# OCC Interpretive Letter No. 892: National bank may take positions in equity securities solely to hedge bank permissible equity derivative transactions originated by customers for their independent business purposes, subject to certain bank representations

> Federal · Agency guidance · In force

URL: https://www.frixlaw.com/law-library/statutes/OCC_INT0892

## Section

- **Citation:** OCC Interpretive Letter No. 892
- **Heading:** National bank may take positions in equity securities solely to hedge bank permissible equity derivative transactions originated by customers for their independent business purposes, subject to certain bank representations
- **Jurisdiction:** Federal
- **Kind:** Agency guidance
- **Status:** In force
- **Text as of:** August 14, 2026
- **Source:** Compiled text
- **Location:** OCC Interpretive Letters / National bank may take positions in equity securities solely to hedge bank permissible equity derivative transactions originated by customers for their independent business purposes, subject to certain bank representations.

## Text

O
Comptroller of the Currency
Administrator of National Banks
Washington, DC 20219
September 13, 2000 Interpretive Letter #892
September 2000
The Honorable James A. Leach 12 USC 24(7)
Chairman
Committee on Banking & Financial Services
2129 Rayburn House Office Building
Washington, D. C. 20515-6050
Dear Chairman Leach:
I am writing in response to your letter of today's date in which you raise concerns about an OCC
determination concerning bank holdings of securities to hedge customer-driven, bank
permissible equity derivative transactions.1 You had noted this point when we discussed this
matter at some length on Wednesday of this week, and I offered to have OCC staff fully brief
you and your staff on the issue. I regret that we were not afforded the opportunity to provide this
briefing, which would have addressed the misunderstandings that were unfortunately reflected in
your letter to me. In particular, I believe it would have been clear from such a briefing that these
carefully limited transactions have no implications at all for bank involvement in merchant
banking or for breaching the wall between banking and commerce -- matters that I know well are
of concern to you.
In brief, the OCC determined, in the case of three national banks, that the banks could take
positions in equity securities solely to hedge bank permissible equity derivative transactions
originated by customers for their valid and independent business purposes. The banks
committed that they will use equities solely for hedging and not for speculative purposes. The
banks will not take anticipatory, or maintain residual positions in equities except as necessary to
the orderly establishment or unwinding of a hedging position
to hedge bank permissible equity derivative transactions
originated by customers for their valid and independent business purposes. The banks
committed that they will use equities solely for hedging and not for speculative purposes. The
banks will not take anticipatory, or maintain residual positions in equities except as necessary to
the orderly establishment or unwinding of a hedging position. Moreover, the banks may not
acquire equities for hedging purposes that constitute more than 5% of a class of stock of any
issuer.
Based on the representations and commitments made by the banks and an extensive review by
supervisory staff of (1) the banks' derivative transactions, (2) proposed hedging of risks arising
from those transactions, including an analysis of how equity holdings reduce risks and enhance
the efficiency of the hedging, and (3) internal risk management systems, we concluded the banks

1 The term “equity derivative transactions” means transactions in which a portion of the return (including interest,
principal or payment streams) is linked to the price of a particular equity security or to an index of such securities.
Equity derivative transactions include equity and equity index swaps, equity index deposits, equity-linked loans and
debt issues, and other bank permissible equity derivative products.

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may hold equities to hedge customer-driven, bank permissible equity derivative transactions as
an activity that is incidental to the business of banking. National banks interested in using
equities to hedge customer-driven, bank permissible equity derivative transactions must consult
with the examiner-in-charge of the bank and obtain OCC supervisory approval prior to engaging
in the activity. Before the OCC will consider approving the activity for a national bank, the bank
must provide the OCC information about its derivative business and proposed hedging activities,
including their effectiveness and efficiency in reducing risks
ble equity derivative transactions must consult
with the examiner-in-charge of the bank and obtain OCC supervisory approval prior to engaging
in the activity. Before the OCC will consider approving the activity for a national bank, the bank
must provide the OCC information about its derivative business and proposed hedging activities,
including their effectiveness and efficiency in reducing risks. Banks will also need to establish
that they have an appropriate risk management process in place. As detailed further in the
Comptroller’s Handbook “Risk Management of Financial Derivatives” (January 1997) and OCC
Banking Circular 277,2 an effective risk management process will include Board supervision,
managerial and staff expertise, comprehensive policies and operating procedures, risk
identification, measurement and management information systems, as well as effective risk
control functions that oversee and ensure the continuing appropriateness of the risk management
process. It is unsafe and unsound for a national bank to engage in equity hedging activities
without an appropriate risk management process in place.
I. Background
Currently, the banks enter into bank permissible, customer-driven equity derivative transactions
that they book directly. The banks hedge the equity derivative transactions with equity
derivatives or through mirror transactions with nonbank affiliates. The terms of the “mirror”
transactions between the banks and nonbank affiliates exactly offset the terms of customer-
driven equity derivative transactions. The affiliates hedge the mirror transactions by taking
physical positions in equities.
To illustrate, in a “long” equity swap transaction with a customer, the bank agrees to pay the
customer the appreciation, over a set period of time, in the value of a notional principal
investment in the underlying equity. The bank may also agree to pay the customer amounts
equal to dividends on the underlying equity
filiates hedge the mirror transactions by taking
physical positions in equities.
To illustrate, in a “long” equity swap transaction with a customer, the bank agrees to pay the
customer the appreciation, over a set period of time, in the value of a notional principal
investment in the underlying equity. The bank may also agree to pay the customer amounts
equal to dividends on the underlying equity. In return, the customer agrees to pay the bank if
there is any decrease in value of the notional principal investment in the underlying equity, and
an agreed upon rate of interest applied to that investment.3
The bank hedges its long swap transaction by entering into a mirror transaction with a nonbank
affiliate. Under the mirror transaction, the nonbank affiliate agrees to pay the bank the
appreciation in, and dividends on, the same notional principal investment in the same underlying
equity under the same terms as the bank’s initial transaction with the customer. The bank, in
turn, agrees to pay the nonbank affiliate depreciation in, and the rate of interest applied to, the
value of the underlying equity.

2 OCC Banking Circular 277 (October 27, 1993) (BC-277).
3 This type of equity swap transaction is a total rate of return swap because the parties exchange the total return on
the asset for another cash-flow.

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The nonbank affiliate then hedges its obligations to the bank by purchasing the equity in an
amount equal to the notional principal investment in that equity under the swap transaction
between the bank and the customer.4 The banks represent that engaging in customer-driven
equity derivative transactions in this fashion effectively moves revenues from the banks to the
relevant nonbank affiliate. The banks prefer to eliminate the “mirror” portion of their equity
derivative transactions and internally book the physical hedges.
The banks demonstrated that equity holdings provide substantial financial advantages
er.4 The banks represent that engaging in customer-driven
equity derivative transactions in this fashion effectively moves revenues from the banks to the
relevant nonbank affiliate. The banks prefer to eliminate the “mirror” portion of their equity
derivative transactions and internally book the physical hedges.
The banks demonstrated that equity holdings provide substantial financial advantages. The
banks' represented that eliminating the mirror transactions enables them to downsize the staff
currently used to support the processing, reconciliation, accounting, reporting, and funding for all
the internal transactions between the banks, their holding companies, and their nonbank
affiliates, resulting in significant cost savings on an annual basis. The banks also established that
equity hedging will allow the banks to retain the revenue and profits generated by the in-house
equity derivative transactions and hedges. Finally, the banks represented that a reduction in net
interest expense results from eliminating the mirror transactions, which are funded at the
borrowing rate of their holding companies, rather than the more favorable rate enjoyed by the
banks. The banks projected that their increase in annualized savings as the business and related
funding requirements continue to grow.
The banks also established that the equity hedges provide significant operational advantages.
Upon eliminating the mirror transactions and moving the physical hedges into the banks, the
banks expect a significant potential reduction in trading, risk management, compliance, and
operation risks that currently result from the back-to-back booking of the mirror transactions.
The banks committed that they will use physical equities only to hedge risks arising from
customer-driven, bank permissible equity derivative transactions and will not engage in any
speculation
nto the banks, the
banks expect a significant potential reduction in trading, risk management, compliance, and
operation risks that currently result from the back-to-back booking of the mirror transactions.
The banks committed that they will use physical equities only to hedge risks arising from
customer-driven, bank permissible equity derivative transactions and will not engage in any
speculation. The banks further committed that they will not maintain any residual positions in
equities that are not directly for the purpose of hedging individual equity derivative transactions
or a portfolio of equity derivative transactions. Finally, the banks may not acquire equities for
hedging purposes that constitute more than 5% of a class of stock of any issuer.
Our determination that the activity in question was permissible for these particular banks was
dependent on the facts and circumstances of each situation and our supervisory knowledge and
experience with the banks involved, and did not represent a conclusion that the activity was
generally permissible for all national banks. Thus, the conclusion was conveyed as a supervisory
matter to those institutions rather than a generally applicable legal interpretation. As discussed
above, the OCC will permit equity hedging programs only after a careful review by our
examination staff of each bank’s program, only where the bank can establish equity holdings are
solely for hedging purposes and offer benefits to the bank, and only where the bank has an
appropriate risks management process in place. National banks are not generally authorized to
conduct these activities based on our response to these particular banks.

4 Alternatively, the affiliate could hedge a portfolio of swap transactions using a basket of securities having a close
correlation with the Bank’s underlying exposure.
bank has an
appropriate risks management process in place. National banks are not generally authorized to
conduct these activities based on our response to these particular banks.

4 Alternatively, the affiliate could hedge a portfolio of swap transactions using a basket of securities having a close
correlation with the Bank’s underlying exposure.

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II. Discussion
National banks may engage in customer-driven equity derivative transactions as part of the
business of banking. Hedging risks arising from these permissible banking activities is an
essential and integral part of those banking activities. The banks' use of equities to hedge
permissible equity derivative transactions provides the most accurate, least costly hedges, and
thus is convenient and useful in conducting permissible banking activities, and incidental to the
business of banking. National banks are not banned from holding equities in all circumstances
and, in fact, hold equities in a variety of contexts in connection with their banking business. The
equity hedging activity is not prohibited by Section 16 of the Banking Act of 1933.5
A. The National Bank Act (“Act”)
A national bank may engage in activities pursuant to 12 U.S.C. § 24(Seventh) if the activities are
part of, or incidental to, the business of banking. Section 24(Seventh) expressly provides that
national banks shall have the power:
To exercise . .
th their banking business. The
equity hedging activity is not prohibited by Section 16 of the Banking Act of 1933.5
A. The National Bank Act (“Act”)
A national bank may engage in activities pursuant to 12 U.S.C. § 24(Seventh) if the activities are
part of, or incidental to, the business of banking. Section 24(Seventh) expressly provides that
national banks shall have the power:
To exercise . . . all such incidental powers as shall be necessary to carry on the business
of banking; by discounting and negotiating promissory notes, drafts, bills of exchange,
and other evidences of debt; by receiving deposits; by buying and selling exchange, coin,
and bullion; by loaning money on personal security; and by obtaining, issuing, and
circulating notes according to the provisions of title 62 of the Revised Statutes.6
The Supreme Court has rejected a narrow view of the bank powers clause that would interpret
the Act as granting to national banks only the five specified powers and such ancillary powers
needed to perform those five.
The powers clause is a broad grant of the power to engage in the business of banking, including,
but not limited to, the five specifically recited powers and such other powers that are reasonably
necessary to perform not just the enumerated powers, but the business of banking as a whole.7
Many activities that are not included in the enumerated powers, including equity derivative
transactions and risk management activities such as hedging risks arising from banking activities,
also are part of the business of banking. 8

5 48 Stat. 162 et seq. (“1933 Act”).
6 The cited language will be referred to later in this memorandum as the “powers clause.”
7 NationsBank of North Carolina v. Variable Annuity Life Insurance Co., 513 U.S. 251 (1995)(“VALIC”)
anagement activities such as hedging risks arising from banking activities,
also are part of the business of banking. 8

5 48 Stat. 162 et seq. (“1933 Act”).
6 The cited language will be referred to later in this memorandum as the “powers clause.”
7 NationsBank of North Carolina v. Variable Annuity Life Insurance Co., 513 U.S. 251 (1995)(“VALIC”).
8 Judicial cases affirming OCC interpretations establish that an activity is within the scope of the “business of
banking” if the activity: [1] is functionally equivalent to or a logical outgrowth of a traditional banking activity; [2]
would respond to customer needs or otherwise benefit the bank or its customers; and [3] involves risks similar to
those already assumed by banks. See, e.g., Merchant Bank v. State Bank , 77 U.S. 604 (1871); M & M Leasing Corp.
v. Seattle First Nat’l Bank , 563 F.2d 1377, 1382 (9th Cir. 1977), cert. denied, 436 U.S. 956 (1978); American
Insurance Assn. v. Clarke, 865 F.2d 278, 282 (2d Cir. 1988). In IAA v. Hawke, ___ F.3d (D.C. Cir. May 16,
2000), the court expressed the position that the “logical outgrowth” rational needed to be kept within bounds, but
endorsed the “functional equivalent” component of the test.

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National banks are also authorized to engage in an activity that is incidental to the performance
of the five powers enumerated in Section 24(Seventh) or incidental to the performance of an
activity that is part of the business of banking. Incidental activities are activities that are
permissible for national banks, not because they are part of the powers expressly authorized for
banks or the “business of banking,” but rather because they are “convenient” or “useful” to those
activities.9
In addition to the above authorizations, national banks are expressly authorized to enter into
contracts under 12 U.S.C. § 24(Third).
B
banking. Incidental activities are activities that are
permissible for national banks, not because they are part of the powers expressly authorized for
banks or the “business of banking,” but rather because they are “convenient” or “useful” to those
activities.9
In addition to the above authorizations, national banks are expressly authorized to enter into
contracts under 12 U.S.C. § 24(Third).
B. Equity Derivative Transactions are Authorized under Express Authorities in the
National Bank Act and as Part of the Business of Banking
Congress has recognized the authority of national banks to engage in equity derivative
transactions. Under the Gramm-Leach-Bliley Act10 banks may offer “identified banking
products” without registration under the Securities Exchange Act of 1934,11 subject only to
banking law requirements. “Identified banking products” include certain swap agreements,
defined as “any individually negotiated contract, agreement, warrant, note or option that is based,
in whole or in part, on the value of, any interest in, or any quantitative measure or the occurrence
of any event relating to, one or more commodities, securities, currencies, interest or other rates,
indices, or other assets. 12 The GLBA conference report further observes that these products are
among the "activities in which banks have traditionally engaged."13 Congress’ recognition that
banks engage in equity derivative transactions and exemption of these activities from certain
securities regulations, provides confirmation for the OCC’s longstanding position that equity
derivative transactions are permissible activities for national banks.
The OCC has found equity derivative transactions permissible under the express statutory
authority granted to national banks to accept deposits, make loans, and enter into contracts and as
part of the business of banking as a financial intermediation activity. As early as 1988, the OCC

9 VALIC; Arnold Tours, Inc. v
le activities for national banks.
The OCC has found equity derivative transactions permissible under the express statutory
authority granted to national banks to accept deposits, make loans, and enter into contracts and as
part of the business of banking as a financial intermediation activity. As early as 1988, the OCC

9 VALIC; Arnold Tours, Inc. v. Camp, 472 F.2d 427 (1st Cir. 1972) (“ Arnold Tours”); OCC Interpretive Letter No.
742 (August 19, 1996), reprinted in [1997-1998 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 81-106; OCC
Interpretive Letter No. 737 (August 19, 1996), reprinted in [1997-1998 Transfer Binder] Fed. Banking L. Rep.
(CCH) ¶ 81-101; OCC Interpretive Letter No. 494 (December 20, 1989), reprinted in [1989-90 Transfer Binder]
Fed. Banking L. Rep. (CCH) ¶ 83,083.
10 Pub. L. No. 106-102 (1990)(effective May 12, 2001)(GLBA).
11 15 U.S.C. § 78c.
12 Section 206 of Title II, Subtitle A of GLBA. (emphasis added). The definition of “swap agreement” is also
defined broadly in the Federal Deposit Insurance Act and U.S. Bankruptcy Code. 12 U.S.C. § 1821(e)(8)(D)(vi)(I);
11 U.S.C. § 101(53B).
13 H.R. Rep. No. 106-434 at 163 (1999)(Summary of Title II in Managers' Statement).

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determined that national banks could engage in equity derivative transactions.14 In MII Deposit,
the OCC concluded that a national bank may offer a non-transferable time deposit contract with
interest payable at a rate tied to the S&P 500 Index. 15 In reaching that conclusion, the OCC
recognized that the deposit was a permissible banking activity fully within a national bank’s
expressly authorized power to receive deposits and make loans and as part of the “business of
banking” under 12 U.S.C. § 24(Seventh)
d that a national bank may offer a non-transferable time deposit contract with
interest payable at a rate tied to the S&P 500 Index. 15 In reaching that conclusion, the OCC
recognized that the deposit was a permissible banking activity fully within a national bank’s
expressly authorized power to receive deposits and make loans and as part of the “business of
banking” under 12 U.S.C. § 24(Seventh). More recently, the OCC determined that national
banks may offer time deposit accounts or certificates of deposit that pay interest at a rate based
on the gain in designated equity indices.16 The OCC concluded that the deposits were authorized
under the express authority of national banks to receive deposits and enter into contracts under
12 U.S.C. §§ 24(Seventh) and (Third) and as part of the business of banking as a financial
intermediation activity.
In 1994, the OCC addressed the legal permissibility of national banks engaging in swap activities
tied to equities and equity indices.17 The OCC recognized that swap contracts are, in some
respects, direct descendants of traditional deposit contracts because payments under the contacts
are similar to the receipt of deposits and the payment of interest on deposits.18 Based, in part, on
that lineage, the OCC concluded that national banks may make payments to, or receive payments
from, equity and equity index swap customers in the event of a gain or loss in a designated

14 Decision of the Office of the Comptroller of the Currency on the Request by Chase Manhattan Bank, N.A. to Offer
the Chase Market Index Investment Deposit Account (Comptroller concludes that a national bank may buy and sell
futures on the S&P 500 Index to hedge deposits with interest rates tied to the S&P 500 Index)(1988)(“MII
Deposit”); Investment Company Institute v. Ludwig, 884 F. Supp. 4 (D.D.C. 1995) (upholding Comptroller’s
decision that the hedged deposit in MII Deposit is a bank permissible product that does not violate the Glass-Steagall
Act)
count (Comptroller concludes that a national bank may buy and sell
futures on the S&P 500 Index to hedge deposits with interest rates tied to the S&P 500 Index)(1988)(“MII
Deposit”); Investment Company Institute v. Ludwig, 884 F. Supp. 4 (D.D.C. 1995) (upholding Comptroller’s
decision that the hedged deposit in MII Deposit is a bank permissible product that does not violate the Glass-Steagall
Act).
15 MII Deposit, supra.
16 Letter from Ellen Broadman, Director, Securities and Corporate Practices Division, OCC, to Barbara Moheit,
Regional Counsel, FDIC (October 29, 1998)(unpublished)(“Broadman Letter”).
17 OCC Interpretive Letter No. 652 (September 13, 1994), reprinted in [1994 Transfer Binder] Fed. Banking L.
Rep. (CCH) ¶ 83,600. The OCC has recognized the ability of banks to engage in swap products for a number of
years. In the 1980’s the OCC opined on the permissibility of national banks engaging in interest rate, currency, and
commodity price index swaps and caps. OCC No-Objection Letter No. 87-5 (July 20, 1987), reprinted in [1988 -
1989 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 84,034; OCC Interpretive Letter No. 462 (December 19,
1988), reprinted in Fed. Banking Law Rep. (CCH) ¶ 85,686; OCC Letter from J. Michael Shepherd, Senior Deputy
Comptroller, Corporate and Economic Programs (July 7, 1988)(unpublished). Then, in the 1990’s, the OCC
recognized that national banks may advise, structure, arrange, and execute transactions, as agent or principal, in
connection with interest rate, basis rate, currency, currency coupon, and cash-settled commodity swaps; swaptions,
captions, and other option-like products; forward rate agreements, rate locks and spread locks, as well as similar
products that national banks are permitted to originate and trade in and in which they may make markets. OCC
Interpretive Letter No. 725 (May 10, 1996), reprinted in [1995-1996 Transfer Binder] Fed. Banking L. Rep. (CCH)
¶ 81,040; OCC Letter from Jimmy F
d commodity swaps; swaptions,
captions, and other option-like products; forward rate agreements, rate locks and spread locks, as well as similar
products that national banks are permitted to originate and trade in and in which they may make markets. OCC
Interpretive Letter No. 725 (May 10, 1996), reprinted in [1995-1996 Transfer Binder] Fed. Banking L. Rep. (CCH)
¶ 81,040; OCC Letter from Jimmy F. Barton, Deputy Comptroller Multinational Banking, to Carl Howard,
Associate General Counsel, Citibank, N.A. (May 13, 1992)(unpublished); OCC Letter from Horace G. Sneed,
Senior Attorney, Legal Advisory Services Division (March 2, 1992)(unpublished); OCC No-Objection Letter No.
90-1 (February 16, 1990), reprinted in [1989-1990 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 83,095.
18 OCC Interpretive Letter No. 652, supra.

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equity or equity index. The OCC further recognized that equity and equity index swap activities
are permissible for national banks as a financial intermediation activity.19 In such arrangements,
national banks act as financial intermediaries between customers that want to manage risks
resulting from the variations in a particular equity or equity index. Customers do not deal
directly with one another, but instead make payments through the intermediary bank.
Banks, through their equity derivative transactions, are better able to meet customer needs by
offering financial instruments that serve important risk management and other financial
functions. National banks have benefited from equity derivative transactions that enable them to
diversify, expand their customer base, and increase revenues.20 Equity derivative transactions
pose risks similar to those inherent in other types of banking activities that national banks are
familiar with and manage, e.g., interest rate, liquidity, credit, and compliance risks.
C
nd other financial
functions. National banks have benefited from equity derivative transactions that enable them to
diversify, expand their customer base, and increase revenues.20 Equity derivative transactions
pose risks similar to those inherent in other types of banking activities that national banks are
familiar with and manage, e.g., interest rate, liquidity, credit, and compliance risks.
C. Hedging Risks Arising from Bank Permissible Banking Activities is Integral to
Those Permissible Activities
It is axiomatic that managing the risks arising from permissible banking activities is integral to
the business of banking; this principle is equally valid whether the activity is deposit-taking or
derivatives.21 Entering into deposit, loan, and other contracts with customers, and engaging in
other bank permissible activities involve risks that banks must manage as part of the business of
banking.22 A bank must manage the risk in those activities to operate profitably and may engage
in hedging activities to do so.23 Indeed, the OCC recognizes that national banks may sell
forwards to hedge against potential fluctuations in the price of silver as an integral part of the
explicit statutory authority of national banks to buy and sell coins.24 National banks may

19 OCC Interpretive Letter No. 652, supra. OCC Interpretive Letter No. 652 pre-dates VALIC and characterized
swaps as a financial intermediary activity incidental to a bank’s express power to engage in deposit and lending
activities under 12 U.S.C. § 24(Seventh). Upon re-examination, the OCC since has concluded that swap and funds
intermediation activities are part of the business of banking. Broadman Letter.
20 OCC Bank Derivatives Report, Second Quarter (2000).
21 Broadman Letter; OCC Interpretive Letter No. 684 (August 4, 1995), reprinted in [1993-1994 Transfer Binder]
Fed. Banking L. Rep. (CCH) ¶ 83,632; OCC Interpretive Letter No
.C. § 24(Seventh). Upon re-examination, the OCC since has concluded that swap and funds
intermediation activities are part of the business of banking. Broadman Letter.
20 OCC Bank Derivatives Report, Second Quarter (2000).
21 Broadman Letter; OCC Interpretive Letter No. 684 (August 4, 1995), reprinted in [1993-1994 Transfer Binder]
Fed. Banking L. Rep. (CCH) ¶ 83,632; OCC Interpretive Letter No. 632 (June 30, 1993), reprinted in [1993-1994
Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 83,516.
22 OCC “Bank Supervision Process Booklet” Comptroller’s Handbook for National Bank Examiners (April 1996).
In fact, a 1992 decision by an Indiana court and a class action filed in 1991 in the U.S. District Court of the Southern
District of Texas suggest that a duty exists for corporations to hedge their exposures to changing commodity prices
and currency values. Brane v. Roth, 590 N.E. 2d 587 (Ind. Cir. App. 1992); In re Compaq Securities Litigation, 848
F. Supp. 1307 (S.D. Tex. 1993). If corporations have a duty to manage those exposures, it reasonably follows that
corporations must also hedge the exposures arising from equity derivative transactions.
23 OCC Interpretive Letter No. 725, supra; OCC Interpretive Letter No. 652, supra; OCC Interpretive Letter No.
632, supra; OCC No-Objection Letter No. 90-1, supra; MII Deposit, supra; OCC No-Objection Letter No. 87-5
(July 20, 1987), reprinted in [1988 - 1989 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 84,034.
24 OCC Letter from Kenneth W. Leaf, Chief National Bank Examiner (June 12, 1974).
ns.
23 OCC Interpretive Letter No. 725, supra; OCC Interpretive Letter No. 652, supra; OCC Interpretive Letter No.
632, supra; OCC No-Objection Letter No. 90-1, supra; MII Deposit, supra; OCC No-Objection Letter No. 87-5
(July 20, 1987), reprinted in [1988 - 1989 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 84,034.
24 OCC Letter from Kenneth W. Leaf, Chief National Bank Examiner (June 12, 1974).

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purchase spot and futures contracts on exchange, coin and bullion to hedge against future price
fluctuations intrinsic to those commodities.25 National banks may also use futures to hedge
against the risk of loss due to the interest rate fluctuations inherent in bank loan operations, U.S.
Treasury Bills, and certificates of deposit.26
Hedging risks arising from permissible equity derivative activities also is an integral part of
permissible banking activities. In reviewing the legal permissibility of MII Deposit, the OCC
authorized a national bank to purchase equity index futures to hedge interest rate risk exposure
on deposit accounts having interest payable at a rate tied to the S&P 500 Index. The OCC
concluded that the activity was permissible, in part, because the hedge was a necessary
component of the bank’s deposit-taking activities. The OCC has similarly concluded that
hedging interest rate risk on deposits that pay interest at a rate based on the gain in designated
equity indices with options is an integral part of traditional bank deposit functions and the
authority of banks to enter into contracts.27 Finally, national banks may hedge swaps, including
equity and equity index swaps, to manage the risks in, and as an integral part of, those bank
permissible transactions. 28
Through hedging activities, national banks serve as financial intermediaries, a traditional and
permissible banking function
ral part of traditional bank deposit functions and the
authority of banks to enter into contracts.27 Finally, national banks may hedge swaps, including
equity and equity index swaps, to manage the risks in, and as an integral part of, those bank
permissible transactions. 28
Through hedging activities, national banks serve as financial intermediaries, a traditional and
permissible banking function. 29 Longstanding OCC precedent recognizes the authority of
national banks to act as financial intermediaries, for example, by engaging in swap transactions

25 OCC Letter to Republic National Bank from J. T. Watson, Deputy Comptroller of the Currency (March 12,
1975).
26 OCC Letter to Gregory Crane (October 26, 1976)(national banks may use GNMA futures to hedge the interest
rate fluctuation risks inherent in FHA/VA loans as an activity incidental to banking and permissible under 12 U.S.C.
§ 24(Seventh)); OCC Letter to Alan E. Rothenberg, Vice President, Bank of America, from Robert Bloom, First
Deputy Comptroller (Policy)(October 11, 1976)(national banks may hedge the risk of interest rate fluctuations in
conventional real estate loans with GNMA futures to reduce interest rate fluctuations as a legally permissible
activity under the National Bank Act.). In 1976, the OCC also permitted a national bank to purchase T-bill futures
for hedging purposes as part of the authority of national banks to deal in, underwrite, and purchase obligations
issued by the U.S. OCC Letter to Michael Sweeney, Vice President, Merchants National Bank and Trust Company
of Indianapolis (December 29, 1976); OCC Letter to Senator Huddleston, from Donald A. Melbye, Special Assistant
for Congressional Affairs (February 10, 1977) and OCC Banking Circular 79 (November 2, 1976) (BC-79). BC-79
was revised three times, with the latest revision dated April 19, 1983
issued by the U.S. OCC Letter to Michael Sweeney, Vice President, Merchants National Bank and Trust Company
of Indianapolis (December 29, 1976); OCC Letter to Senator Huddleston, from Donald A. Melbye, Special Assistant
for Congressional Affairs (February 10, 1977) and OCC Banking Circular 79 (November 2, 1976) (BC-79). BC-79
was revised three times, with the latest revision dated April 19, 1983. On October 27, 1993, the OCC issued
Banking Circular-277 which provided comprehensive guidance on all forms of financial derivatives and
simultaneously rescinded BC-79; OCC Letter to Charles N. Parrott, Associate Counsel, Deposit Guaranty National
Bank, from Peter Liebesmann, LASD (February 15, 1983) (citing BC-79 (March 19, 1980)(2d Rev)). This
determination specifically addressed the ability of national banks to buy “puts” on the GNMA certificates that would
enable the bank to sell the certificates at set prices with a given period of time. If the value of the certificates
increased, the puts would not be exercised. If the value declined, the bank would exercise the put and deliver the
certificates at the agreed upon price.
27 Broadman Letter, supra.
28 See n.17, supra.
29 Broadman Letter, supra.

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9
and assuming offsetting swap positions or hedges.30 In so doing, the bank protects itself against
risks arising from an established, permissible banking activity. As a result of hedging, a bank
becomes a financial intermediary in a swap transaction, by interposing itself between customers
initiating swap transactions and customers providing offsetting returns. Thus, hedging is an
integral part of financial intermediation services permissible for national banks.
D
bank protects itself against
risks arising from an established, permissible banking activity. As a result of hedging, a bank
becomes a financial intermediary in a swap transaction, by interposing itself between customers
initiating swap transactions and customers providing offsetting returns. Thus, hedging is an
integral part of financial intermediation services permissible for national banks.
D. Banks may Purchase Equity Securities to Hedge Equity Derivative Transactions
as an Activity that is Incidental to the Business of Banking
Section 24(Seventh) gives national banks incidental powers to engage in activities that are
necessary to carry on enumerated bank powers as well as the broader “business of banking.”31
Prior to VALIC, the standard that was often considered in determining whether an activity was
incidental to banking was the one advanced by the First Circuit Court of Appeals in Arnold
Tours.32 The Arnold Tours standard defined an incidental power as one that is “convenient or
useful” in connection with the performance of one of the bank’s established activities pursuant to
its express powers under the National Bank Act.”33 Even prior to VALIC, the Arnold Tours
formula represented the narrow interpretation of the “incidental powers” provision of the
National Bank Act.34 The VALIC decision, however, has established that the Arnold Tours
formula should be read to provide that an incidental power includes one that is “convenient” or
“useful” to the “business of banking,” as well as a power incidental to the express powers
specifically enumerated in 12 U.S.C. § 24(Seventh). Thus, national banks may take possession
of equities for hedging purposes as an activity that is convenient and useful to permissible equity
derivative transactions.
The equity hedges enable the banks to protect against loss in banking transactions in the most
efficient manner and therefore are convenient and useful to the banks' equity derivative business
y enumerated in 12 U.S.C. § 24(Seventh). Thus, national banks may take possession
of equities for hedging purposes as an activity that is convenient and useful to permissible equity
derivative transactions.
The equity hedges enable the banks to protect against loss in banking transactions in the most
efficient manner and therefore are convenient and useful to the banks' equity derivative business.
Here, the banks represented that physically hedging equity derivative transactions within the
banks, rather than through affiliates, will enable them to retain additional revenues from equity
derivative activities and enjoy substantial cost savings. Furthermore, when the mirror
transactions are eliminated, the revenues and profits generated by the equity derivative
transactions and the physical hedges will accrue to the benefit of the banks. Permitting the banks
to use equities to hedge risks arising from permissible equity derivative transactions thus will
enable the banks to operate more efficiently, compete more effectively with entities that engage
in similar optimal hedges, offer customers the least costly and most attractive products and
services, and operate profitably.

30 See n.17, supra.
31 VALIC, supra, at 258 n.2.
32 Arnold Tours, supra.
33 Id. at 432.
34 See n.9, supra.

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10
In addition, equity hedging is incidental to banking as a convenient and useful means of reducing
the operational risks in its equity derivative business that exist as a result of the mirror
transactions between the banks and their nonbank affiliates. In particular, by eliminating the
mirror transactions and physically hedging the equity derivative transactions in the banks, the
banks expect to see a potential reduction in trading, risk management, compliance, and operation
risks that exist from the back-to-back booking of the mirror transactions
that exist as a result of the mirror
transactions between the banks and their nonbank affiliates. In particular, by eliminating the
mirror transactions and physically hedging the equity derivative transactions in the banks, the
banks expect to see a potential reduction in trading, risk management, compliance, and operation
risks that exist from the back-to-back booking of the mirror transactions.
The equity hedges are similar to commodity hedges that are convenient and useful to bank
permissible commodity-linked derivative transactions. The OCC has determined that in some
instances national banks may take physical delivery of commodities to hedge bank permissible
commodity-linked derivative transactions as a convenient and useful means to manage the risks
arising from those permissible banking transactions.35 The OCC permitted the activity, in part,
because the commodities provided accurate and precise hedges. The banks' physical possession
of equities is similarly a means to manage the risks in bank permissible derivative transactions in
a manner that provides precise and cost-effective hedges. Accordingly, the equity hedges benefit
the banks by enabling them to more effectively manage risks arising from permissible equity
derivative transactions, and thus are convenient and useful to those bank permissible activities.
E. Use of Physical Equity Securities to Hedge Banking Risks is not Prohibited by
Section 16 of the 1933 Act
anner that provides precise and cost-effective hedges. Accordingly, the equity hedges benefit
the banks by enabling them to more effectively manage risks arising from permissible equity
derivative transactions, and thus are convenient and useful to those bank permissible activities.
E. Use of Physical Equity Securities to Hedge Banking Risks is not Prohibited by
Section 16 of the 1933 Act
(1) Using Equity Securities to Hedge Equity Derivative Transactions is not
Prohibited Underwriting or Dealing under Section 24(Seventh)
Section 24(Seventh) addresses the ability of a national bank to underwrite and deal in securities.
Specifically, Section 24(Seventh) provides that “[t]he business of dealing in securities and stock
by the association shall be limited to purchasing and selling such securities and stock without
recourse, solely upon the order, and for the account of, customers, and in no case for its own
account, and the association shall not underwrite any issue of securities or stock: Provided, That
the association may purchase for its own account investment securities under such limitations
and restrictions as the Comptroller of the Currency may by regulation prescribe.”18
Here, the banks are not “dealing” in or “underwriting” securities as prohibited by Section
24(Seventh). Although Adealing@ and Aunderwriting@ are not defined in Section 24(Seventh)36

35 OCC Interpretive Letter Nos. 632 and 684, supra. The OCC also has permitted national banks to physically
hedge against the risk of loss from potential payouts on bank permissible employee compensation and benefit plans
with incidental life insurance, in order to recover the cost of providing those benefits. OCC Interpretive Letter No.
848 (November 23, 1998), reprinted in [1998-1999 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 81-202; OCC
Bulletin 96-51 (September 20, 1996), reprinted in Fed. Banking L. Rep. (CCH) ¶ 35-491
f loss from potential payouts on bank permissible employee compensation and benefit plans
with incidental life insurance, in order to recover the cost of providing those benefits. OCC Interpretive Letter No.
848 (November 23, 1998), reprinted in [1998-1999 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 81-202; OCC
Bulletin 96-51 (September 20, 1996), reprinted in Fed. Banking L. Rep. (CCH) ¶ 35-491. Most recently, the OCC
concluded that it was convenient and useful for a national bank to physically hedge an employee compensation
program with bank impermissible insurance company products and investments because the hedge virtually
eliminated all the risk arising under the program to the bank. OCC Interpretive Letter No. 878 (December 22,
1999), reprinted in [1998-1999 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 81-373.
36 Although the securities laws definitions are not dispositive in determining whether a particular type of securities
activity is permitted for banks, these definitions provide a useful starting point for characterizing a bank’s securities
activities. Under section 3 of the Securities Exchange Act of 1934, a “dealer” is defined as “any person engaged in

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11
“dealing” in securities is generally understood to encompass the purchase of securities as
principal for resale to others.37 Dealing is buying and selling as part of a regular business. A
dealer typically maintains an inventory of securities and holds itself out to the public as willing
to purchase and sell and continuously quote prices.38 “Underwriting” is generally understood as
encompassing the purchase of securities from an issuer for distribution and sale to investors.39
Case law confirms that one cannot be an underwriter in the absence of a public offering.40
Under the above definitions, the banks' purchase of equity securities for hedging customer-driven
equity derivative transactions is not “dealing” or “underwriting.” The banks committed to
holding physical equity securities solely for purposes of hedging
om an issuer for distribution and sale to investors.39
Case law confirms that one cannot be an underwriter in the absence of a public offering.40
Under the above definitions, the banks' purchase of equity securities for hedging customer-driven
equity derivative transactions is not “dealing” or “underwriting.” The banks committed to
holding physical equity securities solely for purposes of hedging. The banks do not hold the
securities in order to engage in a regular business of buying and selling them in the secondary
market41 and do not publicly offer the securities to investors.
(2) The Purchase of Equity Securities for Hedging Purposes is not Subject to
the Limitations on the Purchase of Investment Securities
The purchase of equities is not an investment in investment securities and therefore is not subject
to the limitations placed upon the purchase of those securities in 12 U.S.C. § 24(Seventh) or in
12 C.F.R. Part 1. The statutory definition of investment securities includes “marketable
obligations evidencing the indebtedness of any person, copartnership, association or corporation
in the form of bonds, notes, and/or debentures, commonly known as ‘investment securities’” and
gives the Comptroller the authority to define further that term. Accordingly, the OCC issued
implementing regulations defining “investment securities” at 12 C.F.R. Part 1. Under Part 1, an
investment security is defined as “a ‘marketable’ debt obligation that is not predominantly
speculative in nature.”42 Equity securities do not fall within the Section 16 or Part 1 definitions

the business of buying and selling securities for his own account, through a broker or otherwise, but does not include
any person insofar as he buys or sells securities for his own account, either individually or in some fiduciary
capacity, but not part of a regular business.” 15 U.S.C. § 78c(a)(5)
t fall within the Section 16 or Part 1 definitions

the business of buying and selling securities for his own account, through a broker or otherwise, but does not include
any person insofar as he buys or sells securities for his own account, either individually or in some fiduciary
capacity, but not part of a regular business.” 15 U.S.C. § 78c(a)(5). Under the Securities Act of 1933, an
“underwriter” includes “any person who has purchased from an issuer with a view to, or offers or sells for an issuer
in connection with, the distribution of any security.” 15 U.S.C. § 77(b)(a)(11).
37 OCC Interpretive Letter No. 393 (July 5, 1987), reprinted in [1988-1989 Transfer Binder] Fed. Banking L. Rep.
(CCH) ¶ 85,617 (national bank with limited market presence not considered a dealer). See also Louis Loss,
Securities Regulation 2983-84 (3d ed. 1990).
38 Citicorp, J.P. Morgan & Co. Inc., Banker Trust New York Corporation, 73 Fed. Res. Bull. 473 n.4 (1987); OCC
Interpretive Letter No. 684, supra.
39 OCC Interpretive Letter No. 388 (June 16, 1987), reprinted in [1998-1989 Transfer Binder] Fed. Banking L. Rep.
(CCH) ¶ 85,612; OCC Interpretive Letter No. 329 (March 4, 1985), reprinted in [1985-1987 Transfer Binder] Fed.
Banking L. Rep. (CCH) ¶ 85,499.
40 SIA v. Board of Governors, 807 F.2d 1052 (D.C. Cir. 1986), cert. denied, 483 U.S. 1005 (1987).
41 While the banks may purchase and sell equity securities on a regular basis consistent with its hedging activities,
the banks will not act as market-maker in the securities by quoting prices continuously on both sides of the market.
42 12 C.F.R. § 1.2(e).
der] Fed.
Banking L. Rep. (CCH) ¶ 85,499.
40 SIA v. Board of Governors, 807 F.2d 1052 (D.C. Cir. 1986), cert. denied, 483 U.S. 1005 (1987).
41 While the banks may purchase and sell equity securities on a regular basis consistent with its hedging activities,
the banks will not act as market-maker in the securities by quoting prices continuously on both sides of the market.
42 12 C.F.R. § 1.2(e).

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12
of “investment securities.” The basic characteristic of equity securities is a fractional ownership
interest in the corporation involved.43 Equity securities do not represent debt obligations.
Accordingly, the provisions contained in Section 24(Seventh) applicable to investment securities
do not apply to equity investments held by banks for the purpose of engaging in banking
business.
(3) Using Equity Securities to Hedge is not Prohibited by the Fifth Sentence
of Section 24(Seventh)
Section 24(Seventh) does not provide a general authorization to national banks to hold equity
securities. Instead, national banks may hold equity securities only to the extent such holdings are
permissible because, in the situation presented, the holding is authorized as part of, or incidental
to, the business of banking (or other specific statutory authority). The language in the fifth
sentence of Section 24(Seventh) “nothing herein contained shall authorize the purchase by the
association for its own account of any shares of stock of any corporation” is not a blanket bar on
national bank acquisitions of stock. Rather, as discussed below, that language makes clear that
the authorization contained in the statute permitting banks to invest in investment securities does
not include stock. This proviso does not affect national banks’ authority to hold equities, if the
holding can qualify as permissible because it is part of or incidental to permissible banking
activities.
tional bank acquisitions of stock. Rather, as discussed below, that language makes clear that
the authorization contained in the statute permitting banks to invest in investment securities does
not include stock. This proviso does not affect national banks’ authority to hold equities, if the
holding can qualify as permissible because it is part of or incidental to permissible banking
activities.
(a) The Fifth Sentence Clarifies that the Authority to Invest in
Investment Securities does not apply to Stock
The language contained in the fifth sentence referenced above is not a complete bar on bank
purchases of stock. Rather, as a review of the legislative history of the language reveals, that
language references and clarifies provisions in Section 24(Seventh) authorizing the purchase of
investment securities. Congress’ intent was to make clear that the authorization in Section
24(Seventh) for national banks to invest in investment securities was not the source of authority
for national banks to purchase stock. Congress made its intent clear in several respects. First,
the authorization to purchase investment securities was the only new authorization added to
Section 24(Seventh) in 1933. Thus, the caveat in the fifth sentence that the new language does
not authorize banks to purchase stock logically refers to the authorization to purchase investment
securities. Second, the two provisions use the same language to describe the activities they
address. One provision describes activities permitted for investment securities and the other
clarifies that those same activities are not permitted for stock. The similarity in language used in
the two provisions today, and in previous statutes, as discussed below, supports reading the fifth
sentence to clarify that the authorization to invest in investment securities does not include stock.
It is important to appreciate that the 1933 Act was derived from a series of bills introduced in
1932. S
es that those same activities are not permitted for stock. The similarity in language used in
the two provisions today, and in previous statutes, as discussed below, supports reading the fifth
sentence to clarify that the authorization to invest in investment securities does not include stock.
It is important to appreciate that the 1933 Act was derived from a series of bills introduced in
1932. S. 3215, introduced on January 1, 1932, permitted banks to “purchase and hold”

43 Fabozzi and Zarb, Handbook of Financial Markets: Securities, Options and Futures, Second Edition (1986), at
251.

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13
investment securities but precluded the “purchase or holding” of stock. The bill, however, did
not define an “investment security,” and by necessity contained a clarification that the
authorization to invest in “investment securities” did not include “stock.”44
As the legislation evolved and the language authorizing investment in investment securities
changed, the language in the fifth sentence was revised to mirror the language authorizing
investment in investment securities. S. 4412, introduced on January 30, 1932, authorized an
association to “purchase for its own account investment securities” and clarified that “nothing
herein contained shall authorize the purchase” of stock. The 1933 Act similarly provided that
the association may “purchase for its own account investment securities”, and clarified that
“nothing herein contained shall authorize the purchase of stock.”45 The only difference between
these two provisions was the use of “for its own account” in the authorizing language, but not in
the proviso. That difference was eliminated in the 1935 Amendments which added the “for its
own account” to the clarifying provision so that it now reads “nothing herein contained shall
authorize the purchase by the association for its own account” of stock
e of stock.”45 The only difference between
these two provisions was the use of “for its own account” in the authorizing language, but not in
the proviso. That difference was eliminated in the 1935 Amendments which added the “for its
own account” to the clarifying provision so that it now reads “nothing herein contained shall
authorize the purchase by the association for its own account” of stock. Thus, the 1935
Amendments made the language in the fifth sentence identical to the language authorizing
investment securities, providing further confirmation that the fifth sentence clarifies that the
authorization to invest in investment securities does not include stock.
What authority that exists for national banks to own stock must be found under other provisions
of Section 24(Seventh), as part of, or incidental to, the business of banking.46 This reading is
consistent with other portions of Section 16 of the 1933 Act, enacted simultaneously with this
section, which clearly envision that national banks could own stock in connection with banking
activities
The 1933 Act recognized in several contexts the preexisting authority of national banks to own
stock as authorized under the powers clause. The 1933 Act acknowledged the continuing
authority of national banks to hold stock as part of the business of banking by placing restrictions
on the amounts of such investments. For example, the provisions limiting the amounts that
banks may invest in a safe-deposit business acknowledge a pre-existing separate, but not
expressly stated, authority of national banks to invest in such businesses, which arises from the
powers clause.47 Similarly, the provisions limiting amounts a national bank may invest in a

44 Further clarification was provided subsequently in S. 4115 which defined “investment securities” to include only
debt obligations.
45 S
g separate, but not
expressly stated, authority of national banks to invest in such businesses, which arises from the
powers clause.47 Similarly, the provisions limiting amounts a national bank may invest in a

44 Further clarification was provided subsequently in S. 4115 which defined “investment securities” to include only
debt obligations.
45 S. 4412, as reported on April, 18, l932, added “or holding” after the term “purchase” in the clarifying provision,
but this language was deleted in the 1933 Act passed by Congress so that the authorizing and qualifying language
were the same.
46 As discussed above, national banks have no general authorization to acquire stock. Other statutory sections may
also expressly authorize the acquisition of stock in specific circumstances, e.g., 12 U.S.C. § 24(Eleventh) (stock of
community development corporations), 12 U.S.C. § 371d (stock of bank premises corporations), 12 U.S.C. § 1861 et
seq. (stock of bank service corporations), and 15 U.S.C. § 682(b) (stock of small business investment corporations).
47 1933 Act §16, 48 Stat. at 185.

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14
company that holds the bank’s premises acknowledges the preexisting authority under the
powers clause for national banks to invest in those companies.48
The 1933 Act also included a definition of an “affiliate” that recognized a national bank’s
authority to own stock. Specifically, the 1933 Act definition of an affiliate included any
corporation in which a national bank owns or controls a majority of the voting shares. The
ability to own or control a majority of the voting shares of a corporation necessarily depends
upon there being the preexisting authority of a national bank to hold stock under the powers
clause.49
a national bank’s
authority to own stock. Specifically, the 1933 Act definition of an affiliate included any
corporation in which a national bank owns or controls a majority of the voting shares. The
ability to own or control a majority of the voting shares of a corporation necessarily depends
upon there being the preexisting authority of a national bank to hold stock under the powers
clause.49
(b) National Banks may Hold Equities Based on Existing Precedent
Most notably, nearly 35 years of precedent recognize the authority of national banks to hold
stock of operating subsidiaries as part of, or incidental to, the business of banking. As early as
the 1960s, the OCC developed a comprehensive scheme for the regulation and supervision of
national banks engaging in the business of banking through bank operating subsidiaries based on
authorities arising from the powers clause. In 1966, the OCC issued a new regulation and a
ruling confirming again the authority of national banks to own stock under the powers clause.
Then, in 1971, the regulation was substantially revised to reflect the more comprehensive ruling.
Subsequently, in 1983, the regulation was incorporated into 12 C.F.R. 5.34 without substantive
change. Today national banks may own equities of operating subsidiaries based on the
authorities provided under the powers clause and in accordance with 12 C.F.R § 5.34.50
Very recently, Congress affirmed in GLBA that national banks may own stock under Section
24(Seventh) by recognizing that national banks have subsidiaries engaged in activities
permissible for the national bank.51 Notably, rather than reauthorize national banks to own
operating subsidiaries in GLBA, Congress instead recognized that preexisting authority.

48 1933 Act §14, 48 Stat. at 184
A that national banks may own stock under Section
24(Seventh) by recognizing that national banks have subsidiaries engaged in activities
permissible for the national bank.51 Notably, rather than reauthorize national banks to own
operating subsidiaries in GLBA, Congress instead recognized that preexisting authority.

48 1933 Act §14, 48 Stat. at 184.
49 As an alternative, the definition may have simply referred to affiliate stock that banks could already hold pursuant
to Sections 25 and 25A of the Federal Reserve Act pertaining to Edge Act and Agreement corporations and foreign
banks under 12 U.S.C. §§ 601, 611 et seq. However, nothing in the language of this definition suggests such a
narrow reading.
50 Since the recent revisions to 12 C.F.R. § 5.34 became effective on March 11, 2000, national banks that qualify as
well capitalized and well managed have been permitted to engage through operating subsidiaries in an expanded list
of activities by giving the OCC notice after the fact. While all of the activities contained in the new 12 C.F.R. §
5.34 list are ones the OCC has found to be part of, or incidental to, the business of banking, the preamble to the rule
makes clear that the list is not all-inclusive, and that the OCC will periodically review and update the list as
necessary. See Financial and Operating Subsidiaries, 65 Fed. Reg. 12905, 12908 (2000).
51 Sections 121 and 122 of Title I, Subtitle C of GLBA.
in the new 12 C.F.R. §
5.34 list are ones the OCC has found to be part of, or incidental to, the business of banking, the preamble to the rule
makes clear that the list is not all-inclusive, and that the OCC will periodically review and update the list as
necessary. See Financial and Operating Subsidiaries, 65 Fed. Reg. 12905, 12908 (2000).
51 Sections 121 and 122 of Title I, Subtitle C of GLBA.

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15
Courts also recognize the power of national banks to own corporate stock in
connection with satisfaction of debts previously contracted (ADPC@).52 The OCC
similarly recognizes the DPC authority of national banks in its regulations and in its
Interpretive and No-Objection Letters.53 This ability to hold stock arises from the
powers of national banks under 12 U.S.C. § 24(Seventh). In First National Bank of
Charlotte, the Supreme Court made clear that as part of national bank’s powers, the
bank may hold stock in satisfaction of debt. In that case the Court stated:
[The] right of a bank to incur liabilities in the regular course of business,
as well as to become a creditor to others [must necessarily be implied]. Its
own obligations must be met and debts due to it collected or secured. The
power to adopt reasonable and appropriate measures for these purposes is
an incident to the power to incur the liability or become the creditor. . . . .
Banks may do, in this behalf, whatever natural persons could do under like
circumstances. . . . In the honest exercise of the power to compromise a
doubtful debt owing to a bank, it can hardly be doubted that stocks may be
accepted in payment and satisfaction, with a view to subsequent sale or
conversion into money so as to make good or reduce anticipated loss.
Such a transaction would not amount to a dealing in stocks. . .
whatever natural persons could do under like
circumstances. . . . In the honest exercise of the power to compromise a
doubtful debt owing to a bank, it can hardly be doubted that stocks may be
accepted in payment and satisfaction, with a view to subsequent sale or
conversion into money so as to make good or reduce anticipated loss.
Such a transaction would not amount to a dealing in stocks. . . . Of
course, all such transactions must be compromises in good faith, and not
mere cloaks or devices to cover unauthorized practices.54
Based on the above, it is apparent that Congress, the courts, and the OCC recognize that in some
instances, national banks may take physical possession of equities. Banks should similarly be
permitted to take physical possession of equities for purposes of hedging the risks associated
with permissible banking activities. The activity is permissible under 12 U.S.C. § 24(Seventh)
and is not prohibited by Section 16 of the 1933 Act.
III. Conclusion

52 First Nat’l Bank of Charlotte v. Nat’l Exchange Bank of Baltimore, 92 U.S. 122 (1875) (“First Nat’l Bank of
Charlotte”); Atherton v. Anderson, 86 F.2d 518 (6th Cir. 1936) rev’d on other grounds, 302 U.S. 643 (1937); See
also, Bouchelle v. First Nat’l Bank of Birmingham, 173 So. 83 (Ala. 1937).
53 12 C.F.R. §1.7; OCC Interpretive Letter No. 511 (June 20, 1990), reprinted in [1990-1991 Transfer
Binder] Fed. Banking L. Rep. (CCH) ¶ 83,213; OCC Interpretive Letter No. 502 (April 6, 1990), reprinted
in [1989-1990 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 83,097; OCC No-Objection Letter No. 89-
01 (January 25, 1989), reprinted in [1989-1990 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 83,009;
OCC No-Objection Letter No. 88-7 (May 20, 1988), reprinted in [1988-1989 Transfer Binder] Fed.
Banking L. Rep. (CCH) ¶ 84,047; OCC No-Objection Letter 87-10 (November 27, 1987), reprinted in
[1988-1989 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 84,039; OCC Interpretive Letter No
Letter No. 89-
01 (January 25, 1989), reprinted in [1989-1990 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 83,009;
OCC No-Objection Letter No. 88-7 (May 20, 1988), reprinted in [1988-1989 Transfer Binder] Fed.
Banking L. Rep. (CCH) ¶ 84,047; OCC No-Objection Letter 87-10 (November 27, 1987), reprinted in
[1988-1989 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 84,039; OCC Interpretive Letter No. 395
(August 24, 1987), reprinted in [1988-1989 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 85,619.
54 First Nat’l Bank of Charlotte, supra, at 127.

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16
National banks may hold equity securities to hedge risks arising from permissible banking
activities. OCC precedents have long recognized the authority of national banks to engage in
derivative transactions, including those that are equity-linked, under express authorities and the
broader business of banking powers in Section 24(Seventh). Similarly, OCC precedents
recognize that national banks may hedge risks arising from permissible banking activities as an
integral part of those activities using a broad range of risk management tools.
The banks' equity hedges are convenient and useful to customer-driven, bank permissible equity
derivative transactions. In order to conduct authorized equity derivative transactions, the banks
must hedge the transactions to reduce risks, avoid losses, and operate profitably. The equity
hedges provide the banks with the most cost-effective, precise means to hedge risks arising from
customer-driven equity driven transactions. By physically hedging its equity derivative
transactions in-house, the banks enjoy substantial financial and operational advantages.
Accordingly, we concluded, in the particular circumstances presented, that the banks' physical
possession of equities solely for hedging purposes would be a permissible activity for those
banks
to hedge risks arising from
customer-driven equity driven transactions. By physically hedging its equity derivative
transactions in-house, the banks enjoy substantial financial and operational advantages.
Accordingly, we concluded, in the particular circumstances presented, that the banks' physical
possession of equities solely for hedging purposes would be a permissible activity for those
banks. Our conclusions were dependent on the facts and circumstances and on our supervisory
knowledge of and experience with the banks involved, and did not represent a conclusion that the
activity was generally permissible. Thus, the conclusion was communicated as a supervisory
matter rather than as a generally applicable legal interpretation.
I trust the foregoing is responsive to the issues raised in your letter, and I reiterate my offer to
provide a full briefing on this issue.
Sincerely,
-signed-
John D. Hawke, Jr.
Comptroller of the Currency

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- [OCC Interpretive Letter No. 719 Letter concludes that an ESOP is a "company' for purposes of 12 U.S.C. 371c and that an ESOP that controls at least 25% of a bank's voting stock is an "affiliate" under sec. 371c (supersedes existing OCC interpretive letter #261). (10/26/89)](https://www.frixlaw.com/law-library/statutes/OCC_INT0719.md)
- [OCC Interpretive Letter No. 720 Group of affiliate national banks may collectively own, through operating subsidiaries, minority interest in a merchant credit card processing subsidiary. (01/26/96)](https://www.frixlaw.com/law-library/statutes/OCC_INT0720.md)
- [OCC Interpretive Letter No. 722 A national bank may invest CIF assets in mutual funds, including mutual funds that pay the bank a servicing fee, without the bank having to reduce its trustee fees, if the bank concludes, based upon a reasoned opinion of trust counsel, that such an arrangement is authorized by applicable state law, is consistent with the trust instrument, is appropriate for the particular trust accounts, and is consistent with OCC regulations, including in particular 12 C.F.R. 9.18(b)(12). (03/12/96)](https://www.frixlaw.com/law-library/statutes/OCC_INT0722.md)
- [OCC Interpretive Letter No. 724 Bank can sell vehicle service contracts to customers who use home equity loan proceeds to purchase a vehicle, and the maturity of the service contract may be different from the maturity of the loan. (04/22/96)](https://www.frixlaw.com/law-library/statutes/OCC_INT0724.md)
- [OCC Interpretive Letter No. 725 National bank to establish an operating subsidiary to engage in permissible derivatives-related activities. (05/10/96)](https://www.frixlaw.com/law-library/statutes/OCC_INT0725.md)
- [OCC Interpretive Letter No. 726 Letter concerns the application of the Community Reinvestment Act (CRA) regulations to financial institutions' support of microenterprise lending programs. (06/21/96).](https://www.frixlaw.com/law-library/statutes/OCC_INT0726.md)
- [OCC Interpretive Letter No. 730 Letter concludes that loans proposed by the bank to an unaffiliated distributor of mutual funds would not be subject to interaffiliate lending restrictions contained in 12 U.S.C. 371C. (05/29/96).](https://www.frixlaw.com/law-library/statutes/OCC_INT0730.md)
- [OCC Interpretive Letter No. 732 National bank may make a 5.5% investment in software company which is engaged in the design, development, marketing and maintenance of a network for electronic funds transfers and electronic data interchange, including transacting electronic commerce and marketing software products for use on its world-wide electronic commerce network. (05/10/96).](https://www.frixlaw.com/law-library/statutes/OCC_INT0732.md)
- [OCC Interpretive Letter No. 733 National bank receiver is subject to the rights of secured creditors and creditors entitled to setoff. U.S. legal principles regarding enforcement of security interests are applicable to a receivership of a federal branch or agency conducted under National Bank Act. Therefore, receiver of an uninsured federal branch or agency does not have the right to interfere with the rights of secured creditors, including application of collateral held in U.S. to obligations of a non-U.S. office of the bank. (06/19/96).](https://www.frixlaw.com/law-library/statutes/OCC_INT0733.md)
- [OCC Interpretive Letter No. 736 Lending limit exception for participations not limited to banks. Non-banks may act as participants. (07/25/96)](https://www.frixlaw.com/law-library/statutes/OCC_INT0736.md)
- [OCC Interpretive Letter No. 737 Huntington National Bank's acquisition of minority interest in a limited liability company providing stored value systems. (08/19/96)](https://www.frixlaw.com/law-library/statutes/OCC_INT0737.md)
- [OCC Interpretive Letter No. 738 National bank's participation in a guaranty issued by an agent for a syndication of lenders with respect to their borrower's letter of credit reimbursement obligations to another bank or financial institution is permissible under I.R. 7.1016. (08/14/96)](https://www.frixlaw.com/law-library/statutes/OCC_INT0738.md)
- [OCC Interpretive Letter No. 740 Letter advises the Bank as follows: 1) The question of whether "salary" as used in 12 C.F.R. 2.4 includes an officer's base salary, bonuses, director's fees and/or any other compensation paid by the Bank must be determined by the Bank's management; 2) the question of whether the payment bonuses for credit life sales under 12 C.F.R. 2.4 is based on salary received by the recipient in a calendar year, a fiscal year, or any 12-month period must be determined by the Bank's management; and 3) pursuant to 12 C.F.R. 2.4, if the Bank's CEO is a loan officer and the CEO participates in the bonus plan under which payments based on credit life insurance sales are made, the CEO must be included in averaging the salaries of loan officers that participate in the Bank's bonus or incentive plan. (08/19/96)](https://www.frixlaw.com/law-library/statutes/OCC_INT0740.md)
- [OCC Interpretive Letter No. 741 National bank may acquire majority interest in company which operates call center facility which operates programs by which potential customers for new or used automobiles may access databases containing information on the used and new car inventories of numerous automobile dealerships in its metropolitan area. (08/19/96)](https://www.frixlaw.com/law-library/statutes/OCC_INT0741.md)

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Source: Frix Law Library, https://www.frixlaw.com/law-library/statutes/OCC_INT0892. Check the current official text before relying on it. Not legal advice.