WASHINGTON -- As a result of a Federal Home Loan Bank Board action last week, federally insured thrifts are now expressly authorized to trade in over-the-counter financial options.
In approving trades in these instruments, the agency reversed a policy that it had reiterated just months ago in a memorandum to federally insured thrifts. Under that policy, thrifts were permitted only to deal in those financial options traded on the exchanges.
The decision to permit thrifts to trade over-the-counter financial options "will increase significantly the flexibility of institutions to hedge against interest rate risk," said Bank Board attorney Robert Monheit.
Under the rule, however, thrifts may enter into these transactions only with those 36 primary government securities dealers regulated by the Federal Reserve Bank of New York. Thrifts may also enter into options agreements with affiliates of these dealers.
Some thrift analysts were puzzled by the Bank Board's initial prohibition of over-the-counter financial options trading, noting that thrifts have been purchasing options in this market for some time. Analysts say the new rule simply legitimizes the ongoing activity and adds a new restriction -- that thrifts deal only with regulated government securities dealers. The recent collapse of several unregulated government securities firms has rocked the financial world and made banking regulators nervous.
Privately, Bank Board officials acknowledge that the reversal in policy was prompted by pressure from the thrift industry.
"Thrifts had been engaging to a substantial degree in over-the-counter options, but they never had the authority," said one Bank Board official. "There's been quite an outcry from the industry, because these are deemed to be essential. And we agreed these options had their place."
Peregrine Montcreiffe, executive vice president of Shearson Lehman Brothers Inc., said that thrift institutions are attracted to the over-the-counter market because of the opportunity to trade in options on mortgage-backed securities issued by the Government National Mortgage Association, or Ginnie Mae; the Federal National Mortgage Association, or Fannie Mae, and the Federal Home Loan Mortgage Corp., or Freddie Mac.
Those options, which provide an often effective means of hedging against the interest rate risk in thrifts' portfolios, are not traded on the exchanges.
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