(July 16, 2021) Summaries of two final rules – on transition to the new current expected credit loss (CECL) accounting standard, and on derivatives – have been posted on the NASCUS website. Both summaries are available to members only.

At its June meeting, the NCUA Board adopted a final rule intended to mitigate the day-one effect of the CECL accounting standard on capital levels at credit unions. The new rule takes effect Aug. 2 (although NCUA, when the final was adopted, that credit unions could begin applying it immediately); the CECL standard takes effect for most credit unions in January 2023.

Supported by NASCUS, the rule establishes a three-year phase-in period for adverse effects on credit unions’ regulatory capital triggered by the effect of the accounting standard. Federal credit unions with less than $10 million in assets and also state credit unions (if allowed by their state regulations), would be exempted from using the standard to figure loan loss reserves.

The final rule has two changes from the proposal, as advanced by NASCUS. First, the rule makes a technical change (for clarity) removing references to specific calendar dates in the transition period for the phase in. The rule now consistently refers to fiscal years. The second change clarifies that state-chartered FICUs with less than $10 million in assets and that are required by state law to comply with generally accepted accounting practices (GAAP) are eligible for the transition phase-in.

However, NASCUS also noted that the accounting standard remains of concern. “NASCUS, many state credit union regulators, and many state credit union system stakeholders remain concerned that the CECL methodology will be counter-productive when implemented for the credit union system,” NASCUS wrote.

The derivatives rule, approved unanimously by the NCUA Board at its May meeting, makes some changes from the proposal issued in December. The rule affects a limited number of federal credit unions directly (NCUA estimates about 30 FCUs are engaged with derivatives now); it generally offers more flexibility for credit union involvement in the investment vehicles, primarily to manage interest rate risk. State-chartered credit unions follow rules set by their individual regulators.

NASCUS had urged the agency, in its comment on the proposal, to eliminate redundant supervisory notice requirements, where applicable, by providing 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. NCUA declined to make that change, arguing that “the current burden to a FISCU is unchanged as the FISCU is only notifying the applicable (NCUA) Regional Director after entering into its first Derivative transaction compared to the current requirement of notifying the Regional Director at least 30 days before it begins engaging in Derivatives.”

LINKS:

NASCUS Summary: Final Rule, Part 702, Current Expected Credit Loss (CECL) Methodology (members only)

NASCUS Summary: Final Rule, Parts 701, 703, 741, and 746, Derivatives (members only)

(May 21, 2021) Also at its Thursday meeting, a final rule on derivatives was approved unanimously by the NCUA Board, making three changes from the proposal issued last December.

The rule, which affects a limited number of federal credit unions directly (NCUA estimates about 30 FCUs are engaged with derivatives now), generally offers more flexibility for credit union involvement in the investment vehicles, primarily to manage interest rate risk. State-chartered credit unions follow rules set by their individual regulators.

Under the changes made in the final rule, NCUA:

Removed specific collateral requirements for “clear derivatives;”
Continued with current counterparty requirements (that is, those that are swap dealers, introducing brokers, and/or futures commission merchants that are current registrants of the CFTC); and,
Removed the prohibition on written options.

NASCUS had urged the agency, in its comment on the proposal, to eliminate redundant supervisory notice requirements where applicable by providing 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.

NCUA declined to provide the exemption, stating that “the current burden to a FISCU is unchanged as the FISCU is only notifying the applicable (NCUA) Regional Director after entering into its first Derivative transaction compared to the current requirement of notifying the Regional Director at least 30 days before it begins engaging in Derivatives.” The agency said the final rule retains the provisions of the proposed rule for the timing of notification to five days after entering its first derivative transaction.

The final rule takes effect 30 days after publication in the federal register.

LINK:
Final Rule, Parts 701, 703, 741, and 746, Derivatives

(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.

LINK:
NCUA Board meeting agenda, May 20

(April 23, 2021) While no new regulations were proposed or finalized, the NCUA Board did indicate at its meeting Thursday that final rules on two NASCUS-supported proposals – on capitalization of interest and derivatives — are nearing the point of being considered soon, according to comments during this week’s meeting.

In open session of the NCUA Board, Chairman Todd Harper said staff is “working through” issues on proposed rules for capitalization of interest and on derivatives. Harper said he was hopeful to see actions on the proposals “in the near future.”

The issue of action on proposed or pending regulations was brought up by Board Member Rodney Hood. Thursday’s meeting included only board briefings, on cybersecurity and an interim final rule addressing the impact of savings growth due to the coronavirus crisis on credit union capital.

Hood, in his comments, suggested the board work in the future “in a bipartisan manner” to develop board meeting agendas for “robust rulemaking opportunities.” Hood indicated that there are proposed rules awaiting action (and proposals waiting to be unveiled) that he and the other board members want to see move forward.

The capitalization of interest rule was proposed in November by the NCUA Board; it would remove the prohibition in agency rules against the capitalization of interest in connection with loan workouts and modifications, particularly as they struggled with the financial impact of the coronavirus crisis.

NASCUS, in its February comment letter, supported the proposal and called for its expeditious completion. NASCUS also recommended the agency reconsider the blanket prohibition against additional advances, to cover credit union fees and provide them with “the full range of options for managing and structuring loan work outs as other depository institutions.”

The derivatives rule was proposed in October; it would make the agency’s regulation less prescriptive and more “principles-based,” expanding federal credit unions’ authority to purchase and use derivatives as part of their interest-rate risk (IRR) management. NASCUS likewise supported the proposal in its December comment letter, calling for two changes: eliminate the redundant supervisory notice requirements where applicable, and incorporate exempt derivatives transactions directly into part 741.219 of NCUA rules – the section that covers federally insured state-chartered credit unions (FISCUS) and investment requirements.

NASCUS also noted that the proposal continues recognition by NCUA of the primacy of state law in determining investment authority for FISCUs.

Both items were issued for comment without objection by any members of the board.

LINKS:
NASCUS comment: Proposed Rule — Capitalization of Interest in Connection with Loan Workouts and Modifications

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

(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.”

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

(Nov. 25, 2020) A proposal to modernize NCUA rules on derivatives, particularly to make it more “principles based” has been summarized by NASCUS and posted on the association’s website. The summary is available to members only.

The proposal, according to NCUA on Oct. 16 when the board approved its release for a 60-day comment period, is designed to provide more flexibility for federal credit unions to manage their interest rate risk (IRR) through the use of derivatives, while retaining key safety and soundness components.

The agency also said on proposal that the changes would “streamline” the rule and give credit unions more authority to purchase and use derivatives for managing interest-rate risk. The proposal also, NCUA said, reorganizes rule content related to loan pipeline management into one section, which it said would aid in readability and clarity.

NASCUS CEO Ito emphasized at the time the rule was proposed that state credit union derivative authority properly rests with state supervisors, and that they have the experience to apply that power. She noted that state supervisory authorities have extensive experience with derivatives and interest rate swaps both in state-chartered credit unions and community banks, and can play a role as the final rule is developed applying their experiences and lessons to the rule-making.

She also described NCUA’s move to streamline its derivative regulation as “pro-active in anticipation of increased interest rate risk given current low-rate environment and likely long-term rate increases.”

LINK:
Summary: NCUA Proposed Rule (FCUs Only); Derivatives Part 703 (members only)

In other action Thursday, the NCUA Board issued a proposed rule the agency said would streamline its regulations on derivatives, and heard a report on cybersecurity.

Regarding the derivatives proposal, the agency said it is intended to modernize the current rule and make it more “principles-based.” “This proposal retains key safety and soundness components, while providing more flexibility for federal credit unions to manage their interest rate risk (IRR) through the use of Derivatives,” the agency said in proposing the rule.

Further, NCUA said, the changes would “streamline” the rule and give credit unions more authority to purchase and use derivatives for managing interest-rate risk. The proposal also, NCUA said, reorganizes rule content related to loan pipeline management into one section, which it said would aid in readability and clarity.

NASCUS’ Ito asserted that state credit union derivative authority “properly rests” with state supervisors, and that they have the experience to apply that power. “State credit union regulators have extensive experience with derivatives and interest rate swaps both in state-chartered credit unions and community banks,” Ito said. “The state system looks forward to assisting NCUA in raising awareness of derivative oversight in the broader credit union system by bringing state regulator credit union experience and lessons to the learning table.”

Meanwhile, during the discussion on cybersecurity (which featured a staff presentation outlining risks related to the coronavirus crisis), NCUA Board Chairman Rodney Hood was joined by Board Members J. Mark McWatters and Todd Harper in voicing support for third-party vendor examination authority for the agency. Unlike federal banking regulators, NCUA lacks direct statutory exam authority over those vendors.

NASCUS has supported the agency obtaining examination authority over technology service providers (TSPs) that provide services to federally insured credit unions, provided that any such authority requires NCUA to rely on state examinations of such service providers where such authority exists at the state level.

The association has also supported efforts to strengthen state regulatory examination and supervision of third parties providing services to state chartered institutions.

LINKS:
NCUA Proposed Rule, Part 703, Derivatives

Board Briefing, Cybersecurity Considerations for Boards of Directors During COVID-19.