NCUA Continues to Eye Derivatives as Mitigating Tool for Interest Rate Risk

Feb. 8, 2012 - A NASCUS summary of NCUA's second Advance Notice of Proposed Rulemaking (ANPR) regarding the use of derivative transactions by federal credit unions (FCUs) is now available for NASCUS members.  The ANPR follows up on an ANPR NCUA issued in June of 2011 seeking comment on how NCUA should provide FCUs with the ability to use derivative transactions to offset interest rate risk.  If NCUA proceeds with rulemaking, it would only apply to FCUs. State-chartered federally insured credit unions must look to state law and regulations for rules regarding their use of these transactions.

In light of NCUA's publication of its new interest rate risk rule, the Agency views derivatives as a potentially important tool for credit unions to use to manage interest rate risk. The new interest rate risk rule (summarized here) applies to all federally insure credit unions.

In its ANPR, NCUA discusses the need for FCUs seeking to engage in derivative transactions to demonstrate a threshold of interest rate risk necessitating the activity, a specified financial condition measured by net worth, and an expertise of staff to manage the transactions. NCUA also discusses restricting the types of transactions, restricting the collateral that may be pledged, and mandating certain contractual provisions.

NASCUS is encouraging state regulators to review state regulations to determine what activities to mitigate interest rate risk are permissible for state-chartered credit unions. NCUA's ANPR is summarized here. (Member log-in required.)