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ALEXANDRIA, Va. – CUNA and NAFCU both generally supported NCUA’s proposed rule on exchangeable collateralized mortgage obligations in recent comment letters, but agreed that some tweaking needs to be done. “NAFCU welcomes and supports the proposed revisions,” NAFCU President and CEO Fred Becker wrote. “Exchangeable CMOs provide a greater level of flexibility for issuers and investors alike and the marketplace has widely accepted these structures. NAFCU believes the amendments will greatly expand credit union investment authority without increasing risk to the insurance fund.” NCUA’s proposal includes the three conditions necessary for credit unions to invest in exchangeable CMOs: (1) that at purchase the ratio of market price to remaining principle is between 0.8 and 1.2; (2) throughout the life of the investment, the notational principal on the underlying interest-only CMO declines equally to the principal of the non-IO (interest-only) CMOs; and (3) credit unions may only exercise the exchange option if all the underlying CMOs are permissible credit union investments. Both CUNA and NAFCU raised concerns about the first condition because it is unclear whether it would actually mitigate risk. “Before adopting this approach, we request NCUA provide more information regarding the safety and soundness concerns of these investments,” CUNA Assistant General Counsel Jeff Bloch wrote. “We do not believe it is clear that deeply discounted POs (principal-only CMOs) pose undue risks.” Both trade associations said that credit unions that can demonstrate a thorough comprehension of how these investments work should be permitted to invest in deeply discounted CMOs. CUNA’s letter went further to say that federal credit unions should also be able, in limited circumstances, to invest directly in stripped mortgage-backed securities, but only for hedging purposes. Regarding an aggregate cap on a credit unions’ investment in CMOs, CUNA’s Bloch suggested that each individual credit union set the limit. “Aggregate limits may be appropriate, but such limits should be set by the credit union, based on its ability to acquire and manage this additional risk and its assessment of the benefits for any given level of CMO investment. An aggregate level of CMO investment that is safe and sound for one credit union may be too risky for another,” he wrote. CUNA also recommended that NCUA work with credit unions to figure any extra Call Report data that would be necessary. Finally, CUNA advocated that a pilot program for exchangeable CMOs is not necessary. “Rather, we suggest that NCUA establish comprehensive guidelines to ensure that qualified federal credit unions are making these types of investments in a manner that is fully consistent with safety and soundness,” Bloch wrote. He also pointed out that if the pilot program were terminated, credit unions participating in it would be caught in a very tight spot. Additionally, NAFCU’s comment letter supported changes to the definitions of “exchangeable CMO” and “derivatives” in NCUA’s rules and regulations. -

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