[Federal Register Volume 63, Number 78 (Thursday, April 23, 1998)]
[Proposed Rules]
[Pages 20252-20256]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-9881]



[[Page 20251]]

_______________________________________________________________________

Part II





Department of the Treasury





_______________________________________________________________________



Office of Thrift Supervision



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12 CFR Part 563



Financial Management Policies, Financial Derivatives; Proposed Rule and 
Financial Management Policies; Notice

  Federal Register / Vol. 63, No. 78 / Thursday, April 23, 1998 / 
Proposed Rules  

[[Page 20252]]



DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Part 563

[No. 98-37]
RIN 1550-AB13


Financial Management Policies; Financial Derivatives

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Office of Thrift Supervision (OTS) is proposing to issue a 
regulation that would apply to all financial derivatives and would 
replace its existing regulations on forward commitments, futures 
transactions, and financial options transactions. The proposal would 
continue to permit a savings association to engage in transactions 
involving financial derivatives to the extent that these transactions 
are authorized under applicable law and are otherwise safe and sound. 
In addition, the proposed rule would describe the responsibilities of a 
savings association's board of directors and management with respect to 
financial derivatives. Elsewhere in today's Federal Register, OTS is 
seeking public comment on a proposed Thrift Bulletin which would, among 
other things, provide supplemental supervisory guidance on the use of 
financial derivatives. Finally, the Federal Financial Institutions 
Examination Council (FFIEC) is issuing additional guidance in a 
supervisory policy statement addressing this area that appears 
elsewhere in this issue of the Federal Register.

DATES: Comments must be received on or before June 22, 1998.

ADDRESSES: Send comments to: Manager, Dissemination Branch, Records 
Management and Information Policy, Office of Thrift Supervision, 1700 G 
Street, N.W., Washington, D.C. 20552, Attention Docket No. 98-37. These 
submissions may be hand-delivered to 1700 G Street, N.W., from 9:00 
a.m. to 5:00 p.m. on business days; they may be sent by facsimile 
transmission to FAX number (202) 906-7755; or by e-mail: 
[email protected]. Those commenting by e-mail should include 
their name and telephone number. Comments will be available for 
inspection at 1700 G Street, N.W., from 9:00 a.m. until 4:00 p.m. on 
business days.

FOR FURTHER INFORMATION CONTACT: Anthony G. Cornyn, Director of Risk 
Management, (202/906-5727), Ed Irmler, Senior Project Manager, (202/
906-5730), Jonathan D. Jones, Senior Economist (202/906-5729), Risk 
Management; or Vern McKinley, Senior Attorney (202/906-6241), 
Regulations and Legislation Division, Office of the Chief Counsel, 
Office of Thrift Supervision, 1700 G Street, N.W., Washington, DC 
20552.

SUPPLEMENTARY INFORMATION:

I. Background

    OTS's current regulations on financial derivatives were first 
adopted over fifteen years ago.1 These regulations have 
remained virtually unchanged, notwithstanding the development of new 
financial derivative instruments. Today, OTS is proposing a 
comprehensive revision of these outmoded regulations.
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    \1\ 44 FR 29870 (May 23, 1979) (Forward commitments); 46 FR 
36832 (July 16, 1981) (Futures transactions); 47 FR 36625 (August 
23, 1982) (Financial options).
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    One of the goals of this proposed rule is to address the broad 
range of financial derivatives transactions in which thrifts may 
currently engage. The current regulations address three types of 
financial derivatives: forward commitments, futures transactions, and 
financial options transactions. See 12 CFR 563.173, 563.174, and 
563.175. These regulations, thus, do not address all of the derivative 
instruments that have been developed over the past twenty years. 
Significantly, the current regulations do not address interest rate 
swaps, a derivative instrument thrifts commonly use to address interest 
rate risk. The proposed rule would continue to permit savings 
associations to use financial derivatives transactions to manage and 
control risk.
    The overriding goal of this regulatory initiative is to ensure the 
safe and sound management of the risks associated with financial 
derivatives. Accordingly, the proposed regulation emphasizes that 
derivatives activities must be conducted in a safe and sound manner, 
and sets forth the responsibilities of the board of directors and 
management with respect to financial derivatives.
    OTS is simultaneously issuing comprehensive proposed guidance 
regarding savings associations' risk management practices, including 
those pertaining to derivatives transactions. Elsewhere in today's 
issue of the Federal Register, OTS is issuing for comment Thrift 
Bulletin 13a (TB 13a) (``Management of Interest Rate Risk, Investment 
Securities, and Derivatives Activities''). One of the purposes of TB 
13a is to provide specific guidance on how thrifts should implement the 
FFIEC's ``Supervisory Policy Statement on Investment Securities and 
End-User Derivatives Activities'' (FFIEC policy statement).2 
The FFIEC policy statement provides general guidance on sound practices 
for managing the risks of investment securities and derivatives 
activities.
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    \2\ Published elsewhere in this issue of the Federal Register.
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    The proposed rule would also reduce regulatory burden consistent 
with statutory requirements for safe and sound operations. The current 
regulations at Secs. 563.173, 563.174 and 563.175 impose many 
regulatory restrictions on forward commitments, futures transactions, 
and financial options transactions. After reviewing each of these 
existing regulatory requirements, OTS proposes to delete those 
requirements that it no longer considers essential for safety and 
soundness; to incorporate others into guidance; and to convert the 
remainder into broader and more flexible regulatory requirements for 
all types of financial derivative transactions. OTS's proposed 
approach, which relies more on guidance than detailed regulations, more 
closely resembles the bank regulatory agencies' approach with regard to 
banks' use of financial derivatives.3
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    \3\ See e.g., OCC Banking Circular 277 (October 27, 1993).
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II. Proposed Rule

    Because OTS's concerns about the risks institutions incur from the 
various types of derivatives are not unique to one type of derivative, 
the proposed regulation would treat all financial derivatives within a 
common conceptual framework. Proposed Sec. 563.172(a) would define a 
financial derivative as a financial contract whose value depends on the 
value of one or more underlying assets, indices or reference rates. 
This definition would specifically include the three types of financial 
derivatives addressed by the current rule (forward commitments, 
financial futures transactions, and financial options transactions), as 
well as swaps. The proposed definition is based on the Office of the 
Comptroller of the Currency definition of derivative contract. See 12 
CFR Part 3, Appendix A, Section 1(a)(10) (1997). Under the proposed 
definition, a mortgage derivative security, such as a collateralized 
mortgage obligation or a real estate mortgage investment conduit, is 
not a financial derivative. To avoid any confusion, OTS has explicitly 
excluded mortgage derivative securities from the proposed definition.

[[Page 20253]]

    Proposed Sec. 563.172(b) would allow a federal savings association 
to engage in a transaction involving a financial derivative if the 
association is authorized to invest in the assets underlying the 
financial derivative, and the transaction is otherwise safe and sound. 
A state-chartered savings association may engage in a transaction 
involving a financial derivative to the extent that the transaction is 
authorized under its charter and applicable state law, and the 
transaction is otherwise safe and sound. However, institutions engaging 
in derivatives activities generally should do so to reduce their 
overall exposure to risk.
    Proposed Sec. 563.172(c) would address the responsibilities of the 
board of directors with respect to financial derivatives. Under the 
proposed rule, the board would be responsible for effective oversight 
of financial derivatives activities. The board would be required to 
establish written policies and procedures governing authorized 
financial derivatives before the association may engage in any 
transactions involving these instruments. In adopting these policies 
and procedures, the board should review and be guided by TB 13a and 
other applicable agency guidance on establishing a sound risk 
management program. The proposed rule would also require the board to 
periodically review compliance with its policies and procedures, and 
review the adequacy of the policies and procedures to ensure that they 
continue to be appropriate to the nature and scope of the savings 
association's operations and the existing market conditions. Finally, 
the proposed rule would require the board to ensure that management 
establishes an adequate system of internal controls for transactions 
involving financial derivatives.
    Paragraph (d) of the proposed rule would address management's 
responsibilities with respect to financial derivatives. Management 
would be responsible for daily oversight and management of financial 
derivatives activities, including implementing the board's policies and 
procedures and establishing a system of internal controls. Generally, 
this system of internal controls must be designed to ensure safe and 
sound operations, reliable financial and regulatory reporting including 
periodic reporting to the board, and compliance with relevant law. 
Finally, management would be required to ensure that derivatives 
activities are conducted in a safe and sound manner, and should review 
TB 13a and other applicable agency guidance on implementing a sound 
risk management program.
    Proposed Sec. 563.172(e) would prescribe the recordkeeping 
requirements for financial derivatives transactions. Under the proposed 
rule, an association would be required to maintain records adequate to 
demonstrate compliance with the requirements in Sec. 563.172, and 
compliance with the board's policies and procedures on financial 
derivatives.
    As noted above, OTS is also issuing proposed TB 13a for public 
comment. Proposed TB 13a provides additional guidance on what OTS 
considers safe and sound risk management practices with regard to 
financial derivatives, and gives institutions more flexibility in 
addressing risk management concerns than the current regulations. Much 
of the proposed guidance addresses the evaluation of derivatives as a 
component of the institution's overall exposure to interest rate risk.

III. Proposed Disposition of Existing Regulations

    OTS proposes to eliminate existing Secs. 563.173 through 563.175. 
Instead, OTS would rely on the new rule on derivatives and on agency 
guidance. The section-by-section analysis below describes the topics 
addressed by the existing rules and the reasons OTS proposes to modify 
these rules.

Section 563.173  Forward Commitments

    Section 563.173(a) defines various terms used in the regulation, 
and would be eliminated. As noted above, the proposed rule defines 
financial derivatives to include forward commitments. Proposed TB 13a 
would provide additional definitions implementing OTS guidelines 
regarding financial derivatives.4
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    \4\ See OTS Thrift Bulletin 13a, Part III, Section A and 
Appendix D.
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    Section 563.173(b) requires the board of directors of a savings 
association to include in the board minutes certain information 
regarding forward commitment transactions. Under the current rule, the 
minutes must identify thrift personnel that may engage in forward 
commitment transactions, set the limits of these employees' authority, 
identify the brokerage firms through which transactions may be 
conducted, and set a dollar limit on transactions that may be conducted 
with each brokerage firm.
    OTS believes that institutions should continue to perform these 
functions. Under proposed Sec. 563.172(c)(2), the board would be 
required to adopt policies and procedures governing authorized 
financial derivatives activities. In adopting these policies, the board 
should review and be guided by TB 13a, which addresses the content of 
the board's policies and procedures, including the matters specified in 
existing Sec. 563.173(b). Specifically, proposed TB 13a states that an 
institution's policies and procedures should ``identify the staff 
authorized to conduct * * * derivatives activities, their lines of 
authority, and their responsibilities [and] * * * identify dealers, 
brokers, and counterparties that the board * * * has authorized the 
institution to conduct business with and identify credit exposure 
limits for each authorized entity.'' 5
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    \5\ See OTS Thrift Bulletin 13a, Appendix B, Section B. This 
section also includes other relevant guidance. e.g., the board's 
policies and procedures should ``[d]efine, where appropriate, 
position limits and other constraints on each type of authorized 
investment and derivative instrument, including constraints on the 
purpose(s) for which such instruments may be used.''
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    Section 563.173(c) imposes restrictions on savings associations 
that engage in forward commitments. The regulation states a general 
requirement that forward commitments must be conducted in a safe and 
sound manner and includes examples of unsafe and unsound practices. 
This existing regulation also states that outstanding forward 
commitments plus short put options not exceed specified limits based on 
a percentage of total assets.
    While the proposed rule at Sec. 563.172(b) would continue to 
require that all financial derivative transactions must be safe and 
sound, OTS does not believe that a regulatory percentage of assets 
limit is appropriate. Instead, such transactions are best evaluated 
based upon how they affect the interest rate risk of an institution's 
total portfolio. Accordingly, the proposed rule would eliminate 
specific limitations on forward commitments as a percentage of assets. 
Instead, proposed Sec. 563.172(b)(3) would state that an association 
should generally engage in a transaction involving a financial 
derivative to reduce risk exposure. Moreover, in establishing a sound 
risk management program, the board should review and be guided by TB 
13a, which indicates that before engaging in a derivatives transaction, 
the savings association should evaluate the derivative's interest rate 
sensitivity in the context of the institution's overall exposure to 
interest rate risk.6
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    \6\ See OTS Thrift Bulletin 13a, Part III, Section A.
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    Section 563.173(d) requires recognition of all profit or loss upon 
disposal or modification of a forward

[[Page 20254]]

commitment. Since this regulation was first enacted, OTS's accounting 
requirements have been significantly updated, removing the need for 
this specific requirement. OTS expects thrifts to compute gain and loss 
consistent with instructions to the Thrift Financial Report, which 
incorporates the requirements of generally accepted accounting 
principles and the regulatory reporting standards under 12 CFR Part 
562.
    Section 563.173(e) imposes detailed recordkeeping requirements on 
savings associations engaging in forward commitments. Under this 
provision, a savings association must maintain a contract register 
recording specific information on outstanding forward commitments and 
maintain documentation of its ability to fund all outstanding 
commitments when they are due. OTS believes that the level of detail 
specified in the existing regulation is unnecessary. Under proposed 
Sec. 563.172(e), a savings association would be required to maintain 
records sufficient to demonstrate compliance with the regulation and 
with the board's policies and procedures. Proposed TB 13a would provide 
additional guidance on appropriate documentation,7 including 
a contract register containing key information on all outstanding 
contracts and positions.8
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    \7\ See OTS Thrift Bulletin 13a, Part III, Section B. ``[F]or 
each type of financial derivative instrument authorized by the board 
of directors, the institution should maintain records containing: 
(a) the names, duties, responsibilities, and limits of authority 
(including position limits) of employees authorized to engage in 
transactions involving the instrument; (b) a list of approved 
counterparties with which transactions may be conducted; (c) a list 
showing the credit risk limit for each approved counterparty; and 
(d) a contract register containing key information on all 
outstanding contracts and positions.''
    \8\ Id. ``The contract registers should specify the type of 
contract, the price of each open contract, the dollar amount, the 
trade and maturity dates, the date and manner in which contracts 
were offset, and the total outstanding positions.''
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Section 563.174  Futures Transactions

Section 563.175  Financial Options Transactions

    Because Secs. 563.174 and 563.175 address substantially the same 
subjects and impose many identical requirements on futures transactions 
and financial options transactions, these sections are discussed 
together below.
    Sections 563.174(a) and 563.175(a) set forth definitions relevant 
to futures and financial options transactions, respectively. The 
proposed rule would specifically include futures and financial options 
within the definition of financial derivative. In addition, proposed TB 
13a would provide appropriate additional definitions governing 
derivatives transactions. One of the existing definitions at 
Sec. 563.175(a)(13) restricts who may be a permissible counterparty in 
financial options transactions. OTS believes it is more appropriate for 
the board to approve counterparties, as a part of its policies and 
procedures. Accordingly, proposed TB 13a states that the board should 
identify approved counterparties with which the institution may conduct 
business, as well as credit risk limits for each approved 
counterparty.9
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    \9\ See OTS Thrift Bulletin 13a, Appendix B, Section B.
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    Sections 563.174(b) and 563.175(b) detail permissible transactions 
for savings associations. Section 563.174(b) permits a savings 
association to engage in a futures transaction only to the extent that 
the transaction reduces net interest rate risk exposure and sets other 
limits on these transactions. Under Sec. 563.175(b), a thrift may enter 
into a financial option that is a long position or short call without 
any limits, but may enter into short put options only on a limited 
basis. OTS does not propose to place specific limitations on the 
ability of institutions to enter into any positions in futures or 
options contracts. As discussed previously, the proposed rule 
stipulates that, in general, institutions engaging in derivatives 
activities should do so to reduce their overall risk exposure. The 
proposed TB 13a provides extensive guidance on the management of 
interest rate and other risks incurred by savings associations engaging 
in financial derivative transactions.
    Sections 563.174(c) and 563.175(c) authorize savings associations 
to engage in futures and financial options transactions using contracts 
designated by the Commodity Futures Trading Commission (CFTC). Section 
563.175(c) also authorizes savings associations to engage in financial 
options contracts approved by the Securities and Exchange Commission 
(SEC), or financial options contracts entered into with a permissible 
counterparty. OTS proposes to delete these requirements. The guidance 
in proposed TB 13a states that an institution should adequately 
evaluate the enforceability of its derivatives agreement before an 
individual transaction is consummated. As a part of this review, the 
institution should, among other things, ensure that the counterparty 
has authority to enter into the transaction and establish credit 
exposure limits for each counterparty.10
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    \10\ See OTS Thrift Bulletin 13a, Appendix B and the FFIEC 
policy statement (Legal Risk).
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    Sections 563.174(d) and 563.175(d) impose extensive requirements 
for board authorization of interest rate futures and financial options 
transactions. Under the existing rules, a savings association's board 
must authorize such activities before the savings association engages 
in any financial derivatives transactions. These sections also address 
implementation plans, written policies regarding these transactions, 
policy objectives regarding permissible transactions, and internal 
control procedures. Furthermore, the rule requires that board minutes 
must list limits for such transactions, identify personnel authorized 
to engage in such transactions, and specify the duties, 
responsibilities and limits of these personnel. The board must also 
review the institution's position at each regular board meeting.
    The proposed rule would retain those requirements essential for 
developing and maintaining safe and sound risk management practices, 
but would provide institutions more flexibility in designing management 
systems for achieving safe and sound practices. As discussed above, 
proposed Sec. 563.172(c) would continue to require the board to adopt 
policies and procedures before the association may engage in any 
financial derivatives transaction. This section would also require the 
board to monitor compliance with the policies and procedures and to 
ensure that management establishes an adequate system of internal 
control. Moreover, proposed TB 13a would provide guidance on the 
board's establishment of objectives, strategies and major 
policies,11 as well as the other areas of board oversight 
addressed by the current regulation.12
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    \11\ See OTS Thrift Bulletin 13a, Appendix B, Section A 
(addressing the board of directors' approval of broad objectives and 
strategies and major policies relating to interest rate risk 
management).
    \12\ See the discussion of existing Sec. 563.173(b) above.
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    Sections 563.174(e) and 563.175(e) require a savings association to 
notify the appropriate OTS Regional Director following board 
authorization to engage in financial futures and options transactions. 
Furthermore, Sec. 563.175(e) requires counterparties engaging in over-
the-counter financial options transactions with savings associations to 
notify the appropriate OTS Regional Director. Long over-the-counter 
financial options transactions with permissible counterparties in 
excess of a specified limit are subject to the prior approval of the 
Regional Director. These detailed requirements governing OTS 
notification and approval of

[[Page 20255]]

counterparties are not essential to safe and sound risk management. 
Accordingly, OTS proposes to delete this subsection. We note, however, 
that proposed TB 13a would state that institutions should establish a 
list of approved counterparties, as well as record-keeping requirements 
related to counterparties, including individual credit risk 
limits.13
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    \13\ See OTS Thrift Bulletin 13a, Part III, Section B 
(recordkeeping) and Appendix B, Section B (identification of 
counterparties).
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    Sections 563.174(f) and 563.175(f) require a savings association to 
maintain records of futures and financial options transactions, 
including a contract register containing specified information and 
other documentation. Section 563.174(f) specifically requires a savings 
association to retain documents and records for ten years. As discussed 
above, proposed Sec. 563.172 would require a savings association to 
maintain records sufficient to demonstrate compliance with the 
regulation and with the board policy and procedures. Proposed TB 13a, 
which supplements this recordkeeping requirement includes, as an 
example of appropriate documentation, a contract register containing 
information on all outstanding contracts and positions.14
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    \14\ See OTS Thrift Bulletin 13a, Part III, Section B.
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IV. Executive Order 12866

    OTS has determined that this proposed rule does not constitute a 
``significant regulatory action'' for the purposes of Executive Order 
12866.

V. Regulatory Flexibility Act Analysis

    Pursuant to section 605(b) of the Regulatory Flexibility Act, OTS 
has determined that this proposed rule would not have a significant 
economic impact on a substantial number of small entities. The proposed 
rule would reduce the burden of complying with detailed regulations and 
allow for more flexible treatment of derivatives activities for all 
institutions, including small institutions.

VI. Paperwork Reduction Act

    The recordkeeping requirements contained in this notice of proposed 
rulemaking have been submitted to the Office of Management and Budget 
for review in accordance with the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507(d)). Comments on all aspects of this information collection 
should be sent to Office of Management and Budget, Paperwork Reduction 
Project (1550), Washington, D.C. 20503 with copies to the Office of 
Thrift Supervision, Regulations and Legislation Division, Chief 
Counsel's Office, 1700 G Street, NW., Washington, D.C. 20552.
    The information collection requirements currently found in 12 CFR 
563.173, 563.174, and 563.175 have been modified and moved to 12 CFR 
563.172. The burden for these requirements would be reduced from 
120,500 hours to 2,880 hours.
    OTS invites comment on:
    (1) Whether the proposed information collection contained in this 
proposed regulation is necessary for the proper performance of OTS's 
functions, including whether the information has practical utility;
    (2) The accuracy of OTS's estimate of the burden of the proposed 
information collection;
    (3) Ways to enhance the quality, utility, and clarity of the 
information to be collected;
    (4) Ways to minimize the burden of the information collection on 
respondents, including through the use of automated collection 
techniques or other forms of information technology; and
    (5) Estimate of capital and start-up costs of operation, 
maintenance and purchases of services to provide information.
    Recordkeepers are not required to respond to this collection of 
information unless it displays a currently valid OMB control number.
    The information collection requirements contained in this 
regulation are found at 12 CFR 563.172. OTS requires this information 
for the proper supervision of interest rate risk for its regulated 
savings associations. The likely respondents/recordkeepers are OTS-
regulated savings associations. The burden estimates found below 
reflect the burden found in 12 CFR 563.172:
    Estimated average annual burden hours per recordkeeper: 36.
    Estimated number of recordkeepers: 80.
    Estimated total annual recordkeeping burden: 2,880.
    Start up costs to respondents: None.

VII. Unfunded Mandates Reform Act of 1995

    Section 202 of the Unfunded Mandates Reform Act of 1995, Pub. L. 
104-4 (Unfunded Mandates Act) requires that an agency prepare a 
budgetary impact statement before promulgating a rule that includes a 
Federal mandate that may result in expenditure by State, local, and 
tribal governments, in the aggregate, or by the private sector, of $100 
million or more in any one year. If a budgetary impact statement is 
required, section 205 of the Unfunded Mandates Act also requires an 
agency to identify and consider a reasonable number of regulatory 
alternatives before promulgating a rule. As discussed above, this 
proposed rule would reduce regulatory burden by eliminating 
unnecessarily restrictive regulations. OTS has, therefore, determined 
that the effect of the proposed rule will not result in expenditures by 
State, local, or tribal governments or by the private sector of $100 
million or more. Accordingly, OTS has not prepared a budgetary impact 
statement or specifically addressed the regulatory alternatives 
considered.

List of Subjects in 12 CFR Part 563

    Accounting, Advertising, Crime, Currency, Investments, Reporting 
and recordkeeping requirements, Savings associations, Securities, 
Surety bonds.

    Accordingly, the Office of Thrift Supervision proposes to amend 
part 563, chapter V, title 12, Code of Federal Regulations as set forth 
below:

PART 563--OPERATIONS

    1. The authority citation for part 563 continues to read as 
follows:

    Authority: 12 U.S.C. 375b, 1462, 1462a, 1463, 1464, 1467a, 1468, 
1817, 1820, 1828, 3806, 42 U.S.C. 4106.


Secs. 563.173, 563.174, 563.175  [Removed]

    2. Sections 563.173, 563.174, and 563.175 are removed.
    3. Section 563.172 is added to read as follows:


Sec. 563.172  Financial derivatives.

    (a) What is a financial derivative? A financial derivative is a 
financial contract whose value depends on the value of one or more 
underlying assets, indices, or reference rates. The most common types 
of financial derivatives are futures, forward commitments, options, and 
swaps. A mortgage derivative security, such as a collateralized 
mortgage obligation or a real estate mortgage investment conduit, is 
not a financial derivative under this section.
    (b) May I engage in transactions involving financial derivatives? 
(1) If you are a federal savings association, you may engage in a 
transaction involving a financial derivative if you are authorized to 
invest in the assets underlying the financial derivative, the 
transaction is safe and sound, and you otherwise meet the requirements 
in this section.
    (2) If you are a state-chartered savings association, you may 
engage in a transaction involving a financial derivative if your 
charter or applicable

[[Page 20256]]

state law authorizes you to engage in such transactions, the 
transaction is safe and sound, and you otherwise meet the requirements 
in this section.
    (3) In general, if you engage in a transaction involving a 
financial derivative, you should do so to reduce your risk exposure.
    (c) What are my board of directors' responsibilities with respect 
to financial derivatives? (1) Your board of directors is responsible 
for effective oversight of financial derivatives activities.
    (2) Before you may engage in any transaction involving a financial 
derivative, your board of directors must establish written policies and 
procedures governing authorized financial derivatives. Your board of 
directors should review Thrift Bulletin 13a, ``Management of Interest 
Rate Risk, Investment Securities, and Derivatives Activities,'' 
(available at the address listed in Sec. 516.1 of this chapter) and 
other applicable agency guidance on establishing a sound risk 
management program.
    (3) Your board of directors must periodically review:
    (i) Compliance with the policies and procedures established under 
paragraph (c)(2) of this section; and
    (ii) The adequacy of these policies and procedures to ensure that 
they continue to be appropriate to the nature and scope of your 
operations and existing market conditions.
    (4) Your board of directors must ensure that management establishes 
an adequate system of internal controls for transactions involving 
financial derivatives.
    (d) What are management's responsibilities with respect to 
financial derivatives? (1) Management is responsible for daily 
oversight and management of financial derivatives activities. 
Management must implement the policies and procedures established by 
the board of directors and must establish a system of internal 
controls. This system of internal controls should, at a minimum, 
provide for periodic reporting to the board of directors and 
management, segregation of duties, and internal review procedures.
    (2) Management must ensure that financial derivatives activities 
are conducted in a safe and sound manner and should review Thrift 
Bulletin 13a, ``Management of Interest Rate Risk, Investment 
Securities, and Derivatives Activities,'' and other applicable agency 
guidance on implementing a sound risk management program.
    (e) What records must I keep on financial derivative transactions? 
You must maintain records adequate to demonstrate compliance with this 
section and with your board of directors' policies and procedures on 
financial derivatives.

    By the Office of Thrift Supervision.

    Dated: April 9, 1998.
Ellen Seidman,
Director.
[FR Doc. 98-9881 Filed 4-22-98; 8:45 am]
BILLING CODE 6720-01-P