OCC 99-43 
Subject: Risk-Based Capital Interpretations	 	
	 Credit Derivatives	     
Description: Joint Agency Statement
Date:	November 15, 1999



TO: Chief Executive Officers of All National 
Banks, Department and Division Heads, and 
All Examining Personnel


Attached is a joint issuance by the Office of 
the Comptroller of the Currency and the Federal 
Reserve Board addressing the risk-based capital 
treatment of certain synthetic securitization 
transactions involving credit derivatives.  The 
objective of these capital interpretations is to 
recognize the effective transference of the economic 
risk of loss in these synthetic securitization transactions.

In 1996, the OCC published its initial guidance on 
national banks' participation in the newly developing 
market for credit derivatives.  OCC Bulletin 96-43 
provided background information on the common instruments 
used in this market (e.g., default swaps, total return 
swaps and credit-linked notes) and described the risks 
associated with credit derivatives.  This document noted 
that, if used prudently, credit derivatives can enhance 
banks' ability to manage risk by hedging credit exposures 
in ways that would otherwise be unavailable.  Additional 
information and guidance on the risk management of derivatives 
and loan portfolios is available in the "Risk Management of 
Financial Derivatives" and "Loan Portfolio Management" 
sections of the Comptroller's Handbook.

The attached document recognizes in the risk-based capital 
framework the risk mitigating effects of certain credit 
derivatives.  The capital treatment is available only for 
banks and transactions that effectively transfer credit 
risk and satisfy specifically identified safety and 
soundness-related conditions.  Because the qualifying 
transactions are synthetic securitizations in which the 
hedged assets remain on the bank's balance sheet, these 
interpretations do not affect the calculation of a national 
bank's Tier 1 leverage ratio.

Minimum Conditions for Risk-Based Capital Interpretation

To qualify for the risk-based capital treatment 
described in the interpretations, the national bank 
must (1) demonstrate meaningful transfer of credit 
risk to third parties, (2) adequately measure and manage 
the credit risk not transferred to third parties (i.e., 
any retained risk on the hedged portfolio as well as the 
credit risk of unhedged assets), (3) have adequate capital 
for its credit risk, and (4) publicly disclose the impact 
of these transactions on its risk profile and capital adequacy.  
The bank's risk management process should include a credible 
internal economic capital assessment process, analysis of any 
concentrations of credit risk and maturity mismatches, and 
rigorous and robust forward-looking stress tests.  The capital 
market's assessment of the transaction is also an important 
condition of the risk-based capital interpretations.  The 
structure must include a senior class of notes that receives 
the highest possible investment grade rating by a nationally 
recognized credit rating agency.

For further information about this bulletin, contact 
Margot Schwadron in the Capital Policy Division at 
(202) 874-5070 or Kurt Wilhelm in the Treasury and 
Market Risk Division at (202) 874-4479.




Emory W. Rushton
Senior Deputy Comptroller for Bank Supervision Policy


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