WASHINGTON -- In a major shift in the regulation of derivatives, the federal banking agencies are moving to bar sales of certain types of the instruments to customers not prepared for the risks.
The plans, unveiled on Thursday, mark the first time the agencies have sought to protect banks' derivative customers. Previous regulatory efforts focused squarely on protecting banks themselves.
"The notion of protecting bank customers is a responsibility that bank regulators are stepping up to," said Securities and Exchange Commission member Richard Y. Roberts, in praising the agencies.
"As banks increase their noninsured product lines, there is a greater need for customer protections," he added.
The increased concern over derivatives customers follows efforts by regulators to protect banks' mutual fund customers. Last year, the agencies developed guidelines to make sure that fund buyers understood the risks and weren't sold unsuitable investments,
The derivatives rules deal mainly with suitability. They will target two broad classes of derivatives -- collateralized mortgage obligations and structured notes -- but stop short of spelling out types of investors that should be steered clear of the instruments.
Douglas E. Harris, senior deputy comptroller for capital markets at the Office of the Comptroller of the Currency, announced Thursday that the OCC, the Federal Reserve Board, and the Federal Deposit Insurance Corp. will develop the new sales practice rules.
The SEC's Mr. Roberts said securities regulators would work with bank regulators to eliminate both the gaps and the duplications in their rules.
Derivatives are financial contracts whose returns are derived from the performance of an underlying set of currencies, interest rates, or commodities. Structured notes are derivatives that are usually issued by government-sponsored enterprises with triple-A credit ratings. They appear safe but can be quite volatile.
Bank trade groups believe many banks have internal policies that mirror the new rules.
Nevertheless, "this should be a wake-up call to those institutions to take a look at their policies and procedures to make sure that they have incorporated suitability guidelines," said Sarah A. Miller, senior government relations counsel at the American Bankers Association.
Bank-affiliated broker-dealers already have to follow such rules. Ms. Miller said the new rule's impact "is going to be limited only because most banks have suitability rules in place."
Mr. Harris also cautioned banks that sell off-balance-sheet derivatives like swaps, futures, and forwards to be sure the products are appropriate for their customers.
There is no legal requirement that banks refrain from selling unsuitable off-balance-sheet derivatives to customers who insist on buying them. But the OCC does require banks selling such products to document that they have warned customers against such purchases.
Mr. Hams said the OCC is concerned about the litigation risk for banks selling derivatives that are inappropriate for their customers.
Bankers Trust New York Corp. already has been hit with suits from two derivatives customers, Gibson Greetings and Procter & Gamble.
