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Federal Register / Vol. 86, No. 100 / Wednesday, May 26, 2021 / Rules and Regulations
Derivative transaction is a reasonable compromise. Derivatives can be complex and risky transactions, and a prompt notification will allow the applicable Regional Director to efficiently manage examination resources.
The Board also believes that the current burden to a FISCU is unchanged as the FISCU is only notifying the applicable Regional Director after entering into its first Derivative transaction compared to the current requirement of notifying the Regional Director at least 30 days before it begins engaging in Derivatives.
The Board therefore is retaining the provisions of the proposed rule for the timing of notification to five days after entering into its first Derivative transaction.
B. Collateral Requirements Three commenters addressed the proposed collateral requirements for cleared Derivatives. All three commenters disagreed with the NCUA
specifying acceptable collateral for cleared Derivatives. One commenter stated that the current Derivatives rule does not have collateral requirements;
rather, the current rule relies on the FCU to have systems in place to effectively manage collateral. Further, this commenter stated that for cleared Derivatives, having collateral requirements would create a parallel structure with the collateral requirements of the clearinghouse. This commenter argued that this parallel structure may lead to confusion and/or unnecessary reviews to ensure the FCUs transaction is compliant with both the clearinghouses requirements and the NCUAs regulation. The other two commenters that addressed this topic echoed the previous statements regarding the inefficiency and unintended consequences that may occur if the NCUA mandates specific collateral, particularly for cleared Derivatives.
In the proposal, the Board noted the rule could be simplified by creating one collateral requirement for both cleared and Non-cleared Derivatives. The Board asked if this approach could cause unintended consequences. Commenters indicated that one collateral standard for cleared Derivatives and Non-cleared Derivatives could create problems for FCUs using cleared Derivatives. Based on comments and further analysis, the Board will not implement collateral requirements for cleared Derivatives.
Rather, the final rule only requires specific collateral types for Non-cleared Derivatives, otherwise collateral requirements for cleared derivatives are
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subject to the clearinghouse requirements. The Board notes that the collateral requirements for Non-cleared Derivatives are the same requirements included in the proposed rule. As such, the Board is only changing which transactions are subject to those requirements.
The Board believes that the distinction between cleared versus Noncleared for collateral requirements is consistent with safety and soundness and will prevent any inefficiencies and unintended consequences that could be caused by mandating specific collateral requirements for cleared Derivatives.
C. Counterparties Two commenters addressed the requirement that all Counterparties be domestic entities domiciled in the United States. One commenter disagreed with the NCUA limiting permissible Counterparties to those that are domestic. This commenter stated that there is no comparable limitation by the Commodity Futures Trading Commission CFTC. The commenter went on to point out that there are dozens of authorized swap dealers that are not U.S. domiciled. This commenter agreed that all FCU
Derivatives transactions should be subject to U.S. law, but argued that this can be accomplished through the legal terms of the Derivatives agreement, requiring the transaction be tied to Domestic Interest Rates, denominated in dollars, and subject to U.S. regulation and law. The second commenter stated that the term domiciled could lead to confusion, as there are multiple interpretations of this term. This commenter stated that, alternatively, the NCUA should consider expanding the definition to include U.S. Branch Offices of foreign-based Swap Dealers or any U.S. registered Swap Dealer, or explicitly addressing the prohibition to transactions with these entities in the final rules commentary.
After consideration of the comments, the Board is declining to finalize the proposed change that would require all Counterparties to be domiciled in the United States. As such, the current Counterparty requirements will be effective for the final rule. In this final rule, the Board has included the current Counterparty requirements and associated definitions. The current rule allows for Swap Dealers, Introducing Brokers, and/or Futures Commission Merchants that are current registrants of the CFTC to be Counterparties for exchange-traded and cleared Derivatives. For Non-cleared Derivatives, the current rule allows for
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registered CFTC Swap Dealers to be the Counterparty.
As part of retaining the current rules Counterparty requirement for cleared/
exchange-traded and Non-cleared Derivatives, the Board will retain the following definitions from the current rule:
Counterparty;
Derivatives Clearing Organization;
Futures Commission Merchant;
Introducing Broker;
Non-cleared; and, Swap Dealer.
In retaining the Counterparty requirements of the current rule, the Board is deleting the definition of Domestic Counterparty as proposed.
D. Liquidity Review Three commenters requested clarification on the liquidity review required in the proposed rule. These commenters suggested that the NCUA
should allow the aforementioned review to be part of the FCUs overall liquidity review, rather than requiring a separate liquidity review for an individual product type. While the Board is not making any rule text changes related to an FCUs liquidity review, the Board does believe it is necessary to clarify its expectations related to the same. The requirement to conduct a liquidity review as part of the operational support requirements in 703.106b5 is not intended to require a separate liquidity analysis for Derivatives. Rather, it is permissible for Derivatives be part of the more comprehensive liquidity risk management processes required in part 741 of the NCUAs regulations.4
E. Maturity Three commenters requested that the NCUA remove the 15-year maturity limit on Derivatives. Commenters stated that removing this limit would provide additional flexibility and not subject FCUs to a one-sized fits all approach.
For the reasons stated in the proposal,5 the Board continues to believe that the 15-year maturity limit allows FCUs to effectively hedge various points of the yield curve for longer-term assets like mortgages, while preventing an excessive exposure to very long Derivative maturities. As such, the Board is not making any amendments to this section of the rule.
F. Written Options While the proposed rule moved toward a principles-based approach, the Board explicitly proposed to prohibit an FCU from using written options. This 4 12
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CFR part 741.
FR 68487, 68491 Oct. 29, 2020.

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