PURPOSE/OBJECTIVES - CUES



INVESTMENT POLICY PURPOSE/OBJECTIVESThe principal purpose of the credit union’s investment program is to provide additional income without jeopardizing liquidity or safety. All investments will be made within the parameters of this policy with all due concern given to limiting the amount of risk involved in accomplishing these goals. The credit union’s goal is to develop a portfolio of investments with various maturities and durations. This will permit maximum earning power; yet provide adequate liquidity to cover unexpected withdrawals or increases in loan demand. PERSONS WHO HAVE INVESTMENT AUTHORITY AND THE EXTENT OF THAT AUTHORITYThe Board of Directors is ultimately responsible for the credit union’s investment program. The President/CEO shall have authority to make day-to-day investment decisions. The authority to make day-to-day investment decisions shall include the authority to purchase and sell investments within the limits of this policy statement. The authority to make day-to-day decisions regarding interest rates shall include the authority to set loan and dividend rates approved by the Board of Directors. However, the Board of Directors may change the loan and dividend rates set by the President/CEO and may revoke the authority to set loan and dividend rates at any time. Credit Union Management will:Ensure that all investments are made in agreement with applicable laws and regulations, and in accordance with these policiesMake recommendations to the Board of Directors about investment policy and strategyMonitor investments and submit reports to the Board of Directors in conformance with the REPORTING section of this policy.The Board of Directors will review and approve these investment policies at least annually.AUTHORIZED INVESTMENTSThe composition of the investment portfolio is subject to both regulatory limitations and the constraints imposed by the Board of Directors. In allocating funds, Management should aim to realize as high a yield as possible without sacrificing safety and liquidity. Safety of an investment is affected by the creditworthiness of its issuer and its price sensitivity to interest rate fluctuations. The credit union will manage its exposure to interest rate risk by defining an acceptable range of maturities for each category of investment; analyzing the price sensitivity of certain security investments prior to purchase, and periodically thereafter; monitoring changes in the economy that may impact the movement and direction of interest rates; and by evaluating the impact of adverse changes in interest rates on the credit union’s investments and net worth. Irrespective of the range of maturities established for each category of investment, or the level of price sensitivity associated with any particular security investment, the ratio of net capital to total assets should not decline to a level below 5 percent after giving effect to an immediate and sustained parallel shift in the Treasury Yield Curve of plus 300 basis points in the investment portfolio.At least quarterly, Management shall determine the credit union’s projected net capital ratio after giving effect to a 300 basis point shift in interest rates. In the event that the credit union fails to maintain the minimum level of net capital required by this policy (e.g. the credit union’s projected net capital ratio is less than 5 percent after giving effect to an immediate and sustained parallel shift in interest rates of plus 300 basis points in the investment portfolio), Management will formulate plans to bring the credit union back within the parameters of the policy. By the next available Board meeting, the management will notify the Board of Directors of its plan to bring the credit union back within the policy limit. Board acceptance or revisions to the plan will be noted in the Board minutes. To continue to operate outside of the policy limit for more than 120 days will require Board approval.While treasury and agency securities require no credit risk research due to the high creditworthiness of the issuer, an investment in a corporate credit union, for example, must be supported by a credit analysis if the investment is not fully insured by NCUA.Liquidity risk refers to the inability to meet short-term obligations. A credit union must have sufficient liquidity to meet loan demand and expected savings withdrawals. In view of liquidity considerations the ratio of cash on deposit plus cash equivalents plus short-term investments (maturities less than 1-year) to total assets must not be less than 10% at any given time. Another consideration in managing a portfolio is concentration risk. To reduce the credit union’s vulnerability to unforeseen market, credit and liquidity risks, the Board of Directors has established specific concentration limits with respect to the types of investments to be purchased, issuers, and fund allocation to a single issue. These concentration limits shall apply at the time the investment is purchased. Additionally, purchases of U.S. Government, Federal agency, and Federally issued mortgage-backed securities, shall be subject to a size limitation of $500,000.00. For example, when investing in bonds or notes issued by a Federal agency, corporation, or enterprise, no single purchase transaction may exceed $500,000.00. In view of the above considerations, the following outline specifies authorized investments and characteristics to which they must conform:1.U.S. Treasury Bills and Notes whose maturity should not exceed 5 years. Funds may be invested in this category in the aggregate up to 30% of the whole investment portfolio; however, no single issue should exceed 10% of the investment portfolio. 2.Bonds and notes issued by one or more of the following U.S. Agencies, Corporations, State Issued General Obligation Bonds, or Enterprises:Federal National Mortgage Association (FNMA or Fannie Mae)Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac)Government National Mortgage Association (GNMA or Ginnie Mae)Student Loan Marketing Association (SLMA or Sallie Mae)Small Business Administration (SBA)Federal Home Loan Bank (FHLB)Federal Farm Credit Bank (FFCB).Funds may be invested in this category in the aggregate not to exceed 50% of the entire investment portfolio. No single issue should account for more than 10% percent of the investment portfolio. State Municipal bonds will be limited to general obligation bonds. The credit union will not invest in State revenue bonds. The maximum amount allowed to be invested in municipal bonds will be limited to 15% of the investment portfolio (same limit that applies to bank notes). The credit union will hold municipal bonds only if rated in one of the four highest rating categories by a nationally recognized statistical rating organization as follows: Rating S&P Moody's First AAAAaa Second AA Aa Third AA Fourth BBBBaa3. Mortgage-Backed Securities shall include mortgage pass-through securities and Collateralized Mortgage Obligations (CMOs) and Real Estate Mortgage Investment Conduits (REMICs) issued by: Federal National Mortgage Association (FNMA or Fannie Mae) Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac) Government National Mortgage Association (GNMA or Ginnie Mae).When investing in CMOs and REMICs, the President/CEO must be familiar with the basic structure of each CMO/REMIC. In all cases, the President/CEO shall invest in CMO/REMIC classes that insulate the investor from significant levels of prepayment or extension risk; examples of such bond classes could include Sequential Pay, Planned Amortization Classes (PACs), and Very Accurately Defined Maturity (VADM) classes. The President/CEO must maintain in the credit union’s files a copy of the prospectus or a description of the security from an industry-recognized information provider. This information must be obtained at the time of purchase and all subsequent analyses must be documented in the credit union’s files. No purchases may be entered into with any dealer unwilling to share this printed information prior to purchase. The maximum stated maturity of the mortgage-backed security must not exceed 30 years. In analyzing mortgage-backed securities for purchase, the President/CEO is to use the security’s remaining average life. To be considered for purchase, the security’s remaining average life may not exceed 10 years at the time of purchase. The total investment in mortgage-backed securities as defined should not exceed 35% of the investment portfolio. No single mortgage-backed security should account for more than 10% of the portfolio. 4. Certificates of Deposit (CDs) CDs, including callable deposits, issued by savings banks, mutual savings banks, or commercial banks that have federal deposit insurance. In all cases, CDs with a single institution must not exceed the insurance limit (including accumulated interest). The maturity of any CD investment should not exceed 10 years, while the total investment in this category should not exceed 75% of the investment portfolio. Additionally, the credit union’s total holdings of callable CDs may not exceed 20% of the whole investment portfolio.5. Bank Notes (as defined in Section 703.150 of the NCUA Rules and Regulations) provided that the instrument meets the following requirements:Original weighted average maturity of less than 5 yearsThe issuing institution must be an eligible depository facility for the credit union under Section 107(8) of the Federal Credit Union Act The instrument must be rated in one of the two highest rating categories by at least one nationally recognized statistical rating organization (NRSRO). For example, Standard and Poor’s: AAA or AA+. Financial statements of the institution will be reviewed prior to purchase and at least annually thereafter.The total investment in bank notes may not exceed 15% of the investment portfolio, while investments in the obligations of any one issuer may not exceed $500,000.00 excluding accrued interest. The rating of the investment must be updated at least semi-annually as long as the investment is held.6. Federally Insured Credit Unions. Shares, share certificates, or share deposits in a federally insured credit union shall be limited to the insurance limit (including accumulated interest). The maximum maturity of these investments is 5 years and the total investment should not exceed 5% of the investment portfolio.7. Corporate Credit Unions. In shares, share certificates, or share deposits of corporate credit unions provided that the corporate is operating in compliance with Part 704 of the NCUA Rules and Regulations. The credit union may also invest in membership capital and member paid-in capital of a corporate credit union. The aggregate purchase of member paid-in capital and membership capital is limited to 1% of the credit union’s total assets per corporate credit union. Before buying shares, share certificates, or share deposits in a corporate credit union in excess of the NCUA share insurance limit, the President/CEO should review the corporate’s earnings performance, capital level and investment portfolio. The President/CEO should also determine the corporate’s operating level under Part 704 of the NCUA Rules and Regulations and its exposure to a 300 basis point shift in interest rates. The review will be updated at least annually as long as the investment is held. The total level of investment in this category is limited to 30% of the entire investment portfolio, while the overall level of callable investments is limited to 10% of the portfolio. Except member paid-in capital and membership capital, the maximum maturity of these investments should not exceed 5 years. 8. Federal Funds (Fed Funds) Sold shall be limited to recognized regional banks and major money-center banks that are eligible depository facilities for the credit union under Section 107(8) of the Federal Credit Union Act. Fed Funds Sold to any one bank should not exceed $500,000. Monitoring of banks eligible to enter into Fed Funds sold transactions is the responsibility of the President/CEO. It is also the President/CEO’s responsibility to maintain current financial information on any bank with which the credit union has entered into a Fed Funds Sold transaction. Should the financial position of such a bank ever be in doubt, the President/CEO has the authority to terminate the Fed Funds transaction with that bank. Fed Funds Sold transactions will normally have a maturity of one business day. Federal Funds Sold investments should not in the aggregate exceed 15% of the investment portfolio.9. The credit union is empowered to enter into Repurchase and Reverse Repurchase Transactions. A repurchase transaction may take place as long as the repurchase securities are legal investments for the credit union, adequate margin is maintained, and an assessment of the market value of the repurchase securities is maintained on a daily basis. A reverse repurchase transaction may be executed as long as any cash received is within the borrowing limit specified in Section 107(9) of the Federal Credit Union Act. Additionally, any investments made with that cash (other than loans to members) must mature no later than the maturity of the transaction. A condition that must be met in both types of transactions is that there are signed contracts with all approved counterparties. Repurchase and reverse repurchase transactions shall be limited to recognized regional banks and securities firms, and corporate credit unions. In all cases in which the credit union is lending funds, a board-approved safekeeper shall hold the repurchase collateral to partly reduce the credit risk of the transactions. The total investment in repurchase agreements should not exceed 15% of the credit union’s investment portfolio. The maximum maturity of these investments is limited to 90 days, while no single repurchase agreement should exceed $1,000,000. 10. Federal Home Loan Bank (FHLB) Stock may be purchased provided that the investment is limited to the minimum amount of stock required for FHLB membership or to secure an advance from the FHLB.11. The credit union is permitted to invest in adjustable or variable rate instruments that may be offered by any of the approved issuers; however, the underlying index must be tied to domestic interest rates and not, for example, to foreign currencies, foreign interest rates, or domestic or foreign commodity prices, equity prices, or inflation rates. Indices approved by the Board of Directors include the following: London Interbank Offer Rate (LIBOR)Treasury Constant Maturity Indices (CMTs)National Prime RateTo be an eligible investment for the credit union, the interest rate of the instrument must reset at least annually and be at least 300 basis points below the maximum allowable rate for the instrument at the time of purchase.PREPURCHASE ANALYSISPrior to purchasing any security with one or more of the features described in item 1 of the REPORTING section of this policy statement, or any other security whose features render it less familiar, relatively more complex, or potentially volatile, the President/CEO shall obtain an analysis of the price sensitivity of the instrument assuming various interest rate shifts. Specifically, the analysis should show the impact of an immediate and sustained parallel shift in interest rates of plus and minus 100, 200, and 300 basis points. To be an eligible investment for the credit union, the price of the instrument should not vary by more than 17 percent in response to any one of the interest rate shifts.MATURITY DISTRIBUTIONThe following guidelines have been established for the maturity distribution of the investment portfolio: Short Term -The following are authorized as short term investments (12 months or less)U.S. Treasury BillsNotes of federal agencies, corporations, or enterprises CDsFederally insured credit unionsCorporate Credit UnionsRepurchase AgreementsFederal Funds SoldConcentration Limit: 75% of investment portfolioIntermediate -- The following are authorized as intermediate investments (13 months to 36 months)U.S. Treasury NotesBonds and notes of federal agencies, corporations, or enterprises Mortgage pass-throughs and CMOs/REMICs CDsFederally insured credit unionsCorporate Credit UnionsConcentration Limit: 65% of investment portfolioLong Term -The following are authorized as long term investments (more than 3 years)U.S. Treasury NotesBonds and notes of federal agencies, corporations, or enterprisesMortgage pass-throughs and CMOs/REMICs CDs Federally insured credit unionsCorporate Credit UnionsConcentration Limit: 50% of investment portfolioIMPERMISSIBLE INVESTMENTSLaw, regulation and the Board of Directors prohibit the following investments:1. Financial derivatives, such as futures, options, interest rate swaps, and forward rate agreements, except as permitted under Section 701.21(i) of the NCUA Rules and Regulations Adjusted trading or short salesStripped mortgage-backed securities, residual interests in CMOs/REMICs, mortgage servicing rights, commercial mortgage-related securities, or small business-related securitiesZero coupon investments with a maturity date that is more than 10 years from the settlement date.SECURITIES CLASSIFICATIONSAt acquisition, the credit union shall classify securities into one of three categories: held-to-maturity, available-for-sale, or trading, in conformance with Statement of Financial Accounting Standards 115 (SFAS 115). No less frequently than the end of each dividend period, the appropriateness of each classification shall be reassessed.It is not the policy of the credit union to maintain a trading account. Trading involves buying and selling securities principally for the purpose of trading them in the near term (thus held for only a short period of time). Trading usually involves active and frequent buying and selling, and trading securities are generally used with the objective of generating profits through short-term price movements.Although the credit union will not engage in trading activity, market conditions or changes in the credit union’s business environment may require that certain securities be classified as available-for-sale at the time of purchase; these securities may be sold in response to changes in market interest rates, need for liquidity, changes in the availability of and yield on alternative investments, and changes in funding sources and terms.Securities that are not classified as available-for-sale will be placed in a held-to-maturity account based on the credit union’s positive intent and ability to hold these securities to maturity.The accounting treatment for available-for-sale and held-to-maturity securities shall be in conformity with SFAS 115.REPORTINGCredit Union Management is responsible for monitoring investments and for the preparation of monthly reports to the Board of Directors. Reports should set forth, for each security held, the fair value and dollar change since the previous month-end, with summary information for the whole securities portfolio. At least quarterly, a written report must be prepared setting forth the sum of the fair values of all fixed and variable rate securities that have one or more of the following features:Embedded optionsRemaining maturities greater than 3 yearsCoupon formulas that are related to more than one index or are inversely related to, or multiples of, an index.The report must provide a reasonable and supportable estimate of the potential impact, in percentage and dollar terms, of an immediate and sustained parallel shift in market interest rates of plus and minus 300 basis points on:The fair value of each security in the portfolioThe fair value of the portfolio as a whole Net capital.Monitor and create quarterly reports listing non-security investments in banks, credit unions, and other depository institutions that have one or more of the following features:Embedded optionsRemaining maturities greater than 3 yearsCoupon formulas that are related to more than one index or are inversely related to, or multiples of, an index.The Board of Directors shall review these reports, and shall make the review a matter of record in the board minutes.INVESTMENT FIRMS (BROKER-DEALERS)Brokers-dealers must be screened and approved by the Board of Directors prior to conducting business with the credit union. This policy contains the list of approved broker-dealers. The following requirements will apply when analyzing and selecting a broker-dealer:1. Except as noted in item 3 below, a broker-dealer may be used to purchase and sell investments as long as the party is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.) or is a depository institution whose broker-dealer activities are regulated by a federal regulatory agency.2. In determining whether to buy or sell investments through a broker-dealer, the Board of Directors must analyze and annually update the following factors:The background of any sales representative with whom business is conductedInformation available from state or federal securities regulators and securities industry self-regulatory organizations, such as the National Association of Securities Dealers and the North American Securities Administrators Association, about any enforcement actions against the broker-dealer, its affiliates, or associated personnel If the broker-dealer is acting as the credit union’s counterparty, the ability of the broker-dealer and its subsidiaries or affiliates to fulfill commitments, as evidenced by capital strength, liquidity, and operating results. The Board of Directors should consider current financial data, annual reports, reports of nationally recognized statistical rating organizations, relevant disclosure documents, and other sources of financial information. 3. The condition contained in item 1 above does not apply when the credit union purchases a certificate of deposit or share certificate directly from a bank, credit union, or other depository institution. The Board of Directors has approved the following investment firms to conduct business with the credit union: Morgan Stanley & CO.Short Hills, NJ SAFEKEEPING/OFAC/OTHERWith respect to payment, delivery and the safekeeping of investments, the following procedures will apply:Purchased investments and repurchase collateral must be in the credit union’s possession, recorded as owned by the credit union through the Federal Reserve Book-Entry System, or held by a board-approved safekeeper under a written custodial agreement. A custodial agreement is a contract in which a third party agrees to exercise ordinary care in protecting the securities held in safekeeping for its customersAn individual confirmation statement must be obtained for each investment purchased or sold and will be reconciled to the portfolio at least quarterly.Any safekeeper that the credit union uses must be regulated and supervised by either the Securities and Exchange Commission or a federal or state depository institution regulatory agencyA statement of purchased investments and repurchase collateral held in safekeeping must be obtained and reconciled monthlyAll purchases and sales of investments must be delivery vs. payment (i.e., payment for an investment must occur simultaneously with its delivery). 6. Credit Union policy prohibits employees from receiving anything of value in connection with an investment transaction.7. The OFAC list need not be checked for wire transfers to well-known financial institutions having their own ABA number based on oversight by other US Government agencies and include the following institutionsThe Board of Directors has approved the following third-party safekeeping facilities:Catalyst Corporate FCU 6801 Parkwood Blvd. .Plano, TX 75024 Morgan Stanley & Co.150 JFK ParkwayShort Hills, NJ 07078 NON-CONFORMING INVESTMENTSCredit Union Management shall notify the Board of Directors as soon as possible, but no later than the next regularly scheduled Board meeting, of any investment that is outside Board policy after purchase or has failed a requirement of Part 703 of the NCUA Rules and Regulations. The Board of Directors must document its action regarding the investment in the minutes of the Board meeting, including a detailed explanation of any decision not to sell an investment that has failed a requirement of Part 703. Within 5 days after the Board meeting, Credit Union Management will notify the appropriate Regional Director in writing of an investment that has failed a requirement of Part 703.INVESTMENT DOCUMENTATIONDocumentation regarding an investment transaction must be maintained at least as long as the investment is held, and until the documentation has been both audited and examined. At a minimum, the documentation will include, as appropriate, bids and prices at purchase and sale and for periodic updates, relevant disclosure documents or a description of the security from an industry-recognized information provider, financial data, and all of the tests and reports required by regulation and this investment policy. Documentation used in approving a broker-dealer or safekeeping entity must be maintained at least as long as the broker-dealer or entity is on the credit union’s approved list and until it has been both audited and examined. ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download