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F ederal Reserv e Bank o f Dallas
DALLAS, TEXAS

75 2 22

Circular No. 80-179
September 23, 1980

POLICY STATEMENT
(Bank Holding Company Participation in Forward Placement or Delayed
Delivery Contracts and Interest Rate Futures Contracts)

TO ALL MEMBER BANKS,
BANK HOLDING COMPANIES,
AND OTHERS CONCERNED IN THE
ELEVENTH FEDERAL RESERVE DISTRICT:
The Board of Governors of the Federal Reserve System has approved
a policy statem ent relating to bank holding companies' participation in forward
placement or delayed delivery contracts and interest rate futures contracts. The
policy statem ent, presented in the form of a letter to bank holding compaines,
is enclosed.
The three Federal bank regulatory agencies jointly issued revised
policy statem ents earlier this year, which set forth precautionary rules and
specific guidelines for commercial banks that may consider it desirable to enter
into futures, forward or standby contracts on U.S. Goverment and agency
securities. The press release announcing those revisions is also enclosed.
Any questions concerning the enclosed documents should be directed
to the Attorneys' Section of our Holding Company Supervision Department, Ext.
6182. Additional copies of this circular will be furnished upon request to the
Bank and Public Information Department, Ext. 6266.
Sincerely yours,
Robert H. Boykin
First Vice President
Enclosures

Banks and others are encouraged to use the following incoming W A T S numbers in contacting this Bank:
1-800-442-7140 (intrastate) and 1-800-527-9200 (interstate). For calls placed locally, please use 651 plus the
extension referred to above.

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

LETTER TO BANK HOLDING COMPANIES

The three Federal bank regulatory agencies jointly issued revised
policy statements on March 14, 1980 which set forth precautionary rules and
specific guidelines for banks that may consider it desirable to enter into
futures, forward and standby contracts on U. S. Government and agency secur­
ities ("financial contracts"). A copy of the press release announcing these
revisions is enclosed for your convenient reference. In recent months, ques­
tions have arisen concerning the application of the joint bank policy state­
ments to bank holding companies that might consider engaging in similar prac­
tices.
In supervising the activities of bank holding companies, the Board
has adopted and continues to follow the principle that bank holding companies
should serve as a source of strength for their subsidiary banks. Accordingly,
the Board believes that any positions that bank holding companies or their
nonbank subsidiaries take in financial contracts should reduce risk exposure,
that is, not be speculative.
If the parent organization or nonbank subsidiary is taking or
intends to take positions in financial contracts, that company's board of
directors should approve prudent written policies and establish appropriate
limitations to insure that financial contract activities are performed in
a safe and sound manner with levels of activity reasonably related to the
organization’s business needs and capacity to fulfill obligations. In
addition, internal controls and internal audit programs to monitor such
activity should be established. The board of directors, a duly authorized
committee thereof or the internal auditors should review periodically (or
at least monthly) all financial contract positions to insure conformance with
such policy*and limits. In order to determine the company's exposure, all
open positions should be reviewed and market values determined at least
monthly, or more often, depending on volume and magnitude of positions.
In formulating its policies and procedures, the parent holding com­
pany may consider the interest rate exposure of its nonbank subsidiaries,
but not that of its bank subsidiaries. As a matter of policy, the Board
believes that any financial contracts executed to reduce the interest rate
exposure of a bank affiliate of a holding company should be reflected on
the books and records of the bank affiliate (to the extent required by the
bank policy statements), rather than on the books and records of the parent
company. If a bank has had an interest rate exposure that management believes
requires hedging with financial contracts, the bank should be the direct
beneficiary of any effort to reduce that exposure. The Board also believes
that final responsibility for financial contract transactions for the account
of each affiliated bank should reside with the management of that bank.
As you may know, the joint bank policy statements referred to above
Include accounting guidelines for banks that engage in financial contract
activities. Since a special task force of the American Institute of Certi­
fied Public Accountants is presently considering accounting standards for
contract activities, no specific accounting requirements for financial con­
tracts entered into by parent bank holding companies and nonbank subsidiaries
are being mandated at this time. The Board expects to review further develop­
ments in this area.

- 2 -

The Board intends to monitor closely bank holding company transac­
tions In financial contracts to ensure that any such activity Is consistent
with maintaining a safe and sound banking system. In any cases where bank
holding companies are found to be engaging in speculative practices, the
Board is prepared to institute appropriate action under the Financial Institu­
tions Supervisory Act of 1966, as amended.

Enclosure

Joint News Release

Comptroller of the Currency_________
Federal Deposit Insurance Corporation
Federal Reserve Board

For immediate release
The three Federal bank regulatory agencies today announced a
n u m b e r o f r e v i s i o n s in t h e i r g u i d e l i n e s f or b a n k s tha t e n g a g e in f u t u r e s ,
f o r w a r d a n d s t a n d b y c o n t r a c t s o n U.S. g o v e r n m e n t a n d a g e n c y s e c u r i t i e s .
T h e c h a n g e s a n n o u n c e d t o d a y w e r e to g u i d e l i n e s a d o p t e d last
November.

T h e F e d e r a l D e p o s i t I n s u r a n c e C o r p o r a t i o n a n d the F e d e r a l R e s e r v e

B o a r d i n c o r p o r a t e d t h e g u i d e l i n e s in a p o l i c y s t a t e m e n t .

T h e C o m p t r o l l e r of

th e C u r r e n c y ' s g u i d e l i n e s w e r e c o n t a i n e d in a n o p e r a t i n g c i r c u l a r .
I n one c h a n g e , a d o p t e d b y t h e F D I C a n d t h e F e d e r a l R e s e r v e , fut ures
and f o r w a r d c o n t r a c t s e x e c u t e d b y S t a t e c h a r t e r e d b a n k s b e f o r e J a n u a r y 1,
1 9 8 0 w e r e e x e m p t e d f r o m t h e a c c o u n t i n g p r o c e d u r e s s p e c i f i e d in t h e g u i d e l i n e s .
T h e C o m p t r o l l e r of t he C u r r e n c y r e t a i n e d the J a n u a r y 1 e f f e c t i v e d a t e for all
c o n t r a c t s e n t e r e d i n t o b y n a t i o n a l b a n k s , as t h e C o m p t r o l l e r h a s h a d s i m i l a r
a c c o u n t i n g p r o v i s i o n s in e f f e c t s i n c e 1977.
O t h e r p r i n c i p a l c h a n g e s in t h e g u i d e l i n e s a d o p t e d in t h e l i g h t o f
s u b s t a n t i a l c o m m e n t r e c e i v e d s i n c e t he g u i d e l i n e s w e r e p u b l i s h e d last N o v e m b e r ,
i n c l u d e t he fol lowin g:
1.
B a n k s m a y e x e r c i s e t h e o p t i o n o f c a r r y i n g fu t u r e s a n d for w a r d
positions o n a m a r k e t or o n a lower of cost or m a r k e t basis.
2.
Futures and forward contract activities associated w i t h bona
fid e h e d g i n g o f a m o r t g a g e b a n k i n g o p e r a t i o n a r e e x e m p t e d f r o m the
oth erwis e prescrib ed a c c ounti ng tre atment for such contracts.
3. A n u m b e r o f o t h e r t e c h n i c a l c h a n g e s h a v e b e e n m a d e , i n c l u d i n g
rel a x a t i o n o f the req uirement that a bank's boa rd of dir ectors
r e v i e w c o n t r a c t s at lea st m o n t h l y .
The agencies adopted the guidelines following a Treasury/Federal
R e s e r v e S t u d y i n d i c a t i n g t h a t b a n k s c a n e f f e c t i v e l y u s e f i n a n c i a l fut u r e s

-2-

c o n t r a c t s to h e d g e t h e i r r i s k o f lo s s e s d u e to c h a n g e s in i n t e r e s t rat es, b u t n o t i n

that i m p r o p e r use o f i n t e r e s t r a t e fut u r e s c o n t r a c t s i n c r e a s e s , r a t h e r t h a n d e c r e a s e
t h e r i s k o f loss d u e to c h a n g e s in i n t e r e s t rates.
I n a d d i t i o n to t h e i r g u i d e l i n e s , t h e a g e n c i e s p r o v i d e d t h e f o l l o w i n g
p r e c a u t i o n a r y rules to b a n k s t h e y s u p e r v i s e :
1.

B a n k s tha t e n g a g e in fut u r e s , f o r w a r d o r s t a n d b y c o n t r a c t t r a n s a c t i o n s

s h o u l d d o so o n l y in a c c o r d a n c e w i t h saf e and s o u n d b a n k i n g p r a c t i c e s .
2.

S u c h t r a n s a c t i o n s s h o u l d be of a s i z e r e a s o n a b l y r e l a t e d to t h e b a n k ' s

b u s i n e s s n e e d s and to its c a p a c i t y to f u l f i l l o b l i g a t i o n s inc ur r e d .
3.

T h e p o s i t i o n s b a n k s t a k e in fut ures, f o r w a r d and s t a n d b y c o n t r a c t s

s h o u l d b e s u c h as to r e d u c e t h e b a n k ' s e x p o s u r e to loss t h r o u g h i n t e r e s t r a t e c h a n g e
4.

P o l i c y o b j e c t i v e s s h o u l d b e f o r m u l a t e d i n t h e light o f t h e b a n k ' s

e n t i r e m i x o f a s s e t s and l i a b i l i t i e s .
5.

S t a n d b y c o n t r a c t s c a l l i n g for s e t t l e m e n t in e x c e s s o f 150 d a y s s h o u l d

n ot be i s s u e d b y b a n k s e x c e p t in s p e c i a l c i r c u m s t a n c e s a n d o r d i n a r i l y s u c h l o n g t e r m
s t a n d b y c o n t r a c t s w o u l d be v i e w e d b y t h e a g e n c i e s as b e i n g i n a p p r o p r i a t e .
T h e 1 0 - p o i n t g u i d e l i n e s tha t s h o u l d b e f o l l o w e d b y b a n k s a u t h o r i z e d to
p a r t i c i p a t e in t h e s e m a r k e t s i n c l u d e d i r e c t i v e s o n the r o l e o f b a n k b o a r d s of
d i r e c t o r s , r e c o r d k e e p i n g , m o n i t o r i n g of s u c h a c t i v i t i e s , v a l u a t i o n o f c o n t r a c t s ,
t r e a t m e n t o f fee i n c o m e i n c o n n e c t i o n w i t h a s t a n d b y c o n t r a c t , d i s c l o s u r e s o f
a c t i v i t y b y a b a n k in fut u r e s , f o r w a r d a nd s t a n d b y c o n t r a c t s , m o n i t o r i n g o f c r e d i t
r i s k e x p o s u r e a n d i n t e r n a l c o n t r o l s at b a n k s .
The text of the guidelines is attached.
- 0 -

Guidelines for Banks that Engage

i n Fut u r e s , F o r w a r d a nd S t a n d b y
Contract Activities
B a n k s t h a t e n g a g e in f u t u r e s f o r w a r d and s t a n d b y ^ c o n t r a c t
,U
U
a c t i v i t i e s s h o u l d o n l y do so in a c c o r d a n c e w i t h s a f e a n d s o u n d b a n k i n g
p r a c t i c e s w i t h l e v e l s of a c t i v i t y r e a s o n a b l y r e l a t e d to the b a n k ’s b u s i n e s s
n e e d s a n d c a p a c i t y to f u l f i l l its o b l i g a t i o n s u n d e r t h e s e c o n t r a c t s .
In
m a n a g i n g t h e i r a s s e t s a n d l i a b i l i t i e s , b a n k s s h o u l d e v a l u a t e the i n t e r e s t
r a t e r i s k e x p o s u r e r e s u l t i n g f r o m th e i r o v e r a l l a c t i v i t i e s to i n s u r e that
the p o s i t i o n s t h e y tak e in fut u r e s , f o r w a r d a n d s t a n d b y c o n t r a c t m a r k e t s
w i l l r e d u c e th e i r r i s k e x p o s u r e ; a n d p o l i c y o b j e c t i v e s s h o u l d b e f o r m u ­
l a t e d i n l i g h t of the b a n k ' s e n t i r e a s s e t a n d l i a b i l i t y mix.
The following
a r e m i n i m a l g u i d e l i n e s to b e f o l l o w e d b y b a n k s a u t h o r i z e d to p a r t i c i p a t e
in t h e s e m a r k e t s .
1.
P r i o r to e n g a g i n g in t h e s e t r a n s a c t i o n s , a b a n k s h o u l d
o b t a i n an o p i n i o n of c o u n s e l o r its S t a t e b a n k i n g a u t h o r i t y
c o n c e r n i n g the l e g a l i t y of its a c t i v i t i e s u n d e r S t a t e l a w . 4/

1/

Futures C o n t r a c t s : These are sta ndardized contracts traded on org anized
e x c h a n g e s to p u r c h a s e o r s e l l a s p e a i f i e d s e c u r i t y o n a f u t u r e d a t e at
a s p e c i f i e d pri ce.
Futures contracts on GNMA mortgage-backed securities
a n d T r e a s u r y b i l l s w e r e the f i r s t i n t e r e s t r a t e f u t u r e s c o n t r a c t s .
Several other interest rate futures contracts have b e e n developed, and
it is a n t i c i p a t e d that n e w and s i m i l a r i n t e r e s t r a t e f u t u r e s c o n t r a c t s
w i l l c o n t i n u e to b e p r o p o s e d a n d a d o p t e d f o r t r a d i n g o n v a r i o u s exc hange s.
2J F o r w a r d C o n t r a c t s : T h e s e a r e o v e r - t h e - c o u n t e r c o n t r a c t s for f o r w a r d
p l a c e m e n t o r d e l a y e d d e l i v e r y of s e c u r i t i e s in w h i c h o n e p a r t y a g r e e s
to p u r c h a s e a n d a n o t h e r to s e l l a s p e c i f i e d s e c u r i t y at a s p e c i f i e d
p r i c e for f u t u r e d e l i v e r y .
C o n t r a c t s s p e c i f y i n g s e t t l e m e n t in e x c e s s
of 30 day s f o l l o w i n g t r a d e d a t e s h a l l b e d e e m e d to b e f o r w a r d c o n t r a c t s .
Forward contracts are not traded on org anize d exchanges, generally
have not required m a r g i n payments, and can only be terminated b y
a g r e e m e n t of b o t h p a r t i e s to the t r a n s a c t i o n .
3/ S t a n d b y C o n t r a c t s : T h e s e a r e o p t i o n a l d e l i v e r y f o r w a r d c o n t r a c t s o n
U.S. g o v e r n m e n t and a g e n c y s e c u r i t i e s a r r a n g e d b e t w e e n s e c u r i t i e s
d e a l e r s a n d c u s t o m e r s a nd do n o t c u r r e n t l y i n v o l v e t r a d i n g o n o r g a n i z e d
exchanges.
T h e b u y e r of a s t a n d b y c o n t r a c t (put o p t i o n ) a c q u i r e s ,
u p o n p a y i n g a fee, the r i g h t to s e l l s e c u r i t i e s to the o t h e r p a r t y at
a s t a t e d p r i c e at a f u t u r e time.
T h e s e l l e r of a s t a n d b y (the issuer)
r e c e i v e s the fee, and m u s t s t a n d r e a d y to b u y the s e c u r i t i e s at the
o t h e r p a r t y ' s opt ion.
4/
T h e C o m p t r o l l e r ’s O f f i c e h a s d e f i n e d t h e s e c o n t r a c t s to b e i n c i d e n t a l
to b a n k i n g p r o v i d e d t h e i r u s e c o r r e s p o n d s to t he d e f i n i t i o n s o u t l i n e d
i n the C o m p t r o l l e r ' s B a n k i n g C i r c u l a r .

- 2 -

2. T h e b o a r d of d i r e c t o r s s h o u l d c o n s i d e r a n y p l a n to
e n g a g e i n t h e s e a c t i v i t i e s and s h o u l d e n d o r s e s p e c i f i c w r i t t e n
policies in authorizing these activities.
Policy objectives
m u s t b e s p e c i f i c e n o u g h to o u t l i n e p e r m i s s i b l e c o n t r a c t
s t r a t e g i e s and the ir r e l a t i o n s h i p to o t h e r b a n k i n g a c t i v i t i e s ,
a n d r e c o r d k e e p i n g s y s t e m s m u s t be s u f f i c i e n t l y d e t a i l e d to
p e r m i t i n t e r n a l a u d i t o r s and e x a m i n e r s to d e t e r m i n e w h e t h e r
operating personnel have acted in accordance with authorized
objectives.
B a n k p e r s o n n e l a re e x p e c t e d to be a b l e to d e s c r i b e
a nd d o c u m e n t in d e t a i l h o w the p o s i t i o n s the y h a v e t a k e n in
fut u r e s , f o r w a r d a n d s t a n d b y c o n t r a c t s c o n t r i b u t e to the
a t t a i n m e n t of t h e b a n k ' s s t a t e d o b j e c t i v e s .
3.
T h e b o a r d of d i r e c t o r s s h o u l d e s t a b l i s h l i m i t a t i o n s
a p p l i c a b l e to fut u r e s , f o r w a r d a nd s t a n d b y c o n t r a c t p o s i t i o n s ;
a n d the b o a r d of d i r e c t o r s , a d u l y a u t h o r i z e d c o m m i t t e e the reof,
cr the b a n k ' s i n t e r n a l a u d i t o r s s h o u l d r e v i e w p e r i o d i c a l l y (at
l e a s t m o n t h l y ) c o n t r a c t p o s i t i o n s to a s c e r t a i n c o n f o r m a n c e w i t h
s u c h lim its.
4.
The b an k should m a i n t a i n general ledger m e m orand um
a c c o u n t s or c o m m i t m e n t r e g i s t e r s to a d e q u a t e l y i d e n t i f y a nd
c o n t r o l a l l c o m m i t m e n t s to m a k e or take d e l i v e r y of s e c u r i t i e s .
S u c h r e g i s t e r s a n d s u p p o r t i n g j o u r n a l s s h o u l d at a m i n i m u m
inc lude:
(a)
(b)
(c)
(d)

the type a n d a m o u n t of e a c h c o n tract ,
the m a t u r i t y d a t e of e a c h c o n t r a c t ,
the c u r r e n t m a r k e t p r i c e a n d c o s t of eac h
c o n t r a c t , and
the a m o u n t of m o n e y h e l d in m a r g i n a c c o u n t s .

5. W i t h t he e x c e p t i o n of c o n t r a c t s d e s c r i b e d in i t e m 6, all
o p e n p o s i t i o n s s h o u l d b e r e v i e w e d and m a r k e t v a l u e s d e t e r m i n e d at
l e a s t m o n t h l y (or m o r e often, d e p e n d i n g o n v o l u m e a n d m a g n i t u d e of
p o s i t i o n s ) , r e g a r d l e s s of w h e t h e r the b a n k is r e q u i r e d to d e p o s i t
m a r g i n i n c o n n e c t i o n w i t h a g i v e n c o n t r a c t . 5/ A l l f u t u r e s and
f o r w a r d c o n t r a c t s s h o u l d b e v a l u e d o n the b a s i s of e i t h e r m a r k e t
or the l o w e r of c o s t or m a r k e t , at the o p t i o n of the b a n k . 6 /
Standby
c o n t r a c t s s h o u l d b e v a l u e d o n the b a s i s of the l o w e r of c o s t or m a r k e t .7/
M a r k e t b a s i s f o r f o r w a r d a n d s t a n d b y c o n t r a c t s s h o u l d b e b a s e d o n the

5/

U n d e r l y i n g s e c u r i t y c o m m i t m e n t s r e l a t i n g to o p e n f u t u r e s a n d f o r w a r d
c o n t r a c t s s h o u l d n o t be r e p o r t e d o n the b a l a n c e sheet. M a r g i n d e p o s i t s
a n d a n y u n r e a l i z e d l o s s e s (and in c e r t a i n i n s t a n c e s , u n r e a l i z e d gains)
a r e u s u a l l y the o n l y e n t r i e s to b e r e c o r d e d o n the bo o k s .
See " G e n e r a l
I n s t r u c t i o n s " to the P»eports of C o n d i t i o n a n d I n c o m e f or a d d i t i o n a l det a i l s
6/ F u t u r e s a n d f o r w a r d c o n t r a c t s e x e c u t e d for t r a d i n g a c c o u n t p u r p o s e s s h o u l d
be v a l ued on a basis consistent w i t h other trading positions.
7/ L o s s e s o n s t a n d b y c o n t r a c t s n e e d b e c o m p u t e d o n l y in t he c a s e of the
p a r t y c o m m i t t e d to p u r c h a s e u n d e r the c o n t r a c t , a n d o n l y w h e r e the
m a r k e t v a l u e of the s e c u r i t y is b e l o w the c o n t r a c t p r i c e a d j u s t e d for
d e f e r r e d f e e inc ome.

-3m a r k e t v a l u e of the u n d e r l y i n g s e c u r i t y , e x c e p t w h e r e p u b l i c l y
quoted forward contract price quotations are available.
All
losses resulting from mon thly contract v a l u e determination should
b e r e c o g n i z e d as a c u r r e n t e x p e n s e item; th o s e b a n k s that v a l u e
c o n t r a c t s o n a m a r k e t b a s i s w o u l d r e c o g n i z e ga i n s as a c u r r e n t
i n c o m e item.
In the ev e n t the a b o v e d e s c r i b e d f u t u r e s a n d f o r w a r d
c o n t r a c t s r e s u l t in the a c q u i s i t i o n of s e c u r i t i e s , suc h s e c u r i t i e s
s h o u l d be r e c o r d e d o n a b a s i s c o n s i s t e n t w i t h tha t a p p l i e d to the
c o n t r a c t s ( e i t h e r m a r k e t or l o w e r of c o s t or m a r k e t ) . A c q u i s i t i o n
of securities arising from standby contracts should be rec orded on
the b a s i s of l o w e r of a d j u s t e d c o s t (see I t e m 7(c)) o r m a r k e t .
6.
F u t u r e s or f o r w a r d c o n t r a c t s a s s o c i a t e d w i t h b o n a f i d e
h e d g i n g of m o r t g a g e b a n k i n g o p e r a t i o n s , i.e., the o r i g i n a t i o n
and p u r c h a s e of m o r t g a g e l o a n s f o r r e s a l e to i n v e s t o r s or the
i s s u a n c e of m o r t g a g e - b a c k e d s e c u r i t i e s , m a y b e a c c o u n t e d for in
accordance with generally accepted accounting principles applicable
to s u c h a c t i v i t y .
7. F e e i n c o m e r e c e i v e d b y a b a n k in c o n n e c t i o n w i t h a s t a n d b y
c o n t r a c t s h o u l d b e d e f e r r e d at i n i t i a t i o n of the c o n t r a c t and
a c c o u n t e d for as f ol lows:
a. u p o n e x p i r a t i o n of a n u n e x e r c i s e d c o n t r a c t
the d e f e r r e d a m o u n t s h o u l d b e r e p o r t e d as income;
b.
u p o n a n e g o t i a t e d s e t t l e m e n t of the c o n t r a c t
p r i o r to m a t u r i t y , t he d e f e r r e d a m o u n t s h o u l d be
a c c o u n t e d for as a n a d j u s t m e n t to the e x p e n s e of
s u c h s e t t l e m e n t , a n d t he n e t a m o u n t s h o u l d be
t r a n s f e r r e d to the i n c o m e acc o u n t ; or
c.
u p o n e x e r c i s e of the c o n t r a c t , the d e f e r r e d
a m o u n t s h o u l d b e a c c o u n t e d f or as a n a d j u s t m e n t
to the b a s i s of the a c q u i r e d s e c u r i t i e s .
Suc h
a d j u s t e d c o s t b a s i s s h o u l d b e c o m p a r e d to m a r k e t
v a l u e of s e c u r i t i e s a c q u i r e d .
See i t e m 5.
8. B a n k f i n a n c i a l r e p o r t s s h o u l d d i s c l o s e i n an e x p l a n a t o r y
n o t e a n y fut u r e s , f o r w a r d a n d s t a n d b y c o n t r a c t a c t i v i t y that
m a t e r i a l l y a f f e c t s the b a n k ’s f i n a n c i a l c o n d i t i o n .
9. To i n s u r e t h a t b a n k s m i n i m i z e c r e d i t r i s k a s s o c i a t e dw i t h
f o r w a r d a nd s t a n d b y c o n t r a c t a c t i v i t y , b a n k s s h o u l d i m p l e m e n t a s y s t e m
for m o n i t o r i n g c r e d i t r i s k e x p o s u r e a s s o c i a t e d w i t h v a r i o u s c u s t o m e r s
a n d d e a l e r s w i t h w h o m o p e r a t i n g p e r s o n n e l a r e a u t h o r i z e d to t r a n s a c t
business.
10. To a s s u r e a d h e r e n c e to b a n k p o l i c y a n d p r e v e n t u n a u t h o r i z e d
t r a d i n g a n d o t h e r abu s e s , b a n k s s h o u l d e s t a b l i s h o t h e r i n t e r n a l
con­
trols i n c l u d i n g p e r i o d i c r e p o r t s to m a n a g e m e n t , s e g r e g a t i o n of d u t i e s ,
and internal audit programs.

- 4 -

The i s s u a n c e of l o n g - t e r m s t a n d b y c o n t r a c t s , i.e., c h o s e for
150 d a y s or mor e, w h i c h g i v e the o t h e r p a r t y to the c o n t r a c t the o p t i o n to
d e l i v e r s e c u r i t i e s to the b a n k w i l l o r d i n a r i l y b e v i e w e d as a n i n a p p r o p r i a t e
practice.
In alm ost all instances w h e r e standby contracts specified settle­
m e n t i n e x c e s s of 1 50 days, s u p e r v i s o r y a u t h o r i t i e s h a v e f o u n d tha t s u c h
c o n t r a c t s w e r e r e l a t e d n o t to the i n v e s t m e n t o r b u s i n e s s n e e d s of the i n s t i ­
tut ion, b u t p r i m a r i l y to the e a r n i n g of f e e i n c o m e or to s p e c u l a t i n g on
f u t u r e i n t e r e s t r a t e m o v e m e n t s . 'Accordingly, b a n k s s h o u l d n o t i s s u e s t a n d b y
c o n t r a c t s s p e c i f y i n g d e l i v e r y in e x c e s s of 150 day s, u n l e s s s p e c i a l c i r c u m ­
stances warrant.


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102