NCUA Preemption of State Derivatives Authority Raises Serious Concerns: Proposal Fails to Recognize State Expertise and Experience

July 26 In today's letter to the National Credit Union Administration (NCUA), NASCUS wrote that it cannot support the proposed derivatives regulation in its current form as the proposal would limit the authority of state regulators to supervise derivatives activities in their states.

NCUA's proposed rule would grant new authority to federal credit unions to engage in certain limited derivatives transactions. Federally insured state-chartered credit unions (FISCUs), however, are granted no new authority in the proposal. Rather, the proposal limits the ability of states to allow FISCUs to engage in derivatives transactions, in some cases preempting long-standing state authorities. Many state credit union regulatory agencies have experience supervising derivatives activities at the state level in state credit unions, and substantially more experience supervising the activity in state banks. That state experience, coupled with the historic independence of states to determine appropriate investments for state-chartered credit unions, should mean that NCUA has a compelling case for such sweeping preemption. There is no such case. As such, NASCUS' comment letter states that NCUA's rule should address only federal credit unions.

In the letter, NASCUS explains that state regulators agree with NCUA that credit unions engaging in derivatives transactions should have appropriate experience, policies, procedures, controls, and oversight in place to manage the activities. Well managed derivatives activities can significantly mitigate interest rate risk on a credit union's balance sheet, and reduce risk to the insurance fund, and many states have a long history of supervising these activities in state-chartered credit unions and banks. "NASCUS is confident that state regulators and their examination teams are capable of supervising a wide range of derivatives activities in state credit unions," said NASCUS President and CEO Mary Martha Fortney. "NASCUS sees this proposal as sweeping aside state laws and authority," she continued.

NASCUS concludes the letter cautioning NCUA about overly restrictive provisions that may stray from industry norms. The rationale for permitting credit unions to engage in derivatives transactions is predominantly to provide a means of offsetting interest rate risk. However, restricting derivatives to such an extent out of an abundance of caution may render moot the purpose for which the transactions are undertaken. Furthermore, such stringently prescribed requirements provide little flexibility for either regulators or credit unions to adapt in the future.

To view our comment letter in its entirety, follow this link.

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