[Federal Register Volume 63, Number 230 (Tuesday, December 1, 1998)]
[Rules and Regulations]
[Pages 66348-66350]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-31673]



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Part IV





Department of the Treasury





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Office of Thrift Management



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12 CFR Part 563



Financial Management Policies: Financial Derivatives; Final Rule and 
Thrift Bulletin 13a; Notice

  Federal Register / Vol. 63, No. 230 / Tuesday, December 1, 1998 / 
Rules and Regulations  

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DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Part 563

[No. 98-116]
RIN 1550-AB13


Financial Management Policies; Financial Derivatives

ACTION: Final rule.

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SUMMARY: The Office of Thrift Supervision (OTS) is issuing a final rule 
on financial derivatives. The final rule permits savings associations 
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 final rule describes 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 publishing a Thrift Bulletin that provides 
supplemental supervisory guidance on the use of financial derivatives.

EFFECTIVE DATE: This final rule is effective January 1, 1999. OTS will 
not object if an institution wishes to apply this final rule beginning 
December 1, 1998.

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. On April 23, 1998, OTS proposed a 
comprehensive revision of these outmoded regulations.2
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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).
    \2\ 63 FR 20252 (April 23, 1998).
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    One of the goals of the proposed rule was to address the broad 
range of financial derivative 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. The current rules, thus, do not address all of the derivative 
instruments that have been developed over the past twenty years. 
Significantly, these rules do not address interest rate swaps, a 
derivative instrument that thrifts commonly use to address interest 
rate risk.
    The overriding goal of the proposed rule, however, was to ensure 
the safe and sound management of the risks associated with financial 
derivatives. Accordingly, the proposed regulation emphasized that 
derivatives activities must be conducted in a safe and sound manner, 
and set forth the responsibilities of the board of directors and 
management with respect to financial derivatives.
    The proposed rule was also intended to reduce regulatory burden 
consistent with statutory requirements for safe and sound operations. 
Accordingly, OTS proposed to delete regulatory requirements that were 
no longer considered to be essential for safety and soundness, 
redrafted other requirements as guidance, and revised the remaining 
existing requirements as broader and more flexible regulatory 
requirements for all types of financial derivative transactions. OTS's 
proposed approach, which relied more on guidance than detailed 
regulations, more closely resembled 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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    At the same time it issued the proposed rule, OTS proposed 
comprehensive guidance regarding savings associations' risk management 
practices, including those pertaining to derivatives 
transactions.4 Proposed Thrift Bulletin 13a (TB 13a) 
(``Management of Interest Rate Risk, Investment Securities, and 
Derivatives Activities'') included specific guidance on how thrifts 
should implement the Federal Financial Institutions Examination 
Council's ``Supervisory Policy Statement on Investment Securities and 
End-User Derivatives Activities'' (FFIEC policy statement).5
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    \4\ 63 FR 20257 (April 23, 1998).
    \5\ 63 FR 20191 (April 23, 1998). The FFIEC policy statement 
provides general guidance on sound practices for managing the risks 
of investment securities and derivatives activities.
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II. Summary of Public Comments

    The public comment period on the proposed rule and the proposed 
thrift bulletin closed on June 22, 1998. One commenter, a savings 
association, filed a comment supporting the proposed rule.
    The OTS received twenty-seven comments on proposed TB 13a. The 
substance of these comments is addressed in connection with the related 
TB 13a. Some of the commenters also addressed issues related to the 
proposed rule.
    Several commenters suggested that the proposed thrift bulletin and 
the proposed regulation on financial derivatives should be finalized 
simultaneously. The OTS believes that TB 13a provides important and 
necessary guidance on the management of interest rate risk, investment 
securities and derivatives activities. Accordingly, it has made this 
guidance effective on the date of publication in the Federal Register. 
Subject to certain exceptions, however, 12 U.S.C. 4802(b) provides that 
new regulations and amendments to regulations prescribed by a Federal 
banking agency which impose additional reporting, disclosures, or other 
new requirements on an insured depository institution shall take effect 
on the first day of a calendar quarter which begins on or after the 
date on which the regulations are published in final form. Section 
4802(b) also permits persons who are subject to such regulations to 
comply with the regulation before its effective date. Accordingly, OTS 
will not object if an institution wishes to apply the provisions of 
this final rule beginning with the date it is published in the Federal 
Register.
    One commenter, a law firm representing numerous savings 
associations, noted that the proposed rule text would incorporate TB 
13a in several places. Proposed Sec. 563.172(c)(2), for example, states 
that the savings association's board of directors should review TB 13a 
and other applicable agency guidance on establishing a sound risk 
management program. Similarly, proposed Sec. 563.172(d)(2) states that 
management should review the thrift bulletin and other applicable 
agency guidance on implementing a sound risk management program. The 
commenter also noted that OTS sought public comment on TB 13a, a 
procedural step that it does not generally follow for thrift bulletins. 
The commenter asked OTS to clarify whether the cross-references in the 
rule text and the procedures followed in promulgating the thrift 
bulletin were intended to change the legal status of guidance in the 
bulletin.
    The inclusion of cross-references to TB 13a and other agency 
guidance in

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the rule text merely serves as a reference point to the board of 
directors and management in establishing and implementing written 
policy and procedures on financial derivatives. As such, the cross-
references to TB 13a only provide guidance on how financial derivatives 
activities may be conducted in a safe and sound manner.6 
They do not alter the legal status of the guidance contained in the 
bulletin. Similarly, publication of TB 13a for public comment does not 
change its legal status as a thrift bulletin. Rather, the bulletin 
represents the Agency's best judgment in interpreting regulations and 
statutes which it administers. The administrative procedures used 
specifically to develop TB 13a were intended to provide OTS with public 
comment on all possible aspects of the management of interest rate 
risk, investment securities and derivative activities.
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    \6\ OTS has incorporated other similar cross-references into its 
regulations. See 12 CFR 562.2(b) which cross-references guidance in 
OTS bulletins, and examination handbooks.
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    One commenter on the Thrift Bulletin urged the OTS to amend its 
capital regulations to eliminate the interest rate risk component at 12 
CFR 567.7. The agency believes that a review of Sec. 567.7 may have 
merit. However, neither the proposed Thrift Bulletin nor the notice of 
proposed rulemaking suggested that the OTS was considering any revision 
to its capital rules.
    In order to get the full benefit of public comment on this issue, 
the OTS will shortly initiate a rulemaking that will examine the need 
to retain Sec. 567.7 in light of the tools that are currently available 
to measure and control interest rate risk.

III. Final Rule

    Since no commenter suggested substantive changes to the proposed 
rule and OTS has identified no other reasons to modify the text, OTS 
has adopted the proposed rule without substantive change. Elsewhere in 
today's Federal Register, OTS is also publishing a final TB 13a, which 
provides supplemental supervisory guidance on the use of financial 
derivatives.

IV. Executive Order 12866

    OTS has determined that this final 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 final rule does not have a significant 
economic impact on a substantial number of small entities. The final 
rule reduces the burden of complying with detailed regulations and 
allows for more flexible treatment of derivatives activities for all 
institutions, including small institutions.

VI. Paperwork Reduction Act

    The recordkeeping requirements contained in this final rule have 
been submitted to and approved by the Office of Management and Budget 
in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3507(d)) under OMB Control No. 1550-0094. 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 contained in this rule are 
found in 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.
    Respondents/recordkeepers are not required to respond to the 
collections of information unless the collection displaces a current 
valid OMB control number.

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 final 
rule reduces regulatory burden by eliminating unnecessarily restrictive 
regulations. OTS has, therefore, determined that the effect of the 
final 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 amends 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 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

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procedures governing authorized financial derivatives. Your board of 
directors should review Thrift Bulletin 13a, ``Management of Interest 
Rate Risk, Investment Securities, and Derivatives Activities,'' 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'' (available at the address 
listed at Sec. 516.1 of this chapter), 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.

    Dated: November 20, 1998.

    By the Office of Thrift Supervision.
Ellen Seidman,
Director.
[FR Doc. 98-31673 Filed 11-30-98; 8:45 am]
BILLING CODE 6720-01-P