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NCUA Finalizes Rule on Derivatives

The National Credit Union Administration (NCUA) Board adopted a final rule last week to provide limited derivatives authority for federal credit unions to mitigate interest rate risk (IRR), which the Missouri Credit Union Association (MCUA) supported in its Comment Letter, dated July 29, 2013. Specifically, the rule addresses permissible derivatives and characteristics, derivatives limits, operational requirements, counterparty and margin requirements, and procedures a credit union must follow to apply for derivatives authority. NCUA will issue guidance on the rule for federal and state credit unions when the rule becomes effective 30 days after publication in the Federal Register, which is expected shortly. The agency will coordinate with state regulators on state credit union derivatives activities.

The final rule does not include fees associated with using derivatives. MCUA has strongly opposed application and/or supervision fees paid to the agency in order for credit unions to apply for or maintain derivatives programs or for any other financial activity that is directly authorized by statute or incidental to such authority.

In addition, NCUA made a number of other improvements in the final rule. Generally, under the rule, credit unions must have at least $250 million in assets to apply for derivatives authority, but regional directors can permit smaller credit unions to apply. NCUA believes about 400 credit unions will be eligible for derivatives authority, and expects about 30 to 60 credit unions to apply initially.

The types of derivatives that can be used, subject to requirements under the rule, are interest rate swaps, caps, and floors; basis swaps; and Treasury futures. Credit unions must have a CAMEL rating of 1, 2, or 3, and a management rating of 1 or 2.

Credit unions are required to apply for derivatives authority through a two-stage process. In the first stage, the credit union must provide NCUA with an IRR mitigation plan to demonstrate how derivatives would contribute to that plan and how it will acquire the appropriate resources, controls, and systems to implement a sound derivatives program. In the second stage, NCUA will evaluate the credit union based on its actual readiness to engage in derivatives transactions. Credit unions can get interim approval within 60 days, and final approval within another 60 days after it submits the notice of readiness to NCUA that states the credit union has acquired and implemented all the necessary elements to comply with the final rule. A credit union may not begin using derivatives until it receives final approval.

The supervisory costs associated with the rule will be covered by the National Credit Union Share Insurance Fund. NCUA has also budgeted $750,000 for 2014 and 2015 to cover related consulting costs. 

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