Structured notes have again taken a hit by banking regulators, this time being labeled inappropriate for many national bank investors by the OCC. The agencys warning marks the second time in as many weeks that derivative instruments have been targeted by regulators.

The Office of the Comptroller of the Currency warned the risks of these instruments are potentially too great for banks and bankers dabbling in the market should be able to explain how these notes accomplish the institutions strategic portfolio objectives.

The OCC warning was issued July 21 in a letter that raised concerns that some national banks, particularly community banks, have purchased structured notes without fully understanding the market, liquidity and cash flow risks they have assumed.

Because of the risks involved and the difficulty in assessing those risks, some types of structured securities are inappropriate investments for most national banks. The determination of whether a particular instrument is appropriate depends on the banks ability to understand, measure, monitor and control that instruments risks consistent with banking circular 277, OCC said.

BC 277, titled Risk Management of Financial Derivatives, was issued Oct. 27, 1993, and guides on risk management practices to national banks and federal branches and agencies engaging in financial derivatives activities.

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