12 C.F.R. § 563.172 Financial derivatives.
Title 12 - Banks and Banking
(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 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 §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. [63 FR 66349, Dec. 1, 1998]
Title 12: Banks and Banking
PART 563—SAVINGS ASSOCIATIONS—OPERATIONS
Subpart F—Financial Management Policies
§ 563.172 Financial derivatives.
