OCC Guidelines Seek to Control Risk at Bank Futures Subsidiaries

the collapse of one of England's oldest banks, the Office of the Comptroller of the Currency has issued examiner guidelines for banks' futures subsidiaries. While the guidelines for the most part merely formalize standards that examiners already use, the new rules will put more burdens on senior management and boards of banks to develop and implement risk management policies. "The notion that there ought to be independent and separate risk management and control units - separate from the part of the bank creating the risk - is fundamental to good internal controls," said Douglas E. Harris, the OCC's deputy comptroller for capital markets. "And yet we've seen time and time again over the last year that it is one of the internal controls that is most often neglected." Mr. Harris said the guidelines are important in light of billion-dollar losses at two international banks - Daiwa Bank and Barings PLC - that came to light this year. In both instances, one person filled the dual role of head trader and head of the back office. Mr. Harris said the new guidelines give examiners a roadmap on how to prevent similar problems at the futures operations of national banks. And if problems are found, he said the agency is "going to come back to the bank again and again until we find it corrected." Among the new requirements, the OCC will expect a bank's senior management and board of directors to develop risk management policies for their futures operations. Such risk limits should consider how the futures operations will affect risks at other subsidiaries of the bank. "Senior management and the board should certainly have an idea as to how the risk being assumed by the bank is affected by the transactions by the FCM," Mr. Harris said. Examiners will also attempt to make sure the marketing methods used by the futures operation do not harm the bank's reputation. Likewise, management and the board will be expected to commit enough capital to the futures operation to support the level of risk, even if that means committing more capital than required by regulators. So far, the rules have not created much of a stir in the industry. One banker said he had no comment because he didn't believe the rules were a big deal. Indeed, much of the territory covered by the guidelines is already handled by other regulatory bodies that banks' futures operations must answer to. For instance, matters such as capital requirements are already handled well by the Commodities Futures Trading Commission, certain exchanges and clearing houses. Mr. Harris said that, while the potential exists for regulators to step on each others' toes, it is unlikely. For one thing, the OCC's rules will focus on risk management to ensure the safety and soundness of the banks' subsidiary. "The CFTC has traditionally been concerned with customer protection, financial integrity of the marketplace and price discovery function of futures and options trading," said Mr. Harris, who before joining the CFTC was general counsel of J.P. Morgan & Co.'s futures operations. "We're focusing on the control of reputation risk."