Financial Derivatives Seen Enhancing CU Hedging

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ALEXANDRIA, Va. – Credit union leaders are calling on NCUA to deregulate its stance on financial derivatives to give credit unions new options for hedging a variety of risks.

Currently, only a handful of credit unions are authorized to buy widely used financial derivatives such as interest rate swaps and options through a closely monitored NCUA pilot program or through a third-party provider. NCUA has asked credit unions for ideas on how to open up derivatives use to more credit unions.

“We believe that one of the greatest threats facing credit unions over the next decade is the interest rate risk associated with serving members’ needs through long-term real estate lending – the most viable lending product that credit unions can produce at sufficient scale to both serve their members’ needs and sustain themselves financially,” Randy Chambers, chief financial officer for Self-Help FCU, told NCUA in a comment letter urging the deregulation of the agency’s rules on financial derivatives.

“Self-Help FCU supports expanding the number of FCUs using derivatives to effectively manage their interest rate risk,” wrote Chambers. “Such derivatives, unlike credit default swaps, held up during the 2008 financial crisis and have been a standard component of managing interest rate risk in the market.”

Rudy Hanley, president of SchoolsFirst FCU in California, told NCUA credit unions should be authorized to participate in the derivatives market with limited NCUA oversight, as long as they are healthy and well-capitalized.

Hanley noted that NCUA’s close scrutiny of derivatives is no longer needed because of new regulations introduced by the Wall Street Reform Bill, including requirements for clearing all derivatives deals. “The limitations on derivatives transactions prescribed by the NCUA in Part 703 are unwarranted given the new transparencies created in the derivatives process by Title VII of the Dodd-Frank Act,” wrote Hanley.

Chevron FCU noted it is one of a few credit unions that have been using derivatives to mitigate interest risk for years under NCUA’s pilot program. James Moody, president of the credit union, said the use of derivatives to hedge interest rate risk has successfully helped the $1.7 billion institution, one of the few large California credit unions to avoid losses during the state’s real estate meltdown, enhance its profitability while avoiding interest rate shock scenarios.

“Interest rate derivatives are a valuable risk management tool and should be an option for credit unions in a controlled and managed environment,” wrote Mark Vinella, of Travis CU. “The types of derivatives available through NCUA’s Pilot Program format are simple and effective when used correctly. While we recognize that derivatives do not solve all risk management problems for everyone, they can play a vital role for those that have the knowledge and understanding to employ them in situations where they make sense.”

 

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