The fee structure presented with the NCUA's proposed derivatives rule is a deal breaker for one of thecredit unions involved in the pilot program.

Denise Boutross McGlone, CFO of the $2.4 billion Affinity FCU ofBasking Ridge, N.J., participated in the pilot, using derivativesto hedge against interest rate risk created by Affinity's large30-year, fixed mortgage portfolio.

McGlone said she's glad the NCUA proposed the rule and saidderivatives can be a helpful balance sheet management tool forcredit unions. However, she was not as happy about the fees.

The NCUA included with the proposed rule a potential feestructure that would levy a $75,000 to $125,000 application fee oncredit unions seeking Level II authority, intended for creditunions of Affinity's size. Level I authority application fees wouldvary from $25,000 to $50,000. Both levels could additionally besubjected to ongoing fees to cover additional exam costs, aswell.

When I read about the fees, my response was that Affinity willnot be applying for derivatives authority,” she said. “The conceptthat we would have to pay fees to reduce risk to the fund is aliento me in any other regulatory regime.”

During the meeting when the rule was introduced, both NCUAChairman Debbie Matz and Board Member Michael Fryzel urged commentson the fee structure, acknowledging such an addition to the finalrule would be an historic one.

McGlone worked in investmentbanking before joining the Affinity executive team in 2007, andwas previously chief financial officer and executive vice presidentof 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 sixto 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 marketsdivision, McGlone said she's surprised the regulator needs theadditional expertise.

“Certainly the NCUA auditors that we have encountered are morethan capable,” she said.

The CFO also said the fee would in effect be double taxation onlarge credit unions. Because the NCUA already collects operatingfees from credit unions as a percentage of assets, she said, largecredit unions pay 80% of operating fees and assessments, so theywould already bear much of the cost resulting from operating budgetincreases.

Vincent Pennisi, executive vice president at the $54 billionNavy Federal Credit Union, said a fee structure wouldn't preventhis 4.3 million member cooperative from applying for the Level IIauthority should the rule be finalized. Navy FCU also participatedin the NCUA pilot program.

But, Pennisi did say it could be a problem for smaller creditunions.

“Credit unions could benefit from derivatives, but the feescould create a barrier to entry for some credit unions to enter theprogram,” he said. “And, the fee negatively impacts the value ofthe transactions. It's a potential disincentive.”

Robert Perry, financial adviser at investment firm ALM First,said the potential fee structure was part of every conversationhe'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 thetransactions for eight of the 10 credit unions that participated.The Dallas-based firm, which had previously gained NCUA authorityto make derivatives transactions for its clients, inherited creditunions participating in the pilot program through Western BridgeCorporate FCU after it was liquidated.

“The break-even point is further out now,” he said. “You have toget in big enough to make sense, and the more up-front costs, thebigger than number will be.”