NCUA Board Seeks Feedback on Derivative Use for FCUs and Other Actions

June 16, 2011 - During its monthly meeting on June 17, the National Credit Union Administration (NCUA) Board acted on several items including an advanced notice of proposed rulemaking (ANPR) on the possible use of derivatives for federal credit unions.

ANPR – Derivatives

NCUA seeks comments in an ANPR to permit natural person federal credit unions (FCUs) to engage in certain derivative activities for purposes of hedging interest rate risk.  NCUA has allowed FCUs to engage in certain derivative activity since 1998 under a Pilot Program adopted by the agency. Only a handful of credit unions since that time have used derivatives under the Pilot Program.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) requires financial entities to clear their derivatives through a clearinghouse, unless an exception to the mandatory clearing applies. The section directs the Commodity Futures Trading Commission (CFTC) to consider whether to exempt entities under $10 billion in assets. The CFTC recently issued a proposed rule on this issue, and credit unions could quality for the clearing exemption.

Given the CFTC’s proposed rule, NCUA is looking to reconsider and resolve issues related to whether and under what conditions to govern the evaluation of an FCU’s request for approval to engage in derivatives through a third party, and what approval standards should be established for an FCU to engage in derivatives independently.

For state-chartered credit unions, derivative use is governed by state law and whether that activity is permissible under state authority.

Final Rule: Sample Income Data – Low Income Designation – 701.34

The final rule will permit federal credit unions that do not qualify for a low-income designation using the NCUA geo-coding software to submit an analysis of a statistically valid sample of their member income data as evidence they qualify.  The reason for the amendment is the current rule, as an alternative to NCUA’s geo-coding software, requires member data drawn from loan applications or member surveys to show a majority of the members are low income as defined in the low-income rule.  Regarding federally insured state-chartered credit unions (FISCUs) under NCUA’s regulations at section 741.204(b), a FISCU must obtain a low-income designation to accept certain nonmember accounts, if these can be accepted under state law.  Additionally, pursuant to section 705.3, in order to participate in the Community Revolving Loan Program, a low-income determination must be made pursuant to section 701.34.  The appropriate state regulator makes the low-income designation, with the concurrence of NCUA, on the same basis as provided in section 701.34(a) for FCUs.

In addition, the NCUA Board approved a technical correction to its recent golden parachutes and indemnifications payments final rule, approved last month. An insurance fund report was also given at the meeting and can be found here.