FFIEC Seeks Comment on Proposed Standards for Investment Securities and End-User Derivatives Activities
The Federal Financial Institutions Examination Council (FFIEC)
has proposed revisions to its supervisory guidelines for
investment securities and end-user derivatives activities, and is
seeking comment on its proposals. Comments are due to the FFIEC
by November 17, 1997.
Specifically, the FFIEC has proposed rescinding its 1992
Supervisory Policy Statement on Securities Activities and
enacting a new policy statement, Supervisory Policy Statement on
Investment Securities and End-User Derivatives Activities. The
new policy statement contains a set of sound practices that focus
on the risk management of investment activities, with a
particular emphasis on market risk (primarily interest rate
Rescinding the February 3, 1992, policy statement would eliminate
the constraints on investing in mortgage derivative products
(MDPs) that are deemed "high risk" under existing supervisory
guidance. The decision to eliminate such constraints does not
mean the regulatory agencies believe that MDPs currently
identified as "high risk" are appropriate or inappropriate
investments. Rather, the decision reflects the view that the
appropriateness of any investment product must be evaluated using
a variety of factors, especially management's ability to measure
and manage the risks of investment activities.
The FFIEC's proposed new policy statement reflects the risk-based
approach to supervision adopted by the financial institution
supervisors. It also shows the FFIEC's intent to encourage
financial institutions to evaluate and control the risks
associated with investment activities more broadly, on an
investment-portfolio or institution-wide basis.
As a matter of sound practice, financial institutions should
understand the risks inherent in their securities activities,
both prior to purchase and on an ongoing basis. The FFIEC
agencies continue to believe that the stress testing of MDP
investments, as well as other investments, has significant value
for financial institution's management of risk.
The FFIEC encourages comments on the proposals, which are
attached. The agencies proposing these changes, acting through
the FFIEC, are the Federal Reserve Board, the Federal Deposit
Insurance Corporation, the Office of the Comptroller of the
Currency, the Office of Thrift Supervision and the National
Credit Union Administration.
For more information, please contact one of the following FDIC
officials in the Division of Supervision: William A. Stark,
Assistant Director (202-898-6972), Miguel D. Browne, Manager
(202-898-6789), or John J. Feid, Chief of Risk Management (202-
898-8649); or contact Michael B. Phillips, Counsel in the FDIC's
Legal Division (202-898-3581).
Nicholas J. Ketcha Jr.
Attachment: Federal Register, Vol. 62, No. 192, 3 Oct. 1997, pp.
51862-51867 -- available from FDIC's web site:
Distribution: FDIC-Supervised Banks (Commercial and Savings)
NOTE: Paper copies of FDIC financial institution letters may be
obtained through the FDIC's Public Information Center, 801 17th
Street, N.W., Room 100, Washington, D.C. 20434 (800-276-6003 or
(703) 562-2200). Electronic copies are available from the FDIC web