States back proposed derivatives rule, with two suggestions

(Jan. 8, 2021) NASCUS supports NCUA’s proposed derivatives rule, but has made two recommendations to the agency that the association said would make the proposal more flexible for the needs of the state credit union system.

In the letter filed Dec. 28, NASCUS noted that the proposal would continue to defer to state law for federally insured state credit union (FISCU) derivatives authority, and adjust the timeframe for FISCUs to notify NCUA of derivatives activity. The proposal was issued by the NCUA Board Oct. 15. It is designed, the agency said then, to make the agency regulations over derivatives less prescriptive and more principles-based – and expand federal credit unions’ (FCUs) authority to purchase and use derivatives as part of their interest-rate risk (IRR) management.

For the state system, a key part of the proposal (as NASCUS noted in its letter) is continued recognition by NCUA of the primacy of state law in determining investment authority for FISCUs. The association made two recommendations for improving the proposal by, NASCUS said, enhancing coordination between NCUA and state supervisory authorities (SSAs).

First, NASCUS said the agency should eliminate redundant supervisory notice requirements where applicable. The agency, NASCUS wrote, should provide an exemption from its notice requirement for FISCUs in states where pre-approval or pre-notification is required to be given to the state regulator.

NASCUS cited the examples of Georgia and Connecticut as states where prior approval from the state regulator is required. “Exempting FISCUs in states where the state regulator is willing to provide notification to NCUA on behalf of FISCUs eliminates redundancy, streamlines the regulatory framework, provides regulatory relief for credit unions, and reduces the potential for confusion resulting from different state and federal notification timeframes,” NASCUS wrote.

Second, NASCUS recommended that the agency should incorporate exempt derivatives transactions directly into part 741.219 of its rules – the section that covers FISCUS and investment requirements. Specifically, NASCUS “strongly recommended” that — to facilitate FISCU compliance – the agency should incorporate the excluded transactions under the proposal (under part 703.14 of NCUA rules, which only apply to FCUs) directly into a new subpart (d) of section 741.219. Restating the excluded transactions directly in the relevant FISCU rule, NASCUS wrote, “is a better organizational framework that more clearly communicates to FISCUs the required compliance obligations.”

NASCUS Comment: Proposed Rule — Derivatives (RIN 3133–AF29)