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NCUA may alter CU derivative investment rules
ALEXANDRIA, Va. (6/20/11)--The National Credit Union Administration (NCUA) is considering broadening rules that allow certain credit unions to hedge interest rates by investing in some forms of derivatives, and is accepting public comment on this action. The agency currently allows only institutions that were approved under its own investment pilot program that was established in 1999 to take part in derivatives transactions. These transactions typically involve interest rate swaps and caps to hedge interest rate risk on fixed-rate investments such as mortgages. Using interest rate swaps and caps in this manner can effectively convert a fixed-rate loan into a variable-rate loan for the duration of the swap or cap contract. The NCUA is accepting comment on whether it should consider allowing credit unions to be approved to use derivatives -- such as interest-rate swaps -- on a case-by-case basis, allowing credit unions to invest via third parties, or invest independently in derivatives. The agency is also considering canceling its existing credit union derivatives investment program altogether. Comments on how best to regulate any credit union derivative activity will also be accepted. Under the NCUA’s pilot investment program, credit unions that invest in derivatives must have a minimum net worth ratio of 7% and to have positive earnings for the past 12 months. Eligible credit unions must also review each transaction before it is made, and affirm that the transaction is being made to address interest rate risk only. Periodic reviews of the status of the investment, and the credit unions own financials, are also required. A credit union must also ensure that its own accounting policies and procedures are suitable for derivative transactions before it may proceed. The agency also requires specific internal controls. The NCUA will accept comment on its advanced notice of proposed rulemaking for 60 days after it is published in the Federal Register. The recently issued “golden parachute” prohibition was also addressed during the meeting, with the NCUA issuing a technical change that specifies that 457(b) tax free deferred compensation plans, but not other types of 457 plans, are among employee payment options that are protected from regulator scrutiny. The agency noted, however that other types of 457 plans, such as 457(f) plans, can often fall within a different exemption depending on the applicable facts and circumstances. The prohibition, which prevents credit unions from offering high value payments to departing executives of troubled credit unions, does not apply to qualified pension plans, "bona fide" deferred compensation, and some other types of employee benefits and severance agreements. The NCUA also made final rules that will permit federal credit unions to use "statistically valid" random samples of member income data to prove their low-income status to the agency. The low-income and golden parachute releases will remain out for public comment for 30 days. For more on the NCUA meeting, use the resource links.


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