Title 12

SECTION 703.104

703.104 Requirements for derivative counterparty agreements, collateral and margining.

§ 703.104 Requirements for derivative counterparty agreements, collateral and margining.

(a) A Federal credit union may have exchange-traded, centrally cleared, or non-cleared derivatives, in accordance with the following:

(1) Exchange-traded and cleared derivatives. A Federal credit union with derivatives that are exchange-traded or centrally cleared must:

(i) Comply with the Commodity Futures Trading Commission's rules;

(ii) Use only swap dealers, introducing brokers, and/or futures commission merchants that are current registrants of the Commodity Futures Trading Commission; and

(iii) Comply with the margining requirements required by the futures commission merchant.

(2) Non-cleared derivative transactions. A Federal credit union with derivatives that are non-cleared must:

(i) Have a master service agreement and credit support annex with a registered swap dealer that are in accordance with ISDA protocol for standard bilateral agreements;

(ii) Utilize margining requirements contracted through a credit support annex and have a minimum transfer amount of $250,000 for daily margining requirements; and

(iii) Accept as collateral, for margin requirements, only cash (U.S. dollars), U.S. Treasuries, government-sponsored enterprise debt, and government-sponsored enterprise residential mortgage-backed security pass-through securities.

(b) Counterparty, collateral, and margining management. A Federal credit union must:

(1) Have systems in place to effectively manage collateral and margining requirements;

(2) Have a collateral management process that monitors the Federal credit union's collateral and margining requirements daily and ensures that its derivatives positions are collateralized at all times and in accordance with the collateral requirements of this subpart and the Federal credit union's agreement with its counterparty. This includes the posting, tracking, valuation, and reporting of collateral using fair value; and

(3) Analyze and measure potential liquidity needs related to its derivatives program and stemming from additional collateral requirements due to changes in interest rates. The Federal credit union must calculate and track contingent liquidity needs in the event a derivatives transaction needs to be novated or terminated, and must establish effective controls for liquidity exposures arising from both market or product liquidity and instrument cash flows.

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