Title 12
SECTION 703.106
703.106 Operational support requirements.
§ 703.106 Operational support requirements.(a) Required experience and competencies. A Federal credit union operating with derivatives authority must internally possess the following experience and competencies:
(1) Board. Before entering into any derivatives transactions, and annually thereafter, a Federal credit union's board members must receive training that provides a general understanding of derivatives and the knowledge required to provide strategic oversight of the Federal credit union's derivatives program. This requirement includes understanding how derivatives fit into the Federal credit union's business model and risk management process. The Federal credit union must maintain evidence of this training, in accordance with its document retention policy, until its next NCUA examination.
(2) Senior executive officers. A Federal credit union's senior executive officers must be able to understand, approve, and provide oversight for the derivatives activities. These individuals must have a comprehensive understanding of how derivatives fit into the Federal credit union's business model and risk management process.
(3) Qualified derivatives personnel. To engage in derivatives transactions, a Federal credit union must employ staff with experience in the following areas:
(i) Asset/liability risk management. Staff must be qualified to understand and oversee asset/liability risk management, including the appropriate role of derivatives. This requirement includes identifying and assessing risk in transactions, developing asset/liability risk management strategies, testing the effectiveness of asset/liability risk management, determining the effectiveness of managing interest rate risk under a range of stressed rates and statement of financial condition scenarios, and evaluating the relative effectiveness of alternative strategies. Staff must also be qualified to understand and undertake or oversee the appropriate modeling and analytics related to scope of risk to earnings and economic value over the expected maturity of derivatives positions;
(ii) Accounting and financial reporting. Staff must be qualified to understand and oversee appropriate accounting and financial reporting for derivatives transactions in accordance with GAAP;
(iii) Derivatives execution and oversight. Staff must be qualified to undertake or oversee trade executions; and
(iv) Counterparty, collateral, and margining management. Staff must be qualified to evaluate counterparty, collateral, and margining risk as described in § 703.104 of this subpart.
(b) Required management and internal controls structure. To effectively manage its derivatives activities, a Federal credit union must assess the effectiveness of its management and internal controls structure. At a minimum, the internal controls structure must include:
(1) Transaction support. Before executing any derivatives transaction, a Federal credit union must identify and document the circumstances that lead to the decision to hedge, specify the derivatives strategy the Federal credit union will employ, and demonstrate the economic effectiveness of the hedge;
(2) Internal controls review. For the first two years after commencing its derivatives program, a Federal credit union must have an internal controls review that is focused on the integration and introduction of derivatives functions. This review must be performed by an independent external unit or, if applicable, the Federal credit union's internal auditor. The review must ensure the timely identification of weaknesses in internal controls, modeling methodologies, risk, and all operational and oversight processes;
(3) Financial statement audit. Any Federal credit union engaging in derivatives transactions pursuant to this subpart must obtain an annual financial statement audit, as defined in § 715.2(d) of this chapter, and be compliant with GAAP for all derivatives-related accounting and reporting;
(4) Process and responsibility framework. A Federal credit union must maintain a written and schematic description (e.g., flow chart or organizational chart) of the derivatives management process in its derivatives policies and procedures. The description must include the roles of staff, qualified personnel, external service providers, senior executive officers, the board of directors, and any others involved in the derivatives program;
(5) Separation of duties. A Federal credit union's process, whether conducted internally or by an external service provider, must have appropriate separation of duties for the following functions defined in paragraph (a)(3) of this section:
(i) Asset/liability risk management;
(ii) Accounting and financial reporting;
(iii) Derivatives execution and oversight; and
(iv) Collateral, counterparty, and margining management.
(c) Legal review. A Federal credit union with derivatives authority must hire or engage legal counsel to reasonably ensure that all derivatives contracts adequately protect the legal and business interests of the Federal credit union. The Federal credit union's counsel must have legal expertise with derivatives contracts and related matters.
(d) Policies and procedures. A Federal credit union with derivatives authority must operate according to comprehensive written policies and procedures for control, measurement, and management of derivatives transactions. At a minimum, the policies and procedures must address the requirements of this subpart, except for those in §§ 703.108 through 703.114, and any additional limitations imposed by the Federal credit union's board of directors. A Federal credit union's board of directors must review the policies and procedures described in this section annually and update them when necessary.