WASHINGTON -- Bank examiners will soon receive new instructions for regulating derivatives.
The manual is still being finalized, and Mr. Harris declined to detail all of its provisions. But he said the instructions will draw distinctions between banks that are derivatives dealers, banks that are active end users of the instruments, and those that occasionally hold derivatives.
Derivatives are financial contracts whose returns are derived from the performance of currencies, interest rates, or commodities. They have drawn fire in recent months because some banks and other companies have suffered large losses as a result of bad investments in the potentially volatile instruments.
Examiners now have less than a dozen of pages of guidelines for evaluating the complicated instruments. Until now, "We haven't had one large document," Mr. Harris said. "There will be quite a bit that they will have to get up to speed on."
Yet Mr. Harris insisted the exam guidelines will not represent changing standards for regulating derivatives. They will simply detail instructions for evaluating banks' use of derivatives under current rules.
"There is a lot more detail here that is not in the guidance to the banks," Mr. Harris said. "It doesn't mean there are new requirements."
The Comptroller's office has issued roughly 50 pages of guidelines to banks in an effort to remind them to keep tight watch on their growing derivatives holdings. The core standards are detailed in the agency's circular 277, with additional guidelines spelled out in hypothetical questions and answers and in a recent advisory on the hidden risks in derivatives called structured notes.
The agency's guidelines on derivatives trading activities will be similar to standards the Federal Reserve issued earlier, Mr. Harris said. But the manual from the Comptroller's office also will address other areas.
It will tell examiners how to evaluate a bank's holdings in structured notes, which can be quite volatile although they bear little credit risk.
The document also will tell examiners how to ensure that, for instance, a bank's derivatives trading unit is sufficiently independent from its operations unit, Mr. Harris said.
The new guidelines could be out as soon as mid-October. At the latest, the agency is aiming to finalize the manual by the end of next month, Mr. Harris said.
In the meantime, the Comptroller's office has a little advice for bankers: "What the bankers should be doing is ensuring that they are complying with our banking circular 277 and the questions and answers as well as our advisory on structured notes," Mr. Harris said.
