Last January, the NCUA Board voted to let credit unions use derivatives. It granted this authority after gathering responses to its proposed ruling.
The most significant change in the agency’s final rule involved “notional” amounts, basing them more on duration and extending maturity limits. Other critical components of the rule involve the use of external service providers and counterparty requirements.
NCUA is allowing credit unions to enter into interest-rate swaps, purchase interest-rate caps and floors, and execute Treasury futures contracts (the latter being added in the Final ruling). Futures contracts are generally more liquid and counterparty transactions are more efficient.
Eligible credit unions are those with assets of more than $250 million, a CAMEL rating of 1, 2, or 3, and a management rating of 1 or 2. The rule also includes a provision that smaller credit unions are eligible at the discretion of an NCUA field director.
Credit unions may use an external service provider to support or conduct aspects of its derivatives program as long as the provider isn’t a counterparty, isn’t a principal or agent of the trade, and doesn’t have discretion.
Credit unions can use these service providers as advisers, to aid in accounting and back-office operations or to provide reporting.