Compliance with NCUA Regulations
Regulation 703 was amended in 1997 to allow credit unions to lend their securities, and it provides guidelines for how to do so. The following excerpts from 703.13(e) provide the conditions under which a credit union may enter into a securities lending transaction, and the way in which Alaska USA Trust Company helps clients meet the guidelines:
"You may enter into a securities lending transaction as long as the credit union receives written confirmation of the loan…."
With Alaska USA Trust Company as your custodian, you receive daily online, real-time access to all activity in your portfolio. This includes access to all securities lending transactions. In addition, you will receive hard copy confirmation of all transactions on a monthly basis.
"Any collateral you receive is a legal investment for federal credit unions, you take physical possession or control of the collateral… and you receive a daily assessment of the market value of the collateral, including accrued interest, and maintain adequate margin that reflects a risk assessment of the collateral and the term of the loan."
Alaska USA Trust Company has structured a securities lending program that provides services for "credit unions only." As such, only collateral that is permissible under NCUA regulations will be acceptable. As your custodian, we will ensure that you take legal possession of the collateral. Our securities lending program provides a daily assessment of all securities loaned and all collateral/reinvestment activity, including accrued interest. The margin rates will be negotiated with our counterparties and will be a minimum of industry standard. The NCUA has examined the Alaska USA program, and was satisfied with the safety and soundness standards of the collateral margins.
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"Any cash the federal credit union receives is subject to the borrowing limit specified in Section 107(9) of the Act, and any investments the federal credit union purchases with that cash are permissible for federal credit unions and mature no later than the maturity of the transaction…"
107(9) of the Act allows credit unions to lend securities equal to 50% of their capital and unimpaired surplus, which will usually exceed the market value of the investment portfolio, (allowing most federal credit unions to lend 100% of their securities). As previously stated, all collateral accepted or reinvestments made in the Alaska USA Trust Company program will be permissible investments, and the program is structured to manage interest rate risk in accordance with this provision.
"The federal credit union has executed a written loan and security agreement with the borrower."
As your custodian and securities lending agent, Alaska USA Trust Company has executed loan and security agreements with all approved counterparties (borrowers), and this documentation will be available to you. The list of borrowers is subject to your approval, allowing you to be in control of which counterparties your securities are loaned to. The Trust Company performs a regular due diligence review of all counterparties in the securities lending program. NCUA expects all credit unions participating in securities lending to follow prudent due diligence standards, (e.g., 703.8(b)(3)), and to regularly update their information on these counterparties. Alaska USA Trust Company will provide data regarding counterparties on the approved list to all participants in the securities lending program on a regular basis to assist you in keeping your own due diligence files current.
