12 CFR § 7.1030 - Permissible derivatives activities for national banks.
(a) Authority. This section is issued pursuant to 12 U.S.C. 24(Seventh). A national bank may only engage in derivatives transactions in accordance with the requirements of this section.
(b) Definitions. For purposes of this section:
(1) Customer-driven means a transaction is entered into for a customer's valid and independent business purpose (and a customer-driven transaction does not include a transaction the principal purpose of which is to deliver to a national bank assets that the national bank could not invest in directly);
(2) Perfectly-matched means two back-to-back derivatives transactions that offset risk with respect to all economic terms (e.g., amount, maturity, duration, and underlying);
(3) Portfolio-hedged means a portfolio of derivatives transactions that are hedged based on net unmatched positions or exposures in the portfolio;
(4) Physical hedging or physically-hedged means holding title to or acquiring ownership of an asset (for example, by warehouse receipt or book-entry) solely to manage the risks arising out of permissible customer-driven derivatives transactions;
(5) Physical settlement or physically-settled means accepting title to or acquiring ownership of an asset;
(6) Transitory title transfer means accepting and immediately relinquishing title to an asset; and
(7) Underlying means the reference asset, rate, obligation, or index on which the payment obligation(s) between counterparties to a derivative transaction is based.
(c) In general. A national bank may engage in the following derivatives transactions after notice in accordance with paragraph (d) of this section, as applicable:
(1) Derivatives transactions with payments based on underlyings a national bank is permitted to purchase directly as an investment;
(2) Derivatives transactions with any underlying to hedge the risks arising from bank-permissible activities;
(3) Derivatives transactions as a financial intermediary with any underlying that are customer-driven, cash-settled, and either perfectly-matched or portfolio-hedged;
(4) Derivatives transactions as a financial intermediary with any underlying that are customer-driven, physically-settled by transitory title transfer, and either perfectly-matched or portfolio-hedged; and
(5) Derivatives transactions as a financial intermediary with any underlying that are customer-driven, physically-hedged, and either portfolio-hedged or hedged on a transaction-by-transaction basis, and provided that:
(i) The national bank does not take physical delivery of any commodity by receipt of physical quantities of the commodity on bank premises; and
(ii) Physical hedging activities meet the requirements of paragraph (e) of this section.
(d) Notice procedure.
(1) A national bank must provide notice to its Examiner-in-Charge prior to engaging in any of the following with respect to derivatives transactions with payments based on underlyings that a national bank is not permitted to purchase directly as an investment:
(i) Engaging in derivatives hedging activities pursuant to paragraph (c)(2) of this section;
(ii) Expanding the bank's derivatives hedging activities pursuant to paragraph (c)(2) of this section to include a new category of underlying for derivatives transactions;
(iii) Engaging in customer-driven financial intermediation derivatives activities pursuant to paragraph (c)(3), (4), or (5) of this section; and
(iv) Expanding the bank's customer-driven financial intermediation derivatives activities pursuant to paragraph (c)(3), (4), or (5) of this section to include any new category of underlyings.
(2) The notice pursuant to paragraph (d)(1) of this section must be submitted in writing at least 30 days before the national bank commences the activity and include the following information:
(i) A detailed description of the proposed activity, including the relevant underlyings;
(ii) The anticipated start date of the activity; and
(iii) A detailed description of the bank's risk management system (policies, processes, personnel, and control systems) for identifying, measuring, monitoring, and controlling the risks of the activity.
(e) Additional requirements for physical hedging activities.
(1) A national bank engaging in physical hedging activities pursuant to paragraph (c)(5) of this section must hold the underlying solely to hedge risks arising from derivatives transactions originated by customers for the customers' valid and independent business purposes.
(2) The physical hedging activities must offer a cost-effective means to hedge risks arising from permissible banking activities.
(3) The national bank must not take anticipatory or maintain residual positions in the underlying except as necessary for the orderly establishment or unwinding of a hedging position.
(4) The national bank must not acquire equity securities for hedging purposes that constitute more than 5 percent of a class of voting securities of any issuer.
(5) With respect to physical hedging involving commodities:
(i) A national bank's physical position in a particular physical commodity (including, as applicable, delivery point, purity, grade, chemical composition, weight, and size) must not be more than 5 percent of the gross notional value of the bank's derivatives that are in that particular physical commodity and allow for physical settlement within 30 days. Title to commodities acquired and immediately sold by a transitory title transfer does not count against the 5 percent limit;
(ii) The physical position must more effectively reduce risk than a cash-settled hedge referencing the same commodity; and
(iii) The physical position hedges a physically-settled customer-driven commodity derivative transaction(s).
(f) Safe and sound banking practices. A national bank must adhere to safe and sound banking practices in conducting the activities described in this section. The bank must have a risk management system (policies, processes, personnel, and control system) that effectively manages (identifies, measures, monitors, and controls) these activities' interest rate, credit, liquidity, price, operational, compliance, and strategic risks.