Wednesday, January 22, 2014

Derivatives: Choosing To Ignore The Facts... Business (BS) As Usual?

Seemingly NCUA, in its current wisdom, is hell-bent on approving the use of derivatives by some credit unions at its Board meeting tomorrow.  

Change of course...
The Agency has for decades pooh-poohed the advantages of derivatives, but now is determined to make a volte-face to correct those prior insensibilities by Board and senior staff. The simple acknowledgment by the Agency that: "We had it wrong and we're now going to correct our errors in thinking. "... may be the most important step forward in the process.  

Hubris, after all, is far more dangerous than derivatives!

As the Agency moves toward a correction in course on risk , there are a number of remaining illogicalities in NCUA's derivatives rule which hopefully will have been reconciled...

1. Why has the Agency decided to reverse course on derivatives? (The most current reason that "We have entered a new world of risk" is not only untrue, but is an explanation which insults all of us who are truly concerned. The Agency should be clear and succinct in its reasoning; it has not been so far.)

2. Why would the Agency consider charging a separate fee to CU derivative users for a tool which the Agency claims lowers risk? (The logic of that proposal escapes most of us.)

3. Why would the Agency so severely limit the use of derivatives for qualified credit unions? (The proposed limits clearly constrain qualified CUs from using derivatives to the same extent as qualified FDIC insured banks. Why not equally permissive rules? Why should NCUA seek to disadvantage qualified credit unions?)

4. Why are smaller credit unions prohibited by the proposed rule from having equal access to derivatives if the CU has qualified staff? (This seems like yet another - intentional or unintentional - regulatory nail in the coffin of less large credit unions. Why?)

5. How does the NCUA implement (or even write) a derivatives regulation, which the Agency fully acknowledges it lacks the current talent to administer? (All the extra costs outlined in the proposal involve the admission that the skill sets needed to monitor derivatives do not currently exist at NCUA - something that all of us have known all-too-well since the Corporates tanked.)

6. Why doesn't the Agency take this specific opportunity to require full public disclosure of CU derivatives positions and the underlying risks being managed on a monthly basis? (The NCUSIF is a shared-risk pool and other CUs should have the right to know the derivatives exposures they are underwriting.   Since there can be no speculative, proprietary investment strategy by a CU, disclosure can do no harm and perhaps much good as a "checks and balance". NCUA has a chance to improve its diminished reputation by setting a new, positive standard for transparency. after all, none of us want any more Corporates-style "surprises", do we?)

7. After years of refusal and three failed attempts at a rule (which even now few feel is workable), what is the "rush" on derivatives at NCUA? - especially when much heated controversy continues within the broader financial world on the topic?  (Few credit unions seem to want or need derivatives and the vast majority of credit unions (<$250 million) have been prohibited? So who is pushing for the rule? Any reason not to simply extend the pilot programs until the outlook clears? Would be easy to add a few new pilots if beneficial; or simply let the state regulators, who have actual, hands-on experience with derivatives, proceed in their states.)

8. Would NCUA please publicly confirm its understanding that derivatives are used to maximize risk on a balance sheet not to minimize risk? (It would be helpful to understand why the Agency permits CUs to layer on risky assets, rather than simply prohibiting the booking of such assets as the 30-year fixed rate mortgage - seemingly a far more intelligent approach to risky practices at risky credit unions.)

9. Or since we really have a "New NCUA", why not delay the new rule - just briefly - and have an open town hall meeting in D.C. where the issue of derivatives can be openly discussed? (Or would that be too "innovative" for the New NCUA?)

Perhaps dialogue is more dangerous than derivatives?

… insular, isolated, detached -
always a very, very risky "counterparty".

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