Office of the Comptroller of the Currency to prepare guidelines on how banks pay their traders. Douglas E. Harris, senior deputy comptroller for capital markets, last week told a group of London bankers that poorly constructed compensation policies can threaten the health of some banks. "We have become increasingly concerned that compensation policies at some banks may unnecessarily create incentives for excessive risk taking," Mr. Harris said. The guidelines will affect not only the way banks pay their traders, but how they measure the risk and profits created by their trading operations. While the guidelines are written for the agency's examiners, bank senior managers are expected to use the standards to create compensation policies that discourage hazardous trading practices. Mr. Harris' comments in London were the latest in a series of guidelines issued by the OCC relating to exchange-traded and over-the-counter derivatives markets. On Nov. 19, he issued examiner guidelines for bank- affiliated futures commission merchants. Leslie Rahl, principal of Capital Market Risk Advisors in New York, said such guidelines are needed at a time when traders can expect at least one significant surprise to occur every year. "I agree with Doug that this is a potential issue," she said. "I have certainly seen institutions where it has not been as effectively dealt with as at others." She said some traders may not admit to management how much risk they are assuming, especially when their pay is based on high returns regardless of the risks associated with those trades. By measuring the kinds of risks associated with trading profits, bank management can base trader pay on risk-adjusted returns. Mr. Harris said it is up to the board of directors and senior management to establish and review compensation policies so that they comply not only with bank regulations, but internal policies and stated goals as well. Of particular concern is how the actions of the trading desk may affect the overall risk position of the bank. He said the guidelines will ask examiners to see if management considered the risk inherent in and caused by relevant trading activities in developing these policies.
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