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NCUA Proposed Rule Change to Ease Derivatives use for Credit Unions

By: John Trefethen, Director & Co-Founder

This past October the National Credit Union Administration (“NCUA”) proposed a rule change to its derivatives use policy that is intended to ease the application burden for credit unions seeking to use derivatives to manage interest rate risk on their balance sheet. NCUA Chairman Rodney E. Hood provided the following statement:

“I am pleased that we have been able to refine the derivative rule and make it more flexible for federal credit unions. This is indeed an unprecedented and uncertain time for all credit unions as they are facing the economic fallout from the COVID-19 pandemic. I believe that enhancing the ability for federal credit unions to better protect themselves against market risks is critically important at all times. In fact, managing balance sheet risks through a time of disruption and uncertainty underscores how important it is for credit unions to have tools, like financial derivatives, at their disposal to help guard against volatile economic periods that can hurt liquidity, earnings and capital.”

– Robert E. Hood, NCUA Chairman

Specifically, the proposed rule change would provide the following:

  • Eliminate the application process for federal credit unions with at least $500 million in assets that have a CAMEL1 rating of 1 or 2.

  • Eliminate the regulatory limits on the amount of derivatives a federal credit union may purchase.

  • Eliminate the limitation of a forward-start date beyond 90 days.

  • Eliminate the specification of allowable derivative instruments as long as they meet the following criteria:

  • Are U.S. dollar denominated

  • Are based off of domestic interest rates or dollar denominated LIBOR

  • Have a maturity less than or equal to 15 years

  • Are not used to create structured liability offerings

Over 500 federal credit unions alone will benefit by eliminating the application process. For credit unions with less than $500 million in assets, they would still need to complete an application. However, they no longer need to obtain interim approval which would reduce the overall process from up to 120 days to less than 60 days. In a letter to the NCUA, the Credit Union National Association (“CUNA”) wrote:

“We support the proposed rule. We believe the proposal retains key safety and soundness components, while providing more flexibility for federal credit unions to manage their interest rate risk through the use of derivatives. We believe the changes will streamline the regulation and expand credit unions’ authority to purchase and use derivatives for managing interest rate risk.” – CUNA

The proposed changes to the derivatives rule are consistent with a more principals-based approach to managing interest rate risk, while maintaining elements necessary in a hedging strategy. The additional flexibility and ease of use should be welcoming to those credit unions that have not yet added this capability to their risk management practices.


1 CAMEL ratings system is levied by Federal Financial Institutions Examination Council (FFIEC) and assesses the strength of a financial institution through six assessment categories. CAMEL is an acronym derived from the six assessment categories: Capital adequacy, Assets, Management capability, Earnings, Liquidity and Sensitivity. The rating system is on a scale of one to five, with one being the best rating and five being the worst rating.


To learn more on how HedgeStar can help your credit union utilize derivatives feel free to contact John Trefethen at


Contact the Author:

John Trefethen, Director & Co-Founder

Phone: 952-746-6040

Media Contact:

Megan Roth, Marketing Generalist

Office: 952-746-6056



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