Exploration of the NCUA Credit Union Derivatives Rule
June 6, 2013
June 6, 2013
As part of its strategy for helping credit unions manage interest-rate risk, the National Credit Union Administration (NCUA) Board proposed allowing certain well-managed credit unions with assets above $250 million, and with appropriate safeguards in place, to purchase limited amounts of simple derivatives—interest rate swaps and interest rate caps—as a hedge against that risk.
Eligible federally chartered credit unions must apply and obtain approval from NCUA through their applicable Regional Director or the Office of National Examinations and Supervision. Eligible credit unions that are federally insured and state-chartered and are located in states that permit these investments, must obtain approval from NCUA and their state supervisory authority. Credit unions applying for the authority must demonstrate how derivatives will be part of an overall interest-rate risk mitigation plan.
Credit unions may apply for one of two levels of authority under the proposed rule. The levels differ in the amount of transactions permitted, the expertise and systems requirements associated with operating a derivatives program, and certain application requirements. Only credit unions with a CAMEL code of 1, 2, or 3 and a management component of 1 or 2 may apply. Credit unions seeking Level II authority must demonstrate why Level I authority is insufficient to meet their interest-rate risk mitigation needs.
The Board is requesting specific comment on whether to institute a fee structure for credit unions that take advantage of this rule once it is finalized. Total program costs will vary based on the number of applications received, which NCUA initially estimates will range between 75 to 150 credit unions for 2014. NCUA estimates a program cost range for 2014 between $6.25 million and $10.75 million, reflecting one-time start-up costs and costs of qualifying, processing and supervising a variable number of credit unions seeking derivatives authority. Thereafter, program costs are projected to decline in 2015 to between $2.05 million to $3.85 million.
NCUA has prepared a Q&A on the proposed derivatives rule, which is available online here.
The Board issued the proposed rule with a 60-day comment period, once published in the Federal Register.
Questions? Contact the Compliance Hotline: 1.800.546.4465, firstname.lastname@example.org.