Permissibility Of A Credit Union To Offer "Repurchase Agreements" - Q2 1999

By the Division of Banks

A credit union seeks to offer its members "Repurchase Agreements". When a member wishes to purchase a Repurchase Agreement for a specified time period, and a specific amount, the amount of the underlying securities would be segregated from the credit union's other securities held at the Federal Reserve Bank. The transaction would be a liability (borrowing) to the credit union secured by the securities. When the Repurchase Agreement matured, the credit union would return funds to its member in accordance with the agreement and would note that the securities were no longer set aside for that particular Repurchase Agreement. This proposed transaction essentially is an uninsured investment product that the credit union would offer to its members.

Mass. Gen. Laws chapter 171, section 67, subsection (l) permits a credit union to invest "in repurchase agreements secured by government obligations up to one year maturity." In such a transaction, a credit union would agree to purchase a security from a party and to resell the same or identical security to that party at a specified future date and at a specified price. This transaction is the opposite of the one proposed by the credit union in which the credit union would sell the security and agree to repurchase it at a future date at a specified price. The Division does not find statutory or regulatory authority for the retail uninsured investment product transaction proposed by the credit union. Accordingly, the credit union may not enter into such transactions. Said chapter 171, section 73 permits a credit union to borrow money with the approval of the Division. The transaction that the credit union has proposed could be considered a borrowing in the form of an "uninsured deposit." Accordingly, the Division would not consider extending the provisions of section 73 to allow an uninsured investment transaction with individual members. The Division notes that the investment and borrowing authorities under said sections 67 and 73 are implicitly directed at transactions between a credit union and other financial institutions or institutional investors. It is also noted that the credit union's proposed transaction would indirectly contravene the maximum share/deposit limitation of said chapter 171, section 30. This statute's full deposit insurance requirements are clearly consumer protection provisions, which are intended to limit the possibility of member loss.