WASHINGTON (UPDATED: 7/24/13, 12:10 P.M. ET)--The Credit Union National Association supports the National Credit Union Administration's efforts to solicit comments on a proposal to authorize derivatives to manage interest rate risk (IRR), but "does not support a number of the key provisions in the proposal," CUNA's Deputy General Counsel Mary Dunn said in a comment letter to the agency filed yesterday.
Comments on the proposal are due by July 29. CUNA's letter was developed under the auspices of the CUNA Examination and Supervision Subcommittee, with broad input from the credit union system.
CUNA's board earlier this month specifically reviewed this issue and all members of the board agreed one aspect under consideration in particular is of deep concern: Whether application and supervision fees should be imposed in order for credit unions to gain derivatives authority.
CUNA adamantly opposed this approach. "If derivatives reduce IRR, then NCUA should be encouraging credit unions to make appropriate use of permissible derivative options instead of retiring barriers to their use, such as fees to apply or for supervision," Dunn said.
"An à la carte fee structure sets a precedent that, if applied to other products and services, could stifle innovation for credit unions by imposing additional burdens and costs that are simply not justified," the CUNA letter emphasizes. "We feel that it is incumbent upon NCUA to develop the expertise necessary to enable it to properly regulate the evolving business model of a credit union without imposing extra changes," Dunn stated.
Other issues of concern addressed by Dunn in the comment letter include:
- CUNA strongly opposes the imposition of application and/or supervision fees paid to the agency in order for credit unions to apply for or maintain derivatives programs or for any other financial activity that is directly authorized by statute or incidental to such authority;
- CUNA does not support an asset eligibility threshold for derivatives participation;
- CUNA is concerned that the investment limitations are too restrictive and urges the agency to provide for waivers and/or permit additional derivatives authority that would permit more flexibility for qualified credit unions;
- Credit unions should be able to rely on external service providers to a greater extent than the proposal would permit to meet expertise and experience requirements;
- An internal controls audit will be extremely costly for applicants and redundant since other audit requirements will provide NCUA with the information it needs to be assured a credit union will conduct its derivatives program in a safe and sound manner;
- While all eligible credit unions should be permitted to engage in derivatives to hedge against interest rate risk, state chartered credit unions should not be subject to this rule. Rather, they should be permitted to engage in derivatives activities as authorized by state law implemented by state regulators; and
- Credit unions that have participated in the pilot program on derivatives should be allowed to continue to do so, without having to reapply for derivatives authority.
Ultimately the comment letter states that the requirements in the rule will prove so costly to meet that most credit unions will choose not to seek derivatives authority because their benefits will not out weight the costs.
"This is a very important proposal, for many reasons. CUNA strongly supports the agency's efforts to move forward with a derivatives rule" but "at the same time we urge the agency to make the key revisions we are advocating in order to ensure the program will be as accessible as possible to mitigate IRR as broadly as possible," Dunn said.