1. (a) Limitations. A credit union may not invest an amount that is greater than 50% of its reserves and undivided earnings with any obligor or related obligors except for investments issued by or fully guaranteed as to principal and interest by the United States or an agency, enterprise, corporation, or instrumentality of the United States, or in any trust or trusts established for investing directly or collectively in such securities, obligations, or instruments. For the purposes of this section, obligor is defined as an issuer, trust, or originator of an investment, including the seller of a loan participation.

2. (b) Notwithstanding subsection (a) of this section:

   1. (1) A credit union's board of directors, as a single exception to this section, will be allowed to establish the aggregate credit-risk exposure to a single financial institution approved by the board as the credit union's designated depository based on the credit union's liquidity trends and funding needs as documented by its asset/liability management policy, provided that the credit union has appropriately documented its due diligence to demonstrate that the investments in this designated depository do not pose a safety and soundness concern.
   2. (2) A credit union may invest in loan participations purchased from other credit unions provided the loan complies with the purchasing credit union's loan policy and credit risk standards.

3. (c) Prohibited Activities.

   1. (1) Definitions.

      1. (A) Adjusted trading--selling an investment to a counterparty at a price above its current fair value and simultaneously purchasing or committing to purchase from the counterparty another investment at a price above its current fair value.
      2. (B) Collateralized mortgage obligation (CMO)--a multi-class bond issue collateralized by mortgages or mortgage-backed securities.
      3. (C) Fair value--the price at which a security can be bought or sold in a current, arms length transaction between willing parties, other than in a forced or liquidation sale.
      4. (D) Real estate mortgage investment conduit (REMIC)--a nontaxable entity formed for the sole purpose of holding a fixed pool of mortgages secured by an interest in real property and issuing multiple classes of interests in the underlying mortgages.
      5. (E) Residual interest--the remainder cash flows from a CMO/REMIC, or other mortgage-backed security transaction, after payments due bondholders and trust administrative expenses have been satisfied.
      6. (F) Short sale--the sale of a security not owned by the seller.
      7. (G) Stripped mortgage-backed security (SMBS)--a security that represents either the principal-only or the interest-only portion of the cash flows of an underlying pool of mortgages or mortgage-backed securities. Some mortgage-backed securities represent essentially principal-only cash flows with nominal interest cash flows or essentially interest-only cash flows with nominal principal cash flows. These securities are considered SMBSs for the purposes of this rule.
      8. (H) Zero coupon investment--an investment that makes no periodic interest payments but instead is sold at a discount from its face value. The holder of a zero coupon investment realizes the rate of return through the gradual appreciation of the investment, which is redeemed at face value on a specified maturity date.

   2. (2) A credit union may not:

      1. (A) Purchase or sell financial derivatives, such as futures, options, interest rate swaps, or forward rate agreements;
      2. (B) Engage in adjusted trading or short sales;
      3. (C) Purchase stripped mortgage backed securities, residual interests in CMOs/REMICs, mortgage servicing rights, commercial mortgage related securities, or small business related securities;
      4. (D) Purchase a zero coupon investment with a maturity date that is more than 10 years from the settlement date;
      5. (E) Purchase investments whereby the underlying collateral consists of foreign receivables or foreign deposits; or
      6. (F) Purchase securities used as collateral by a safekeeping concern.

4. (d) Investment pilot program. The commissioner may authorize a credit union to engage in other types of investment activities under an investment pilot program. In approving a credit union's request to participate in a pilot program, the commissioner, in the exercise of discretion, may condition or limit the investment activity to be conducted. A credit union wishing to participate in an investment pilot program shall submit a request that addresses the following items:

   1. (1) Board policies approving the activities and establishing limits on them;
   2. (2) A complete description of the activities, with specific examples of how the credit union will conduct them and how they will benefit the credit union;
   3. (3) A demonstration of how the activities will affect the credit union's financial performance, risk profile, and asset-liability management strategies;
   4. (4) Examples of reports the credit union will generate to monitor the activities;
   5. (5) A projection of the associated costs of the activities, including personnel, computer, audit, etc.;
   6. (6) A description of the internal systems to measure, monitor, and report the activities, and the qualifications of the staff and/or official(s) responsible for implementing and overseeing the activities; and
   7. (7) The internal control procedures that will be implemented, including audit requirements.

Source Note:The provisions of this §91.803 adopted to be effective March 8, 1984, 9 TexReg 1155; amended to be effective July 8, 1994, 19 TexReg 4939; amended to be effective July 9, 2001, 26 TexReg 5001.