ALEXANDRIA, Va. (5/17/13)--A proposed rule that would allow eligible credit unions to engage in interest rate swaps and to purchase interest rate caps was released for public comment by the National Credit Union Administration on Thursday.
|CUNA Deputy General Counsel Mary Dunn, left, and Executive Vice President of Strategic Communications and Engagement Paul Gentile speak with NCUA Chairman Debbie Matz, right, following Thursday's NCUA open board meeting. The NCUA said there are still questions about how the proposed derivatives rule would work, and the agency has asked credit unions for their thoughts on all aspects of the proposal. (CUNA Photo)|
Approved credit unions would be permitted to use these simple derivatives to hedge against interest rate risks.
"Our initial take is that NCUA took a positive step to issue the proposal for comments to assess credit unions' views--a development we have been urging for months--although the devil is always in the details," Credit Union National Association Deputy General Counsel Mary Dunn said. "We will be reviewing it very carefully."
NCUA Chairman Debbie Matz and board member Michael Fryzel both stressed that the proposal is not cast in stone, and said they will welcome comments on all aspects of the proposal. The agency also released a question and answer document to help credit unions better understand the proposal. (Use the resource link.)
"Working with credit unions to manage interest-rate risk exposure is a top priority for NCUA," Matz said in a Thursday release. "The negative impact on balance sheets when rates rise, especially if they rise rapidly, will significantly reduce the earnings and net worth of exposed credit unions. NCUA urges credit unions to prepare for this event. After careful evaluation, the NCUA Board is proposing to allow eligible credit unions, which hold nearly 80 percent of industry assets, to purchase simple types of derivatives with certain safeguards to hedge interest-rate risk."
Under the terms of the NCUA proposal, only credit unions that have assets of more than $250 million, are well-managed, and have the appropriate expertise will be eligible to apply for an agency derivatives investment program. The NCUA estimated that 75 to 150 credit unions would apply for derivatives authority within the first two years of the program. The agency said it would need to add new resources to handle application processing and supervision if the program is approved.
The proposal would apply to federal credit unions and federally insured state-chartered credit unions that are permitted under state law to engage in derivatives and that meet NCUA's criteria.
Credit unions seeking derivatives authority would be required to submit an application for one of two levels of authority:
The NCUA has developed separate eligibility requirements for each of these two levels. Level I application fees would start at $25,000, and Level II application fees would range from $75,000 to $125,000, depending on the complexity of the application.
These application fees would help the agency cover the costs of the program. NCUA staff estimate that the program would require six to 12 new examiners and would cost $6 million to $11 million to initiate. "Charging these types of application and participation fees is unprecedented, and we will be scrutinizing the proposal, the fee issues and the agency's cost estimates very carefully as we analyze the proposal," Dunn added.
The NCUA will accept comment for 60 days after the proposal is published in the Federal Register. A final rule could be released in the summer or fall, with an effective date of the end of the year or early next year, Dunn said.
For more on the proposal and the NCUA board meeting, use the resource link.