Catalyst Corporate Rolls Out Hedging Service
Catalyst Strategic Solutions, the wholly-owned CUSO of the $2.6 billion Catalyst Corporate Federal Credit Union, launched a comprehensive derivative hedging service to help credit unions mitigate interest rate risk.
“While a small number of credit unions have had access to derivative instruments for the last decade, using them to hedge risk is unchartered territory for most,” said Bruce Fox, Catalyst Corporate’s EVP/chief investment officer, and Catalyst Strategic Solutions principal. “Catalyst Strategic Solutions is uniquely positioned to help credit unions implement a successful hedging program for a variety of reasons – one of which is a track record of developing credit union balance sheet risk management strategies for more than 20 years.”
In January, the NCUA approved a rule authorizing certain federal credit unions to purchase derivative instruments for risk management purposes. Catalyst Strategic Solutions began to formulate a plan to offer derivative hedging services in 2013, in anticipation of eventual regulatory approval.
The CUSO’s background also includes 10 years of working specifically with hedging strategies, as Catalyst Strategic Solutions was an approved vendor under the NCUA’s credit union derivative pilot program.
“We already have the expertise, experience and systems in place to help credit unions move forward,” Fox said.
He added that Catalyst Corporate itself has managed the execution of derivate transactions for 20 years, and recently was approved by the NCUA to implement a derivatives hedging program for its own balance sheet.
Parameters set by the NCUA for credit unions purchasing derivatives under the new rule include assets of $250 million or more, a CAMEL rating of 1, 2, or 3, and a management rating of 1 or 2.
Approved credit unions will be permitted to invest in interest rate swaps, caps and floors, basis swaps, and Treasury futures.
“Credit unions will spend months gearing up to take advantage of the new regulation,” Fox said.
Preparations include a multi-phase approval process, board and management training, policy development and complex analytics for calculating risk, impact to earnings, and structuring transaction strategies, among other steps.
“Even larger credit unions may not have the infrastructure in place to proceed efficiently. Catalyst’s program is designed to be comprehensive in scope to make the planning, approvals and execution of a derivatives hedging program as convenient as possible,” he said.
New services provided by Catalyst include:
- In-depth training and education for start-to-finish derivative programs;
- Assistance with NCUA derivative application;
- Development of derivative policies and procedures;
- Interest rate risk modeling;
- Legal review of all derivative documentation;
- Counterparty credit analysis;
- Derivative hedging strategies, trade execution and transaction management;
- Daily monitoring of derivative pricing and collateral management; and,
- Monthly mark-to-market reports.
“While starting a derivatives program may seem daunting, the benefits for doing so make it worthwhile for many credit unions,” Fox said.
Some of the reasons credit unions want to use derivatives include the ability to hold a greater concentration of longer-term, higher-yielding assets, without the associated interest rate risk; stabilization of their cost of funds’ as a viable alternative to either selling an asset or borrowing, with minimal balance sheet impact; and to hedge their mortgage pipeline, he said.