[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]
[[Page 66347]]
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Part IV
Department of the Treasury
_______________________________________________________________________
Office of Thrift Management
_______________________________________________________________________
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
[[Page 66348]]
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
[[Page 66349]]
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
