ALEXANDRIA, Va. The NCUA Board yesterday proposed a new derivatives rule that was almost immediately criticized by some.
Under the proposal, federal credit unions that are well-managed and are $250-million in assets or larger will be able to use simple derivatives as a hedge against interest-rate risk. Those CUs also would need to demonstrate they have the expertise to use derivatives, which in this case will be limited to swaps and caps.
The program would be managed by NCUA and fees would be charged to cover any costs, such as the processing of applications and supervision, under the proposal. NCUA estimates a program cost range for 2014 between $6.25 million and $10.75 million, reflecting one-time start-up costs and costs of qualifying, processing and supervising a variable number of credit unions seeking derivatives authority. Thereafter, program costs are projected to decline in 2015 to between $2.05 million to $3.85 million, NCUA said.
“Working with credit unions to manage interest-rate risk exposure is a top priority for NCUA,” said NCUA chairman Debbie Matz in a statement. “The negative impact on balance sheets when rates rise, especially if they rise rapidly, will significantly reduce the earnings and net worth of exposed credit unions. NCUA urges credit unions to prepare for this event. After careful evaluation, the NCUA board is proposing to allow eligible credit unions, which hold nearly 80% of industry assets, to purchase simple types of derivatives with certain safeguards to hedge interest-rate risk.”
The agency is estimating that somewhere between 75 and 150 credit unions likely will apply to the program in its first two years.
NAFCU said it has “serious questions” about the proposal.
“NAFCU has strongly advocated for expanding credit union investment powers that includes limited derivatives authority,” said NAFCU CEO Fred Becker. “As such, we appreciate that NCUA has continued the rulemaking process. A key aspect of NCUA’s proposed rule seeks to establish a pay-to-play’ regulatory scheme for credit unions that seek to, and subsequently are permitted to, engage in derivatives activities. A pay-to-play’ requirement would be a first for our industry and would create a significant long-term strategic question by potentially setting a precedent for other activities that credit unions might seek to engage in the future.”
CUNA indicated is it studying the proposal.
At the board meeting NCUA also approved a series of technical amendments, including the transfer of authority under the Dodd-Frank Act for rulemaking for certain consumer protection laws to the Consumer Financial Protection Bureau.
Finally, board members also received a briefing on a proposed supplemental interagency rule amending a recently issued rule concerning appraisals for higher-priced mortgages. The supplementary rule creates new exemptions for existing manufactured homes, certain refinancings and transactions of $25,000 or less. The current interagency rule, issued Jan. 18, 2013 and effective Jan. 18, 2014, requires creditors issuing higher-priced mortgages to obtain an appraisal or appraisals meeting certain specified standards.
