NAFCU Compliance Blog

NCUA's Derivatives Proposal; Can't Help Myself

Written By JiJi Bahhur, Regulatory Compliance Counsel

Today, the NCUA Board issued a proposed rule to provide qualified credit unions limited authority to engage in derivatives activities for purposes of mitigating against interest rate risk (IRR). But, the proposal establishes a “pay-to-play” regulatory scheme for credit unions that are permitted to engage in derivatives activities. I’ll get into that in a moment. 

First, I should probably give some background on what derivatives are and what NCUA is proposing. NCUA has created a Q&A document addressing this, among other things.  From the Q&A document:

“Q.1: What are derivatives? What kinds of derivatives is NCUA proposing to allow for credit unions?

The Commodities Futures Trading Commission (CFTC) broadly defines a derivative as: “A financial instrument, traded on or off an exchange, the price of which is directly dependent upon (i.e., “derived from”) the value of one or more underlying securities, equity indices, debt instruments, commodities, other derivative instruments, or any agreed upon pricing index or arrangement (e.g., the movement over time of the Consumer Price Index or freight rates). They can be used to hedge risk or to exchange a floating rate of return for fixed rate of return. Derivatives include futures, options, and swaps.”

While the term “derivatives” covers a broad spectrum of financial instruments in today’s market, NCUA is only recommending authorizing the use of plain-vanilla, US Dollar-denominated (USD) interest rate swaps and purchased-only interest rate caps. These instruments are widely transacted in today’s capital markets, have deep and transparent pricing and afford end users with strong liquidity and execution. The Bank for International Settlements reports that interest rate swaps are the largest component of the global over-the-counter (OTC) derivatives market.

With regard to interest rate swaps, the NCUA Board is proposing to authorize only standard “pay-fixed/receive-floating” and “pay-floating/receive-fixed” interest rate swaps. It is currently anticipated that most interest rate swaps users would enter into “pay-fixed/receive-floating” transactions to hedge against rising interest rates. This “plain vanilla” interest rate swap affords some protection against the most common interest rate exposure experienced by credit unions with material interest-rate risk (IRR) sensitivity—namely, a balance sheet with an asset portfolio that does not reset to external rate changes as quickly as its liabilities. Most credit unions use non-maturity and other short-term shares to fund longer duration assets, creating an inherent re-pricing mismatch for which pay-fixed/receive-floating interest rate swaps can provide some effective mitigation.”

Eligible credit unions seeking derivatives authority must submit an application for one of two levels of authority.  Level I authority contains more stringent limits, including limits to the notional value of interest rate swaps, aggregate book value of interest rate caps, combined limit of interest rate swaps and caps, and the maximum weighted average life of all derivatives transactions cannot exceed 5 years.  Level II authority has fewer limits, but credit unions that seek Level II authority must show why the Level I limits are not adequate to meet their IRR mitigation needs.

So what’s the catch? You have to “pay-to-play.”  The proposed rule calls for application fees and pretty hefty ones at that.  Level I application processing costs would range from $25,000 to $50,000 and Level II applications would range from $75,000 to $125,000.  If that’s not bad enough, there is an associated fee for every year after that. 

NAFCU has long advocated for expanded investment authorities for credit unions, but the "pay-to-play" proposal raises concerns as this would be the first time “pay-to-play” will be required in the credit union industry. 

The proposal can be accessed here.  NCUA’s Q&A document – which provides an understanding of the rule’s intent and the main contents – can be accessed here.  Also, NAFCU’s Regulatory Affairs team is in the process of drafting a Regulatory Alert (NAFCU Member Log-In required) on this proposal so keep your eyes peeled for that. 

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I just had to share these pictures with you all.  Have a great weekend.

FASB Publishes Proposal for Disclosing Liquidity and Interest Rate Risk

Written By JiJi Bahhur, Regulatory Compliance Counsel

In a recent News Release, the Financial Accounting Standards Board (FASB) announced its proposed Accounting Standards Update (ASU), intended to improve financial reporting about certain risks inherent in financial instruments.  The stated purpose of the proposed guidance is to help users of financial statements better understand organizations’ exposures to risks and the ways in which those risks are managed.  Those affected by the proposal have until September 25, 2012, to comment on the matter. 

The purpose of the Update is to address concerns regarding how an organization discloses their exposure to risks related to items such as financial assets, liabilities, obligations, and other financial instruments.  To address these concerns, the ASU proposed new disclosures related to liquidity risk and interest rate risk.  Specifically:

• The proposed liquidity risk disclosures would apply to all public, private, and not-for-profit organizations, but the nature of the disclosures would be dependent on whether the reporting organization is considered a financial institution.  The disclosures are intended to provide information on the risks that will be encountered by the reporting organization when meeting its financial obligations. 

• The proposed interest rate risk disclosures would apply only to financial institutions.  The disclosures are intended to provide information about the exposure of financial assets and liabilities to fluctuations in market interest rates. 

The News Release does an excellent job breaking down the proposed amendments to the two disclosures. 

         “The amendments in the proposed ASU on liquidity risk disclosures would require:

• A financial institution to disclose the carrying amounts of classes of financial assets and financial liabilities in a table, segregated by their expected maturities, including off-balance-sheet financial commitments and obligations.

• A financial institution that is also a depository institution to disclose information about its time deposit liabilities, including the cost of funding in a table or list during the previous four fiscal quarters.

• An organization that is not a financial institution to disclose its expected cash flow obligations in a table, segregated by their expected maturities, without being required to include the reporting organization’s financial assets in that table.

• All reporting organizations to provide their available liquid funds in a table, which includes unencumbered cash, high-quality liquid assets, and borrowing availability.

• All reporting organizations to provide additional quantitative or narrative disclosure of the organization’s exposure to liquidity risk, including discussion about significant changes in the amounts and timing in the quantitative tables and how the reporting organization managed those changes during the current period.

        The amendments in the proposed ASU on interest rate risk disclosures would require a financial institution to disclose:

• The carrying amounts of classes of financial assets and financial liabilities according to time intervals based on the contractual repricing of the financial instruments.

• An interest rate sensitivity table that presents the effects on net income and shareholders’ equity of hypothetical, instantaneous shifts of interest rate curves.

• Quantitative or narrative disclosures of the organization’s exposure to interest rate risk, including discussion about significant changes in the amounts and timing in the quantitative tables and how the reporting organization managed those changes during the current period.”   

For a full read of the proposed ASU, go here.  An effective date for this proposed guidance has not been issued at this time. 

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NAFCU Members.  NAFCU's Regulatory Affairs Team is in the process of drafting a Regulatory Alert on FASB's proposed Accounting Standards Update.  Once it is available, you can find it here. 

Guidance on Interest Rate Risk Requirements; Hearing on Regulatory Burden

Written by Steve Van Beek

Apologies for the later than usual posting today.  We had some unexpected technical issues.  

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Yesterday, NCUA issued Letter to Credit Unions 12-CU-05 which provides an overview of their Interest Rate Risk regulation (12 CFR 741.3(b)(5)).  The requirements are effective September 30, 2012.

The Letter to Credit Unions addresses frequently asked questions since the rule was finalized in January.  The Letter also includes the Examination Questionnaire that has been provided to NCUA examiners.    

Below is the first FAQ:

"Is your credit union subject to the new requirements?

You are subject to the requirements of the final rule if:

• Your credit union’s assets exceed $50 million, as shown by your most recent Call Report filing; or
• Your credit union’s assets are equal to or greater than $10 million but do not exceed $50 million and the sum of your first mortgage loans held and investments with maturities exceeding five years is equal to or greater than 100% of your net worth at quarter end.

Otherwise, you are not subject to the rule requirements. We are mindful of the need to avoid unjustified regulatory burden. We recognize past efforts to develop sound IRR policy and believe many FICUs already meet the rule requirements.

To promote transparency and facilitate implementation for FICUs with higher IRR exposure, we included comprehensive guidance on developing an IRR policy and an effective IRR management program in an appendix to the rule. This guidance describes widely accepted sound practices in IRR management and prior supervisory guidance such as the FFIEC Advisory on Interest Rate Risk Management discussed in NCUA Letter to Credit Unions 10-CU-06 (May 2010)."

NAFCU Webcast.  We have a May 24th webcast which will feature NCUA speakers taking A Detailed Look at NCUA's Interest Rate Risk Rule.  You'll have an opportunity to ask your own questions during the webcast and hear directly from NCUA.  Save $100 by signing up by May 17th.  

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Testimony on the Hill.  This morning Ed Templeton, CEO of SRP FCU and NAFCU Board Treasurer, testified during the House Financial Services Committee hearing "Rising Regulatory Compliance Costs and Their Impact on Small Financial Institutions."

You can read more about today's hearing in the NAFCU Today.  Mr. Templeton's full written testimony can be found here.  I have a feeling quite a few blog readers will find themselves nodding their heads in agreement while reading the testimony.  

Compliance Resources: Newsletters; Webinars; Webcasts

Written by Steve Van Beek

Today's post seeks to aggregate some useful compliance resources. 

NCUA Listening Session.  The first of NCUA's six listening sessions is today in Boston.  Registration for all sessions is now available here.  

NAFCU Members.  The May 2012 NAFCU Compliance Monitor is now available.  This month the articles look at the CFPB's movements in mortgage servicing as well as third-party service providers.  For those who missed the April 2012 BSA Blast, it is available here.    

Both the Compliance Monitor and the BSA Blast are NAFCU-member publications.  If your credit union is interested in NAFCU membership, check out our trial membership program.  Additional member benefits are discussed here.  

If you are a NAFCU-member and would like to be added to the Compliance Monitor and BSA Blast email notification lists, just send us an email - compliance@nafcu.org.  

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Vendor Risk Management Webinar.  The Philadelphia Federal Reserve is hosting a free Risk Management Webinar today at 2:00 Eastern.  The slides are already up and available here.  

FinCEN Webinar.  FinCEN will be hosting a free May 8th webinar discussing the technical specifications of the new SAR, CTR and DOEP forms.  Registration is here.   

Note:  This webinar promises to be very, very technical and geared toward IT folks.  Be sure to pass this along to anyone at your CU who fits the bill.  FinCEN will be conducting a future webinar for compliance professionals. 

CU Online Upgrade Webinar.  NCUA recently announced an upcoming upgrade to CU Online.  The upgrade is scheduled for May 28th and NCUA is hosting a free May 15th webinar discussing the upgrade.  Registration is here.  

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NAFCU Webcasts.  We also have a series of upcoming webcasts that might be of interest:

• May 9th:  Essential Financial Literacy Education (Sign up today and save $100)
• May 17th:  IRA Compliance: Managing a Successful IRA Program
• May 24th:  An Inside Look at NCUA's Interest Rate Risk Rule

Remember, all NAFCU webcasts are available for one-year after the purchase date and can be viewed numerous times.  The Financial Literacy webcast is a good example.  Not many credit union Boards meet at 2:00 p.m. on a Wednesday - but your credit union can use the webcast at a Board meeting or training session by accessing the "on-demand" version. 

All NAFCU webcasts are listed here (both upcoming live webcasts and on-demand webcasts).  

Financial Literacy; NCUA LCU 12-CU-04; Remittance Transfers; NCUA IRR Video

Written by JiJi Bahhur, Regulatory Compliance Counsel

Financial Literacy Month.  April is Financial Literacy Month and NAFCU is conducting a survey of members seeking general information about the different types of financial literacy programs they offer and how the credit union determines the effectiveness of its program. 

For background information on Financial Literacy Month and where to obtain the results of NAFCU’s survey, check out this NAFCU Today story. 

NCUA also announced a twitter campaign for Financial Literacy Month.  The CFPB will also be active this month with information for consumers.

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NCUA Letter to Credit Unions 12-CU-04.  NCUA announced, in its Letter to Credit Unions 12-CU-04, that it’s making $1.3 million in grants available to low-income credit unions.  Any credit union with a low-income designation may apply for up to $25,000 in grants for initiatives covering financial literacy and education in school branches; new product/service development; staff, official and board member training; student and job creation internship; and/or volunteer income tax assistance. 

The LCU has an attached enclosure – 2012 Grant Guidelines for Low-Income Credit Unions – which provides examples of projects that these grants could fund, the grant process, and the application.  The deadline to apply for a grant under this program is June 29, 2012. 

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Remittance Transfers.  The CFPB recently blogged on the consumer benefits of the new remittance transfer rule, which goes in effect in February 2013:

“Better Disclosures: Under this rule, remittance transfer providers must generally disclose the exchange rate, any fees related to the remittance, the amount of money that will be delivered abroad, and the date the money will be available. Certain disclosures must be provided both before and after the consumer pays for a remittance transfer. Consumers will generally receive these disclosures in English and sometimes in other languages. The CFPB thinks the clarity provided by these disclosures will help inform consumer decisions and instill confidence.

Option to Cancel: Typically, consumers will have at least 30 minutes after payment to cancel a remittance. If they cancel within the 30 minute window, they will get their money back, whether they make a mistake, change their minds, or feel something isn’t right.

Correction of Errors: With this rule, remittance transfer providers will generally be held accountable for errors. If a remittance sender reports a problem with a transfer within 180 days, the provider must generally investigate and correct errors. Companies that provide remittance transfers may also be responsible for mistakes made by their agents. The CFPB believes this will encourage remittance transfer providers to use reliable agents and partners in the U.S. and abroad, helping to weed out the bad actors.” 

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NCUA IRR Video.  NCUA released its third economic update series, which features an in-depth discussion on NCUA’s Interest Rate Risk (IRR) rule.  The rule essentially requires a written policy to address IRR management and an effective IRR program for successful asset liability management.  To see the free video, go here (Youtube.com). 

Also, NAFCU Members, the April Compliance Monitor features an article on Interest Rate Risk with additional information and resources on the new requirement (Effective September 30, 2012).  

Playing Catch-Up: SAFE Act Procedures; Compliance Monitor; Final Regulations

Written by Steve Van Beek

Initially, I want to say Thank You to all the attendees at last week's Regulatory Compliance School.  It was a great week, made even better by the great questions and interaction among attendees.  Thank You - and hope to see you at Regulatory Compliance Seminar in the future (no tests - I promise!)  

And - good luck to everyone who took the NCCO Exams!  

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Strange as it sounds, it feels good to be back in the office after a long week at School.  I'm sure there are more than a few items to get up to speed on, but first a few older items that might be useful.

CFPB's SAFE Act Examination Procedures.  On March 7, the CFPB announced their SAFE Act examination procedures.  While the CFPB's primary examination authority extends only to credit unions above $10 billion in assets, all credit unions offering mortgage loans need to follow Regulation G - 12 CFR 1007.  I'd pass these examinations procedures along to the appropriate folks at your credit union as NCUA might take a similar approach in its future examinations.  If nothing else, the examination procedures could serve as a useful internal audit tool.      

NAFCU's March Compliance Monitor.  The March 2012 NAFCU Compliance Monitor is available.  The Worth Noting section highlights issues over the past month or so that might impact your credit union and there are articles on the CFPB and small blurbs on Health Care Reform and Periodic Statements for Mortgages.  

The Compliance Monitor is a NAFCU member-only publication.  If your credit union is interested in learning more about NAFCU membership, take a peek at our trial membership program.

NAFCU Final Regulation - Reg E:  International Remittances.  NAFCU-members, our Final Regulation on the Remittances rule is available (12-EF-02).  Compliance is required by February 7, 2013. 

NAFCU Final Regulation - NCUA:  Interest Rate Risk Policy.  Our Final Regulation on NCUA's Interest Rate Risk Policy and Management is also available (12-EF-01).  Remember, compliance is required by September 30, 2012.

Regulatory Compliance School; NCUA Board Meeting & NCUA Report; Division 3 Update

Written by Steve Van Beek

Just wanted to provide a short note regarding next week.  

Reg School.  NAFCU's Regulatory Compliance School takes place next week.  Our Compliance Team will be in and out of the office next week giving presentations, so please bear with us as our response times will be a little longer than normal.  The blog will continue as usual.  

Study Guide & GPS.  For those attending school next week, we've put together a handy Study Guide to help if you will be taking the exams to obtain your NAFCU Certified Compliance Officer (NCCO) designation.  Additionally, be sure to download your version of the Updated 2012 NAFCU Credit Union Compliance GPS (you will also receive a hard copy of the GPS at School).

Note:  For those not attending Compliance School, the Updated GPS will be available for purchase very shortly.  Blog readers will be the first to know when the Updated GPS is available.    

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NCUA Board Meeting.  Late yesterday, NCUA announced their agenda for next Thursday's NCUA Board Meeting.  You can find the agenda here.

NCUA Report.  NCUA also released their March 2012 issue of the NCUA Report.  This looks to be a good one to read, here is what is discussed:

• Chairman Matz's Corner: CFPB Director Cordray Answers Key Questions on NCUA Webinar 
• Building Wealth and Deposits: An Opportunity for Credit Unions – Individual Development Accounts, Part II
• Board Perspective: Interest Rate Risk Policy and Program
• Board Perspective: The Rites of Spring
• Understanding Credit Union Indirect Lending Programs
• Elements of an Effective Member Business Lending Program
• Trends in Member Complaints and Consumer Inquiries

Quite a few of those look like good reads.  Be sure to pass those along to others at your credit union who might be interested.  

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A quick update on the potential Division 3 basketball matchup between Hope College (my alma mater) and the College of Wooster (my wife's alma mater).  Wooster held up their end of the bargain but Hope fell in double-overtime.

I was really hoping for this matchup as I thought it would be a lot of fun.  I can't say the same about my wife.  Wooster's game finished a good half hour before Hope finally lost.  She spent the majority of that time on the phone with her Dad - who works at the College of Wooster - discussing the potential matchup and rooting against Hope.  As she so elegantly stated it:  "I want Wooster to win and that means Hope needs to lose, so be it."