IS THE NEW DERIVATIVE RULE FOR YOU?
My Take:
The rule is much improved and should be considered by any credit union with a substantial real estate loan concentration.
The NCUA Board approved the final rule that modernizes the NCUA’s derivatives rule and makes it more principles-based while retaining essential safety and soundness components. It includes appropriate safeguards, such as derivatives training and strong internal controls.
The Board finalized the rule largely as proposed during its last year, except for a few changes to various sections based on the comments received. These changes will provide more flexibility for federal credit unions to manage interest rate risk using derivatives. Changes include permitting written options that comply with this final rule and amending the collateral requirements for cleared derivatives.
The rule includes among other things, amendments to:
· streamline the application process and exempt certain FCUs from the requirement to submit an application;
· remove regulatory limits on the amount of Derivatives an FCU can enter into;
· remove permissible Derivatives types in favor of a characteristic-based approach; and,
· reorganize rules related to loan pipeline management.
WHO CAN USE DERIVATIVES WITHOUT NCUA APPROVAL?
Short Answer:
If you have assets over $500 million and a NCUA Management CAMEL component is a rating of 1 or 2 you can start your program without NCUA approval.
Another reason to do all you can to maintain your CAMEL rating.
Long Answer:
(a) Notification. A Federal credit union that meets the following requirements must notify the applicable Regional Director in writing or via electronic mail within five business days after entering into its first Derivatives transaction:
(1) The Federal credit union's most recent NCUA Management CAMEL component is a rating of 1 or 2; and
(2) The Federal credit union has assets of at least $500 million as of its most recent call report.
WHAT IF YOUR ASSETS ARE LESS THAN $500 MILLION OR YOUR MANAGEMENT RATING IS A 3,4, or 5?
Short answer:
Your administrative burden is much higher, as you must submit a detailed application, but it is still worth the effort to hedge your risk.
Long Answer:
(b) Application. A Federal credit union that does not meet the requirements of paragraphs (a)(1) and/or (2) of this section must obtain approval before engaging in Derivatives under this subpart from its applicable Regional Director, by submitting an application, that, at a minimum, includes the following:
(1) An Interest Rate Risk mitigation plan that shows how Derivatives are one aspect of the Federal credit union’s overall Interest Rate Risk mitigation strategy, and an analysis showing how the Federal credit union will use Derivatives in conjunction with other on-balance sheet instruments and strategies to effectively manage its Interest Rate Risk;
(2) A list of the Derivatives products and characteristics of such products the Federal credit union is planning to use;
(3) Draft policies and procedures that the Federal credit union has prepared in accordance with § 703.106 of this subpart;
(4) A description of how the Federal credit union plans to acquire, employ, and/or create the resources, policies, processes, systems, internal controls, modeling, experience, and competencies to meet the requirements of this subpart. This includes a description of how the Federal credit union will ensure that Senior Executive Officers, the board of directors, and personnel have the knowledge and experience in accordance with the requirements of this subpart;
(5) A description of how the Federal credit union intends to use External Service Providers as part of its Derivatives program, and a list of the name(s) of and service(s) provided by the External Service Providers, as described in § 703.107 of this subpart, it intends to use;
(6) A description of how the Federal credit union will support the operations of Margining and collateral, as described in § 703.104 of this subpart;
(7) A description of how the Federal credit union will comply with the accounting and financial reporting in GAAP; and
(8) Any additional information requested by the Regional Director
FINAL THOUGHTS
Once again, the importance of maintaining your CAMEL code weaves its way into regulation.
I help Credit Union CEOS achieve the best possible examination results so they save time and money. Reach out to me at 407-493-1180 or info@marktreichel.com to set up a no obligation call on how I may be able to assist.