With the comment period ended Monday, the votes have all been cast on the NCUA's derivatives proposal. The message was clear: Credit unions and their trade groups want access to derivatives to go forward, but the regulator needs to sharpen its pencil and find a new way to both assess and cover costs if the program is going to be successful.
CUNA, NAFCU and NASCUS all praised the regulator for its willingness to enable credit unions to find new ways to control interest rate risk through "plain vanilla" swaps and caps derivatives.
But each group vehemently opposed the high cost of participation and the regulator's play-to-pay implementation strategies.
The fear is that, by charging too much for too little financial advantage, limited participation will hamstring the program before it even gets underway. Derivatives provide an important buffer for credit unions needing to better manage interest rates risk, providing credit unions can participate.
"There are so many costly restrictions that credit unions that otherwise should be eligible to invest in derivatives won't be able to do so," said Mary Dunn, CUNA senior vice president and deputy general counsel who authored several comment letters. "The proposal's goal is laudatory and commendable, but the specifics of it will work to defeat its purpose."
CUNA supports an independent analysis of NCUA's proposal by Dallas-based ALM First that showed serious flaws in the regulators cost assessment and pricing strategy. By eliminating application, audit, legal and staffing fees the consultant felt unnecessary, proposal costs went from more than $180,000 per credit union per year to around $50,000, significantly increasing the overall savings per credit union.
The pay-to-play approach also aroused the ire of respondents.
"We vehemently oppose activities priced separately from the operating fee credit unions already pay," said Carrie Hunt, NAFCU's general counsel and vice president of regulatory affairs. "It sets a dangerous precedent and doesn't accurately reflect the cost."
The NCUA's failure to acknowledge local authority over state-chartered credit unions was particularly nettlesome for NASCUS. Many credit unions with state charters already are authorized by local regulators to invest in derivatives and that authority should continue, according to Mary Martha Fortney, NASCUS president/CEO.
"Several states allow derivatives activity for state credit unions, and there has been no demonstrated elevated risk to the NCUSIF," Fortney said.
The NCUA declined to comment the submitted proposals. Formal response likely will be issued this fall.
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