NCUA Approves Proposed Rule to Allow Expanded Use of Derivatives Posted by AVCU on 8:13 AM

 The NCUA board on Thursday unanimously approved a proposed rule that would expand the ability of credit unions to invest in derivatives to manage interest rate risk.

The proposed rule would eliminate regulatory language specifying the types of derivatives that credit unions may invest in to manage interest rate risk.

“I know that the very word derivative can have a negative connotation,” NCUA Chairman Rodney Hood said, adding that the agency is still taking a conservative approach in allowing the use of derivatives by credit unions.

The NCUA board in 2014 approved a rule that allowed some credit union involvement in derivatives, but the rule was somewhat restrictive because the industry had not had much experience with them, said Tom Fay, the NCUA’s capital markets manager in the Office of Examination and Insurance.

“The changes included in this proposal would streamline the regulation and expand credit unions’ authority to purchase and use Derivatives for the purpose of managing [interest rate risk],” the proposed rule stated.

“Prudently hedging interest rate risk with properly structured and underwritten interest rate swaps will serve to enhance credit union profitability and reduce safety and soundness risk,” Board Member J. Mark McWatters said.

During Thursday’s meeting, the three board members again appealed to Congress to give the agency oversight control of vendors used by credit unions.

Members cited an agency Inspector General’s report last month that repeated recommendations that the NCUA have that power.

Board member Todd Harper called that omission a “regulatory blind spot.”

Hood said he believes that Congress should wait until the coronavirus crisis has ended before expanding the agency’s oversight power.

However, McWatters said, “The NCUA needs vendor authority and it needs it immediately.”

The NCUA board also received a briefing on cybersecurity risks and actions that credit unions should take.

Johnny Davis Jr., Hood’s special advisor for cybersecurity, told the board that even the smallest credit unions can be targets for various types of breaches.

“There is no such thing in the financial services [world] as being too small to be a target,” Davis said, adding that institutions with under $100 million in assets “present a very lucrative target for some people.”

The board also approved a final rule governing corporate credit unions.