California Code of Regulations
Title 10 - Investment
Chapter 2 - Savings and Loan Commissioner
Subchapter 8 - Operations-Investments and Borrowings
Article 3 - Investments and Borrowings
Section 108.306 - Authorized Investments Pursuant to CFC Section 6702(g)

Universal Citation: 10 CA Code of Regs 108.306

Current through Register 2024 Notice Reg. No. 38, September 20, 2024

(a) The securities in which an association may invest under subsection (g) of Section 6702 of the California Financial Code in addition to the securities stated therein are the following:

(1) With approval of the commissioner preferred stock of any corporation.

(2) Futures transactions.
(a) Definitions. As used in this section, the following definitions apply unless the context otherwise requires:
(1) Interest-rate futures contract. A transferable agreement to make or take delivery of a standardized amount of an interest-bearing security, of standardized minimum quality grade, during a month specified in the agreement, under terms and conditions established by an exchange designated and regulated by the Commodity Futures Trading Commission.

(2) Interest-rate futures transaction. Purchase or sale of an interest-rate futures contract.

(3) Long position. The holding of a futures contract to take delivery of securities.

(4) Mortgage-related securities. Securities based on and backed by mortgages, including GNMA-guaranteed mortgage-backed securities, Mortgage Participation Certificates of the Federal Home Loan Mortgage Corporation, and similar obligations issued by the association or in which the association is authorized to invest.

(5) Offset. To close out an obligation to make or take delivery of securities under a futures contract. A futures contract to purchase securities is offset by a futures contract to sell securities of the same type for the same delivery month. A futures contract to sell securities is offset by a futures contract to purchase securities of the same type for the same delivery month.

(6) Short position. The holding of a futures contract to make delivery of securities.

(b) Permitted transactions. To the extent that it has legal power to do so, an association may engage in interest-rate futures transactions to reduce its net interest-rate exposure. For purposes of this section, net interest-rate risk exposure is the volatility in an association's earnings that can arise from the mismatching of the effective maturities of assets and liabilities. An association may enter into short positions that are appropriate for reducing its net interest-rate risk exposure. Long positions, other than those that offset short positions, may be entered into only under the following conditions:
(1) The futures position must be matched against a firm forward commitment to sell mortgages not yet originated or to issue mortgage-related securities based on mortgages not yet originated. For purposes of this paragraph (B), a firm forward commitment is a written commitment obligating the seller to make delivery, and the buyer to take delivery, of mortgage loans not yet originated or mortgage-related securities based on mortgages not yet originated, at a price and on or before a date specified in the commitment; and

(2) An association may enter into and maintain long futures positions only to the extent that its firm forward commitments exceed 10 percent of long-term assets with fixed interest rates. For purposes of this section, long-term assets are those having remaining terms to maturity in excess of five years.

Until February 6, 1982, associations may continue to engage in mortgage rate futures transactions as authorized immediately prior to January 23, 1982. Associations with interest-rate futures positions entered into before February 6, 1982, that are not permitted under this paragraph (B), will be permitted to continue to hold those futures contracts; provided that the mortgage-rate futures transactions were authorized when entered into and the contracts are not renewed.

(c) Authorized contracts. An association may engage in interest-rate futures transactions using any interest-rate futures contracts designated by the Commodity Futures Trading Commission and based upon a security in which the association has authority to invest.

(d) Board of directors' authorization. Prior to engaging in interest-rate futures transactions, an association's board of directors must authorize such activity. In authorizing futures trading, the board of directors shall consider any plan to engage in interest-rate futures transactions, shall endorse specific written policies, and shall require the establishment of internal control procedures. Policy objectives must be specific enough to outline permissible contract strategies taking into account price and yield correlations between the assets or liabilities and the futures contracts with which they are matched, their relationship to the association's operations and how such strategies reduce the association's net interest-rate risk exposure. Internal control procedures shall include, at a minimum, periodic reports to management, segregation of duties and internal review procedures. In addition, the minutes of the meeting of the board of directors shall set forth limits applicable to futures transactions, identify personnel authorized to engage in futures transactions, and set forth the duties, responsibilities and limits of authority of such personnel. The board of directors shall review the position limit, all outstanding contract positions, and the unrealized gains or losses on those positions at each regular meeting of the board.

(e) Notification. Each association engaging in interest-rate futures transactions shall notify the commissioner at the inception of such activity and thereafter on a monthly basis shall report such information as the commissioner shall require.

(f) Recordkeeping requirements. An association engaging in futures transactions shall maintain records of such transactions sufficient to document how the transactions reduce the net interest-rate risk exposure of the association in accordance with the following requirements:
(1) Contract register. The association shall maintain a contract register adequate to identify and control all interest-rate futures contracts and including, at a minimum, the type and amount of each contract, the maturity date of each contract, the cost of each contract, the dollar amount and description of the asset or liability with which the futures contract is matched, and the date and manner in which a contract is closed out. Such register shall be prepared in a manner sufficient to indicate at any time the association's total outstanding long and short interest-rate futures positions.

(2) Other documentation. The association shall maintain, as part of the documentation of its interest-rate futures strategy, a schedule of the assets and liabilities for which net interest-rate risk exposure is being reduced and the purpose of each contract entered into.

(3) Maintenance of records. The records designated in this paragraph (F) shall be maintained for all futures transactions closed out during the past two years.

(4) Forward commitments to purchase securities, subject to all the requirements and limitations set forth below:
(A) Definitions.
1. Forward Commitment. An oral or written contract to buy securities 30 or more days after the contract date; such a commitment is a standby commitment if delivery is optional with the seller and a firm commitment if both buyer and seller are obligated to perform on the agreed date.

2. Securities. Assets which are legal investments for an association under Section 6702 of the law and implementing regulations issued (except mortgage futures under Section 108.306(a)(4) of the regulations).

3. Commitment Fee. Any consideration received directly or indirectly by an association for a forward commitment.

(B) Authorized Personnel. The minutes of the board of directors of the association shall set out the names, duties, responsibilities, and current limits of authority of the association's personnel authorized to engage in forward commitment transactions for the association; the brokerage firms through which authorized personnel may conduct forwards activity; and the dollar limit on transactions with each such firm.

(C) Limitations.
1. General. An association may make forward commitments to purchase securities, subject to the limits in paragraph 2 below, if that activity is conducted in a safe and sound manner. An example of an unsafe and unsound practice which may preclude further investment under this regulation is an inability to fund commitments when due. No association may sell a forward commitment or security under agreement to purchase another forward commitment or security at a price other than actual market value.

2. Percent of Assets. An association's outstanding forward commitments to purchase securities may not exceed an amount equal to ten percent of its total assets if statutory net worth is less than five percent of total assets, or 15 percent of total assets if statutory net worth is five percent or more of total assets.

(D) Disposal Before Settlement. All profit or loss related to disposal or modification of a forward commitment before settlement shall be recognized on the association's books at the time of disposal or modification.

(E) Recordkeeping Requirements. An association engaging in forward commitments shall establish and maintain the following:
1. A current register of all outstanding forward commitments, including the type (firm or standby), commitment date, amount, rate, price to be paid at settlement, market price at date of commitment, settlement date, commitment fees received, date and manner of disposal, sales price and market value at disposal if disposition is made on or prior to settlement date other than through funding, and seller's identify and confirmation; and

2. Documentation of the association's ability to fund all outstanding forward commitments when due.

(F) Commitment Fees Received. A fee received for a forward commitment shall be recorded according to generally accepted accounting principles for loan commitment fees. If the commitment period is less than 30 days, a fee shall be deferred as provided in Section 113.

(b) Each association shall maintain detailed, separate "Section 6702(g) Regulation" investment files and records which confirm for examiners compliance with this regulation of any investments made pursuant to the sole authority of this regulation.

1. Change without regulatory effect renumbering former Section 231.6 to Section 108.306 (Register 87, No. 14). For prior history, see Register 83, No. 16.

Note: Authority cited: Section 5255, Financial Code. Reference: Section 6702, Financial Code.

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