Derivative Hedging Services

Schedule a Derivatives MeetingMeeting members’ needs, regardless of interest rate fluctuations, is critical to the long-term success of a credit union. However, when interest rates are rising, credit unions that add long-term mortgages or investments can bump up against policy limits, increasing risk. This may necessitate selling at a loss and obscure the best path forward.

Managing risk exposure keeps your credit union safe but can also lead to missing out on great opportunities. Good financial health is balancing risk management and future growth and investments. At Catalyst, our goal is not only to help you succeed, but also thrive well into the future.

Interest rate risk, while real, should not be a limiting factor for credit unions seeking to successfully grow and meet their member needs. It would appear that regulators share that opinion, as NCUA eased constraints when it approved a new derivatives rule that greatly reduces the barriers for entry.

Credit unions have long managed interest rate risk exposures through loan sales, loan participations and term borrowings. Each of these strategies, while having a strategic place in risk management, can present challenges ranging from lower long-term earnings potential to net worth dilution.

Credit Union Insights for Understanding Derivative Hedging

  • What are interest rate derivatives?

  • How do interest rate derivatives help credit unions?

  • What place do interest rate derivatives have in a larger risk management strategy?

The benefits of Interest rate risk derivatives help alleviate many of the challenges credit unions face:

  • Cost Efficient: Interest rate derivatives typically have a lower cost for the same term as term borrowings.
  • Flexible: Over the counter (OTC) derivatives can be customized to hedge your selected asset or liability, and they are easily liquidated if a hedged position changes.
  • No Penalty Fee: OTC derivatives can be liquidated at fair market value and do not have prepayment penalties that are common with term advances.
  • Preserve Net Worth: With successful hedge accounting treatment, interest rate derivatives are kept off-balance sheet, which means they do not increase total assets and thus do not dilute net worth.
  • Maintain Liquidity: Liquidity risk is very real. Interest rate derivatives do not consume secondary liquidity sources to manage interest rate risk as term borrowings do.