WASHINGTON - The National Credit Union Administration's forthcoming rule on investments may discourage small institutions from playing the market.

The proposal, which is still in a draft stage and won't be presented to the board until this fall, stresses reporting and documentation requirements that would be impossible for small credit unions to meet, sources said.

"The big credit unions have the staff to do the paperwork the regulation requires, but the small ones don't," said an industry source familiar with the document.

"I think that might be (the agency's) intention - to make small credit unions stay away from the markets and put their money in CDs and the like," the source said. "They don't have a lot of confidence in their investment ability."

The document is by no means final, said David M. Marquis, NCUA director of examination and insurance. The agency is meeting with credit union and trade group officials to discuss the draft, and Mr. Marquis expects changes will be made.

"We're going a long way toward balancing credit unions' need for flexibility and our need for safety and soundness," he said.

The 13-page working document calls for credit unions to establish specific investment policies in writing.

Among other details, a credit union's policy would have to address: authorized investments, by issuer and characteristics; approved prepayment models for collateralized mortgage obligations, or CMOs, and real estate mortgage investment conduits, or Remics; interest rate risk; approved securities broker-dealers; and limits on the amounts and types of transactions permitted with each one.

The proposal's focus on interest rate risk reflects the NCUA's discovery this year that many credit unions couldn't explain how their CMOs would react to rate fluctuations.

The proposal would require credit union managers to evaluate the interest rate sensitivity of an investment, establish the maximum acceptable difference between book and fair value of the entire portfolio compared to net capital, and regularly report to the board on the portfolio's performance.

Regarding the beefed up documentation requirements, a source said the proposal "makes you jump through a certain number of regulatory hoops you probably already do, or should do, if you're investing. It formalizes the process."

One possible point of contention is a requirement that a credit union notify its regional director within five days that a CMO or Remic has failed a stress test. The credit union must then either sell the investment or prepare a plan within 15 days.

"A question is whether five days is enough time to either report it to the regional director or divest it," another source said.

But in general, people familiar with the proposal said they think it's less onerous than one addressing corporate credit union investments that was issued this year. They were relieved it did not further restrict the conservative range of allowable credit union investments.

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