NCUA Derivatives Proposal: Loose Logic

Waiting for what?

As a credit union leader, you are evidently not yet concerned about the substantial degree of additional risk the recent NCUA derivatives proposal imposes on your credit union and your members.  

Maybe you haven't said anything because derivatives are not an easy topic; perhaps you don't think it affects you; could be you're waiting on your trusted, effective trade association to represent your interests; after all we're all really busy...

Derivatives? Who nose ??

And besides, who are you to believe in all this anyway?  Some folks keep yapping that derivatives increase risk, others claim that derivatives are a safe way to reduce risk... who's right, who can you trust???

Well, here are a couple of direct quotes from the new derivatives proposal by that most trusted and authoritative of sources, the good ole NCUA itself:

1) "For safety and soundness reasons, NCUA has adopted regulatory restrictions on certain investments and activities permitted by the Act.  Currently, derivatives are among the investments specifically prohibited by NCUA."

2) "NCUA prohibited derivatives because they are complex financial instruments..."

3) "... that potentially introduce significant degrees of risk to a credit union."

Obviously ready
to plow ahead...

1. 4)  "In addition several key lessons emerged from NCUA's involvement with the derivatives pilot programs.  Various weaknesses were encountered over time.  Some areas of concern included: 

• "lack of, or inadequate, assessment of the capacity to absorb losses and establish processes to proactively limit loss exposure;"
• "lack of due diligence on counterparties and  credit risk mitigation;"
• "lack of vigilant collateral management;"
• "heavy reliance on external parties to value derivatives for base and stress scenarios;"
• "and, lack of analysis and disclosure of transaction costs."

Duh?

"Well sure.... but other than that,
Mrs. Lincoln, how did the President enjoy the play?"

(... and based on those pretty scary pilot results, we will expand the derivatives program?!?)