In taking steps to provide federal credit unions with derivatives authority as an additional tool to manage interest rate risk on the balance sheet, the NCUA demonstrated flexible thinking in evaluating its rules. That is to be commended.
However, since the NCUA proposed changes to its derivatives regulation at its May 2013 board meeting, we at NASCUS have noticed confusion within the credit union system about the nature of the proposal.
Some within the movement have the misperception that NCUA’s proposed rule represents the creation of a new authority for all federally insured credit unions.
It does not.
The proposed rule expands federal credit union authority under section 703 of NCUA’s Rules and Regulations by permitting federal credit unions to engage in certain derivatives transactions if they meet the specified criteria. But to be clear, for some federally insured state-chartered credit unions, NCUA is not being expansive: rather, NCUA is proposing to take away or limit the authority of FISCUs in some states.
While NCUA regulations have long prohibited federal credit unions from engaging in derivatives transactions, as with most NCUA investment based regulations, NCUA’s Part 703 mostly speaks to federal credit union authority. State laws generally dictate state-chartered credit union investment authority, and in the case of derivatives, some states already allow the activity for their credit unions with proper supervision. The NCUA’s proposed rule would unnecessarily limit the ability of states that already allow their credit unions to mitigate interest rate risk through the use of derivatives transactions to continue to do so to the full extent of state law.
It is true that in most states, state-chartered credit unions are prohibited from engaging in derivatives transactions. NCUA’s proposed rule does not change that. While some of those states may use their wild card or parity provision to match NCUA’s grant of derivatives authority for federal credit unions, ultimately the decision on whether the activity is appropriate for state-chartered credit unions in those states will properly remain with the state regulator.
For the states that allow credit unions to engage in derivatives activity, NCUA’s proposed rule would preempt state authority and limit an available tool to state credit unions to mitigate interest rate risk. No evidence has been produced that would indicate the state supervision of derivatives transactions produces a material risk to the share insurance fund. In fact, many of our state regulators are quite experienced in supervising derivatives activities.
How do state credit union regulatory agencies have this experience supervising derivative activity? While state credit union regulatory departments across the country examine and supervise state credit unions through variously titled “Credit Union Divisions,” it is important to note that many of these credit union divisions operate as combined and integrated state agencies. These combined agencies also regulate many state-chartered financial entities including, but not limited to, commercial banks, savings banks, non-depository mortgage lenders, servicers and brokers, consumer lenders, money services businesses, issuers of private placement equity, debt securities, and derivatives products, securities and derivatives broker-dealers, investment advisers, and more.
These state agencies operate collaboratively between divisions to both determine the appropriate scope of derivatives use by their state-chartered credit unions, and to prudently regulate that use. Moreover, these states have demonstrated the capability to effectively regulate derivatives activity through their historic role of regulating the local securities markets, and their prudential examination of the investments made by all depository institutions they regulate. Many states have both the state authority as well as experienced and trained examination staff to continue to monitor the derivatives activities of their state’s credit unions.
We know that opinion is divided within the credit union movement about whether the NCUA should allow derivatives authority for federal credit unions. Frankly, that is an issue for the federal side of our system to determine and work out.
For the state-chartered system, the case is simple, straightforward and uncomplicated. States should continue to determine if the activity is appropriate for their credit unions.
Simply stated, the rule proposes to give a new authority to federal credit unions and, in some cases, limits state authority.
Mary Martha Fortney is the president and CEO of NASCUS.
703-528-8688 or marymartha@ nascus.org