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Final Derivatives Rule Took Affect Monday; NCUA Issues Derivatives Examination Guidance
Wednesday, March 5, 2014 6:35 AM

On Monday, the National Credit Union Administration’s final derivatives rule too effect, which allows federal credit unions to apply to use derivatives to reduce interest rate risks. In a letter to federally insured credit unions, NCUA Chair Debbie Matz explains that the agency’s new regulation requires federal credit unions to apply for, and receive, NCUA approval before using the derivatives investment authority.  It also limits a federal credit union’s total derivatives exposure. 

Federally insured credit unions must notify NCUA in writing at least 30 days before it begins engaging in derivatives transactions. Additionally, the regulation applies specifically to federal credit unions, which much meet eligibility requirements (assets of at least $250 million and a composite CAMEL rating of 1, 2, or 3) in order to apply to use derivatives.  An NCUA Field Director may permit selected federal credit unions with assets of less than $250 million to apply as well.

Approved federal credit unions will have limited authority to invest in simple interest rate derivatives for balance sheet management and risk reduction, including interest rate swaps, interest rate caps, interest rate floors, basis swaps, and Treasury futures. 

In the letter, Matz explains why the board issued the derivatives rule.

“It is critical that credit unions have management programs and tools in place to effectively anticipate and mitigate interest rate risk,” she explains. “With sound processes and controls in place, derivatives can be an effective tool to help credit unions hedge interest rate risk and better protect earnings and capital from adverse rate moves.”

To read letter 14-CU-04, visit the NCUA’s website. Also on the agency’s website, is the Supervisory Letter — Derivatives Examination Guidance.