Following are excerpts from a speech last week by Douglas E. Harris, the senior deputy comptroller in the Office of the Comptroller of the Currency.

He spoke in Barcelona, Spain, at the annual meeting of the International Swaps and Derivatives Association.

The notional amount of outstanding derivatives contracts held by U.S. domestic commercial banks has grown from roughly $5 trillion in 1990 to slightly over $15 trillion by the end of 1994.

The top 25 commercial banks account for roughly 97% of that activity, with 608 commercial banks accounting for the remaining 3%.

Credit risk exposures are generally of the order of 1% to 2% of notional amounts, and credit exposures as a percentage of capital for the 25 most active banks are roughly consistent with exposures that generally result from banks' more traditional activities.

This growth and the increasing losses suffered by a variety of U.S. institutions with respect to derivatives, defined very broadly, are why we at the OCC have devoted increasing supervisory resources to national banks' derivatives activities.

We have observed some deficiencies in risk management in a number of areas:

First, there is a need for further development of independent risk management systems and audit coverage; second, some banks do not have adequate, comprehensive, written policies with respect to the bank's risk management policy and systems.

There is some weakness in valuation systems used by some dealers and active position takers. This weakness relates to independent verification of market values obtained from traders.

There are some weaknesses primarily relating to lack of formalization of liquidity monitoring systems used by some Tier 2 dealers and active position takers.

Some active position takers do not have the operational systems to perform the netting of contracts and positions.

The losses suffered during the past year by many U.S. corporations as well as pension plans, municipalities, and money market and mutual funds (have raised the issue of) sales practices. The specific issue and the one that obviously has generated the most industry concern is suitability.

When a bank makes a loan to a customer, bank regulators do not require that, in order to protect the customer, the bank determine the loan is suitable for the customer. However, bank regulators do expect that, as part of its credit analysis, a bank will determine that the terms of the loan, including the amount, the interest rate, and the covenants, are understood by the borrower and that the borrower can in fact repay the loan.

The application of a suitability rule to dealer banks' off-balance-sheet derivatives transactions would raise the question of why such a rule should not be applicable to other transactions by a bank with its customers. At the OCC we do not currently believe that it is necessary to make a fundamental change in the relationships between banks and their customers or, more specifically, in the obligations of banks toward their customers.

If we find that national banks are not complying with guidance in section C1 of banking circular 277 (which requires dealer banks to make an assessment of whether a transaction is consistent with its counterparty's policies and procedures), we will review our position.

To that end, we have commenced a review of five of the multinational banks which we supervise to determine how, specifically, these banks are going about complying with appropriateness standards in section C1.

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