We applaud the NCUA for affirmatively voting to allow derivative use within the credit union movement. Properly used, derivatives can offset interest-rate risk that is inherent within the credit union industry today. This is vital because as competition grows, it will allow credit unions to compete more effectively.
The NCUA listened to responses and altered restrictions that would have severely limited the impact of derivative use. The most significant change was altering notional amounts so they are based more on duration and extending maturity limits. Eliminating the entrance fee, we believe, was also a prudent move.
The biggest surprise was the addition of Treasury futures as permissible derivative instruments. Futures contracts are generally more liquid and counterparty transactions are more efficient, so we applaud this move as well. Risk management programs within the credit union industry will be more complete with exchange-traded futures as permissible items.
Eligible credit unions are those with assets over $250 million and with a CAMEL rating of 1, 2, or 3 and a management rating of 1 or 2, along with a provision for smaller credit unions to be eligible at the discretion of an NCUA field director. Credit unions that qualify should take the time to look into derivatives as instruments to put in their toolbox to aid in interest-rate risk management.
Emily Hollis, Partner
ALM First, Dallas
