OCC Offers Guidelines on Risk Management for Credit Derivatives

Article excerpt

The Office of the Comptroller of the Currency on Monday advised national banks to institute risk management systems for credit derivatives, a new breed of instruments designed to reduce a bank's exposure to loan concentration risk.

In a bulletin issued to national banks, the OCC said credit derivatives offer substantial risk management benefits but must be treated with the same care as any other hedging instrument. That means banks should install systems to monitor and control risks stemming from these instruments. For example, the guidelines recommended that credit derivatives activities be reviewed by bank employees not directly involved in the transactions.

Blythe Masters, global head of credit derivatives for J.P. Morgan, called the OCC's approach "very encouraging."

"The absence of any regulatory discussion whatsoever has been a constraint on the short-term growth of credit derivatives," Ms. Masters said. "Had any initial statement from the regulators been overly conservative, we would have been concerned that the growth of this product would have been stymied.

"The OCC has made the regulatory environment a much friendlier place," she added.

The Federal Deposit Insurance Corp. …