March 03, 2014

NCUA Letter to CUs out on derivatives applications

March 4, 2014 – NCUA Letter to Credit Unions 14-CU-04 describes the application process for credit unions interested in using derivatives to reduce interest rate risk under a rule that took effect Monday.

NCUA also included Supervisory Letter No. 14-02, which clarifies its supervisory expectations about those derivatives products used by federal credit unions and federally insured, state-chartered credit unions.
NCUA's final rule on derivatives was approved at the agency's January board meeting. The regulation requires NCUA approval before federal credit unions begin using the derivatives investment authority created by the rule. Letter 14-CU-04 also states that the agency will limit a federal credit union's total derivatives exposure.

The final rule says credit unions with $250 million or more in assets that have a CAMEL rating of 1, 2, or 3 and a management component of 1 or 2 may apply to NCUA for derivatives authority. It includes some flexibility as well: it permits NCUA field examiners to allow smaller credit unions that meet the minimum CAMEL requirements to apply.

Those credit unions approved for derivatives use "will have limited authority to invest in simple interest rate derivatives for balance sheet management and risk reduction, including interest rate swaps, interest rate caps, interest rate floors, basis swaps, and Treasury futures," according to the letter.

NAFCU welcomed the board's action in January on this issue and praised its decision to eliminate the "pay to play" feature that was included in the proposed rule.