The National Credit Union Administration’s proposed changes that would allow credit unions to use derivatives for hedging is a welcome event. Credit unions are complex financial institutions that should be allowed to use these tools to mitigate interest rate risk if they have staff with the right expertise. With a more complete toolkit for managing risk, credit unions would be able to focus on what they do best—serving members by taking deposits and making loans (or buying appropriate investments when necessary) without taking undue market interest rate risk.
Buying Derivatives Has Gotten Easier
Since the Dodd-Frank act was enacted in 2010, entering into an interest rate derivative relationship with a derivative dealer has become a lot less onerous, especially as it relates to interest rate and basis swaps. Negotiating the standard document regularly used to govern over-the-counter derivatives transactions, a master agreement put forth by the International Derivatives and Swaps Association, can take time and drain resources. Under the proposal, credit unions would be able to trade on an individual dealer swap execution facility, which according to the Dodd-Frank act is a facility, trading system or platform in which multiple participants can execute or trade swaps by accepting bids and offers made by other participants that are open to multiple participants in the facility or system. Most large global investment banks now have their own SEF.
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