Giving banks access to the best slice of the derivatives market, regulators last week permitted NationsBank Corp. to deal directly from an AAA-rated subsidiary.

The Office of the Comptroller of the Currency opened the door for national bank operating subsidiaries to enter into derivatives agreements with customers demanding higher credit ratings from their counterparties.

Before the May 10 approval, which became public Friday, only foreign banks and nonbanks were permitted to establish these top-rated derivatives- dealing subsidiaries, also called "derivative product companies." Commercial banks were effectively cut out of the derivatives market's top tier.

"Increasingly, the ability to be a profitable and efficient derivatives dealer depends on credit rating," said Douglas E. Harris, senior deputy comptroller for capital markets. "This allows domestic banks to remain competitive with U.S. investment banks and foreign banks in the area of derivative dealing."

The Comptroller's Office has struggled with this issue for several years. In 1992, Citicorp and Continental Bank Corp. applied to establish such top-rated bank subsidiaries, but the OCC convinced the banks to withdraw the proposals.

The applications were discouraged in part because the agency feared too much money would be sucked out of the banks to capitalize the units.

NationsBank's new subsidiary, NationsBanc Financial Products Inc., will initially be capitalized with $300 million from its parent. The unit will operate out of Chicago Research and Trading Group Ltd., a trading firm acquired by NationsBank in 1993 to create a platform for its expanding derivatives business.

House Banking Committee Chairman Jim Leach, usually critical of the OCC's attempts to broaden the national bank charter, praised the NationsBank decision in a letter Friday to Comptroller Eugene A. Ludwig.

"The OCC has afforded NationsBank, and other banks in the future, the ability to compete ... on an equitable basis for customers who trade only, or primarily, with dealers rated double-A or higher," the Iowa Republican wrote. "Your action is a positive step toward our common goal of establishing a fair and competitive financial services market."

Charlotte, N.C.-based NationsBank is currently rated A-plus by Standard & Poor's Ratings Group and "A1" by Moody's Investors Service. The ratings have restricted the bank's derivatives business, according to senior vice president William Fall.

"There are certain counterparties that have minimum rating standards for their counterparties, and that cutoff is normally an 'AA' rating," said Mr. Fall, who heads up the bank's domestic derivatives sales and marketing. "This will allow us to continue aggressively growing our risk management business."

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