ARLINGTON, Va.–In a comment letter on NCUA’s proposed amendments to its derivatives rules, NAFCU was supportive of the overall intent but has offered several changes it would like to see.
Saying it supports the application threshold exemption, NAFCU urged NCUA to “explore the possibility” of lowering the threshold for credit unions under $500 million in assets that meet certain requirements, and further asked NCUA to not specify acceptable collateral standards, as “this could create duplicative and unnecessary due diligence efforts on credit unions.”
The trade group said NCUA should also provide credit unions with all possible training opportunities and resources regarding implementation and management of derivative programs.
NAFCU said the proposal is an improvement over NCUA’s current rules, saying a principles-based approach removes the discrete loss limits, eliminates the application requirements for complex credit unions with at least $500 million and a CAMEL management component rating of 1 or 2, and removes the prescriptive derivative product list and instead provides a list of required characteristics.
In the letter, Senior Regulatory Affairs Counsel Kaley Schafer said approximately 30% of all credit unions with an approved derivatives application have outstanding derivatives transactions, and that NCUA has not reported any material issues or red flags since finalization of the 2014 derivatives rule.
‘Extremely Valuable Tool’
Additionally, wrote Schafer, NCUA’s proposed rule fits into a theme of recent efforts by other federal agencies to evaluate the use of derivatives and echoes the SEC’s rationale that modernization is necessary as agencies gain new information on the use and development of products in the industry.
“Derivatives programs can be an extremely valuable tool for credit unions in managing balance sheet risks, primarily those related to fixed-rate mortgage loans. According to NAFCU’s 2020 Federal Reserve Meeting Survey, over 70% of respondents reported that demand for first mortgages has increased in the last 12 months,” Schafer stated. “Moreover, first mortgage loan originations in the four quarters through June 2020 were 76% higher versus the previous four quarters. Considering the increasing demand for mortgages throughout the last year, managing risks associated with fixed-rate mortgages will continue to be a priority. When employed correctly and safely, derivatives improve a credit union’s risk management capabilities; however, the prescriptive approach is outdated and in need of modernization.
“The proposed amendments will be beneficial to credit unions by enabling them to manage their inherent and idiosyncratic risks, rather than trying to adhere to the previously permissible options and risk limits,” the comment letter continues. “A more streamlined and modernized approach is appropriate at this time to alleviate the regulatory burden on credit unions while protecting safety and soundness. Derivatives used as an IRR mitigation strategy are a valuable tool for credit unions to employ to hedge against sharp changes in the economic landscape and market volatility.”
Exemption Request
Other points made in the letter include:
- NAFCU said it supports the proposed application exemption for complex federal credit unions (FCUs) with at least $500 million in assets and a CAMEL rating of 1 or 2, as “this exemption provides flexibility while accounting for the complexities of implementing a derivatives program. Credit unions must have the reasonable ability to acquire the necessary internal infrastructure and to execute and manage an effective derivatives program. Credit unions over $500 million in assets are also likely able to absorb the inherent valuation fluctuations.”
- Schafer further noted the proposal contemplates adjusting the proposed threshold if warranted and said NAFCU urges the NCUA to consider lowering the exemption threshold. “NAFCU generally opposes arbitrary asset-based thresholds, but absent a different metric for establishing this exemption, the NCUA should lower the exemption threshold for credit unions under $500 million in assets that possess the same requirements under the proposal,” she stated.
- NAFCU said NCUA should not specify acceptable collateral types, as establishing express standards will have “unintended consequences.”