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Federal Register / Vol. 86, No. 155 / Monday, August 16, 2021 / Proposed Rules
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appropriate risk weights for credit derivatives.
For off-balance sheet securitization exposures, the credit conversion factor would be 100 percent. The 2015 Final Rule does not currently provide a credit conversion factor for the off-balance sheet portion of securitization exposures. The risk weight would be determined as if the exposure is an onbalance sheet securitization exposure.
Under the 2015 Final Rule, the risk weight for securitization exposures is dependent upon whether the exposure is a subordinated or non-subordinated tranche. Non-subordinated tranches can receive a 100 percent risk weight credit unions also have the option to use the gross up approach.98 In contrast, a subordinated tranche would receive a 1,250 percent risk weight credit unions also have the option to use the gross-up approach.99
For securities borrowing or lending transactions, the proposed credit conversion factor would be 100 percent.
The 2015 Final Rule does not provide a credit conversion factor for securities borrowing or lending transactions.
Including an explicit 100 percent credit conversion factor would provide parity between the other banking agencies and the NCUA. Unlike the other banking agencies rules, the proposed rule would include a risk weight of 100 percent for these transactions. The Board is aware this may be a more conservative risk weight than for securities borrowing and lending transactions under the other banking agencies 2013 capital rule.
The Board is proposing a 100 percent risk weight for simplicity. However, a credit union may recognize the credit risk mitigation benefits of financial collateral by risk weighting the collateralized portion of the exposure under the applicable provisions of 12
CFR 324.35 or 324.37. Any collateral recognized would have to meet the definition of financial collateral under the other banking agencies 2013 capital rules.100 The Board solicits comments 98 12 CFR 702.104c2vB8 effective Jan. 1, 2022.
99 12 CFR 702.104c2x effective Jan. 1, 2022.
100 See 12 CFR 324.2. Financial collateral means collateral: 1 In the form of: i Cash on deposit with the FDIC-supervised institution including cash held for the FDIC-supervised institution by a third-party custodian or trustee; ii Gold bullion;
iii Long-term debt securities that are not resecuritization exposures and that are investment grade; iv Short-term debt instruments that are not resecuritization exposures and that are investment grade; v Equity securities that are publicly traded;
vi Convertible bonds that are publicly traded; or vii Money market fund shares and other mutual fund shares if a price for the shares is publicly quoted daily; and 2 In which the FDIC-supervised institution has a perfected, first-priority security interest or, outside of the United States, the legal
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on whether referencing the other banking agencies risk mitigation provisions introduces undue complexity. The Board understands that some credit unions engaged in securities lending and borrowing transactions would benefit from a lower risk weight, as provided by the other banking agencies rules; however, the Board believes most credit unions do not engage in a substantial amount of securities lending and borrowing activities and therefore would benefit from a simple, although conservative, 100 percent risk weight.
The proposed rule would also include a specific credit conversion factor and risk weight for the off-balance sheet exposure amount of repurchase transactions.101 Under the proposed rule, the off-balance sheet exposure amount for a repurchase transaction would equal all of the positions the credit union has sold or bought subject to repurchase or resale, which equals the sum of the current fair values of all such positions. The off-balance sheet exposure amounts of repurchase transactions are not provided a credit conversion factor under the 2015 Final Rule. The proposed rule would provide a 100 percent risk weight for the offbalance sheet exposure amounts of repurchase transactions. A credit union may recognize the credit risk mitigation benefits of financial collateral, as defined by 12 CFR 324.2, by risk weighting the collateralized portion of the exposure under the applicable provisions of 12 CFR 324.35 or 324.37.
The Board notes that repurchase transactions are not included in the definition of off-balance sheet exposure.
This exclusion of repurchase transactions from the definition of offbalance sheet exposure is because the other banking agencies did not include repurchase transactions in their related measure of CBLR and the definition of off-balance sheet exposure is used for purposes of the CCULR eligibility criteria.102
Even though, for purposes of the CCULR framework, repurchase transactions are excluded from the offequivalent thereof with the exception of cash on deposit; and notwithstanding the prior security interest of any custodial agent or any priority security interest granted to a CCP in connection with collateral posted to that CCP.
101 Repurchase transactions would mean either a transaction in which a credit union agrees to sell a security to a counterparty and to repurchase the same or an identical security from that counterparty at a specified future date and at a specified price or a transaction in which an investor agrees to purchase a security from a counterparty and to resell the same or an identical security to that counterparty at a specified future date and at a specified price.
102 12 CFR 324.12a2iii.

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balance sheet criterion, the Board believes that the off-balance sheet portion of repurchase transactions should be risk-weighted under the riskbased capital ratio. First, repurchase transactions are included in the current definition of off-balance sheet items.
Second, the other banking agencies riskweight the off-balance sheet portion of repurchase transactions in their riskbased capital framework.103
The Board, however, does not believe that repurchase transactions are a material exposure for credit unions. As of December 31, 2020, there are only 31
complex credit unions with repurchase transactions on their balance sheets.
Therefore, the proposed rule would include the off-balance sheet portion of repurchase transactions for purposes of risk-based capital, even though such transactions are not included as part of the off-balance sheet eligibility criteria under the CCULR framework.104
Finally, the proposed rule would include a catchall category. Under the proposed rule, all other off-balance sheet exposures not explicitly provided a credit conversion factor or risk weight that meet the definition of a commitment would be given a credit conversion factor of 100 percent and a risk weight of 100 percent. The Board believes a catchall category is necessary given that the definition of commitment is broad. Commitments include any legally binding arrangement that obligates the credit union to extend credit, purchase or sell assets, enter into a borrowing agreement, or enter into a financial transaction.105 To ensure all off-balance sheet exposures that met the definition of commitment are provided a credit conversion factor and risk weight, the proposed rule would include a new catchall category for such exposures.
2. Asset Securitizations Issued by Complex Credit Unions The 2019 Supplemental Rule included asset securitizations as one of the reasons the Board sought a holistic reevaluation of the 2015 Final Rule. The Board has further considered asset securitizations issued by credit unions and has decided to propose to amend the 2015 Final Rule to explicitly address credit union issued securitizations.
103 12

CFR 324.33b4ii.
proposed rule would also revise the definition of off-balance sheet items. The proposed definition of off-balance sheet items would include off-balance sheet exposures and the off-balance sheet exposure amount of repurchase transactions.
This change is necessary to ensure repurchase transactions are not included as part of the offbalance sheet criteria for eligibility in the CCULR
framework.
105 12 CFR 702.2 effective Jan. 1, 2022.
104 The
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