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

December 28, 2020

Melane Conyers-Ausbrooks
Secretary of the Board
National Credit Union Administration
1775 Duke Street
Alexandria, Virginia 22314

Re: NASCUS Comments on Proposed Rule: Derivatives – RIN 3133–AF29

Dear Secretary Conyers-Ausbrooks:

The National Association of State Credit Union Supervisors (NASCUS)[1] submits this letter in response to the National Credit Union Administration’s (NCUA’s) request for comments on RIN 3133-AF29, the proposed changes to Parts 701, 703, 741, and 746 pertaining to derivatives transactions by federally insured credit unions.[2] The proposed rule would provide federal credit unions greater flexibility to engage in derivatives transactions, 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.

NASCUS supports the proposed rulemaking and commends NCUA for continuing to recognize the primacy of state law in determining investment authority for FISCUs. Adjusting the timeframe for FISCUs to report derivatives activity to NCUA clarifies that NCUA’s pre-approval is not necessary for FISCUs to enter into derivatives transactions and reinforces the principle that FISCUs follow state law with respect to investments.

NASCUS offers the following recommendations to improve the proposed changes to § 741.219 by enhancing coordination between NCUA and State Supervisory Authorities (SSAs) and reducing regulatory burden on FISCUs. We limit our comments to the proposal’s application to FISCUs.

NCUA Should Eliminate Redundant Supervisory Notice Requirements Where Applicable

The proposed rule adjusts the notice requirement applicable to FISCUs from the current 30-day advance notice to a requirement to notify NCUA within five days of having engaged in a derivatives transaction.[3] We note that some states require notice to, or the pre-approval of, the state regulator before banks or credit unions engage in derivatives transactions.[4] NASCUS appreciates NCUA’s supervisory interest in notice that a FISCU has engaged in derivatives transactions. We support the proposed change and recommend a single adjustment that is consistent with the intent of the proposal and is within the scope of this request for comments.

To improve supervisory efficiency and reduce regulatory burden, NCUA’s revised § 741.219 should provide an exemption from NCUA’s notice requirement for FISCUs in states where pre-approval or pre-notification is required to be given to the state regulator.

NCUA’s notification requirement is not intended to directly mitigate material risk taking in a FISCU, rather it is intended to allow NCUA to better allocate and plan examination resources to evaluate the FISCU’s activities after the fact.[5] The same goal could be achieved by allowing notice to be provided by the state regulator in those states with state specific rules. 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 recommends final 741.219 read as follows:

  • 741.219 Investment requirements.

* * * * *

(b) Any credit union which is insured pursuant to title II of the Act must notify the applicable NCUA Regional Director in writing within five business days after entering into its first Derivatives transaction. Such transactions do not include those included in § 703.14 of this chapter.

(c) State rules. Federally insured state-chartered credit unions in a given state are exempted from compliance with section (b) of this part if the state supervisory authority requires notification before credit unions begin engaging in derivatives transactions and agrees to provide the NCUA Regional Director notice of the credit union’s entering into its first derivatives transaction.

NCUA Should Incorporate Exempt Derivatives Transactions Directly into Part 741.219

NCUA’s proposed rule would exclude from the proposed notification requirement transactions included in proposed § 703.14.[6] NASCUS supports this exclusion. To facilitate FISCU compliance, we strongly recommend NCUA incorporate the excluded transactions of  § 703.14 directly into a new subpart (d) of proposed § 741.219. Part 703 of NCUA’s rules do not apply to FISCUs. Requiring FISCUs to reference that provision is an unnecessary burden. Restating the excluded § 703.14 transactions directly in the relevant FISCU rule is a better organizational framework that more clearly communicates to FISCUs the required compliance obligations.

NASCUS appreciates the opportunity to submit comments on the NCUA’s proposed derivatives rule. While our comments focus on provisions applicable to FISCUs, we also support the proposed expansion of derivatives authority for federal credit unions. NASCUS would be happy to further discuss our recommendations or answer any questions at your convenience.



– signature redacted for electronic publication –

Brian Knight

Executive Vice President & General Counsel

[1] NASCUS is the professional association of the nation’s 45 state credit union regulatory agencies that charter and supervise over 2,000 state credit unions. NASCUS membership includes state regulatory agencies, state chartered and federally chartered credit unions, and other important stakeholders in the state system. State chartered credit unions hold nearly half the $1.76 trillion assets in the credit union system and are proud to represent nearly half of the 123 million credit union members.

[2] “Derivatives,” 85 Fed. Reg. 68487 (October 29, 2020).

[3] Id. 68496.

[4] See Georgia Rule 80-2-9-.01 Investment Securities requiring prior written approval by the Georgia Banking Department (mirroring a similar rule for Georgia community banks); Connecticut General Statute 36a – 455(a)(23) allows credit unions to invest in derivatives with prior written approval of the Commissioner.

[5] 85 Fed. Reg. 68496 (October 29, 2020).

[6] Ibid.