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CFTC exempts most CUs from derivatives rules
WASHINGTON (7/11/12)--The Commodity Futures Trading Commission (CFTC) on Tuesday approved a final rule to exempt, as end users, credit unions with under $10 billion in assets from the terms of pending derivatives regulations, and introduced a proposal that would also exempt certain larger credit unions from those same rules.

If the proposal, which the Credit Union National Association (CUNA) has already weighed in with the agency to support, is adopted, virtually all credit unions will avoid the CFTC's rules on derivatives. "This could be important particularly if regulations limiting the ability of credit unions to use plain vanilla instruments to hedge interest rates are further considered by the National Credit Union Administration," CUNA Deputy General Counsel Mary Dunn said.

The CFTC rule finalizes definitions of swaps, security-based swaps and security-based swap agreements. The new swap definitions are effective immediately, according to the CFTC.

Portions of the Dodd-Frank Wall Street Reform Act would bar certain institutions from engaging in swap transactions, and require institutions that engage in swaps to sell and buy them through federally registered clearinghouses and open markets. However, these regulations could not become effective until swaps were defined by federal regulators.

With the new definitions approved, some of the swap regulations could become effective in about 60 days, the CFTC said.

In addition, the CFTC approved a rule to provide an exemption for small financial institutions, under which credit unions and other end-user financial institutions with fewer than $10 billion in assets will not be subject to pending mandatory swaps clearing requirements. CUNA called for this exemption in a 2011 comment letter and supported it in subsequent discussions with policymakers.

CFTC Chairman Gary Gensler said the regulatory burdens faced by smaller institutions were discussed as the CFTC considered the exemption.

The exemption from the swap clearing requirements also could be extended to credit unions with more than $10 billion in assets under a separate CFTC proposal issued on Tuesday. That proposal would provide a so-called "cooperative exemption" for cooperative businesses if all of a given business's members are non-financial entities, financial entities to which the "small financial institution exemption" applies, or cooperatives. This definition would likely cover credit unions with more than $10 billion in assets that meet the exemption criteria, CUNA Assistant General Counsel Luke Martone said.

The proposed exemption will be open for public comment for 30 days after it is published in the Federal Register, and CUNA will submit a comment letter on the proposal.

Federal credit unions are allowed to enter into some types of over-the-counter agreements, which would meet the definition of "swaps," and some state credit unions have this authority as well. Relatively few credit unions use derivatives to hedge interest-rate risk.
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