NCUA moves to loosen derivatives rule for credit unions

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While derivatives emerged as a bad word during the financial crisis, the National Credit Union Administration believes its share insurance fund may be safer if more credit unions used them.

NCUA’s governing board unanimously approved a proposed revision to its six-year-old derivative rule that would permit larger credit unions to enter into agreements without first obtaining agency approval. The move opens a 60-day comment period, after which the agency can take final action.

NCUA Chairman Rodney Hood, pictured here testifying virtually before the Senate Banking Committee earlier this year.

Thomas Fay, a senior capital markets specialist at NCUA, called the original rule, approved in January 2014, “intentionally prescriptive,” given the industry’s limited experience with derivatives. There have been no material problems since then, “so a more streamlined modernized regulation is appropriate,” Fay said.

Indeed, “if there were greater use to hedge against interest rate risk, it could be a beneficial public policy option,” Fay said.

Currently, just 23 federal credit unions have active derivative contracts, according to NCUA Chairman Rodney Hood.

“I know the word derivative can have a very negative connotation,” Hood said.

Both the current and proposed rules limit credit unions’ derivative use to managing interest rates. But the proposed rule scales back restrictions on the types of derivative products and eliminates regulatory limits on the amount of derivatives an FCU may purchase.

To date, most of the derivative transactions credit unions have entered into have been interest rate swaps, Hood said.

Smaller institutions interested in derivatives would still have to obtain NCUA's permission, but credit unions with assets of $500 million or more and a Camels component rating of 1 or 2 would be allowed to execute contracts on their own. The rule applies to federal credit unions but state-chartered institutions have to notify NCUA of any derivative use.

“Prudently hedging interest rate risk with properly structured and underwritten interest rate swaps will serve to enhance credit union profitability and reduce safety and soundness risk,” board member J. Mark WcWatters said.

The board was also briefed on cybersecurity by Johnny E. Davis Jr., who was named special adviser to the chairman for cybersecurity in July 2019.

Board members used the briefing to renew calls on Congress to provide NCUA with oversight authority over vendors and credit union service organizations.

“We’d certainly like to have this,” Hood said, adding that he hoped Congress would address the issue once recovery from the COVID-19 pandemic was underway.

Board member Todd Harper labeled the agency’s lack of vendor authority “a regulatory blind spot.” Without it, “NCUA cannot accurately assess the risk present in the system.”

“I hope we get the authority sooner rather than later,” McWatters added.

Last month, NCUA’s inspector general issued a report concluding oversight authority over credit union service organizations and third-party venders was necessary “to effectively identify and reduce the risks vendor relationships pose.”

The board also approved a final rule revising regulations governing corporate credit unions. The new rule makes it easier for corporate credit unions to invest in credit union service organizations and expands the categories of senior staff at natural-person credit unions eligible to serve on a corporate credit union’s board.

McWatters characterized the revised rule as “a modest and thoughtful relaxation to certain aspects of the rules that will reduce regulatory burden without threatening safety and soundness.”

Thursday was the seventh month the board has met virtually in response to COVID. The pandemic has resulted in an increase in traffic on the agency’s websites, Hood noted. has seen a 17% increase in the number of users and a more than 13% increase in the number of sessions compared with the same time frame in 2019. Similarly,, NCUA’s consumer website, has seen a more than 13% increase in both categories.

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Law and regulation NCUA Interest rates Interest rate risk Federal credit unions Cyber security Regulatory reform