A final rule that will allow well-run federal credit unions to use simple derivatives to hedge against interest rate risks was approved at Thursday’s National Credit Union Administration board meeting.
The NCUA plan will allow only well-managed credit unions with $250 million or more in assets to invest in derivatives.
The final rule includes key changes sought by the Credit Union National Association, such as removing the fees for supervision of the use of these products. CUNA in general has supported derivatives investments for credit unions.
Credit unions that wish to have derivatives investment authority will go through a two-stage application process. In the first stage, the credit union must provide NCUA with an IRR mitigation plan to demonstrate how derivatives would contribute to that plan and how it will acquire the appropriate resources, controls and systems to implement a sound derivatives program. In the second stage, NCUA will evaluate the credit union based on its actual readiness to engage in derivatives transactions.
Credit unions can get interim approval within 60 days, and final approval within another 60 days after it submits the notice of readiness to NCUA that states the credit union has acquired and implemented all the necessary elements to comply with the final rule. A credit union may not begin using derivatives until it receives the final approval.
Continue Reading