Off-balance sheet derivative transactions for financially sound credit unions to hedge interest-rate risk by managing earnings and capital volatility

Southwest Corporate Investment Services' (SCIS) derivative hedging program provides SCFCU members the ability to offer a broader and more consistent range of lending and savings programs while managing interest rate risk through a hedging program approved by the NCUA. Participation is open to federally chartered credit unions that have a seven percent net worth ratio, positive earnings for the preceding twelve months and a demonstrated capacity to operate within prudent risk management limitations.

SCIS' derivative program supplements traditional risk management practices and provides the credit union:

• Appropriate and well-structured transactions
• More efficient use of capital through off-balance sheet accounting
• Alternatives to asset sales, lengthening of deposit maturity structures, long-term fixed-rate funding

Management and boards of directors must have a clear understanding of the business and economic reasons for using derivatives and demonstrate proficiency in current derivative accounting and reporting requirements. To provide that expertise, SCIS provides education and training to participating credit unions in seven key areas:

• Best practices in interest rate risk management and modeling
• Interpretation of results of balance-sheet interest rate risk analysis
• Identification of basic risk and return characteristics of common financial derivative instruments
• Understanding the business and economic reasons for using derivatives in risk management strategies
• Application of derivative transactions and balance sheet hedging techniques
• Risks involved in using derivative instruments
• Current accounting and reporting requirements for derivatives

Credit unions will receive consulting that includes:

• Quarterly risk assessment of current and forecasted interest-rate risk exposure
• Review of credit union's risk management and accounting policies and procedures
• Recommendation of proper derivative hedging options in risk mitigation strategies, if indicated
• Execution of derivative transactions and monitoring of financial and hedge accounting performance for the duration of the hedge
• Swaps Master Agreement, Schedule and Credit Support Annex between SCIS and the credit union
• Monthly fair-value reporting

Southwest Corporate Federal Credit Union (SCFCU) has successfully structured billions of dollars in derivatives since 1992 to help manage its own balance sheet. To put that 15 years of Derivative Hedging experience to work at your credit union, contact an national account executive at 800.301.6196.