[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
_______________________________________________________________________
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