Recent NCUA derivatives ruling is a game-changer for many credit unions

The updated rule will allow more credit unions to use this balance sheet management tool while managing interest rate risk and pursuing income strategies.

In late May, the National Credit Union Administration board approved a final ruling on derivatives use that aims to offer some federal credit unions more flexibility to manage interest rate risk.

Credit unions that are at least $500 million in assets and carry a CAMEL management rating of 1 or 2 are no longer required to receive pre-approval before entering derivatives transactions. However, if a credit union falls below either of the thresholds, it would be required to cease derivatives activity and apply for approval to continue. Credit unions with at least $250 million in assets are still able to apply for approval if they have the requisite infrastructure to safely manage a derivatives program.

The ruling aims to provide credit unions more tools to manage interest rate risk, which can be challenging in an ongoing low interest rate environment. Over the last year, credit unions have seen significant increased demand for both new and refinanced mortgages, which typically carry fixed rates and long durations. The mismatch between such assets and typical credit union liabilities can push interest rate risk metrics to levels beyond those permitted in the institution’s policies. In such instances, management would need to limit the number of mortgages added to the loan portfolio, likely at the cost of potential income.


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