Bankers Trust makes pact with Fed on derivatives practice.

WASHINGTON -- Bankers Trust New York Corp. and its subsidiaries reached an agreement yesterday with the Federal Reserve Board to improve disclosure and sales practices involving its leveraged derivative transaction business

The improvements, which are expected to be in place by yearend, will apply to any of its leveraged derivative customers, which could include state and local governments.

The agreement comes as Bankers Trust is being investigated by federal regulators, including the Securities and Exchange Commission and the Commodity Futures Trading Commission, regarding derivatives sales to some of its clients including Gibson Greetings Inc. and Procter and Gamble Co.

"The agreement does not affect our overall derivatives business but is limited specifically to our leveraged derivative transaction activities, which have never been a core business for Bankers Trust," said Bankers Trust chairman Charles Sanford Jr. in a prepared statement.

Sanford said leveraged derivative transactions accounted for less than 5% of Bankers Trust's total revenue for the period beginning Jan. 1, 1993, and through the first three quarters of 1994.

In reaching the agreement, the Federal Reserve Board reiterated its view that banking institutions engaged in derivatives activities, including the leveraged derivative transaction business, "should maintain effective policies and procedures relating to client selection, marketing and sales practices, and pricing and valuation."

Bankers Trust and its subsidiaries, Bankers Trust Co. and BT Securities Corp., agreed by yearend to jointly develop and submit to the Reserve Bank written policies and procedures to ensure that client selection and appropriateness policies are consistent with safe and sound banking practices.

In addition, Bankers Trust will submit written policies by yearend about the disclosure made available to its customers.

Bankers Trust and its subsidiaries agreed to reasonably ensure that each leveraged derivative transaction customer has the ability to understand the nature and material terms, conditions, and risks of transactions entered into.

The bank agreed to provide disclosure that will supply customers with sufficient information to understand the nature and material terms of the transactions and to ensure reasonable price transparency and valuation.

Bankers Trust will also enhance its management and supervision process for the leveraged derivative transaction business, and it will augment a training program for the marketing and sale of leveraged derivative transactions.

The agreement also provides that with the assistance of outside counsel, Bankers Trust will review how revenue and expense in the leveraged derivative transaction business are allocated among the company and its affiliates.

Both the Federal Reserve and Bankers Trust said they entered into the agreement in recognition of common goals to ensure the prudent operation of the leveraged derivative transaction business.

Bankers Trust has already begun a comprehensive review of its leveraged derivative transaction business to ensure that it will be appropriately managed.

As a result of that review, many of the procedures outlined in the agreement with the Federal Reserve have been set in place and others are in the process of being implemented, the bank said in its statement.

Sanford said Bankers Trust has already taken some actions, where necessary, against employees that violated its code of conduct.

"Where warranted, we have taken disciplinary actions against individuals who violated the firm's Code of Conduct, and we have enhanced controls to prevent future violations," Sanford said.

Sanford noted that the terms of the agreement will benefit Bankers Trust clients.

"The standards and procedures described in this agreement will bring to the leveraged derivative transaction business a level of transparency and supervision that will benefit our clients," Sanford said.

He emphasized that the agreement won't restrict Bankers Trust's business.

"This agreement will in no way restrict our ability to grow our risk management business or restrain our leadership in product innovation," Sanford said. "Instead, these improvements in our procedures and controls will facilitate our work with clients and pave the way for the continued expansion of this business."

Bankers Trust said it will continue to cooperate with other regulators in their review of the leverage derivative transactions business.

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