Some trust departments at national banks may be taking too much risk when investing fiduciary funds in derivatives, a top regulator warned Wednesday.
Douglas E. Harris, senior deputy comptroller for capital markets, said the Comptroller's Office is putting the finishing touches on a bulletin to national banks about trust departments' use of derivatives.
"We have uncovered some situations where national banks acting as fiduciaries may not have had the kind of robust risk management processes that we wanted to see," said Mr. Harris in an interview after a speech to an End-Users of Derivatives Association conference here.
Mr. Harris said that a number of national bank trust departments have not been following the OCC's banking circular 277 - guidelines issued in 1993 for managing the credit risks of derivatives transactions.
"Some of our banks were missing the fact that banking circular 277 was applicable to their actions as fiduciaries," Mr. Harris said. The circular also recommended that national banks assess whether a particular derivative transaction is appropriate for a customer.
The upcoming bulletin, which may be sent as early as next week, will recommend that national banks determine whether derivatives are appropriate investments for specific fiduciary accounts.
National banks will also be warned about investing money from different fiduciary accounts in a single derivative instrument, Mr. Harris said.
"We will caution banks about the potentially increased market and liquidity risk resulting from such a practice," he said.
The bulletin was prompted in part by a letter the OCC received from Olena Berg, assistant secretary for welfare benefits at the Labor Department. The March 21 letter outlined how derivatives should be used in managing pension plan portfolios.
"We determined that this was an opportune time to set forth our expectations concerning risk management of derivatives and mortgage-backed securities transactions in a bulletin specifically targeted at national bank trust departments," Mr. Harris said.
In his speech to the conference, Mr. Harris noted that the banking agencies are close to publishing a proposed rule governing banks' sales of government securities. The proposal is expected to be similar to a recent one from the Securities and Exchange Commission.
