ALEXANDRIA, Va. Credit unions are calling on NCUA to make major changes to its financial derivatives proposal by expanding the authorized derivatives they may purchase; establishing provisions for clearing derivatives on an exchange; setting higher limits on average life of an instrument; and most of all, eliminating fees to be charged for examining credit unions who elect to buy derivatives.
“Unfortunately, upon reading the current Proposed Amendments, we have determined that we would not be able to utilize this valuable additional tool for interest rate risk management,” George Berry, chairman of the board for Florida’s VyStar CU, said in a comment letter to NCUA, adding the proposal “will be too onerous and costly for most credit unions to consider implementing.”
“The application fee,” wrote Berry, “is an unprecedented attempt to spread examination costs to the very few credit unions to which the rule would apply. The fee will discourage many of the credit unions than can benefit most from this type of program from applying. The application fee would also have to be considered as an increase in the transaction fee for derivatives, which would be unfairly placed on credit unions while banks do not have such fees or requirements form regulators.”
While the use of mortgage-backed derivatives is commonplace among credit unions, NCUA has restricted the use of financial derivatives to all but a handful of credit unions over the past decade on a pilot basis. The latest proposal, more than two years in the works, would expand permissibility to a much broader number of credit unions under strict rules, among them are that credit unions pay to participate.
Brad Miller, chief financial officer at Coastal FCU, said charging a fee for derivatives would set a precedent to charge for oversight of activities engaged in by a minority of credit unions, and he noted that banking regulators do not charges fees for derivatives oversight.
Several commenters urged NCUA to expand the permissible derivatives from the proposed use of interest rate caps and swaps. Several credit unions urged that interest rate floors also be included for falling rate environments.
Navy FCU also suggested that basis swaps, which allow users to manage the mismatch between different floating rate securities, be allowed. In his comment, Cutler Dawson, president of the $54 billion credit union, said the type of derivatives NCUA has proposed allowing will enable credit unions to create their own basis swap. “However, this process is less efficient and more costly than allowing NPCUs to use a basis swap,” wrote Dawson.
Affinity FCU’s Denise McGlone, chief financial officer, suggested the use of forward starting swaps, notional swaps and swaptions, should also be permitted under the rule. These derivatives, she wrote, “are all “plain vanilla” instruments that need to be in a financial institution’s toolbox.”
Susan Leonard, CFO at New England FCU, criticized NCUA’s proposed limits of five years for weighted average life. “Many credit unions have access to longer term real estate loans and, given declining loan to deposit ratios, there is a lot of interest in booking these mortgages,” she wrote. “However, well managed credit unions understand the risk of booking longer term mortgages and have avoided adding the interest rate risk. Having access to longer term derivative transactions will enable credit unions to increase their profitability while protecting themselves from increased interest rate risk.” She suggested NCUA extend the permissible maturity to at least 15 years.
