Don’t Fear Derivatives: Letter to the Editor

ALM First Financial Advisors has closely followed the NCUA’s efforts to develop an appropriate rule for credit unions’ use of derivatives as a hedging tool. We support the use of derivatives within the credit union industry as instruments for effectively managing interest rate risk.

Derivatives used for hedging interest rate risk shouldn’t be feared. They are very different from the nonconforming securities that contributed to the failure of several corporate credit unions during the credit crisis. Further, they are easier to understand than some other strategies credit unions deal with today and using them is a normal practice for many financial institutions. As the NCUA highlighted in the ANPR supplemental information, 28% of banks with assets between $250 million and $1 billion, and 57% of banks with assets between $1 billion and $5 billion use derivatives.