The Comptroller of the Currency gave Citibank permission this week to enter into equity swaps and equity index swaps.
The nation's largest bank is already in this market, but the regulatory approval formalizes its authority.
The OCC approval also marks a milestone in derivatives regulation. Because banks are barred by law from investing in the equity securities underlying such swaps, this approval signals that the Glass-Steagall Act's barriers will not be extended to derivatives.
Equity swaps bring parties together who agree to pay one another based on the rise or fall in value of a notional principal investment in a particular equity or stock index.
In a letter to Citibank Tuesday, Senior Deputy Comptroller Douglas E. Harris laid out the agency's approval and certain limitations.
The OCC permitted Citibank to trade in the derivatives only for its clients, not as an end user.
Paul B. Spraos, publisher and editor of Swaps Monitor newsletter, said U.S. commemial banks had $75 billion to $100 billion in notional amounts of over-the-counter equity derivatives. "Citi is the most active of the national banks" in the market, he said, adding, "less than 10 [banks] are actively involved."
Equity swaps and equity index swaps "tend to be a pretty profitable business for banks," Mr. Spraos said.
"Our view is that these are financial contracts regardless of the underly'mg commodity or instrument, and banks perform a valuable and traditional banking service in acting as a financial intermediary" in such arrangements, Mr. Harris said.
A Citibank spokeswoman confirmed that the bank is involved in the equity derivatives market. The OCC letter, she said, "does not change how we currently conduct our business."
