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Federal Register / Vol. 86, No. 100 / Wednesday, May 26, 2021 / Rules and Regulations
commenters sought an outright removal of the proposed asset threshold; the third commenter sought removal or a reduction of the amount of the threshold.
The Board is not making any changes to the requirements related to the asset threshold that determines which FCUs must submit an application for Derivatives authority. As stated in the proposal, the asset threshold aligns with the definition of complex credit union in the NCUAs risk-based capital RBC rule.2 The Board chose an asset threshold of $500 million for the RBC
rule after careful consideration of the activities and volume of activities of credit unions at certain asset thresholds.
As such, the Board believes the RBC
asset threshold is a valuable demarcation line above which it is reasonable to expect FCUs will have the required infrastructure to safely engage in Derivatives. This is further supported by the Boards experience in reviewing FCU applications since the inception of the current Derivatives rule. A review of Derivatives applications under the current rule confirms that FCUs greater than $500 million in assets generally possess the management expertise and required infrastructure to support a Derivatives program.
The Board notes that it did receive a small number of applications, under the current rule, from FCUs with assets under $500 million. While these FCUs met the requirements of the current rule, the Board believes this small group of FCUs may not be representative of the capabilities of all FCUs under $500
million in assets. As such, the Board does not believe this small number of FCUs supports lowering the $500
million threshold. In addition, the Board notes that this final rule does not bar FCUs under the asset threshold from receiving Derivatives authority. As discussed in the next paragraph, such an FCU may receive Derivatives authority after completing an application that demonstrates it can safely manage a Derivatives program.
As commenters stated, it is possible that an FCU under $500 million may have the requisite infrastructure to safely engage in Derivatives. While the Board agrees with the commenters that an FCU with total assets under $500
million may have the requisite infrastructure to support Derivatives, those FCUs may not be representative of all FCUs with total assets under $500
million. However, this final rule provides all FCUs with total assets under $500 million the ability to use Derivatives by retaining the provisions 2 83

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of the proposed rule, which require that these FCUs apply for Derivatives authority consistent with 703.108b and demonstrate the requisite infrastructure to safely engage in Derivatives.
2. Change in Condition One commenter raised a concern and a question with the proposed requirement that an FCU have a Management CAMEL component rating of 1 or 2 to forego submitting an application for Derivatives authority.
This commenters concern and question focused on a scenario where an FCU
receives approval for Derivatives authority, but its management component later falls below the required management rating. Specifically, the commenter stated that it:
. . . disagrees with the proposal to require that a credit union, previously meeting the requirements to engage in derivatives, cease entering into new derivatives in the event the Management CAMEL component rating is downgraded below 2. The Management CAMEL component rating can be downgraded for reasons not related to the credit unions management of its derivative program. Prohibiting the use of an effective tool to manage interest rate risk would have a destabilizing impact to the credit union especially when the derivative activity is subject to the existing derivative restrictions ensuring safety and soundness.

Separately, but related, this commenter also questioned how the aforementioned scenario would be applied in the case of an FCU that received approval under the current Derivatives rule and is grandfathered under this final rule Grandfathered FCU. Specifically, this commenter asked:
Is the NCUAs intent that said credit unions, if downgraded to a Management CAMEL component rating below 2, are also required to cease further derivative transactions until receiving approval to a newly submitted application? Said credit unions have already taken the step of demonstrating the quality of their derivative programs, and those programs are reviewed on a regular basis by the NCUA.

The Board appreciates these comments and in the following part of this document will clarify several different scenarios related to an FCU
failing to comply with the requirements to forgo an initial application. In addition to the ensuing clarifying discussion, the Board, as discussed later in this section, is also making changes to 703.108d of this final rule to ensure the regulatory text is clear and transparent.

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As discussed in the preamble to the proposed rule 3 and the accompanying rule text, 703.108a states that an FCU
is not required to apply for Derivatives authority if it has assets of at least $500
million and its most recent Management CAMEL component rating is a 1 or 2.
The Board believes clarification is warranted on how these requirements relate to 703.108d. Specifically, 703.108d requires an FCU to immediately cease entering into any new Derivatives and notify the applicable Regional Director if the FCU
experiences a negative change in condition such that it no longer meets the requirements discussed above or, if applicable, renders its approved application inaccurate.
The Board notes that in any instance in which an FCU, not subject to an active application under 703.108b, no longer meets the requirements in 703.108a, such FCU would need to immediately cease entering into new Derivatives transactions and notify the applicable Regional Director. An FCU
required to cease entering into Derivatives may not continue entering into Derivatives transactions until it receives written notification from the applicable Regional Director that it is permitted to do so. For clarification, the cessation and notification discussed in the prior sentences would apply in any of the following circumstances:
1. A Grandfathered FCUs Management CAMEL component rating drops to a 3, 4, or 5, or is a 3, 4, or 5 as of the effective date of this final rule; and/or the FCUs assets drop below $500 million or are below $500
million as of the effective date of this final rule;
2. An FCU that was not required to submit an application for Derivatives authority under this final rule, and no longer meets either or both of the requirements in 703.108a; and 3. An FCU that was required to submit an application under 701.108b, but later meets the requirements in 703.108a and then subsequently fails to meet the requirements in 703.108a.

Under the first scenario above, a Grandfathered FCU would, under the current Derivatives rule, already be prohibited from entering into new Derivatives transactions if its Management CAMEL component rating is a 3, 4, or 5. Under this final rule, such FCU would be remain prohibited from entering into new Derivatives transactions. Unlike the current rule, however, such FCU would not be automatically barred from continuing to use Derivatives until its management rating met the regulatory standard.
Rather, this final rule provides the 3 85

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