Catalyst News

NCUA’s New Proposed Derivative Rule: 3 Key Areas of Focus

by Catalyst Corporate | Oct 20, 2020

The NCUA Board proposed a rule at its October 15 meeting that amends the agency’s derivatives rule to allow more flexibility for federal credit unions to manage their interest rate risk.

Regarding the changes, NCUA Chairman Rodney E. Hood said, “Managing balance sheet risks through a time of disruption and uncertainty underscores how important it is for credit unions to have tools, like financial derivatives, at their disposal to help guard against volatile economic periods that can hurt liquidity, earnings and capital.”

Although it contains a number of changes, the spirit and intent of the proposed rule are clear, said Mark DeBree, Managing Principal at Catalyst Strategic Solutions. “NCUA has gained comfort with how derivatives have been used in the industry, and they are now open to credit unions employing derivatives to manage interest rate risk,” DeBree wrote in a new blog following NCUA’s action last week.

“Interest rate derivatives are an important and valuable tool for credit unions to consider when faced with sharp changes in economic environments and extremely volatile times – both of which we’ve had in spades over the past decade,” DeBree added.

In his blog, DeBree said the most significant changes lie in three main areas:

  1. Easing and complete elimination (for some) of the application process to obtain hedging authority
  2. Removal of the specification of allowable derivative instruments
  3. Elimination of position limitations

DeBree’s blog on the derivative rule change takes a wider look at these three key areas of focus.

“Working with credit unions for almost two decades, I have encouraged them to gain derivative authority,” DeBree said. “It is simply too important to have access to this tool when managing interest rate risk.”

For additional information, view DeBree’s blog or learn more about the proposed changes here.