WASHINGTON The derivatives czar for the Office of the Comptroller of the Currency said the banking industry is in "substantial compliance" with his agency's guidelines for the sometimes risky instruments.
Nonetheless, senior deputy Comptroller Douglas E. Harris said that his agency still found several areas in which banks could improve their records.
The senior deputy comptroller detailed them last. week as he discussed the agency's new derivatives guidelines for bank examiners.
The first shortcoming that the Comptroller's office found is that banks are not doing a good enough job of keeping derivatives dealings separate from their supporting operations, Mr. Harris said.
"There were a good number of banks that probably could have done better by having a more independent operations unit. Mr. Harris said.
Banks need to segregate the back office from the units that create derivatives exposure. In a related area, the operations unit should not rely on traders when they determine the market value of banks' derivatives holdings, Mr. Harris said.
The agency was surprised to find that a number of banks lacked written derivatives policies and procedures for senior management, Mr. Harris said. He refused to say what percentage of banks lacked such documents, which regulators require.
The Comptroller's office also believes banks should be careful about the messages conveyed by paychecks.
On the one hand, the agency wants to be sure that traders don't win bonuses for engaging in excessive risk taking, Mr. Harris said.
On the other hand, however, banks must' pay their back-office staff "well enough so that you are able to retain ... these very crucial employees."
Structured notes, a type of derivative that on the surface may appear safe, can pose problems for less-sophisticated derivatives users ....
"Smaller banks very often have had a problem identifying complex and risky transactions." on secunues issued by government-sponsored enterprises like Fannie Mae, the World Bank, and the Federal Home', Loan Bank system.
"Our examiners have the same problem when they go into a bank," Mr. Harris said. Often, when examiners see governmentsponsored enterprise securities on banks' books, "They are not generally inclined to look further."
Mr. Harris stressed that despite these criticisms, "We are overall quite pleased."
"Most of the larger banks ... really do have very robust riskmanagement controls." he said. However, "Generally smaller banks are in better shape," on complying with the OCC's derivatives guidelines.
