Examiners will more closely scrutinize derivatives trading activities at more national banks, the Office of the Comptroller of the Currency said Thursday.
Expanded supervision guidelines, being mailed to examiners and national bank executives, include several safeguards to prevent losses from derivatives trading.
"Because more and more banks are getting into derivatives, more examiners will need this more detailed level of guidance," said Michael L. Brosnan, acting senior deputy comptroller for capital markets.
The 190-page handbook contains a new section on employee compensation. Traders who engage in lucrative but overly risky transactions should not be rewarded, the OCC said.
The agency also said national banks can prevent rogue traders from concealing unauthorized trading for long periods of time by requiring employees who can "significantly affect the books and records of the bank" to take two consecutive weeks of leave annually.
This section was added to address several derivatives trading debacles, such as the Barings PLC and Daiwa Bank Ltd. cases, that have occurred since the handbook was last updated in October 1994.
"The market has evolved a lot over the years in a positive way, but we've also seen a number of unfortunate events," according to Mr. Brosnan.
Also included in the guidelines is a new section that discusses the importance of validating national banks' price risk measurement models. For example, the OCC suggests that banks periodically test these internal models to show how a derivatives portfolio would perform under large fluctuations in interest rates.
The agency also warned about early-termination agreements, which allow a counterparty to back out of a derivatives transaction if a bank's rating drops below a specified level.
"Early terminations may be triggered when the bank can least afford the liquidity drain," the handbook warned.