| (a) Definitions. Unless the context clearly indicates
otherwise, these words and terms, when used in this section, shall
have the following meanings. Any technical words, terms, or phrases
that are not specifically defined in this section shall be construed
in a manner consistent with the Texas Code of Construction Act (Tex. Govt. Code §311.001).
(1) Asset-backed security--A bond, note, or other obligation
issued by a financial institution, trust, insurance company, or other
corporation secured by either a pool of loans, extensions of credit
which are unsecured or secured by personal property, or a pool of
personal property leases.
(2) Bailment for hire contract--A contract whereby
a third party, bank, or other financial institution, for a fee, agrees
to exercise ordinary care in protecting the securities held in safekeeping
for its customers; also known as a custodial agreement.
(3) Bankers' acceptance--A time draft that is drawn
on and accepted by a bank, and that represents an irrevocable obligation
of the bank.
(4) Borrowing repurchase transaction--A transaction
whereby a credit union either:
(A) agrees to sell a security to a counterparty and
to repurchase the same or any identical security from that counterparty
at a future date and at a specified price; or
(B) borrows funds from a counterparty and collateralizes
the loan with securities owned by the credit union.
(5) Cash forward agreement--An agreement to purchase
or sell a security with delivery and acceptance being mandatory and
at a future date in excess of 30 days from the trade date.
(6) Counterparty--An entity with which a credit union
conducts investment-related activities in such a manner as to create
a credit risk exposure for the credit union to the entity.
(7) Eurodollar deposit--A deposit denominated in U.
S. dollars in a foreign branch of a United States financial institution.
(8) Federal funds transaction--A short-term or open-ended
transfer of funds to a financial institution.
(9) Financial institution--A bank or savings association,
the deposits of which are insured by the Federal Deposit Insurance
Corporation, a federal or state-chartered credit union, or the National
Credit Union Central Liquidity Facility.
(10) Investment--Any security, obligation, account,
deposit, or other item authorized for investment by the Act or this
section. For the purposes of this section, the term does not include
an investment authorized by §124.351(a)(1) of the Texas Finance
Code.
(11) Investment repurchase transaction--A transaction
in which a credit union agrees to purchase a security from a counterparty
and to resell the same or any identical security to that counterparty
at a later date and at a specified price.
(12) Mortgage related security--A security which meets
the definition of mortgage related security in United States Code
Annotated, Title 15, §78c(a)(41).
(13) Nationally recognized statistical rating organization
(NRSRO)--A rating organization such as Standard and Poor's, Moody's,
or Fitch which is recognized by the Securities and Exchange Commission
(14) Ordinary care--The degree of care, which an ordinarily
prudent and competent person engaged in the same line of business
or endeavor should exercise under similar circumstances.
(15) Security--An investment that has a CUSIP number
or that is represented by a share, participation, or other interest
in property or in an enterprise of the issuer or an obligation of
the issuer that:
(A) either is represented by an instrument issued in
bearer or registered form or, if not represented by an instrument,
is registered in books maintained to record transfers by or on behalf
of the issuer;
(B) is of a type commonly traded on securities exchanges
or markets or, when represented by an instrument, is commonly recognized
in any area in which it is issued or traded as a medium for investment;
and
(C) either is one of a class or series or by its terms
is divisible into a class or series of shares, participations, interests,
or obligations.
(16) Settlement date--The date originally agreed to
by a credit union and a vendor for settlement of the purchase or sale
of a security.
(17) Small business-related securities--Is a security
as defined in Section 3(a)(53) of the Securities Exchange Act of 1934
(15 U.S.C. 78c(a)(53). This definition does not include Small Business
Administration securities permissible under section 107(7) of the
Federal Credit Union Act.
(18) Trade date--The date a credit union originally
agrees, whether orally or in writing, to enter into the purchase or
sale of a security.
(19) Yankee dollar deposit--A deposit in a United States
branch of a foreign bank, the deposits of which are insured by the
Federal Deposit Insurance Corporation, that is licensed to do business
in the state in which it is located, or a deposit in a state chartered,
foreign controlled bank.
(b) Policy. A credit union may invest funds not used
in loans to members, subject to the conditions and limitations of
the written investment policy of the board of directors. The investment
policy may be part of a broader, asset-liability management policy.
The board of directors must review and approve the investment policy
at least annually to ensure that the policies adequately address the
following issues:
(1) The types of investments that are authorized to
be purchased.
(2) The aggregate limit on the amount that may be invested
in any single investment or investment type, set as a percentage of
net worth. This requirement does not apply to certificates of deposit
or other accounts issued by a financial institution that are fully
insured (including accumulated interest) by either the Federal Deposit
Insurance Corporation or the National Credit Union Administration.
(3) The delegation of investment authority to the credit
union's officials or employees, including the person or persons authorized
to purchase or sell investments, and a limit of the investment authority
for each individual or committee.
(4) The authorized broker-dealers or other third-parties
that may be used to purchase or sell investments, and the internal
process for assessing the credentials and previous record of the individual
or firm.
(5) The risk management framework given the level of
risk in the investment portfolio. This will include specific methods
for evaluating, monitoring, and managing the credit risk, interest-rate
risk, and liquidity risk from the investment activities.
(6) The authorized third-party safekeeping agents.
(7) If the credit union operates a trading account,
the policy shall specify the persons authorized to engage in trading
account activities, trading account size limits, stop loss and sale
provisions, time limits on inventoried trading account investments,
and internal controls that specify the segregation of risk-taking
and monitoring activities related to trading account activities.
(8) The procedure for reporting to the board of directors
investments and investment activities that become noncompliant with
the credit union's investment policy subsequent to the initial purchase.
(c) Authorized activities.
(1) General authority. A credit union may contract
for the purchase or sale of a security provided that delivery of the
security is by regular-way settlement. Regular-way settlement means
delivery of a security from a seller to a buyer within the time frame
that the securities industry has established for that type of security.
All purchases and sales of investments must be delivery versus payment
(i.e., payment for an investment must occur simultaneously with its
delivery).
(2) Cash forward agreements. A credit union may enter
into a cash forward agreement to purchase or sell a security, provided
that:
(A) the period from the trade date to the settlement
date does not exceed 90 days;
(B) if the credit union is the purchaser, it has written
cash flow projections evidencing its ability to purchase the security;
(C) if the credit union is the seller, it owns the
security on the trade date; and
(D) the cash forward agreement is settled on a cash
basis at the settlement date.
(3) Investment repurchase transactions. A credit union
may enter an investment repurchase transaction provided:
(A) the purchase price of the security obtained in
the transaction is at or below the market price;
(B) the repurchase securities are authorized investments
under Texas Finance Code §124.351 or this section;
(C) the credit union has entered into signed contracts
with all approved counterparties;
Cont'd... |
