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Mich. state CUs granted derivatives authority
LANSING, Mich. (7/1/14)--The Michigan Department of Insurance and Financial Services (DIFS) has granted state-chartered credit unions the authority to purchase interest-rate derivatives to mitigate interest-rate portfolio risks.
 
DIFS Director Annette Flood signed Order No. 14-033-CU on June 23 to allow state-chartered credit unions the authority under the Michigan Credit Union Act (MCUA), the Michigan Credit Union League reported ( Monitor June 30).
 
The league, together with DFCU Financial CU, Dearborn, Mich., with $3.6 billion in assets, requested derivative authority based on the current provisions of the MCUA. DFCU and the league said that the use of derivatives is commonplace in the financial industry as part of sound risk-management practices.

Credit unions, like their banking counterparts, have interest-rate risk and are directed by their regulators to mitigate that risk. Appropriately used derivatives is a cost-effective means to mitigate that risk and a tool necessary to compete with other services providers, including federally chartered credit unions and banks.
 
Under the MCUA, the state director may issue an order authorizing domestic credit unions to exercise powers not specifically authorized if the director finds those powers appropriate and necessary to complete with other financial service providers in the state. Within the order, the director specifically found that:
  • Domestic credit unions may purchase interest-rate derivatives for the purpose of mitigating interest-rate portfolio risk in a safe and sound manner;
  • Sections 401 and 431 of the MCUA support authorizing such activity;
  • Competing federal credit unions operating under recently promulgated NCUA regulations already have the authority to engage in such purchases, thereby placing domestic credit unions at a competitive disadvantage if they are not permitted to use these derivatives;
  • There are no specific limitations on domestic credit union powers under the MCUA or other law that would prohibit authorizing these additional powers; and
  • Granting this additional authority is appropriate and necessary to enable domestic credit unions to compete with other providers of financial services.
State-chartered credit unions planning to purchase interest-rate derivatives to mitigate interest rate-risk must notify DIFS 60 days prior to the purchase, the order said.


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