Final derivatives rule, insurance fund actions, on board agenda

(May 14, 2021) A final rule on investments in derivatives by credit unions, and two items that could have a significant impact on a savings insurance premium for credit unions, are all on the agenda for the NCUA Board when it meets on Thursday.

The final rule on derivatives follows up on a proposal from the agency issued in October, which was designed to make current regulations less prescriptive and more principles-based. The proposal would also expand federal credit unions’ (FCUs) authority to purchase and use derivatives as part of their interest-rate risk (IRR) management.

NASCUS, in its comment letter on the proposal filed with the agency in late December, said the state system supports the proposal, but made two recommendations to make the rule more flexible for the needs of state credit unions. First, NASCUS said the agency should eliminate redundant supervisory notice requirements where applicable. NCUA, the association 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.

Second, NASCUS wrote 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 also acknowledged in its letter that a key part of the proposal is continued recognition by NCUA of the primacy of state law in determining investment authority for FISCUs.

Regarding the insurance fund and the future of a premium, the NCUA Board will also consider at next week’s meeting:

  • Issuing a comment request on the National Credit Union Share Insurance Fund’s (NCUSIF) “normal operating level” (NOL), which is the reserve level at which the board has determined the fund can adequately cover any losses presented to the fund. The NOL plays a key role in determining whether a premium will be charged to credit unions to bolster the fund’s reserves. The subject of a premium has been the focus recently of considerable discussion. However, NCUA Board Chairman Todd Harper has repeatedly said the question is increasingly not if, but when, a premium will be charged. Separately (but related): In September, the FDIC Board adopted a restoration plan for the agency’s Deposit Insurance Fund (DIF) which — much like the NCUSIF — had been diluted by the massive influx of savings as a result of the financial impact of the coronavirus crisis. The FDIC plan would restore the fund’s reserve ratio to at least 1.35% of reserves to total insured funds within eight years, as required under federal law — but would require no “extraordinary measures” – such as increasing assessment rates. Instead, the agency said last fall that it would, over the next eight years: monitor deposit balance trends, potential losses, and other factors that affect the reserve ratio; maintain the current schedule of assessment rates for insured banks and other institutions; and provide updates to its loss and income projections at least semiannually.
  • A quarterly report on the NCUSIF, which should include details on the latest equity level of the fund, which also has an impact on a future premium. Lately, the equity level (the amount of total reserves in the fund relative to total savings insured) has been dropping as insured savings have been growing, spurred by member deposits of federal stimulus payments and other savings. Federal law requires that if the NCUSIF equity ratio drops below 1.2%, the board must adopt a “restoration plan” to bring the equity ratio back up to the fund NOL – including a premium. The insurance fund closed 2020 with an equity level of 1.26%, well below the current NOL of 1.38% (but an improvement from earlier in the year when the equity level stood at just 1.22%).

The board meeting gets underway at 10 a.m. ET; audio of the meeting will be live-streamed via the Internet.

NCUA Board meeting agenda, May 20