WASHINGTON (4/5/12)--State and federal credit unions should be permitted to manage their interest rate risk (IRR) through investments in derivatives, the Credit Union National Association (CUNA) said in a comment letter sent to the National Credit Union Administration (NCUA).
The NCUA is considering allowing more credit unions to hedge IRR by using limited types of derivatives, and has released an advanced notice of proposed rulemaking on this subject. The agency has suggested that credit unions that demonstrate a relevant, material IRR exposure, have demonstrated the ability to manage derivatives, and have the net worth and financial health needed to manage derivatives could be allowed to invest in interest rate swaps and interest rate caps.
The agency currently allows only a select number of federal credit unions to engage in derivatives through an investment pilot program, but could permit more credit unions to independently use derivatives to hedge IRR.
CUNA commended the NCUA for taking on the derivatives issue, and said it supports allowing well-managed credit unions to invest in derivatives through third-parties. CUNA also supports granting independent derivative investment authority for certain credit unions with adequate derivatives experience.
The list of derivatives that are approved for credit union investment should include basic interest rate swaps, such as interest rate swaps that are payfixed or receive-floating instruments. These types of derivatives, CUNA said, would offset the credit union's balance sheet since floating rates would be paid on shares and payments with fixed rates would be received from mortgages and loans. CUNA also suggested that interest rate caps could be used by credit unions to hedge IRR. "Certain other types of derivatives to hedge IRR may be appropriate for well managed credit unions as long as they comply with any counterparty requirements, as applicable, as addressed in a regulation," CUNA added.
Any derivatives regulation that is eventually developed by the NCUA should "provide a sufficient number of eligible derivatives counterparties to provide credit unions with greater access to products and more competitive pricing," CUNA said.
For the full CUNA comment letter, use the resource link.