June 20, 2011 – NCUA’s board on Friday released an advance notice of proposed rulemaking seeking input on whether and to what extent federal credit unions should be allowed to engage in derivatives contracts.
Currently, only a handful of federal credit unions are authorized by the agency engage in derivatives contracts. The activity is conducted as part of an investment pilot program that has been in place for 12 years. NCUA is seeking comments on whether it should modify its investment rules to permit more credit unions to buy and sell financial derivates to offset interest-rate risk.
NAFCU President Fred Becker welcomed NCUA’s move to address this issue, noting that it could lead to a rule that provides credit unions added flexibility in serving their members.
One of the concerns NCUA noted in Thursday’s board meeting is that derivative transactions in the market have been used in a highly speculative manner. However, the Dodd-Frank Act sets new requirements in the clearing of derivatives that are intended to reduce risk, increase transparency and promote market integrity.
Specifically, the act requires “financial entities” to clear their derivatives transactions through a “derivatives clearing organization,” or clearinghouse, unless there is an exception to mandatory clearing.
The Commodity Futures Trading Commission is considering a proposed rule that would set new requirements governing the elective exception to mandatory clearing of swaps available to swap counterparties, and NCUA says credit unions may qualify for this exception. Reporting would be required. (NAFCU submitted comments to the CFTC and the Securities and Exchange Commission earlier this year, seeking an exemption for credit unions.)
NCUA’s board is taking a cautious view of the issue but encouraging input from credit unions to determine the level of interest in such activity.
The agency will take comments on the ANPR for 60 days following its publication in the Federal Register. NAFCU is preparing a Regulatory Alert for members.
In other action Friday, the board:
- Approved a final rule on qualifying for low-income designation: Effective 30 days after publication, this final rule allows federal credit unions that don’t qualify for the agency’s low-income designation using its geo-coding software to submit an analysis of a statistically valid sample of their member income data as evidence that they serve a predominately low-income population. The data must be drawn entirely from loan data or survey data; NCUA has 60 days to make a final decision on whether to grant the designation.
- Approved technical correction no golden parachute and indemnification payments: Issued as an interim final rule, this technical correction excludes Internal Revenue Code section 457 (b) plans from the definition of a prohibited golden parachute payment, as similar retirement and deferred-compensation plans are excluded. NCUA is taking comments for 30 days
NAFCU supports the final rule on qualification for the low-income designation. “Regarding the interim rule on golden parachutes and indemnification payments, we welcome greater clarity on this subject, but we have concerns with some outstanding issues,” said Becker.