ALM First Financial Advisors has closely followed the NCUA'sefforts to develop an appropriate rule for credit unions' use ofderivatives as a hedging tool. We support the use of derivativeswithin the credit union industry as instruments for effectivelymanaging interest rate risk.

Derivatives used for hedging interest rate risk shouldn't befeared. They are very different from the nonconforming securitiesthat contributed to the failure of several corporate credit unionsduring the credit crisis. Further, they are easier to understandthan some other strategies credit unions deal with today and usingthem is a normal practice for many financial institutions. As theNCUA highlighted in the ANPR supplemental information, 28% of bankswith assets between $250 million and $1 billion, and 57% of bankswith assets between $1 billion and $5 billion use derivatives.

Income and firm value are generally created through the use offinancial intermediation and balance sheet risk management. Manymember assets compete for a place on a credit union's balance sheetand, constructed properly, may come with unwanted or undesiredinterest rate risk. Credit union management teams should earnliquidity premiums for being a long-run investor and liquidityprovider, originate quality loans and diversify them into aportfolio, and develop a core funding base and service clients.Credit union management teams should not take undue interest raterisk or offer members an abbreviated menu of products because ofinterest rate concerns.

Credit unions are financial intermediaries for member-owners notrate bettors. Derivatives bridge this gap. Properly used,derivatives can offset interest rate risk that is inherent withinthe credit union industry today. This is vital because ascompetition grows, it will allow credit unions to competeeffectively.

I encourage credit unions that meet the NCUA's criteria toeducate themselves on the use of derivatives and comment on therecent proposed rule and important modifications necessary to makeit a strategy worth considering.

Emily Moré Hollis
Partner
ALM First
Dallas