NEWS: Wisconsin’s Office of Credit Unions has published Letter CU 4-21: Derivatives. It repeals and replaces a 2014 OCU letter, which set forth a process for Wisconsin credit unions to obtain authority to use derivatives to reduce interest rate risk.
The new letter explains that the National Credit Union Administration (NCUA) has updated its rules on derivatives for federal credit unions, and that the OCU will follow the same standards for state-chartered credit unions. To review the NCUA’s rules on derivatives, see 12 C.F.R. part 703, subpart B.
Under the NCUA’s new rules, which took effect June 25, a derivative is “a financial contract which derives its value from the value and performance of some other underlying financial instrument or variable, such as an index or interest rate.” The new NCUA rules streamline the application process and exempt certain credit unions. In addition, the NCUA rules mandate that derivatives can only be used for the purpose of managing interest rate risk.
The OCU letter goes on to say:
The OCU will require that state-chartered credit unions follow the standards in the new federal rule. If a Wisconsin credit union seeks derivatives authority, it should review the federal rule and standards and seek approval from the OCU. A credit union seeking derivatives authority must demonstrate that it has completed appropriate due diligence, that it employs staff and consultants that understand derivatives, and that it has put in place proper policies, operational support requirements and reporting requirements. It is also expected that the credit union’s board of directors has a basic understanding of derivatives and how the use of them will assist its credit union to manage interest rate risk.
Credit unions with questions about derivatives are invited to contact the OCU by email or call (608) 261-9543.