WASHINGTON The Office of the Comptroller of the Currency plans to release today extensive new instructions for banks using derivatives. The nearly 100 pages of guidelines will be the first comprehensive set of instructions for national bank examiners to use in evaluating institutions. They will also provide a road map for banks.
"This really is going to be the bible for our examiners and what they should be looking for is really what the banks should be doing," said Senior Deputy Comptroller Douglas E. Harris, who briefed reporters last week. The OCC is placing responsibility for conforming to the new guidelines squarely on the shoulders of senior bank management. The agency stressed last week that banks would be charged with safety and soundness violations if their managers fail to properly oversee the risks.
Derivatives are often-volatile financial instruments whose value is tied to currencies, interest rates, and other benchmarks. About 350 OCC-regulated banks use derivatives.
Which OCC standards will apply depends on which of four categories each bank fits into: dealers that make markets in derivatives; less active derivative dealers; end users with large derivatives positions compared to their asset size; and limited end users of derivatives.
The new guidance won praise from banking trade groups.
"By differentiating between different types of derivatives users, they have taken the right approach," said Diane Casey, executive director of the Independent Bankers Association of America.
Mr. Harris urged banks to calculate derivatives risk in the same way they measure equivalent risks in loans. "The exposure to loans is something which everybody in a bank understands," he said.
The guidance includes instructions for small banks that invest in structured notes.
Examiners are being asked to check that purchases reflect management's ability to understand the instruments, to see if they are within established limits of price risk, and to ensure that banks received price quotes on them from several dealer firms.
The agency is also warning dealer banks to sell derivatives to appropriate customers who understand their risk.
"The bank should not recommend transactions that management knows or has reason to believe are inappropriate for a customer," the guidelines warn.
