Now that NCUA has approved its final rule on derivatives, many credit union chief financial officers (CFOs) are taking a closer look at these instruments.
“Affinity was already approved to do derivatives through NCUA’s pilot program,” says Richard Chin, vice president/treasurer at $2.2 billion asset Affinity Federal Credit Union, Basking Ridge, N.J. “We’ve used derivatives in the past to manage our interest-rate risk profile and haven’t experienced any problems. We see derivatives as one of a number of effective tools to manage interest-rate risk.”
Kathy Elser, CFO at $12 billion asset BECU, Tukwila, Wash., shares similar insight. “Derivatives will enable us to add a higher percentage of longer-term loans [mortgage or home equity] without adding an inordinate amount of interest-rate risk,” she says. “The largest risk is that rates rise and margins compress as the long-term asset yield stays the same, but deposit pricing must increase with market rates. Derivatives, when used properly, will increase in value and provide income under those rising-rate scenarios.”
At $1 billion asset Workers Credit Union, Fitchburg, Mass., CFO Tim Smith prefers not to use the word “derivative” because it has negative connotations outside of interest rates. “Interest-rate swaps, caps, and floors are much easier to understand, and those terms have practical uses for credit unions,” he explains. Smith prefers to talk in terms of “turning a long-term, fixed-rate asset into a variable asset with an interest-rate swap, or limiting how far rates will go up on your money market accounts with a cap.”
Smith says derivatives will help his credit union meet the needs of more commercial borrowers in the near term. For the long term, “they’ll provide more flexibility in pricing products on both sides of the balance sheet, which ultimately means lower risk for credit unions and greater value for members.”