NAFCU, in a letter to NCUA released Wednesday, indicates “strong support” for the NCUA's efforts to find ways to permit credit unions to invest in derivatives, said Tessema Tefferi, regulatory affairs counsel at the trade group.

“Derivatives can be a very helpful tool in managing risk,” said Tefferi. “We support what the NCUA is doing, with a few tweaks.”

Derivatives, a well-established investment vehicle, traditionally can be used to speculate or to hedge. What the NCUA is seeking is to permit credit unions to invest in derivatives as hedges.

The NCUA currently is operating a very limited pilot program that permits a handful of credit unions to invest in derivatives.

NAFCU, in its letter, specifically asks the agency to loosen several proposed restrictions that the agency wants to apply to derivatives investments.

One is an NCUA proposal that credit unions be allowed to buy derivatives through a third party only when they can point to positive earnings over the prior 12 months.

Wrote NAFCU: “A credit union should not be precluded from being able to conduct derivatives transactions when it most needs to. While we understand that NCUA is attempting to create a baseline for 'safe' participation, we believe this requirement should be more flexible. We recognize that a credit union may not have positive earnings in a particular year for myriad reasons.”

The trade association proposed various similar changes in the NCUA's proposal but the bottom line, Tefferi said in an interview, is that the agency is “properly balancing the concerns about derivatives” while proposing to give credit unions a proven risk management tool.