NCUA Derivatives Rule Invites New Capital Partners Into The Credit Union Fold

Know you were hoping that we would not discuss the topic of derivatives again, but there doesn't appear to be any escape, so let's take it in pieces - slowly.

Now a Moving Force
in derivatives negotiations...

First the really good news is that CUNA has finally sprung into action on this issue - although the CU pilot programs have now been running for 15 years and despite 3 past inconclusive efforts by NCUA at derivatives rule making - and hopes to have a position soon.  

The policy wonking and derivatives detailing has been assigned to the CUNA Examination and Supervision Subcommittee, an august group of 18 CU leaders.  The key leadership "negotiating roles" have been given to Wisconsin League president Brett Thompson and Virginia League president Rick Pillow - both nice people.  Not aware of their background in derivatives, but do know that Rick is close with the folks at Navy FCU - one of the lead pilot programs - which should help immensely with the "negotiations"....

Derivatives:
Guess Again?

But let's step back and review a couple of things about derivatives that most folks agree on: 1) a derivative is a financial transaction which transfers risk from one party to another generally for a fee - but the risk still exists; 2) derivatives can be used to "hedge" (try to minimize) risk or for speculation - but, of course, CUs would never consider "speculating" in derivatives and the rule will be so thoughtfully drawn and so thoroughly and effectively monitored and enforced by NCUA that speculation will never occur; and 3) the counterparties, the "risk takers" (the folks to whom the risk will be transferred) will be, for the most part, the 5 top Wall Street traders - BOA, Citigroup, Chase, Goldman, and Morgan.

So now, bear with me, take a deep breath and consider these four thoughts:

1. CUs need to have derivatives because they have too much risk on their balance sheet.
2. One way for CUs to reduce these risks  would be to simply not make those "risky" investments which require an additional derivatives transaction.
3. Another way for CUs, which are making these "risky" investments, to mitigate the risk is for the CUs to put aside more of their own capital - rather than spread this risky "manure" around to other CUs - or to those nice folks on Wall Street.
4. Require CUs making these "risky" investments to raise real (rather than "notational"!) supplemental capital directly in the financial marketplace - a much better assessor of risk than NCUA can ever hope to be!

"Don't worry,
I'll look after you..."

But instead, we are inviting Wall Street traders to supply that risk capital to credit unions through derivatives.  Asking the caring folks on Wall Street to become our capital partners in the credit union movement.

Well, at least we have nice people at the table to negotiate on our behalf...