issue-1996-06-04•Federal Register proposed rules — 1996-06-04
Federal Register proposed rules — 1996-06-04
issue-1996-06-04Federal Register proposed rules — 1996-06-04Proposed Regulation
Published Federal Register documents, not public-inspection drafts. The GPO XML/text rendition is a research aid; the linked complete official PDF retains the printed layout and all graphics. Graphics are retained in that PDF and are not independently reproduced in this text rendition. Publication does not establish that every provision remains legally in force.
FR Doc. 96-13980 Reinvention of Administrative Procedures Regulations
[Federal Register Volume 61, Number 108 (Tuesday, June 4, 1996)]
[Proposed Rules]
[Pages 28116-28118]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-13980]
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DEPARTMENT OF HEALTH AND HUMAN SERVICES
Food and Drug Administration
21 CFR Parts 1, 2, 3, 5, 10, 12, 20, 56, and 58
[Docket No. 96N-0163]
RIN 0910-AA69
Reinvention of Administrative Procedures Regulations
AGENCY: Food and Drug Administration, HHS.
ACTION: Advance notice of proposed rulemaking.
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SUMMARY: The Food and Drug Administration (FDA) is considering ways to
further streamline its administrative procedures regulations as a
result of a page-by-page review of the agency's regulations. This
regulatory review is part of the administration's ``Reinventing
Government'' initiative that seeks to streamline Government and to ease
the burden on regulated industry and consumers. FDA is seeking public
comment on ways to streamline its administrative procedures
regulations.
DATES: Written comments by September 3, 1996.
[[Page 28117]]
ADDRESSES: Submit written comments to the Dockets Management Branch
(HFA-305), Food and Drug Administration, 12420 Parklawn Dr., rm. 1-23,
Rockville, MD 20857.
FOR FURTHER INFORMATION CONTACT:
Regarding information concerning the regulations: Philip L. Chao,
Policy Development and Coordination Staff (HF-23), Food and Drug
Administration, 5600 Fishers Lane, Rockville, MD 20857, 301-827-3380.
Regarding general information on FDA's ``reinventing initiative'':
Lisa M. Helmanis, Regulations Policy Management Staff (HF-26), Food and
Drug Administration, 5600 Fishers Lane, Rockville, MD 20857, 301-443-
3480.
SUPPLEMENTARY INFORMATION: On March 4, 1995, President Clinton
announced plans for reforming the Federal regulatory system as part of
his ``Reinventing Government'' initiative. In his March 4, 1995,
directive, the President ordered all Federal agencies to conduct a
page-by-page review of their regulations and to ``eliminate or revise
those that are outdated or otherwise in need of reform.'' This notice
represents FDA's continuing effort to implement the President's plan.
In previous issues of the Federal Register, FDA proposed revoking or
revising other regulations; the agency expects to issue additional
reinvention proposals in the future.
In this notice, FDA is seeking comments on ways listed in the table
below in which its administrative regulations could be updated or
revised in order to streamline the agency's administrative practices
and procedures.
The following table contains a section-by-section analysis of the
regulations that FDA is considering ``reinventing.'' These regulations
are listed numerically as they appear in the Code of Federal
Regulations (CFR).
Section-by-Section Analysis of Regulations Under Consideration
------------------------------------------------------------------------
Description or
21 CFR Cite Title of Explanation of
Regulation Reinvention
------------------------------------------------------------------------
Sec. 1.3..................... Defines label and Should the
labeling. definitions be
amended? There are
only two definitions
(label and labeling)
involved, but they
could be updated to
be more consistent
with current
statutory language.
Sec. 1.21.................... Describes what This section provides
constitutes a general information
failure to on failures to
reveal a reveal material
material fact. facts. Should this
section be revised,
expanded, or
removed?
Sec. 1.23.................... Describes This provision could
procedures for be rewritten to
requesting a remove extraneous
variance or material and to
exemption from provide better
required label instructions on
statements. procedures for a
variance or
exemption.
Sec. 1.24.................... Lists granted Because much of the
label exemptions text is devoted to
for foods, foods, the provision
animal drugs, could be relocated
and cosmetics. to that part of the
CFR devoted to
foods. Similar moves
could be made for
the paragraphs on
animal drugs and
cosmetics. Would it
be more useful to
move these
provisions to the
corresponding
subject areas?
Sec. 1.90.................... Notice of This section explains
sampling. the procedures for
notification of
sampling of imports.
Should this section
be consolidated with
Sec. 1.91?
Sec. 1.91.................... Payment for This section provides
samples. that FDA will pay
for import samples
of nonviolative
goods.
Sec. 2.125................... Establishes Should this provision
procedures to be modified to
permit the use reflect current
of requirements under
chlorofluorocarb the Clean Air Act
ons (CFC's) in and to correspond
self-pressurized with the
containers. Environmental
Protection Agency
regulations on CFC
use and warning
labels?
Sec. 3.6..................... States who the This section should
product be amended to
jurisdiction reflect the current
officer is. information.
Part 5........................ Delegations of Some of the
authority. delegations of
authority refer to
offices or titles
that no longer exist
or have changed due
to reorganizations.
This part should be
revised to reflect
the most current
information. Does it
remain useful to
codify these
delegations of
authority?
Part 10 subparts A and B...... Administrative These regulations
practices and govern the practices
procedures. and procedures for
petitions, hearings,
and other
administrative
proceedings and
activities conducted
by FDA. Some
sections should be
revised to provide
more flexibility or
efficiency. For
example, could FDA's
citizen petitions
process be made more
efficient?
Part 12....................... Formal Should FDA's
evidentiary regulations
public hearing. governing formal
hearings be
simplified or
clarified?
Part 20....................... Public This part governs
information. FDA's communication
with the public.
Does this part
continue to reflect
the best way for FDA
to handle public
information? Are
there better, more
efficient approaches
that should be
embodied in FDA's
regulations?
Sec. 56.104.................. Describes The first two exempt
exemptions from classes are probably
institutional inapplicable today
review boards because they refer
requirements. to clinical research
begun before July
27, 1981. Should
this section be
amended by removing
paragraphs (a) and
(b)?
Part 58....................... Good laboratory This part describes
practice fundamental
regulations. principles for
laboratories to
observe and are
intended to ensure
the quality and
integrity of safety
data. Updating to
reflect current
technology (such as
greater use of
computers) may be
needed.
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Interested persons may, on or before, September 3, 1996, submit to
the Dockets Management Branch (address above) written comments
regarding this advance notice of proposed rulemaking (ANPRM). Two
copies of any comments are to be submitted, except that individuals may
submit one copy. Comments are to be identified with the docket number
found in brackets in the heading of this document. Received comments
may be seen in the office above between 9 a.m. and 4 p.m., Monday
through Friday.
[[Page 28118]]
This ANPRM is issued under section 301 et seq. of the Federal Food,
Drug, and Cosmetic Act (21 U.S.C. 301 et seq.) and under the authority
of the Commissioner of Food and Drugs.
Dated: May 28, 1996.
William B. Schultz,
Deputy Commissioner for Policy.
[FR Doc. 96-13980 Filed 6-3-96; 8:45 am]
BILLING CODE 4160-01-F
Complete official Federal Register PDF
FR Doc. 96-13897 Importation of Horses From CEM Countries
[Federal Register Volume 61, Number 108 (Tuesday, June 4, 1996)]
[Proposed Rules]
[Pages 28073-28085]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-13897]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 61, No. 108 / Tuesday, June 4, 1996 /
Proposed Rules
[[Page 28073]]
DEPARTMENT OF AGRICULTURE
Animal and Plant Health Inspection Service
9 CFR Part 92
[Docket No. 95-054-1]
Importation of Horses From CEM Countries
AGENCY: Animal and Plant Health Inspection Service, USDA.
ACTION: Proposed rule.
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SUMMARY: We are proposing to amend the regulations regarding the
importation of horses from countries affected with contagious equine
metritis to incorporate new testing and treatment protocols for mares
and stallions, provide for the use of accredited veterinarians to
monitor horses temporarily imported into the United States for
competition purposes, incorporate a new testing protocol for
thoroughbred horses in training in their country of origin, and remove
the requirements for endometrial cultures and clitoral sinusectomies in
mares. These proposed changes are intended to update, clarify, and
streamline the existing regulations. The proposed changes would
simplify the requirements for importing horses from countries affected
with contagious equine metritis without increasing the risk of the
disease being introduced into or disseminated within the United States.
DATES: Consideration will be given only to comments received on or
before August 5, 1996.
ADDRESSES: Please send an original and three copies of your comments to
Docket No. 95-054-1, Regulatory Analysis and Development, PPD, APHIS,
Suite 3C03, 4700 River Road Unit 118, Riverdale, MD 20737-1238. Please
state that your comments refer to Docket No. 95-054-1. Comments
received may be inspected at USDA, room 1141, South Building, 14th
Street and Independence Avenue SW., Washington, DC, between 8 a.m. and
4:30 p.m., Monday through Friday, except holidays. Persons wishing to
inspect comments are requested to call ahead on (202) 690-2817 to
facilitate entry into the comment reading room.
FOR FURTHER INFORMATION CONTACT: Dr. Joyce Bowling, Staff Veterinarian,
Import/Export Animals, National Center for Import and Export, VS,
APHIS, 4700 River Road Unit 39, Riverdale, MD 20737-1231, (301) 734-
6479; or E-mail: [email protected].
SUPPLEMENTARY INFORMATION:
Background
The regulations in 9 CFR part 92 (referred to below as the
regulations) prohibit or restrict the importation of certain animals
into the United States to prevent the introduction of communicable
diseases of livestock and poultry. Subpart C--Horses, Secs. 92.300
through 92.326 of the regulations, pertains to the importation of
horses into the United States. Sections 92.301 and 92.304 of the
regulations contain specific provisions for the importation and post-
entry handling of horses from countries affected with contagious equine
metritis (CEM), a highly contagious bacterial venereal disease.
Currently, the regulations in Sec. 92.301(c)(1) identify countries
where CEM exists and countries that trade horses freely with countries
where CEM exists without testing for CEM and prohibit, with certain
exceptions, the importation of horses into the United States from those
countries (hereafter referred to as CEM-affected countries). The
specific conditions under which certain horses may be imported into the
United States from CEM-affected countries are set forth in
Sec. 92.301(c)(2). The regulations in Sec. 92.304 (a)(4) through
(a)(12) provide for the approval of States to receive stallions and
mares from CEM-affected countries, list the States that have received
such approval from the Administrator of the Animal and Plant Health
Inspection Service (APHIS), and provide for the approval of
laboratories to conduct CEM cultures and tests.
We have determined that our CEM regulations can be changed to make
horse importations easier without increasing the risk of introducing
CEM into the United States. Therefore, we are proposing to amend the
regulations by:
Reorganizing the CEM regulations to eliminate duplication
and to make their provisions easier to find and use;
Removing the requirements for clitoral sinusectomies and
endometrial cultures in female horses and establishing new protocols
for the collection of specimens for culturing;
Incorporating new testing and treatment protocols for
stallions and test mares;
Incorporating a new testing protocol for thoroughbred
horses in training in their country of origin; and
Providing for the use of accredited veterinarians to
monitor horses from CEM-affected countries that are temporarily in the
United States for competition purposes.
These proposed changes, along with several more minor proposed
changes, are discussed in greater detail below.
Reorganization of Provisions
We are proposing to reorganize Sec. 92.301(c) and Sec. 92.304
(a)(4) through (a)(12) to eliminate duplication and make the provisions
directly related to CEM easier to find and use. The proposed new
structure would be as follows:
The prohibition on the importation of horses from CEM-affected
countries and the list of countries affected with CEM would remain in
Sec. 92.301(c)(1). The exceptions to that prohibition would remain in
Sec. 92.301(c)(2), but only as categories of horses that may be
imported into the United States from countries affected with CEM under
certain conditions; we are proposing to set out the specific conditions
applicable to importation of horses from each category in new
paragraphs Sec. 92.301 (d), (e), (f), and (g). In this way, rather than
having the categories and conditions spread across many pages of
regulatory text as is currently the case, the reader would be presented
with a single list of all the categories of eligible horses, and then
directed to a specific paragraph to find the conditions that apply to
the importation of a particular category of horses.
The conditions that apply to the importation of horses in one of
the categories that would be listed in Sec. 92.301(c)(2) are brief and
require little elaboration. Specifically, current Sec. 92.301(c)(2)(ii)
provides for the importation of geldings, weanlings, or yearlings whose
age is certified on the import health certificate prescribed in
[[Page 28074]]
Sec. 92.314. In short, the category defines the conditions, so there is
no need to list the conditions in a separate paragraph. We are
proposing, however, to make geldings a separate category, distinct from
weanlings and yearlings, because the age certification required for
weanlings and yearlings is not necessary for geldings.
With regard to weanlings and yearlings, we are also proposing to
amend the definition in Sec. 92.300 of the term weanling or yearling,
which is currently defined as ``any horse, weaned from its dam, which
was foaled not more than 731 days prior to its offer for entry into the
United States.'' There have been instances in which an individual
certified that a horse being offered for entry was younger than 731
days of age, but the horse, upon examination by APHIS, was found to
have erupted first permanent incisors. Those teeth are not expected to
erupt until a horse has reached 2\1/2\ years of age, and subsequent
investigation disclosed that the horse was indeed older than 731 days
of age and had been fraudulently certified. We are, therefore,
proposing to include the eruption of the first permanent incisors in
the definition of weanling or yearling as a benchmark; specifically, a
sentence would be added to the definition to make it clear that if a
horse's first permanent incisors have erupted, the horse will not be
considered to be a weanling or yearling.
We are also proposing to add a new category of exceptions in
Sec. 92.301(c)(2) for wild (non-domesticated) species of equidae, such
as zebras and wild asses. These animals would be allowed to be imported
without additional restrictions for CEM if the animal had been captured
in the wild or was to be imported from a zoo or other facility where it
would be unlikely that the animal would have had contact with
domesticated horses used for breeding. That lack of contact minimizes
the risk of such an animal contracting CEM and spreading the disease to
horses in the United States. The wild or non-domesticated equine would
still have to meet the inspection and certification requirements of
Sec. 92.314 with regard to CEM and other diseases, as well as all the
applicable permit, port-of-entry inspection, and other applicable
requirements of the regulations, so the general health and movement
issues associated with its importation would continue to be addressed.
The specific provisions for importing horses in the remaining
categories would be moved to four proposed new paragraphs:
Thoroughbred horses imported for permanent entry from
France, Germany, Ireland, or the United Kingdom (current
Sec. 92.301(c)(2)(iii)) would become new Sec. 92.301(d);
Stallions and mares over 731 days of age imported for
permanent entry (current Sec. 92.301(c)(2) (iv) through (vii)) would
become new Sec. 92.301(e). The post-entry testing and treatment
requirements for those stallions and mares (current Sec. 92.304 (a)(4)
to (a)(5) and (a)(7) to (a)(8), respectively) would also be
incorporated into new Sec. 92.301(e);
Horses over 731 days of age imported for no more than 90
days to compete in specified events (current Sec. 92.301(c)(2) (viii)
through (x)) would become new Sec. 92.301(f); and
Horses that have been temporarily exported from the United
States or another country not known to be affected with CEM to a
country affected with CEM (current Sec. 92.301(c)(2)(xi)) would become
new Sec. 92.301(g).
We are also proposing to establish two more new paragraphs in
Sec. 92.301 into which we would move the remaining CEM-specific
provisions of Sec. 92.304. First, we are proposing to move the
provisions of paragraphs Sec. 92.304 (a)(4) through (a)(9) to proposed
new paragraph Sec. 92.301(h). Those paragraphs provide for the approval
of States to accept stallions and mares from CEM-affected countries and
list the States that have received such approval. Second, the
provisions of Sec. 92.304 (a)(10) through (a)(12), which pertain to the
approval of laboratories to conduct CEM cultures and tests, would
become new Sec. 92.301(i).
We are also proposing to make nonsubstantive organizational changes
to Secs. 92.304(b) and 92.314 to improve their readability. Current
Sec. 92.304(b) consists of four sentences, the last of which contains
six clauses, that can logically be divided into three subordinate
paragraphs. Similarly, current Sec. 92.314 consists of three sentences
of regulatory text, the first of which takes up over a half a page in
the Code of Federal Regulations and contains numerous clauses and two
provisos. To make those portions of the regulations easier to read and
use, we are proposing to amend Sec. 92.304(b) by organizing its
regulatory text into paragraphs (b)(1) through (b)(3) and to amend
Sec. 92.314 by organizing its regulatory text into paragraphs (a)
through (c).
As part of our proposed reorganization of the regulations, we would
also make several nonsubstantive editorial changes to improve the
clarity of the regulations.
Elimination of Duplication
There are places in the current regulations where provisions found
in one section are unnecessarily duplicated in another. Specifically,
the regulations pertaining to the importation of thoroughbred horses
(Sec. 92.301(c)(2)(iii)), stallions over 731 days of age
(Sec. 92.301(c)(2)(iv)), mares over 731 days of age (Sec. 92.301(c)(2)
(v), (vi), and (vii)), and horses that have been temporarily exported
to a CEM-affected country from the United States or another country not
known to be affected with CEM (Sec. 92.301(c)(2)(xi)) all require a
horse offered for importation to be accompanied by a certificate that
confirms certain facts regarding the horse's health.
The certificate referred to in those paragraphs is the same
certificate required by Sec. 92.314 for all horses offered for
importation, and Sec. 92.314 clearly describes the information that the
certificate must contain and who may sign the certificate. Two of the
criteria found in Sec. 92.314--the description of who may sign the
certificate and a requirement that the certificate confirm that each
horse has been found free of evidence of communicable disease--are
repeated in those paragraphs of Sec. 92.301(c)(2) cited in the
preceding paragraph. Because those signature and confirmation criteria
are clearly described in Sec. 92.314, we do not believe that it is
necessary to repeat them in other sections of the regulations.
Therefore, proposed new Sec. 92.301 (d), (e), and (g), which would
contain the requirements for the importation of thoroughbred horses,
stallions and mares over 731 days of age, and horses temporarily
exported to a CEM-affected country, would simply state that the horses
must be accompanied by a certificate issued in accordance with
Sec. 92.314.
We are proposing to eliminate duplication in several other places
in the regulations by combining, where appropriate, separate provisions
for mares and stallions. We believe that combining separate provisions
is possible in those parts of the regulations dealing with the
collection of specimens because the requirements as to when and by whom
the specimens are to be collected are the same for both stallions and
mares; it is only the sites from which the specimens are to be
collected that differ. Therefore, in proposed new Sec. 92.301 (d), (e),
and (h), we would combine those provisions that are common to both male
and female horses, while keeping separate those provisions that must
necessarily be gender-specific.
[[Page 28075]]
Similarly, where there are now three different sets of provisions
for importing female horses over 731 days of age for permanent entry
(Sec. 92.301 (c)(2)(v), (c)(2)(vi), and (c)(2)(vii)), proposed new
Sec. 92.301(e) would contain a single set of provisions. The proposed
consolidation of those three sets of provisions would be made possible,
in large part, by other proposed changes, discussed below, that would
remove the clitoral sinusectomy requirement and standardize testing
protocols.
Use of Nitrofurazone
The regulations require, as a pre-import treatment for certain
stallions and a post-entry treatment for certain stallions and mares,
that a nitrofurazone ointment be used to coat or pack the animals'
genitalia as a means of killing the CEM organism. However, many
countries now prohibit the use of nitrofurazone on horses due to
concerns about its residues in horsemeat, so we are proposing to amend
those portions of the regulations that specifically require the use of
nitrofurazone.
Under the regulations in current Sec. 92.301(c)(2)(iv)(E), if a
specimen taken from a stallion prior to export to the United States is
found positive for CEM, the stallion's prepuce, urethral sinus, and
fossa glandis must be scrubbed with a solution of chlorhexidine and
then packed with an ointment of nitrofurazone for 5 consecutive days in
order to kill the CEM organism. We are proposing to remove those
specific instructions for scrubbing and packing and replace them with
the requirement that the stallion be treated for CEM in a manner
approved by the national veterinary service of the country of origin.
We would require that the treatments performed and the dates of the
treatments be recorded on the horse's health certificate, so APHIS
would have the opportunity to consider the treatments used when the
stallion is offered for importation into the United States. We would
continue to require that the stallion be retested no less than 21 days
following the completion of treatment and found free of CEM before it
could enter the United States. Because the requirement for retesting
would be in place, we believe that allowing the national veterinary
service of the country of origin to use its discretion in deciding the
appropriate treatment for stallions that have been found to be positive
for CEM would not result in an increased risk of CEM-infected stallions
entering the United States.
As part of these proposed changes, we are also proposing to amend
Sec. 92.301(c)(2)(iv)(B) by removing footnote 7, which is referenced at
the end of the paragraph. Footnote 7 states: ``Except for stallions
that test positive for CEM, treatment in the country of origin is
optional.'' We are proposing to remove that footnote because we believe
that the regulatory text of proposed new Sec. 92.301(e) clearly
describes the testing and treatment requirements for stallions and
spells out which stallions must be treated to be eligible for
importation into the United States. Subsequent footnotes in the
regulations that refer the reader to ``footnote 7 to subpart C'' would
also be removed.
Once the stallion has been imported into the United States and has
been sent to an approved State for quarantine, the regulations in
current Sec. 92.304(a)(5)(iii)(A) require, among other things, that the
prepuce, penis, and urethral sinus of the stallion be scrubbed with a
solution of chlorhexidine and packed with an ointment of nitrofurazone
for 5 consecutive days. Similarly, the regulations in
Sec. 92.304(a)(8)(iii)(B) regarding the treatment and handling of
imported mares in quarantine in approved States require that the mare's
external genitalia, vaginal vestibule, and, if present, clitoral
sinuses, must be scrubbed with a solution of chlorhexidine and then
coated with an ointment of not less than 0.2 percent nitrofurazone; the
clitoral fossa and, if present, the clitoral sinuses, must also be
packed with an ointment of not less than 0.2 percent nitrofurazone. We
are proposing to modify those requirements by removing the reference to
nitrofurazone and requiring only that an ointment effective against the
CEM organism be used. Because the availability of such ointments can
vary over time and from place to place, and because the treatments must
be performed by an accredited veterinarian and monitored by a State or
Federal veterinarian, we do not believe it is necessary to maintain a
list of specific ointments in the regulations. Rather, the accredited
veterinarian, State veterinarian, and Federal veterinarian, or any
other interested person, could obtain a list of ointments recognized as
being effective against the CEM organism from APHIS. A footnote to that
effect would be added to the regulations regarding the post-entry
treatment and handling of stallions and mares.
Clitoral Sinusectomy
We are proposing to eliminate the requirement that certain mares
undergo a clitoral sinusectomy. Currently, clitoral sinusectomies are
required for female horses over 731 days of age imported for permanent
entry (Sec. 92.301 (c)(2)(v)(C), (c)(2)(v)(G), and (c)(2)(vi)(G)),
certain mares over 731 days of age that had originally been imported
for no more than 90 days and that are moved to an approved State for
permanent entry (Sec. 92.301(c)(2)(x)), and mares that were not
required to undergo a clitoral sinusectomy as a condition of
importation but that have been cultured for CEM with positive results
in an approved State prior to release from State quarantine
(Sec. 92.304(a)(8)(iii)(E)).
We believe that the clitoral sinusectomy requirement can be
eliminated completely because the procedure is no longer necessary to
ensure that imported mares do not introduce CEM into the United States.
A new procedure has been developed that allows veterinarians to clean
and treat the clitoral sinuses to eliminate the CEM organism, thus
rendering clitoral sinusectomies unnecessary. Therefore, the clitoral
sinusectomy requirement and any provisions related to that requirement
would be removed from the regulations. Proposed new Sec. 92.301(e)(5),
which contains the testing and treatment requirements for mares, would
spell out the proposed new cleaning and treatment procedure. In that
procedure, an accredited veterinarian would manually remove organic
debris from the clitoral sinuses of a mare, then flush the sinuses with
a cerumalytic agent. For 5 consecutive days after the cleaning, the
accredited veterinarian would aseptically clean and wash the mare's
external genitalia and vaginal vestibule, including the clitoral fossa,
with a solution of not less than 2 percent chlorhexidine in a detergent
base and then fill the clitoral fossa and sinuses and coat the external
genitalia and vaginal vestibule with an antibiotic ointment effective
against the CEM organism. This procedure has been shown to effectively
eliminate debris that could harbor the CEM organism and can be carried
out without the use of the restraints, anesthesia, or tranquilizers
needed for the clitoral sinusectomy surgery, which would clearly be to
the mare's benefit.
Endometrial Cultures
We are proposing to remove the requirement for the collection and
culturing of endometrial specimens from mares. Currently, the
regulations require that endometrial specimens be collected during
estrus from female thoroughbred horses (Sec. 92.301(c)(2)(iii)(B)),
female horses over 731 days of age (Sec. 92.301 (c)(2)(v)(F) and
(c)(2)(vi)(D)), test mares used for testing stallions in an approved
State (Sec. 92.304 (a)(5)(iii)(B)(2) and (a)(5)(iii)(C)(2)), pregnant
mares over 731 days of age (Sec. 92.304(a)(8)(iii)(C)(1)),
[[Page 28076]]
nonpregnant mares over 731 days of age (Sec. 92.304(a)(8)(iii)(C)(2)),
and mares over 731 days of age that have been found to be positive for
CEM (Sec. 92.304 (a)(8)(iii)(D) and (a)(8)(iii)(E)). We believe that
the required collection and culturing of endometrial specimens can be
eliminated completely because over the last 10 to 12 years we have
cultured over 900 pregnant mares offered for importation and have never
found a positive endometrial culture in specimens collected from mares
that were negative on cultures of the clitoral sinuses. Because we
would continue to require the collection of specimens from the clitoral
sinuses, and because additional specimens would be drawn from the
urethra and cervix, we believe that the requirement for endometrial
cultures could be removed without increasing the risk of CEM being
introduced into or disseminated within the United States.
As part of this proposed change, we are also proposing to remove
the requirement for testing the foals of mares that had been pregnant
at the time they were received in quarantine in an approved State. The
regulations in Sec. 92.304(a)(8)(iii)(C)(1) require that 7 days after
the mare foals, three endometrial specimens be collected from the mare
and another specimen be collected from the vaginal vestibule or prepuce
of her foal, depending on its sex. We believe that the accuracy of the
cultures of specimens collected from the clitoral sinuses, which we
cited in the previous paragraph as rendering endometrial cultures
unnecessary, also makes it unnecessary to test foals. If cultures of
specimens collected from a pregnant mare indicated she was free from
CEM infection, there would be no cause to test her foal, since the foal
could only contract the disease from its dam during birth. This
proposed change would also mean that a pregnant mare would no longer
have to remain under quarantine in the approved State until 7 days
after foaling, since endometrial cultures from the mare and cultures
from the foal would no longer be required.
Collecting Specimens From Mares Over 731 Days of Age
The current regulations contain three different pre-import test
protocols for mares over 731 days of age; a protocol for testing
pregnant mares and, later, their foals, in quarantine in an approved
State after importation; and yet another protocol for testing
nonpregnant mares in quarantine in an approved State. Those protocols
differ in terms of their timing and sites from which specimens are to
be collected for culturing because some mares require endometrial
cultures while others do not, and some mares must undergo a clitoral
sinusectomy, some do not, and others would have already undergone the
surgery before a particular test. With the requirements for endometrial
cultures and clitoral sinusectomies removed as proposed above, we
believe that we can simplify matters by standardizing the sites from
which specimens would be collected from mares and the timing of those
collections when multiple sets of specimens are needed for culturing.
We are proposing that for all mares over 731 days of age offered
for importation or in quarantine in an approved State, specimens would
be collected from the mucosal surface of the urethra, the mucosal
surface of the clitoral sinuses, and the mucosal surface of the cervix.
Using the mucosal surfaces of the urethra, clitoral sinuses, and cervix
as sites for the collection of specimens for culturing is in keeping
with current codes of practice for the diagnosis of CEM and would allow
us to accurately assess the CEM status of mares over 731 days of age
that are offered for importation or that are quarantined in an approved
State.
The regulations currently require that three sets of specimens be
collected from mares over 731 days of age in quarantine in an approved
State; those specimens are to be drawn at intervals of no less than 7
days. We are proposing to decrease the time over which specimens are to
be drawn by requiring that all three sets of specimens be collected
over a single 7-day period, with the collections taking place on the
first, fourth, and seventh days. When collecting multiple sets of
specimens from a horse for culturing, it is prudent to collect sets of
specimens on different days in order to increase the likelihood that
any infection will be detected. However, we believe the current 7-day
minimum interval between collections is unnecessarily long; the
proposed 7-day collection period would simplify and shorten the testing
process for mares while continuing to provide for a sufficient amount
of time between the collection of sets of specimens.
Testing and Treatment for Stallions Over 731 days of Age
Once a stallion over 731 days of age has been imported into the
United States and has been sent to quarantine in an approved State, the
regulations currently require that a set of specimens be collected from
the stallion and cultured for CEM, after which the stallion's genitalia
are to be washed with a surgical scrub and packed with an antibiotic
ointment for 5 consecutive days; 7 days after the fifth day of cleaning
and packing, the stallion must be test bred to two qualified test
mares. In order to increase the likelihood that testing will detect the
presence of CEM, we are proposing to reverse the order of the latter
two items, i.e., we would require that the test breeding take place
before the cleaning and packing. If the stallion was infected with CEM,
the two test mares would most likely contract the disease as a result
of the test breeding, so there would be, in effect, three chances to
detect the disease--one through the tests conducted on the stallion and
two through the tests conducted on each test mare. The cleaning and
packing, when conducted first, may reduce the chance that an infected
stallion would transmit the disease to the test mares by reducing the
presence of the CEM organism to a low level.
Test Mares
The current regulations require that a test mare must qualify as
apparently free from CEM. To qualify, the mare must be tested with
negative results by a complement fixation test for CEM, and specimens
taken from the mare must be cultured negative for CEM. Currently, one
set of specimens must be drawn from the endometrium, clitoral sinuses,
and clitoral fossa; then, no less than 7 days later, another set of
specimens must be drawn from the cervix, clitoral sinuses, and clitoral
fossa. As previously explained, we are proposing to remove the
requirement for the collection and culturing of endometrial specimens
from imported mares. We are proposing to remove that requirement for
test mares, for the same reasons. We are also proposing that test mares
would have specimens collected from the mucosal surface of the urethra,
clitoral sinuses, and cervix, as proposed for all mares over 731 days
of age offered for importation. This would be in keeping with current
codes of practice for the diagnosis of CEM and would allow us to
accurately assess the CEM status of test mares. We are also proposing
that three sets of specimens be collected, and that all sets of
specimens be collected within a 7-day period, on days 1, 4, and 7. This
would be consistent with proposed CEM tests for mares offered for
importation.
After being test bred by the stallion, the regulations currently
require that specimens be collected from the test mares on the second,
fourth, and seventh days after breeding and cultured for CEM;
endometrial specimens must be collected and cultured during the next
estrus; and two blood serum samples must be drawn
[[Page 28077]]
from the test mares 15 to 40 days after breeding and tested for CEM
using the complement fixation test. As discussed above, we have
proposed to remove the requirement for endometrial cultures, so that
step would be eliminated. We are proposing to further amend those
requirements by shifting the collection of specimens to the third,
sixth, and ninth days after breeding, which means that any CEM
infection would have an additional day to manifest itself in the test
mares, followed by a full 2 days between the collection of each
additional set of samples. By delaying and slightly lengthening the
period over which specimens are collected from bred test mares, we
would increase the likelihood that the presence of CEM infection will
be detected in the test mares. We are also proposing to reduce the
number of required complement fixation tests to a single test conducted
15 days after breeding. We believe that the second complement fixation
test is unnecessary because the multiple cultures conducted on the
specimens drawn during the 9 days after breeding would provide, in
nearly all cases, an accurate indication of the test mare's CEM status;
a single complement fixation test would be adequate to confirm the
findings of the culturing.
New Testing Protocol for Thoroughbred Horses
We are proposing to simplify the pre-export testing protocols for
thoroughbred horses from France, Germany, Ireland, and the United
Kingdom. Under the current regulations, three sets of specimens must be
collected and cultured from thoroughbred horses at intervals of no less
than 7 days, with the final collection and culturing being completed
within 30 days of export. We are proposing to shorten the time frame
for collections and culturing from over 2 weeks to 1, with specimens
being collected on the first, fourth, and seventh days of the 7-day
period. We would, however, retain the requirement that the last set of
specimens must be collected and cultured within 30 days of export. As
noted above with regard to test mares and mares over 731 days of age
quarantined in an approved State, we believe the current 7-day interval
between collections is unnecessarily long; the proposed 2-day interval
simplifies and shortens the pre-export testing process for thoroughbred
horses while continuing to provide for a sufficient amount of time
between the collection of sets of specimens.
We are also proposing to modify the collection sites for specimens
drawn from female thoroughbred horses to make those sites consistent
with the proposed changes regarding collection sites for test mares and
mares over 731 days of age and to reflect the proposed discontinuation
of the collection and culturing of endometrial specimens. As was
proposed for the other two categories of female horses, and for the
same reasons, the collection sites for specimens from female
thoroughbred horses would be the mucosal surfaces of the urethra,
clitoral sinuses, and cervix.
The regulations regarding the importation of thoroughbred horses
currently contain no specific provisions for the treatment and
retesting of thoroughbred horses that test positive for CEM during pre-
export testing. We are proposing to add provisions that would allow the
thoroughbred horse to be treated for CEM in a manner approved by the
national veterinary service of the country of origin. We would require
that the treatments performed and the dates of the treatments be
recorded on the horse's health certificate, so APHIS would have the
opportunity to consider the treatments used when the thoroughbred horse
is offered for importation into the United States. We would require
that the retesting of the thoroughbred horse take place no less than 21
days following the completion of treatment. The horse would have to be
found free of CEM on the retest before it could enter the United
States. These proposed provisions for retesting thoroughbred horses are
consistent with the retest provisions for stallions and mares over 731
days of age and would serve the same purpose. Because the thoroughbred
horses would not be allowed entry into the United States until they had
been found free of CEM, we believe that allowing thoroughbred horses
that have tested positive for CEM to be treated and retested would not
result in an increased risk of CEM-infected horses entering the United
States.
We are also proposing to make two minor changes in the regulations
regarding the importation of thoroughbred horses. First, we are
proposing to remove two references to the ``Federal Republic of
Germany'' and replace them with references simply to ``Germany,''
because the reunification of East Germany and West Germany has removed
the need to differentiate between the two. Second, footnote 6 in
current Sec. 92.301(c)(2)(iii)(A), which lists specifically approved
recordkeeping associations in those countries from which thoroughbred
horses may be imported, contains an out-of-date reference to such
associations in Australia. We are proposing to remove that reference
because Australia is no longer on the list of CEM-affected countries in
Sec. 92.301(c)(1).
Use of Accredited Veterinarians
The regulations in Sec. 92.301(c)(2)(viii)(B)(2) require that
horses imported for no more than 90 days to compete in specified events
must be monitored by an APHIS representative--i.e., an APHIS
veterinarian or other authorized APHIS employee--while the horse is on
the premises at which it is competing. The regulations pertaining to
import permits in Sec. 92.304(a)(1)(iii) state that the approval of a
permit application to temporarily import a horse is contingent upon
APHIS' determination that a sufficient number of APHIS personnel are
available to provide the required services. In order to increase the
number of qualified veterinarians available to perform the required
activities and decrease the costs associated with the temporary
importation of horses for competition, we are proposing to allow the
required monitoring to be conducted by an accredited veterinarian. An
accredited veterinarian is, by definition, already familiar with APHIS'
animal health programs and regulations and is approved by the
Administrator to perform the functions associated with those programs,
so we believe that accredited veterinarians would be fully capable of
monitoring temporarily imported horses at the premises on which they
are competing. We would, however, provide for an APHIS representative
to conduct spot checks to ensure compliance with the regulations. If
the APHIS representative found that the requirements of the regulations
were not being met, APHIS would have the option of requiring that all
remaining monitoring for a particular event be conducted by APHIS
representatives. The proposed spot checks and the option for APHIS to
take over monitoring duties would act as additional safeguards against
the spread of disease and would help to ensure compliance with the
regulations.
Other Proposed Changes
The regulations in Sec. 92.301(c)(2)(viii)(G) currently require the
owner or importer of a temporarily imported horse to enter into a trust
fund agreement with APHIS to ensure that he or she pays all costs
associated with APHIS' supervision and maintenance of the horse during
the time it is in the United States. When the required supervision and
maintenance services can be provided by an APHIS representative
operating out of his or her usual place of duty, however,
[[Page 28078]]
APHIS' costs can be recovered through user fees payable under 9 CFR
part 130, so it would not be necessary for the owner or importer to
enter into a trust fund agreement. There are still cases, though, in
which a trust fund agreement would be necessary, such as when an APHIS
representative is not available to provide the necessary services in a
given area, or there is an insufficient number of APHIS representatives
to meet the needs of a large event, and an APHIS representative must be
temporarily detailed from his or her usual place of duty to the site of
a particular event. Therefore, we are proposing to amend the
regulations to differentiate between those cases where user fees would
be sufficient to recover APHIS' costs and those cases where the owner
or importer of a horse would have to enter into a trust fund agreement
with APHIS.
Miscellaneous Changes
Several of the proposed changes discussed above would result in
footnotes being added, deleted, or moved; therefore, we are proposing
to redesignate the footnotes that follow those that would be affected
by the proposed changes to maintain numerical order.
Executive Order 12866 and Regulatory Flexibility Act
This proposed rule has been reviewed under Executive Order 12866.
The rule has been determined to be not significant for the purposes of
Executive Order 12866 and, therefore, has not been reviewed by the
Office of Management and Budget.
This proposed rule would amend the regulations regarding the
importation of horses from countries affected with contagious equine
metritis to incorporate new testing and treatment protocols for mares
and stallions, provide for the use of accredited veterinarians to
monitor horses temporarily imported into the United States for
competition purposes, incorporate a new testing protocol for
thoroughbred horses in training in their country of origin, and remove
the requirements for endometrial cultures and clitoral sinusectomies in
mares. These proposed changes are intended to update, clarify, and
streamline the existing regulations. The proposed changes would
simplify the requirements for importing horses from countries affected
with contagious equine metritis without increasing the risk of the
disease being introduced into or disseminated within the United States.
The United States is a net exporter of horses, exporting three to
four horses for every one imported, and unit values for imports and
exports favored the United States until 1994. The unit value of exports
was $3,197 per head in 1993, while the unit import value was $2,944 per
head; in 1994, these values shifted to $2,458 per head (export) and
$4,032 per head (import).
In 1993, U.S. exports of horses totaled 64,478 head valued at
$206.1 million; in 1994, the total was 85,299 head valued at $209.7
million. Most of those horses were exported to Canada, Mexico, Western
Europe (especially the United Kingdom and Ireland), the Middle East, or
Asia. U.S. imports of horses, on the other hand, are small relative to
total inventory and U.S. horse exports. In 1993, U.S. horse imports
totaled 20,715 head valued at $61 million; in 1994, the total was
23,186 head valued at $93.5 million. Canada and Mexico were the source
of almost 90 percent of all U.S. horse imports in those years. In each
year, those imports equaled approximately 1 percent of the domestic
horse inventory (USDA, Economic Research Service, ``Foreign
Agricultural Trade of the United States,'' January/February 1995).
Small entities maintain almost 95 percent of the domestic horse
inventory.
The proposed new testing and treatment protocols presented in this
document are the only aspects of this proposed rule that are expected
to have an economic impact. In each case, the proposed changes would
reduce the time required to collect samples, conduct tests, and
administer treatments, which would shorten the period that an imported
horse would have to spend in quarantine. Because the importer or owner
of an imported horse must bear the cost of providing care, feeding, and
handling of the horse during the time it is quarantined for CEM testing
and treatment in an approved State, a shorter quarantine period would
clearly reduce an owner's or importer's boarding costs. The current
course of testing and treatment runs, on average, from 4 to 6 weeks;
the testing and treatment protocols proposed in this document are
expected to cut that time frame to 2 to 3 weeks.
We do not expect, however, that the proposed changes will result in
an increase of horse imports into the United States. Those countries
that can already profitably ship horses to the United States and meet
the current requirements of the regulations would not be significantly
affected, and those countries that do not currently meet those
requirements are not expected to meet the proposed new requirements
either.
Under these circumstances, the Administrator of the Animal and
Plant Health Inspection Service has determined that this action would
not have a significant economic impact on a substantial number of small
entities.
Executive Order 12372
This program/activity is listed in the Catalog of Federal Domestic
Assistance under No. 10.025 and is subject to Executive Order 12372,
which requires intergovernmental consultation with State and local
officials. (See 7 CFR part 3015, subpart V.)
Executive Order 12778
This proposed rule has been reviewed under Executive Order 12778,
Civil Justice Reform. If this proposed rule is adopted: (1) All State
and local laws and regulations that are inconsistent with this rule
will be preempted; (2) no retroactive effect will be given to this
rule; and (3) administrative proceedings will not be required before
parties may file suit in court challenging this rule.
Paperwork Reduction Act
This proposed rule contains no new information collection or
recordkeeping requirements under the Paperwork Reduction Act of 1995
(44 U.S.C. 3501 et seq.).
List of Subjects in 9 CFR Part 92
Animal diseases, Imports, Livestock, Poultry and poultry products,
Quarantine, Reporting and recordkeeping requirements.
Accordingly, 9 CFR part 92 would be amended as follows:
PART 92--IMPORTATION OF CERTAIN ANIMALS AND POULTRY AND CERTAIN
ANIMAL AND POULTRY PRODUCTS; INSPECTION AND OTHER REQUIREMENTS FOR
CERTAIN MEANS OF CONVEYANCE AND SHIPPING CONTAINERS THEREON
1. The authority citation for part 92 would continue to read as
follows:
Authority: 7 U.S.C. 1622; 19 U.S.C. 1306; 21 U.S.C. 102-105,
111, 114a, 134a, 134b, 134c, 134d, 134f, 135, 136, and 136a; 31
U.S.C. 9701; 7 CFR 2.22, 2.80, and 371.2(d).
2. In Sec. 92.300, the definition of Weanling or yearling would be
revised to read as follows:
Sec. 92.300 Definitions.
* * * * *
Weanling or yearling. Any horse, weaned from its dam, that was
foaled not more than 731 days prior to its being offered for entry into
the United States.
[[Page 28079]]
A horse will not be considered to be a weanling or yearling if its
first permanent incisors have erupted.
Secs. 92.303 and 92.304 [Amended]
3. Sections 92.303 and 92.304 would be amended as follows:
a. In Sec. 92.304, footnote 12 and its reference in the section
heading would be removed.
b. In Sec. 92.303(e), footnote 11 and its reference in the text
would be redesignated as footnote 12.
4. In Sec. 92.301, paragraph (c) would be revised and new
paragraphs (d) through (i) would be added to read as follows:
Sec. 92.301 General prohibitions; exceptions.
* * * * *
(c) Specific prohibitions regarding contagious equine metritis;
exceptions.
(1) Importation prohibited. Except as provided in paragraph (c)(2)
of this section, notwithstanding the other provisions of this part
concerning the importation of horses into the United States, the
importation of all horses from any of the following listed countries
and the importation of all horses that have been in any listed country
within the 12 months immediately preceding their being offered for
entry into the United States is prohibited, either because contagious
equine metritis (CEM) exists in the listed country or because the
listed country trades horses freely with a country in which CEM exists
without testing for CEM: Austria, Belgium, Bosnia and Herzegovina,
Croatia, Czech Republic, Denmark, Finland, France, Germany, Guinea-
Bissau, Ireland, Italy, Japan, the Member States of the European Union,
The Netherlands, Norway, Slovakia, Slovenia, Sweden, Switzerland, The
Former Yugoslav Republic of Macedonia, the United Kingdom (England,
Northern Ireland, Scotland, Wales, and the Isle of Man), and the
nonrecognized areas of the former Yugoslavia (Montenegro and Serbia).
Note: Montenegro and Serbia have asserted the formation of a joint
independent State entitled ``The Federal Republic of Yugoslavia,'' but
this entity has not been formally recognized as a State by the United
States.
(2) Exceptions. The provisions of paragraph (c)(1) of this section
shall not apply to the following:
(i) Wild (non-domesticated) species of equidae if captured in the
wild or imported from a zoo or other facility where it would be
unlikely that the animal would come in contact with domesticated horses
used for breeding;
(ii) Geldings;
(iii) Weanlings or yearlings whose age is certified on the import
health certificate required under Sec. 92.314(a);
(iv) Horses imported in accordance with conditions prescribed by
the Administrator as provided in Sec. 92.301(a);
(v) Thoroughbred horses imported for permanent entry from France,
Germany, Ireland, or the United Kingdom if the horses meet the
requirements of paragraph (d) of this section;
(vi) Stallions or mares over 731 days of age imported for permanent
entry if the horses meet the requirements of paragraph (e) of this
section;
(vii) Horses over 731 days of age imported into the United States
for no more than 90 days to compete in specified events if the horses
meet the requirements of paragraph (f) of this section; and
(viii) Horses temporarily exported from the United States or from
another country not known to be affected with CEM to a country listed
in paragraph (c)(1) of this section within the 12 months immediately
preceding their being offered for entry into the United States if the
horses meet the requirements of paragraph (g) of this section.
(d) Thoroughbred horses from France, Germany, Ireland, and the
United Kingdom. (1) Thoroughbred horses may be imported for permanent
entry from France, Germany, Ireland, or the United Kingdom if the
horses meet the following requirements:
(i) Each horse is accompanied at the time of importation by an
import permit in accordance with Sec. 92.304;
(ii) Each horse is accompanied at the time of importation by an
import health certificate issued in accordance with Sec. 92.314(a). In
addition to the information required by Sec. 92.314(a), the
veterinarian signing and issuing the certificate shall certify that:
(A) He or she has examined the daily records of the horse's
activities maintained by the trainer and certified to be current, true,
and factual by the veterinarian in charge of the training or racing
stable;
(B) He or she has examined the records of the horse's activities
maintained by a breed association specifically approved by the
Department 6 and certified by the breed association to be current,
true, and factual for the following information: Identification of the
horse by name, sex, age, breed, and all identifying marks;
identification of all premises where the horse has been since reaching
731 days of age and the dates that the horse was at such premises; and
that none of the premises are breeding premises;
---------------------------------------------------------------------------
\6\ The following breed associations and their record systems
have been approved by the Department: Weatherby's Ltd. for the
United Kingdom and Ireland; Haras du Pain for France; and
Direktorium fur Vollblutzucht und Rennen e.v. for Germany.
---------------------------------------------------------------------------
(C) He or she has compared the records maintained by the approved
breed association with the records kept by the trainer and has found
the information in those two sets of records to be consistent and
current;
(D) For thoroughbred horses over 731 days of age, cultures negative
for CEM were obtained from sets of specimens collected on 3 separate
occasions within a 7-day period from the mucosal surface of the
urethra, the mucosal surface of the clitoral sinuses, and the mucosal
surface of the cervix of any female horses and from the surfaces of the
prepuce, the urethral sinus, and the fossa glandis, including the
diverticulum of the fossa glandis, of any male horses. For both female
and male horses, the sets of specimens must be collected on days 1, 4,
and 7 of the 7-day period, and the last of these sets of specimens must
be collected within 30 days of exportation. All specimens required by
this paragraph must be collected by a licensed veterinarian who either
is, or is acting in the presence of, the veterinarian signing the
certificate; and
(E) All specimens required by paragraph (d)(1)(ii)(D) of this
section were received within 48 hours of collection by a laboratory
approved to culture for CEM by the national veterinary service of the
country of export and were accompanied by a statement indicating the
date and time of their collection.
(2) If any specimen collected in accordance with paragraph
(d)(1)(ii)(D) of this section is found to be positive for CEM, the
horse must be treated for CEM in a manner approved by the national
veterinary service of the country of export. After the treatment is
completed, at least 21 days must pass before the horse will be eligible
to be tested again in accordance with paragraph (d)(1)(ii)(D) of this
section. All treatments performed, and the dates of the treatments,
must be recorded on the health certificate.
(3) Thoroughbred horses imported under paragraph (d)(1) of this
section must complete the Federal quarantine required under
Sec. 92.308. Upon completion of the Federal quarantine, the horses may
be released.
(e) Stallions and mares over 731 days of age from CEM-affected
countries.
(1) Stallions or mares over 731 days of age may be imported for
permanent entry from a country listed in paragraph (c)(1) of this
section if the horses meet the following requirements:
[[Page 28080]]
(i) Each horse is accompanied at the time of importation by an
import permit issued in accordance with Sec. 92.304. The import permit
must indicate that, after completion of the Federal quarantine required
in Sec. 92.308, the stallion or mare will be consigned to a State that
the Administrator has approved to receive such horses in accordance
with paragraph (h) of this section;
(ii) The horses are accompanied at the time of importation by an
import health certificate issued in accordance with Sec. 92.314(a);
(iii) A set of specimens must be collected from each horse within
30 days prior to the date of export by a licensed veterinarian who
either is, or is acting in the presence of, the veterinarian signing
the certificate. For stallions, the specimens must be collected from
the prepuce, urethral sinus, and fossa glandis, including the
diverticulum of the fossa glandis; for mares, the specimens must be
collected from the mucosal surface of the urethra, the mucosal surface
of the clitoral sinuses, and the mucosal surface of the cervix. All of
the specimens collected must be cultured for CEM with negative results
in a laboratory approved to culture for CEM by the national veterinary
service of the country of origin;
(iv) The horses described on the certificate must not have been
used for natural breeding, for the collection of semen for artificial
insemination in the case of stallions, or for artificial insemination
in the case of mares, from the time the specimens were collected
through the date of export;
(v) All specimens required by paragraph (e)(1)(iii) of this section
must be received within 48 hours of collection by a laboratory approved
to culture for CEM by the national veterinary service of the country of
export and must be accompanied by a statement indicating the date and
time of their collection; and
(vi) If any specimen collected in accordance with paragraph
(e)(1)(iii) of this section is found to be positive for CEM, the
stallion or mare must be treated for CEM in a manner approved by the
national veterinary service of the country of export. After the
treatment is completed, at least 21 days must pass before the horse
will be eligible to be tested again in accordance with paragraph
(e)(1)(ii) of this section. All treatments performed, and the dates of
the treatments, must be recorded on the health certificate.
(2) Post-entry. (i) Stallions and mares imported under paragraph
(e)(1) of this section must complete the Federal quarantine required
under Sec. 92.308. Upon completion of the Federal quarantine, stallions
must be sent to an approved State listed in paragraph (h)(6) of this
section, and mares must be sent to an approved State listed in
paragraph (h)(7) of this section.
(ii) Once in the approved State, the stallions or mares shall be
quarantined under State or Federal supervision until the stallions have
met the testing and treatment requirements of paragraph (e)(3) of this
section and the mares have met the testing and treatment requirements
of paragraph (e)(5) of this section.
(iii) All tests and cultures required by paragraphs (e)(3) through
(e)(5) of this section shall be conducted at the National Veterinary
Services Laboratories, Ames, IA, or at a laboratory approved by the
Administrator in accordance with paragraph (i) of this section to
conduct CEM cultures and tests.
(iv) To be eligible for CEM culture or testing, all specimens
collected in accordance with paragraphs (e)(3) through (e)(5) of this
section must be received by the National Veterinary Services
Laboratories or the approved laboratory within 48 hours of collection
and must be accompanied by a statement indicating the date and time of
their collection.
(3) Testing and treatment requirements for stallions. (i) Once the
stallion is in the approved State, one specimen each shall be taken
from the prepuce, the urethral sinus, and the fossa glandis, including
the diverticulum of the fossa glandis, of the stallion and be cultured
for CEM. After negative results have been obtained, the stallion must
be test bred to two test mares that meet the requirements of paragraph
(e)(4) of this section. Upon completion of the test breeding:
(A) The stallion must be treated for 5 consecutive days by
thoroughly cleaning and washing (scrubbing) its prepuce, penis,
including the fossa glandis, and urethral sinus while the stallion is
in full erection with a solution of not less than 2 percent surgical
scrub chlorhexidine and then thoroughly coating (packing) the
stallion's prepuce, penis, including the fossa glandis, and urethral
sinus with an ointment effective against the CEM organism.7 The
treatment shall be performed by an accredited veterinarian and
monitored by a State or Federal veterinarian.
---------------------------------------------------------------------------
\7\ A list of ointments effective against the CEM organism may
be obtained from the National Center for Import and Export, Import/
Export Animals, VS, APHIS, 4700 River Road Unit 39, Riverdale, MD
20737-1231.
---------------------------------------------------------------------------
(B) Each mare to which the stallion has been test bred shall be
cultured for CEM from sets of specimens that are collected from each of
the mucosal surfaces of the cervix, urethra, and clitoral sinuses on
the third, sixth, and ninth days after the breeding, with negative
results. A complement fixation test for CEM must be done with negative
results on the fifteenth day after the breeding.
(ii) If any culture or test required by this paragraph is positive
for CEM, the stallion shall be treated as described in paragraph
(e)(3)(i)(A) of this section and retested by being test bred to two
mares no less than 21 days after the last day of treatment.
(iii) A stallion may be released from State quarantine only if all
cultures and tests of specimens from the mares used for test breeding
are negative for CEM and all cultures performed on specimens taken from
the stallion are negative for CEM.
(4) Requirements for test mares. (i) Mares to be used to test
stallions for CEM shall be permanently identified before the mares are
used for such testing with the letter ``T.'' The marking shall be
permanently applied by an inspector, a State inspector, or an
accredited veterinarian who shall use a hot iron, freezemarking, or a
lip tattoo. If a hot iron or freezemarking is used, the marking shall
not be less than 2 inches (5.08 cm) high and shall be applied to the
left shoulder or left side of the neck of the mare. If a lip tattoo is
used, the marking shall not be less than 1 inch (2.54 cm) high and 0.75
inch (1.9 cm) wide and shall be applied to the inside surface of the
upper lip of the test mare.
(ii) The test mares must be qualified prior to breeding as
apparently free from CEM and may not be used for breeding from the time
specimens are taken to qualify the mares as free from CEM. To qualify,
each mare shall be tested with negative results by a complement
fixation test for CEM, and specimens taken from each mare shall be
cultured negative for CEM. For culture, sets of specimens shall be
collected on the first, fourth, and seventh days of a 7-day period from
the mucosal surfaces of the urethra, clitoral sinuses, and cervix.
(iii) A test mare that has been used to test stallions for CEM may
be released from quarantine only if:
(A) The test mare is found negative for CEM on all cultures and
tests required under paragraph (e)(3)(ii) of this section;
(B) The test mare is subjected to an ovariectomy by an accredited
veterinarian under the direct supervision of a State or Federal
veterinarian;
[[Page 28081]]
(C) The test mare is treated and handled in accordance with
paragraph (e)(5) of this section; or
(D) The test mare is moved directly to slaughter without unloading
en route, is euthanized, or dies.
(5) Testing and treatment requirements for mares. (i) Once the mare
is in the approved State, sets of specimens shall be collected from
each mare on three separate occasions within a 7-day period. On days 1,
4, and 7, an accredited veterinarian shall collect a specimen from the
mucosal surfaces of the urethra, clitoral sinuses, and cervix, and
shall submit each specimen or set of specimens to the National
Veterinary Services Laboratories, Ames, IA, or at a laboratory approved
by the Administrator in accordance with paragraph (i) of this section
to conduct CEM cultures and tests.
(ii) Following the collection of specimens in accordance with
paragraph (e)(5)(i) of the section, an accredited veterinarian shall
manually remove organic debris from the sinuses of each mare and then
flush the sinuses with a cerumalytic agent.8
---------------------------------------------------------------------------
\8\ Recommended protocols for the flushing of sinuses may be
obtained from the National Center for Import and Export, Import/
Export Animals, VS, APHIS, 4700 River Road Unit 39, Riverdale, MD
20737-1231.
---------------------------------------------------------------------------
(iii) For 5 consecutive days after the sinuses have been cleaned,
an accredited veterinarian shall aseptically clean and wash (scrub) the
external genitalia and vaginal vestibule, including the clitoral fossa,
with a solution of not less than 2 percent chlorhexidine in a detergent
base and then fill the clitoral fossa and sinuses, and coat the
external genitalia and vaginal vestibule with an antibiotic ointment
effective against the CEM organism.9
---------------------------------------------------------------------------
\9\ A list of ointments effective against the CEM organism may
be obtained from the National Center for Import and Export, Import/
Export Animals, VS, APHIS, 4700 River Road Unit 39, Riverdale, MD
20737-1231.
---------------------------------------------------------------------------
(iv) A mare may be released from State quarantine only if all
cultures performed on specimens taken from the mare are negative for
CEM.
(v) If any culture required by this paragraph is positive for CEM,
the mare shall be treated as described in paragraphs (e)(5)(ii) and
(e)(5)(iii) of this section. No less than 21 days after the last day of
treatment, the mare shall be tested again in accordance with paragraph
(e)(5)(i) of this section. If all specimens are negative for CEM, the
mare may be released from quarantine.
(f) Special provisions for temporary importation. Horses over 731
days of age may be imported into the United States for no more than 90
days to compete in specified events if the following conditions are
met:
(1) The horse may remain in the United States for not more than 90
days following the horse's arrival in the United States, except as
provided in paragraph (f)(6) of this section and, while in the United
States, the horse must be moved according to the itinerary and methods
of transport specified in the import permit provided for in Sec. 92.304
of this part;
(2) While the horse is in the United States, the following
conditions must be met:
(i) Except when in transit, the horse must be kept on a premises
that has been approved, orally or in writing, by an APHIS
representative. If the approval is oral, it will be confirmed in
writing by the Administrator as soon as circumstances permit. To
receive approval, the premises:
(A) Must not be a breeding premises; and
(B) Must be or contain a building in which the horse can be kept in
a stall that is separated from other stalls containing horses, either
by an empty stall, by an open area across which horses cannot touch
each other, or by a solid wall that is at least 8 feet (2.4 m) high.
(ii) While at the premises at which the horse competes, the horse
must be monitored by an accredited veterinarian or APHIS representative
to ensure that the provisions of paragraphs (f)(2)(i), (f)(2)(iv), and
(f)(2)(v) of this section are met. If the monitoring is performed by an
accredited veterinarian, spot checks will be conducted by an APHIS
representative to ensure that the requirements of this section are
being met. If an APHIS representative finds that requirements are not
being met, the Administrator may require that all remaining monitoring
for the event be conducted by APHIS representatives to ensure
compliance.
(iii) While in transit, the horse must be moved in either an
aircraft or a sealed van or trailer. If the horse is moved in a sealed
van or trailer, the seal may be broken only by an APHIS representative
at the horse's destination, except in situations where the horse's life
is in danger.
(iv) Except when actually competing or being exercised, the horse
must be kept in a stall that is separated from other stalls containing
horses, either by an empty stall, by an open area across which horses
cannot touch each other, or by a solid wall that is at least 8 feet
(2.4 m) high.
(v) The horse may not be used for breeding purposes (including
artificial insemination), may not have any other sexual contact with
other horses, and may not undergo any genital examinations.
(vi) After the horse is transported anywhere in the United States,
any vehicle in which the horse was transported must be cleaned and
disinfected in the presence of an APHIS representative, according to
the procedures specified in Secs. 71.7 through 71.12 of this chapter,
before any other horse is transported in the vehicle.
(vii) The cleaning and disinfection specified in paragraph
(f)(2)(vi) of this section must be completed before the vehicle is
moved from the place where the horse is unloaded. In those cases where
the facilities or equipment for cleaning and disinfection are
inadequate at the place where the horse is unloaded, the Administrator
may allow the vehicle to be moved to another location for cleaning and
disinfection when the move will not pose a disease risk to other horses
in the United States.
(viii) The owner or importer of the horse must comply with any
other provisions of this part applicable to him or her.
(3) If the owner or importer wishes to change the horse's itinerary
or the methods by which the horse is transported from that which he or
she specified in the application for the import permit, the owner or
importer must make the request for change in writing to the
Administrator. Requests should be sent to the Administrator, c/o
Import-Export Animals Staff, VS, APHIS, 4700 River Road Unit 39,
Riverdale, MD 20737-1231. The change in itinerary or method of
transport may not be made without the written approval of the
Administrator, who may grant the request for change when he or she
determines that granting the request will not endanger other horses in
the United States and that sufficient APHIS personnel are available to
provide the services required by the owner or importer. If more than
one application for an import permit is received, APHIS personnel will
be assigned in the order that the applications that otherwise meet the
requirements of this section are received.
(4) The Administrator may cancel, orally or in writing, the import
permit provided for under Sec. 92.304 of this part whenever the
Administrator finds that the owner or importer of the horse has not
complied with the provisions of paragraphs (f)(1) through (f)(3) of
this section or any conditions imposed under those provisions. If the
cancellation is oral, the Administrator will confirm the cancellation
and the reasons for the cancellation in writing as
[[Page 28082]]
soon as circumstances permit. Any person whose import permit is
canceled may appeal the decision in writing to the Administrator within
10 days after receiving oral or written notification of the
cancellation, whichever is earlier. If the appeal is sent by mail, it
must be postmarked within 10 days after the owner or importer receives
oral or written notification of the cancellation, whichever is earlier.
The appeal must include all of the facts and reasons upon which the
person relies to show that the import permit was wrongfully canceled.
The Administrator will grant or deny the appeal in writing as promptly
as circumstances permit, stating the reason for his or her decision. If
there is a conflict as to any material fact, a hearing will be held to
resolve the conflict. Rules of practice concerning the hearing will be
adopted by the Administrator.
(5) Except in those cases where an appeal is in process, any person
whose import permit is canceled must move the horse identified in the
import permit out of the United States within 10 days after receiving
oral or written notification of cancellation, whichever is earlier. The
horse is not permitted to enter competition from the date the owner or
importer receives the notice of cancellation until the horse is moved
out of the United States or until resolution of an appeal in favor of
the owner or importer. Except when being exercised, the horse must be
kept, at the expense of the owner or importer, in a stall on the
premises where the horse is located when the notice of cancellation is
received, or, if the horse is in transit when the notice of
cancellation is received, on the premises where it is next scheduled to
compete according to the import permit. The stall in which the horse is
kept must be separated from other stalls containing horses, either by
an empty stall, by an open area across which horses cannot touch each
other, or by a solid wall that is at least 8 feet (2.4 m) high. In
cases where the owners of the above specified premises do not permit
the horse to be kept on those premises, or when the Administrator
determines that keeping the horse on the above specified premises will
pose a disease risk to horses in the United States, the horse must be
kept, at the expense of the owner or importer, on an alternative
premises approved by the Administrator.
(6) Stallions or mares over 731 days of age that are imported for
no more than 90 days in accordance with paragraphs (f)(1) through
(f)(3) of this section may be eligible to remain in the United States
if the following is completed:
(i) Following completion of the itinerary specified in the import
permit provided for in Sec. 92.304 of this part, the horse's owner or
importer applies for and receives a new import permit that specifies
that the stallion or mare will be moved to an approved State listed in
paragraph (h)(6) or (h)(7) of this section; and
(ii) The stallion or mare is transported in a sealed vehicle that
has been cleaned and disinfected to an approved facility in an approved
State where it is quarantined under State or Federal supervision until
the stallion or mare has met the testing and treatment requirements of
paragraph (e)(3) or (e)(5) of this section.
(7) All costs and charges associated with the supervision and
maintenance of a horse imported under paragraphs (f)(1) through (f)(3)
of this section will be borne by the horse's owner or importer. The
costs associated with the supervision and maintenance of the horse by
an APHIS representative at his or her usual places of duty will be
reimbursed by the horse's owner or importer through user fees payable
under part 130 of this chapter.
(8) In the event that an APHIS representative must be temporarily
detailed from his or her usual place of duty in connection with the
supervision and maintenance of a horse imported under paragraphs (f)(1)
through (f)(3) of this section, the owner or importer of the horse must
execute a trust fund agreement with APHIS to reimburse all expenses
(including travel costs, salary, per diem or subsistence,
administrative expenses, and incidental expenses) incurred by the
Department in connection with the temporary detail. Under the trust
fund agreement, the horse's owner or importer must deposit with APHIS
an amount equal to the estimated cost, as determined by APHIS, for the
APHIS representative to inspect the premises at which the horse will
compete, to conduct the monitoring required by paragraph (f)(2)(ii) of
this section, and to supervise the cleaning and disinfection required
by paragraph (f)(2)(vi) of this section. The estimated costs will be
based on the following factors:
(i) Number of hours needed for an APHIS representative to conduct
the required inspection and monitoring;
(ii) For services provided during regular business hours (8 a.m. to
4:30 p.m., Monday through Saturday, except holidays), the average
salary, per hours, for an APHIS representative;
(iii) For services provided outside regular business hours, the
applicable rate for overtime, night differential, or Sunday or holiday
pay, based on the average salary, per hour, for an APHIS
representative;
(iv) Number of miles from the premises at which the horse competes
to the APHIS office or facility that is monitoring the activities;
(v) Government rate per mile for automobile travel or, if
appropriate, cost of other means of transportation between the premises
at which the horse competes and the APHIS office or facility;
(vi) Number of trips between the premises at which the horse
competes and the APHIS office or facility that APHIS representatives
are required to make in order to conduct the required inspection and
monitoring;
(vii) Number of days the APHIS representative conducting the
inspection and monitoring must be in ``travel status;''
(viii) Applicable government per diem rate; and
(ix) Cost of related administrative support services.
(9) If a trust fund agreement with APHIS has been executed by the
owner or importer of a horse in accordance with paragraph (f)(8) of
this section and APHIS determines, during the horse's stay in the
United States, that the amount deposited will be insufficient to cover
the services APHIS is scheduled to provide during the remainder of the
horse's stay, APHIS will issue to the horse's owner or importer a bill
to restore the deposited amount to a level sufficient to cover the
estimated cost to APHIS for the remainder of the horse's stay in the
United States. The horse's owner or importer must pay the amount billed
wi
FR Doc. 96-13897 Importation of Horses From CEM Countries
thin 14 days after receiving the bill. If the bill is not paid within
14 days after its receipt, APHIS will cease to perform the services
provided for in paragraph (f)(2) of this section until the bill is
paid. The Administrator will inform the owner or importer of the
cessation of services orally or in writing. If the notice of cessation
is oral, the Administrator will confirm, in writing, the notice of
cessation and the reason for the cessation of services as soon as
circumstances permit. In such a case, the horse must be kept, at the
expense of the owner or importer and until the bill is paid, in a stall
either on the premises at which the horse is located when the notice of
cessation of services is received, or, if the horse is in transit when
the notice of cessation of services is received, on the premises at
which it is next scheduled to compete according to the import permit.
The stall in which the horse is kept must be separated from other
stalls containing horses either by an empty stall, an open area across
which horses cannot touch each other,
[[Page 28083]]
or a solid wall that is at least 8 feet (2.4 m) high. In cases where
the owners of the above specified premises do not permit the horse to
be kept on those premises, or when the Administrator determines that
keeping the horse on the above specified premises will pose a disease
risk to other horses in the United States, the horse must be kept, at
the expense of the owner or importer, on an alternative premises
approved by the Administrator. Until the bill is paid, the horse is not
permitted to enter competition. Any amount deposited in excess of the
costs to APHIS to provide the required services will be refunded to the
horse's owner or importer.
(g) Special provisions for the importation of horses that have been
temporarily exported to a CEM-affected country. If a horse has been
temporarily exported for not more than 60 days from the United States
to a CEM-affected country listed in paragraph (c)(1) of this section,
or if a horse has been temporarily exported for not more than 60 days
from another country not known to be affected with CEM to a CEM-
affected country during the 12 months preceding its exportation to the
United States, the horse may be eligible for return or importation into
the United States without meeting the requirements of paragraphs (d)
through (f) of this section under the following conditions:
(1) The horse must be accompanied by a certificate that meets the
requirements of Sec. 92.314(a) of this part issued by each CEM-affected
country that the horse has visited during the term of its temporary
exportation, and each certificate must contain the following additional
declarations:
(i) That the horse was held separate and apart from all other
horses except for the time it was actually participating in an event or
was being exercised by its trainer;
(ii) That the premises on which the horse was held were not used
for any equine or horse breeding purpose;
(iii) That the horse was not bred to or bred by any animal, nor did
it have any other sexual contact or genital examination while in such
country; and
(iv) That all transport while in such country was carried out in
cleaned and disinfected vehicles in which no other horses were
transported since such cleaning and disinfection;
(2) The horse is accompanied by an import permit issued in
accordance with Sec. 92.304 of this part at the time of exportation;
(3) If the horse was temporarily exported from the United States
and is being returned to the United States, the horse must be
accompanied by a copy of the United States health certificate issued
for its exportation from the United States and endorsed in accordance
with the export regulations in part 91 of this chapter;
(4) The horse must be examined by an inspector at the U.S. port of
entry and found by the inspector to be the identical horse covered by
the documents required by paragraphs (a) through (c) of this section
and found by the inspector to be free of communicable disease and
exposure thereto; and
(5) The horse must be quarantined and tested at the U.S. port of
entry as provided in Sec. 92.308 of this part prior to release.
(h) Approval of States. In order for a State to be approved to
receive stallions or mares over 731 days of age from a CEM-affected
country listed in paragraph (c)(1) of this section that are imported
under paragraph (e) of this section, the State must meet the following
conditions:
(1) The State must enter into a written agreement with the
Administrator, whereby the State agrees to enforce its laws and
regulations to control CEM and to abide by the conditions of approval
established by the regulations in this part.
(2) The State must agree to quarantine all stallions and mares over
731 days of age imported under the provisions of paragraph (e) of this
section until the stallions have been treated in accordance with
paragraph (e)(3) of this section and the mares have been treated in
accordance with paragraph (e)(5) of this section.
(3) The State must agree to quarantine all mares used to test
stallions for CEM until the mares have been released from quarantine in
accordance with paragraph (e)(4) of this section.
(4) The State must have laws or regulations requiring that
stallions over 731 days of age imported under paragraph (e) of this
section be treated in the manner specified in paragraph (e)(3) of this
section, and that mares over 731 days of age imported under paragraph
(e) of this section be treated in the manner specified in paragraph
(e)(5) of this section.
(5) Approval of any State to receive stallions or mares imported
from countries affected with CEM may be suspended by the Administrator
upon his or her determination that any requirements of this section are
not being met. After such action is taken, the animal health
authorities of the approved State will be informed of the reasons for
the action and afforded an opportunity to present their views thereon
before such suspension is finalized; however, such suspension of
approval shall continue in effect unless otherwise ordered by the
Administrator. In those instances where there is a conflict as to the
facts, a hearing shall be held to resolve such conflict.
(6) The following States have been approved to receive stallions
over 731 days of age imported under paragraph (e) of this section:
The State of Alabama
The State of California
The State of Colorado
The State of Florida
The State of Kentucky
The State of Louisiana
The State of Maryland
The State of Montana
The State of New Hampshire
The State of New Jersey
The State of New York
The State of North Carolina
The State of Ohio
The State of South Carolina
The State of Tennessee
The State of Texas
The State of Virginia
The State of Wisconsin
(7) The following States have been approved to receive mares over
731 days of age imported under paragraph (e) of this section:
The State of Alabama
The State of California
The State of Colorado
The State of Kentucky
The State of Louisiana
The State of Maryland
The State of Montana
The State of Hew Hampshire
The State of New Jersey
The State of New York
The State of North Carolina
The State of Ohio
The State of South Carolina
The State of Tennessee
The State of Texas
The State of Virginia
The State of Wisconsin
(i) Approval of laboratories. (1) The Administrator will approve a
laboratory to conduct CEM cultures and tests only after consulting with
the State animal health official in the State in which the laboratory
is located and after determining that the laboratory:
(i) Has technical personnel assigned to conduct the CEM culturing
and testing who possess the following minimum qualifications:
(A) A bachelor's degree in microbiology;
(B) A minimum of 2 years experience working in a bacteriology
laboratory; and
(C) Experience working with the CEM organism, including knowledge
of the specific media requirements, atmospheric requirements, and
[[Page 28084]]
procedures for the isolation and identification of the CEM
organism.10
---------------------------------------------------------------------------
\10\ When training regarding CEM culturing and testing is
necessary, it may be obtained at the National Veterinary Services
Laboratories, Ames, IA 50010.
---------------------------------------------------------------------------
(ii) Follows standard test protocol prescribed by the National
Veterinary Services Laboratories; 11 and
---------------------------------------------------------------------------
\11\ Standard test protocols prescribed by the National
Veterinary Services Laboratories and a list of approved laboratories
can be obtained from the National Veterinary Services Laboratories,
Ames, IA 50010.
---------------------------------------------------------------------------
(iii) Reports all official test results to the State animal health
official and the Veterinarian in Charge.
(2) To retain approval, the laboratory must meet the requirements
prescribed in paragraph (i)(1) of this section, and shall test with the
CEM organism each lot of media it prepares to ensure that the media
will support growth of the laboratory's reference culture. Media that
will not support growth of the reference culture must be discarded.
(3) The Administrator may deny or withdraw approval of any
laboratory to conduct CEM culturing or testing upon a determination
that the laboratory does not meet the criteria for approval or
maintenance of approval under paragraphs (i)(1) and (i)(2) of this
section.
(i) In the case of a denial of approval, the operator of the
laboratory will be informed of the reasons for denial and, upon
request, will be afforded an opportunity for a hearing with respect to
the merits or validity of the denial in accordance with rules of
practice that will be adopted for the hearing.
(ii) In the case of a withdrawal of approval, before such action is
taken, the operator of the laboratory will be informed of the reasons
for the proposed withdrawal and, upon request, will be afforded an
opportunity for a hearing with respect to the merits or validity of the
proposed withdrawal in accordance with rules of practice that will be
adopted for the hearing. However, the withdrawal will become effective
pending a final determination in the hearing when the Administrator
determines that such action is necessary to protect the public health,
interest, or safety. The withdrawal will be effective upon oral or
written notification, whichever is earlier, to the operator of the
laboratory. In the event of oral notification, written confirmation
will be given as promptly as circumstances allow. The withdrawal will
continue in effect pending completion of the hearing and any judicial
review of the hearing, unless otherwise ordered by the Administrator.
(iii) Approval for a laboratory to conduct CEM culturing or testing
will be automatically withdrawn by the Administrator when the operator
of the approved laboratory notifies the National Veterinary Services
Laboratories, Ames, IA 50010, in writing, that the laboratory no longer
conducts CEM culturing and testing.
(Approved by the Office of Management and Budget under control
number 0579-0040)
5. Section 92.304 would be amended as follows:
a. The section heading would be revised to read as set forth below.
b. In the introductory text of paragraph (a)(1)(ii), the reference
``Sec. 92.301(c)(2)(viii)'' would be removed both times it appears and
the reference ``Sec. 92.301(f)'' added in its place.
c. In paragraph (a)(1)(iii), in the first sentence, the reference
``Sec. 92.301(c)(2)(viii)'' would be removed and the reference
``Sec. 92.301(f)'' added in its place.
d. Paragraphs (a)(4) through (a)(12) would be removed.
e. Paragraph (b) would be revised to read as set forth below.
Sec. 92.304 Import permits for horses from countries affected with CEM
and for horse specimens for diagnostic purposes; reservation fees for
space at quarantine facilities maintained by APHIS.
(a) * * *
(b) Permit. (1) When a permit is issued, the original and two
copies will be sent to the importer. It shall be the responsibility of
the importer to forward the original permit and one copy to the shipper
in the country of origin, and it shall also be the responsibility of
the importer to ensure that the shipper presents the copy of the permit
to the carrier and makes the necessary arrangements for the original
permit to accompany the shipment to the specified U.S. port of entry
for presentation to the collector of customs.
(2) Horses and horse test specimens for which a permit is required
under paragraph (a) of this section will be received at the port of
entry specified on the permit within the time prescribed in the permit,
which shall not exceed 14 days from the first day that the permit is
effective.
(3) Horses and horse test specimens for which a permit is required
under paragraph (a) of this section will not be eligible for entry if:
(i) A permit has not been issued for the importation of the horse
or horse test specimen;
(ii) If the horse or horse test specimen is unaccompanied by the
permit issued for its importation;
(iii) If the horse or horse test specimen is shipped from any port
other than the one designated in the permit;
(iv) If the horse or horse test specimen arrives in the United
States at any port other than the one designated in the permit;
(v) If the horse or horse test specimen offered for entry differs
from that described in the permit; or
(vi) If the horse or horse test specimen is not handled as outlined
in the application for the permit and as specified in the permit
issued.
Sec. 92.308 [Amended]
6. In Sec. 92.308(a)(3), footnote 16 and its reference in the text
would be redesignated as footnote 14.
7. In Sec. 92.308(c)(1), footnote 17 and its reference in the text
would be redesignated as footnote 15.
8. Section 92.314 would be revised to read as follows:
Sec. 92.314 Horses, certification, and accompanying equipment.
(a) Horses offered for importation from any part of the world shall
be accompanied by a certificate of a salaried veterinary officer of the
national government of the country of origin, or if exported from
Mexico, shall be accompanied either by such a certificate or by a
certificate issued by a veterinarian accredited by the National
Government of Mexico and endorsed by a full-time salaried veterinary
officer of the National Government of Mexico, thereby representing that
the veterinarian issuing the certificate was authorized to do so,
showing that:
(1) The horses described in the certificate have been in said
country during the 60 days preceding exportation;
(2) That each horse has been inspected on the premises of origin
and found free of evidence of communicable disease and, insofar as can
be determined, exposure thereto during the 60 days preceding
exportation;
(3) That each horse has not been vaccinated with a live or
attenuated or inactivated vaccine during the 14 days preceding
exportation: Provided, however, That in specific cases the
Administrator may authorize horses that have been vaccinated with an
inactivated vaccine to enter the United States when he or she
determines that in such cases and under such conditions as he or she
may prescribe such importation will not endanger the livestock in the
United States, and such horses comply with all other applicable
requirements of this part;
(4) That, insofar as can be determined, no case of African horse
sickness, dourine, glanders, surra, epizootic lymphangitis, ulcerative
lymphangitis,
[[Page 28085]]
equine piroplasmosis, Venezuelan equine encephalomyelitis, or equine
infectious anemia has occurred on the premises of origin or on
adjoining premises during the 60 days preceding exportation; and
(5) That, except as provided in Sec. 92.301(g):
(i) The horses have not been in any country listed in
Sec. 92.301(c)(1) as affected with CEM during the 12 months immediately
prior to their importation into the United States;
(ii) The horses have not been on any premises at any time during
which time such premises were found by an official of the veterinary
services of the national government of the country where such premises
are located, to be affected with CEM;
(iii) The horses have not been bred by or bred to any horses from
an affected premises; and
(iv) The horses have had no other contact with horses that have
been found to be affected with CEM or with horses that were imported
from countries affected with CEM.
(b) If a horse is presented for importation from a country where it
has been for less than 60 days, the horse must be accompanied by a
certificate that meets the requirements of paragraph (a) of this
section that has been issued by a salaried veterinary officer of the
national government of each country in which the horse has been during
the 60 days immediately preceding its shipment to the United States.
The dates during which the horse was in each country during the 60 days
immediately preceding its exportation to the United States shall be
included as a part of the certification.
(c) Following the port-of-entry inspection required by Sec. 92.306
of this part, and before a horse offered for importation from any part
of the world is released from the port of entry, an inspector may
require the horse and its accompanying equipment to be disinfected as a
precautionary measure against the introduction of foot-and-mouth
disease or any other disease dangerous to the livestock of the United
States.
Sec. 92.315 [Amended]
9. In Sec. 92.315, in the undesignated center heading ``CANADA
18'', footnote 18 and its reference in the center heading would be
redesignated as footnote 16.
Sec. 92.319 [Amended]
10. In Sec. 92.319, in the undesignated center heading ``COUNTRIES
OF CENTRAL AMERICA AND WEST INDIES 19'', footnote 19 and its
reference in the center heading would be redesignated as footnote 17.
Sec. 92.321 [Amended]
11. In Sec. 92.321, in the undesignated center heading
``MEXICO\20\'', footnote 20 and its reference in the center heading
would be redesignated as footnote 18.
Sec. 92.324 [Amended]
12. In Sec. 92.324, in the second sentence, footnote 21 and its
reference in the text would be redesignated as footnote 19.
Done in Washington, DC, this 30th day of May 1996.
Terry L. Medley,
Acting Administrator, Animal and Plant Health Inspection Service.
[FR Doc. 96-13897 Filed 6-03-96; 8:45 am]
BILLING CODE 3410-34-P
Complete official Federal Register PDF
FR Doc. 96-13890 Airworthiness Directives; CFM International CFM56-5/-5B/-5C Series Turbofan Engines
[Federal Register Volume 61, Number 108 (Tuesday, June 4, 1996)]
[Proposed Rules]
[Pages 28112-28114]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-13890]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF TRANSPORTATION
Federal Aviation Administration
14 CFR Part 39
[Docket No. 95-ANE-65]
RIN 2120-AA64
Airworthiness Directives; CFM International CFM56-5/-5B/-5C
Series Turbofan Engines
AGENCY: Federal Aviation Administration, DOT.
ACTION: Notice of proposed rulemaking (NPRM).
-----------------------------------------------------------------------
SUMMARY: This document proposes the adoption of a new airworthiness
directive (AD) that is applicable to CFM International (CFMI) CFM56-5/-
5B/-5C series turbofan engines. This proposal would require initial and
repetitive borescope inspections of the stage 1 disk bore of certain
high pressure compressor rotor (HPCR) stage 1-2 spools for rubs and
scratches, and replacement, if found rubbed or scratched, with a
serviceable part. This proposal would also require removal and
replacement of certain stationary number 3 bearing aft air/oil seals as
terminating action to the inspection program. This proposal is prompted
by a report of an engine found with a rub on the forward corner of the
HPCR stage 1 disk bore due to contact with the stationary number 3
bearing aft air/oil seal. The actions specified by the proposed AD are
intended to prevent a failure of the stage 1 disk of the HPCR stage 1-2
spool, which could result in an uncontained engine failure and damage
to the aircraft.
DATES: Comments must be received by August 5, 1996.
ADDRESSES: Submit comments in triplicate to the Federal Aviation
Administration (FAA), New England Region, Office of the Assistant Chief
Counsel, Attention: Rules Docket No. 95- ANE-65, 12 New England
Executive Park, Burlington, MA 01803- 5299. Comments may also be
submitted to the Rules Docket by using the following Internet address:
``[email protected]''. Comments may be inspected at this
location between 8:00 a.m. and 4:30 p.m., Monday through Friday, except
Federal holidays.
The service information referenced in the proposed rule may be
obtained from CFM International, Technical Publications Department, One
Neumann Way, Cincinnati, OH 45215; telephone (513) 552-2981, fax (513)
552-2816. This information may be examined at the FAA, New England
Region, Office of the Assistant Chief Counsel, 12 New England Executive
Park, Burlington, MA.
FOR FURTHER INFORMATION CONTACT: Robert J. Ganley, Aerospace Engineer,
Engine Certification Office, FAA, Engine and Propeller Directorate, 12
New England Executive Park, Burlington, MA 01803-5299; telephone (617)
238-7138, fax (617) 238-7199.
[[Page 28113]]
SUPPLEMENTARY INFORMATION:
Comments Invited
Interested persons are invited to participate in the making of the
proposed rule by submitting such written data, views, or arguments as
they may desire. Communications should identify the Rules Docket number
and be submitted in triplicate to the address specified above. All
communications received on or before the closing date for comments,
specified above, will be considered before taking action on the
proposed rule. The proposals contained in this notice may be changed in
light of the comments received.
Comments are specifically invited on the overall regulatory,
economic, environmental, and energy aspects of the proposed rule. All
comments submitted will be available, both before and after the closing
date for comments, in the Rules Docket for examination by interested
persons. A report summarizing each FAA-public contact concerned with
the substance of this proposal will be filed in the Rules Docket.
Commenters wishing the FAA to acknowledge receipt of their comments
submitted in response to this notice must submit a self-addressed,
stamped postcard on which the following statement is made: ``Comments
to Docket Number 95- ANE-65.'' The postcard will be date stamped and
returned to the commenter.
Availability of NPRMs
Any person may obtain a copy of this NPRM by submitting a request
to the FAA, New England Region, Office of the Assistant Chief Counsel,
Attention: Rules Docket No. 95-ANE- 65, 12 New England Executive Park,
Burlington, MA 01803- 5299.
Discussion
This proposed airworthiness directive (AD) is applicable to CFM
International (CFMI) CFM56-5/-5B/-5C series turbofan engines. The
Federal Aviation Administration (FAA) has received a report of an
engine found with a rub on the forward corner of the high pressure
compressor rotor (HPCR) stage 1 disk bore due to contact with the
stationary number 3 bearing aft air/oil seal. The manufacturer has
discovered a potential lack of clearance condition between the HPCR
stage 1 disk bore and certain stationary number 3 bearing aft air/oil
seals. This potential lack of clearance may result in contact between
the two parts during engine operation. The manufacturer has determined
that this lack of clearance condition is limited to engines that have a
certain stationary number 3 bearing aft air/oil seal installed. This
condition, if not corrected, could result in a failure of the stage 1
disk of the HPCR stage 1-2 spool, which could result in an uncontained
engine failure and damage to the aircraft.
The FAA has reviewed and approved the technical contents of CFM56-5
Service Bulletin (SB) No. 72-440, CFM56- 5B SB No. 72-064, and CFM56-5C
SB No. 72-229, all Revision 2, dated June 23, 1995, that describes
procedures for borescope inspections of the stage 1 disk bore of
certain HPCR stage 1-2 spools for rubs and scratches.
Since an unsafe condition has been identified that is likely to
exist or develop on other products of this same type design, the
proposed AD would require initial and repetitive borescope inspections
of the stage 1 disk bore of certain HPCR stage 1-2 spools for rubs and
scratches, and replacement, if found rubbed or scratched, with a
serviceable part. This proposal would also require removal and
replacement of certain stationary number 3 bearing aft air/oil seals as
terminating action to the inspection program. The actions would be
required to be accomplished in accordance with the SB's described
previously.
There are approximately 131 engines of the affected design in the
worldwide fleet. The manufacturer has advised the FAA that there are no
engines installed on U.S. registered aircraft that would be affected by
this AD. Therefore, there is no associated cost impact on U.S.
operators as a result of this AD. However, should an affected engine be
imported on an aircraft and placed on the U.S. registry in the future,
it would take approximately 402 work hours to accomplish the required
actions, and that the average labor rate is $60 per work hour. Required
parts would cost approximately $87,700 per engine. Based on these
figures, the cost impact of the proposed AD is estimated to be $111,820
per engine.
The regulations proposed herein would not have substantial direct
effects on the States, on the relationship between the national
government and the States, or on the distribution of power and
responsibilities among the various levels of government. Therefore, in
accordance with Executive Order 12612, it is determined that this
proposal would not have sufficient federalism implications to warrant
the preparation of a Federalism Assessment.
For the reasons discussed above, I certify that this proposed
regulation (1) is not a ``significant regulatory action'' under
Executive Order 12866; (2) is not a ``significant rule'' under the DOT
Regulatory Policies and Procedures (44 FR 11034, February 26, 1979);
and (3) if promulgated, will not have a significant economic impact,
positive or negative, on a substantial number of small entities under
the criteria of the Regulatory Flexibility Act. A copy of the draft
regulatory evaluation prepared for this action is contained in the
Rules Docket. A copy of it may be obtained by contacting the Rules
Docket at the location provided under the caption ADDRESSES.
List of Subjects in 14 CFR Part 39
Air transportation, Aircraft, Aviation safety, Safety.
The Proposed Amendment
Accordingly, pursuant to the authority delegated to me by the
Administrator, the Federal Aviation Administration proposes to amend
part 39 of the Federal Aviation Regulations (14 CFR part 39) as
follows:
PART 39--AIRWORTHINESS DIRECTIVES
1. The authority citation for part 39 continues to read as follows:
Authority: 49 USC 106(g), 40113, 44701.
Sec. 39.13 [Amended]
2. Section 39.13 is amended by adding the following new
airworthiness directive:
CFM International: Docket No. 95-ANE-65.
Applicability: CFM International (CFMI) CFM56-5/-5B/- 5C series
turbofan engines, installed on but not limited to Airbus A320, A321,
and A340 series aircraft.
Note: This airworthiness directive (AD) applies to each engine
identified in the preceding applicability provision, regardless of
whether it has been modified, altered, or repaired in the area
subject to the requirements of this AD. For engines that have been
modified, altered, or repaired so that the performance of the
requirements of this AD is affected, the owner/operator must use the
authority provided in paragraph (h) to request approval from the
Federal Aviation Administration (FAA). This approval may address
either no action, if the current configuration eliminates the unsafe
condition, or different actions necessary to address the unsafe
condition described in this AD. Such a request should include an
assessment of the effect of the changed configuration on the unsafe
condition addressed by this AD. In no case does the presence of any
modification, alteration, or repair remove any engine from the
applicability of this AD.
Compliance: Required as indicated, unless accomplished
previously.
To prevent a failure of the stage 1 disk of the high pressure
compressor rotor (HPCR) stage 1-2 spool, which could result in an
uncontained engine failure and damage to the aircraft, accomplish
the following:
[[Page 28114]]
(a) For CFM56-5/-5B/-5C engines that have a stationary number 3
bearing aft air/oil seal, Part Number (P/N) 1364M71G02, installed,
inspect the stage 1 disk of the HPCR stage 1-2 spool in accordance
with the Accomplishment Instructions of CFM56-5 Service Bulletin
(SB) No. 72-440, CFM56-5B SB No. 72-064, or CFM56-5C SB No. 72-229,
all Revision 2, dated June 23, 1995, as applicable, as follows:
(1) If the disk has been previously inspected prior to the
effective date of this AD, inspect prior to accumulating 2,200
cycles since new (CSN).
(2) If the disk has been previously inspected prior to the
effective date of this AD, and the disk was found not to be rubbed
or scratched, reinspect prior to accumulating 2,200 cycles since
last inspection (CSLI).
(b) Thereafter, for disks that have been inspected in accordance
with paragraph (a)(1) or (a)(2) of this AD, inspect in accordance
with the Accomplishment Instructions of CFM56-5 SB No. 72-440,
CFM56-5B SB No. 72-064, or CFM56-5C SB No. 72-229, all Revision 2,
dated June 23, 1995, as applicable, at intervals not to exceed 2,200
CSLI.
(c) Remove from service HPCR stage 1-2 spools with rubbed or
scratched stage 1 disks and replace with a serviceable part, as
follows:
(1) For spools with less than 2,200 CSN on the effective date of
this AD, at the next engine shop visit after the effective date of
this AD, or prior to accumulating 2,200 CSN, whichever occurs first.
(2) For spools with 2,200 CSN or more on the effective date of
this AD, at the next engine shop visit after the effective date of
this AD, or prior to accumulating 2,200 CSLI, whichever occurs
first.
(d) Remove from service stationary number 3 aft air/oil seals,
P/N 1364M71G02, at the next engine shop visit after the effective
date of this AD, and replace with a serviceable part. Compliance
with this paragraph constitutes terminating action to the inspection
requirements of paragraphs (a)(1), (a)(2), and (b) of this AD.
(e) For the purpose of this AD, a serviceable HPCR stage 1-2
spool is defined as a spool without a rub or scratch indication on
the stage 1 disk, a P/N 1834M55G01 spool, or a spool that has
accomplished the stage 1 disk rework in accordance with any revision
level of CFM56-5 SB No. 72-442, CFM56-5B SB No. 72-066, or CFM56-5C
SB No. 72-230, as applicable.
(f) For the purpose of this AD, a serviceable stationary number
3 bearing aft air/oil seal is defined as any seal other than a P/N
1364M71G02 seal.
(g) For the purpose of this AD, an engine shop visit is defined
as the induction of an engine into the shop for any reason.
(h) An alternative method of compliance or adjustment of the
compliance time that provides an acceptable level of safety may be
used if approved by the Manager, Engine Certification Office. The
request should be forwarded through an appropriate FAA Principal
Maintenance Inspector, who may add comments and then send it to the
Manager, Engine Certification Office.
Note: Information concerning the existence of approved
alternative methods of compliance with this airworthiness directive,
if any, may be obtained from the Engine Certification Office.
(i) Special flight permits may be issued in accordance with
sections 21.197 and 21.199 of the Federal Aviation Regulations (14
CFR 21.197 and 21.199) to operate the aircraft to a location where
the requirements of this AD can be accomplished.
Issued in Burlington, Massachusetts, on May 22, 1996.
Robert E. Guyotte,
Acting Manager, Engine and Propeller Directorate, Aircraft
Certification Service.
[FR Doc. 96-13890 Filed 6-3-96; 8:45 am]
BILLING CODE 4910-13-U
Complete official Federal Register PDF
FR Doc. 96-13889 Airworthiness Directives; Pratt & Whitney JT8D Series Turbofan Engines
[Federal Register Volume 61, Number 108 (Tuesday, June 4, 1996)]
[Proposed Rules]
[Pages 28114-28116]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-13889]
-----------------------------------------------------------------------
DEPARTMENT OF TRANSPORTATION
14 CFR Part 39
[Docket No. 93-ANE-79]
RIN 2120-AA64
Airworthiness Directives; Pratt & Whitney JT8D Series Turbofan
Engines
AGENCY: Federal Aviation Administration, DOT.
ACTION: Supplemental notice of proposed rulemaking; reopening of
comment period.
-----------------------------------------------------------------------
SUMMARY: This notice revises an earlier proposed airworthiness
directive (AD), applicable to Pratt & Whitney (PW) JT8D series turbofan
engines, that would have superseded a current AD by reducing the rear
flange inspection interval for combustion chamber outer cases (CCOC's)
when only the aft face of the rear flange has been inspected, and
introducing an improved ultrasonic probe assembly. That proposal was
prompted by reports of crack origins in the forward face of the rear
flange that could not be detected by the inspection methods for
installed CCOC's that were mandated in the current AD. This action
retains the elements of the original proposal, but simplifies the
compliance instructions, and incorporates a new PW Alert Service
Bulletin (ASB). This action also revises the proposed rule by
introducing new non-destructive inspection procedures (NDIP's), and
introducing a rotating eddy current probe for shop inspections in which
the case is removed from the engine. In addition, this action
eliminates fluorescent penetrant inspection (FPI), fluorescent magnetic
particle inspection (FMPI), and visual inspections from hot section
disassembly level inspection procedures. This action also revises the
proposed rule by consolidating the inspection requirements of an
additional current AD, 95-08-15, into this proposed AD. The actions
specified by this proposed AD are intended to prevent CCOC flange
cracks that could result in uncontained engine failure, inflight engine
shutdown, engine cowl release, and airframe damage.
DATES: Comments must be received by August 5, 1996.
ADDRESSES: Submit comments in triplicate to the Federal Aviation
Administration (FAA), New England Region, Office of the Assistant Chief
Counsel, Attention: Rules Docket No. 93-ANE-79, 12 New England
Executive Park, Burlington, MA 01803-5299. Comments may also be
submitted to the Rules Docket by using the following Internet address:
``epd-adcommen[email protected]''. Comments may be inspected at this
location between 8:00 a.m. and 4:30 p.m., Monday through Friday, except
Federal holidays.
The service information referenced in the proposed rule may be
obtained from Pratt & Whitney, 400 Main Street, East Hartford, CT
06108. This information may be examined at the FAA, New England Region,
Office of the Assistant Chief Counsel, 12 New England Executive Park,
Burlington, MA.
FOR FURTHER INFORMATION CONTACT: Mark A. Rumizen, Aerospace Engineer,
Engine Certification Office, FAA, Engine and Propeller Directorate, 12
New England Executive Park, Burlington, MA 01803-5299; telephone (617)
238-7137, fax (617) 238-7199.
SUPPLEMENTARY INFORMATION:
Comments Invited
Interested persons are invited to participate in the making of the
proposed rule by submitting such written data, views, or arguments as
they may desire. Communications should identify the Rules Docket number
and be submitted in triplicate to the address specified above. All
communications received on or before the closing date for comments,
specified above, will be considered before taking action on the
proposed rule. The proposals contained in this notice may be changed in
light of the comments received.
Comments are specifically invited on the overall regulatory,
economic, environmental, and energy aspects of the proposed rule. All
comments submitted will be available, both before and after the closing
date for comments, in the Rules Docket for examination by interested
persons. A report summarizing each FAA-public contact concerned with
the substance of this proposal will be filed in the Rules Docket.
Commenters wishing the FAA to acknowledge receipt of their comments
submitted in response to this notice
[[Page 28115]]
must submit a self-addressed, stamped postcard on which the following
statement is made: ``Comments to Docket Number 93-ANE-79.'' The
postcard will be date stamped and returned to the commenter.
Availability of NPRMs
Any person may obtain a copy of this NPRM by submitting a request
to the FAA, New England Region, Office of the Assistant Chief Counsel,
Attention: Rules Docket No. 93-ANE-79, 12 New England Executive Park,
Burlington, MA 01803-5299.
Discussion
On October 3, 1989, the Federal Aviation Administration (FAA)
issued airworthiness directive (AD) 87-11-07 R1, Amendment 39-6360 (54
FR 46045, November 1, 1989), applicable to Pratt & Whitney (PW) JT8D
series turbofan engines, to require repetitive eddy current,
fluorescent penetrant, fluorescent magnetic penetrant, or visual
inspections for cracks in the rear flange, and ultrasonic, fluorescent
penetrant, or fluorescent magnetic penetrant inspections for cracks in
the PS4 boss, and drain bosses of the combustion chamber outer case
(CCOC). That action was prompted by reports of uncontained rupture of
the CCOC. That condition, if not corrected, could result in CCOC flange
cracks that if undetected could result in uncontained engine failure,
inflight engine shutdown, engine cowl release, and airframe damage.
Since the issuance of that AD, the FAA has received reports of
crack origins in the forward face of the rear flange that cannot be
detected by the inspection methods for installed CCOC's that were
mandated in that AD. While no failures have been attributed to these
undetected cracks, analysis indicates that a reduced inspection
interval is necessary to prevent crack propagation to critical lengths
as the CCOC's age. The FAA has determined that to reduce the fleet-wide
risk to an acceptable level, the inspection interval should be reduced
if only the aft face of the rear flange is inspected.
A proposal to amend part 39 of the Federal Aviation Regulations (14
CFR part 39) to add an AD, applicable to PW JT8D series turbofan
engines, was published as a notice of proposed rulemaking (NPRM) in the
Federal Register on March 15, 1994 (59 FR 11942). That NPRM would have
reduced the inspection interval for CCOC's that have had only the aft
face of the rear flange inspected and introduced an improved ultrasonic
probe assembly. That NPRM was prompted by reports of rupture of CCOC's
that had only the aft face of the rear flange inspected in accordance
with the current AD.
Since the issuance of that NPRM, the manufacturer has introduced
improved non-destructive inspection procedures (NDIP's) that are
applicable to the existing CCOC inspection requirements of AD 87-11-07
R1. The FAA has determined that the improved NDIP's should be
incorporated into the CCOC inspection requirements, that the FPI, FMPI,
and visual inspections should be eliminated from the hot section
inspection level of disassembly inspection requirements, that a new
rotating eddy current probe should be introduced for shop level
inspections in which the case is removed from the engine, and that the
compliance section should be simplified.
In addition, since issuance of the NPRM the FAA has issued AD 95-
08-15, Amendment 39-9204 (60 FR 20019, April 24, 1995), which requires
an additional inspection of the CCOC rear flange for intergranular
cracking. In addition, PW has issued Revision 1 to the Alert Service
Bulletin (ASB) incorporated in that AD, No. A6202, dated January 4,
1996, which removes the in-shop ultrasonic inspection requirement and
clarifies the borescope inspection requirements. The FAA has determined
that AD 95-08-15 should be superseded and the compliance requirements
of that AD and that PW ASB No. A6202, Revision 1, dated January 4,
1996, should be consolidated into the existing CCOC inspection
requirements of AD 87-11-07 R1.
In addition, PW has issued ASB No. A6228, dated November 7, 1995,
which introduces the improved NDIP's, eliminates the FPI and FMPI from
the hot section disassembly level inspection requirements, and
consolidates inspection procedures for the CCOC. This ASB is
incorporated in this proposed rule. Pratt & Whitney ASB No. A6228,
dated November 7, 1995, also includes an inspection of PS4 and drain
bosses for a thin walled condition in Paragraph 2.C, Part III of that
ASB. The FAA has determined, however, that this condition does not pose
a significant risk to continued safe flight and therefore is not
included in this proposed AD.
Interested persons have been afforded an opportunity to participate
in the making of this proposal. Due consideration has been given to the
comments received.
Two commenters state that the new, reduced, rear flange inspection
interval should only apply to future inspections, and not be
retroactive, such that some engines would require inspection
immediately upon AD effectivity. The FAA agrees. This proposed AD
allows the inspection interval previously established under AD 87-11-07
R1 to be completed prior to imposing the new, reduced intervals.
One commenter states that inspection records may not specifically
state whether or not both faces of the rear flange were inspected, or
if only the aft face was inspected, thus precluding determination of
the appropriate reinspection interval in accordance with PW ASB No.
A6228, dated November 7, 1995. The FAA agrees. As stated above, the
previously established inspection interval, determined in accordance
with AD 87-11-07 R1, may be used for the initial inspection without the
need for a more comprehensive records search.
One commenter states that an inspection should not be required at
shop visits that occur within a short time period of a previous shop
visit in which the CCOC was inspected. The FAA agrees. Shop visits that
occur within 1,000 cycles of a previous shop visit that included a CCOC
inspection do not need to be reinspected.
Three commenters state that the shop visit definition conflicted
with the definition contained in the PW ASB, and in some instances CCOC
inspections and associated extensive engine disassembly could be
required during limited scope maintenance activities. The FAA agrees.
This proposed AD requires use of the shop visit definition in the ASB,
and this definition has been refined in response to operators'
concerns.
One commenter states that an incorrect Table reference was
specified in paragraph (d) of the NPRM. The FAA agrees. This proposed
AD contains a simplified compliance section that limits references to
only the applicable major paragraphs of the ASB compliance section.
Three commenters state that the AD applicability section should
specify the applicable CCOC part numbers as well as the applicable
engine models. The FAA agrees. The applicability section in this
proposed AD includes these part number references.
One commenter states that the ASB is complex and could lead to non-
compliance with the AD. The FAA agrees. Both the ASB and the proposed
AD have been simplified.
One commenter states that the equipment and procedures used for the
inspection of the PS4 and drain bosses produce unreliable results. The
FAA agrees in part. The FAA acknowledges that the inspections are
complex and require skilled and trained inspectors,
[[Page 28116]]
and refinements have been made to these inspection procedures and tools
based on past in-service experience and reports from operators of the
PW JT8D series engines.
One commenter concurs with the proposed AD as written.
Since these changes expand the scope of the originally proposed
rule, the FAA has determined that it is necessary to reopen the comment
period to provide additional opportunity for public comment.
The FAA estimates that 6,815 engines installed on aircraft of U.S.
registry would be affected by this proposed AD and that it would take
approximately 4.5 work hours per engine to accomplish the proposed
actions. Since publication of the NPRM, the FAA has revised its average
labor rate estimate from $55 per work hour to $60 per work hour to
better reflect current costs. Based on these figures, the total cost
impact of the proposed AD on U.S. operators is estimated to be
$1,840,050.
The regulations proposed herein would not have substantial direct
effects on the States, on the relationship between the national
government and the States, or on the distribution of power and
responsibilities among the various levels of government. Therefore, in
accordance with Executive Order 12612, it is determined that this
proposal would not have sufficient federalism implications to warrant
the preparation of a Federalism Assessment.
For the reasons discussed above, I certify that this proposed
regulation (1) is not a ``significant regulatory action'' under
Executive Order 12866; (2) is not a ``significant rule'' under the DOT
Regulatory Policies and Procedures (44 FR 11034, February 26, 1979);
and (3) if promulgated, will not have a significant economic impact,
positive or negative, on a substantial number of small entities under
the criteria of the Regulatory Flexibility Act. A copy of the draft
regulatory evaluation prepared for this action is contained in the
Rules Docket. A copy of it may be obtained by contacting the Rules
Docket at the location provided under the caption ADDRESSES.
List of Subjects in 14 CFR Part 39
Air transportation, Aircraft, Aviation safety, Safety.
The Proposed Amendment
Accordingly, pursuant to the authority delegated to me by the
Administrator, the Federal Aviation Administration proposes to amend
part 39 of the Federal Aviation Regulations (14 CFR part 39) as
follows:
PART 39--AIRWORTHINESS DIRECTIVES
1. The authority citation for part 39 continues to read as follows:
Authority: 49 USC 106(g), 40113, 44701.
Sec. 39.13 [Amended]
2. Section 39.13 is amended by removing amendment 39-6360 (54 FR
46045, November 1, 1989) and amendment 39-9204 (60 FR 20019, April 24,
1995) and by adding a new airworthiness directive to read as follows:
Pratt & Whitney: Docket No. 93-ANE-79. Supersedes AD 87-11-07 R1,
Amendment 39-6360, AD 87-11-07, Amendment 39-5619, and AD 95-08-15,
Amendment 39-9204.
Applicability: Pratt & Whitney (PW) Models JT8D-1, -1A, -1B, -7,
-7A, -9, -9A, -11, -15, -15A, -17, -17A, -17R, and -17AR turbofan
engines, with combustion chamber outer case (CCOC) part numbers (P/
Ns) 490547, 542155, 616315, 728829, 728829-001, 730413, 730413-001,
730414, 730414-001, 767197, 767279, 767279-001 installed. These
engines are installed on but not limited to Boeing 737 and 727
series, and McDonnell Douglas DC-9 series aircraft.
Note: This airworthiness directive (AD) applies to each engine
identified in the preceding applicability provision, regardless of
whether it has been modified, altered, or repaired in the area
subject to the requirements of this AD. For engines that have been
modified, altered, or repaired so that the performance of the
requirements of this AD is affected, the owner/operator must use the
authority provided in paragraph (c) to request approval from the
Federal Aviation Administration (FAA). This approval may address
either no action, if the current configuration eliminates the unsafe
condition, or different actions necessary to address the unsafe
condition described in this AD. Such a request should include an
assessment of the effect of the changed configuration on the unsafe
condition addressed by this AD. In no case does the presence of any
modification, alteration, or repair remove any engine from the
applicability of this AD.
Compliance: Required as indicated, unless accomplished
previously.
To prevent CCOC flange cracks that could result in uncontained
engine failure, inflight engine shutdown, engine cowl release, and
airframe damage, accomplish the following:
(a) Inspect, disposition, and report CCOC distress, in
accordance with the intervals and procedures described in Paragraphs
2.A and 2.C of PW Alert Service Bulletin (ASB) No. A6202, Revision
1, dated January 4, 1996. Reporting requirements have been approved
by the Office of Management and Budget and assigned OMB control
number 2120-0056.
(1) For the purposes of this AD, the accomplishment effective
date to be used for determination of inspection intervals, as
required by Section 2.A of PW ASB A6202, Revision 1, dated January
4, 1996, is defined as the effective date of this AD.
(b) Inspect, disposition, and report CCOC distress in accordance
with the intervals and procedures described in Paragraphs 2.A. (Part
I), 2.B. (Part II), and 2.D of PW ASB No. A6228, dated November 7,
1995. Reporting requirements have been approved by the Office of
Management and Budget and assigned OMB control number 2120-0056.
(c) An alternative method of compliance or adjustment of the
compliance time that provides an acceptable level of safety may be
used if approved by the Manager, Engine Certification Office. The
request should be forwarded through an appropriate FAA Principal
Maintenance Inspector, who may add comments and then send it to the
Manager, Engine Certification Office.
Note: Information concerning the existence of approved
alternative methods of compliance with this airworthiness directive,
if any, may be obtained from the Engine Certification Office.
(d) Special flight permits may be issued in accordance with
sections 21.197 and 21.199 of the Federal Aviation Regulations (14
CFR 21.197 and 21.199) to operate the aircraft to a location where
the requirements of this AD can be accomplished.
Issued in Burlington, Massachusetts, on May 22, 1996.
Robert E. Guyotte,
Acting Manager, Engine and Propeller Directorate, Aircraft
Certification Service.
[FR Doc. 96-13889 Filed 6-3-96; 8:45 am]
BILLING CODE 4910-13-U
Complete official Federal Register PDF
FR Doc. 96-13866 Denial of Petition for Rulemaking; Federal Motor Vehicle Safety Standards
[Federal Register Volume 61, Number 108 (Tuesday, June 4, 1996)]
[Proposed Rules]
[Pages 28123-28124]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-13866]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF TRANSPORTATION
National Highway Traffic Safety Administration
49 CFR Part 571
Denial of Petition for Rulemaking; Federal Motor Vehicle Safety
Standards
AGENCY: National Highway Traffic Safety Administration (NHTSA),
Department of Transportation.
ACTION: Denial of petition for rulemaking.
-----------------------------------------------------------------------
SUMMARY: This document denies the Society of Automotive Engineers (SAE)
petition to incorporate the latest version of SAE J592 Clearance, Side
Marker, and Identification Lamps, and SAE J593 Backup Lamps, into
Federal Motor Vehicle Safety Standard (FMVSS) No. 108. NHTSA's analysis
of the petition concludes that there is minimal benefit to the public
in updating the reference to these SAE standards. While incorporation
would make them more readily available to lighting and vehicle design
engineers as a reference, this is a minimal benefit compared to the
expenditures of Agency resources to implement it and other SAE
standards whose references in FMVSS No. 108 are not the most recent.
The Agency's commitment of its resources to its safety priorities
precludes granting this petition. However, the agency has compiled a
reference document of materials incorporated into FMVSS No. 108 to
improve the availability of these materials. This document is available
upon request.
FOR FURTHER INFORMATION CONTACT: Mr. Richard L. Van Iderstine, Office
of Crash Avoidance Standards, NHTSA, 400 Seventh Street, SW,
Washington, DC 20590. Mr. Van Iderstine's telephone number is: (202)
366-5280. His facsimile number is (202) 366-4329.
SUPPLEMENTARY INFORMATION: By letter dated February 15, 1996, William
A. McKinney, Chairman of the Lighting Coordinating Committee of the
Society of Automotive Engineers, Inc. (Petitioner) petitioned the
agency to incorporate the latest version of SAE J592 Clearance, Side
Marker, and Identification Lamps, and SAE J593 Backup Lamps, into 49
CFR 571.108 (Federal Motor Vehicle Safety Standard No. 108, Lamps,
reflective devices and associated equipment.)
The Petitioner claimed the changes in SAE J592 DEC94 Clearance,
Side Marker, and Identification Lamps provide significant improvements
as follows:
a. Photometric performance requirements are based on zones,
including 60% minimum requirement for individual test points, and are
consistent with the required format used for most signal and marking
lamps regulated by FMVSS 108, and a 0.5 degree radius tolerance area
for maximum readings is also additionally specified to allow for
inconsequential light streaks,
b. Additional explanations and guidelines for installation are
provided,
c. The format and content is consistent with the current SAE
formatting requirements, and
d. Information on SAE publications referenced in the document is
incorporated.
The petitioner claimed the changes in SAE J593 OCT95 Backup provide
the following:
a. A definition of point of visibility,
b. Photometric performance requirements based on zones, including
60% minimum requirement for individual test points, thus allowing the
deletion of FMVSS 108, Figure 2, Minimum Luminous Intensity
Requirements for Backup Lamps,
c. A specific maximum requirement of 500 cd for a one (1) backup
lamp system, whereas the current FMVSS 108, Table 2 footnote leaves the
maximum requirement subject to interpretation,
d. Specific requirements for limiting and measuring the currently
specified ``incidental red, amber, or white light * * *.''
e. Additional explanations and guidelines for photometry and
installation,
f. Revised format with content that is consistent with the current
SAE formatting requirements, and
g. Information on SAE publications referenced in the document.
Petitioner further claimed that these revisions make new versions
easier to apply, as well as easier to find because they are located in
current SAE Handbooks. Petitioner also claimed that the changes would
not adversely affect the costs of any lighting. No claims about safety
or performance were made.
The agency has reviewed what would be required to implement the
Petitioner's desired solution. It has found that the tests and many
requirements of the new documents are from other SAE standards newer
than those referenced in FMVSS No. 108, making an update only partially
of value to any particular user.
Thus, the advantage claimed by Petitioner by referencing standards
in current SAE Handbooks appears to be very small because this action
would update only the two referenced documents, and none of the
subreferenced documents. Additionally, because NHTSA reference to SAE
standards is not always absolute, in that parts of standards are
referenced or exceptions are made to specific requirements in SAE
standards where different or more stringent performance is necessary
for safety purposes, the value of having the latest version of an SAE
document is lessened. Thus, without a careful reading of FMVSS No. 108,
a reader of the newest referenced documents could be misled as to the
pertinent requirements, just as can occur with the currently referenced
versions.
Additionally, it is unlikely these two documents, or any version of
a referenced industry standard would be wholly usable for more than
just a short period of time and probably would be out of print within
no more than five years because of SAE's 5-year schedule
[[Page 28124]]
of periodic updating of its standards. In fact, SAE J593 was updated in
June 1987, February 1995, and October 1995, three times in less than
nine years. Thus, unless SAE changes the policy of regular updates, the
value of the rulemaking effort requested by this petition soon would be
negated by another update. While the agency acknowledges that industry
standards must be updated to assure their relevance to technology and
their value to users, periodic updating where few if any substantive
changes are made may be counterproductive for use as Federal Motor
Vehicle Safety Standards.
Allocation of agency resources and agency priorities also must be
considered in processing what is the second petition from the SAE to
update its standards directly or indirectly referenced in FMVSS No.
108. All of these standards have specific dated versions referenced in
FMVSS No. 108. Because the SAE endeavors to update its standards on a
regular schedule, the federal regulatory workload from such a course of
updating would be continuous and drain resources from the Agency's
identified priorities. This is not a desirable course. Nonetheless,
NHTSA recognizes that the technical expertise of engineers from around
the world participating in SAE Committee activities is invaluable to
NHTSA's mission, particularly when performance requirements must be
developed to accommodate new technologies.
As stated in the recent denial (61 FR 14044) on the first SAE
petition to update references to SAE standards, NHTSA is considering
how best to cooperate with SAE. The Agency has compiled and will
provide on request, a reference document containing all the SAE and
other organizations' standards that are directly referenced in FMVSS
No. 108. The immediate effect is to make it easier for all interested
parties, especially lighting and vehicle personnel, to have available
the requirements in the Federal lighting standard. The agency
recognizes the problem of finding older SAE standards, and takes this
action as a short term solution to solve that problem. Together, this
document of referenced standards and the current version of FMVSS No.
108 will provide our customers with as current a version of the
lighting standard as is reasonable.
As a longer term solution, the Agency looks to SAE and our
regulated partners to help find ways to make the more recent SAE
documents be more acceptable from a regulatory burden and motor vehicle
safety perspective, and to be longer lasting in their value. Thus, the
agency will be favorably inclined to consider any future SAE or other
petitioner's request that has significant safety benefit or when such
action would remove impediments to the use of new technologies.
In accordance with 49 CFR part 552, this completes the agency's
review of the petition. The agency has concluded that there is no
reasonable possibility that the specific action requested by the
petitioner would be issued at the conclusion of a rulemaking
proceeding. Accordingly, it denies the SAE's petition.
Authority: 49 U.S.C. 30103, 30162; delegation of authority at 49
CFR 1.50 and 501.8.
Issued on: May 29, 1996.
Barry Felrice,
Associate Administrator for Safety Performance Standards.
[FR Doc. 96-13866 Filed 6-3-96; 8:45 am]
BILLING CODE 4910-59-P
Complete official Federal Register PDF
FR Doc. 96-13864 Federal Motor Vehicle Safety Standards; Power-Operated Window, Partition, and Roof Panel Systems
[Federal Register Volume 61, Number 108 (Tuesday, June 4, 1996)]
[Proposed Rules]
[Pages 28124-28131]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-13864]
-----------------------------------------------------------------------
DEPARTMENT OF TRANSPORTATION
49 CFR Part 57l
[Docket No. 87-10; Notice 6]
RIN 2127-AF83
Federal Motor Vehicle Safety Standards; Power-Operated Window,
Partition, and Roof Panel Systems
AGENCY: National Highway Traffic Safety Administration (NHTSA),
Department of Transportation.
ACTION: Notice of Proposed Rulemaking (NPRM).
-----------------------------------------------------------------------
SUMMARY: In response to a petition from Prospects Corporation
(Prospects), this document proposes to amend Standard 118, Power-
Operated Window, Partition, and Roof Panel Systems, to accommodate
power windows, partitions, and roof panels which automatically reverse
when closing if an infrared system detects an object in or near the
path of the closing window, partition, or panel. Since infrared systems
may fail to detect an object the size of a very young child's finger,
but can detect the child's hand, the agency is proposing to test those
systems using a rod representing the side profile of a child's hand.
The proposal also specifies the infrared reflectance of the rods used
for testing those systems. This document also proposes to amend the
requirements for systems that stop the window, partition, or panel
before an appendage or other body part could become trapped by it by
eliminating the requirement that those systems reverse after stopping.
Reversal is not necessary unless there is a risk that a person may
become trapped. In addition, this document requests comment on the
safety of express-up power windows (i.e., power windows that fully
close after a single, momentary touching of the window switch), because
numerous callers to NHTSA have alleged that express-up windows exist
and are unsafe.
DATES: Comment Date: Comments must be received by August 5, 1996
Effective and Compliance Dates: If adopted, the proposed amendments
would become effective, and compliance required, 30 days following
publication of the final rule.
ADDRESSES: Comments should refer to the docket and notice number of
this notice and be submitted to: Docket Section, Room 5109, National
Highway Traffic Safety Administration, 400 Seventh Street, SW,
Washington, DC 20590. (Docket Room hours are 9:30 a.m.-4 p.m., Monday
through Friday.)
FOR FURTHER INFORMATION CONTACT: The following persons by mail at the
National Highway Traffic Safety Administration, 400 Seventh Street, SW,
Washington, DC 20590:
For technical issues:
Mr. Richard Van Iderstine, Office of Crash Avoidance Standards,
NPS-21, telephone (202) 366-5280, facsimile (202) 366-4329, electronic
mail ``[email protected]''.
For legal issues:
Mr. Paul Atelsek, Office of the Chief Counsel, NCC-20, telephone
(202) 366-2992, facsimile (202) 366-3820, electronic mail
``[email protected]''. Please note that comments should be sent to
the docket section rather than faxed to the contact persons.
SUPPLEMENTARY INFORMATION:
I. Background
Standard No. 118 regulates the safety of power windows, partitions,
and roof panels. For the sake of simplicity, and because NHTSA
anticipates that this proposal would primarily affect power windows,
the agency collectively refers to these three systems as ``power
windows'' in the preamble. However, the proposed changes apply equally
to powered partitions and roofs. The standard addresses the threat to
unsupervised children of being strangled or suffering limb-crushing
injuries by closing power windows. Originally, the standard required
that the activation of power windows be linked to an ignition
interlock. The standard prohibited the activation of power windows
unless the ignition key was in the ignition and turned to the ``on'',
``start'' or ``accessory'' position, based on the presumption that this
precondition would ensure that a driver
[[Page 28125]]
was present to supervise children. Making the presence of the ignition
key a precondition to power window activation also ensured that the
driver is provided with a simple means of disabling the power windows
of a parked vehicle, i.e., key removal. The power windows of most
vehicles are still linked to an ignition interlock.
Over the years, the standard has been amended to permit power
window closing in situations in which the key is not in the ignition,
but the existence of adult supervision could be presumed for other
reasons. In the most recent rulemaking, in 1991, NHTSA responded to the
interest of manufacturers in offering remote controls for window
closing. 56 FR 15290. In doing so, the agency was mindful that the
unrestricted allowance of remote controls, especially ones that
activated windows using radio frequency signals which can penetrate
obstructing walls, could pose a danger to child occupants because the
person activating the window might not be able to see a child in the
window opening. Therefore, in an effort to ensure the presence of a
supervising person, the agency amended the standard to permit power
windows to be operable through the use of remote controls only if the
controls had a very limited range, i.e., not more than 6 m. A longer
range, up to 11 m, was permitted for controls that were operable only
if there were an unobstructed line of sight between the control and the
vehicle.
In addition, the agency reasoned that its provisions permitting the
remote control of a power window need not be premised on the likely
existence of supervision if the window were equipped with an automatic
reversal system. If the window closing system itself could sense the
child's hand or head when it became trapped between the window and the
window frame, and thereupon stop and reverse to release the child, then
supervision would not be required. Therefore, the agency also
established a provision permitting power windows equipped with an
automatic reversal system to be closed in any manner (e.g., with or
without a key) desired by the manufacturer. It also permitted remote
controls of unrestricted range as well as new products, such as devices
to open and close windows automatically in response to heat and rain,
since they would be made safe by the automatic reversal system.
To qualify as an automatic reversal system, a system had to reverse
a power window, either before the window contacted, or before it
exerted ``a squeezing force of 100 newtons on a semi-rigid cylindrical
rod from 4 mm to 200 mm in diameter * * *'' The test procedure
specified a range of rods to represent portions of a person's body,
ranging in size from infant fingers to juvenile heads, inserted in the
window openings. This procedure addressed the fundamental safety
problem in terms of the level of squeezing force thought to be
injurious. It allowed for contact with a test rod if reversal is
triggered before the window exerts the injurious squeezing force on the
test rod. Upon reversal, the window was required to open for the
purpose of allowing easy extrication of a trapped head.
At the time of the most recent amendment, automatic reversal
systems for power windows did not exist on U.S. vehicles. The most
detailed comments on the amendment seemed to indicate companies were
contemplating reversal systems triggered by force measurement. NHTSA
assumed that manufacturers would produce power window reversal systems
based on force sensing technology.
The development of automatic reversal systems has not proceeded as
NHTSA anticipated. NHTSA currently is not aware of any force sensing
systems currently being certified to meet FMVSS No. 118, suggesting
that the manufacturers that had been considering force sensing systems
may have found them to be undesirable or impractical.
NHTSA also sought to allow the use of proximity sensing systems by
allowing automatic reversal systems that reversed the power window at
any time before contact with the test rods. The agency attempted to
word carefully the provisions regarding non-contact systems so as to
avoid discouraging their development. A commenter on the 1991 amendment
also indicated interest in developing reversal systems triggered by the
blockage of light by the child's body (the principle used by automatic
reversal mechanisms on some garage doors with remote controls).
Accordingly, the agency drafted a test procedure that satisfactorily
tests non-contact systems based on this principle.
The test procedure is less appropriate for non-contact systems
based on other principles. Prospects Corporation has developed a non-
contact automatic window reversal system which can detect the proximity
of some portion of a person's body by sensing the reflection (instead
of the blockage) of infrared light by a passenger's body. In Prospect's
system, there are an infrared emitter and a detector within the
interior of the vehicle that are not aligned with one another. When no
object is present in or near the plane of the window, the detector
receives a constant background level of infrared radiation reflected by
the inside of the vehicle. In this situation, the window may safely
close. However, when a child's hand, for example, approaches the
window, the hand reflects a certain amount of additional radiation from
the emitter to the detector. The detector senses the increase and
electronically reverses the window even before the child's hand reaches
the plane of the window.
To work well under the variety of foreseeable circumstances, an
infrared reflectance system must be sufficiently sensitive to detect a
variety of materials. Different materials (e.g., skin, hair, cloth,
plastic) have characteristic abilities to reflect infrared radiation, a
property called reflectance. The amount of radiation reflected is
affected by the wavelength of the radiation, the angle of incidence of
the radiation, the color and texture of the material, and the amount of
surface area exposed.
Since the standard currently does not specify the infrared
reflectance of the test rods, it cannot adequately assess the safety of
an automatic window reversal system based on infrared reflectance. Use
of a test rod with a higher reflectance than that of a child's hand
might allow a system to pass NHTSA's compliance test even though that
system might not be sufficiently sensitive to detect a child's hand
placed in or near the window opening. Therefore, the agency has
tentatively decided that the test procedure should be changed to
specify the aspects of the test rods that are necessary for testing the
compliance of infrared reflectance-based systems.
In proposing to amend the standard to provide for better testing of
non-contact systems based on infrared reflectance, NHTSA recognizes
that in the future there may be non-contact systems based on still
other principles. However, the agency cannot propose to amend the
standard to address those systems until their underlying principles are
identified and adequately defined.
II. Size of the Target Inboard of the Window Plane
The standard currently specifies information about the sizes of the
test rods that are appropriate for testing contact-based systems for
compliance. The standard requires that the reversal system protect
portions of a person's body, as represented by test rods ranging from 4
mm (about the size of an infant's finger) to 200 mm (about the size of
a child's head) in diameter. Typical placements of the test rods are
illustrated in drawings showing cylinders placed in various window and
roof openings. The illustrations show
[[Page 28126]]
the portion of the rods inside the vehicle passenger compartment (the
portion that would be used as a handle by the person conducting the
test) as having the same diameter as the portion in the plane of the
window. The standard requires that the part of the test rod exposed to
window contact be protected over the full range of test diameters.
There is no distinction made for the length or minimum diameter of the
part of the test rod inboard of the window plane, even though the cross
section of an infant's hand is larger than 4 mm.
Because it does not specify the size of the portion of the test
rods that is inboard of the window (the area in or near the plane of
the window when it is closed), the existing standard does not specify
one of the most important test conditions for the reflective proximity
detection scheme used by the petitioner. The petitioner's system
provides reflective proximity detection by projecting infrared light
across the inboard surface of the window, and using a sensor to detect
the amount of light that is reflected by objects in the zone
immediately inboard of the window. In the case of a child's hand in or
reaching toward the window, the smallest object from the standpoint of
reflective detection would be the hand, and not one of the fingers.
Prospects stated that its system may fail to detect the presence of
the smallest rod, which is intended to represent an infant's finger.
However, the petitioner believes that in reality its system would
always protect infant fingers because it would detect the infant's
hand. The petitioner suggested that the test rods be shaped like an
infant's hand (measured across the palm) with a width of 28 mm.
NHTSA agrees with the petitioner that it is not appropriate to test
the petitioner's device with a finger-sized target that is not
connected with a representation of a hand, but does not agree with the
use of a full hand width-size target. The infant could hold the palm of
its hand on edge, i.e., in a plane parallel to the direction of the
infrared radiation, and extend its finger. Therefore, to provide the
minimum realistic reflective cross section, the hand should be
represented with its full thickness (measured from the palm to the back
of the hand) providing reflection to the sensor.
NHTSA tentatively concludes that a reasonable worst-case dimension
for targets inboard of the plane of the window is 15 mm. The petitioner
reports a thickness of at least 15 mm in the edge view of a 15 month
old infant's hand. The agency considers this to be a reasonably
conservative estimate. Newborn babies with somewhat smaller hands would
be incapable of raising themselves up into an exposed position, and
even the smallest hands would present a target wider than 15 mm in most
orientations. Therefore, the test rods inside the window should not be
less than 15 mm in diameter to provide a representative test of
proximity sensing devices. Although the petitioner suggested a hand-
shaped test rod, the use of cylindrical rods as targets remains
desirable because it is easier to manufacture and removes the need to
consider the orientation of the target along its axis.
III. Reflectance of the Target
A. Testing Methods
NHTSA also considered what level of reflectance would appropriately
represent the clothed and unclothed hands and arms of young children.
Reflectance is the ratio of the intensity of the light (measured by a
detector as energy) reflected by the surface of a material to that of
the light that strikes the surface of the material. An important
objective of this proposal is to determine a reasonable value of
reflectance for the test rods that NHTSA will use in compliance
testing. The level of reflectance that NHTSA is proposing is based on
experimental data the petitioner submitted (Prospects' report on the
reflectance of skin and clothing is available in rulemaking docket
number 87-10; Notice No. 6). NHTSA believes that the data generated by
Prospect's laboratory test apparatus can be applied generally to in-
vehicle detection systems based on infrared reflectance, and requests
comment on this assumption.
Prospect's petition gave little detailed information on
reflectance. Therefore, NHTSA asked the petitioner to address the
question of reflectance in more detail. Because color affects
reflectance, the reflective properties of skin of different shades and
colors was of obvious importance, and the effect of color was also
addressed by the petitioner. NHTSA also asked the petitioner to
investigate whether gloves and other clothing would be more difficult
to detect than bare skin.
The petitioner responded by providing measurements of the infrared
light reflected from human skin and a large variety of leathers and
fabrics. The measurements were conducted with an apparatus
incorporating an infrared light source (nominal wavelength 950
nanometers (nm)) and a light sensor of the type used in the prototype
window reversal system appearing in Appendix 1 of the petitioner's
report. The apparatus projected infrared light on the skin or material
sample and received the reflected (or scattered) light at an equal
angle of reflection. The angle of incidence was 16 degrees. The
distance from the source to the sample, and the distance from the
sample to the light sensor, was the same, about 135 mm. The light
reaching the sensor was measured with and without the sample in place,
so that the light reflected from the sample holder could be discounted.
Although the light reaching the sensor can be thought of as having
been reflected by the sample, it arrives by the combination of
reflection from the surface of the sample and scattering by the texture
of the sample. Since both the test apparatus and any in-vehicle devices
that might be produced measure the sum of reflection and scatter, there
is no need to distinguish between the two mechanisms which result in
light reaching the sensor. Therefore, the term ``reflection'' is used
below in a broad sense to refer to all light reaching the sensor as a
consequence of the presence of the sample.
NHTSA's test procedures should be as general and as design-
independent as possible, to avoid restricting vehicle manufacturers'
choices. Prospects' tests compared the infrared reflectance of various
portions of a person's body and clothing materials and found relative
reflectance relationships that ought to hold true for infrared
reflectance-based detection systems in general. However, the absolute
numerical results (in terms of microwatts of power received by the
sensor) are specific to the particular test apparatus used by
Prospects. NHTSA discussed with the petitioner the need to express the
infrared reflective properties of skin and other material in terms that
are not specific to a particular light source and sensor.
A reasonable solution was found in the use of a high reflectance
mirror as a comparison medium. A mirror that reflects 99.99 percent of
infrared light was mounted in the apparatus as a sample. The presence
of the mirror caused the infrared sensor to receive 47 microwatts. The
power measured with the sample materials was divided by this power and
the resulting ratio was multiplied by 100 percent to produce a value
that is characteristic of each sample. When normalized by the mirror
measurement in this way, the skin and material measurements become
independent of the power, beam size and dispersion of the light source
and the size and sensitivity of the infrared sensor.
This method of normalizing the power measurements also has the
[[Page 28127]]
benefit of producing results of general utility, regardless of the size
of the sample. The sensitivity of the reflectance determination to
changes in the light path length of the apparatus is low because
measurements using the sample and the mirror would be affected in the
same proportion by a change in light path length. Therefore, the length
of the light path need not be specified.
However, NHTSA is specifying the angles of incidence and reflection
to be used when determining the reflectance of test rods, in order to
avoid changes in the relative composition of reflected and scattered
light from textured samples. The agency notes that specifying these
angles does not restrict vehicle design in any way, but only defines
the parameters to be used when producing test rods.
B. Test Results
In order to test skin for reflectance values, Prospects had
different people place their hands against the back of the sample
holder. The skin of White, Black and Asian persons was measured at the
back of the hand and at the palm. Three individuals of each race were
measured. The macro-texture of the palms and backs of hands can be
presumed to affect the relative contribution of reflection and scatter.
The range of reflectance from the palms of hands was from 2.43 to 2.96
percent, and the range for the skin on the back of the hand was from
2.04 to 2.83 percent. The total range of 2.04 to 2.96 percent for
differences between races, individuals and hand orientation was very
small compared to that of common fabrics, as can be seen from the
following results.
In response to NHTSA's concern about the reflectance of various
skin coverings, Prospects tested thirty-seven samples comprising
various colors, textures and types of fabric and leather, including
wool, silk, cotton, polyester, and a 35 percent cotton/65 percent
polyester blend. The range of reflectance of the fabric and leather
samples was from 0.70 to 6.09 percent. With the exception of three
samples, the fabrics and leathers were more reflective than skin. The
worst case was a black cotton/polyester material which reflected about
\1/3\ the amount of infrared light reflected by human skin. Figure 8 of
the petitioner's report summarizes the range of material reflectance
(Docket No. 87-10; Notice No. 6). The large variety of skin and
potential skin-covering materials Prospects tested appears to provide a
good representation of foreseeable detection targets.
The narrow range of reflectance for skin despite differences in
individuals, races, and part of body indicates that infrared skin
reflection is not very sensitive to common variables including the lack
of ``flatness'' of hand samples. This validates the ability of the
infrared reflectance proximity sensor to detect its primary target,
skin. It is also encouraging that most clothing materials appear to
improve the infrared reflectance of the body. However, at least one
common material would reduce the reflectance of the body by two thirds.
NHTSA is proposing a minimum reflectance of 0.7 percent for the
test rods. This is a conservative value which equals the minimum
reflectance of black cotton/polyester. That material had the lowest
reflectance in Prospects' experiment. Bare skin, at about 2-3 percent
reflectance, is three times more detectable.
Manufacturers should have little difficulty producing test rods
with the proper reflectance. The reflectance of the surface material of
NHTSA's test rods would be tested using an apparatus similar to the one
used by Prospects. However, as discussed above, there is considerable
flexibility in the construction of the test apparatus. Only the
wavelength of the source and the angles of incidence and reflection
would need to be kept constant.
IV. Protection of Persons Outside the Vehicle
Since paragraph S5 of Standard No. 118 relieves power windows
systems with automatic reversal from the presence-of-supervision-
assuring restrictions of S4, NHTSA should consider whether protection
is provided for a person who is outside the vehicle and is reaching
toward or into the vehicle. It cannot be assumed that an infrared
proximity detector will operate on objects shielded by window glass,
thus only portions of a person's body inside the window would be
capable of triggering it under this proposal.
There are a number of reasons to believe that this is not a great
danger. Small children inside vehicles can reach the pinch points (the
area where the window and window frame meet) by standing on the seat,
but a child standing on the ground outside the vehicle must be
considerably older and taller to reach most pinch points. The agency
expects that even the single bare finger of a child of that size would
be detected. Even if a bare finger is much smaller than the proposed
test rod diameter of 15 mm, it would likely be detected because the
reflectance of skin is so much greater than the proposed test rod. A
child holding the edge of the window would offer an even larger target
for detection, the width of his or her palm, and a child leaning into
the vehicle so that his or her head is in the window would certainly be
detected and protected.
However, it would be possible for a person willfully to ``fool''
the detector by placing just the tip of a finger on the outside upper
edge of the window as it shuts. In that location, the finger tip could
be shielded from the infrared emitter. (Recall that this situation is
possible only for persons outside the vehicle because fingers of a
vehicle occupant cannot get to the pinch points without exposing the
hand to detection.) The most likely occasion for such abuse involves a
child inside the vehicle operating the windows in playing ``chicken''
with another child outside the vehicle.
The agency recognizes the possibility of abuse of the system but
believes that the possibility is not serious enough to warrant
declining to facilitate the use of power window systems with infrared
sensors. This belief is based on the assumption that manufacturers
would not make automatic window closing possible in the absence of the
ignition key except possibly for rain protection or for a limited time
after key removal. NHTSA requests comments on the validity of this
assumption. In addition, children who can reach the top of the window
from the ground are old enough to possess some level of experience and
judgment, and a very slight withdrawal motion is all that is necessary
for self-protection.
V. Presumption of Supervision
Although not raised in the petition submitted by Prospects, many
callers to this agency have expressed certain reservations about the
safety of the existing standard. Accordingly, NHTSA is using this
document to take the opportunity to request comments on these concerns.
This is especially appropriate in light of the consideration that the
agency is giving to making the standard more permissive.
The safety of children depends on driver supervision when power
windows close in the modes permitted by section S4. However, there are
some design possibilities not prohibited by S4 that can reduce either
the likelihood or the effectiveness of driver supervision. The standard
allows window closing with the ignition key in the ``accessory'', as
well as in the ``on'' and ``start'' positions. Drivers may be tempted
to leave unattended children in a vehicle with the key in the
``accessory'' position in order to operate the vent fan or the radio,
thus failing to maintain supervision of the power windows. Drivers need
to supervise children in
[[Page 28128]]
the rear seat, but vehicles are not required to have a driver
controlled lock-out of the rear power windows. Many vehicles are
designed to avoid these potential problems, but designs that exceed the
safety standard are not universal. Is the presumption of supervision a
valid one?
Some callers have questioned the safety of a convenience feature
that they say some manufacturers are offering, i.e., an ``express up''
closing mode, which requires only a momentary switch contact rather
than continuous activation to close the window. No caller reported any
injuries associated with this feature. NHTSA is aware of such systems
on a few of the most expensive German cars. In all of these cases, the
express-up windows are also equipped with automatic reversal (although
these reversal systems may not pass the requirements of FMVSS No. 118).
It is possible that part of the interest by vehicle manufacturers in
infrared proximity detectors is motivated by a desire to assure the
safety of express-up windows. If the agency proceeds to a final rule,
the agency will consider while writing the forthcoming final rule
whether to propose that express-up operation of windows, other than the
driver's, should be excluded from the closing modes of S4, which
presume driver supervision and, by implication, some level of control.
These thoughts are offered in the questions to commenters below to
guide possible future rulemaking.
VI. Need for Reversal
The existing standard requires that closing power windows halt to
avoid applying excessive squeezing force on a passenger, and then
reverse their travel to release the person. The reversing requirement
is necessary when the halting of a window is triggered by a force
measurement because, otherwise, the squeezed person might remain
trapped by the window.
Although the petitioner did not question the application of the
reversal requirement to a window equipped with an infrared sensor, it
appears that it may not be necessary to apply the requirement to all
infrared sensing systems since most of these systems would detect
objects in a large zone and would ensure safety by merely halting.
Devices which halt power windows by detecting limbs and heads interior
to the plane of the powered window opening and in a wide detection area
around the pinch zone will halt the windows before the body enters the
pinch zone, eliminating the possibility of trapping. A three-
dimensional detection zone extending from the window frame 100 mm into
the opening and extending horizontally inboard into the interior of the
vehicle 50 mm from the interior surface of the closed window would
probably be sufficient to prevent trapping by halting the window alone.
Therefore, NHTSA proposes that non-contact window systems which detect
proximity of persons over such a large interior space, thereby halting
the window before the person enters the pinch zone, be relieved of the
necessity of reversing as well.
It is not necessary for non-contact systems to detect the proximity
of persons over such a large range of space to prevent injury. Even a
system sensitive in a narrow zone only a few millimeters below the
window frame would prevent contact. However, a window whose detection
system has such limited sensitivity must be able to reverse to avoid
the possibility of trapping a child's head.
VII. Questions for Commenters
A. The proposed test rods would combine a reasonable worst case
target size (15 mm) with a reasonable worst case reflectance (0.7
percent). If there is an even more appropriate combination of factors,
please explain what these factors are and why they are better than the
proposed factors. If one considers the target size of 15 mm as
indicative of bare limbs, would a maximum reflectance of 1 percent be
adequate? A reflectance of 1 percent is half the reflectance of skin
and thus would provide a factor of safety of 2 relative to bare skin.
Is the proposed 0.7 percent reflectance (a factor of safety of 3)
necessary to ensure that persons outside the vehicle are adequately
protected?
B. Can prototype infrared proximity systems detect a target
combining the worst case size (15 mm) and worst case reflectance (0.7
percent) at all points near the frame of a large side window? Would its
performance be hindered by bright sunlight or other infrared sources?
What other factors might limit the effectiveness of infrared systems?
How should the agency guard against the effects of those factors?
C. The information submitted to the agency concerning the
reflectance of skin and the relative reflectance of skin and clothing
was obtained using infrared light of a nominal 950 nm wavelength. While
the agency endeavors to make standards as simple and general as
possible, it has no basis to assume that this reflectance information
is applicable to infrared light of significantly different wavelengths.
Therefore, the proposed compliance tests are limited to infrared
devices operating at wavelengths of 950 nm +/- 100 nm. Is there any
evidence that significantly different reflectance properties would be
manifested within that narrow range of infrared wavelengths? Would a
two hundred nanometer range be sufficient to avoid unduly restricting
manufacturer's choice of equipment? Is there any reason to believe that
manufacturers would prefer to have infrared devices operating at
different parts of the infrared spectrum? Are there any data showing
that devices in other areas of the spectrum would provide an equivalent
level of safety?
D. Would the 16 degree angle of incidence/reflection used in the
Prospects study be appropriate for testing the reflectance of
materials? Are there any data indicating that the angle is critical to
the strength of either the reflection or scattering components of the
detected light? Are other angles more appropriate?
E. NHTSA is proposing that compliance testing be done in direct
sunlight so that the in-vehicle sensors are exposed to the highest
possible background ``noise'' level of extraneous infrared light. This
should make the test more demanding because small differences in the
amount of infrared radiation reaching the detector should be harder to
perceive against a higher background level. NHTSA requests comment on
whether this is a valid assumption and whether other extraneous factors
can affect the safe functioning of such in-vehicle infrared detection
systems.
F. The safety of children depends on driver supervision when power
windows close in the modes permitted by section S4. The standard allows
window closing with the ignition key in the ``accessory'', as well as
in the ``on'' and ``start'' positions. Drivers may be tempted to leave
unattended children in a vehicle with the key in the ``accessory''
position in order to operate the vent fan or the radio, failing to
maintain supervision of the power windows. Drivers need to supervise
children in the rear seat, but vehicles are not required to have a
driver controlled lock-out of the rear power windows. Many vehicles are
designed to avoid these potential problems. What current production
vehicles have power window operation with the key in the ``accessory''
position or have rear power windows without a driver controlled lock-
out? Do they present safety problems needing regulatory attention? Is
there any evidence of a safety problem?
G. The standard does not regulate the express-up closing mode which
requires
[[Page 28129]]
only a momentary switch contact rather than continuous activation to
close the window. Should windows that have the express-up operation be
prohibited from closing in the modes specified in S4, which presume
driver supervision? What production vehicles, if any, have express-up
window operation and on which windows is it applied? Is there any
evidence that express-up windows represent a safety problem?
NHTSA is proposing to make the proposed amendments effective 30
days after publication of a final rule. Compliance with the
requirements would be required by manufacturer's offering infrared
reflectance-based window systems on the same date. NHTSA believes that
there would be good cause for such an effective date since the
amendments would not impose any new requirements but instead relieve a
restriction.
VIII. Rulemaking Analyses and Notices
A. Executive Order 12866 and DOT Regulatory Policies and Procedures
This rulemaking document was not reviewed under E.O. 12866,
``Regulatory Planning and Review.'' This action has been determined to
be ``non-significant'' under the Department of Transportation's
regulatory policies and procedures. The proposed amendments would not
impose any new requirements, but simply provide additional detail to
the test procedures so that a new technology may be tested, thus
allowing manufacturers to certify vehicles employing these technologies
as meeting the existing requirements. Therefore, the impacts of the
proposed amendments would be so minor that a full regulatory evaluation
is not required.
B. Regulatory Flexibility Act
NHTSA has also considered the impacts of this notice under the
Regulatory Flexibility Act. I hereby certify that this proposed rule
would not have a significant economic impact on a substantial number of
small entities. As explained above, the rule would not impose any new
requirements but would instead relieve a restriction resulting from a
lack of specificity in the current requirements. The infrared sensing
technologies that may be permitted as a result of this proposal are
only likely to be offered on a small number of vehicles produced by
major automobile manufacturers.
C. Paperwork Reduction Act
In accordance with the Paperwork Reduction Act of 1980 (Pub. L. 96-
511), there are no requirements for information collection associated
with this proposed rule.
D. Executive Order 12612 (Federalism)
NHTSA has analyzed this proposal in accordance with the principles
and criteria contained in E.O. 12612, and has determined that this
proposed rule would not have sufficient federalism implications to
warrant the preparation of a Federalism Assessment.
E. Civil Justice Reform
This proposed rule would not have any retroactive effect. Under 49
U.S.C. 30103, whenever a Federal motor vehicle safety standard is in
effect, a State may not adopt or maintain a safety standard applicable
to the same aspect of performance which is not identical to the Federal
standard, except to the extent that the state requirement imposes a
higher level of performance and applies only to vehicles procured for
the State's use. 49 U.S.C. 30161 sets forth a procedure for judicial
review of final rules establishing, amending or revoking Federal motor
vehicle safety standards. That section does not require submission of a
petition for reconsideration or other administrative proceedings before
parties may file suit in court.
IX. Submission of Comments
Interested persons are invited to submit comments on the proposal.
It is requested but not required that 10 copies be submitted.
Comments must not exceed 15 pages in length (See 49 CFR 553.21).
Necessary attachments may be appended to these submissions without
regard to the 15-page limit. This limitation is intended to encourage
commenters to detail their primary arguments in a concise fashion.
If a commenter wishes to submit certain information under a claim
of confidentiality, three copies of the complete submission, including
purportedly confidential business information, should be submitted to
the Chief Counsel, NHTSA, at the street address given above, and seven
copies from which the purportedly confidential information has been
deleted should be submitted to the Docket Section. A request for
confidentiality should be accompanied by a cover letter setting forth
the information specified in the agency's confidential business
information regulation. See 49 CFR Part 512.
All comments received before the close of business on the comment
closing date indicated above for the proposal will be considered, and
will be available for examination in the docket at the above address
both before and after that date. To the extent possible, comments filed
after the closing date will also be considered. Comments received too
late for consideration in regard to the final rule will be considered
as suggestions for further rulemaking action. Comments on the proposal
will be available for inspection in the docket. NHTSA will continue to
file relevant information as it becomes available in the docket after
the closing date, and it is recommended that interested persons
continue to examine the docket for new material.
Those persons desiring to be notified upon receipt of their
comments in the rules docket should enclose a self-addressed, stamped
postcard in the envelope with their comments. Upon receiving the
comments, the docket supervisor will return the postcard by mail.
List of Subjects in 49 CFR Part 571
Imports, Motor vehicle safety, Motor vehicles.
In consideration of the foregoing, it is proposed that 49 CFR part
571 be amended as follows:
PART 571--FEDERAL MOTOR VEHICLE SAFETY STANDARDS
1. The authority citation for part 571 of Title 49 would continue
to read as follows:
Authority: 49 U.S.C. 322, 30111, 30115, 30117, and 30166;
delegation of authority at 49 CFR 1.50.
2. Section 571.118 would be amended as follows:
a. S3 is amended by adding a new definition in alphabetical order.
b. S5 is revised.
c. S6 is added.
d. Figure 2 is added to the end of the section, following Figure 1.
The additions and revisions would read as follows:
Sec. 571.118 Standard No. 118; Power-operated window, partition, and
roof panel systems.
* * * * *
S3. Definitions.
* * * * *
Infrared reflectance means the ratio of intensity of infrared light
reflected and scattered by a flat sample of the test rod material, to
the intensity of infrared light incident on that material, as measured
by the apparatus shown in Figure 2.
* * * * *
S5. (a) A power operated window, partition, or roof panel system
that meets the requirements in paragraphs (1) through (2)(iii) may
close in
[[Page 28130]]
circumstances other than those specified in S4--
(1) Except as specified in S5(b), while closing, the window,
partition or roof panel system must halt and reverse direction either
before
(i) Contacting, or
(ii) Exerting a squeezing force of 100 newtons or more on a semi-
rigid cylindrical rod that has the properties described in S6(b), and
that is placed through the window, partition or roof panel system
opening at any location, in the manner described in S6(a); and
(2) Upon such reversal, the window, partition or roof panel system
must open to one of the following positions, at the manufacturer's
option:
(i) A position that is at least as open as the position at the time
closing was initiated;
(ii) A position that is not less than 125 millimeters more open
than the position at the time the window reversed direction; or
(iii) A position that permits a semi-rigid cylindrical rod that is
200 mm in diameter to be placed through the opening at the same contact
point(s) as the rod described in S5(a)(1).
(b) A closing window, partition, or roof panel system need not
reverse direction as required in S5(a)(1) if it can halt upon entry of
any portion of a 15 mm cylindrical test rod at any location within a
zone bounded by:
(i) The interior surface of the closed window, partition, or roof
panel,
(ii) A surface 50 mm inboard of that surface,
(iii) The portion of the window, partition, or roof panel frame
that the window, partition, or roof panel closes against, and
(iv) A surface 100 mm from that part of the frame.
(c) If a vehicle uses the principle of proximity detection by
infrared reflection to halt the powered window, partition, or roof
panel before it contacts the test rod, the infrared source shall
project infrared light at a nominal wavelength of not less than 850 and
not more than 1050 nm.
S6. Test procedures for determining compliance with S5.
(a)(1) For testing power window, partition, or sunroof systems
designed to detect contact with the test rod, place the test rod
through the window, partition, or roof panel opening from the inside of
the vehicle such that the cylindrical surface of the rod contacts any
part of the structure with which the window, partition, or roof panel
mates. Typical placements of test rods are illustrated in Figure 1.
Attempt to shut the power window, partition, or roof panel.
(2) For testing power window, partition, or sunroof systems
designed to detect the proximity of the test rod using infrared
reflectance and to halt the powered window, partition, or roof panel
before it contacts the test rod, this test is conducted with the
vehicle in direct sunlight. Place a stationary test rod anywhere in the
window, partition, or roof panel opening, with the window, partition,
or roof panel in any position. Attempt to close the window, partition,
or roof panel. Remove the test rod. Fully open the window, partition,
or roof panel and then begin to close it. While the window, partition,
or roof panel is closing, move a test rod so that it approaches the
window, partition, or roof panel, or its frame, in any orientation from
the interior of the vehicle.
(b) Test rods.
(1) Test rods are of cylindrical shape in the range of diameter
from 4 mm to 200 mm, except that a single 15 mm diameter rod shall be
used to test power window, partition, or sunroof systems that detect
the proximity of a test rod using infrared reflectance.
(2) For testing power window, partition, or sunroof systems that
detect contact with the test rod, the force-deflection ratio of the
test rod is not less than 65 N/mm for a rod 25 mm or smaller in
diameter, and not less than 20 N/mm for a rod larger than 25 mm in
diameter.
(3) For testing power window, partition, or sunroof systems that
detect the proximity of the test rod using infrared reflectance, the
test rod shall meet the following requirements:
(i) The infrared reflectance of the rod surface material is not
less than 0.7 percent, when measured using the apparatus shown in
Figure 2.
(ii) The infrared reflectance of the rod surface material is
measured using a flat sample and an infrared light source and sensor
operating at a nominal wavelength of 950 nm.
(iii) The intensity of incident infrared light is determined using
a mirror of nominally 100 percent reflectance mounted in place of the
sample.
(iv) Measurements of the test rod surface sample and the mirror are
corrected to remove the contribution of infrared light reflected and
scattered from the sample holder and other parts of the apparatus
before the computation of the ratio.
* * * * *
BILLING CODE 4910-59-P
[[Page 28131]]
[GRAPHIC] [TIFF OMITTED] TP04JN96.008
Issued on: May 29, 1996.
Barry Felrice,
Associate Administrator for Safety Performance Standards.
[FR Doc. 96-13864 Filed 6-3-96; 8:45 am]
BILLING CODE 4910-59-C
Complete official Federal Register PDF
FR Doc. 96-13835 Inspection of Radio Installations on Large Cargo and Small Passenger Ships
[Federal Register Volume 61, Number 108 (Tuesday, June 4, 1996)]
[Proposed Rules]
[Pages 28122-28123]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-13835]
=======================================================================
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FEDERAL COMMUNICATIONS COMMISSION
47 CFR Parts 0 and 80
[CI Docket 95-55; DA 96-822]
Inspection of Radio Installations on Large Cargo and Small
Passenger Ships
AGENCY: Federal Communications Commission.
ACTION: Proposed rule; extension of time.
-----------------------------------------------------------------------
SUMMARY: The United States Coast Guard (Coast Guard) has requested an
extension of time to prepare comments to a Notice of Proposed Rule
Making (NPRM) that the Commission adopted on April 25, 1996. Because
the Coast Guard is responsible for maritime safety in the United States
and the Commission is coordinating this proposal with the Coast Guard
we are granting their request. The intended effect of this extension is
to permit the Coast Guard and other interested parties additional time
to prepare comments.
DATES: Comments must be filed on or before June 24, 1996, and reply
comments must be filed on or before July 15, 1996. Written comments by
the public and federal agencies on the proposed and/or modified
information collections are due by June 24, 1996.
ADDRESSES: Federal Communications Commission, 1919 M Street, N.W.,
Washington, DC 20554. In addition to filing comments with the
Secretary, a copy of any comments on the information collections
contained herein should be submitted to Dorothy Conway, Federal
Communications Commission, Room 234, 1919 M Street, N.W., Washington,
DC 20554, or via the Internet to [email protected], and to Timothy Fain,
OMB Desk Officer, 10236 NEOB, 725-17th Street, N.W., Washington, DC
20503 or via the Internet to [email protected].
FOR FURTHER INFORMATION CONTACT: George R. Dillon of the Compliance and
Information Bureau at (202) 418-1100. For additional information
concerning the information collections contained in this NPRM contact
Dorothy Conway at 202-418-0217, or via the Internet at [email protected].
SUPPLEMENTARY INFORMATION: On April 25, 1996, the Commission adopted a
Notice of Proposed Rule Making, CI Docket 95-55, FCC 96-194, 61 FR
21151, May 9, 1996, that proposed to permit the Commission to use
private sector organizations to inspect all U. S. cargo ships and
passenger ships that are required by statute to have an inspection.
Because the Commission's primary objective is preserving safety of life
at sea we requested specific comments on how to ensure that safety will
not be compromised by using private sector inspectors. Additionally, we
noted that we would coordinate this proceeding with the U. S. Coast
Guard.
1. The U. S. Coast Guard has requested an extension of time in
which to file comments. The Coast Guard states that the proposals are
substantial and that the additional time will permit it to prepare a
thorough review of the proposal. We requested that comments be filed by
May 24, 1996, and reply comments be filed by June 3, 1996.
2. Because Commission staff are coordinating this proposal with the
Coast Guard and we have requested their comments, we believe that an
extension of time is warranted. For good cause shown, and pursuant to
Sections
[[Page 28123]]
4(j) and 303(r)of the Communications Act of 1934, 47 U.S.C. 154 (j) and
303 (r), it is ordered that the period of time for filing comments and
reply comments in the Notice of Proposed Rule Making, CI Docket 95-55,
released on April 26, 1996, is hereby extended. Comments must be filed
on or before June 24, 1996. Reply comments must be filed on or before
July 15, 1996.
3. To file formally in this proceeding, you must file an original
and four copies of all comments, reply comments, and supporting
comments. If you want each Commissioner to receive a personal copy of
your comments, you should file an original and nine copies. You should
send your comments and reply comments to Office of the Secretary,
Federal Communications Commission, Washington, D.C. 20554.
4. You may also file informal comments by electronic mail. You
should address informal comments to [email protected]. You must put the
docket number of this proceeding on the subject line (see the caption
at the beginning of this Notice). You must also include your full name
and Postal Service mailing address in the text of the message. Comments
and reply comments will be available for public inspection during
regular business hours in the Reference Center of the Federal
Communications Commission (Room 239), 1919 M Street, N.W., Washington,
D.C. 20554.
Federal Communications Commission.
Beverly G. Baker,
Chief, Compliance and Information Bureau.
[FR Doc. 96-13835 Filed 6-3-96; 8:45 am]
BILLING CODE 6712-01-P
Complete official Federal Register PDF
FR Doc. 96-13722 Proposed Amendments to the Regulations on the Determination of Interest Expense Deduction of Foreign Corporations and Branch Profits Tax; Correction
[Federal Register Volume 61, Number 108 (Tuesday, June 4, 1996)]
[Proposed Rules]
[Page 28118]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-13722]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[INTL-0054-95]
RIN 1545-AT96
Proposed Amendments to the Regulations on the Determination of
Interest Expense Deduction of Foreign Corporations and Branch Profits
Tax; Correction
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Correction to notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: This document contains a correction to the notice of proposed
rulemaking [INTL-0054-95] which was published in the Federal Register
for Friday, March 8, 1996 (61 FR 9377). The notice of proposed
rulemaking relate to the determination of the interest expense
deduction of foreign corporations, and the branch profits tax.
FOR FURTHER INFORMATION CONTACT: Ahmad Pirasteh or Richard Hoge (202)
622-3870 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
The notice of proposed rulemaking that is subject to these
corrections are under sections 882 and 884 of the Internal Revenue
Code.
Need for Correction
As published, the proposed rulemaking contains errors that are in
need of clarification.
Correction of Publication
Accordingly, the publication of the proposed rulemaking which is
the subject of FR Doc. 96-5264 is corrected as follows:
1. On page 9378, in the preamble under column 2, following the
paragraph heading ``B. Hedging transactions'', line 6, the language
``case may be, the amount of their U.S.'' is corrected to read ``case
may be, the amount of its U.S.''.
Sec. 1.882-5 [Corrected]
2. On page 9379, column 3, Sec. 1.882-5(d)(6), Example 4. (i), line
18, the language ``liabilities of 90x U.S. dollars and 1000 x'' is
corrected to read ``liabilities of 90x U.S. dollars and 1000x''.
Sec. 1.884-1 [Corrected]
3. On page 9380, column 3, Sec. 1.884-1(d)(2)(xi), Example 8., last
line, the language ``from securities) of the value of the securities.''
is corrected to read ``from securities) of the amount of the
securities.''.
Cynthia E. Grigsby,
Chief, Regulations Unit, Assistant Chief Counsel (Corporate).
[FR Doc. 96-13722 Filed 6-3-96; 8:45 am]
BILLING CODE 4830-01-U
Complete official Federal Register PDF
FR Doc. 96-13518 Corporate Credit Unions; Involuntary Liquidation of Federal Credit Unions and Adjudication of Creditor Claims Involving Federally Insured Credit Unions in Liquidation; Requirements for Insurance
[Federal Register Volume 61, Number 108 (Tuesday, June 4, 1996)]
[Proposed Rules]
[Pages 28085-28112]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-13518]
=======================================================================
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NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Parts 704, 709, and 741
Corporate Credit Unions; Involuntary Liquidation of Federal
Credit Unions and Adjudication of Creditor Claims Involving Federally
Insured Credit Unions in Liquidation; Requirements for Insurance
AGENCY: National Credit Union Administration (NCUA).
ACTION: Proposed rule.
-----------------------------------------------------------------------
SUMMARY: NCUA is issuing proposed revisions to the rules governing
corporate credit unions. As the credit union industry has become more
complex and competitive, the demands on corporate credit unions have
become greater. Corporate credit unions are providing a greater variety
of more sophisticated services. The proposed rule is intended to
strengthen corporate credit union capital and ensure that the risk on
corporate credit union balance sheets is adequately managed and
controlled.
DATES: Comments must be received on or before September 3, 1996.
ADDRESSES: Comments should be directed to Becky Baker, Secretary of the
Board. Mail or hand-deliver comments to: National Credit Union
Administration, 1775 Duke Street, Alexandria, Virginia 22314-3428. Fax
comments to (703) 518-6319. Post comments on NCUA's electronic bulletin
board by dialing (703) 518-6480. Please send comments by one method
only.
FOR FURTHER INFORMATION CONTACT: Robert F. Schafer, Acting Director,
Office of Corporate Credit Unions, at the above address or telephone
(703) 518-6640; or Edward Dupcak, Director, Office of Investment
Services, at the above address or telephone (703) 518-6620.
SUPPLEMENTARY INFORMATION:
A. Background
Part 704 was amended in 1992 to address a broad array of corporate
credit union matters. See 57 FR 22626 (May 28, 1992). The regulation
has been in effect for several years, during a time of great change in
the credit union industry. NCUA has had an opportunity to see how the
regulation has worked and to consider how it could be improved. Section
704.12, governing representation issues, was revised in 1994. See 59 FR
59357 (Nov. 17, 1994). In April 1995, NCUA issued a proposed regulation
to revise most of the sections of Part 704. See 60 FR 20438 (Apr. 26,
1995). Comments were due by June 26, 1995. On May 17, 1995, NCUA
extended the comment period an additional 60 days to August 25, 1995.
See 60 FR 27240 (May 23, 1995). The supplementary information section
noted that NCUA had been working with an outside firm to provide risk-
profile assessments of corporate credit unions, using simulated
modeling techniques, and that the process had proven to be more time-
consuming than envisioned.
In response to the comments received and results of the modeling,
NCUA determined to issue this revised proposed rule for another round
of public comment. In developing this revised proposal, NCUA considered
all of the written comments, the results of further modeling, and the
input provided by corporate credit union representatives in a number of
dialogue meetings conducted by NCUA.
It should be noted that the background section of the initial
proposed rule observed that NCUA supervises all corporate credit unions
but that only those that are federally chartered pay an operating fee
to the agency. Questions were raised as to whether this put federally
chartered corporate credit unions at a competitive disadvantage and
whether all corporate credit unions should pay for NCUA's corporate
credit union supervision program. NCUA asked for comment on whether it
would be appropriate to assess all corporate credit unions an
examination fee or to abolish corporate credit union fees altogether
and require natural person credit unions, since they benefit from the
existence of corporate credit unions, to make up the difference.
[[Page 28086]]
Most of those who commented on this issue favored assessing all
corporate credit unions a fee, rather than having natural person credit
unions pay for corporate credit union supervision. Many noted that not
all natural person credit unions use their corporate credit union. NCUA
has determined not to pursue the issue of funding corporate credit
union supervision expenses in this proposed regulation. However, given
the impact that the proposed rule could have on future supervision
efforts, this issue will be reviewed in the future.
B. Comments
NCUA received over 1300 comments on the proposed regulation, the
bulk of which were from natural person credit unions. Comments were
also received from the national credit union trade associations and
most of the corporate credit unions and state credit union leagues.
Finally, comments were received from other trade associations, state
credit union regulatory authorities, credit union organizations and
consultants, a Member of Congress, other entities that do business with
credit unions, and individuals.
The commenters generally opposed the proposed regulation,
particularly the asset-liability management and capital requirements.
The proposed regulation required that a corporate credit union
identically match all of its shares and deposits, except for 25 percent
of its overnight funds, to corresponding assets. The commenters stated
that the proposal represented an attempt to eliminate risk from the
system, whereas the appropriate role of a corporate credit union was to
manage risk. They stated that the proposal would make it impossible for
corporate credit unions to provide competitive products to their
members and to generate sufficient income to meet the proposed minimum
capital requirements. The proposed regulation required that corporate
credit unions achieve primary capital levels of 4 percent of average
daily assets by January 1, 1998.
The commenters also contended that the proposed rule would
disproportionately affect small natural person credit unions, which
rely more heavily on corporate credit unions for investments and other
services. They argued that because the corporate credit unions would
not be able to earn a spread on their investment activities, costs for
services would increase and yield on investments would decrease. -
C. Dialogue Meetings
After considering the comments and preliminary modeling results,
NCUA determined that some changes to the proposed regulation might be
appropriate. To obtain input on those changes, NCUA hosted a series of
meetings with representatives of corporate credit unions, natural
person credit unions, and national credit union trade associations.
There was a productive exchange of information and views. This proposed
rule incorporates a number of the suggestions received during the
meetings.
D. Modeling
NCUA contracted with a mortgage investment and interest rate risk
advisory firm (the firm) to estimate the market value of portfolio
equity and interest rate sensitivity of the balance sheets of seven
corporate credit unions. The modeling exercise was conducted to provide
NCUA with an independent assessment of the relative market risk in a
broad cross-section of corporate credit unions. The firm believes that
market value of portfolio equity (MVPE) is the best measure of interest
rate risk, as it can be computed quickly, captures interest and
principal cash flows, provides an analysis of embedded option risk, and
is more complete than income simulations. In addition, MVPE models are
not driven by assumptions regarding future behavior or reactions to
interest rate changes. The firm concluded that requiring corporate
credit unions to use MVPE techniques would introduce a necessary risk
analysis and reduction discipline. The firm stated that when properly
implemented, MVPE techniques would significantly reduce the likelihood
of another failure similar to that of Capital Corporate Federal Credit
Union, which failed in early 1995. Interestingly, many of the
commenters to the initial proposed rule recommended that NCUA use MVPE
to measure interest rate risk.
The firm noted that managing market value correctly can reduce the
volatility of earnings and net worth. The effects of good management
decisions stand out when earnings are not significantly affected by
unexpected changes in interest rates. Market value is the best measure
of the firm's value and is usually the best benchmark to judge
management's performance. Also, MVPE, and its volatility, is usually
the best indication of risk to the insurer and regulators.
The firm analyzed the corporate credit unions' base MVPE and the
sensitivity of MVPE for instantaneous and sustained parallel shifts in
interest rates up and down 400 basis points in 100 basis point
increments. It also provided a 12-month net interest income projection
for the same interest rate scenario.
Additional tests included stresses on several market-related
variables to determine their effect on MVPE. These included: (1)
flattening and steepening the reference yield curve with a pivot at the
three-year maturity; (2) increasing market volatilities by 50 percent
from the reference levels; (3) stressing prepayment speed projections
for mortgage-related securities 100 percent faster for the down 300
basis point scenario; (4) stressing prepayment speed projections for
mortgage-related securities 50 percent slower for the up 300 basis
point scenario; and (5) increasing market spreads by 50 basis points
above projected spreads.
Project results concluded that large changes in prepayment
expectations, widening spreads, and increases in volatility levels
would adversely affect corporate credit union MVPEs. Changes in the
shape of the yield curve did not have a significant adverse effect;
this was due, in large part, to the relatively short asset duration of
most corporate credit union balance sheets.
The balance sheets of the corporate credit unions studied were
``long the market,'' that is MVPE increased when interest rates
declined and decreased when interest rates rose. This is a result of
the effective duration of the corporate credit unions' assets being
longer than that of their liabilities. Some corporate credit union
assets were shown to be negatively convex, that is, projected gains to
MVPE were smaller for interest rate declines than losses for equivalent
interest rate increases. This negative convexity is caused by the
presence of embedded options, found most commonly in mortgage-related
securities and structured notes.
The firm determined that many corporate credit unions would need to
upgrade their interest rate risk models to account for the impact of
embedded options. It noted that the establishment of a minimum MVPE
ratio would be a key aspect of any regulation attempting to control
interest rate risk using MVPE techniques. According to the firm, the
minimum should provide a safe margin above the exposures created by a
positive or negative 300 basis point rate shift. This is necessary
because, as the tests indicated, MVPE can also be affected by changes
in the slope of the Treasury curve, prepayment activity that differs
from that expected, changes in market spread levels, and changes in
market volatilities. -
E. Three-Tiered Approach
In developing this revised proposed rule, NCUA acknowledged the
diversity within the corporate credit union network and the breadth of
functions
[[Page 28087]]
that are provided. Accordingly, this proposal provides the flexibility
for additional authorities for those corporate credit unions with a
more developed infrastructure and codifies the requirements to obtain
those authorities. Presently, such authorities are granted by waiver.
The basic regulatory requirements and authorities applicable to all
corporate credit unions are set forth in the main text of Part 704.
Thus, a corporate credit union that does not seek expanded authorities
need read only the main text and Appendix A, which contains model
disclosure forms that a corporate credit union may choose to use for
capital accounts. A ``basic'' corporate credit union need not read
Appendices B and C, which set forth additional authorities available to
corporate credit unions and the requirements to obtain such
authorities. The incorporation of expanded authorities allows for an
element of self-determination that was not a component of the initial
proposal. This approach is intended to remove the ``one-size-fits-all''
constraint and permit flexibility for a corporate credit union to
choose a path consistent with its members' needs. The board of a
corporate credit union may pursue, via a self- assessment, the level at
which it wishes its institution to operate.
F. Effective Date and Transition
Section 704.18 of the initial proposal stated that the rule would
take effect on January 1, 1996. Obviously, that date has passed. Due to
the complexity of this rule, it is difficult to determine when a final
rule will be issued, and thus to predict a reasonable effective date.
Accordingly, rather than stating an effective date in this proposal,
the final rule will announce an effective date that is approximately 1
year from the date the final rule is issued.
The preamble to the initial proposal stated that NCUA was
considering requiring compliance with the investment section 30 days
after issuance of the final rule, which would be prior to the effective
date of the rest of the regulation. This was to deter corporate credit
unions from ``loading up'' on investments that would no longer be
permissible under the new rule. The commenters generally objected to
this provision, and NCUA has determined not to proceed with it. As
noted in proposed Section 704.6(g), a corporate credit union's
authority to hold an investment is governed by the regulation in effect
at the time of purchase.-
As discussed above, if this proposal is made final, each corporate
credit union will have to determine the level at which it wishes to
operate. While a corporate credit union may change its level at a later
date, it will have to make an initial decision regarding what its
status will be when the final rule becomes effective. So that NCUA can
effectively supervise the transition to the new regulation, each
corporate credit union will be asked to inform NCUA, within 90 days of
the final rule's publication, of its decision.
A corporate credit union that plans to operate with expanded
authorities should submit its application for such authorities as soon
as possible to ensure approval and implementation prior to the
effective date. The application must demonstrate that the corporate
credit union either has sufficient staffing and infrastructure to
support the authorities or will make the necessary changes so that it
will have such staffing and infrastructure. The application also must
set forth the expected costs of such changes. Since there is no
guarantee of approval, a corporate credit union normally will not
implement these changes until it receives preliminary approval.
NCUA will work closely with a corporate credit union in evaluating
its application. Once all issues are resolved, NCUA will issue a
preliminary approval. If the issues cannot be resolved, NCUA will
notify the corporate credit union. Once preliminary approval has been
received, the corporate credit union must make the planned changes.
Once NCUA has been notified that the corporate credit union is ready to
begin using the expanded authorities, it will review the corporate
credit union's operations. If they are sufficient to support the
requested authorities, final approval will be granted.
Recognizing that an institution may not be at the required capital
level or within the required MVPE limitations by the effective date of
the regulation, NCUA plans to work with the corporate credit unions to
develop realistic time frames for compliance. NCUA also is aware of the
unique role of wholesale corporate credit unions and will make
accommodations to allow such institutions to comply with the
regulation. -
G. Section-by-Section Analysis
Section 704.1--Scope
Part 704 applies directly to all federally insured corporate credit
unions. It applies to non federally insured corporate credit unions,
via Part 703 of the Rules and Regulations, if such credit unions accept
shares from federally chartered credit unions. To clarify the
application of Part 704, NCUA proposed to amend the Scope section so
that it states both that the regulation applies to all federally
insured corporate credit unions, and that non federally insured
corporate credit unions must agree, by written contract, to adhere to
the regulation and submit to NCUA examination as a condition of
receiving funds from federally insured credit unions. Some commenters
objected to this latter requirement, arguing that it meant that NCUA
was holding non federally insured corporate credit unions to a higher
standard than other investment alternatives available to natural person
credit unions.
These credit unions may be held to a higher standard because they
are differently situated than other natural person credit union
investment alternatives. The failure of a corporate credit union, even
one not federally insured, would affect the credit union system more
dramatically than the failure of a bank or broker-dealer. First, the
public would not necessarily distinguish between a federally and non
federally insured corporate credit union: all would be tarnished.
Second, it is likely that a far greater number of federally insured
natural person credit unions would be affected by the failure of a
corporate credit union than would be affected by the failure of a bank
or broker-dealer. For these reasons, and because of NCUA's
responsibility to protect the National Credit Union Share Insurance
Fund (NCUSIF), NCUA has determined to retain in the revised proposed
rule the requirement that non federally insured corporate credit unions
must agree, by written contract, to adhere to the regulation and submit
to NCUA examination as a condition of receiving funds from federally
insured credit unions.
As in the first proposed rule, Section 704.1(b), which sets forth
NCUA's authority to waive a requirement of Part 704, is retained in
this revised proposal. NCUA again emphasizes that corporate credit
unions are expected to comply with the rule and that waivers will not
be granted as a matter of course.
Section 704.2--Definitions
As noted in the initial proposed rule, Part 704 currently
incorporates by reference Part 703, which governs federal credit union
investments, except where inconsistent with Part 704. To eliminate the
confusion regarding the applicability of certain provisions of Part 703
to corporate credit unions, NCUA determined in the initial proposed
rule to make the investment section in Part 704 stand on its own.
[[Page 28088]]
Among other tasks, this necessitated importing a number of definitions
from Part 703 into Part 704. No commenters objected to this idea, and
it is continued in this revised proposal.
The definitions that have been repeated, either identically or with
minor changes, from current Part 703 are: ``adjusted trading,''
``collateralized mortgage obligation,'' ``federal funds transaction,''
``futures contract,'' ``immediate family member,'' ``market price,''
``maturity date,'' ``real estate mortgage investment conduit,''
``repurchase transaction,'' ``residual interest,'' ``reverse repurchase
transaction,'' ``Section 107(8) institution,'' ``senior management
employee,'' ``settlement date,'' ``short sale,'' ``stripped mortgage-
backed security,'' and ``trade date.''
Since the issuance of the initial proposed rule, NCUA has issued a
proposed revision to Part 703. 50 FR 61219 (Nov. 29, 1995). Proposed
Part 703 contains a number of new definitions, some of which have been
included in this revised proposed Part 704. These are: ``business
day,'' ``commercial mortgage related security,'' ``fair value,''
``industry-recognized information provider,'' ``mortgage related
security,'' ``mortgage servicing,'' ``pair-off transaction,''
``prepayment model,'' ``securities lending transaction,'' and ``small
business related security.''
The initial proposed rule also introduced a number of new
definitions, several of which have been included in this revised
proposal. These are: ``embedded option,'' ``forward rate agreement,''
``long-term investment,'' ``market value of portfolio equity,''
``matched'' (``identically matched'' in initial proposal),
``official,'' ``option contract,'' ``penalty for early withdrawal,''
``primary dealer,'' ``short-term investment,'' ``swap agreement,'' and
``wholesale corporate credit union.''
The initial proposal rule deleted a number of definitions because
the terms were not used in the proposed regulation, or because the
meaning was so self-evident as to not require definition. No commenters
objected to this idea and it is continued in this revised proposal. The
definitions that are proposed to be deleted are: ``average life,''
``capital of a broker/dealer,'' ``claims,'' ``corporate reserves,'' non
credit union member,'' ``original maturity,'' ``other reserves,''
``risk-based capital,'' ``secondary capital,'' ``speculative
activities,'' ``term subordinated debt,'' and ``United States
depository institutions.''
Finally, this revised proposal has introduced definitions for the
following terms: ``capital ratio,'' ``correspondent services,''
``credit enhancement,'' ``daily average net assets,'' ``dealer bid
indication,'' ``gains trading,'' ``membership capital,'' ``mortgage-
backed security,'' ``moving daily average net assets,'' ``NCUA,'' ``non
secured investment,'' ``paid-in capital,'' ``private placement,''
``reserves,'' ``reserve ratio,'' ``secured loan,'' ``tri-party
contract,'' and ``weighted average life.'' NCUA believes that the
definitions are self-explanatory, but will clarify any that are
confusing in the preamble to the final rule.
Section 704.3--Corporate Credit Union Capital
Section 704.11 of the current regulation establishes specific
levels of capital that corporate credit unions must maintain, based on
risk-weighted assets. Primary capital, which consists of reserves and
undivided earnings, must be at least 4 percent of risk- weighted
assets, and total capital, which consists of primary capital and
membership capital share deposits, must be at least 8 percent of risk-
weighted assets. In response to public expressions of concern regarding
the relatively low levels of primary capital in corporate credit
unions, Section 704.12 of the initial proposed rule established a new
capital requirement based on the ratio of primary capital to average
daily assets. The goal was for corporate credit unions to reach the
minimum ratio of 4 percent of primary capital to average daily assets
by January 1, 1998. The initial proposed rule also required that all
corporate credit unions maintain a minimum ratio of 10 percent of
capital to risk-weighted assets.
The proposed definition of primary capital included, in addition to
reserves and undivided earnings, certain other reserve accounts and a
new type of member-contributed capital, called a permanent capital
share account (PCSA). Up to 50 percent of primary capital could consist
of PCSAs, the most significant feature of which was that they could be
redeemed only with the written concurrence of NCUA. In general, the
commenters opposed this requirement. Corporate credit union commenters
stated that they would be unable to sell such shares, and natural
person credit unions stated that they would not purchase them.
With respect to the proposed capital requirements, the commenters
stated that if PCSAs were to be retained, all such shares should be
counted toward primary capital. In addition, the commenters objected to
the new membership capital shares, called secondary capital share
accounts, not being included in primary capital. They argued that such
shares were at risk and should be counted. The commenters also argued
that the asset and liability provisions were so stringent that it would
be impossible to meet the 4 percent requirement in the time frame
provided. Many commenters also objected to using two ratios to measure
the adequacy of corporate credit union capital.
NCUA is proposing to move away from the concept of risk-based
capital. Because corporate credit union assets tend to have relatively
low credit risk, most corporate credit unions have high risk-based
capital ratios, even if they have low levels of leverage capital to
protect against interest rate or market risks. This revised proposal
focuses on the capital that is available to protect against those
risks. Comments are specifically requested on whether NCUA should
require the calculation of the capital to risk-weighted assets ratio.
In responding to this issue, commenters should bear in mind that NCUA
would likely require that the ratio be calculated using the same risk
weights and risk categories required by the other federal financial
institution regulators.
Proposed Section 704.3(b) requires that a corporate credit union
without expanded authorities have a capital ratio of 4 percent. Capital
is defined as the sum of a corporate credit union's reserves and
undivided earnings, paid-in capital, and membership capital. Membership
capital accounts are similar to the current membership capital share
deposits, except that they must have at least a three-year notice
provision, rather than a one-year provision. Paid-in capital consists
of funds obtained from credit union and non credit union sources. Paid-
in capital has no maturity and is callable only at the option of the
corporate credit union and only if the corporate credit union meets its
minimum level of required capital after the funds are called.
The capital (or ``leverage'') ratio is calculated by dividing a
corporate credit union's capital by its moving daily average net
assets. Including membership capital in the definition of capital means
that most corporate credit unions are already at 4 percent. NCUA
believes that 4 percent is appropriate, because it is the amount
estimated to meet corporate credit union needs and is comparable to the
levels established by the other financial institution regulators.
The role of membership capital relative to a corporate credit
union's internally generated reserves and undivided earnings has been
cause for extensive debate. NCUA regards
[[Page 28089]]
membership capital as a vital component of the corporate network's
total capital structure. It is used in calculating the minimum leverage
ratio (also included in total capital requirement for expanded
authorities), the limit on loans to members, the limit on loans to
CUSOs, and the limit on fixed assets. However, for purposes of market
and credit risk exposure, this proposal sets the MVPE and concentration
limits as a percentage of the sum of reserves and undivided earnings
and paid-in capital. Indirectly, the member-contributed capital is in
line to absorb losses, but the revised proposal seeks to restrict the
incidence of losses to a corporate credit union's own equity.
The ability of a member to withdraw its capital contribution has
been preserved in this revised proposal. The fact that a member may
cancel its ownership stake, irrespective of any ability on the part of
the corporate credit union to replace it, adds an extraordinary
dimension to the capitalization of corporate credit unions. Some have
argued that a mechanism needs to exist which permits a member to
voluntarily provide a more permanent form of capital to its corporate
credit union. Thus, the revised proposal permits a member to purchase
paid-in capital. This establishes the alternative for a member to make
a perpetual capital investment which the corporate credit union can
use, along with its reserves and undivided earnings, for direct risk-
taking purposes. -
As members of a unique, private, and cooperative financial system,
corporate credit unions will benefit from building appropriate internal
capital reserves and, in turn, diminish the prospect of placing member
funds directly at risk. Over time, the buildup of internal reserves
will increase a corporate credit union's capacity to provide greater
products and services to members while it decreases the risk to members
that they will lose their capital stake due to market or credit risk
exposures or other business losses incurred by their corporate credit
union. -
Proposed Part 703, noted above, limits a natural person credit
union's purchase of capital shares in corporate credit unions to one
percent of the investing credit union's assets. Commenters with
opinions on this issue should direct them at proposed Part 703. -
Since NCUA believes that the stability of the corporate system will
be strengthened if each corporate credit union's reserves and undivided
earnings plus paid-in capital ultimately equals 4 percent of net
assets, proposed Section 704.3(c) establishes mandatory reserve
transfers when the amount is below 4 percent. Although NCUA expects
that a 4 percent capital ratio will be appropriate for most corporate
credit unions without expanded authorities, a higher level may be
necessary in the rare situation when, for example, a corporate credit
union refuses to recognize a loss, or a loss not anticipated by the
regulation occurs. A lower level may be appropriate in the event of a
natural disaster or when, for example, a merger results in the
continuing corporate credit union's reserves falling below 4 percent,
and a workout plan has been approved. To accommodate increasing or
decreasing the capital requirement, proposed Section 704.3(d) provides
that NCUA may require a different minimum capital ratio for an
individual corporate credit union based on its circumstances. Before
imposing a different capital requirement, NCUA will provide notice to
the corporate credit union and allow it to respond. -
In rare circumstances, conditions may exist in a corporate credit
union when additional reserves may be needed but are not available
immediately. In those cases, NCUA may require a corporate credit union
to increase the regularly scheduled reserve transfers with supplemental
transfers which will ultimately raise the reserves to the required
level. As an example, NCUA may require that a corporate credit union
transfer 12 basis points each period, rather than the 10 basis points
required by the regulations. This action may be taken in conjunction
with a reserve transfer, or in lieu of the reserve transfer. -
As noted earlier, NCUA and corporate credit union representatives
have discussed this revised proposal during its development. As the 4
percent capital ratio requirement has been debated, some corporate
credit union representatives have asked about the consequences of going
below 4 percent, because, for example, the corporate credit union has
accepted a large volume of shares. NCUA is committed to corporate
credit unions maintaining capital at the required minimum, but realizes
that there may be situations where a corporate credit union temporarily
drops below that level. To accommodate sudden spikes in share growth,
the capital ratio is calculated by dividing capital by the moving daily
average net assets for the previous 12 months. -
Proposed section 704.3(e) requires management of a corporate credit
union to notify the board of directors, the supervisory committee, and
NCUA within 10 business days when capital falls below the minimum
required. The 10 business days refers to the time period after the
books are closed at month end. It is important to notify the board and
supervisory committee so that they can act promptly, including the
calling of a special meeting, if necessary, to ensure compliance within
the month.
If a corporate credit union is not in compliance by month end,
proposed Section 704.3(f) requires that it submit a plan to restore and
maintain its capital ratio at the minimum required level. For example,
if a corporate credit union closes its books on March 31, and the
capital ratio is 3.9 percent, it must notify the board of directors,
the supervisory committee, and NCUA by April 10. If, on April 30, the
capital ratio is at or above 4 percent, no further action is necessary.
If, however, the ratio is at 3.95 percent, a plan must be submitted to
NCUA by May 15. -
Even if a corporate credit union comes into compliance by the end
of the month, a plan is required if the corporate credit union drops
below the required minimum two more times within 12 months from the
first violation. Violating the required minimum three times in one year
indicates a systemic problem that must be addressed. Failure to develop
an adequate plan, fully supported by projections and estimates,
increases the chances that NCUA will issue a capital directive, a
procedure that is provided for in proposed Section 704.3(g). -
A capital directive may order a corporate credit union to achieve
adequate capitalization by taking one or more of a number of actions,
such as reducing dividends and limiting deposits. Unless a corporate
credit union's capital level is severely under the required minimum, it
is intended that capital directive will be issued only after verbal and
written communication between NCUA and the corporate credit union has
failed to result in an acceptable capital restoration plan or a plan
has not been followed. -
Since a capital directive will be issued only as a last resort,
NCUA expects full and immediate compliance with any such directive.
NCUA will view failure to comply with a capital directive as a serious
issue. -
It should be noted that the proposed regulation provides for
consultation with the state regulator where a state-chartered corporate
credit union is involved. NCUA will support state requirements for
higher capital levels or shorter time frames for compliance. -
Section 704.3(a) requires that a corporate credit union develop
capital
[[Page 28090]]
goals, objectives, and strategies. A corporate credit union should
develop various scenarios to accommodate slow, medium, and rapid asset
growth. It also should consider setting goals higher than regulatory
minimums in order to avoid non compliance due to unexpected growth.
Preplanning for capital growth is needed if a corporate credit union
anticipates applying for expanded authorities.
Section 704.4--Board Responsibilities -
Currently, several different sections of Part 704 set out policy
and operational requirements for corporate credit union boards of
directors. For example, Section 704.3 requires boards to adopt and
review strategic plans and to prepare business plans for certain
material expenditures. Sections 704.4 through 704.7 require corporate
credit unions to develop certain policies and goals in the areas of
asset and liability management, capital, investments, and lending, but
the board is accountable for the ratification of and adherence to such
policies and goals. The initial proposed rule did not substantially
change this approach, maintaining the requirement for board development
of strategic and business plans in Section 704.3 and the requirement
for credit union development of capital goals, objectives, and
strategies in Section 704.6. Section 704.4, however, did combine the
requirements for credit union development of investment and asset and
liability management policies. -
No significant comments were received in this area, but to
emphasize the fact that the board sets the agenda and is ultimately
responsible for the corporate credit union, Section 704.4 of this
revised proposal requires a board to approve comprehensive written
plans and policies. The board should oversee senior management to
ensure that policy limits are consistent with the existing and forecast
levels of capital and that all activities are conducted in a safe and
sound manner and are consistent with the board's overall risk
management philosophy. The board should also understand the role
financial instruments play in the corporate credit union's business
strategies and the mechanisms used to manage risks. The board must
provide for adequate staffing and technological/financial resources to
support the corporate credit union's activities. When a corporate
credit union plans to enter a new market, the board evaluation should
reflect the cost of establishing appropriate controls, procedures, and
attracting professional staff with necessary expertise.
The emphasis upon board responsibilities is not intended to turn
directors into operating managers. A board needs to delegate the
development of goals, policies, and procedures to operating management.
However, the board retains the ultimate responsibility for ensuring
that such delegations are reasonably fulfilled. A board's active
commitment to this can significantly improve its awareness and control
of potential risks.
Section 704.5--Investments
Currently, Section 704.6 requires a corporate credit union to
develop written investment policies and sets out a list of authorized
investments and divestiture requirements. In the initial proposed rule,
the policies provision was moved to Section 704.4, and the remaining
provisions were revised and recodified at Section 704.5. Section 704.5
of the proposed rule also included the relevant provisions of Part 703,
governing natural person federal credit union investments, rather than
simply incorporating them by reference. No comments were received on
this matter, and the split between Parts 703 and 704 has been
maintained in this revised proposal.
Section 704.6 of the initial proposed rule restricted the aggregate
of a corporate credit union's investment in any one institution,
issuer, or trust to 25 percent of primary capital. It instituted
minimum asset size and rating requirements for investments in
depository institutions. It also tightened the standards for CMOs.
A number of commenters stated that the 25 percent of primary
capital limitation was too low, arguing that it would concentrate
corporate credit union investments in the hands of fewer issuers and
create more credit risk in the industry. They also suggested that U.S.
Government and Agency securities should be exempt from the restriction.
NCUA agrees that the 25 percent of primary capital concentration
limit was too low and has also determined that concentration concerns
should properly focus on credit risk. Therefore, new concentration
limits are set forth in proposed Section 704.6, which governs credit
risk management.
The weakness in the current CMO tests became evident during the
bear market of 1994. While the fixed-rate CMO test proved reasonably
adequate in preventing the purchase of many high risk fixed-rate CMOs,
the floating-rate test proved inadequate. Many floating-rate CMOs were
structured to enable them to pass the test even though they contained
significant market risk resulting from option and basis risk.
This revised proposal expands the fixed rate CMO test to include
limits on extension/contraction of weighted average life (WAL) and on
price volatility. These are similar to the second two tests of the
Federal Financial Institutions Examination Council (FFIEC) test for
CMOs. Unlike the current rule, the proposal allows for bonds to extend
from the initial expected WAL provision of five years to seven years.
The price volatility test sets the maximum market value decline at 15
percent of the base case value. This means that the volatility of a CMO
should not exceed the comparable price volatility of approximately a
five year zero coupon bond.
This proposal expands the floating rate CMO test to include three
new tests. There is an initial expected WAL limit, an extension/
contraction WAL limit, and a price volatility limit. These tests were
proposed in response to the volatile price history of floating rate
CMOs and the inability of the FFIEC test to adequately capture cap and
basis risk. The view that floating rate securities are immune from
general market risks has been rudely dispelled over the past several
years, and NCUA believes there is a need to subject such securities to
rigorous prepurchase selection tests.
During the dialogue sessions with corporate credit unions, several
participants argued have that a comprehensive MVPE analysis which
captures option and basis risk eliminates the need for a special CMO
test. The fact that total risk is addressed in MVPE, and subsequently
limited as a percentage of reserves and undivided earnings plus paid-in
capital, may make the CMO tests redundant and needlessly restrictive.
Commenters are specifically requested to address this issue.
To control possible ``cherry picking'' involving the testing of
CMOs (selecting a prepayment model that will allow a particular CMO to
pass the tests), this revised proposal requires a corporate credit
union board to approve at least three prepayment models, or a median
estimate, that will be used in the tests. The models must be used for
all subsequent tests.
Section 704.5(c) of this revised proposal establishes consistent,
minimum standards for repurchase and securities lending transactions.
These transactions create room for spread trade opportunities with
minimal MVPE and credit risk. Proposed Section 704.5(c)(4) requires
that collateral securities be legal for corporate credit unions, except
that CMO/REMIC securities that pass the FFIEC HRST are permissible
provided that the term of the transaction does not exceed 95 days. The
95-day limit will permit standard 3-month trades with such collateral.
[[Page 28091]]
Section 704.5(k) of the initial proposed rule carried over the
provision from Part 703 authorizing investment in a mutual fund if the
investments and investment transactions of the fund are legal for the
purchasing credit union. Proposed Section 704.5(d) broadens this
authority by permitting investment in an investment company that is
registered with the Securities and Exchange Commission under the
Investment Company Act of 1940, with the same restriction regarding the
permissibility of the underlying investments and investment
transactions. A mutual fund is the most common type of registered
investment company, but credit unions have been authorized by opinion
letter to invest in other types, such as money market mutual funds and
unit investment trusts. The regulatory language has been changed to
clarify that these other types of registered investment companies are
permissible investments for corporate credit unions. A corporate credit
union can determine if the investments and investment transactions of
an investment company are permissible by reviewing the fund's
prospectus and statement of additional information. Oral or other
written representations regarding the fund's activities are not
sufficient. The language also clarifies that investments such as asset-
backed securities (ABS), which are specifically authorized for
corporate credit unions but are not registered investment companies,
are permissible regardless of the underlying instruments that make up
the security.
Proposed Section 704.5(e) sets forth investment activities that are
prohibited for corporate credit unions that are not operating with
expanded authorities. Several prohibitions are carried over from Part
703. Proposed Section 704.5(e)(1) prohibits a corporate credit union
from purchasing and selling off-balance-sheet financial derivatives.
While derivatives can be important risk management tools, NCUA believes
that they are appropriate only for corporate credit unions that have
sophisticated risk management systems in place. Proposed Section
704.5(e)(3) prohibits a corporate credit union from purchasing
commercial mortgage related securities and small business related
securities because the market for these securities is undeveloped and
the potential timing of cash flows from the securities is not widely
disseminated. -
Section 704.6--Credit Risk Management
Except for the concept of risk-based assets, the current regulation
addresses credit risk only briefly. Section 704.6(a) requires that a
corporate credit union's investment policies address, among other
things, risk diversification and approved investment credit limits and
credit ratings. Section 704.6(b) authorizes the purchase of certain
investments only if they have specific minimum credit ratings.
The initial proposed rule did not significantly change this
approach. Section 704.4 required a corporate credit union to develop
policies regarding acceptable credit risk, to identify the credit risk
associated with an asset prior to purchase, and to monitor such risks
while an asset was held. Section 704.5 established minimum credit
ratings for certain investments and required corporate credit unions to
prepare quarterly evaluations of lines of exposure to foreign banks.
Some commenters took exception to some of the required ratings and to
the mandatory quarterly evaluations. In addition, there was a
suggestion that credit risk be discussed more comprehensively.
This revised proposed rule addresses credit risk in a separate
section and requires that the board of a corporate credit union adopt a
written credit policy that reflects objectives and limits consistent
with its risk management philosophy. Proposed Section 704.6 was
developed in response to concerns that some corporate credit unions
consider that credit risk management only requires the use of credit
ratings. This section requires a corporate credit union to establish a
credit risk management policy, sets concentration limits and minimum
credit ratings for certain investments, and establishes specific
reporting and documentation procedures.
In-depth credit risk management requires considerable human and
financial resources. Many corporate credit unions may not wish to
commit the resources necessary to assume significant credit risk
exposure. Therefore, the proposed rule establishes conservative credit
ratings and concentration requirements. It also permits an expansion of
these basic credit authorities provided that credit risk management
resources increase accordingly. For corporate credit unions that
restrict their credit activities, a minimum due diligence process is
required. However, if a corporate credit union increases its credit
exposure, the requirements will increase accordingly.
Proposed Section 704.6(a) requires that a corporate credit union's
credit risk management policy address how it will ensure that it has
exercised due diligence in analyzing credit risk. The due diligence
requirement will not be met solely by subscribing to a rating agency's
credit research. To the extent that a corporate credit union assumes
material credit risk exposures, the internal analysis must provide the
basis for acceptable credit lines. The analysis should contain a
rationale for the approved risk exposure. A corporate credit union
choosing to accept greater risk exposure must have resident credit
expertise commensurate with the level of risk assumed.
To ensure reduced risks to member credit unions, the proposal
requires a corporate credit union to establish maximum credit limits
based on its reserves, undivided earnings, and paid-in capital. NCUA
believes that establishing limits based upon net assets provides a poor
basis to support risk since the size of a corporate credit union's
balance sheet does not meaningfully correlate to its capacity to absorb
risk.
The proposal also requires that a corporate credit union establish
limits on concentrations of credit risk that may occur, by, for
example, sector (e.g., automobile industry related receivables),
industry (e.g., banks), or region (e.g., geographical concentrations of
loans in private mortgage-backed securities). The policies must address
the fact that diversification by issuer does not mitigate all pertinent
credit risk factors. Absent the appropriate risk considerations, NCUA
is concerned that the corporate credit union system's assets could
become overly concentrated in one type of credit and be prone to a
systemic credit crisis. The remedy is not to avoid credit risk but
rather to analyze and manage it.
The credit risk management section establishes specific
concentration limits for certain types of securities and money market
transactions. These limits are higher than those set forth in the
initial proposal. NCUA was persuaded that the more conservative limits
could have the unintended consequence of forcing corporate credit
unions to purchase securities from issuers with greater credit risk. A
credit instrument which possesses structural components which reduce
the risk of default is preferred to a credit instrument that is based
upon the credit quality of the issuer. Therefore, the concentration
limits make a distinction between securities which have an element of
credit enhancement and non secured direct obligations. The latter have
no collateral or securitization enhancements to absorb losses resulting
from default.
Proposed Section 704.6(c)(1) provides that the aggregate
investments in any single mortgage-backed security (MBS) or asset-
backed security (ABS) or trust are limited to 200 percent of the sum of
[[Page 28092]]
the corporate credit union's reserves and undivided earnings and paid-
in capital. MBS and ABS are instruments with substantial credit
enhanced structures. The underlying instruments provide protection from
a credit risk perspective. The limit on MBS and ABS was set higher than
the limit on unsecured transactions because of the relative lower
credit risk associated with these secured investments. This limit
allows for an appropriate level of activity absent the substantial
credit review process that is requisite for proportionately greater
credit risk exposures.
Repurchase agreements provide opportunities for most corporate
credit unions to obtain spread income while limiting MVPE exposure.
Repurchase agreements and securities lending typically have a high
degree of protection against default. Since these transactions are
fully collateralized and valued on a daily basis, they have minimal
credit risk exposure. The concentration limits set forth in proposed
Section 704.6(c)(2) reflect the objective to maintain credit risk
management requirements commensurate with exposures. It provides that a
corporate credit union's aggregate investments in repurchase and
securities lending agreements with any one counterparty are limited to
400 percent of the sum of reserves and undivided earnings and paid-in
capital. This limit does not apply to investments in a wholesale
corporate credit union. The concentration limit restricts the volume of
repurchase transactions with one counterparty and will require a
corporate credit union to develop an adequate number of relationships
to support the level of current and projected repurchase activity.
Proposed Section 704.6(c)(3) limits non secured transactions to 100
percent of the sum of a corporate credit union's reserves and undivided
earnings and paid-in capital. To the extent that a corporate credit
union cannot conduct an in-depth analysis of credit counterparties,
this limit restrict exposures to an appropriate maximum. It is
understood that preferences for risk taking (i.e., credit versus market
risk) may change over time. The expanded authorities address the
capacity for a corporate credit union to assume greater levels of
credit exposure if and when it chooses. NCUA is concerned about
excessive exposures in non secured credit instruments that are not
supported by the requisite due diligence.
Proposed Section 704.6(d) addresses credit ratings. It cannot be
emphasized too strongly that a high rating is not a substitute for due
diligence. Debt structures and counterparty creditworthiness must still
be evaluated, and the approval of credit lines and limits must contain
rationale which reasonably justifies the willingness of the corporate
credit union to place its capital at risk. The proposed rule requires
that downgraded instruments be reviewed by the corporate credit union.
The corporate credit union must ensure that any decision to hold a
downgraded instrument can be justified. The provision does provide
flexibility to avoid automatic divestiture. The specific conditions for
instruments with rating which fall below the regulatory minimum is
addressed in proposed Section 704.10. Although the initial proposed
rule contained entity ratings, these have not been included in this
revised proposal due to the variability of standards on the part of the
rating agencies.
In establishing a minimum rating for asset-backed securities, NCUA
considered the additional legal and financial structure risks resident
in such securities. The complexity of these factors is typically
greater for lower rated bonds. Taking these other risk factors into
consideration, it was decided that that ABS would be limited to AAA,
despite the fact that the relative credit risk was not necessarily
different from other similarly rated securities.
Proposed Section 704.6(b) exempts from the credit requirements of
Section 704.6 securities issued by the United States government, its
agencies, and enterprises. Although government-sponsored enterprises,
such as Fannie Mae and Freddie Mac, have been exempted, they do possess
some credit risk. A corporate credit union should not fail to consider
that any material credit risk needs to be evaluated commensurate with
the exposure taken. These entities should not be considered exempt from
due diligence.
Section 704.7--Lending
Under Section 704.7 of the current rule, loans to one credit union
member are limited to the corporate credit union's capital or 10
percent of its shares and capital, whichever is greater. The aggregate
amount of loans to non credit union members is limited to 15 percent of
the corporate credit union's capital. The aggregate amount of loans to
credit union non members is limited to 25 percent of the corporate
credit union's shares and capital, with the loans to one credit union
non member being limited to capital or 10 percent of shares and
capital, whichever is greater.
Out of concern that the existing limitation was too permissive and
posed a potential threat to corporate credit unions and the NCUSIF,
Section 704.8 of the initial proposed regulation limited loans to one
member credit union to the corporate credit union's primary capital.
Corporate credit unions were prohibited from lending to members that
were not credit unions, except for loans to CUSOs and overdraft
protection for clearing accounts, and were also prohibited from lending
to non members.
A number of commenters argued that the limitation on loans to one
member credit union was too low. They argued that there should be a
separate limitation for secured and unsecured loans, due to the
differing magnitude of potential risk. NCUA agrees, noting that the
majority of corporate credit union lending to member credit unions is
done on a secured basis. NCUA also notes that a limit based solely on
capital, which includes membership capital, may be unfair to some
corporate credit unions, which may choose not to issue membership
capital. Therefore, Section 704.7(c) of this revised proposal limits
unsecured loans to 50 percent of capital or 75 percent of the sum of
the reserves and undivided earnings and paid-in capital, whichever is
greater, and limits secured loans to 100 percent of capital or 200
percent of the sum of reserves and undivided earnings and paid-in
capital, whichever is greater. NCUA believes that the unsecured limit
represents a balance between safety and soundness concerns and the
mission of corporate credit unions to make loans. The secured lending
limit allows for adequate diversification of the loan portfolio with
limited risk associated with any one borrower.
NCUA emphasizes that the term ``secured loan'' is defined to mean a
loan in which the lender has perfected a security interest in the
collateral. The rules for perfecting a security interest are governed
by state law. For example, if collateral consists of loans, and state
law requires possession of loan documents to perfect a security
interest in a loan, then the corporate credit union must take
possession of the documents. If this is not feasible, then the loan
must be included in the corporate credit union's unsecured loan limit.
To assess the impact of the unsecured vs. secured loan limits, NCUA
seeks comments on restrictions imposed by state law on individual
corporate credit unions' lending activities.
NCUA was convinced by comments that the corporate credit unions
should have the ability to make loans to non credit union members.
Section 704.7(d) of the revised proposal allows corporate
[[Page 28093]]
credit unions to make loans to members other than credit unions as long
as the loans are in compliance with Section 701.21(h) of the NCUA Rules
and Regulations, which governs member business loans. Additionally, the
aggregate of loans to members other than credit unions cannot exceed 15
percent of the corporate credit union's capital plus pledged shares.
NCUA also was convinced that corporate credit unions should have
the authority to make loans to non member credit unions in order to
accommodate credit unions with branches in other states. Proposed
Section 704.7(e) authorizes a corporate credit union to make an
overdraft loan related to correspondent services to a non member credit
union. Although such a loan generally will have a maturity of only one
business day, NCUA will not take exception if, in the regular course of
business, an overdraft loan occasionally has a maturity of two or three
days.
Section 704.8--Asset and Liability Management
Section 704.4 of the current regulation requires a corporate credit
union to develop and implement comprehensive written funds management
policies and to prepare monthly reports showing the degree of mismatch
between the sources and uses of funds. In addition, 704.6 requires a
corporate credit union to develop written investment policies which
address funds management strategies, among other things.
In response to the assumption of significant interest rate risk by
many corporate credit unions, Section 704.4 of the initial proposed
rule required that corporate credit unions identically match almost all
shares and deposits to corresponding assets. In addition, corporate
credit unions were required to calculate the fair value of all
investment securities monthly, limit aggregate losses on available-for-
sale assets to 15 percent of primary capital, limit investment in
instruments with embedded options to capital, and impose early
withdrawal penalties to guarantee protection from replacement risk.
Most respondents to the original proposal pointed out that this
combination was too restrictive to permit both a realistic management
of asset and liability positions and an adequate provision of basic
financial products and services.
To ensure that corporate credit unions were cognizant of potential
interest rate risk exposures before they arose, proposed Section 704.4
required the performance of monthly ``shock test'' calculations to show
the impact on net interest income and MVPE of interest rate changes.
The supplementary information section of the proposed regulation
indicated that NCUA would conduct analytical assessments of the
proposed rule through simulation modeling techniques.
The linchpin of the asset and liability management section of this
revised proposed rule is the use of MVPE. MVPE shocks provide a
critical insight into potential risks to earnings and capital. Most
financial institutions are comfortable viewing risk in terms of
variability of income. MVPE adds the dimension of capital-at-risk to
the assessment of risk exposure. Simulation models that produce
estimates for both net interest income and MVPE provide a more
comprehensive risk assessment.
NCUA is primarily focused upon the preservation of capital. MVPE
simulations provide a long-term, dynamic, and forward-looking
projection of the market risk impact upon capital. Coupled with net
interest income sensitivity analysis, MVPE provides a mechanism to view
earnings on a capital-at-risk basis. In most cases, the management of
MVPE will rely upon the management of asset price volatility.
NCUA realizes that the level of MVPE that a corporate credit union
targets is not static. As a corporate credit union assumes a greater
mismatch between liabilities and assets, MVPE variability will rise.
Corporate credit unions will need to make constant adjustments to the
level of MVPE exposure based upon their market biases and preferences.
It is assumed that a corporate credit union uncomfortable with
positioning its balance sheet based upon assumptions about future
market factors will minimize MVPE variability by matching a majority of
assets and liabilities. The management of higher MVPE variability
requires considerable human, financial, and system resources. The
proposed regulation recognizes that some corporate credit unions will
have sufficient infrastructure to permit them to incur more interest
rate risk.
This proposal requires that a corporate credit union maintain a
certain level of MVPE and that it not decline too drastically in
response to interest rate shocks. However, effective risk management
begins and ends with the board of directors. The board should consider
that the regulatory limitations in this rule are outer boundaries. It
is anticipated that boards will set policies within these boundaries,
recognizing that shock tests can only approximate real world events are
based upon a number of subjective inputs. Estimated results frequently
vary from actual results, and corporate credit unions will need to
develop procedures to ensure regulatory and board policy limits are not
exceeded.
The board also is required to establish policy limits on the
maximum decline in net income in both percentage and dollar terms.
While NCUA does not address specific limits for net interest income or
net income in the asset and liability management section, it recognizes
that corporate credit unions must evaluate risk both from a liquidation
and a going concern perspective. The board should receive reports which
reflect the impact on both the net interest margin and the non interest
components of income.
A corporate credit union also must model indexes so that it can
establish a relevant correlation between its cost of funds and the
reference indexes to which asset coupon formulas are linked. The risk
that an index will change independently of the factors which affect
liabilities creates basis risk. The MVPE calculation misses a
significant risk when indexes (market and non market) are not modeled
appropriately. This is particularly important for non market indexes,
such as COFI, where correlations to funding behavior may be weak or
changes may be difficult to project.
Proposed Section 704.8(e) requires a corporate credit union to
evaluate the risk in its balance sheet by measuring the impact of
interest rate changes on its MVPE and MVPE ratio. A corporate credit
union must limit its risk exposure to levels that do not result in an
MVPE ratio below 1 percent or a decline in MVPE of more than 18
percent. Frequency of testing is a function of the MVPE ratio. If MVPE
is 2 percent or above, testing must be done quarterly. If it falls
below 2 percent, monthly testing is required.
The MVPE floor provision of 1 percent is included in the regulation
to reflect, in part, the potential that a forecast of the effect of
interest rates on a corporate credit union's balance sheet will only
approximate actual market effects of interest rates. This floor
(remaining reserves and undivided earnings plus paid-in capital) must
also absorb other risks which could affect the corporate's balance
sheet such as operational, credit, legal, liquidity, settlement and
systemic risk.-
There has been considerable debate on the appropriate level of this
floor. A floor as low as 1 percent provides a reduced cushion to absorb
differences between forecast results and actual market conditions, the
impact of interest rate risk not fully reflected by a 300 basis point
parallel shock, and the other risks identified above. This increases
[[Page 28094]]
the potential that credit unions could lose membership capital during
significant market disruptions. Therefore, a low floor may require NCUA
to act more quickly and forcefully to protect both natural person
credit union membership capital and the NCUSIF.
NCUA seeks specific data from corporate credit unions to support
the claim that a floor other than 1 percent is appropriate. It seeks
similar analytical support for challenges to the 18, 35, and 50 percent
variation limits.
If all liabilities are matched with corresponding assets, investing
all reserves and undivided earnings and paid-in capital in a 6-year
zero coupon bond is about the same as an MVPE variance of 18 percent.
This is a moderate but acceptable risk limit for corporate credit
unions with limited risk management infrastructure. The firm's modeling
results showed that corporate credit unions with matched assets and
liabilities had MVPE variances of less than 5 percent when their
balance sheets were subjected to plus and minus 300 basis point
parallel shocks. Therefore, corporate credit unions that choose to
remain with the base case authorities will have room to manage a
mismatch of assets and liabilities while remaining within prudent
limits.
The assumption of higher MVPE variability is possible through
expanded authorities, but it is expected that a corporate credit union
with that authority will aggressively alter its balance sheet in
response to shifting market trends. Again, the MVPE variability limit
should not be viewed as a static operating level for market exposure.
Managing money via significantly mismatching assets and liabilities
carries a host of attendant risks which must be constantly evaluated. A
corporate credit union cannot run a mismatched portfolio with a ``buy
and hold'' strategy. Instead, it must actively manage its balance sheet
in response to changing market factors.
NCUA believes that the basic shock test set forth in this revised
proposal will reflect most interest rate risk, although it may fail to
capture some of the risk associated with other market conditions. One
of the primary concerns with the MVPE calculations is the estimate of
convexity risk resulting from embedded options. Most of the excessive
MVPE variability experienced within the corporate network in recent
years is the result of an excess of options written (e.g., prepayment
options on amortizing securities and periodic and lifetime caps on
variable rate bonds) versus options purchased (usually none). These
options typically represent the most dynamic component of the MVPE
variability.
Therefore, under the proposed rule, a corporate credit union with
instruments which possess unmatched embedded options in excess of 200
percent of the sum of its reserves and undivided earnings and paid-in
capital must conduct additional tests. NCUA recognizes that this is a
naive hurdle since the book amount of an instrument with an option does
not represent the actual amount of option risk. The development of a
specific measure of option risk was not pursued because of the unwieldy
nature of compliance. This level was chosen as an approximate threshold
when aggregate unmatched option exposure could have a material effect
upon MVPE. A number of tests, in addition to the standard rate shocks,
are required when this hurdle is exceeded. For example, a corporate
credit union must evaluate the effect on MVPE of non parallel shifts in
the yield curve. Simulation tests done in conjunction with this
proposal found that non linear shifts did not have a significant
incremental effect on the test results. However, the pivot point was
selected at the three year note. A corporate credit union would need to
conduct a test which pivots around a point on the curve that reflects
its balance sheet structure.
In addition, adjustments to prepayment speeds are necessary because
the historical evidence indicates that prepayment projections have
varied substantially from actual prepayment behavior. The adjustment to
prepayment speeds in the firm's simulated model exercise yielded
significantly different MVPE results.
The supply and demand factors which can dominate various investment
sectors are reflected in the spread at which such investments trade
relative to Treasuries. If a model maintains a static spread assumption
in all tests it may not reflect a crucial form of market risk. Credit
spreads can be driven by numerous factors, and a corporate credit union
should be prepared to address the impact of such spreads.
A major potential component of option value is the measure of
volatility. A corporate credit union must be able to measure the impact
of how changes in volatility affect MVPE if it has a material exposure
to option risk.
Proposed Section 704.8(f) sets forth procedures for violations of
the regulatory MVPE limits. This proposed rule does not require the use
of particular risk models, allowing corporate credit unions to use
their own. NCUA regards the timely disclosure of violations as
essential for this approach to remain valid. It is crucial that NCUA,
the corporate credit union board, and the supervisory committee, be
informed as soon as possible of any violation that is not corrected
within 5 days. NCUA will work with the corporate credit union to assist
it in returning to compliance.
Proposed Section 704.8(g) sets forth procedures for violations of
board asset and liability policy. Again, NCUA must be informed, but
after notification is provided to the board.
Section 704.9--Liquidity Management
The current rule does not address liquidity explicitly, although
the requirements in Sections 704.4 and 704.6 regarding the development
of funds management policies clearly include a concern for liquidity.
Further, Section 704.8 provides that a corporate credit union may
borrow up to 10 times capital or 50 percent of shares, whichever is
greater. The initial proposed rule also did not contain a separate
section regarding liquidity, but paragraph (j) of the asset and
liability section did require corporate credit unions to develop
contingency funding plans that ranked all sources of liquidity that
were available to service immediate outflows of member funds. Proposed
Section 704.9 authorized a corporate credit union to borrow up to 10
times capital or 50 percent of shares, whichever was less, and stated
that borrowing could only be done for liquidity needs.
No significant comments were received on proposed Section 704.4(j),
but a number of commenters objected to the proposed limitation on
borrowed funds. In addition, many commenters questioned the restriction
on borrowing only for liquidity purposes. In Section 704.9 of this
revised proposal, NCUA has determined to leave the borrowing limit at
the current level, that is 10 times capital or 50 percent of shares,
whichever is greater. Further, the restriction on borrowing only for
liquidity needs has been removed. However, this revised proposal
requires that a corporate credit union take a number of actions to
ensure that it can fulfill one of its primary functions, that of being
a liquidity provider. A corporate credit union must evaluate the
potential liquidity needs of its members in a variety of economic
scenarios, continuously monitor sources of internal and external
liquidity, ensure that it has sufficient investment securities
classified as available-for-sale to meet liquidity needs, and develop a
contingency funding plan.
[[Page 28095]]
Section 704.10--Divestiture
Currently, Section 704.6(d) provides that a corporate credit union
in possession of an investment that does meet regulatory requirements
must either sell the investment within 10 days or request NCUA
permission to hold it. Section 704.5(a) of the initial proposed rule
required divestiture within 10 days of any downgraded asset, and
704.5(h)(4) required the same of any CMO that failed the average life
test or the price sensitivity test.
Many commenters objected to the general divestiture requirement,
stating that it could result in one corporate credit union being
required to sell a security at the same time that it was a legal
investment for another corporate credit union. The commenters also
objected to the absolute nature of both requirements and the fact that
corporate credit unions were given only 10 days to sell the downgraded
or failed securities. They stated that automatic divestiture within a
short time frame could magnify losses if a corporate credit union were
forced to sell in an adverse market.
With respect to instruments that have been downgraded but are still
permissible under the regulations, proposed Section 704.6 now requires
only that a corporate credit union review the investment and be able to
justify any decision to hold. With respect to instruments that have
failed a requirement of Part 704, proposed Section 704.10 requires that
the board and NCUA be informed within 20 business days. If the
investment continues to fail, the corporate credit union must provide
NCUA with a plan within 25 business days that provides the
characteristics and risks of the investment, how it fits into
FR Doc. 96-13518 Corporate Credit Unions; Involuntary Liquidation of Federal Credit Unions and Adjudication of Creditor Claims Involving Federally Insured Credit Unions in Liquidation; Requirements for Insurance
the
corporate credit union's asset and liability management strategy, the
impact of holding or selling, and the likelihood that the investment
will again meet the requirements of Part 704. Although the proposed
rule provides for NCUA to require submission of the plan in less than
25 days, it is anticipated that this would be necessary only if there
were a serious safety and soundness problem.
Section 704.11--Corporate Credit Union Service Organizations (Corporate
CUSOs)
Currently, the authority of corporate credit unions to invest in
credit union service organizations (CUSOs) is contained in Section
704.6 and the authority to lend to CUSOs is contained in Section 704.7.
In addition, rather than setting forth specific CUSO guidelines,
Section 704.6 incorporates by reference much of Section 701.27, which
governs natural person investments in and loans to CUSOs. NCUA
determined, in the initial proposed rule, to address corporate credit
union investments in and loans to CUSOs in one section and to
explicitly include the applicable portions of Section 701.27. This was
done in proposed Section 704.7.
NCUA also proposed to create a new term for corporate CUSOs:
corporate service organizations (CSOs). A CSO was limited to serving
only the corporate credit unions that had invested in or loaned to the
CSO and/or the members of such corporate credit unions. In addition,
CSOs were authorized to provide only a few of the services authorized
for natural person CUSOs. Finally, the proposed rule required that a
CSO be chartered as a corporation under state law.
In response to comments and because ``CUSO'' is a term used and
understood throughout the credit union industry, NCUA has determined to
retain use of the term in the context of corporate credit unions. To
avoid confusion with natural person CUSOs, however, this revised
proposal does adopt the term ``corporate CUSO.'' In addition, for ease
of reference, the definition of corporate CUSO has been included in
Section 704.11, rather than being placed in Section 704.2.
The limitation on the types of entities that could be served by a
CSO was designed to preserve the integrity of field of membership
requirements. The thought was that if a corporate credit union could
provide services to any natural person credit union through a CUSO,
field of membership limitations would be less meaningful. Further, NCUA
did not wish to address the issue of broadening corporate credit union
fields of membership in the proposed regulation. The commenters,
however, argued forcefully that CSOs should be able to provide services
to non members. They suggested that a CSO should be permitted to
develop expertise in a specific service which could benefit all natural
person credit unions. NCUA agrees and the proposed rule allows
corporate CUSOs to serve natural person credit unions that are not
members of affiliated corporate credit unions.
In proposing to limit the services that could be provided by CSOs,
NCUA was attempting to relate those services to the daily activities of
corporate credit unions, that is, serving credit unions rather than
natural persons. However, the commenters argued that CSOs should be
able to participate in ventures related to services for members of
natural person credit unions, such as shared branching and home
banking. NCUA is persuaded that corporate CUSOs can have a broader
purpose. Accordingly, this revised proposed rule requires simply that a
corporate CUSO restrict its services to those related to the daily
activities of credit unions. Section 701.27(d) of the NCUA Regulations
provides guidance in this area.
Section 704.7 of the initial proposed rule limited the aggregate of
all investments in and loans to member and non member CSOs to 15
percent of a corporate credit union's capital. Some commenters
expressed concern that CUSOs involved in secondary mortgage market
activities might need additional funds at certain times. This revised
proposal allows a corporate credit union to loan to CUSOs an additional
15 percent of capital, provided that the loan is secured.
Section 704.7 of the initial proposal also incorporated some of the
limitations and requirements of Section 701.27 (b) and (d). One of
these was the requirement that the credit union ``ensure'' that it will
not be held liable for the obligations of the CUSO. Some commenters
stated that it was impossible to provide absolute assurance on this
score. In response, Section 704.11(b) of this revised proposal requires
a corporate credit union to obtain a written legal opinion that the
corporate CUSO is organized and operated in such a manner that the
corporate credit union will not ``reasonably be held liable'' for the
obligations of the corporate CUSO. The point of this requirement is to
obtain reasonable assurance that a corporate CUSO is operated as a
sufficiently separate entity that a court would not ``pierce the
corporate veil,'' conclude that the CUSO and corporate credit union
were essentially the same organization, and hold the corporate credit
union liable for the obligations of the CUSO. Since there seems to be
some confusion on this issue, clarifying language has been added.
Since initial proposed Sections 704.7(b) and (c) received little
comment, they have been retained in revised proposed Sections 704.11(c)
and (d). Section 704.7(d) of the initial proposed rule required a
corporate credit union to take steps to bring its investments and loans
in line with the new regulation. Since CSOs were significantly more
restricted than were CUSOs, it was possible that many investments in
and loans to CUSOs would not have been authorized. This provision has
not been retained in the revised proposed rule, as
[[Page 28096]]
corporate CUSOs will have much the same authority as existing CUSOs,
and the majority of existing investments and loans will continue to be
authorized. Finally, Section 704.11(e) of the revised proposed rule
clarifies that the sole authority for a corporate credit union to
invest in or loan to a CUSOs is that contained in Part 704.
Section 704.12--Services
-Section 704.9 currently states that corporate credit unions may
provide services involving investments, liquidity management, payment
systems, and correspondent services. NCUA believed that this authority
had, on occasion, been interpreted too broadly and proposed revising
this section to eliminate the specific list of services. The initial
proposal simply stated that corporate credit unions could provide
services to their member credit unions, intending that to mean
traditional loan, deposit, and payment services. The initial proposal
also stated that a corporate credit union could provide services only
to its members and could not provide services to non members through
correspondent credit union arrangements or the service contract
authority of Section 701.26 of the NCUA Rules and Regulations.
Some commenters expressed confusion regarding the prohibition
against correspondent credit union arrangements. The intent was to
prohibit arrangements whereby two corporate credit unions would agree
for one to provide services to the members of another. NCUA has
determined, however, that a corporate credit union may provide services
to the members of another corporate credit union, provided that the
second corporate credit union consents and NCUA has given its prior
written approval. A corporate credit union also may provide
correspondent services to non member, natural person credit union
branch operating in the geographical area that the corporate credit
union serves. --
Section 704.13--Fixed Assets
Currently, Section 704.11 limits a corporate credit union's
investment in fixed assets to 15 percent of capital. The initial
proposed rule changed the limitation to 15 percent of primary capital,
in order to control future large fixed asset investments. Some
commenters argued that the proposed limitation was too restrictive,
while others stated that corporate credit unions should not put a
significant portion of their funds into fixed assets.
NCUA has determined that corporate credit unions may need to make
greater investments in fixed assets, in order to better serve their
member credit unions, and has set the limit in this revised proposed
rule at 15 percent of capital. In addition, the requirements relating
to the submission of waivers from the limitation have been condensed.
As in the initial proposed rule, this revised proposal eliminates the
provision regarding a corporate credit union proceeding with its
investment if it does not receive notification of the action taken on
its request within 45 days. This will ensure that NCUA has adequate
time to review requests to invest more than 15 percent of capital in
fixed assets.
Section 704.14--Representation
As noted earlier, NCUA amended the representation section of Part
704 in 1994. Those changes were made because NCUA was concerned about
both real and apparent conflicts of interest. The initial proposed rule
recodified that section as 704.13, and amended it further by providing
that only representatives of member credit unions were permitted to
vote and stand for election. It also incorporated by reference the
provisions of Section 701.14 of the Rules and Regulations, governing
changes in officials and senior executive officers in credit unions
that are newly chartered or in troubled condition.
Although few comments were received on this section, NCUA has
received assurances that this issue will be addressed by the corporate
credit unions themselves and, thus, has determined not to go forward
with the proposal to allow only representatives of member credit unions
to vote and run for office.
For the reasons stated in the preamble to the initial proposed
rule, this revised proposal again incorporates the provisions of
Section 701.14.
Section 704.15--Audit Requirements
Currently, Section 704.13 only addresses the requirements for
annual audits. The initial proposed rule recodified the provision at
Section 704.14 and added a requirement for an internal auditor function
for corporate credit unions with assets over $100 million. The proposed
rule did not require the hiring of a full-time internal auditor, and
the supplementary information section indicated that, based on the
asset size and complexity of the institution, it would be permissible
to hire a part-time auditor or contract with an outside firm to perform
the function. The proposed rule did list specific responsibilities of
the internal auditor.
Section 704.15 of the revised proposed rule segregates the audit
requirements by external and internal functions. The external audit
function relates to the annual opinion audit. Although the existing
regulation contains the phrase reportable conditions letter, some
commenters were confused about the meaning of the term. Accordingly, it
has been deleted. This revised proposal requires that all
correspondence provided to a corporate credit union by the external
auditor be made available to NCUA.
A number of commenters stated that $100 million was too low a
threshold for an internal auditor function requirement. NCUA agrees and
has set a threshold of $400 million in this proposal. In addition,
rather than listing specific responsibilities for the internal auditor,
the revised proposed rule simply states that the auditor must meet the
guidelines of the Standards and Professional Practices of Internal
Auditing, as established by the Institute of Internal Auditors. This
proposal also requires that the internal auditor report to the chair of
the supervisory committee, who may delegate supervision of the internal
auditor's daily activities to the chief executive officer of the
corporate credit union. The authority to delegate was provided in
response to comments that the supervisory committee normally is not
directly involved in the daily operation of the corporate credit union,
Notwithstanding the statement in the supplementary information
section that the proposed rule did not require the hiring of a full-
time internal auditor, some commenters stated that the corporate credit
union did not have the resources to hire such an auditor. Again, this
is not required. Some corporates have the operational complexity to
warrant a full-time internal auditor on staff. Other corporate credit
unions may choose to hire a part-time internal auditor or contract with
an outside firm to perform the internal auditor function. -
Section 704.16--Contracts/Written Agreements
Neither the initial proposed rule nor this revised proposal made
changes to this provision.
Section 704.17--State-Chartered Corporate Credit Unions
The initial proposed rule added new Section 704.16(b) to put non
federally insured state-chartered corporate credit unions that receive
funds from federally insured credit unions on notice that they were
considered ``institution-affiliated parties'' within Section 206(r) of
the Federal Credit Union Act and
[[Page 28097]]
subject to all of the enforcement provisions of the Act. There was no
significant objection to the proposal and it has been retained in this
revised proposed rule.
Section 704.18--Fidelity Bond Coverage
The currently regulation specifically lists the bond forms that
NCUA has approved for corporate credit unions. NCUA has recently
approved several new forms for credit unions, CUMIS Credit Union Bond
200, CUMIS Credit Union Bond 300, and CUMIS Credit Union Bond 400, all
of which corporate credit unions may use, although some may not be
appropriate for particular institutions. Rather than adding these to
the proposal and then having to amend the regulation as other forms are
approved in the future, this proposal deletes all references to
specific bond forms. Instead of listing them in the regulation, NCUA
will notify corporate credit unions of all approved forms as new forms
are approved.
In current Section 704.17, the deductibles are based on a corporate
credit unions primary capital to risk asset ratio. Since the initial
proposed rule eliminated this ratio, the primary capital ratio was used
in this section. The initial proposal also clarified that the minimum
bond coverage would be based on a corporate credit union's average
daily assets as of the preceding December 31. NCUA received few
comments on this section.
Since the primary capital ratio is being eliminated in this revised
proposed rule proposed Section 704.19 uses the corporate credit union's
reserve ratio. NCUA requests comments on the effect of this change on a
corporate credit union's deductible. In addition, the proposed rule
deletes current Section 704.17(e), which allows a corporate credit
union to request approval for reduced coverage. Under Section 704.1, a
corporate credit union may request a waiver of any provision of Part
704.
Appendix A--Model Forms
Appendix A of the current rule sets forth a summary of risk weights
and risk categories used to calculate a corporate credit union's
capital to risk-weighted assets ratio. Since this revised proposed rule
eliminates the required calculation of that ratio, the summary has been
deleted. Appendix A of this revised proposal contains variations of the
model disclosure forms that were set forth in Appendix C of the initial
proposal.
Appendix B--Expanded Authorities and Requirements; Appendix C--
Guidelines for Evaluating Requests for Expanded Authorities
Appendix B of the current rule sets out off-balance-sheet
conversion factors that are used in calculating the capital to risk-
weighted assets ratio. Since the ratio is not used in this proposal,
the factors have been deleted. Appendix C currently contains a list of
U.S. Government obligations and agencies. Rather than having a fixed
list, which may become outdated as entities are created, dissolved, or
changed, the proposed rule contains definitions of government agencies
and enterprises and places the responsibility for determining an
entity's status on the corporate credit union.
Appendix B of this revised proposal sets forth incrementally
greater authorities for corporate credit unions and the infrastructure
and capital requirements that must be in place to obtain such
authorities. NCUA recognizes that each corporate credit union has
partly evolved in response to unique competitive forces and member
needs. The mission of a corporate credit union and its capacity to
fulfill its respective goals can vary considerably from institution to
institution. Expanded authorities were established to permit the
corporate credit unions that qualify to obtain a reasonable expansion
of market and credit risk limits. This mechanism permits the
flexibility for self-determination and it avoids the consequence of
regulating down to the least developed institutions at the expense of
the most developed.
The expanded authorities are a natural extension of the existing
waiver process whereby a corporate can submit a request to NCUA to
obtain additional powers or an exemption from some provision of the
rules and regulations. None of the incremental powers provided for in
this proposal are beyond the scope of existing waiver authorities.
Codifying these powers in the regulation standardizes the process and
provides an established set of criteria for approval.
Authorities are segregated into four parts to allow for some
measure of selectivity by corporate credit unions that may seek only
limited expansions of their basic operating powers. These parts, and
their respective guidelines for approval, are based upon an increasing
scale of depth and complexity. Greater expansions of authority are
supported by greater capacities to measure and control the
corresponding risks.
Proposed Appendix C sets forth guidelines for evaluating requests
for expanded authorities. The guidelines are based, in part, on a
number of subjective factors. Factors include the areas of board,
management and staff; systems and operations; credit risk management;
liquidity risk management; audit and compliance; and legal.
The proposal requires that a corporate credit union seeking to use
the expanded authorities set forth in Part 1 of Appendix B have a
capital ratio of 5 percent and meet additional infrastructure criteria
set forth in Appendix C. Additional capital is required because of the
greater opportunity to take risk. Strengthened management, staff, and
systems are required in order to safely manage that risk. A corporate
credit union seeking to use the even more expanded authorities set
forth in Part 2 of Appendix B must have a capital ratio of 6 percent
and meet even stronger infrastructure criteria. Again greater risk
requires greater protection against loss and greater ability to manage
the risk.
The proposal requires that a corporate credit union seeking to
invest in foreign obligations, as set forth in Part 3 of Appendix B,
have a capital ratio of 5 percent, meet the infrastructure criteria
required for corporate credit unions seeking the expanded authorities
under Part 1 of Appendix B, and meet additional infrastructure criteria
relating to automation of systems and staff experience with foreign
credit. A corporate credit union seeking to use financial derivatives,
as set forth in Part 4 of Appendix B, also must have a capital ratio of
5 percent and meet the infrastructure required for corporate credit
unions seeking the expanded authorities under Part 1 of Appendix B. In
addition, the corporate credit union must apply to NCUA for the
specific derivatives authority sought and have additional staff and
systems in place to adequately control the risks of such instruments.
Part 709--Involuntary Liquidation and Creditor Claims
Section 709.5(b) of the NCUA Rules and Regulations establishes a
payout priority for claims against credit unions that are in
involuntary liquidation. Currently, the seventh item is membership
capital share deposits of corporate credit unions. Since the proposed
rule uses the term ``membership capital,'' the words ``share deposits''
have been deleted. The proposed rule also provides for an eighth item,
i.e., paid-in capital.
[[Page 28098]]
Part 741--Requirements for Insurance
The initial proposed rule amended Section 741.3 of the NCUA Rules
and Regulations, governing requirements for insured credit unions, to
prohibit federally insured credit unions from transacting business with
corporate credit unions that did not comply with Part 704 and were not
examined by NCUA. There was no significant objection to the proposal
and it has been retained in this revised proposed rule. In the interim,
Section 741.3 has been recodified, so this revised proposed rule
creates new Section 741.219, containing the same language as set forth
in the initial proposal.
H. Regulatory Procedures
Regulatory Flexibility Act
NCUA certifies that the proposed rule, if made final, will not have
a significant economic impact on small credit unions (those under $1
million in assets). The rule applies only to corporate credit unions,
all of which have assets well in excess of $1 million. Accordingly, a
Regulatory Flexibility Analysis is not required.
Paperwork Reduction Act
The collection of information contained in this notice of proposed
rulemaking has been submitted to the Office of Management and Budget
for review in accordance with the Paperwork Reduction Act of 1980 (44
U.S.C. 3504(h)). Comments on the collection of information should be
directed to Ms. Beauchesne, at the National Credit Union
Administration, 1775 Duke Street, Alexandria, Virginia 22314-3428; Fax
No. (703) 518-6433; E-Mail Address: [email protected] within 90 days from
the date of this publication in the Federal Register. Comments should
also be sent to the OMB Desk Officer at the following address: Mr. Milo
Sunderhauf, OMB Reports Management Branch, New Executive Office
Building, Room 10202, Washington DC 20530.
The collection of information requirements in this proposed
regulation are found in 12 CFR [704.2; 704.3(a); 704.4(a); 704.6(a);
704.7(a); 704.8(a); 704.3(e)-(g); 704.5(b)(i)-(v); 704.6(e); 704.8(e)-
(g); 704.10; 704.15(b); and Appendices A and B]. This information is
required by corporate credit union management and staff in making
critical operational decisions on an ongoing basis. Additionally, the
information will be utilized by NCUA during the annual examination and
the ongoing supervision process. The respondents and recordkeepers are
corporate credit unions. Respondents and recordkeepers are not required
to respond to this collection of information unless it displays a
currently valid OMB control number.
Respondents: Corporate credit unions.
Estimated number of respondents and/or recordkeepers: 41.
Estimated average annual burden hours per respondent/recordkeeper:
3,909 hours.
Estimated total annual reporting and recordkeeping burden: 160,293
hours.
Estimated Total Annual Cost: $4,018,630.
Executive Order 12612
Executive Order 12612 requires NCUA to consider the effect of its
actions on state interests. It states that: ``Federal action limiting
the policy-making discretion of the states should be taken only where
constitutional authority for the action is clear and certain, and the
national activity is necessitated by the presence of a problem of
national scope.'' The risk of loss to federally insured credit unions
and the NCUSIF caused by actions of corporate credit unions are
concerns of national scope. The proposed rule would help assure that
proper safeguards are in place to ensure the safety and soundness of
corporate credit unions.
The rule applies to all corporate credit unions that accept funds
from federally insured credit unions. NCUA believes that the protection
of such credit unions, and ultimately the NCUSIF, warrants application
of the proposed rule to non federally insured corporate credit unions.
NCUA, pursuant to Executive Order 12612, has determined that this rule
may have an occasional direct effect on the states, on the relationship
between the national government and the states, or on the distribution
of power and responsibilities among the various levels of government.
However, the potential risk to the NCUSIF without these changes
justifies them.
I. List of Subjects
12 CFR Part 704
Credit unions, Reporting and recordkeeping requirements.
12 CFR Part 709
Claims, Credit unions, Liquidation.
12 CFR Part 741
Bank deposit insurance, Credit unions, Reporting and recordkeeping
requirements.
By the National Credit Union Administration Board on May 22,
1996.
Becky Baker,
Secretary of the Board.
For the reasons set out in the preamble, NCUA proposes to amend 12
CFR parts 704, 709, and 741 as follows:
1. Part 704 is revised to read as follows:
PART 704--CORPORATE CREDIT UNIONS
Sec.
704.1 Scope.
704.2 Definitions.
704.3 Corporate credit union capital.
704.4 Board responsibilities.
704.5 Investments.
704.6 Credit risk management.
704.7 Lending.
704.8 Asset and liability management.
704.9 Liquidity management.
704.10 Divestiture.
704.11 Corporate Credit Union Service Organizations (Corporate
CUSOs).
704.12 Services.
704.13 Fixed assets.
704.14 Representation.
704.15 Audit requirements.
704.16 Contracts/written agreements.
704.17 State-chartered corporate credit unions.
704.18 Fidelity bond coverage.
Appendix A to Part 704--Model Forms
Appendix B to Part 704--Expanded Authorities and Requirements
Appendix C to Part 704--Guidelines for Evaluating Requests for Expanded
Authorities
Authority: 12 U.S.C. 1762, 1766(a), 1781, and 1789.
PART 704--CORPORATE CREDIT UNIONS
Sec. 704.1 Scope.
(a) This part establishes special rules for all federally insured
corporate credit unions. Non federally insured corporate credit unions
must agree, by written contract, to both adhere to the requirements of
this part and submit to examinations, as determined by NCUA, as a
condition of receiving shares or deposits from federally insured credit
unions. This part grants certain additional authorities to federal
corporate credit unions. Except to the extent that they are
inconsistent with this part, other provisions of NCUA's Rules and
Regulations (12 CFR Chapter VII) and the Federal Credit Union Act apply
to federally chartered corporate credit unions and federally insured
state-chartered corporate credit unions to the same extent that they
apply to other federally chartered and federally insured state-
chartered credit unions, respectively.
[[Page 28099]]
(b) The Board has the authority to issue orders which vary from
this part. This authority is provided under Section 120(a) of the
Federal Credit Union Act, 12 U.S.C. 1766(a). Requests by state-
chartered corporate credit unions for waivers to this part must be
approved by the state regulator before being submitted to NCUA.
Sec. 704.2 Definitions.
Adjusted trading means any method or transaction used to defer a
loss whereby a corporate credit union sells a security to a vendor at a
price above its current market price and simultaneously purchases or
commits to purchase from the vendor another security at a price above
its current market price.
Asset-backed security means a security that is primarily serviced
by the cashflows of a discrete pool of receivables or other financial
assets, either fixed or revolving, that by their terms convert into
cash within a finite time period plus any rights or other assets
designed to assure the servicing or timely distribution of proceeds to
the securityholders. This definition excludes those securities referred
to in the financial markets as mortgage-backed securities (MBS), which
includes collateralized mortgage obligations (CMOs) and real estate
mortgage investment conduits (REMICs).
Business day means a day other than a Saturday, Sunday, or federal
holiday.
Capital means the sum of a corporate credit union's reserves and
undivided earnings, paid-in capital, and membership capital.
Capital ratio means the corporate credit union's capital divided by
its moving daily average net assets.
Collateralized Mortgage Obligation (CMO) means a multi-class bond
issue collateralized by whole loan mortgages or mortgage-backed
securities.
Commercial mortgage related security means a mortgage related
security where the mortgages are secured by real estate upon which is
located a commercial structure.
Commitment means any unconditional arrangement that obligates a
corporate credit union to extend credit in the form of loans; to
purchase loans, securities or other assets; or to participate in loans
and leases. Commitments also include overdraft facilities, revolving
credit, home equity, and mortgage lines of credit, and similar
transactions. An obligation is conditional if the corporate credit
union is not automatically obligated to extend funds.
Corporate credit union means an organization that:
(1) Is chartered under Federal or state law as a credit union;
(2) Receives shares from and provides loan services to credit
unions;
(3) Is operated primarily for the purpose of serving other credit
unions;
(4) Is designated by NCUA as a corporate credit union;
(5) Limits natural person members to the minimum required by state
or federal law to charter and operate the credit union; and
(6) Does not condition the eligibility of any credit union to
become a member on that credit union's membership in any other
organization.
Correspondent services means services provided by one financial
institution to another, and includes check clearing, credit and
investment services, and any other banking services.
Credit enhancement means collateral, third-party guarantees, and
other features that are designed to provide structural support and
protection against losses to investors in a particular security.
Daily average net assets means the average of net assets calculated
for each day during the period.
Dealer bid indication means a dealer's approximation of the bid
price of a security.
Embedded option means a characteristic of certain assets and
liabilities which gives the issuer of the instrument the ability to
change the features such as final maturity, rate, principal amount and
average life. Options include, but are not limited to, caps, floors,
and prepayment options.
Fair value of a financial instrument means the amount at which an
instrument could be exchanged in a current arms-length transaction
between willing parties, other than in a forced liquidation sale.
Market prices, if available, are the best evidence of the fair value of
financial instruments. If market prices are not available, the best
estimate of fair value may be based on the quoted market price of a
financial instrument with similar characteristics or on valuation
techniques (for example, the present value of estimated future cash
flows using a discount rate commensurate with the risks involved,
option pricing models, or matrix pricing models).
Federal funds transaction means a short-term or open-ended transfer
of funds between U.S. depository institutions.
Foreign bank means an institution which is organized under the laws
of a country other than the United States, is engaged in the business
of banking, and is recognized as a bank by the banking supervisory
authority of the country in which it is organized.
Forward rate agreement means an over-the-counter contract between
counterparties where one party agrees to pay the other a specified
interest rate payment on a reference notional amount at a specified
date in the future (settlement date). The amount paid or received at
the settlement date of the contract is based on the market value of the
contract. The market value depends upon the notional amount, the
contract rate, and the prevailing market reference rate at the time of
settlement.
Futures contract means a contract for the future delivery of
commodities, including certain money market instruments and government
securities, sold on commodities exchanges.
Gains trading means the purchase of a security as an investment
portfolio asset and the subsequent sale of that same security at a
profit after a short-term holding period.
Immediate family member means a spouse or other family member
living in the same household.
Industry recognized information provider means an organization
which obtains compensation by providing information to investors and
receives no compensation for the purchase or sale of investments.
Long-term investment means, for the purpose of issue ratings, an
investment that has an initial maturity, or expected maturity, greater
than one year.
Market price means the price at which a security can be bought or
sold.
Market value of portfolio equity (MVPE) means the fair value of
assets minus the fair value of liabilities. All fair value calculations
must include the value of embedded options. Membership capital is
treated as a liability for purposes of this calculation. The MVPE ratio
is calculated by dividing MVPE by the fair value of assets.
Matched means, with respect to assets and liabilities, that the
factors which affect cash flows of an asset are replicated in a
corresponding liability.
Material means an amount that exceeds 5 percent of the corporate
credit union's capital.
Maturity date means the date on which a security matures, and shall
not mean the call date or the average life of the security.
Member reverse repurchase transaction means an integrated
transaction in which a corporate credit union purchases a security from
one of its member credit unions under agreement by that member credit
union
[[Page 28100]]
to repurchase the same security at a specified time in the future. The
corporate credit union then sells that same security, on the same day,
to a third party, under agreement to repurchase it on the same date on
which the corporate credit union is obligated to return the security to
its member credit union.
Membership capital means funds contributed by members which are
available to cover losses that exceed reserves and undivided earnings
and paid-in capital. In the event of liquidation of the corporate
credit union, membership capital is payable only after satisfaction of
all liabilities of the liquidation estate, including uninsured share
obligations to shareholders and the National Credit Union Share
Insurance Fund (NCUSIF). The funds have a minimum withdrawal notice of
three years, are not insured by the NCUSIF or other share or deposit
insurers, and cannot be used to pledge against borrowings. Membership
capital may be sold to a member, subject to the corporate credit
union's approval. The funds may be in the form of a term certificate,
or may be in the form of an adjusted balance account. An adjusted
balance account may be adjusted in relation to a measure established
and disclosed by the corporate credit union at the time the account is
opened (e.g., one percent of a member credit union's assets). Upon
written notice of intent to withdraw membership capital, the balance of
the account will be frozen (no annual adjustment) until the conclusion
of the notice period. The terms and conditions of a membership capital
account must be disclosed to the recorded owner of such account at the
time the account is opened and at least annually thereafter. Upon
notification of intent to withdraw, the amount of the account on notice
that can be considered membership capital is reduced by a constant
monthly amortization which ensures the recognition of membership
capital is fully amortized at the end of the notice period. The full
balance of a membership capital account that has been placed on notice,
not just the remaining non amortized portion, is available to absorb
losses in excess of the sum of reserves and undivided earnings and
paid-in capital until the funds are released by the corporate credit
union at the conclusion of the notice period.
Mortgage backed security means a security that represents either an
ownership claim in a pool of mortgages or an obligation that is secured
by such a pool, where the cash flows are passed through to the holders
of the security.
Mortgage related security means a security as defined in Section
3(a)(41) of the Securities Exchange Act of 1934, i.e., a privately-
issued security backed by mortgages secured by real estate upon which
is located a dwelling, mixed residential and commercial structure,
residential manufactured home, or commercial structure. -
Mortgage servicing means performing tasks to protect a mortgage
investment, including collecting the installment accounts, monitoring
and dealing with delinquencies, and overseeing foreclosures and
payoffs.
Moving daily average net assets means the average of daily average
net assets for the month being measured and the previous 11 months.
NCUA means NCUA Board (Board), unless the particular action has
been delegated by the Board.
Net assets means total assets less Central Liquidity Facility (CLF)
stock subscriptions, CLF loans guaranteed by the NCUSIF, U.S. Central
CLF certificates, and member reverse repurchase transactions. For its
own account, a corporate credit union's payables under reverse
repurchase agreements and receivables under repurchase agreements may
be netted out if the Generally Accepted Accounting Principles (GAAP)
conditions for offsetting are met.
Net interest income means the difference between income earned on
interest bearing assets and interest paid on interest bearing
liabilities.
Nonsecured investment means an obligation backed solely by the
creditworthiness of the obligor.
Official means any director or committee member.
Option contract means a right, but not an obligation, to buy or
sell a security at a specified price and settlement date in the future.
Paid-in capital means funds which are obtained from credit union
and non credit union sources and are available to cover losses that
exceed reserves and undivided earnings. Paid-in capital is nonvoting
and subordinate to membership capital and the NCUSIF. The funds have no
maturity and are callable only at the option of the corporate credit
union and only if the corporate credit union meets its minimum level of
required capital after the funds are called. The terms and conditions
of a paid-in capital account held by a member or non member credit
union must be disclosed to the recorded owner of such account at the
time the account is opened and at least annually thereafter.
Pair-off transaction means a security purchase transaction that is
closed out or sold at, or prior to, the settlement or expiration date.
Penalty for early withdrawal of a share, deposit, or liability
means a fee which will, at a minimum, fully compensate a corporate
credit union for the difference between fair value and book value of
the asset that is divested (including any accumulated losses since the
asset was purchased), or the replacement cost of funds, to meet the
demand for early withdrawal.
Prepayment model means an empirical method which produces a
reasonable and supportable forecast of mortgage prepayments in
alternative interest rate scenarios. Models are typically available
from securities broker-dealers and industry-recognized information
providers. These models are used in tests to forecast the weighted
average life, change in weighted average life, and price sensitivity of
CMOs/REMICs and mortgage-backed securities.
Primary dealer means a bank or investment dealer authorized to buy
and sell government securities in direct dealings with the Federal
Reserve Bank of New York in its execution of Fed open market
operations.
Private placement means the sale of an entire issue to a small
group of investors. Except for investments with tax shelter provisions,
private placement to 35 or fewer investors are exempt from Securities
and Exchange Commission registration requirements.
Real Estate Mortgage Investment Conduit (REMIC) means 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.
Repurchase transaction means a transaction in which a corporate
credit union agrees to purchase a security from a counterpart and to
resell the same or any identical security to that counterpart at a
later date.
Reserve ratio means the corporate credit union's reserves and
undivided earnings plus paid in capital divided by its moving daily
average net assets.
Reserves mean all regular or statutory reserves, including all
valuation allowances established to meet the full and fair disclosure
requirements of Sec. 702.3 of this chapter.
Residual interest means the remainder cash flows from a CMO or
REMIC transaction after payments due bondholders and trust
administrative expenses have been satisfied.
Reverse repurchase transaction means a transaction whereby a
corporate credit union agrees to sell a security to a purchaser and to
repurchase the same or any identical security from that
[[Page 28101]]
purchaser at a future date and at a specified price.
Section 107(8) institution means an institution described in
Section 107(8) of the Federal Credit Union Act (12 U.S.C. 1757(8)).
Secured loan means a loan collateralized by assets in which the
lender has perfected a security interest under state law.
Securities lending transaction means a transaction in which a
federal credit union agrees to lend a security to a counterparty.
Senior management employee means a chief executive officer, any
assistant chief executive officer (e.g., any assistant president, any
vice president or any assistant treasurer/manager) and the chief
financial officer (controller).
Settlement date means the date originally agreed to by a corporate
credit union and a counterpart for settlement of the purchase or sale
of a security.
Short sale means the sale of a security not owned by the seller.
Short-term investment means, for the purpose of issue ratings, an
investment that has an initial maturity, or expected maturity, of one
year or less.
Small business related security means a security as defined in
Section 3(a)(53) of the Securities and Exchange Act of 1934, i.e., a
security, rated in one of the four highest rating categories by a
nationally recognized statistical rating organization, that represents
ownership of one or more promissory notes or leases of personal
property which evidence the obligation of a small business concern. It
does not mean a security issued or guaranteed by the Small Business
Administration.
Stripped Mortgage-Backed Security means a security that represents
either the principal or interest only portion of the cash flows of an
underlying pool of mortgages.
Swap agreement means a contract to exchange payments that are based
upon a specified dollar amount at specified dates in the future.
Trade association means an association of organizations or persons
formed to promote their common interests. For the purposes of
Sec. 704.14, the term includes entities owned or controlled directly or
indirectly by such an association but does not include credit unions.
Trade date means the date a corporate credit union originally
agrees, whether orally or in writing, to enter into the purchase or
sale of a security.
Tri-party contract means a repurchase agreement between two parties
in which a third party acts as a custodian for the securities involved.
Undivided earnings means all forms of retained earnings, except:
(1) Regular or statutory reserves; and
(2) Valuation allowances established to meet the full and fair
disclosure requirements of Sec. 702.3 of this chapter.
United States Government or its agencies means the United States
Government or instrumentalities of the United States, the debt
obligations of which are fully and explicitly guaranteed as to the
timely payment of principal and interest by the full faith and credit
of the United States Government.
United States Government-sponsored corporations and enterprises
means agencies originally established or chartered to serve public
purposes specified by Congress, the debt obligations of which are not
explicitly guaranteed by the full faith and credit of the United States
Government.
Weighted average life means the weighted average time to principal
repayment of a security based upon the proportional balances of the
cash flows that make up the security.
Wholesale corporate credit union means a corporate credit union
which meets the requirements of Part II of Appendix B of this part and
which primarily serves other corporate credit unions.
Sec. 704.3 Corporate credit union capital.
(a) General. A corporate credit union must develop and ensure
implementation of written short- and long-term capital goals,
objectives, and strategies which provide for the building of capital
consistent with regulatory requirements, the maintenance of sufficient
capital to support the risk exposures that may arise from current and
projected activities, and the periodic review and reassessment of the
capital position of the corporate credit union.
(b) Capital ratio. A corporate credit union will maintain a minimum
capital ratio of 4 percent, except as otherwise provided in this part.
A corporate credit union must calculate its capital ratio at least
monthly.
(c) Reserve transfers. A corporate credit union's monthly reserve
transfers are based upon the level of its reserve ratio. Where the
reserve ratio is greater than or equal to 4 percent, the reserve
transfer is optional. Where the reserve ratio is greater than or equal
to 3 percent but less than 4 percent, the corporate credit union must
transfer .10 percent of its moving daily average net assets. Where the
reserve ratio is less than 3 percent, the corporate credit union must
transfer .15 percent of its moving daily average net assets. Reserve
transfers must be calculated on a monthly basis and funded on at least
a quarterly basis.
(d) Individual capital ratio, reserve transfer requirement. (1)
When significant circumstances or events warrant, NCUA may require a
different minimum capital ratio and/or reserve transfer level for an
individual corporate credit union based on its circumstances. Factors
that might warrant a different minimum capital ratio or reserve
transfer level include, but are not limited to, for example:
(i) An expectation that the corporate credit union has or
anticipates losses resulting in capital inadequacy;
(ii) Significant exposure exists due to credit, liquidity, market,
fiduciary, operational, and similar types of risks;
(iii) A merger has been approved; or
(iv) An emergency exists because of a natural disaster.
(2) When NCUA determines that a different minimum capital ratio or
reserve transfer level is necessary or appropriate for a particular
corporate credit union, NCUA will notify the corporate credit union in
writing of the proposed ratio or level and, if applicable, the date by
which the ratio should be reached. NCUA also will provide an
explanation of why the proposed ratio or level is considered necessary
or appropriate for the corporate credit union. In the case of a state-
chartered corporate credit union, NCUA also will provide notification
and explanation to the state supervisory authority.
(3)(i) The corporate credit union may respond to any or all of the
items in the notice. The response must be in writing and delivered to
NCUA within 10 business days after the date on which the corporate
credit union received the notice. NCUA may shorten the time period
when, in its opinion, the condition of the corporate credit union so
requires, provided that the corporate credit union is informed promptly
of the new time period, or with the consent of the corporate credit
union. In its discretion, NCUA may extend the time period for good
cause.
(ii) Failure to respond within 10 business days or such other time
period as may be specified by NCUA shall constitute a waiver of any
objections to any item in the notice. Failure to address any item in a
response shall constitute a waiver of any objection to that item.
(iii) After the close of the corporate credit union's response
period, NCUA will decide, based on a review of the corporate credit
union's response and other information concerning the corporate credit
union, and, in the case of a state-chartered corporate credit
[[Page 28102]]
union, in consultation with the state supervisory authority, whether a
different minimum capital ratio or reserve transfer level should be
established for the corporate credit union and, if so, the ratio or
level and the date the requirement will become effective. The corporate
credit union will be notified of the decision in writing. The notice
will include an explanation of the decision, except for a decision not
to establish a different minimum capital ratio or reserve transfer
level for the corporate credit union.
(e) Failure to maintain minimum capital ratio requirement. When a
corporate credit union's capital ratio falls below the minimum required
by paragraphs (b) or (d) of this section, or Appendix B, as applicable,
operating management of the corporate credit union must notify its
board of directors, supervisory committee, and NCUA within 10 business
days.
(f) Capital restoration plan. (1) A corporate credit union must
submit a plan to restore and maintain its capital ratio at the minimum
requirement when either of the following conditions exist:
(i) The capital ratio falls below the minimum requirement and is
not restored to the minimum requirement by the next month end; or
(ii) Regardless of whether the capital ratio is restored by the
next month end, the capital ratio falls below the minimum requirement
for three months in any 12-month period.
(2) The capital restoration plan must, at a minimum, include the
following:
(i) Reasons why the capital ratio fell below the minimum
requirement;
(ii) Descriptions of steps to be taken to restore the capital ratio
to the minimum requirement within specific time frames;
(iii) Actions to be taken to maintain the capital ratio at the
minimum required level and increase it thereafter;
(iv) Balance sheet and income projections, including assumptions,
for the current calendar year and one additional calendar year; and
(v) Certification from the board of directors that it will follow
the proposed plan if approved by NCUA.
(3) The capital restoration plan must be submitted to NCUA, and in
the case of a state-chartered corporate credit union, to the state
supervisory authority, within 30 business days of the occurrence.
(g) Capital directive. (1) If a corporate credit union fails to
submit a capital restoration plan; or the plan submitted is not deemed
adequate to either restore capital or restore capital within a
reasonable time; or the credit union fails to implement its approved
capital restoration plan, NCUA may issue a capital directive.
(2) A capital directive may order a corporate credit union to:
(i) Achieve adequate capitalization within a specified time frame
by taking any action deemed necessary, including but not limited to the
following:
(A) Increase the amount of capital to specific levels;
(B) Reduce dividends;
(C) Limit receipt of deposits to those made to existing accounts;
(D) Cease or limit issuance of new accounts or any or all classes
of accounts;
(E) Cease or limit lending or making a particular type or category
of loans;
(F) Cease or limit the purchase of specified investments;
(G) Limit operational expenditures to specified levels;
(H) Increase and maintain liquid assets at specified levels; and
(I) Restrict or suspend expanded authorities issued under Appendix
B of this part.
(ii) Adhere to a previously submitted plan to achieve adequate
capitalization.
(iii) Submit and adhere to a capital plan acceptable to NCUA
describing the means and a time schedule by which the corporate credit
union shall achieve adequate capitalization.
(iv) Meet with NCUA.
(v) Take a combination of these actions.
(3) Prior to issuing a capital directive, NCUA will notify a
corporate credit union in writing of its intention to issue a capital
directive. In the case of a state-chartered corporate credit union,
NCUA also will provide notice to the state supervisory authority.
(i) The notice will state:
(A) The reasons for the issuance of the directive; and
(B) The proposed content of the directive.
(ii) A corporate credit union must respond in writing within 10
business days of receipt of the notice stating that it either concurs
or disagrees with the notice. If it disagrees with the notice, it must
state the reasons why the directive should not be issued and/or propose
alternative contents for the directive. The response should include all
matters that the corporate credit union wishes to be considered. For
its comments to be considered, the state supervisory authority must
respond in writing within the same 10 business days. For good cause,
the response time may be shortened or lengthened, including the
following conditions:
(A) When the condition of the corporate requires, and the corporate
credit union is notified of the shortened response period in the
notice;
(B) With the consent of the corporate credit union; or
(C) When the corporate credit union already has advised NCUA that
it cannot or will not achieve adequate capitalization.
(iii) Failure to respond within 10 business days, or another time
period specified in the notice, shall constitute a waiver of any
objections to the proposed directive.-
(4) After the closing date of the corporate credit union's response
period, or the receipt of the response, if earlier, NCUA shall consider
the response and may seek additional information or clarification.
Based on the information provided during the response period, NCUA will
determine whether or not to issue a capital directive and, if issued,
the form it should take.
(5) Upon issuance, a capital directive and a statement of the
reasons for its issuance will be delivered to the corporate credit
union. A directive is effective immediately upon receipt by the
corporate credit union, or upon such later date as may be specified
therein, and shall remain effective and enforceable until it is stayed,
modified, or terminated by NCUA.
(6) A capital directive may be issued in addition to, or in lieu
of, any other action authorized by law in response to a corporate
credit union's failure to achieve or maintain the applicable minimum
capital ratios.
(7) Upon a change in circumstances, a corporate credit union may
request reconsideration of the terms of the directive. Requests that
are not based on a significant change in circumstances or are
repetitive or frivolous will not be considered. Pending a decision on
reconsideration, the directive shall continue in full force and effect.
Sec. 704.4 Board responsibilities.
(a) General. A corporate credit union's board of directors must
approve comprehensive written strategic plans and operating policies,
review them annually, and provide them upon request to the auditors,
supervisory committee, and NCUA. The board of directors must know and
understand the activities, policies, and procedures of the corporate
credit union.
(b) Operating policies. A corporate credit union's operating
policies must be commensurate with the scope and complexity of the
corporate credit union.
(c) Procedures. The board of directors of a corporate credit union
must ensure that:
[[Page 28103]]
(1) Senior managers have an in-depth, working knowledge of their
direct areas of responsibility and are capable of identifying, hiring,
and retaining qualified staff;
(2) Qualified personnel are employed or under contract for all line
support and audit areas, and designated back-up personnel with adequate
cross-training are in place;
(3) GAAP is followed;
(4) Accurate balance sheets, income statements, and internal risk
assessments (e.g., risk management measures of liquidity, market, and
credit risk associated with current activities) are produced timely in
accordance with Secs. 704.6, 704.8, and 704.9;
(5) Systems are audited periodically in accordance with industry-
established standards;
(6) Financial performance is evaluated to ensure that the
objectives of the corporate credit union and the responsibilities of
management are met; and
(7) Planning addresses the necessary retention of external
consultants to review the adequacy of technical, human, and financial
resources dedicated to support major risk areas.
Sec. 704.5 Investments.
(a) All investments must be U.S. dollar-denominated and subject to
the credit policy restrictions set forth in Sec. 704.6.
(b) A corporate credit union may invest in:
(1) Securities, deposits, and obligations set forth in Sections
107(7), 107(8), and 107(15) of the Federal Credit Union Act, 12 U.S.C.
1757(7), 1757(8), and 1757(15), except as provided in this section;
(2) Deposits in, the sale of federal funds to, and debt obligations
of corporate credit unions and Section 107(8) institutions and deposits
in state banks, trust companies, and mutual savings banks not domiciled
in the state in which the corporate credit union does business;
(3) Corporate CUSOs, as defined in and subject to the limitations
of Sec. 704.11;
(4) Marketable debt obligations of corporations chartered in the
United States. This authority does not apply to debt obligations that
are convertible into the stock of the corporation;
(5) Asset-backed securities; and
(6) CMOs/REMICs, subject to these additional limitations:
(i) Fixed rate CMOs/REMICs must meet the following NCUA-modified
Federal Financial Institutions Examination Council (FFIEC) High Risk
Security Test requirements:
(A) The weighted average life may not exceed 5 years at the time of
purchase;
(B) The weighted average life may not extend by more than 2 years,
nor contract by more than 3 years for an instantaneous, permanent, and
parallel shift in market rates of plus or minus 300 basis points;
(C) The extended weighted average life may not, in any case, exceed
7 years; and
(D) The investment's price may not decline by more than 15 percent
for an instantaneous, permanent, and parallel shift in market rates of
plus or minus 300 basis points;
(ii) Floating rate CMOs/REMICs must meet the following NCUA-
modified FFIEC High Risk Security Test requirements:
(A) The weighted average life of the security may not exceed 7
years at the time of purchase;
(B) The weighted average life may not extend by more than 2 years,
nor contract by more than 3 years for an instantaneous, permanent, and
parallel shift in market rates of plus or minus 300 basis points;
(C) The extended weighted average life may not, in any case, exceed
9 years; and
(D) The investment's price may not decline by more than 10 percent
for an instantaneous, permanent, and parallel shift in market rates of
plus or minus 300 basis points;
(iii) The NCUA-modified FFIEC High Risk Security Tests must be
prepared monthly on all CMO/REMICs, documented and reviewed by an
appropriate committee, and retained until after completion of the next
audit and examination;
(iv) A corporate credit union's board of directors must approve at
least three prepayment models for CMOs/REMICs unless a median estimate
from an industry-recognized information provider is used. These
approved models must be used consistently for all subsequent compliance
tests. Any changes in approved models should be infrequent and
documented with a reasonable and supportable justification; and
(v) A corporate credit union must obtain prepayment estimates,
based upon an instantaneous, permanent, parallel shift in market rates
of plus or minus 100, 200, and 300 basis points, to conduct the tests
set forth in paragraph (b)(6) of this section.
(A) If a median prepayment estimate is used, it must be obtained
from an industry-recognized information provider. At purchase, the
median estimate must be based on at least 5 prepayment models. At
retesting, the median estimate must be based on at least 2 prepayment
models.
(B) If individual prepayment models are used, estimates must be
obtained from all of the models identified in the corporate credit
union's investment policy. One of the individual prepayment models may
be the median prepayment estimate from an industry-recognized
information provider. All of the models identified in the investment
policy must be used when purchasing and retesting a CMO/REMIC. At
purchase, a CMO/REMIC must pass the tests for each prepayment model
used. At retesting, the CMO/REMIC must pass the tests for a majority of
the prepayment models used at the time of purchase.
(c) A corporate credit union may enter into a repurchase agreement
or securities lending transaction provided that:
(1) The corporate credit union takes physical possession of the
security, receives written confirmation of the purchase and a
safekeeping receipt from a third party under a written custodial
contract, or is recorded as owner of the security through the Federal
Reserve Book-Entry Securities Transfer System;
(2) Collateral securities are legal investments for corporate
credit unions, except that a corporate credit union may receive, as
permissible collateral, CMO/REMIC securities that pass the FFIEC High
Risk Security Test if the term of the repurchase transaction does not
exceed 95 days from the date of settlement;
(3) In the event of default, the corporate credit union sells the
collateral in a timely manner, subject to a bankruptcy stay, to satisfy
the commitment of any net principal and interest owed to it by the
counterpart;
(4) The corporate credit union receives daily assessment of the
market value of collateral securities, including a market quote or
dealer bid indication and any accrued interest, and maintains adequate
margin that reflects a risk assessment of the collateral securities and
the term of the transaction;
(5) The corporate credit union has entered into signed contracts
with all approved counterparts. Such contracts must address any
supplemental terms and conditions necessary to meet the specific
requirements of this part. Third party arrangements must be supported
by tri-party contracts in which collateral is priced and reported daily
and the tri-party agent ensures compliance; and
(6) The corporate credit union has sufficient market relationships
established in advance to timely execute the disposition of collateral
securities.
[[Page 28104]]
(d) A corporate credit union may invest in an investment company
registered with the Securities and Exchange Commission under the
Investment Company Act of 1940 (15 U.S.C. 80a), provided that the
portfolio of such management company is restricted by its investment
policy, changeable only if authorized by shareholder vote, solely to
investments and investment transactions that are permissible for that
corporate credit union.
(e) A corporate credit union is prohibited from:
(1) Purchasing or selling financial derivatives such as futures,
options, interest rate swap contracts, or forward rate agreement;
(2) Engaging in pair-off transactions, when issued trading,
adjusted trading, gains trading, or short sales; and
(3) Purchasing stripped mortgage-backed securities, residual
interests in CMO/REMICs, mortgage servicing rights, commercial mortgage
related securities or small business related securities.
(f) A corporate credit union's officials, employees, and immediate
family members of such individuals, may not receive pecuniary
consideration in connection with the making of an investment or deposit
by the corporate credit union. Employee compensation is exempt from
this prohibition. All transactions not specifically prohibited by this
paragraph must be conducted at arm's length and in the interest of the
corporate.
(g) A corporate credit union's authority to hold an investment is
governed by the regulation in effect at the time of purchase. However,
all grandfathered investments are subject to the requirements of
Sec. 704.8 and Sec. 704.9.
Sec. 704.6 Credit risk management.
(a) Policies. A corporate credit union must operate according to a
credit risk management policy, which addresses, at a minimum:
(1) The approval process associated with credit limits;
(2) Due diligence analysis requirements;
(3) Maximum credit limits with each obligor and transaction
counterpart, set as a percentage of the sum of reserves and undivided
earnings and paid-in capital. In addition to addressing loans,
deposits, and securities, limits with transaction counterparts must
address aggregate exposures of all transactions, including, but not
necessarily limited to, repurchase agreements, securities lending, and
forward settlement of purchases or sales of investments; and
(4) Concentrations of credit risk (e.g., sector, industry, and
regional concentrations);
(b) Exemption. The requirements of this section do not apply to
instruments that are issued or fully guaranteed as to principal and
interest by the U.S. government or its agencies or enterprises or are
fully insured (including accumulated interest) by the National Credit
Union Administration or Federal Deposit Insurance Corporation.
(c) Concentration limits. (1) Aggregate investments in mortgage-
backed and asset-backed securities are limited to 200 percent of the
sum of reserves and undivided earnings and paid-in capital for any
single security or trust.
(2) Except for investments in a wholesale corporate credit union,
aggregate investments in repurchase and securities lending agreements
with any one counterpart are limited to 400 percent of the sum of
reserves and undivided earnings and paid-in capital.
(3) Except for investments in a wholesale corporate credit union,
the aggregate of all investments in non secured obligations of any
single domestic issuer is limited to 100 percent of the sum of reserves
and undivided earnings and paid-in capital.
(4) For purposes of measurement, each new credit transaction must
be evaluated in terms of the corporate credit union's sum of reserves
and undivided earnings and paid-in capital at the time of the
transaction. A subsequent reduction in the sum of reserves and
undivided earnings and paid-in capital will require a suspension of
additional transactions until maturities, sales or terminations bring
existing exposures within the requirements of this part.-
(d) Credit ratings. (1) All debt instruments must have a credit
rating from at least one nationally recognized statistical rating
organization.
(2) The rating(s) must be monitored for as long as the corporate
owns an instrument.
(3) Any rated instrument that is downgraded by the nationally
recognized statistical rating organization(s) used to meet the
requirements of this part at the time of purchase must be reviewed by
an appropriate committee within 20 business days of the downgrade.
Instruments that fall below the minimum rating requirements of this
part are subject to the divestiture requirements of 704.10.
(4) Investments in asset-backed securities must be rated no lower
than AAA (or equivalent). All other investments must be rated no lower
than A-1 (or equivalent) for short-term investments and AA (or
equivalent) for long-term investments at the time of purchase and at
any subsequent time by the nationally recognized statistical rating
organization(s) used to meet the requirements of this part at the time
of purchase.
(e) Reporting and documentation.
(1) A written evaluation of each credit line must be prepared at
least annually and formally approved by an appropriate committee of the
board. A watch list of existing and/or potential credit problems must
be prepared at least monthly and provided to an appropriate committee
of the board. Summary credit exposure reports, which demonstrate
compliance with the corporate's risk management policies, must be
continuously maintained, reviewed by appropriate staff, and provided
monthly to the board.
(2) At a minimum, the corporate must maintain:
(i) A justification for each approved credit line;
(ii) Prospectuses for all publicly traded securities and offering
memoranda for private placements and securities that are exempt from
the registration requirements of the Securities Act of 1933 or the
margin requirements of the Securities Exchange Act of 1934; and
(iii) The latest available financial reports, industry analyses,
internal and external analyst evaluations, and rating agency
information for each approved credit line.
Sec. 704.7 Lending.
(a) Policies. A corporate credit union must operate according to a
lending policy which addresses, at a minimum:
(1) Loan types and limits;
(2) Required documentation and collateral; and
(3) Analysis and monitoring standards.
(b) General. Each loan or line of credit limit will be determined
after analyzing the financial and operational soundness of the borrower
and the ability of the borrower to repay the loan.
(c) Loans to member credit unions. The maximum aggregate amount in
loans and irrevocable lines of credit to any one member credit union,
excluding pass-through and guaranteed loans from the CLF and the
NCUSIF, shall not exceed 50 percent of capital or 75 percent of the sum
of reserves and undivided earnings and paid-in capital, whichever is
greater, for unsecured loans and irrevocable lines of credit, or 100
percent of capital or 200 percent of the sum of reserves and undivided
earnings and paid-in capital, whichever
[[Page 28105]]
is greater, for secured loans and irrevocable lines of credit.
(d) Loans to members that are not credit unions. Any loan or
irrevocable line of credit made to a member, other than a credit union
or a corporate CUSO, must be made in compliance with Sec. 701.21(h) of
this chapter, governing member business loans. The aggregate amount of
loans and irrevocable lines of credit to members other than credit
unions and corporate CUSOs shall not exceed 15 percent of the corporate
credit union's capital plus pledged shares.
(e) Loans to non member credit unions. A loan to a credit union
that is not a member of the corporate credit union is only permissible
if the loan is for an overdraft related to the providing of
correspondent services pursuant to Sec. 704.12. Generally, such a loan
will have a maturity of only one business day.
(f) Loans to corporate CUSOs. A corporate credit union may make
loans and issue lines of credit to corporate CUSOs, subject to the
limitations of Sec. 704.11.
(g) Participation loans with other corporate credit unions. A
corporate credit union is permitted to participate in a loan with
another corporate credit union and must retain an interest of at least
5 percent of the face amount of the loan. The participation agreement
may be executed at any time prior to, during, or after disbursement. A
participating corporate credit union must exercise the same due
diligence as if it were the originating corporate credit union.
(h) Prepayment penalties. If provided for in the loan contract, a
corporate credit union is authorized to assess prepayment penalties on
loans.
Sec. 704.8 Asset and liability management.
(a) Policies. A corporate credit union must operate according to a
written asset and liability management policy which addresses, at a
minimum:
(1) The purpose and objectives of the corporate credit union's
asset and liability activities;
(2) The tests that will be used to evaluate instruments prior to
purchase;
(3) The maximum allowable percentage decline in market value of
portfolio equity (MVPE), over specified periods of time, compared to
current MVPE;
(4) The minimum allowable MVPE ratio under any condition;
(5) The maximum decline in net income (before reserve transfers),
in percentage and dollar terms, compared to current net income;
(6) Policy limits and specific test parameters for the interest
rate risk simulation tests set forth in paragraph (e) of this section;
(7) Concentration limits that reflect the default, liquidity, and
market risks of investments;
(8) Policy limits which address transaction types and amounts for
all off-balance sheet risk (e.g., lines of credit or other contracts);
and
(9) The modeling of indexes that serve as references in financial
instrument coupon formulas.
(b) Asset and liability management committee (ALCO). A corporate
credit union's ALCO must have at least one member who is also a member
of the board of directors. The ALCO must review the asset and liability
management reports on at least a monthly basis. These reports must
address compliance with Federal Credit Union Act, NCUA Rules and
Regulations, and all related risk management policies.
(c) Penalty for early withdrawals. A corporate credit union that
permits early certificate/share withdrawals must assess market-based
penalties sufficient to cover the estimated replacement cost of the
certificate/share redeemed.
(d) Risk analysis. A corporate credit union must adopt appropriate
tests and criteria for evaluating each investment prior to its
purchase. Risk analysis of the instrument type and industry sector must
be conducted for any new product that is considered for purchase by the
corporate credit union and/or for sale to members.
(e) Interest rate sensitivity analysis. (1) A corporate credit
unio
FR Doc. 96-13518 Corporate Credit Unions; Involuntary Liquidation of Federal Credit Unions and Adjudication of Creditor Claims Involving Federally Insured Credit Unions in Liquidation; Requirements for Insurance
n must:
(i) Evaluate the risk in its balance sheet by measuring, at least
quarterly, the impact of an instantaneous, permanent, and parallel
shock in the Treasury yield curve of plus or minus 100, 200, and 300
basis points on its MVPE and MVPE ratio. If the base case MVPE ratio
falls below 2 percent at the last testing date, these tests must be
calculated no less frequently than monthly until the base case MVPE
ratio again exceeds 2 percent; and
(ii) Limit its risk exposure to levels that do not result in a MVPE
ratio below 1 percent at any time either from a calculation of a base
case MVPE ratio or as a result of the tests indicated in paragraph
(e)(1)(i) of this section.
(2) A corporate credit union must limit its risk exposures to
levels that do not result in a decline in MVPE of more than 18 percent
at any time.
(3) A corporate credit union that owns an aggregate amount of
instruments which possess unmatched embedded options in a book value
amount which exceeds 200 percent of the sum of its reserves and
undivided earnings and paid-in capital must conduct additional tests
that address market factors which potentially can impact the value of
the instruments and that reflect the policy limits addressed in
paragraph (a) of this section. These factors should include, but not be
limited to, the following:
(i) Changes in the shape of the Treasury yield curve;
(ii) Adjustments to prepayment projections used for amortizing
securities to consider the impact of significantly faster/slower
prepayment speeds;
(iii) Adjustments to the market spread assumptions for non Treasury
instruments to consider the impact of widening spreads; and
(iv) Adjustments to volatility assumptions to consider the impact
that changing volatilities have on embedded option values.
(f) Regulatory violations. If a corporate credit union's base case
MVPE or MVPE ratio or the MVPE or MVPE ratio resulting from the tests
indicated in paragraph (e)(1)(i) of this section decline below the
limits established by this part and are not brought into compliance
within 5 business days, operating management of the corporate credit
union must report the information to the board of directors,
supervisory committee, and NCUA on the sixth business day. If any of
these measures remain below the limits established by this part by the
25th business day, the corporate credit union must submit a detailed,
written action plan to NCUA that sets forth the time needed and means
by which it intends to correct the violation. If NCUA determines that
the plan is unacceptable, the corporate credit union must immediately
restructure the balance sheet to bring the exposures back within
compliance or adhere to an alternative course of action determined by
NCUA.
(g) Policy violations. If a corporate credit union's MVPE or MVPE
ratio for any required test(s) exceed the limits established by the
board, it must determine how it will bring the exposures within policy
limits. The disclosure to the board of the limit violation must occur
no later than its next regularly scheduled board meeting. A specific
written disclosure detailing the limit violation(s) and the intended
course of action must be sent to NCUA within 25 business days after
disclosure to the board.
Sec. 704.9 Liquidity management.
(a) General. In the management of liquidity, a corporate credit
union must: -
(1) Evaluate the potential liquidity needs of its membership in a
variety of economic scenarios; -
[[Page 28106]]
(2) Continuously monitor sources of internal and external
liquidity; -
(3) Demonstrate that the accounting classification of investment
securities is consistent with its ability to meet potential liquidity
demands; and
(4) Develop a contingency funding plan that addresses alternative
funding strategies in successively deteriorating liquidity scenarios.
The plan must:
(i) List all sources of liquidity, by category and amount, that are
available to service an immediate outflow of funds in various liquidity
scenarios.
(ii) Analyze the impact that potential changes in fair value will
have on the disposition of assets in a variety of interest rate
scenarios; and
(iii) Be reviewed by an appropriate committee of the board no less
frequently than annually or as market or business conditions dictate.
(b) Borrowing. A corporate credit union may borrow up to 10 times
capital or 50 percent of shares (excluding shares created by the use of
member reverse repurchase agreements) and capital, whichever is
greater. CLF borrowings and borrowed funds created by the use of member
reverse repurchase agreements are excluded from this limit. The
corporate credit union must demonstrate, through periodic usage of
external lines, that all contingent sources of liquidity remain
available.
Sec. 704.10 Divestiture.
(a) Any corporate credit union in possession of an investment that
fails to meet a requirement of this part must, within 20 business days
of the failure, report the failed investment to its board of directors
and NCUA. If the corporate credit union does not sell the failed
investment, and the investment continues to fail to meet a requirement
of this part, the corporate credit union must, by the 25th business day
after the failure, provide to NCUA a written action plan that
addresses:
(1) The investment's characteristics and risks;
(2) The process to obtain and adequately evaluate the investment's
market pricing, cash flows, and risk;
(3) How the investment fits into the credit union's asset and
liability management strategy;--
(4) The impact that either holding or selling the investment will
have on the corporate credit union's earnings, liquidity, and capital
in different interest rate environments; and
(5) The likelihood that the investment may again pass the
requirements of this part.
(b) NCUA may require, for safety and soundness reasons, a shorter
time period for plan development than that set forth in paragraph (a)
of this section.
(c) If the plan described in paragraph (a) of this section is not
approved by NCUA, the credit union must adhere to NCUA's directed
course of action.
Sec. 704.11 Corporate Credit Union Service Organizations (Corporate
CUSOs).
(a) A corporate CUSO is an entity that:
(1) Has received a loan from and/or is at least partly owned by a
corporate credit union;
(2) Primarily serves credit unions;
(3) Restricts its services to those related to the daily activities
of credit unions; and
(4) Is chartered as a corporation under state law.
(b) The aggregate of all investments in and loans to member and non
member corporate CUSOs shall not exceed 15 percent of a corporate
credit union's capital. However, a corporate credit union may loan to
member and non member corporate CUSOs an additional 15 percent of
capital if it is a secured loan. A corporate credit union may not use
this authority to acquire control, directly or indirectly, of another
financial institution, or to invest in shares, stocks, or obligations
of another financial institution, insurance company, trade association,
liquidity facility, or similar organization. A corporate CUSO must be
operated as an entity separate from any credit union. A corporate
credit union investing in or lending to a corporate CUSO must obtain a
written legal opinion that the corporate CUSO is organized and operated
in such a manner that the corporate credit union will not reasonably be
held liable for the obligations of the corporate CUSO. This opinion
must address factors that have led courts to ``pierce the corporate
veil,'' such as inadequate capitalization, lack of separate corporate
identity, common boards of directors and employees, control of one
entity over another, and lack of separate books and records.
(c) An official or senior management employee of a corporate credit
union which has invested in or loaned to a corporate CUSO, and
immediate family members of such an individual, may not receive, either
directly or indirectly, any salary, commission, investment income, or
other income, compensation, or consideration from the corporate CUSO.
This prohibition extends to any other corporate credit union employee
if such employee deals directly with the corporate CUSO.
(d) Prior to making an investment in or loan to a corporate CUSO, a
corporate credit union must obtain a written agreement that the
corporate CUSO will:
(1) Follow GAAP;
(2) Provide financial statements to the corporate credit union at
least quarterly;
(3) Obtain an annual CPA audit and provide a copy to the corporate
credit union; and
(4) Allow the auditor, board of directors, and NCUA complete access
to its books, records, and any other pertinent documentation.
(e) Corporate credit union authority to invest in or loan to a CUSO
is limited to that provided in this section. A corporate credit union
is not authorized to invest in or loan to a CUSO under Sec. 701.27 of
this chapter.
Sec. 704.12 Services.
Except for correspondent services to a non member, natural person
credit union branch office operating in the geographic area defined in
the corporate credit union's charter, a corporate credit union may
provide services only to its members, subject to the limitations of
this part. A corporate credit union may not provide services to non
members through agreements with other corporate credit unions or
pursuant to Sec. 701.26 of this chapter, except with the written
permission of NCUA.
Sec. 704.13 Fixed assets.
(a) A corporate credit union's ownership in fixed assets shall be
limited as described in Sec. 701.36 of this chapter, except that in
lieu of Sec. 701.36(c) (1) through (4), paragraph (b) of this section
applies.
(b) A corporate credit union may invest in fixed assets where the
aggregate of all such investments does not exceed 15 percent of the
corporate credit union's capital. A corporate credit union desiring to
exceed the limitation shall submit a written request to NCUA, which
will provide a written decision.
Sec. 704.14 Representation.
(a) Board representation. The board shall be determined as
stipulated in the standard corporate federal credit union bylaws
governing election procedures, provided that:
(1) At least a majority of directors, including the chair of the
board, must serve on the board as representatives of member credit
unions;
(2) The chair of the board may not serve simultaneously as an
officer, director, or employee of a credit union trade association;
(3) A majority of directors may not serve simultaneously as
officers, directors, or employees of the same credit union trade
association or its affiliates (not including chapters or other subunits
of a state trade association); and
[[Page 28107]]
(4) For purposes of meeting the requirements of paragraphs (a)(1)
and (a)(2) of this section, an individual may not serve as a director
or chair of the board if that individual holds a subordinate employment
relationship to another employee who serves as an officer, director, or
employee of a credit union trade association.
(5) In the case of a corporate credit union whose membership is
composed of more than 25 percent non credit unions, the majority of
directors serving as representatives of member credit unions, including
the chair, must be elected only by member credit unions.
(b) Representatives of member credit unions. (1) A member credit
union may appoint one of its members or officials as a representative
to the corporate credit union. The representative shall be empowered to
attend membership meetings, to vote, and to stand for election on
behalf of the member. No individual may serve as the representative of
more than one member credit union in the same corporate credit union.--
(2) Any vacancy on the board of a corporate credit union caused by
a representative being unable to complete his or her term shall be
filled by the board of the corporate credit union according to its
bylaws governing the filling of board vacancies.
(c) Recusal provision. (1) No director, committee member, officer,
or employee of a corporate credit union shall in any manner, directly
or indirectly, participate in the deliberation upon or the
determination of any question affecting his or her pecuniary interest
or the pecuniary interest of any entity (other than the corporate
credit union) in which he or she is interested, except if the matter
involves general policy applicable to all members, such as setting
dividend or loan rates or fees for services.
(2) An individual is ``interested'' in an entity if he or she:
(i) Serves as a director, officer, or employee of the entity;
(ii) Has a business, ownership, or deposit relationship with the
entity; or
(iii) Has a business, financial, or familial relationship with an
individual whom he or she knows has a pecuniary interest in the entity.
(3) In the event of the disqualification of any directors, by
operation of paragraph (c)(1) of this section, the remaining qualified
directors present at the meeting, if constituting a quorum with the
disqualified directors, may exercise, by majority vote, all the powers
of the board with respect to the matter under consideration. Where all
of the directors are disqualified, the matter must be decided by the
members of the corporate credit union.
(4) In the event of the disqualification of any committee member by
operation of paragraph (c)(1) of this section, the remaining qualified
committee members, if constituting a quorum with the disqualified
committee members, may exercise, by majority vote, all the powers of
the committee with respect to the matter under consideration. Where all
of the committee members are disqualified, the matter shall be decided
by the board of directors.
(d) Administration.- (1) A corporate credit union shall be under
the direction and control of its board of directors. While the board
may delegate the performance of administrative duties, the board is not
relieved of its responsibility for their performance. The board may
employ a chief executive officer who shall have such authority and such
powers as delegated by the board to conduct business from day to day.
Such chief executive officer must answer solely to the board of the
corporate credit union, and may not be an employee of a credit union
trade association. -
(2) The provisions of Sec. 701.14 of this chapter apply to
corporate credit unions, except that where reference is made to
``Regional Director,'' substitute ``NCUA.''
Sec. 704.15 Audit requirements.
(a) External audit. The corporate credit union supervisory
committee shall cause an annual opinion audit to be made by an
independent, duly licensed certified public accountant (CPA) and shall
submit the audit report to the board of directors. A copy of the audit
report, and copies of all communications that are provided to the
corporate credit union by the external auditor, shall be submitted to
NCUA within 30 days after receipt by the board of directors. The CPA's
audit workpapers shall be provided upon request to NCUA. A summary of
the audit report shall be submitted to the membership at the next
annual meeting.
(b) Internal audit. A corporate credit union with average daily
assets in excess of $400 million for the preceding calendar year, or as
ordered by NCUA, must employ or contract, on a full- or part-time
basis, the services of an internal auditor. The internal auditor's
responsibilities will, at a minimum, comply with the Standards and
Professional Practices of Internal Auditing, as established by the
Institute of Internal Auditors. The internal auditor will report
directly to the chair of the corporate credit union's supervisory
committee, who may delegate supervision of the internal auditor's daily
activities to the chief executive officer of the corporate credit
union. The internal auditor's reports, findings, and recommendations
will be in writing and presented to the supervisory committee no less
than quarterly, and will be provided upon request to the external
auditor and NCUA.
Sec. 704.16 Contracts/written agreements.
Services, facilities, personnel, or equipment shared with any party
shall be supported by a written contract, with the duties and
responsibilities of each party specified and the allocation of service
fee/expenses fully supported and documented.
Sec. 704.17 State-chartered corporate credit unions.
(a) This part does not expand the powers and authorities of any
state-chartered corporate credit union, beyond those powers and
authorities provided under the laws of the state in which it was
chartered.
(b) A state-chartered corporate credit union that is not insured by
the NCUSIF, but that receives funds from federally insured credit
unions, is considered an ``institution-affiliated party'' within the
meaning of Section 206(r) of the Federal Credit Union Act, 12 U.S.C.
1786(r).
Sec. 704.18 Fidelity bond coverage.
(a) Scope. This section provides the fidelity bond requirements for
employees and officials in corporate credit unions.
(b) Review of coverage. The board of directors of each corporate
credit union shall, at least annually, carefully review the bond
coverage in force to determine its adequacy in relation to risk
exposure and to the minimum requirements in this section.
(c) Minimum coverage. Approved forms. Every corporate credit union
will maintain bond coverage with a company holding a certificate of
authority from the Secretary of the Treasury. All bond forms, and any
riders and endorsements which limit the coverage provided by approved
bond forms, must receive the prior written approval of NCUA. Fidelity
bonds must provide coverage for the fraud and dishonesty of all
employees, directors, officers, and supervisory and credit committee
members. Notwithstanding the foregoing, all bonds must include a
provision, in a form approved by NCUA, requiring written notification
by surety to NCUA:
(1) When the bond of a credit union is terminated in its entirety;
[[Page 28108]]
(2) When bond coverage is terminated, by issuance of a written
notice, on an employees, director, officer, supervisory or credit
committee member; or
(3) When a deductible is increased above permissible limits. Said
notification shall be sent to NCUA and shall include a brief statement
of cause for termination or increase.
(d) Minimum coverage amounts. (1) The minimum amount of bond
coverage will be computed based on the corporate credit union's daily
average net assets as of December 31 of the preceding year. The
following table lists the minimum requirements.
------------------------------------------------------------------------
Minimum
Daily average net assets bond
(million)
------------------------------------------------------------------------
Less than $50 million........................................ $1.0
$50-$99 million.............................................. 2.0
$100-$499 million............................................ 4.0
$500-$999 million............................................ 6.0
$1.0-$1.999 billion.......................................... 8.0
$2.0-$4.999 billion.......................................... 10.0
$5.0-$9.999 billion.......................................... 15.0
$10.0-$24.999 billion........................................ 20.0
$25.0 billion plus........................................... 25.0
------------------------------------------------------------------------
(2) It is the duty of the board of directors of each corporate
credit union to provide adequate protection to meet its unique
circumstances by obtaining, when necessary, bond coverage in excess of
the above minimums.
(e) Deductibles. (1) The maximum amount of deductibles allowed are
based on the corporate credit union's reserve ratio. The following
table sets out the maximum deductibles.
------------------------------------------------------------------------
Reserve ratio Maximum deductible
------------------------------------------------------------------------
Less than 1.0 percent..................... 7.5 percent of the sum of
reserves and undivided
earnings and paid-in
capital.
1.0-1.74 percent.......................... 10.0 percent of the sum of
reserves and undivided
earnings and paid-in
capital.
1.75-2.24 percent......................... 12.0 percent of the sum of
reserves and undivided
earnings and paid-in
capital.
Greater than 2.25 percent................. 15.0 percent of the sum of
reserves and undivided
earnings and paid-in
capital up to a maximum of
$1 million.
------------------------------------------------------------------------
(2) A deductible may be applied separately to one or more insuring
clauses in a blanket bond. Deductibles in excess of those showing in
this section must have the written approval of NCUA at least 20 days
prior to the effective date of the deductibles.
(f) Additional coverage. NCUA may require additional coverage for
any corporate credit union when, in the opinion of NCUA, current
coverage is insufficient. The board of directors of the corporate
credit union must obtain additional coverage within 30 days after the
date of written notice from NCUA.
Appendix A--Model Forms
This appendix contains sample forms intended for use by corporate
credit unions to aid in compliance with the membership capital account
and paid-in capital account disclosure requirements of Sec. 704.2
Corporate credit unions that use this form will be in compliance with
those requirements.
Sample Form 1
Terms and Conditions of Membership Capital Account
(1) A membership capital account is not subject to share insurance
coverage by the NCUSIF or other deposit insurer.
(2) A member credit union may withdraw membership capital with
three years' notice.
(3) Membership capital cannot be used to pledge borrowings.
(4) Membership capital is available to cover losses that exceed
reserves and undivided earnings and paid-in capital.
(5) Where the corporate credit union is liquidated, membership
capital accounts are payable only after satisfaction of all liabilities
of the liquidation estate including uninsured obligations to
shareholders and the NCUSIF.
If the form is used when an account is opened, it must also contain
the following statement:
I have read the above terms and conditions and I understand
them. I further agree to maintain in the credit union's files the
annual notice of terms and conditions of the membership capital
account.
The form must be signed by either all of the directors of the
member credit union or, if authorized by board resolution, the chair
and secretary of the board of the credit union.
If the form is used for the annual notice requirement, it must be
signed by the chair of the corporate credit union. The chair must then
sign a statement which certifies that the form has been sent to member
credit unions with membership capital accounts. The certification must
be maintained in the corporate credit union's files and be available
for examiner review.
Sample Form 2
Terms and Conditions of Paid-In Capital Account
(1) A paid-in capital account is not subject to share insurance
coverage by the NCUSIF or other deposit insurer.
(2) The funds have no maturity and are callable only at the option
of the corporate credit union and only if the corporate credit union
meets its minimum level of required capital after the funds are called.
(3) Paid-in capital is available to cover losses that exceed
reserves and undivided earnings.
(4) Paid-in capital is nonvoting and subordinate to membership
capital and the NCUSIF.
If the form is used when an account is opened, it must also contain
the following statement:
I have read the above terms and conditions and I understand
them. I further agree to maintain in the credit union's files the
annual notice of terms and conditions of the paid-in capital
account.
The form must be signed by either all of the directors of the
credit union or, if authorized by board resolution, the chair and
secretary of the board of the credit union.
If the form is used for the annual notice requirement, it must be
signed by the chair of the corporate credit union. The chair must then
sign a statement which certifies that the form has been sent to credit
unions with paid-in capital accounts. The certification must be
maintained in the corporate credit union's files and be available for
examiner review.
Appendix B--Expanded Authorities and Requirements
A corporate credit union may obtain expanded authorities if it
meets all of the requirements of part 704, fulfills additional
capital, management, infrastructure, and asset and liability
requirements, and receives NCUA's written approval. The additional
requirements and authorities are set forth in this Appendix. A
corporate credit union which seeks expanded authorities must submit
to NCUA a self-assessment plan which analyzes and supports its
request. A corporate credit union may adopt these additional
authorities after NCUA has provided its written approval. If NCUA
denies a request for expanded authorities, it will advise the
corporate of the reasons for the denial and what it must do to
resubmit its request. NCUA may revoke these expanded authorities at
any time if an analysis indicates a significant deficiency. NCUA
will notify the corporate credit union in writing of the identified
deficiency. A corporate credit union may request, in writing,
reinstatement of the revoked authorities by providing a self-
assessment plan which details how it has corrected these
[[Page 28109]]
deficiencies. Further guidance on the characteristics necessary to
obtain additional authorities is available in Appendix C.
Part I
(a) In order to participate in the authorities set forth in
paragraphs (b)-(d) of this Part I, a corporate credit union must:
(1) Have a minimum capital ratio of 5 percent.
(2) Meet the management, staff, systems, compliance, legal, and
risk assessment requirements specified in Appendix C.
(3) Evaluate monthly the changes in MVPE and the MVPE ratio for
the tests set forth in Sec. 704.8(e)(1)(i).
(b) A corporate credit union which has met the requirements of
paragraph (a) of this Part I is not bound by the concentration
limits on investments set forth at Sec. 704.6(c) (1) and (2).
Instead, the corporate credit union must establish limits on such
investments as a percentage of the sum of reserves and undivided
earnings and paid-in capital that take into account the relative
amount of credit risk exposure based upon, but not limited to, the
legal and financial structure of the transaction, the collateral,
all other types of credit enhancement, and the term of the
transaction.
(c) A corporate credit union which has met the requirements of
paragraph (a) of this Part I may:
(1) Except for investments in a wholesale corporate credit
union, invest in non secured obligations of any single domestic
issuer up to 150 percent of the sum of reserves and undivided
earnings and paid-in capital;
(2) Purchase short-term investments rated no lower than A-1 (or
equivalent) and long-term investments rated no lower than AA- (or
equivalent); at the time of purchase and at any subsequent time by
same nationally recognized statistical rating organization(s) used
at the time of purchase.
(3) Purchase asset-backed securities rated no lower than AA (or
equivalent);
(4) Engage in short sales of permissible investments to reduce
interest rate risk; and
(5) Purchase principal only (PO) stripped mortgage-backed
securities to reduce interest rate risk.
(d) In performing the rate stress tests set forth in
Sec. 704.8(e)(1)(i), the MVPE of a corporate credit union which has
met the requirements of paragraph (a) of this Part I may decline as
much as 35 percent.
(e) The maximum aggregate amount in loans and irrevocable lines
of credit to any one member credit union, excluding pass-through and
guaranteed loans from the CLF and the NCUSIF, shall not exceed 100
percent of the corporate credit union's capital for unsecured loans
and irrevocable lines of credit. The board directors will establish
the limit, as a percent of the corporate credit union's capital plus
pledged shares for secured loans and irrevocable lines of credit.
Part II
(a) In order to participate in the authorities set forth in
paragraphs (b)-(d) of this Part II, a corporate credit union must:
(1) Have a minimum capital ratio of 6 percent;
(2) Meet the management, staff, systems, compliance, legal, and
risk assessment requirements specified in Appendix C.
(3) Evaluate monthly the changes in MVPE and the MVPE ratio for
the tests set forth in Sec. 704.8(e)(1)(i).
(b) A corporate credit union which has met the requirements of
paragraph (a) of this Part II is not bound by the concentration
limits on investments set forth at Sec. 704.6(c) (1) and (2).
Instead, the corporate credit union must establish limits on such
investments as a percentage of the sum of reserves and undivided
earnings and paid-in capital, that take into account the relative
amount of credit risk exposure based upon, but not limited to, the
legal and financial structure of the transaction, the collateral,
all other types of credit enhancement, and the term of the
transaction.
(c) A corporate credit union which has met the requirements of
paragraph (a) of this Part II may:
(1) Except for investments in a wholesale corporate credit
union, invest in non secured obligations of any single domestic
issuer up to 250 percent of the sum of reserves and undivided
earnings and paid-in capital;
(2) Purchase short-term investments rated no lower than A-1 (or
equivalent) and long-term investments rated no lower than A- (or
equivalent) at the time of purchase and at any subsequent time by
the nationally recognized statistical rating organizations used at
the time of purchase.
(3) Purchase asset-backed securities rated no lower than AA (or
equivalent);
(4) Engage in short sales of permissible investments to reduce
interest rate risk; and
(5) Purchase principal only (PO) stripped mortgage-backed
securities to reduce interest rate risk.
(d) In performing the rate stress tests set forth in
Sec. 704.8(e)(1)(i), the MVPE of a corporate credit union which has
met the requirements of paragraph (a) of this Part II may decline as
much as 50 percent.
(e) The maximum aggregate amount in secured and unsecured loans
and irrevocable lines of credit to any one member credit union,
excluding pass-through and guaranteed loans from the CLF and the
NCUSIF, shall be established by the board of directors as a
percentage of the corporate credit union's capital plus pledged
shares.
Part III
(a) A corporate credit union which has met the requirements of
paragraph (a) of Part I of this Appendix and the foreign investment
criteria set forth in Appendix C, may invest in:
(1) Debt obligations of a foreign country;
(2) Deposits in, the sale of federal funds to, and debt
obligations of foreign banks or obligations guaranteed by these
banks;
(3) Non secured obligations of any single foreign issuer, not
exceeding 150 percent of the sum of reserves and undivided earnings
and paid-in capital; and
(4) Non secured obligations in any single foreign country, not
exceeding 500 percent of the sum of reserves and undivided earnings
and paid-in capital.
(b) All investments with sovereign entities and foreign banks
are subject to the following requirements:
(1) Short-term investments must be rated no lower than A-1 (or
equivalent);
(2) Long-term investments must be rated no lower than AA (or
equivalent);
(3) A sovereign issuer, and/or the country in which a corporate
issuer is organized, must be rated no lower than AA (or equivalent)
for political and economic stability.
(4) For each approved foreign bank line, the corporate credit
union must identify the specific banking centers and branches to
which it will lend funds.
Part IV
A corporate credit union which has met the requirements of
paragraph (a) of Part I of this Appendix and the financial
derivatives criteria set forth in Appendix C, may engage in
derivatives transactions which are directly related to its financial
activities and which have been specifically approved by NCUA. A
corporate credit union may use such derivatives authority only for
the purposes of creating structured instruments and hedging its own
balance sheet and the balance sheets of its members.
Appendix C--Guidelines for Evaluating Requests for Expanded
Authorities
This Appendix provides guidance for corporate credit unions
which seek expanded authorities under Appendix B of part 704. These
guidelines represent the prudent practices and acceptable
qualifications which must be evident in a corporate credit union for
NCUA to approve its request. There are four distinct expanded
authority alternatives which are set forth Appendix B. Corporate
credit unions which are granted expanded authorities must adhere at
all times to the requirements set forth in Appendix B and Appendix
C. NCUA will ensure that corporate credit unions continue to meet
the necessary qualifications and remain in sound financial condition
through its regular, on-going safety and soundness review. Provided
that the corporate credit union is in sound financial condition, the
primary areas which are used to evaluate each request for expanded
authority are: board, senior management, and staff; systems and
operations; credit risk management; liquidity risk management; audit
and compliance; and legal matters.
Part I
(a) General. Requests for the expanded authorities as outlined
in Appendix B, Part I, will be evaluated based on the criteria
outlined in paragraphs (b) through (g) of this Appendix C, Part I.
(b) Board, senior management, and staff.
(1) The board has received adequate training and is sufficiently
knowledgeable to make informed decisions regarding the risk
activities of the corporate credit union and to properly evaluate
the use of the expanded authorities.
(2) Senior management has in-depth experience in their direct
areas of responsibility and a working knowledge of most key areas.
(3) The asset and liability committee (ALCO) members are
conversant in investment activities and strategies and are
[[Page 28110]]
capable of individually explaining, justifying, and supporting the
risk exposures of the corporate credit union.
(4) Senior investment managers and asset and liability managers
have knowledge and experience commensurate with the potential
expanded authorities of the corporate credit union.
(5) Staff supporting the asset and liability management
functions have expert knowledge in developing and applying the
assumptions, methodologies, and interrelationships between the
financial factors driving the risk measurement results. The staff
has the ability to adjust the model and customize applications
consistent with the additional test requirements of
Sec. 704.8(e)(3).
(6) Qualified designated back-ups are in place and capable of
assuming primary responsibilities. Back-ups are adequately trained
to ensure that minimum disruption would occur in the event of the
loss (temporary or permanent) of primary personnel.
(7) Qualified, cross-trained personnel are in place for all
essential support positions.
(c) Systems/Operations. (1) Systems support and operational
capacity are adequate to process, measure, monitor, and report all
financial transactions. This includes the capacity to handle volume
and complexity with timely and accurate results. Systems can provide
sophisticated measures of valuation for a variety of simulated
market scenarios. Systems can interface, and automation ensures a
strong measure of control and standardization.
(2) The major financial-related areas, which require a
particular emphasis upon support and control, are the accounting and
risk measurement systems. Specific areas of infrastructure strength
include, but are not limited to, the following areas:
(i) Valuation of instruments and risk measurement.
(A) Methodologies permit alternative scenario analysis in
addition to those required in Sec. 704.8(e)(3).
(B) Qualified staff are capable of challenging and validating
the analytical applications and assumptions of the risk measurement
methodologies.
(C) Simulations can be produced in a timely, accurate manner on
at least a monthly basis.
(D) Variance analysis is conducted each month to evaluate and
explain the reasons for differences between projected and actual
results.
(E) The model(s) and supporting processes are capable of meeting
the needs of management reporting for both compliance and decision-
making.
(F) The model(s) and supporting statistical analyses used to
measure risk are validated prior to use and periodically thereafter.
(ii) Accounting for transactions.
(A) Accounting processes are independent of the risk taking unit
(investments).
(B) Accounting systems and processes are commensurate with
instruments that have complex structures and/or embedded options,
including off-balance sheet activities.
(C) Systems have a demonstrated ability to produce timely,
accurate financial statements for internal and external purposes, in
conformance with GAAP.
(D) There is an on-line, dedicated, and automated system capable
of providing timely, accurate reports independent of the corporate
credit union's risk taking unit. Reports are standardized and may be
customized for both financial and risk reporting purposes. For
example, systems would include:
(1) Automated data transfer;
(2) On-demand report generation based on current data;
(3) Ability to account for investments with complex structures
and/or embedded options including off-balance sheet activities;
(4) Accounts for all investment characteristics and cash flows;
(5) General ledger treatment--amortization/accretion of
discounts/premiums can be produced for dynamic cash-flow instruments
and transactions;
(6) Security safeguards that ensure protection and integrity of
input and output through a dedicated and controlled system
environment;
(7) Ability to handle expanded authorities and changes in
strategies and external market factors; and
(8) Establishment and maintenance of adequate back-up
arrangements to minimize the disruption of major services and to
address system problems timely.
(d) Credit risk management. The credit risk management function
is independent and able to assess the inherent risk associated with
all concentrations, limits and proposed transactions, including any
additional authorities provided in Appendix B. The measuring and
monitoring methodologies are sufficient to meet the scope and
complexity of all credit related activities. (1) Management/Staff.
(i) Credit risk management is independent from the risk taking unit
and is directed by a level of senior management sufficient to ensure
that credit risk activities remain consistent with board policies
and objectives.
(ii) Analysts are qualified to identify and assess the inherent
credit risk in all transactions that possess material credit
exposures. Analysts have knowledge and experience in evaluating
credit risk in the money and capital markets.
(2) Policies and procedures. (i) Procedures address the
methodology for measuring and monitoring credit risk and the means
of responding to a deterioration in credit.
(ii) There is a daily process of measuring and reporting the
credit exposures in comparison to policy limits.
(iii) Procedures provide the risk taking unit with daily credit
exposures and remaining limit capacity.
(iv) Credit limits and transaction types are approved by a
credit risk committee to ensure consistency with corporate credit
union objectives.
(v) Senior credit personnel have the direct authority to reduce,
suspend, or revoke a credit limit.
(e) Liquidity risk management. (1) Effective controls exist for
liquidity exposures arising from both market or product liquidity
and instrument cash flows.
(2) Daily liquidity management procedures for investment
activities are an integral part of the day-to-day operations.
(3) Management reporting includes an on-going daily liquidity
assessment which is updated to reflect current changes to investment
and funding positions.
(f) Audit and compliance. (1) The internal audit and compliance
area has staff, or has engaged outside personnel, with expert
knowledge and experience adequate to support the scope and
complexity of all activities associated with expanded authorities.
(2) The scope of review addresses appropriateness of risk as
well as general compliance issues.
(g) Legal issues. The corporate credit union has inside legal
counsel or has access to outside counsel which can provide a
specialized review of all associated legal matters.
Part II
(a) General. Requests for the expanded authorities as outlined
in Appendix B, Part II, will be evaluated based on the criteria
outlined in paragraphs (b) through (f) of this Appendix C, Part II.
(b) Senior management and staff. (1) Senior management is
demonstrably familiar with key areas of the corporate credit union
and conversant in technical factors affecting the institution's
risk.
(2) Senior management is substantially represented by
individuals who have extensive related experience with a depository
institution, investment banker, or broker/dealer.
(3) Investment and risk management staff have substantial
experience and have received extensive training to support expanded
authorities.
(c) Systems and operations. (1) Qualified staff are capable of
modeling securities and financial transactions to determine that
components are valued consistent with the market. This means that
the value of all transactions, securities, and options can be
independently determined by corporate credit union staff.
(2) Senior management receives a daily position report detailing
current activities, mark-to-market valuations, balance sheet
positions, and other critical financial information.
(d) Credit risk management. (1) Management and staff. (i) Senior
credit analyst(s) has extensive experience (e.g., years of
experience, held positions of responsibility, and/or completed
specialized credit training in capital markets) with particular
emphasis on evaluating financial institutions and debt securities.
(ii) Sufficient number of analysts are on staff to ensure that
all credits receive appropriate, timely, and in-depth analysis.
(2) Policies and procedures. (i) The credit risk management is a
stand-alone unit.
(ii) There is a formal credit risk committee which approves all
credit limits.
(e) Audit and compliance. (1) There is an independent, stand-
alone risk compliance unit managed by senior staff who are capable
of comprehending, evaluating, and challenging all potential risk
areas of the corporate credit union.
[[Page 28111]]
(2) A highly qualified senior management executive is
responsible for the unit.
(3) The unit is responsible for assuring the board of directors
that staff in all potential risk areas are conducting their
activities in conformance with all board policies and procedures.
(4) The unit is also responsible for assisting management in
developing and enhancing the existing risk management processes to
improve the areas where potential weaknesses or deficiencies are
identified.
(5) The unit has specialized staff with extensive knowledge of
systems, policies, and procedures used to govern all approved
activities and which understands the inherent risk issues affecting
those activities.
(f) Legal issues. The corporate credit union maintains inside
counsel or has established relationships with outside legal firms
which specialize in evaluating relevant contracts and transactions
to ensure that the corporate credit union's legal and business
interests are represented for all expanded authorities.
Part III
(a) General. Requests for the expanded authorities as outlined
in Appendix B, Part III, will be evaluated based on the criteria for
management, staff, systems, compliance, legal, and risk assessment
specified in Part I of this Appendix C and the additional criteria
outlined in paragraphs (b) and (c) of this Part III.
(b) Senior management and staff. (1) Senior management has
addressed the unique potential risk impact of foreign investments
and has contingency policies and procedures to address these
factors.
(2) Staff includes qualified analysts with knowledge and
experience evaluating cross-border risk.
(3) Analysts are experienced in evaluating sovereign and foreign
institution credits and conduct a timely, in-depth analysis for all
approved foreign limits.
(4) Analysts have training and/or experience in evaluating the
political, economic and regulatory environment and the unique
financial and accounting standards which affect the interpretation
of financial data used to evaluate foreign counterparties.
(c) Systems and operations. (1) An automated system is in place
which monitors all foreign investment exposures by entity and
country and is updated daily or as exposures change; and
(2) Credit risk management procedures address the unique
political, legal, and economic factors which potentially affect all
approved foreign counterparties.
Part IV
(a) General. Requests for the expanded authorities as outlined
in Appendix B, Part IV, will be evaluated based on the criteria for
management, staff, systems, compliance, legal, and risk assessment
specified in Part I of this Appendix C and the additional criteria
outlined in paragraphs (b) through (h) of this Part IV.
(b) Request to NCUA for authority. The request for derivative
authority must include, at a minimum, the following:
(1) A detailed description of the relevant products, markets and
business strategies including examples of how each type of proposed
transaction will work;
(2) The methodology for measuring exposures and the proposed
limits on each type of transaction, as well as an aggregate limit
based upon a percentage of capital at risk;
(3) The costs associated with establishing effective risk
management systems and hiring and retaining professionals with
derivative transaction experience;
(4) An analysis which justifies the reasonableness of the
proposed activities relative to the corporate credit union's overall
financial condition and capital level;
(5) An analysis of the risks that may arise from the use of
derivatives which includes, at a minimum, market, credit, liquidity,
operations, and legal risks;
(6) The detailed procedures the corporate credit union will use
to effectively identify, measure, monitor, report, and control
risks;
(7) The relevant accounting guidelines to be used;
(8) Internal control procedures detailing the segregating of
duties between the staff that executes transactions and operational
personnel that monitor and report activity; and
(9) The scope of the audit and internal risk monitoring
functions.
(c) Board, senior management, and staff. (1) Board and senior
management have sufficient knowledge and experience to understand,
approve, and provide oversight for all proposed derivative
activities.
(2) Board members and responsible management and staff have
received adequate training to familiarize them with all relevant
aspects of effective derivative use and related control issues
before assuming risk exposures.
(3) Board and senior management understand and agree that the
risk management process that will be used is appropriate and that
actual and potential risk exposures will be clearly identified and
fully disclosed to the board on a regular basis.
(4) Senior management has retained knowledgeable and experienced
personnel in derivative transactions for both the management and
operations functions.
(5) The manager directly responsible for these activities has
extensive related experience with a depository institution,
investment banker, or broker/dealer.
(d) Systems and operations. (1) The board has dedicated
sufficient financial and personnel resources to support operations
and systems development and maintenance. The sophistication of the
systems support and operational capacity is commensurate with the
size and complexity of the derivatives activity.
(2) Derivatives support systems provide accurate and timely
transactions processing and allow for proper risk exposure
monitoring and interfacing with other systems of the corporate
credit union.
(3) The risk measurement system is capable of quantifying the
risk exposures resulting from derivatives activities arising from
changes in relevant market factors.
(4) The market risk measurement system is capable of producing
prompt and accurate assessments at least monthly.
(5) The risk management system addresses, at a minimum, the
following:
(i) Procedures that accurately identify and quantify risk levels
on a timely basis;
(ii) Limits and other controls on levels of risk associated with
counterparty credit, concentrations and other relevant market
factors;
(iii) Limits on aggregate risk positions which capture the
inter-connected effect of all positions;
(iv) Reports to senior management and the board that accurately
present the types and amounts of risks assumed and demonstrate
compliance with approved policies and limits; and
(v) Auditing procedures to ensure the integrity of risk
management systems and confirm compliance with approved policies and
procedures.
(6) Appropriate resources are devoted to operations sufficient
to support the scope and complexity of the activities.
(7) Effective senior management supervision and Board oversight
is in place to ensure that all derivative activities are conducted
in a safe and sound manner.
(8) Comprehensive written policies and procedures are approved
by the board and periodically reviewed thereafter as activity levels
or market and business conditions warrant.
(9) Procedures support the proper control over the recordation,
settlement, and monitoring of derivative transactions. Internal
controls assure that proper processing procedures for all
transactions and reconciliation of front and back office databases
is done on a regular basis.
(10) Policies and procedures address risk management (market,
credit, liquidity, and operations), legal issues, capital
requirements, and accounting standards. In conjunction with the
credit risk function, the methods of valuation (e.g. bid side or
mid-market) are appropriate and the sources and methods of pricing
are reasonable and supportable.
(e) Credit risk management. (1) Policies and procedures are in
place to address, at a minimum, significant counterparty exposures,
concentrations, credit exceptions, risk ratings, and non performing
contracts. Management has established internal limits which are
prudent and consistent with the corporate credit union's financial
condition and management's expertise.
(2) Timely, detailed reports, which are consistent with the
policy and procedure requirements, are available for board and
senior management review. Reports consolidate activities by
counterparty and are incorporated into aggregate credit exposure
reports for other non derivative exposures.
(3) Approved counterparts have credit ratings no lower than
operating parameters authorized for the corporate credit union under
Part I of this Appendix B.
(4) Credit personnel are qualified to identify and assess the
inherent credit risk in all proposed derivative transactions.
(5) Procedures ensure credit analysis of counterparties is
performed before transactions are executed and there is periodic
assessment of credit throughout the life of outstanding derivative
transactions.
[[Page 28112]]
(6) Credit procedures address the availability and impact of
credit exposure reduction techniques (e.g., bilateral collateral
agreements and/or mutual margining agreements).
(7) The corporate credit union can calculate the current mark-
to-market (current exposure) as well as projected changes in value
(potential exposure) when assessing credit exposure per transaction
and counterparty.
(8) Reports track the aggregate and net exposures for each
counterparty.
(9) Mark-to-market calculations are obtained independently from
qualified sources as frequently as necessary.
(10) Policies and procedures address the issue of settlement
risk and establish prudent settlement limits where applicable.
(f) Liquidity risk management. (1) Effective controls exist for
liquidity exposures arising from both market or product liquidity
and instrument cash flows.
(2) Policies address the exposures to cash flow gaps arising
from derivative transactions and establish appropriate limits on the
size and duration of such gaps (e.g., concentration of swap
payments, margin calls, or early terminations).
(3) Liquidity management procedures for derivatives are an
integral part of the day-to-day operations and are also incorporated
into the overall liquidity stress test and contingency funding plan
requirements of Sec. 704.8.
(4) Monitoring procedures are integrated with the overall
liquidity management process for all corporate credit union
activities.
(g) Audit and compliance. (1) An independent risk management
unit is responsible for measuring and reporting risk exposures taken
in derivatives.
(2) Audit coverage is adequate to ensure timely identification
of internal control weaknesses or system deficiencies. Audit
coverage is provided by competent professionals who are
knowledgeable about the risks inherent in derivative transactions
and have commensurate experience auditing financial institutions
which utilize the same or similar types of derivatives. The scope of
the audit includes coverage of the accounting, legal, operating, and
risk controls.
(3) All risk measurement applications and models are reviewed
and validated annually.
(4) Controls are in place to ensure documentation is confirmed,
maintained and safeguarded. Any documentation exceptions are
monitored and reviewed by appropriate senior management and legal
counsel.
(h) Legal issues. (1) The corporate credit union has in-house
legal counsel or has access to outside counsel which can reasonably
ensure that any derivatives related contracts adequately represent
the legal and business interests of the corporate credit union.
(2) The corporate credit union has access to outside counsel
which is expert in all financial derivatives contracts and related
matters. -
PART 709--INVOLUNTARY LIQUIDATION AND CREDITOR CLAIMS
2. The authority citation for part 709 continues to read as
follows:
Authority: 12 USC 1766; Pub. L. 101-73, 103 Stat. 183, 530
(1989) (12 USC 1787 et seq.).
3. Section 709.5 is amended by revising paragraphs (b)(6) and
(b)(7); removing the period and adding a semicolon and the word ``and''
at the end of paragraph (b)(8); and adding paragraph (b)(9) to read as
follows:
Sec. 709.5 Payout Priorities in Involuntary Liquidation.
* * * * *
(b) * * *
(6) Shareholders to the extent of their respective uninsured shares
and the National Credit Union Share Insurance Fund, to the extent of
its payment of share insurance;
(7) In a case involving liquidation of a corporate credit union,
membership capital; and
* * * * *
(9) In a case involving liquidation of a corporate credit union,
paid-in capital.
* * * * *
PART 741--REQUIREMENTS FOR INSURANCE
4. The authority citation for part 741 continues to read as
follows:
Authority: 12 USC 1757, 1766, and 1781-1790. Section 741.11 is
also authorized by 31 USC 3717.
5. Section 741.219 is added to read as follows:
Sec. 741.219 Investment requirements.
Any credit union which is insured pursuant to Title II of the Act
must adhere to the requirements stated in part 703 of this chapter
concerning transacting business with corporate credit unions.
[FR Doc. 96-13518 Filed 6-3-96; 8:45 am]
BILLING CODE 7535-01-U
Complete official Federal Register PDF
FR Doc. 96-13440 1,1-Difluoroethane; Proposed Exemption from Tolerance
[Federal Register Volume 61, Number 108 (Tuesday, June 4, 1996)]
[Proposed Rules]
[Pages 28118-28120]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-13440]
=======================================================================
-----------------------------------------------------------------------
ENVIRONMENTAL PROTECTION AGENCY
40 CFR Part 180
[PP 5E04443/P659; FRL-5371-5]
RIN 2070-AB18
1,1-Difluoroethane; Proposed Exemption from Tolerance
AGENCY: Environmental Protection Agency (EPA).
ACTION: Proposed rule.
-----------------------------------------------------------------------
SUMMARY: This document proposes that residues of 1,1-difluoroethane
(CAS Reg. No. 75-37-6) be exempted from the requirement of a tolerance
when used as an inert ingredient (aerosol propellant) in aerosol
pesticide formulations used for insect control in food- and feed-
handling establishments and animals. This proposed regulation was
requested by The Dupont Company, pursuant to the Federal Food, Drug,
and Cosmetic Act (FFDCA).
DATES: Comments, identified by the docket control number [PP 5E04443/
P659], must be received on or before July 5, 1996.
ADDRESSES: By mail, submit written comments to: Public Response and
Program Resources Branch, Field Operations Division (7506C), Office of
Pesticide Programs, Environmental Protection Agency, 401 M St., SW.,
Washington, DC 20460. In person deliver comments to: Rm. 1132, Crystal
Mall #2, 1921 Jefferson Davis Highway, Arlington, VA.
Information submitted as a comment concerning this document may be
claimed confidential by marking any part or all of that information as
``Confidential Business Information'' (CBI). Information so marked will
not be disclosed except in accordance with procedures set forth in 40
CFR part 2. A copy of the comment that does not contain CBI must be
submitted for inclusion in the public record. Information not marked
confidential will be included in the public docket by EPA without prior
notice. The public docket is available for public inspection in Rm.
1132 at the address given above, from 8 a.m. to 4:30 p.m., Monday
through Friday, excluding legal holidays.
Comments and data may also be submitted electronically by sending
electronic mail (e-mail) to: [email protected]. Electronic
comments must be submitted as an ASCII file avoiding the use of special
characters and any form of encryption. Comments and data will also be
accepted on disks in WordPerfect in 5.1 file format or ASCII file
format. All comments and data in electronic form must be identified by
the docket number, [PP 5E04443/P659]. No CBI should be submitted
through e-mail. Electronic comments on this proposed rule may be filed
online at many Federal Depository Libraries. Additional information on
electronic submissions can be found below in this document.
FOR FURTHER INFORMATION CONTACT: By mail: Amelia M. Acierto,
Registration Support Branch, Registration Division (7505W), Office of
Pesticide Programs, Environmental Protection Agency, 401 M St., SW.,
Washington, DC 20460. Office location, telephone number, and e-mail
address: 2800 Crystal Drive, North Tower, Arlington, VA, (703) 308-
8375, e-mail: [email protected].
SUPPLEMENTARY INFORMATION: The Dupont Company, 1007 Market Street,
Wilmington, DE 19898 has submitted pesticide petition (PP) 5E04443 to
EPA requesting that the Administrator, pursuant to section 408(e) of
the FFDCA, 21 U.S.C. 346a(e), propose to amend 40 CFR 180.1001(c) and
(e) by establishing an exemption from the requirement of a tolerance
for the residues of 1,1-difluoroethane (CAS Reg. No. 75-37-6) when used
as an inert ingredient (aerosol propellant) in aerosol pesticide
formulations used for insect control in food- and feed-handling
establishments and animals.
Inert ingredients are all ingredients that are not active
ingredients as defined in 40 CFR 153.125 and include, but are not
limited to, the following types of ingredients (except when they have a
pesticidal efficacy of their own): solvents such as alcohols and
hydrocarbons; surfactants such as
[[Page 28119]]
polyoxyethylene polymers and fatty acids; carriers such as clay and
diatomaceous earth; thickeners such as carrageenan and modified
cellulose; wetting, spreading, and dispersing agents; propellants in
aerosol dispensers; microencapsulating agents; and emulsifiers. The
term ``inert'' is not intended to imply nontoxicity; the ingredient may
or may not be chemically active.
The data submitted in the petition and other relevant material have
been evaluated. As part of the EPA policy statement on inert
ingredients published in the Federal Register of April 22, 1987 (52 FR
13305), the Agency set forth a list of studies which would generally be
used to evaluate the risks posed by the presence of an inert ingredient
in a pesticide formulation. However, where it can be determined without
that data that the inert ingredient will present minimal or no risk,
the Agency generally does not require some or all of the listed studies
to rule on the proposed tolerance or exemption from the requirement of
a tolerance for an inert ingredient. The Agency has decided that no
data, in addition to that described below, for 1,1-difluoroethane will
need to be submitted. The rationale for this decision is described
below:
1. 1,1-Difluoroethane has been designated by the EPA as a substance
about which it has little concern regarding its ozone-depleting
potential and is listed as an acceptable substitute for certain uses of
currently used ozone-depleting propellants. 1,1-Difluoroethane is now
used in consumer products (e.g., hair sprays, baby oil mousse, spray
bandage, rug shampoos and oven cleaners).
2. An acute rat toxicity study which showed no mortality when
animals were exposed to 1,1-difluoroethane at concentrations up to
200,000 ppm, indicating that the substance is essentially non-toxic
following acute inhalation exposure.
3. A chronic rat inhalation toxicity study with exposures for 6
hours, 5 days/week for 2 years, with a no-observed-effect-level (NOEL)
of 27,000 mg/M3 and LOEL of 67,500 mg/M3 based on mild
reversible renal effects.
4. A rat inhalation developmental toxicity study with pregnant CD
rats exposed to concentrations of 0, 5,000 or 50,000 ppm for 6 hours/
day on gestation days 6 through 15 showing no treatment-related
maternal or fetal effects at any dose level, indicating that 1,1-
difluoroethane is not a developmental toxicant at dose levels of equal
or less than 50,000 ppm.
5. A human (volunteers) study reported no adverse effects except
for reversible analgesia and feelings of impending loss of
consciousness after acute inhalation exposure to 500,000 ppm of 1,1-
difluoroethane.
6. 1,1-Difluoroethane is approved under 21 CFR 178.3010 by the
United States Food and Drug Administration (FDA) as an indirect food
additive (e.g., blowing agent in the production of polystyrene articles
which come in contact with food).
7. 1,1-Difluoroethane is a gas at ambient temperatures. Therefore,
rapid volatilization of the substance and dilution by ambient air is
expected, suggesting that human exposure would be insignificant. It
would not be expected that the Reference Dose (RfD) of 74 ppm (200 mg/
M3) established by the Agency for this chemical would be reached
or exceeded in exposures resulting from its intended use as an aerosol
propellant.
The toxicological profile indicates a lack of chronic, subchronic
or developmental toxicity. Based upon the physico-chemical
characteristics, and review of its use, and the determination that
there is no reasonable expectation of finite residues in food or feed
items as a result of its use as a propellent in pesticide formulations,
the Agency has concluded that the use of 1,1-difluoroethane would
result in negligible risks to human health and the environment.
Accordingly, the Agency has found that, 1,1-difluoroethane, when used
in accordance with good agricultural practice, is useful and a
tolerance is not necessary to protect the public health. Therefore, EPA
proposes that the exemption from the requirement of a tolerance be
established as set forth below.
Any person who has registered or submitted an application for
registration of a pesticide, under the Federal Insecticide, Fungicide,
and Rodenticide Act (FIFRA) as amended, which contains any of the
ingredients listed herein, may request within 30 days after publication
of this document in the Federal Register that this proposal be referred
to an Advisory Committee in accordance with section 408(e) of FFDCA.
Interested persons are invited to submit written comments on the
proposed regulation. Comments must bear a notation indicating the
docket control number, [PP 5E04443/P659]. All written comments filed in
response to this petition will be available in the Public Response and
Program Resources Branch, at the address given above from 8 a.m. to
4:30 p.m. Monday through Friday, except legal holidays.
A record has been established for this rulemaking under docket
number [PP 5E04443/P659] (including comments and data submitted
electronically as described below). A public version of this record,
including printed, paper versions of electronic comments, which does
not include any information claimed as CBI, is available for inspection
from 8 a.m. to 4:30 p.m., Monday through Friday, excluding legal
holidays. The public record is located in Room 1132 of the Public
Response and Program Resources Branch, Field Operations Division
(7506C), Office of Pesticide Programs, Environmental Protection Agency,
Crystal Mall2, 1921 Jefferson Davis Highway, Arlington, VA.
Electronic comments can be sent directly to EPA at:
[email protected]
Electronic comments must be submitted as an ASCII file avoiding the
use of special characters and any form of encryption.
The official record for this rulemaking, as well as the public
version, as described above will be kept in paper form. Accordingly,
EPA will transfer all comments received electronically into printed,
paper form as they are received and will place the paper copies in the
official rulemaking record which will also include all comments
submitted directly in writing. The official rulemaking record is the
paper record maintained at the address in ``ADDRESSES '' at the
beginning of this document.
The Office of Management and Budget has exempted this proposed rule
from the requirements of section 3 of Executive Order 12866.
This action does not impose any enforceable duty, or contain any
``unfunded mandates'' as described in Title II of the Unfunded Mandates
Reform Act of 1995 (Pub. L. 104-4), or require prior consultation as
specified by Executive Order 12875 (58 FR 58093, October 28, 1993),
entitled Enhancing the Intergovernmental Partnership, or special
consideration as required by Executive Order 12898 (59 FR 7629,
February 16, 1994).
Pursuant to the requirements of the Regulatory Flexibility Act
(Pub. L. 96-3 54, 94 Stat. 1164, 5 U.S.C. 601-612), the Administrator
has determined that regulations establishing new tolerances or raising
tolerance levels or establishing exemptions from tolerance requirements
do not have a significant economic impact on a substantial number of
small entities. A certification statement to this effect was published
in the Federal Register of May 4, 1981 (46 FR 24950).
[[Page 28120]]
List of Subjects in 40 CFR Part 180
Environmental protection, Administrative practice and procedure,
Agricultural commodities, Pesticides and pests, Reporting and
recordkeeping requirements.
Dated: May 15, 1991.
Stephen L. Johnson,
Director, Registration Division, Office of Pesticide Programs.
Therefore, it is proposed that 40 CFR part 180 be amended as
follows:
PART 180--[AMENDED]
1. The authority citation for part 180 continues to read as
follows:
Authority: 21 U.S.C. 346a and 371.
2. Section 180.1001 is amended in paragraphs (c) and (e) in the
table therein by adding and alphabetically inserting the inert
ingredient, to read as follows:
Sec. 180.1001 Exemptions from the requirements of a tolerance.
* * * * *
(c) * * *
------------------------------------------------------------------------
Inert Ingredients Limits Uses
------------------------------------------------------------------------
* * * * * *
*
1,1-difluoroethane (CAS Reg. For aerosol Aerosol propellant
No. 75-37-6). pesticide
formulations
used for insect
control in food-
and feed-
handling
establishments
and animals.
* * * * * *
*
------------------------------------------------------------------------
* * * * *
(e) * * *
------------------------------------------------------------------------
Inert Ingredients Limits Uses
------------------------------------------------------------------------
* * * * * *
*
1,1-difluoroethane (CAS Reg. For aerosol Aerosol propellant
No. 75-37-6). pesticide
formulations
used for insect
control in food-
and feed-
handling
establishments
and animals
* * * * * *
*
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[FR Doc. 96-13440 Filed 6-3-96; 8:45 am]
BILLING CODE 6560-50-F
Complete official Federal Register PDF
FR Doc. 96-13437 greek-a-Alkyl (CINF10-CINF15)-greek-oh-Hydroxy Poly(oxyethylene) Sulfate and its Ammonium, Calcium, Magnesium, Potassium, Sodium and Zinc Salts; Tolerance Exemption
[Federal Register Volume 61, Number 108 (Tuesday, June 4, 1996)]
[Proposed Rules]
[Pages 28120-28122]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-13437]
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ENVIRONMENTAL PROTECTION AGENCY
40 CFR Part 180
[PP 6E04704/P657; FRL-5369-5]
RIN 2070-AC18
-Alkyl (C10-C15)--Hydroxy
Poly(oxyethylene) Sulfate and its Ammonium, Calcium, Magnesium,
Potassium, Sodium and Zinc Salts; Tolerance Exemption
AGENCY: Environmental Protection Agency (EPA).
ACTION: Proposed rule.
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SUMMARY: This document proposes that the current exemption from the
requirement of a tolerance for -alkyl (C12-C15)-
-hydroxy poly(oxyethylene) sulfate and its ammonium, calcium,
magnesium, potassium, sodium and zinc salts; the polyoxyethylene
content averages 3 moles be amended to include alkyl groups ranging
from C10-C14. This proposed regulation was requested by
Henkel Corporation pursuant to Federal Food, Drug, and Cosmetic Act
(FFDCA).
DATES: Comments, identified by the docket control number [PP 6E04704/
P657], must be received on or before July 5, 1996.
ADDRESSES: By mail, submit written comments to: Public Response and
Program Resources Branch, Field Operations Division (7506C), Office of
Pesticide Programs, Environmental Protection Agency, 401 M St., SW.,
Washington, DC 20460. In person deliver comments to: Rm. 1132, Crystal
Mall #2, 1921 Jefferson Davis Highway, Arlington, VA.
Information submitted as a comment concerning this document may be
claimed confidential by marking any part or all of that information as
``Confidential Business Information'' (CBI). Information so marked will
not be disclosed except in accordance with procedures set forth in 40
CFR part 2. A copy of the comment that does not contain CBI must be
submitted for inclusion in the public record. Information not marked
confidential will be included in the public docket by EPA without prior
notice. The public docket is available for public inspection in Rm.
1132 at the Virginia address given above, from 8 a.m. to 4:30 p.m.,
Monday through Friday, excluding legal holidays.
Comments and data may also be submitted electronically by sending
electronic mail (e-mail) to: [email protected]. Electronic
comments must be submitted as an ASCII file avoiding the use of special
characters and any form of encryption. Comments and data will also be
accepted on disks in WordPerfect 5.1 file format or ASCII file format.
All comments and data in electronic form must be identified by the
docket number, [PP 6E04704/P657]. No CBI should be submitted through e-
mail. Electronic comments on this proposed rule may be filed online at
many Federal Depository Libraries. Additional information on electronic
submissions can be found below in this document.
FOR FURTHER INFORMATION CONTACT: By mail: Bipin Gandhi, Registration
Support Branch, Registration Division (7505W), Office of Pesticide
Programs,
[[Page 28121]]
Environmental Protection Agency, 401 M St., SW., Washington, DC 20460.
Office location, telephone number, and e-mail address: 2800 Crystal
Drive, North Tower, Arlington, VA, (703) 308-8380, e-mail: gandhi.bipin
@epamail.epa.gov.
SUPPLEMENTARY INFORMATION: Henkel Corporation, 4900 Este Avenue,
Cincinnati, Ohio 45232-1491, has submitted pesticide petition (PP)
6E04704 to EPA requesting that the Administrator, pursuant to section
408(e) of the FFDCA, 21 U.S.C. 346a(e), propose to amend 40 CFR
180.1001(c) and (e) by establishing an exemption from the requirement
of a tolerance for -alkyl (C10-C14)--
hydroxy poly(oxyethylene) sulfate and its ammonium, calcium, magnesium
potassium, sodium, and zinc salts; the poly(oxyethylene) content
averages 2 moles when used as an inert ingredient (surfactants, related
adjuvants of surfactants) in pesticide formulations applied to growing
crops or to raw agricultural commodities after harvest.
Inert ingredients are all ingredients that are not active
ingredients as defined in 40 CFR 153.125 and include, but are not
limited to, the following types of ingredients (except when they have a
pesticidal efficacy of their own): solvents such as alcohols and
hydrocarbons; surfactants such as polyoxyethylene polymers and fatty
acids; carriers such as clay and diatomaceous earth; thickeners such as
carrageenan and modified cellulose; wetting, spreading, and dispersing
agents; propellants in aerosol dispensers; microencapsulating agents;
and emulsifiers. The term ``inert'' is not intended to imply
nontoxicity; the ingredient may or may not be chemically active.
The data submitted in the petition and other relevant material have
been evaluated. As part of the EPA policy statement on inert
ingredients published in the Federal Register of April 22, 1987 (52 FR
13305), the Agency set forth a list of studies which would generally be
used to evaluate the risks posed by the presence of an inert ingredient
in a pesticide formulation. However, where it can be determined without
that data that the inert ingredient will present minimal or no risk,
the Agency generally does not require some or all of the listed studies
to rule on the proposed tolerance or exemption from the requirement of
a tolerance for an inert ingredient. The Agency has decided that no
data, in addition to that described below, for -alkyl
(C10-C14)--hydroxy poly(oxyethylene) sulfate and
its ammonium, calcium, magnesium, potassium, sodium, and zinc salts;
the poly(oxyethylene) content averages 2 moles will need to be
submitted. The rationale for this decision is described below:
(1) The closely related surfactant, -alkyl (C12-
C15)--hydroxy poly(oxyethylene) sulfate and its
ammonium, calcium, magnesium, potassium, sodium, and zinc salts; the
poly(oxyethylene) content averages 3 moles is exempt from the
requirement of a tolerance under 40 CFR 180.1001(c).
(2) A related alkyl ethoxylate surfactant, -alkyl-
(C8-C18)--hydroxypoly(oxyethylene) with a
poly(oxyethylene) content of 2 to 30 moles, is exempt from the
requirement of a tolerance under 40 CFR 180.1001(c).
(3) The addition of the C10-C14 alkyl chain to the
existing C12-C15 alkyl chain of alkyl C12-C15-
omega-hydroxy poly(oxyethylene) sulfate and its ammonium, calcium,
magnasium, potassium, sodium and zinc salts and a reduction in average
poly(oxyethylene) content from 3 moles to 2 moles is not expected to
result in any adverse effects on health or the environment.
Based upon the above information and review of its use, EPA has
found that, when used in accordance with good agricultural practice,
this ingredient is useful and a tolerance is not necessary to protect
the public health. Therefore, EPA proposes that the exemption from the
requirement of a tolerance be established as set forth below.
Any person who has registered or submitted an application for
registration of a pesticide, under the Federal Insecticide, Fungicide,
and Rodenticide Act as amended, which contains any of the ingredients
listed herein, may request within 30 days after publication of this
document in the Federal Register that this proposal be referred to an
Advisory Committee in accordance with section 408(e) of FFDCA.
Interested persons are invited to submit written comments on the
proposed regulation. Comments must bear a notation indicating the
docket control number, [PP 6E04704/P657]. All written comments filed in
response to this petition will be available in the Public Response and
Program Resources Branch, at the Virginia address given above from 8
a.m. to 4:30 p.m. Monday through Friday, except legal holidays.
A record has been established for this rulemaking under docket
number [PP 6E04704/P657] (including comments and data submitted
electronically as described below). A public version of this record,
including printed, paper versions of electronic comments, which does
not include any information claimed as CBI, is available for inspection
from 8 a.m. to 4:30 p.m., Monday through Friday, excluding legal
holidays. The public record is located in Room 1132 of the Public
Response and Program Resources Branch, Field Operations Division
(7506C), Office of Pesticide Programs, Environmental Protection Agency,
Crystal Mall#2, 1921 Jefferson Davis Highway, Arlington, VA.
Electronic comments can be sent directly to EPA at:
[email protected]
Electronic comments must be submitted as an ASCII file avoiding the
use of special characters and any form of encryption.
The official record for this rulemaking, as well as the public
version, as described above will be kept in paper form. Accordingly,
EPA will transfer all comments received electronically into printed,
paper form as they are received and will place the paper copies in the
official rulemaking record which will also include all comments
submitted directly in writing. The official rulemaking record is the
paper record maintained at the address in ``ADDRESSES'' at the
beginning of this document.
The Office of Management and Budget has exempted this proposed rule
from the requirements of section 3 of Executive Order 12866.
This action does not impose any enforceable duty, or contain any
``unfunded mandates'' as described in Title II of the Unfunded Mandates
Reform Act of 1995 (Pub. L. 104-4), or require prior consultation as
specified by Executive Order 12875 (58 FR 58093, October 28, 1993),
entitled Enhancing the Intergovernmental Partnership, or special
consideration as required by Executive Order 12898 (59 FR 7629,
February 16, 1994).
Pursuant to the requirements of the Regulatory Flexibility Act
(Pub. L. 96-3 54, 94 Stat. 1164, 5 U.S.C. 601-612), the Administrator
has determined that regulations establishing new tolerances or raising
tolerance levels or establishing exemptions from tolerance requirements
do not have a significant economic impact on a substantial number of
small entities. A certification statement to this effect was published
in the Federal Register of May 4, 1981 (46 FR 24950).
List of Subjects in 40 CFR Part 180
Environmental protection, Administrative practice and procedure,
Agricultural commodities, Pesticides and pests, Reporting and
recordkeeping requirements.
Dated: May 15, 1996.
[[Page 28122]]
Stephen L. Johnson,
Director, Registration Division, Office of Pesticide Programs.
Therefore, it is proposed that 40 CFR part 180 be amended as
follows:
PART 180--[AMENDED]
1. The authority citation for part 180 continues to read as
follows:
Authority: 21 U.S.C. 346a and 371.
2. In Sec. 180.1001 the table to paragraphs (c) and (e) is amended
by revising the listing for ``-Alkyl C12-C15-
-hydroxy poly(oxyethylene) sulfate and its ammonium, calcium,
magnesium, potassium, sodium and zinc salts; the polyoxyethylene
content averages 3 moles'' to read as follows:
Sec. 180.1001 Exemptions from the requirements of a tolerance.
* * * * *
(c) * * *
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Ingredients Limits Uses
------------------------------------------------------------------------
* * * * * * *
-Alkyl (C10-C15)- .............. Surfactants, related
-hydroxy adjuvants of
poly(oxyethylene) sulfate surfactants.
and its ammonium, calcium,
magnesium, potassium,
sodium, and zinc salts; the
poly(oxyethylene) content
averages 2 moles.
* * * * * * *
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* * * * *
(e) * * *
------------------------------------------------------------------------
Ingredients Limits Uses
------------------------------------------------------------------------
* * * * * * * `
-Alkyl (C10-C15)- .............. Surfactants, related
-hydroxy adjuvants of
poly(oxyethylene) sulfate surfactants.
and its ammonium, calcium,
magnesium, potassium,
sodium, and zinc salts; the
poly(oxyethylene) content
averages 2 moles.
* * * * * * *
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[FR Doc. 96-13437 Filed 6-3-96; 8:45 am]
BILLING CODE 6560-50-F
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