The National Credit Union Administration has joined other bank regulators in issuing a final rule that replaces the use of credit ratings with alternative standards for assessing the creditworthiness of securities and money-market instruments.

NCUA is the independent federal agency that regulates, charters, and supervises federal credit unions.

Section 939A of the Dodd-Frank Act requires federal agencies to review their use of credit ratings and create substitute standards.NCUA's final rule, published last week in the Federal Register, removes current references to “nationally recognized statistical rating organization credit ratings” and puts in place two new standards: “investment-grade” and “minimal amount of credit risk.” The rule is effective on June 11, 2013.

An “investment-grade” security is defined in the rule as one where a credit union determines the issuer has adequate capacity to meet financial commitments for the projected life of the asset or exposure, even under adverse economic conditions. Issuers of a security with “a minimal amount of credit risk” is have “a very strong capacity” to meet the financial commitments under the security.

The Office of the Comptroller of the Currency and Federal Deposit Insurance Corporation have already finalized similar rulemaking. Effective Jan. 1, the depository institutions they oversee may no longer rely solely on credit ratings to assess whether a security is permissible for investment.

The Securities and Exchange Commission has also proposed to amend the Broker-Dealer Net Capital Rule to remove references to credit ratings. Also proposed is a requirement that a security purchased by a money market mutual fund be rated in “one of the two highest short-term rating categories” and have minimal credit risk, a determination based on credit quality and the issuer's ability to meet short-term financial obligations. Other structural reforms pitched for money market funds have been delayed due to dissent among SEC commissioners and allegations of political wrangling.

The NCUA rule details the factors credit unions may consider when evaluating a security. Among them: credit spreads; internal or external credit risk assessments;  default statistics; the extent to which a security is covered by credit enhancements, such as over-collateralization and reserve accounts; whether the price and yield are consistent with other securities the credit union has determined are subject to a particular amount of credit risk; and asset class-specific criteria.