Impact on Two Charters

A special message from Mary Martha Fortney, President and CEO,
November 2013

n taking steps to provide federal credit unions with derivatives authority as an additional tool to manage interest rate risk on the balance sheet, NCUA demonstrated flexible thinking in evaluating its federal rules. That is to be commended. Since the proposal's publication, however, NASCUS has been working hard to clear up some confusion surrounding the proposal. Some within the movement had the misperception that NCUA's proposed rule represents the creation of a new authority for all federally-insured credit unions. It does not.

The proposed rule expands federal credit union authority under section 703 of NCUA's Rules and Regulations by permitting federal credit unions to engage in certain limited derivatives transactions if they meet the specified criteria. But to be clear, for some federally insured state-chartered credit unions (FISCUs), NCUA is not being expansive: rather, NCUA is proposing to take away or limit the authority of FISCUs in some states. While NCUA regulations have long prohibited federal credit unions from engaging in derivatives transactions, as with most NCUA investment based regulations, NCUA's Part 703 mostly speaks to federal credit union authority. State laws generally dictate state-chartered credit union investment authority, and in the case of derivatives, some states already permit and supervise the activity for their credit unions with proper supervision. The NCUA's proposed rule would unnecessarily limit the ability of states that already allow their credit unions to mitigate interest rate risk through the use of derivatives transactions to continue to do so to the full extent of state law.

It is true that in most states, state-chartered credit unions are prohibited from engaging in derivatives transactions. NCUA's proposed rule does not change that. While some of those states may use their wild card or parity provision to match NCUA’s grant of derivatives authority for federal credit unions, ultimately the decision on whether the activity is appropriate for state-chartered credit unions in those states will properly remain with the state regulator.

For the states that allow credit unions to engage in derivatives activity, NCUA's proposed rule would preempt state authority and limit an available tool to state credit unions to mitigate interest rate risk. No evidence has been produced that would indicate that the state supervision of derivatives transactions produces a material risk to the share insurance fund. In fact, many of our state regulators are quite experienced in supervising derivatives activities.

We know that opinion is divided within the credit union movement about whether NCUA should allow derivatives authority for federal credit unions. Frankly, that is an issue for the federal side of our system to determine and work out.

The proposed rule raises many other intriguing, and in some cases, controversial issues. They are addressed in NASCUS' comments filed with NCUA on August 2 which you can access on the NASCUS website, For now, I wanted to continue to highlight how the rule affects the two charters. Simply stated, the rule proposes to give a new authority to federal credit unions and,in some cases, to limit the authority of the states. Our message is simple. This rule should not sweep in the states. States should continue to determine if the activity is appropriate for their credit unions.

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