The National Credit Union Administration (NCUA) voted to propose changes to the agency’s derivatives rule intended to modernize the rule and make it more principles-based.
“I am pleased that we have been able to refine the derivative rule and make it more flexible for federal credit unions,” NCUA Chairman Rodney Hood said in a release. “This is indeed an unprecedented and uncertain time for all credit unions as they are facing the economic fallout from the COVID-19 pandemic.”
According to the release, the proposed changes include eliminating the preapproval process for federal credit unions that are complex with a Management CAMEL component rating of 1 or 2; eliminating specific product permissibility; and eliminating regulatory limits on the amount of derivatives a federal credit union may purchase.
“I believe that enhancing the ability of federal credit unions to better protect themselves against market risks is critically important at all times,” Hood said. “In fact, managing balance sheet risks through a time of disruption and uncertainty underscores how important it is for credit unions to have tools, like financial derivatives, at their disposal to help guard against volatile economic periods that can hurt liquidity, earnings and capital.”
The National Association of Federally-Insured Credit Unions (NAFCU) supports the proposed changes.
“The proposal provides broader authority for permissible investments, maintains strong prudential controls, and removes more burdensome requirements such as the prescriptive product list and loss limits,” NAFCU Senior Regulatory Affairs Counsel Kaley Schafer wrote in a letter to the NCUA. “NAFCU supports the application threshold exemption and encourages the NCUA to explore the possibility of lowering the thresholds for credit unions under $500 million in assets that meet certain requirements.”
Schafer also asked the agency not to specify acceptable collateral standards and suggested the NCUA provide credit unions with “all possible training opportunities and resources regarding implementation and management of derivative programs.”
“Given the low-interest rate environment, the NCUA should afford credit unions with every opportunity to hedge their interest rate risk (IRR) and strengthen their liquidity and capital positions with the use of derivatives,” Schafer wrote.
“Credit unions continue to have risk management concerns over IRR. According to NAFCU’s 2020 Federal Reserve Meeting Survey, over 43 percent of respondents expect increased levels of risk management concerning IRR over the next three years, representing an 11 percent increase from last year. Considering these increasing concerns, a more flexible, principles-based approach to a derivatives program is necessary.”