National banks investing fiduciary funds in derivatives must manage the risk as carefully as they do when investing their own money, the Office of the Comptroller of the Currency said Thursday.
"We are cautioning banks, with respect to fiduciary activities specifically, that they must carefully manage all risk," Douglas E. Harris, senior deputy comptroller for capital markets, said in a statement.
National bank trust departments must establish risk measurement and reporting systems before investing fiduciary funds in derivatives, the OCC said. While derivatives may be acceptable holdings for a bank's own account, this may not be true when a bank acts as a fiduciary, according to the guidance, which takes effect immediately.
The OCC also mandated that national banks separate traders and investment employees from those responsible for monitoring and controlling risk. The guidance requires national banks to audit their fiduciary investment processes.
In addition, the OCC warned that investing money from different fiduciary accounts in a single derivative instrument increases liquidity and market risk.
Thursday's guidance builds on the OCC's banking circular 277 - guidelines issued in 1993 for managing the credit risks of derivatives transactions.