additionally, compared to the current definition of off-balance sheet exposure, the proposed definition would include off-balance sheet securitizations, including any credit enhancements, representations, or warranties that obligate a credit union to protect another party from losses arising from the credit risk of the underlying 53 A guarantee means a financial guarantee, letter of credit, insurance, or similar financial instrument that allows one party to transfer the credit risk of one or more specific exposures to another party. 12
CFR 702.2 effective Jan. 1, 2022.

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