CUNA Comment Letter

Re: Proposed Rule on Treatment of Swap Agreements (Part 709)

Sent via e-mail:

March 28, 2003

Ms. Becky Baker
Secretary of the Board
National Credit Union Administration
1775 Duke Street
Alexandria, Virginia 22314-3428

Dear Ms. Baker:

The Credit Union National Association (CUNA) appreciates the opportunity to comment on NCUA’s proposal to amend the involuntary liquidations rules with regard to swap agreements. CUNA represents more than 90% of our nation’s 10,000 state and federal credit unions.

The proposed rule will amend NCUA's involuntary liquidation rules to designate swap agreements as qualified financial contracts (QFCs). The treatment of swap agreements as QFCs will limit swap counterparty exposure when a federally insured credit union is placed into involuntary liquidation or conservatorship by allowing the counterparty to terminate and net QFCs in order to protect itself from selective assumption of the QFCs by a liquidating agent, receiver, or conservator. By limiting counterparty exposure, entities will be encouraged to engage in swap agreements with federally insured credit unions. Also, the proposed treatment is consistent with that of swap agreements for banks and thrifts that are placed into involuntary liquidation or conservatorship. This certainty will also preserve market stability whenever a credit union with QFCs is placed into liquidation or conservatorship.

Although few credit unions are currently authorized to engage in swap agreements, we believe that the treatment of these agreements as QFCs will be beneficial both for those credit unions that engage in these activities and for their counterparties.

However, we note that the proposed rule does not contain a reference to the treatment of “master agreements.” Swap transactions are consummated utilizing standard documentation. This documentation includes a master agreement that enables the parties to engage in multiple swap transactions over time through the issuance of confirmations containing the individual deal-specific information. The master agreement provides a cross default protection for the parties in that it treats all swap transactions between the parties as a single swap transaction so that, in the event of a default on one swap transaction, the non-defaulting party may net and close out all swap transactions between the parties.

Master agreements are included as swap agreements under the Federal Deposit Insurance Act (FDIC) for FDIC-insured institutions. Similar treatment of master agreements should also apply to credit unions in order to eliminate the uncertainty of the treatment of master agreements and a party’s ability to protect itself by netting obligations under all outstanding swap transactions.

Thank you for the opportunity to comment on NCUA’s proposed rule on swap agreements. If Board members or agency staff have questions about our comments, please give Associate General Counsel Mary Dunn or me a call at 202-638-5777.

Jeffrey Bloch
Assistant General Counsel