NCUA Board Approves Derivatives Final Rule

Board Action Bulletin

Seeks Comment on Share Insurance Fund Normal Operating Level Policy

ALEXANDRIA, Va. (May 20, 2021) – Through a live webcast, the National Credit Union Administration Board held its fifth open meeting of 2021. The Board unanimously approved:

• A final rule modernizing the NCUA’s derivatives rule by moving it to a more principles-based approach; and
• A notice and request for comment on the Share Insurance Fund Normal Operating Level policy.

In addition, the NCUA’s Chief Financial Officer, Director of Examination and Insurance, and Chief Economist briefed the Board on the performance of the Share Insurance Fund in the first quarter of the year.

Board Approves Final Derivatives Rule

The NCUA Board approved a final rule that modernizes the NCUA’s derivatives rule and makes it more principles-based while retaining essential safety and soundness components. It also includes guardrails, such as derivatives training and strong internal controls.

“In the years ahead, a credit union’s ability to manage interest-rate risk will play a crucial role in its financial performance,” NCUA Chairman Todd M. Harper said. “As such, this rule is a timely and appropriate measure that ensures complex federal credit unions can manage a variety of interest-rate scenarios. It also provides a way for smaller credit unions, which demonstrate proficiency and obtain regulatory approval, to use simple derivatives to hedge their loan portfolios.”

The Board is finalizing the rule largely as proposed during its October 2020 meeting, except for a few changes to various sections based on the comments received. These changes will provide more flexibility for federal credit unions to manage interest rate risk using derivatives. Changes include permitting written options that comply with this final rule and amending the collateral requirements for cleared derivatives. The Board is not finalizing a change that would have required all counterparties to be domiciled in the United States that was in the proposed rule.

The final rule is effective 30 days after publication in the Federal Register.

Agency Seeks Stakeholder Comments on Normal Operating Level Policy

The NCUA Board approved the issuance of a notice and request for comment on the methodology used to set the National Credit Union Share Insurance Fund’s normal operating level.

The Board is seeking public comment on the normal operating level’s policy because of the current economic landscape and the pending resolution of the obligations associated with the corporate asset management estates and NCUA Guaranteed Notes Program.

“This timely request for public comment about the normal operating level is a critical step in setting the Board’s policy objectives for the Share Insurance Fund going forward,” said Chairman Harper. “As I stated at the December Board meeting, the agency must be transparent and engage with stakeholders about how the normal operating level will be determined in the future. The Board must also clearly communicate the policy objectives it is trying to achieve as part of its oversight of the Fund.”

The current policy for setting the normal operating level was adopted in 2017, and it established periodic reviews by NCUA staff of the equity needs of the Share Insurance Fund. This policy also requires any change to the normal operating level of more than one basis point to be made only after a public announcement of the proposed adjustment and an opportunity for comment.

The normal operating level differs from the equity ratio, as it is the NCUA Board’s desired equity level for the Share Insurance Fund. Per the Federal Credit Union Act, the NCUA Board sets the normal operating level between 1.20 percent and 1.50 percent. The main purpose of the normal operating level is to ensure continued confidence in federal share insurance, prevent impairment of the one percent contributed capital deposit, and ensure the Fund can withstand a moderate recession without the equity ratio declining below 1.20 percent over a five-year period.

The current Board-approved normal operating level for the Share Insurance Fund is 1.38 percent.

Comments must be received no later than 60 days following publication in the Federal Register.

Share Insurance Fund Total Assets Increase

The Share Insurance Fund reported a net income of $67.0 million and a net position of $19.7 billion for the first quarter of 2021. The Fund’s total assets increased to $19.8 billion at the end of the quarter from $19.1 billion at the end of the fourth quarter of 2020.

For the first quarter of 2021:

• The number of CAMEL codes 4 and 5 credit unions decreased from 159 to 154 at the end of the fourth quarter of 2020. Assets for these credit unions remained the same from the fourth quarter of 2020 to the first quarter of 2021, at $9.8 billion.
• The number of CAMEL code 3 credit unions increased to 754 from 748 at the end of the fourth quarter of 2020. Assets for these credit unions increased 9.4 percent from the fourth quarter of 2020, to $44.4 billion from $40.6 billion.

The quarterly report included an equity ratio projection. For June 30, 2021, NCUA staff projects the equity ratio for the Fund will be 1.22 percent.

“Insuring the share deposits of members up to $250,000 and safeguarding the Share Insurance Fund from losses are two of the NCUA Board’s most important duties,” Harper said. “We must make sure the Share Insurance Fund is strong enough to weather any stresses — failures and losses we know may be coming. I am committed to maintaining a steady course for the Fund as we navigate these unchartered waters.”

The first-quarter figures for the Share Insurance Fund are preliminary and unaudited.

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