The fee structure presented with the NCUA’s proposed derivatives rule is a deal breaker for one of the credit unions involved in the pilot program.
Denise Boutross McGlone, CFO of the $2.4 billion Affinity FCU of Basking Ridge, N.J., participated in the pilot, using derivatives to hedge against interest rate risk created by Affinity’s large 30-year, fixed mortgage portfolio.
McGlone said she’s glad the NCUA proposed the rule and said derivatives can be a helpful balance sheet management tool for credit unions. However, she was not as happy about the fees.
The NCUA included with the proposed rule a potential fee structure that would levy a $75,000 to $125,000 application fee on credit unions seeking Level II authority, intended for credit unions of Affinity’s size. Level I authority application fees would vary from $25,000 to $50,000. Both levels could additionally be subjected to ongoing fees to cover additional exam costs, as well.
When I read about the fees, my response was that Affinity will not be applying for derivatives authority,” she said. “The concept that we would have to pay fees to reduce risk to the fund is alien to me in any other regulatory regime.”
During the meeting when the rule was introduced, both NCUA Chairman Debbie Matz and Board Member Michael Fryzel urged comments on the fee structure, acknowledging such an addition to the final rule would be an historic one.
McGlone worked in investment banking before joining the Affinity executive team in 2007, and was previously chief financial officer and executive vice president of Sallie Mae where she managed a large derivatives program.
She questioned the NCUA’s estimated costs presented with the rule, which included between $3.8 million and $6.5 million for contractors and an additional six to 12 full time equivalent employees to assist with exams.
Given the simplicity of the derivatives swaps and caps proposed, and the NCUA’s expertise particularly in its capital markets division, McGlone said she’s surprised the regulator needs the additional expertise.
“Certainly the NCUA auditors that we have encountered are more than capable,” she said.
The CFO also said the fee would in effect be double taxation on large credit unions. Because the NCUA already collects operating fees from credit unions as a percentage of assets, she said, large credit unions pay 80% of operating fees and assessments, so they would already bear much of the cost resulting from operating budget increases.
Vincent Pennisi, executive vice president at the $54 billion Navy Federal Credit Union, said a fee structure wouldn’t prevent his 4.3 million member cooperative from applying for the Level II authority should the rule be finalized. Navy FCU also participated in the NCUA pilot program.
But, Pennisi did say it could be a problem for smaller credit unions.
“Credit unions could benefit from derivatives, but the fees could create a barrier to entry for some credit unions to enter the program,” he said. “And, the fee negatively impacts the value of the transactions. It’s a potential disincentive.”
Robert Perry, financial adviser at investment firm ALM First, said the potential fee structure was part of every conversation he’s had with a credit union about the proposed rule, and added, “It’s not sitting well with a few of them.”
ALM First conducted the pilot program for the NCUA, making the transactions for eight of the 10 credit unions that participated. The Dallas-based firm, which had previously gained NCUA authority to make derivatives transactions for its clients, inherited credit unions participating in the pilot program through Western Bridge Corporate FCU after it was liquidated.
“The break-even point is further out now,” he said. “You have to get in big enough to make sense, and the more up-front costs, the bigger than number will be.”