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Derivatives a good rate-risk tool CUNA says
WASHINGTON (8/25/11)—The Credit Union National Association (CUNA) commended the National Credit Union Administration (NCUA) for its plan to allow credit unions to hedge their interest-rate risk (IRR) with financial derivatives saying credit unions need many tools to facilitate their operations as possible, provided they are consistent with vigilant risk management on the credit union’s part and reasonable supervision from regulators. CUNA SVP and Deputy General Counsel Mary Dunn, in CUNA’s comment letter on the agency’s advance notice of proposed rulemaking on derivatives, wrote that CUNA agrees that products, such as derivatives, can allow credit unions to maintain margins on their fixed-rate loan portfolios and, therefore, facilitate credit unions’ ability to continue making loans to their members. “We support this proposal and offer some recommendations concerning issues to be addressed in a subsequent proposed regulation,” Dunn wrote. Currently, the NCUA allows a limited number federal credit unions to engage in derivatives to hedge IRR through an investment pilot program. “Should NCUA choose to regulate in this area, which we would support, we believe the existing investment pilot program, either through a third-party or if the credit union has independent authority, should be grandfathered,” CUNA recommended. (Use the resource link to read CUNA’s more extensive comments regarding the pilot program.) CUNA also suggested the following:
* A final derivatives rules should provide a sufficient number of eligible derivatives counterparties to provide credit unions with greater access to products and more competitive pricing; * Derivative products used by credit unions should include access to over-the-counter (OTC) derivatives that are currently allowed under the investment pilot program. In addition, certain exchange-traded derivatives may be appropriate for well-managed credit unions as long as they comply with any counterparty requirements, as applicable, as addressed in a regulation; * Credit unions should be allowed to seek independent authority to engage in derivatives that do not involve a third-party, subject to meaningful but not overly burdensome qualifications the credit union would be required to meet.
CUNA also recommended that credit union size should not be the determining factor to gauge a credit union’s eligibility to participate in the derivatives markets. “We do not think that small credit unions should be eliminated from participation as access to third-parties and aggregation of smaller contracts could be very beneficial to their operations, when managed properly, and consistent with safety and soundness,” Dunn wrote. Also, the CUNA letter noted that if federally insured, state-chartered credit unions have legal authority for derivatives activities based on state laws and regulations, then NCUA’s regulations should not seek to generally override such authority. A federal preemption should apply only, the CUNA letter suggests, if there are material, demonstrable safety and soundness concerns. In the absence of state requirements, federally insured, state-chartered credit unions should be allowed to conduct their derivatives activities consistent with NCUA’s regulation, according to CUNA. Use the resource link for CUNA’s complete comments.


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