ALEXANDRIA, Va. — During Thursday's monthly NCUA Board meeting,Board Members Debbie Matz and Michael Fryzel encouraged comments ona proposed rule that would grant new investment authorities butcould set a pay-to-play precedent that concerns tradeassociations.

The proposed rule would grant qualifying credit unions theability to use derivative swaps and caps to hedge against interest raterisk.

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However, because of the cost to the NCUA – as high as $16million in temporary staffing costsover the first three years – the final rule could also include anapplication fee and/or an on-going supervision fee, to be paid bythose credit unions applying for and utilizing the authority.

Although Chairman Matz said she supports the proposed rule, shealso said because the agency has never before charged such fees,she's “not sure if it's the way to go.”

Fryzel also encouraged comments from credit unions, trades andother industry stakeholders regarding who should pay for theprogram.

The new authority mitigates risk to the share insurance fund, soit could be argued that the entire industry should shoulder thecost, he said.

However, Fryzel added that those credit unions that don't havethe authority could also rightly argue that only those who have theauthority should pay.

Additionally, Fryzel said he would like to hear suggestionsregarding whether the NCUA should seek to cover all costs for theprogram or just part, and if application fees, annual fees or otherfee structures would be appropriate.

Representatives from CUNA and NAFCU who attended the meetingexpressed concern about the fees.

“The fee is a big deal,” said Paul Gentile, CUNA executive vicepresident of strategic communications and engagement. “The NCUAknows these credit unions already, so what is the fee payingfor?”

NAFCU Regulatory Counsel Tessema Tefferi said he's alsoconcerned the fees could create a barrier to entry for creditunions interested in seeking derivative authority, and could alsoset a dangerous precedent for future rules.

Comments on the proposed rule will be due 60 days after it ispublished in the Federal Register.

The derivate authority would be available only to credit unionsthat have more than $250 million in assets, have an overall CAMELrating of three or better with a management rating of two orbetter, and can demonstrate to the NCUA how derivatives are part ofthe credit union's overall interest rate risk strategy.

The authority would have two levels. Level II would have highertransaction limits, but would also require more stringentrequirements, a higher application fee and more supervision.

The NCUA estimated between 75 and 150 credit unions would applyfor the authority, with 75% seeking Level I, and the remaining 25%seeking Level II.

The rule would only permit derivative swaps and caps, which Matzcalled “plain vanilla.”

J. Owen Cole, director of the Division of Capital and CreditMarkets, explained that derivative swaps involve a credit unionentering into an agreement where it would pay out a fixed ratewhile receiving a floating rate.

In today's low rate environment, the fixed rate would likely behigher at first, Cole said. However, should rates increase, thefloating rate would likely pay more, hedging interest raterisk.

With a derivative cap, a credit union would receive a check ifrates rise above the cap. However, should rates not risk, Colesaid, the risk would be that if rates don't rise, the credit unionwould pay out a one-time premium expense without receiving anyfinancial benefit.

The board Thursday also approved a number of technicalamendments to existing regulations, many of them relating to thenew Office of National Examinations and Supervision, and thetransfer of rulemaking authority for many consumer protection lawsto the Consumer Financial Protection Bureau.

In presenting the final rule changes, staff attorney John Brolintold Matz the move creates no substantive changes or impact oncredit unions.