Working with Credit Unions to
Establish Derivative Hedging
Programs
Steven Houle, CFA
Director, Advisory Services
Proposed Rule
The Proposed Rule
 allows credit unions to engage in limited derivative
transaction for the purposed of mitigating interest rate risk
 applies to all federal credit unions (FCUs) and federally
insured state chartered credit unions (FISCUs)
 requires eligible credit unions to apply to NCUA or in the
case of a FISCU, NCUA and the applicable state
supervisory authority
Levels of Authority
Level I
 lower permissible transactions limits
 more streamlined application process
 less restrictive requirements with respect to experience,
personnel and systems
 lower application fee – starting at $25,000
Level II
 higher permissible transactions limits up to a ceiling
 onsite evaluation
 higher regulatory requirements
 necessary personnel and systems in place before
application
 higher application fee – between $75,000 and $125,000
Permissible Transactions
The proposed rule allows credit union to engage in
a limited amount of “plain vanilla” derivative
transactions which include:
1. Interest Rate Caps
2. Interest Rate Swaps
pay-fixed/receive-floating
pay-floating/receive-fixed
Eligibility
Interest Rate Risk Mitigation
 rather than demonstrate material IRR exposure, a CU must
present a comprehensive risk management strategy, and
articulate how the inclusion of interest rate derivatives will
compliment existing risk mitigation tools
CAMEL Requirements
 most recent CAMEL code assigned by NCUA of 1,2, or 3
 management component rating of 1 or 2
Asset Threshold
 NCUA is proposing an asset threshold of $250 million or
higher
Proposed Requirements
Policies and
Procedures
Collateral
Requirements
Limits
External Service
Providers
Counterparty
Requirements
Asset Liability
Management
Reporting
Systems,
Processes,
Personnel
Transaction
Management
Internal Controls
Structure
External Service Providers
 NCUA believes ESP can play a vital roll in the success of
a derivative program but an overreliance can lead to
additional risks
 the proposed rule prohibits CUs from using ESP that are
principals or agents to derivative transactions involving
the CU
 the proposed rule classifies a number of activities into
two categories of permissible use: Support and Conduct
External Service Provider
Support
 A CU is required to conduct the function in this category
 ESP can provide assistance and input
Conduct
 a CU may contract an ESP to conduct a function or activity
 a CU is responsible for managing an ESP’s work quality
 a CU must have full understanding of ESP’s activities
 a CU is not required to maintain in-house capacity for the
function or activity
External Service Providers
Functions
Level I
Level II
Support
Conduct
Support
Conduct
Yes
-
Yes
-
-
Yes
-
Yes
Yes
-
Yes
-
Counterparty Exposure
Management
-
Yes
Yes
-
Collateral Management
-
Yes
Yes
-
Yes
-
Yes
-
Trade Execution
-
Yes
-
Yes
Transaction Management
-
Yes
Yes
-
Financial Statement Auditing
-
Yes
-
Yes
Legal Services
-
Yes
-
Yes
Asset Liability Management
Accounting and Reporting
Credit Risk
Liquidity Risk
Catalyst Strategic Solutions
 Catalyst Strategic Solutions will be an External Service
Provider to assist credit unions with their derivative
hedging program
 Assistance will range from education and training to
supporting and conducting required functions and
activities
 Pricing will be comprehensive or A la carte
Comments and Questions
Steven Houle, CFA
Director, Advisory Services
800-442-6427
214-703-7882
shoule@catalystcorp.org
Loan Participations for
Credit Unions
Jeff Hamilton, CFA
Vice President, Member Credit
Agenda
The “Rules of the Game”
 NCUA
 FASB 166
Catalyst Agent Loan Participation
Program
 Overview
 How the Program Works
“Rules of the Game” - NCUA
 Purchasing CU must be empowered to make loan
(comply with regulatory requirements)
 Originating lender retains an interest in participated
loan(s) for life of the loan
 10% for FCUs
 5% for FISCUs
 Borrower is a member of one of the participating
credit unions
 Waiver provisions
 Written loan participation policy (Limits)
 Written loan participation agreement
“Rules of the Game” - NCUA
Loan Participation Policy
 Single originator limit: Greater of 100% of NW or $5 Mln
 Single borrower limit: 15% of NW
 Concentration limits by loan type as a % of NW
 May participate in loans that CU does not originate
 May have different underwriting standards for LPs
 “establish prudent underwriting standards for loan
participations”
 “conduct appropriate due diligence before purchasing a
participation”
“Rules of the Game” - NCUA
Loan Participation Agreement
 Properly authorized, executed and retained in office.
 Seller retain interest in participated loans throughout.
 10% for FCUs
 5% for FISCUs
 Identify each participated loan, location and custodian.
 Enumerate servicing responsibilities for the loans.
 Requirements for reporting and participant access to
information.
 Provisions for participants to replace the servicer.
“Rules of the Game” – FASB 166
Participating Interest
A pro rata ownership interest in a financial
asset.
All cash flows are divided proportionately
among participants based on % ownership.
The rights of each participant have the same
priority.
No party has the right to pledge or exchange
the entire financial asset unless all agree.
“Rules of the Game” – FASB 166
Conditions for “Sale Treatment”
The transferred financial assets have been
isolated from the assets of the transferor.
Each transferee has the right to pledge or
exchange the assets.
The transferor does not maintain effective
control over the transferred financial assets.
 No provisions for recourse
 Cleanup calls permitted
Catalyst Agent LP Program
Overview
A comprehensive program that provides the framework
and infrastructure for credit unions to buy and sell loan
participations.
 Secure online platform for hosting and managing due
diligence and documents - TranZact
 Straightforward “standardized” process
 Detailed step-by-step guides
 Model Templates and Forms
 Loan Participation Agreement
 Outline for Participation Policy
 Due diligence checklist
 Pricing assistance
 Marketing, Document Management and Settlement
Catalyst Agent LP Program
Preliminary
Contact &
Discussion
Monthly
Remittance
and Reporting
Prepare and
Submit
Information
Document
Execution and
Settlement
Follow-up
Discussion
Buyer Due
Diligence
Period
Upload Due
Diligence
Information
Marketing of
LP by Catalyst
Catalyst Agent LP Program
Preliminary
Contact &
Discussion








Monthly
Remittance
and Reporting
Discuss Needs and Objectives
Loan Types
Amount, Timing, etc.
Review Catalyst Services, Resources
and Fees Document
Execution and
Settlement
Seller Guide
LP Policy Outline
Data Requirements
Contract for Services
Buyer Due
Diligence
Period
 Set up Access to Loan Participation
Functions in TranZact
Prepare and
Submit
Information
 Review the Information Provided
Follow-up
 Upload to TranZact:
Discussion
 Loan Data File in Required Format
 Loan Performance History:
Delinquencies, Chargeoffs, &
Recoveries
 Underwriting Guidelines
Upload Due
 Loan Participation
Policy (if available)
Diligence
 ExecutedInformation
Contract for Services
Marketing of
LP by Catalyst
Catalyst Agent LP Program
Preliminary
Contact &
Discussion
Discuss Results of Catalyst’s
analysis of the Loan Data
Monthly
Remittance
and Define Participation
Terms.
and Reporting
 Loan Pool Profile, Stratifications, exceptions and
adjustments
 Participation Structure:
 Recourse or Non-Recourse
 CU Servicing
Fee Retained
Document
Execution and
 Clean-up
Call Provision
Settlement
 Cutoff and Payment Cycle
 Catalyst Services and Fees
 LP Agreement - (Buyer/Seller)
 Preliminary Timeline for Sale and Settlement
 Agreement to Proceed
Buyer Due
 Schedule on-site VisitDiligence
(if necessary)
Period
Marketing of
LP by Catalyst
Prepare and
Submit
Information
Follow-up
Discussion
Upload Due
Diligence
Information
Catalyst Agent LP Program
Preliminary
Contact &
Discussion
Upload Due Diligence Information:
 Lending Policies, Procedures, Underwriting
Monthly
Guidelines
Remittance
and Reporting
 Servicing and Collection
Policies and Procedures
 Charge-off, Foreclosure, Repo and Recovery
Policies and Procedures
 Modification and Extension Policies (if applicable)
 Credit Scoring Model/Bureau (e.g. Experian, FICO)
Document
 Systems info:Execution
Lending,
Servicing
and
Settlement
 Staff Info., Designated
Contact Person
 Complete Loan Files
 Catalyst will prepare marketing materials:
 Term Sheets
Buyer
Due Summaries
 Loan Pool Profiles
and
Diligence
Period
Marketing of
LP by Catalyst
Prepare and
Submit
Information
Follow-up
Discussion
Upload Due
Diligence
Information
Catalyst Agent LP Program




Grant Access to TranZact for Buyers
Due Diligence Timeframe
Monthly
Seller Contact for Buyer
Inquiries
Remittance
and Reporting
Submit “Purchase Commitment
Form”
by Close of Due Diligence Period
Preliminary
Contact &
Discussion
 Post “Public” Information on Website
Prepare and
 Calls, e-mails
and Contacts with Interested
Submit
Information
Members
 Calls with Interested Non-Members
 Compile Purchaser Listing With Amounts
Document
and Allocations
Execution and
 Seller ApprovalSettlement
& Proceed
 Prospective Buyers Complete and Submit
“Confidentiality Agreement and Indication
Follow-up
of Interest Form” Discussion
 Provide Frequent Status Updates
Buyer Due
Diligence
Period
Upload Due
Diligence
Information
Marketing of
LP by Catalyst
Catalyst Agent LP Program
Monthly
Remittance
and Reporting
Document
Execution and
Settlement
Buyer Due
Diligence
Period
•
•
•
•
•
Preliminary
Submit
Loan Data File in Required Format
Contact &
Verify
That the Data File Balances
Discussion
Prepare Allocations and Confirm Payment Amount
Prepare and
Submit
Prepare Monthly Statement
for Buyers
Information
Upload Statements and Data File to TranZact for
Buyers
• Verify Funds Availability
• On Payment Date: Debit Seller for Payment
Follow-up
Amount and Credit Buyers with
Their Allocation
Discussion
 Prepare Contracts and Addendums for Buyers to
Execute
 Buyers Execute Agreements
 Seller Execute Agreements
Upload Due
Diligence
 Distribute Fully Executed
Agreements
Information
 OnMarketing
Settlement
Date: Debit Buyers for Purchase
of
LP by Catalyst
Amounts
and Credit Seller with Proceeds
In Summary
The Program:
Designed to make the process of buying and selling loan
participations as simple and straightforward as possible for
both buyers and sellers.
Availability:
Open to all credit unions. However, Catalyst Corporate
members receive first right of purchase for any offerings.
Benefits:
Sellers
Buyers
Maintain Lending Programs
Augment Loan Portfolio
Manage Balance Sheet Risk
Diversification
Augment Liquidity
Deploy Excess Liquidity
Capital Ratio
Boost ROA
Comments and Questions
Jeff Hamilton, CFA
Vice President, Member Credit
800-442-5763
214-703-7870
jhhamilton@catalystcorp.org