Fed signals its approval of wider options trading; Swiss Bank granted greater powers.

WASHINGTON -- The Federal Reserve Board last week approved Swiss Bank Corp.'s bid to engage in several new futures activities, a move advocates said follows the central bank's incremental approach to expanding bank powers.

The Fed on Dec. 23 gave Swiss Bank permission to trade for itself in futures and options based on certificates of deposit and other money market instruments. Previously, a bank could trade for itself only on contracts based on U.S. government securities.

"[B]anks are particularly well equipped to engage in the proposed activity," the governors said.

The Fed also is permitting Swiss Bank to broker swaps and futures contracts based on certain commodities, stocks, bonds, and indexes. The central bank said these transactions closely mirror other investment activities that banks are engaged in currently. And, the Fed said, these activities do not expose financial institutions to undue risk.

The governors also said Swiss Bank could act as a futures commission merchant and adviser to individuals who want to invest in options on the Eurotop 100 Index Futures and in one-month Canadian bankers acceptance futures contracts on the Montreal Exchange.

The Fed previously has authorized banks to trade on other exchanges.

The governors also praised Swiss Bank's risk management techniques, noting that the bank sets credit limits for derivative contracts, has written policies for senior management, employs managers to monitor risk on the trading floor, and uses a computer to get instant price updates.

"[T]he board believes that [Swiss Bank]'s risk management policies, procedures, systems, and controls include the principal components of an effective risk-management system," the Fed said.

The order, while not "earth shaking," does reflect a willingness of the Fed to give banks more powers, said Gil Schwartz, a partner at Skadden, Arps, Slate, Meagher & Flom. Also, the decision shows that the Fed listens when a bank explains why it wants to use a new type of futures contract, he said.

"It is consistent with a long-term approach the Fed has taken to look at each individual futures contract and determine if it is appropriate for bank holding companies," he said.

The decision should boost competition in the futures industry, added Kenneth Raisler, a partner at Sullivan & Cromwell in New York. "Bottom line," Mr. Raisler said, "I think it is good for the market and good for banks."

Karen Shaw, president of bank consultancy ISD/Shaw Inc., said she found the decision's emphasis on risk-management measures particularly important.

"They focus not just on the activity, but also on the risk controls," Ms. Shaw said.

This parallels Fed Chairman Alan Greenspan's often-stated view that bank exams should center more on risk controls, she said.

Swiss Bank, a $139.3 billion institution, is the world's 44th-largest commercial banking organization, operating branches in New York, Chicago, and San Francisco.

The Fed also gave the bank permission to acquire the O'Connor & Associates securities firm of Chicago.

The bank will merge the firm and parts of two of its wholly owned subsidiaries into a single securities business, SBC Government Securities Inc., New York.

In addition to the futures work, the Fed said the newly created subsidiary can offer investment advice, conduct discount and full-service brokerage activities, act as an agent for the private placement of all types of securities, and trade in gold and silver.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER