OCC proposes rule on capital to back holdings of derivatives.

WASHINGTON -- The Office of the Comptroller of the Currency has proposed a rule enforcing new Basel Committee risk-based capital standards on derivatives.

The Federal Reserve put similar rules out for comment last month, and the Office of Thrift Supervision and the Federal Deposit Insurance Corp. are expected to follow suit soon.

Some banks will be required to hold more capital under the proposed rules, and some may hold less, depending on the maturities and types of derivatives contracts they hold, said Douglas Harris, the OCC's senior deputy comptroller.

Smaller banks that hold derivatives will likely face lower capital requirements, he said. That is because the proposed rule would change the way banks calculate future credit exposure, by allowing them to net out their multiple-derivative contracts.

Now, only current credit exposure is subject to the lower capital requirements usually produced by bilateral netting. Banks had requested the netting rule change, Mr. Harris said.

But banks holding foreign exchange derivatives and interest rate swaps with maturities of more than five years or holding equities, precious metals, and other commodities derivative contracts would face increased capital requirements.

Larger banks typically hold these more volatile derivatives, Mr. Harris said. Comments on the new rule are due Oct. 21.

Derivatives are financial contracts whose returns are derived from the market performance of currencies, interest rates, or commodities.

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