Title 12

SECTION 703.101

703.101 Definitions.

§ 703.101 Definitions.

For purposes of this subpart:

Amortizing notional amount means a characteristic of a derivative, in which the notional amount declines on a predetermined fixed basis over the term of the contract, according to an amortization schedule to which the parties agree when executing the contract;

Basis swap means an agreement between two parties in which the parties make periodic payments to each other based on floating rate indices multiplied by a notional amount;

Cleared swap has the meaning as defined by the Commodity Futures Trading Commission in 17 CFR 22.1;

Counterparty means a swap dealer, derivatives clearing organization, or exchange that participates as the other party in a derivatives transaction with a Federal credit union;

Credit support annex means the terms or rules under which collateral is posted or transferred between a Federal credit union and a counterparty to mitigate credit risk that may result from changes in the fair value of derivatives positions;

Derivative means a financial contract which derives its value from the value and performance of some other underlying financial instrument or variable, such as an index or interest rate;

Derivatives clearing organization has the meaning as defined by the Commodity Futures Trading Commission in 17 CFR 1.3(d);

Economic effectiveness means the extent to which a derivatives transaction results in offsetting changes in the interest rate risk that the transaction was, and is, intended to provide;

Exchange means a central financial clearing market where end users can trade futures, as defined in this section of this subpart;

External service provider means any entity that provides services to assist a Federal credit union in carrying out its derivatives program and the requirements of this subpart;

Fair value has the meaning specified in § 703.2 of subpart A of this part;

Field director means an NCUA Regional Director or the Director of the Office of National Examinations and Supervision;

Forward start date means an agreement that delays the settlement date of a derivatives transaction for a specified period of time;

Futures means a U.S. Treasury note financial contract that obligates the buyer to take delivery of Treasury notes (or the seller to deliver Treasury notes) at a predetermined future date and price. Futures contracts are standardized to facilitate trading on an exchange;

Futures commission merchant (FCM) has the meaning as defined by the Commodity Futures Trading Commission in 17 CFR 1.3(p);

Hedge means to enter into a derivatives transaction to mitigate interest rate risk;

Interest rate cap means a contract, based on a reference interest rate, for payment to the purchaser when the reference interest rate rises above the level specified in the contract;

Interest rate floor means a contract, based on a reference interest rate, for payment to the purchaser when the reference interest rate falls below the level specified in the contract;

Interest rate risk means the vulnerability of a Federal credit union's earnings or economic value to movements in market interest rates;

Interest rate swap means an agreement to exchange future payments of interest on a notional amount at specific times and for a specified time period;

Introducing broker means a futures brokerage firm that deals directly with the client, while the trade execution is done by a futures commission merchant;

ISDA protocol means a multilateral contractual amendment mechanism that has been used to address changes to International Swap and Derivatives Association (ISDA) standard contracts since 1998;

Leveraged derivative means a derivative where the value of the transaction does not change in a one to one proportion with the contractual rate or index;

(x) Margin means the minimum amount of funds that must be deposited between parties to a derivatives transaction, as detailed in a credit support annex or clearing arrangement;

Master service agreement means a document agreed upon between two parties that sets out standard terms that apply to all derivatives transactions entered into between those parties. Each time the same two parties enter into a transaction, the terms of the master service agreement apply automatically and do not need to be re-negotiated. The most common form of a master service agreement is a master ISDA agreement;

Minimum transfer amount means the minimum amount of collateral that a party to a derivatives transaction will require, per transfer, to cover exposure in excess of the collateral threshold;

Net economic value means the economic value of assets minus the economic value of liabilities;

Net worth has the meaning specified in § 702.2 of this chapter;

Non-cleared means transactions that do not go through a derivatives clearing organization;

Notional amount means the contracted amount of a derivatives contract for swaps and options on which interest payments or other payments are based. For futures contracts, the notional amount is represented by the contract size;

Novation means the substitution of an old obligation with a new one that either replaces an existing obligation with a new obligation or replaces an original party with a new party;

Reference interest rate means the index or rate to be used as the variable rate for resetting derivatives transactions;

Reporting date means the end of the business day on the date used to report positions and fair values for limit compliance (e.g., daily, month-end, quarter-end and fiscal year-end);

Senior executive officer has the meaning specified in § 701.14 of this chapter and any other similar employee that is directly within the chain of command for the oversight of a Federal credit union's derivatives program, as identified in a Federal credit union's process and responsibility framework, as discussed in § 703.106(b)(1) of this subpart;

Structured liability offering means a share product created by a Federal credit union with contractual option features, such as periodic caps and calls, similar to those found in structured securities or structured notes;

Swap dealer has the meaning as defined by the Commodity Futures Trading Commission in 17 CFR 1.3(ggg);

Swap execution facility means a Commodities and Futures Trading Commission-registered facility that provides a system or platform for participants to execute cleared derivatives transactions;

Threshold amount means an unsecured credit exposure that a party to a derivatives transaction is prepared to accept before requesting additional collateral from the other party;

Trade date means the date that a derivatives order (new transactions, terminations, or assignments) is executed in the market; and

Unamortized premium means the balance of the upfront premium payment that has not been amortized.

---