Data Aggregation

Credit unions should delineate transactional data at the appropriate level of aggregation (for example, by instrument type, coupon rate, or repricing characteristic) to ensure that risk measures capture all meaningful types and sources of IRR, including IRR arising from explicit or embedded options.

Aggregation is the process of grouping together assets and liabilities of similar types and cash flow characteristics. The appropriate account stratification can improve the IRR measurement system’s efficiency, but it can result in an imprecise measure of IRR.

A typical aggregation would include loans of similar rate, maturity, and type (such as six percent, fixed-rate, 30-year residential loans). Therefore, it would be inappropriate to aggregate six percent, fixed-rate loans with six percent, adjustable-rate loans.

The use of aggregation will vary from one credit union to another. Credit unions with less-complex cash flows and a low exposure to IRR may obtain reliable results from its IRR measurement system by aggregating data. A credit union with more complex cash flows or greater IRR exposure should aggregate and simplify carefully, with full consideration for the potential loss of precision in its measurement of IRR.

A credit union should ensure that the measurement system allows for a sufficient separation of assets and liabilities with significantly different cash flow patterns. For example, systems that aggregate information based on Call Report data may not provide the granularity necessary for credit unions with significant levels of embedded options. When applicable, a credit union should validate that its system can model highly structured instruments and unique products.

A credit union’s process of determining how to aggregate assets and liabilities should be transparent, documented, and periodically reviewed. Furthermore, requests for changes to existing groups or new aggregations should be formalized and documented. Credit unions should maintain documentation disclosing the characteristics of aggregated assets and liabilities (including all derivative instruments).

Management should also ensure that all material positions are represented in IRR measures, that the data used are accurate, and that the data adequately reflect all relevant repricing and maturity characteristics. When applicable, data should include information on the contractual coupon rates and cash flows of associated instruments and contracts. Manual adjustments to underlying data should be well documented.

Last updated on December 06, 2024