NCUA Proposes to Amend Derivatives Rule for Credit Unions

The Board is proposing to make numerous changes to the derivatives rule, both substantive and technical. The proposed changes make the derivatives rule less prescriptive and more principles-based. Significant elements of this proposal include eliminating the pre-approval process for federal credit unions that are complex with a Management CAMEL component rating of 1 or 2, eliminating the specific product permissibility, and eliminating the regulatory limits on the amount of derivatives an federal credit union may purchase.

Given the observable safe and effective management of derivatives by credit unions since the 2014 final rule, the Board believes it is appropriate to modernize the derivatives rule to expand the derivatives authority for federal credit unions and shift the regulation toward a more principles-based approach. In developing this proposed rule, the Board carefully considered the risks derivatives pose, contemporary developments in the marketplace, and the experiences of NCUA with credit unions using derivatives. While using derivatives to manage interest rate risk, the Board reminds credit unions that derivatives are not a panacea for managing market risks. Derivatives, when used responsibly, are only a part of the interest rate risk framework of a credit union. Credit unions will still require appropriate risk management by experienced staff, along with suitable policies, procedures, and management oversight. 

The Board remains committed to the principle that any authorized derivative activity should be limited to the purpose of mitigating interest rate risk within a discreet hedging strategy and may not be used to increase risks deliberately or conduct any otherwise speculative transactions. The proposal continues to authorize derivative activity by federal credit unions that demonstrate risk characteristics highly correlated to the assets and liabilities of federal credit union, such that derivatives would be an efficient and effective risk mitigation tool. For these reasons, the Board is proposing to amend the derivatives rule. The Board believes these changes will provide regulatory relief in a safe and sound manner for credit unions choosing to utilize derivatives as part of their interest rate risk mitigation strategy.

Related Link: Federal Register Notice

Comment Due Date: December 28, 2020

Keywords: Americas, US, Banking, Securities, Derivatives, Interest Rate Risk, Derivatives Rule, NCUA