# OCC Interpretive Letter No. 937: Letter concludes that Bank may engage in customer-driven, cash-settled financial intermediation transactions where the payments between parties are based on the price of electricity, and hedge risks arising from these permissible banking activities, provided the Bank has established an appropriate risk measurement and management process for its electricity derivative and hedging activities

> Federal · Agency guidance · In force

URL: https://www.frixlaw.com/law-library/statutes/OCC_INT0937

## Section

- **Citation:** OCC Interpretive Letter No. 937
- **Heading:** Letter concludes that Bank may engage in customer-driven, cash-settled financial intermediation transactions where the payments between parties are based on the price of electricity, and hedge risks arising from these permissible banking activities, provided the Bank has established an appropriate risk measurement and management process for its electricity derivative and hedging activities
- **Jurisdiction:** Federal
- **Kind:** Agency guidance
- **Status:** In force
- **Text as of:** August 14, 2026
- **Source:** Compiled text
- **Location:** OCC Interpretive Letters / Letter concludes that Bank may engage in customer-driven, cash-settled financial intermediation transactions where the payments between parties are based on the price of electricity, and hedge risks arising from these permissible banking activities, provided the Bank has established an appropriate risk measurement and management process for its electricity derivative and hedging activities.

## Text

O
Comptroller of the Currency
Administrator of National Banks
Washington, DC 20219
Interpretive Letter #937
June 27, 2002 June 2002
12 USC 24(7)
Re: Authority of a National Bank to Engage in
Financial Intermediation Transactions
Dear [ ]:
This responds to your request that the Office of the Comptroller of the Currency (“OCC”)
confirm the opinion of [ ] (the “Bank”) that it is permissible for the Bank to
engage in financial intermediation transactions, where the payments between parties are based on
the price of electricity.1 For the reasons discussed below and subject to the limitations described
herein, we believe that the proposed transactions are permissible for the Bank.
I. Background
The Bank currently engages in a variety of financial intermediation transactions involving
exchanges of payments based on interest rates, and the value of equities and commodities. The
Bank’s financial intermediation derivative transactions involve a wide range of energy-related
commodities, including petroleum, natural gas, and other hydrocarbon products. These
transactions provide risk management tools to meet customers’ financial needs. For example, oil
and gas derivatives offer users and producers protection against increases and decreases in the
price of oil or gas.
The Bank proposes to add transactions based on the price of electricity to its existing financial
intermediation derivatives business
natural gas, and other hydrocarbon products. These
transactions provide risk management tools to meet customers’ financial needs. For example, oil
and gas derivatives offer users and producers protection against increases and decreases in the
price of oil or gas.
The Bank proposes to add transactions based on the price of electricity to its existing financial
intermediation derivatives business. Similar to its existing financial intermediation derivatives

1 For the purposes of this letter, the term “electricity derivative transactions” includes cash-settled electricity-linked
transactions of every type -- including derivative products such as futures, forwards, options, swaps, caps, floors,
and collars, and options thereon -- in which a portion of the return (including interest and/or principal and/or
payment streams) is linked to the price of electricity.

2
business involving energy commodities, the electricity derivative business will be a customer-
driven rather than a proprietary trading business. The Bank’s electricity financial intermediation
activities will involve exchanges of payments, similar to other financial intermediary transactions
presently engaged in by the Bank. The transactions will be cash-settled and the Bank will not
physically receive or deliver electricity.
The transactions in which the Bank proposes to engage will enable customers to meet legitimate
financial and risk management needs. Representative examples of these transactions described
below, include swaps, options, and forwards contracts. The Bank represents that each of these
cash-settled transactions is used by market participants (including generators, industrial
consumers and marketers) in their management of price risks in a competitive and deregulated
environment.2
Example 1: An electricity producer has contracts to provide electricity to manufacturers at
market prices over the next two years
options, and forwards contracts. The Bank represents that each of these
cash-settled transactions is used by market participants (including generators, industrial
consumers and marketers) in their management of price risks in a competitive and deregulated
environment.2
Example 1: An electricity producer has contracts to provide electricity to manufacturers at
market prices over the next two years. The electricity producer wants to receive fixed payments
for electricity it produces over that period and obtain protection against price declines.
To eliminate electricity price risk, the producer enters into a cash-settled, electricity derivative
swap with the Bank. Under the swap, the producer pays the Bank the floating market price for a
notional amount of electricity over the next two years, and receives a fixed price for the same
notional amount of electricity. Alternatively, the producer may achieve the same result through a
series of cash-settled forward transactions with the Bank. Under the cash-settled, forward
transactions, the producer pays the Bank the market value of a specified notional amount of
electricity at a future date, and receives a fixed price for the same notional amount of electricity.
Example 2: An industrial consumer of electricity wants to fix its cost of electricity over the next
two years and protect itself against price increases. The consumer enters into a cash-settled,
electricity swap with the Bank. Under the swap, the consumer pays the Bank a fixed price for a
notional amount of electricity over the next two years, and receives the floating market price for
the same notional amount of electricity. Alternatively, the consumer may achieve the same
result through a series of cash-settled forward transactions with the Bank. Under the forward

2 In support of the Bank’s representation, it references the discussion in the Primer on Electricity Futures and Other
Derivatives (U.S
the floating market price for
the same notional amount of electricity. Alternatively, the consumer may achieve the same
result through a series of cash-settled forward transactions with the Bank. Under the forward

2 In support of the Bank’s representation, it references the discussion in the Primer on Electricity Futures and Other
Derivatives (U.S. Department of Energy-funded study by the Environmental Energy Technologies Division of the
University of California Ernest Orlando Lawrence Berkeley National Laboratory, January 1998) (the “Electricity
Derivatives Primer”) of all three of these instruments and their use in electricity markets, as follows. Swaps enable
a customer (either a generator or an end-user) to lock in a specific price for the electricity in question, and can be
tailored to meet the needs of the buyer and the seller (e.g., delivery points, time periods, etc.). Generators and end-
users use both put-options (“floors”) and call-options (“caps”) – or a combination of puts and calls (“collars”) – to
ensure a particular price range for the electricity in question. Under a forward contract, one party is obligated to
buy, and the other to sell, a specified quantity of electricity at a fixed price on a given date in the future. At the
maturity of a forward contract, the seller will deliver the electricity and the buyer will pay the purchase price. If, at
that time, the market price of the electricity is higher than the price specified in the contract, then the buyer will have
protected itself from price volatility. Conversely, if the market price is lower than the contract price, then the seller
will have benefited from the terms of the contract. The Electricity Derivatives Primer emphasizes (at 43) that
“[t]hese types of instruments work well because they can be tailored to the unique circumstances of generators, end
users, and marketers.”
, then the buyer will have
protected itself from price volatility. Conversely, if the market price is lower than the contract price, then the seller
will have benefited from the terms of the contract. The Electricity Derivatives Primer emphasizes (at 43) that
“[t]hese types of instruments work well because they can be tailored to the unique circumstances of generators, end
users, and marketers.”

3
transactions, the customer pays a fixed price for a notional amount of electricity, and the
customer receives the market value of the same notional amount of electricity at a future date.
Example 3: An electricity consumer determines it will meet earnings projections only if the cost
of a notional amount of electricity is $30 or lower. The consumer wants protection against prices
rising over $30 and wants to retain the benefits of prices declining below $30. To achieve this
protection, the consumer enters into a cash-settled cap option with the Bank that entitles the
consumer, for a fee, to receive the difference between $30 and a higher market price for
electricity.
As the Bank’s book of electricity derivative transactions increases, much of the market risk
exposures from transactions with customers may offset each other. Consequently, the Bank will
not need to hedge each transaction individually. It will manage market risks on a “portfolio
basis,” and hedge the resulting net risk exposures. There will normally be some residual market
risk that is left unhedged, which will be subject to risk management limits as discussed below.
However, this risk will be de minimis relative to the Bank's earnings and capital and will be
consistent with a customer-driven business strategy. The Bank’s hedges will include cash-settled
electricity swaps, forwards, and options.
The Bank represents that deregulation dramatically changed the operation of the power markets
ged, which will be subject to risk management limits as discussed below.
However, this risk will be de minimis relative to the Bank's earnings and capital and will be
consistent with a customer-driven business strategy. The Bank’s hedges will include cash-settled
electricity swaps, forwards, and options.
The Bank represents that deregulation dramatically changed the operation of the power markets.
For wholesale market participants, the price of power is a market rate variable that presents a risk
profile analogous to that of interest rates, natural gas prices or equity prices. If left unmanaged,
power prices can introduce volatility into a customer’s earnings. Moreover, as deregulation
proceeds, the variety of customers exposed to power prices will broaden. At present, power
generators and distributors face substantial electricity price risks. Institutional and corporate
consumers (such as chemical companies, refineries, and heavy manufacturers) are also exposed.
The Bank has well-established relationships with these types of customers.
The Bank’s proposed financial intermediary initiative relates exclusively to wholesale energy
and power markets, and does not in any way relate to a business with retail clients or to actual
power procurement. Furthermore, because the Bank proposes to solely engage in cash-settled
electricity derivative transactions, the Bank represents it will not be required to register as a
power marketer with, or otherwise become subject to the supervision or jurisdiction of, the
Federal Energy Regulatory Commission or any regional transmission or other organization
which operates as a power exchange or power pool. And, as previously stated, the Bank will not
receive or deliver actual power as a result of any cash-settled electricity derivative transaction
that it enters.
The Bank believes that financial intermediation activities based on the price of electricity are a
natural extension of the Bank’s existing financial intermediation activities involving energy
commodities
as a power exchange or power pool. And, as previously stated, the Bank will not
receive or deliver actual power as a result of any cash-settled electricity derivative transaction
that it enters.
The Bank believes that financial intermediation activities based on the price of electricity are a
natural extension of the Bank’s existing financial intermediation activities involving energy
commodities. The Bank states that energy derivative customers have requested that the Bank
offer electricity derivative transactions for many years. The Bank’s electricity derivatives
business will provide the Bank’s customers risk management tools in substantively the same
manner as the Bank provides such tools in connection with its existing petroleum, natural gas,
and related derivatives business. Essentially, the Bank will offer electricity derivative

4
transactions to customers as an additional means for them to meet their legitimate financial and
risk management needs.
The Bank has expertise in conducting cash-settled energy commodity derivative transactions.
Consistent with this expertise, the Bank has well-established policies, procedures and controls
that it applies to its commodity derivatives businesses. For example, the Bank: (i) hedges the
price risk arising from cash-settled commodity derivatives on a portfolio basis and values
transactions using data sets and models implemented in accordance with Bank standards;
dity derivative transactions.
Consistent with this expertise, the Bank has well-established policies, procedures and controls
that it applies to its commodity derivatives businesses. For example, the Bank: (i) hedges the
price risk arising from cash-settled commodity derivatives on a portfolio basis and values
transactions using data sets and models implemented in accordance with Bank standards;
(ii) records credit exposure against customer credit limits; (iii) documents cash-settled customer
transactions using the ISDA Master Agreement, with appropriate confirmations; and (iv) uses
operations systems that permit booking and settlement of cash-settled commodity derivative
transactions. The Bank represents that it will conduct the proposed activities in customer-driven,
cash-settled electricity derivatives consistent with the same policies, procedures, and controls it
applies to its existing energy commodity derivatives business (“Electricity Derivative Product
Controls”).
The Bank commits that it will not commence its new cash-settled electricity derivatives business
without first putting in place and implementing all necessary policies, procedures and controls
(including the Electricity Derivative Product Controls) to assure that (i) its electricity derivative
business is customer-driven, cash-settled, and meets all required regulatory standards for
conducting a customer-driven derivative business, and (ii) the Bank has in place all appropriate
mechanisms to identify, monitor, limit and control the risks inherent in conducting this business
so that it complies with all applicable OCC guidance and requirements.3
The Bank specifically acknowledges that, as contemplated by the OCC Derivatives Handbook
and BC-277, an effective risk management process includes appropriate oversight and
supervision, managerial and staff expertise, comprehensive policies and operating procedures,
risk identification, measurement and management information systems, and effective risk control
functions that oversee and ensure the cont
ank specifically acknowledges that, as contemplated by the OCC Derivatives Handbook
and BC-277, an effective risk management process includes appropriate oversight and
supervision, managerial and staff expertise, comprehensive policies and operating procedures,
risk identification, measurement and management information systems, and effective risk control
functions that oversee and ensure the continuing appropriateness of the risk management
process. To manage the risks in its proposed cash-settled electricity derivatives business, the
Bank represents it will implement those policies, procedures and controls set forth in OCC
guidance, e.g., OCC Derivatives Handbook and BC-277, to assure the ongoing function and
maintenance of an effective risk management process. In implementing those policies,
procedures, and controls, the Bank commits to conducting a full evaluation of (i) pricing,
hedging (including portfolio hedging), processing, recordkeeping, documentation, accounting,
“back office” and risk management; (ii) the development of adequate knowledge, staff, oversight
management and technology (including contingency planning) to accommodate the activity;
(iii) the implementation of appropriate controls (including the Electricity Derivative Product
Controls discussed above); (iv) the establishment, implementation and monitoring of appropriate
risk management limits with respect to various types of risks -- such as market risk, credit risk,

3 See, e.g., OCC Handbook: Risk Management of Financial Derivatives (January 1997) (“OCC Derivatives
Handbook”); OCC Banking Circular No. 277 (October 27, 1993), reprinted in CCH Fed. Banking L. Rep. ¶ 62-152
(“BC-277”); OCC Bulletin 94-31 (May 10, 1994), reprinted in CCH Fed. Banking L. Rep. ¶ 62-152.
s of risks -- such as market risk, credit risk,

3 See, e.g., OCC Handbook: Risk Management of Financial Derivatives (January 1997) (“OCC Derivatives
Handbook”); OCC Banking Circular No. 277 (October 27, 1993), reprinted in CCH Fed. Banking L. Rep. ¶ 62-152
(“BC-277”); OCC Bulletin 94-31 (May 10, 1994), reprinted in CCH Fed. Banking L. Rep. ¶ 62-152.

5
and liquidity risk -- associated with a customer-driven, cash-settled derivatives activity;4 and (v)
Compliance Department training of personnel and development of a supervisory framework
designed to ensure compliance with policies and procedures, including trading practices. Such a
framework will strictly prohibit manipulative practices of any kind, including patterns of trading
related to so-called “round tripping” of electricity derivatives transactions.5 Risk Control,
Operations, Accounting, Legal, Compliance, Audit and Senior and Line Management will all be
involved in assuring that the risks undertaken by the Bank are comparable to, and are addressed
in ways comparable to those applicable to, the Bank’s existing energy-based derivative products
and business.
The Bank further commits that: [1] it will not engage in any electricity derivatives transactions
that might physically settle without the OCC’s permission, [2] any trading in derivatives will be
limited to cash-settled derivatives and done primarily to hedge residual open positions arising
from customer transactions, and [3] its electricity derivative business will be customer driven; it
will not be operated as a proprietary trading business. Transactions in electricity markets will
permit the Bank to manage and hedge, within well-controlled limits, the risks arising from valid,
customer-driven, derivative transactions.
II
and done primarily to hedge residual open positions arising
from customer transactions, and [3] its electricity derivative business will be customer driven; it
will not be operated as a proprietary trading business. Transactions in electricity markets will
permit the Bank to manage and hedge, within well-controlled limits, the risks arising from valid,
customer-driven, derivative transactions.
II. Discussion
In our opinion, the Bank may establish a customer-driven, cash-settled electricity derivative
business and hedge risks arising from these permissible banking activities, provided the Bank has
established an appropriate risk measurement and management process for its electricity
derivative and hedging activities. This process is necessary for the Bank to achieve its customer
risk management objectives in a safe and sound manner and, thus, must be established before the
OCC can determine that the proposed activities are permissible as part of the business of
banking.
A. Financial Intermediation Transactions Involving Commodities
are Authorized as Part of the Business of Banking

4 For example, in the context of market and related risks of electricity derivatives, the Bank will specifically address
such matters as price volatility and concentration of market participants on a geographic and power exchange/power
pool/individual customer basis. In the context of options, it will specifically address all of those characteristics
identified in the OCC Derivatives Handbook (e.g., at 20-21 and Appendix B) as primary component measures of
option sensitivity.
5 For example, the head of the electricity derivatives desk will be provided with a “supervisory checklist” that
describes the responsibilities of the position in monitoring transactions for market manipulation, including round-
tripping. This individual will receive daily position and activity reports to review and monitor consistent with the
best practices policy
measures of
option sensitivity.
5 For example, the head of the electricity derivatives desk will be provided with a “supervisory checklist” that
describes the responsibilities of the position in monitoring transactions for market manipulation, including round-
tripping. This individual will receive daily position and activity reports to review and monitor consistent with the
best practices policy. The Bank’s Compliance Division will also receive and review on a daily basis, position and
activity reports and, on a quarterly basis, will test the appropriateness of derivative transactions and hedges and
review documentary support. Bank employees involved in this business will be subject to applicable “Standards of
Professional Conduct” and be required to attend annual compliance training.

6
The OCC has previously concluded in a variety of contexts that national banks may engage in
customer-driven, cash-settled financial intermediation transactions they are authorized to conduct
as part of the business of banking under 12 U.S.C. § 24(Seventh). The OCC has recognized, for
example, that commodity and commodity index derivatives are a modern form of traditional
financial intermediation functions performed by banks and, based in part on that lineage, has
concluded that national banks may make payments to, or receive payments from, customers
under commodity derivative contracts in the event of a gain or loss in a metal or energy product
or index thereon. These derivative transactions thus have been recognized as permissible for
national banks as a financial intermediation activity.6
In these arrangements, national banks act as financial intermediaries between customers that
want to manage risks resulting from the variations in the price of a particular commodity or
commodity index
t of a gain or loss in a metal or energy product
or index thereon. These derivative transactions thus have been recognized as permissible for
national banks as a financial intermediation activity.6
In these arrangements, national banks act as financial intermediaries between customers that
want to manage risks resulting from the variations in the price of a particular commodity or
commodity index. Customers do not deal directly with one another, but instead make payments
to the intermediary bank.7 Under these authorities, the OCC has determined that national banks
may engage in matched and unmatched commodity price index swaps and manage and
warehouse them on a portfolio basis and originate, trade and make markets in certain swap
products and in other derivative instruments such as futures and options.8
Based on similar reasoning, the OCC has permitted national banks to engage in various
commodity-linked transactions involving oil, gas, other hydrocarbons, and metals.9
“Commodity-linked transactions” include making loans, taking deposits, and issuing debt
instruments having terms related to commodity prices, sales, or indices, or measured in relation
to the future; and entering into swaps, forwards, and other transactions relating to commodity

6 See OCC No-Objection Letter No. 90-1 (February 16, 1990), reprinted in [1989-1990 Transfer Binder] Fed.
Banking L. Rep. ¶ 83,095 (“Unmatched Commodity Swap Letter”); OCC No-Objection Letter No. 87-5 (July 20,
1987), reprinted in [1988-1989 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 84,034 (“Matched Commodity Swap
Letter”). The Unmatched Commodity Swap Letter and the Matched Commodity Swap Letter predate NationsBank of
North Carolina v. Variable Annuity Life Insurance Co., 513 U.S. 251 (1995) and characterized the commodity price
index 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)
ched Commodity Swap
Letter”). The Unmatched Commodity Swap Letter and the Matched Commodity Swap Letter predate NationsBank of
North Carolina v. Variable Annuity Life Insurance Co., 513 U.S. 251 (1995) and characterized the commodity price
index 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). The OCC has since concluded that swap and funds intermediation
activities are part of the business of banking. See OCC Interpretive Letter No. 892 (September 13, 2000), reprinted
in [2000-2001 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 81-411; OCC Letter from Ellen Broadman, Director,
Securities and Corporate Practices Division, OCC, to Barbara Moheit, Regional Counsel, FDIC (October 20, 1998)
(unpublished) (“Broadman Letter”).
7 In the event of a customer default on a commodity swap, the bank makes payments in place of a defaulting
customer’s obligation. The bank’s payment is an advance of funds for which the defaulting customer is obligated to
reimburse the bank or is an exercise of a national bank’s authority to make loans.
8 OCC Letter from Jimmy F. Barton, Deputy Comptroller Multinational Banking, to Carl Howard, Associate
General Counsel, Citibank, N.A. (May 13, 1992) (unpublished); Unmatched Commodity Swap Letter, supra;
Matched Commodity Swap Letter, supra.
9 See, e.g., OCC Interpretive Letter No. 684 (August 4, 1995), reprinted in [1993-1994 Transfer Binder] Fed.
Banking L. Rep. (CCH) ¶ 83,632; OCC Letter from Robert Herman, Deputy Comptroller (October 4, 1994)
(unpublished); OCC Interpretive Letter No. 632 (June 30, 1993), reprinted in [1993-1994 Transfer Binder] Fed.
Banking L. Rep. (CCH) ¶ 83,516.
ter, supra;
Matched Commodity Swap Letter, supra.
9 See, e.g., OCC Interpretive Letter No. 684 (August 4, 1995), reprinted in [1993-1994 Transfer Binder] Fed.
Banking L. Rep. (CCH) ¶ 83,632; OCC Letter from Robert Herman, Deputy Comptroller (October 4, 1994)
(unpublished); OCC Interpretive Letter No. 632 (June 30, 1993), reprinted in [1993-1994 Transfer Binder] Fed.
Banking L. Rep. (CCH) ¶ 83,516.

7
prices and indices, or any combination thereof, in order to assist customers of the Bank in
managing their financial exposures.10 National banks may also originate, trade, and make
markets in swap contracts and related derivative products, including cash-settled commodity
swaps, caps, collars, floors, swaptions, captions and other option-like products, based on their
deposit taking, lending, and financial intermediation authority.11
Moreover, Congress has recognized the authority of national banks to engage in commodity
derivative transactions. Under the Gramm-Leach-Bliley Act,12 banks may offer “identified
banking products” without registration under the Securities Exchange Act of 1934,13 subject to
banking law requirements and supervision. “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,14 securities, currencies,
interest or other rates, indices, or other assets."15 The GLBA conference report further observes
that these products are among the "activities in which banks have traditionally engaged."16
Congress’ recognition that banks engage in commodity derivative transactions and exemption of
these activities from certain securities regulations is consistent with the OCC’s longstanding
position that national banks have the authority to engage in customer-driven, cash-settled
commodity derivative transactions, subject to safety and soundness considerat
which banks have traditionally engaged."16
Congress’ recognition that banks engage in commodity derivative transactions and exemption of
these activities from certain securities regulations is consistent with the OCC’s longstanding
position that national banks have the authority to engage in customer-driven, cash-settled
commodity derivative transactions, subject to safety and soundness considerations.
B. The Bank’s Proposed Cash-Settled Electricity Derivative Business is
Functionally Equivalent to other Bank Permissible Commodity Derivative
Transactions
Electricity derivative transactions are a natural extension of the Bank’s existing energy derivative
products, e.g., petroleum, natural gas, and other hydrocarbon derivative products. Electricity
swaps, forwards and options are the operational, structural, and functional equivalents of
commodity derivative transactions the OCC has previously determined are permissible for
national banks. Customer-driven, cash-settled commodity swaps, forwards, and options, whether
based on metals or energy, including electricity, are privately negotiated contracts between the

10 OCC Interpretive Letter No. 632, supra.
11 OCC Letter from Horace Sneed, Senior Attorney, LASD, (March 2, 1992) (unpublished) (“Commodity Swap
Portfolio Letter”).
12 Pub. L. No. 106-102 (1990)(effective May 12, 2001) (“GLBA”).
13 15 U.S.C. § 78a et seq.
14 The Commodity Futures Trading Commission has recognized that entities engage in derivative instruments on
various commodities, including crude oil, refined oil products, natural gas, metals, and electricity. See, e.g., 2000
CFTC Ltr. LEXIS 248 (December 4, 2000).
15 (emphasis added). See P.L. 106-102, 113 Stat. 1338 (1999), §§ 201, 202, 206.
16 H.R. Rep. No. 106-434 at 163 (1999) (Summary of Title II in Managers' Statement).
ommission has recognized that entities engage in derivative instruments on
various commodities, including crude oil, refined oil products, natural gas, metals, and electricity. See, e.g., 2000
CFTC Ltr. LEXIS 248 (December 4, 2000).
15 (emphasis added). See P.L. 106-102, 113 Stat. 1338 (1999), §§ 201, 202, 206.
16 H.R. Rep. No. 106-434 at 163 (1999) (Summary of Title II in Managers' Statement).

8
parties to the transactions. As such, the terms of the swaps, forwards, and options may be
individually tailored to the specific risk sensitivities of customers, e.g., limiting exposure to price
fluctuations and market uncertainties. And, by entering into a swap, forward, or option contract,
the parties agree to make payments based on the performance of a particular commodity or
commodity index, whether the commodity at issue is an energy product, such as petroleum,
natural gas, a hydrocarbon or electricity, or metal, such as aluminum, lead, nickel, tin, zinc
cobalt, iridium and rhodium.
All of these contracts involve exchanges of payments akin to those that a bank makes and
receives in connection with its role as a financial intermediary. Cash-settled electricity swaps are
agreements between two counterparties that allow them to exchange fixed or floating payments
based on a notional amount of electricity. Banks’ authority to enter into cash-settled swaps is
well established.17 Similar exchanges of payments may be achieved using forwards or options.
For example, cash-settled electricity and other swaps are basically portfolios of cash-settled
forwards. Each forward embedded in a swap transaction is an agreement to exchange payments
based on a fixed or floating price at a certain future date. To illustrate, an electricity swap might
consist of an exchange of payments based on a notional amount of electricity every month for the
next five years. The instrument is a swap because the parties exchange the net of two offsetting
payment streams, once a month
ward embedded in a swap transaction is an agreement to exchange payments
based on a fixed or floating price at a certain future date. To illustrate, an electricity swap might
consist of an exchange of payments based on a notional amount of electricity every month for the
next five years. The instrument is a swap because the parties exchange the net of two offsetting
payment streams, once a month. The swap is nothing more than a series of 60 separate forward
contracts (12 months x 5 years). Although forward contracts may provide for physical delivery,
cash-settled forwards are functionally equivalent to cash-settled swaps and permissible under
banks’ deposit, lending and financial intermediary authorities.
Cash-settled options are similar to those cash-settled contracts, and thus permissible for national
banks, in that options permit the holder to decide to execute a transaction in the future with the
seller at a price determined today. Cash-settled options also are similar to cash-settled swaps and
forwards in that two options - a cap and a floor - can replicate the cashflow of swap transactions.
The same legal reasoning that allows national banks to engage in cash-settled electricity swaps
applies to cash-settled forwards and options. Expansion of the Bank’s existing commodity
derivatives business to include cash-settled electricity-linked transactions will not effect any
substantive change in the type or nature of the activity conducted, but only in their underlying
basis (i.e., the particular commodity in question).

17 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. See Matched Commodity Swap Letter; OCC Interpretive Letter No. 462
(December 19, 1988), reprinted in [1988-1989 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 85,686; OCC Letter
from J. Michael Shepherd, Senior Deputy Comptroller, Corporate and Economic Programs (July 7, 1988)
(unpublished)
rmissibility of national banks engaging in interest rate, currency, and
commodity price index swaps and caps. See Matched Commodity Swap Letter; OCC Interpretive Letter No. 462
(December 19, 1988), reprinted in [1988-1989 Transfer Binder] Fed. Banking L. 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 and equity 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. See OCC Interpretive Letter No. 725 (May 10, 1996), reprinted
in [1995-1996 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 81,040; OCC Interpretive Letter No. 652 (September
13, 1994), reprinted in [1994 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 83,600; OCC Letter from Jimmy F.
Barton, Deputy Comptroller Multinational Banking, to Carl Howard, Associate General Counsel, Citibank, N.A.
(May 13, 1992) (unpublished); Commodity Swap Portfolio Letter; Unmatched Commodity Swap Letter, supra.

9
Finally, GLBA supports the permissibility of national banks entering into cash-settled electricity
transactions, by not limiting the types of commodity derivative transactions exempt from
registration under the ’34 Act. Of course, for any commodity derivative transaction to be
permissible for national banks, it must be permissible under national banking law, which
requires, as discussed below, the bank to have appropriate risk measurement and management
processes in place to conduct the activity
ansactions, by not limiting the types of commodity derivative transactions exempt from
registration under the ’34 Act. Of course, for any commodity derivative transaction to be
permissible for national banks, it must be permissible under national banking law, which
requires, as discussed below, the bank to have appropriate risk measurement and management
processes in place to conduct the activity.
As described in Section I, the Bank’s proposal to engage in customer-driven, cash-settled
electricity derivative business is intended to build on the Bank’s existing client product offerings
in petroleum, natural gas and other energy-related financial instruments, and to provide to
customers sophisticated risk management tools directly related to the accommodation of
customer needs. Bank customers seek a creditworthy, sophisticated and focused counterparty to
assist them in meeting their electricity price management needs and to act as an intermediary in
derivative transactions on their behalf. The Bank’s entry into the electricity derivatives business
will provide customers a new high credit quality counterparty for these transactions that is a
trusted and known quantity to them and has significant experience, knowledge and expertise.
The Bank’s ability to engage in a customer-driven, cash-settled, electricity derivative business
will also benefit the Bank’s customers by reducing customers’ financial risks associated with
fluctuations in the prices of commodities.18
In addition, the Bank will benefit from an electricity derivative business that enables it to
diversify, expand its customer base, and increase revenues. The Bank’s proposed cash-settled
electricity derivative business will pose risks similar to those inherent in other types of cash-
settled electricity derivatives transactions with which it is already familiar and for which it has
demonstrated the ability to successfully manage, e.g., counterparty, price, basis, liquidity, credit,
and compliance risks.
C
its customer base, and increase revenues. The Bank’s proposed cash-settled
electricity derivative business will pose risks similar to those inherent in other types of cash-
settled electricity derivatives transactions with which it is already familiar and for which it has
demonstrated the ability to successfully manage, e.g., counterparty, price, basis, liquidity, credit,
and compliance risks.
C. Hedging Risks Arising from Bank Permissible Commodity Derivative Activities
is Integral to Those Permissible Activities
The OCC has long recognized that using derivatives to hedge against the risks associated with
bank permissible activities is an integral part of those permissible banking activities.19 Indeed,
the OCC has determined that national banks may hedge bank permissible commodity derivative
transactions with other commodity derivatives, such as futures, and swaps and options and other

18 See, e.g., Unmatched Commodity Swap Letter.
19 Through hedging activities, national banks serve in a financial intermediation capacity. Longstanding OCC
precedent recognizes the authority of national banks to act as financial intermediaries, engaging in permissible
derivative transactions and assuming offsetting positions or hedges. In so doing, the bank protects itself against
risks arising from established, permissible banking activities. As a result of hedging, a bank becomes an
intermediary, by interposing itself between customers initiating bank permissible derivative transactions and those
providing offsetting returns. Thus, because hedging is an integral part of financial intermediation services, the
activity is permissible for national banks. OCC Interpretive Letter No. 896 (August 21, 2000), reprinted in [2000 -
2001 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 81-415; Broadman Letter, supra.
itself between customers initiating bank permissible derivative transactions and those
providing offsetting returns. Thus, because hedging is an integral part of financial intermediation services, the
activity is permissible for national banks. OCC Interpretive Letter No. 896 (August 21, 2000), reprinted in [2000 -
2001 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 81-415; Broadman Letter, supra.

10
over-the counter (OTC) instruments, when conducted in a safe and sound manner as provided in
OCC guidance.20 Hence, as with other commodity derivatives, national banks may hedge bank
permissible electricity derivative transactions with electricity futures, and swaps and options and
OTC derivative instruments. Further, the OCC has specifically endorsed the hedging of
commodity transactions on a transaction-by-transaction or portfolio basis.21 The principles that
the OCC has articulated in hedging commodity derivatives and related contexts are equally
applicable to hedging customer-driven, cash-settled electricity derivative transactions.22
D. The Customer-Driven, Cash-Settled Electricity Derivative Transactions and
Hedges must be Conducted in a Safe and Sound Manner
Engaging in customer-driven, cash-settled derivative transactions and hedges does not
automatically qualify the activity as part of the business of banking. The nature of the electricity
derivative activity proposed requires sophisticated risk measurement and management capacities
on the part of a bank, and qualified personnel, in order for the activity to actually function as
described and to operate in a safe and sound manner. Thus, in order for the OCC to conclude
that this proposed activity is permissible for the Bank as “part of the business of banking” the
Bank must demonstrate to the satisfaction of the OCC that the Bank has established an
appropriate risk measurement and management process for its electricity derivative activity
activity to actually function as
described and to operate in a safe and sound manner. Thus, in order for the OCC to conclude
that this proposed activity is permissible for the Bank as “part of the business of banking” the
Bank must demonstrate to the satisfaction of the OCC that the Bank has established an
appropriate risk measurement and management process for its electricity derivative activity. As
detailed further in the OCC Derivatives Handbook and BC-277, an effective risk measurement
and management process includes board supervision, managerial and staff expertise,
comprehensive policies and operating procedures, risk identification and measurement, and
management information systems, as well as an effective risk control function that oversees and
ensures the appropriateness of the risk management process.
In addition to a risk management program, the Bank’s process must include an independent
compliance monitoring program to ensure ongoing compliance with the specific commitments
made by the Bank, including its commitment to conduct its financial intermediation activities in

20 OCC Interpretive Letter No. 684, supra; OCC Interpretive Letter No. 683 (July 28, 1995), reprinted in [1994-
1995 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 83,631; OCC Interpretive Letter No. 632, supra; Commodity
Swap Portfolio Letter, supra.
21 See, e.g., Swap Portfolio Letter, supra; Unmatched Commodity Swap Letter, supra; Matched Commodity Swap
Letter, supra.
22 Indeed, the Federal Reserve Board, in recognizing that “[b]anking organizations have developed a number of
commodity… linked transactions. . . including commodity-indexed deposits, loans, debt issues, and derivative
products, such as forwards, options, and swaps,” has noted that banks enter “into exchange-traded commodity or
stock index futures and options in order to hedge the exposure inherent in these transactions.” (emphasis added). 12
C.F.R
that “[b]anking organizations have developed a number of
commodity… linked transactions. . . including commodity-indexed deposits, loans, debt issues, and derivative
products, such as forwards, options, and swaps,” has noted that banks enter “into exchange-traded commodity or
stock index futures and options in order to hedge the exposure inherent in these transactions.” (emphasis added). 12
C.F.R. §208.128 (repealed so as to broaden the authority of state member banks to engage in derivative transactions
without prior Federal Reserve Board approval; See 62 Fed. Reg. 15272, 15276 (Mar. 31, 1997) (discussing proposed
repeal of § 208.128); see also 63 Fed. Reg. 37630 (July 13, 1998)). The OCC recognizes the similarity of different
financial instruments, stating, for example, that “[d]espite their difference in form, options, futures and options on
futures serve a similar function: enabling banks and investors to hedge against risk of. . .price changes relating to the
underlying instruments.” OCC Interpretive Letter No. 896, supra. In the equity context, the OCC Derivatives
Handbook makes clear (at 71) that banks that enter into swap transactions may hedge these transactions with
“futures contracts, options, and similar over-the-counter instruments.” See also note 3 above.

11
electricity as a customer-driven, and non-proprietary trading business.23 The Bank must have an
adequate and effective compliance monitoring program that includes policies, training,
independent surveillance and well-defined exception approval and reporting procedures.
The OCC will make these determinations though the Bank’s examiner-in-charge (“EIC”) and the
Bank may not commence the proposed activities unless and until its EIC has concluded that the
foregoing standards are met.
III
have an
adequate and effective compliance monitoring program that includes policies, training,
independent surveillance and well-defined exception approval and reporting procedures.
The OCC will make these determinations though the Bank’s examiner-in-charge (“EIC”) and the
Bank may not commence the proposed activities unless and until its EIC has concluded that the
foregoing standards are met.
III. Conclusion
The Bank may conduct the proposed customer-driven, cash-settled electricity derivative business
and hedge risks arising from these permissible banking activities as an extension of its existing
energy-related commodities derivatives business, provided the Bank has established, to the
satisfaction of its EIC, an appropriate risk measurement and management process for its
electricity derivative and hedging activities.
Sincerely,
-signed-
Julie L. Williams
First Senior Deputy Comptroller and Chief Counsel

23 The OCC has long considered safety and soundness issues when determining whether an activity is part of, or
incidental to the business of banking. See e.g., OCC Interpretive Letter 892, supra (national bank may engage in
equity hedging activities only if it has an appropriate risk management process in place); OCC Banking Bulletin 96-
5 (September 20, 1996) (replaced by OCC Bulletin 2000-23 (July 20, 2000)) (national bank’s purchase of life
insurance is incidental to banking if it is convenient or useful in connection with the conduct of the bank’s business
and consistent with safe and sound banking practices); OCC Interpretive Letter No. 684, supra (commodity hedging
is a permissible banking activity provided the activity is conducted in accordance with safe and sound banking
practices); Decision of the Office of the Comptroller of the Currency on the Request by Chase Manhattan Bank, N.A
r useful in connection with the conduct of the bank’s business
and consistent with safe and sound banking practices); OCC Interpretive Letter No. 684, supra (commodity hedging
is a permissible banking activity provided the activity is conducted in accordance with safe and sound banking
practices); 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 (August 8, 1988) (national banks have the authority to
establish the amount of the payments to be made and received under their deposit and loan contracts and may
determine the amount of those payments by reference to any index or standard as long as the bank complies with
safe and sound banking principles and, in the case of loans, with state usury laws); OCC Interpretive Letter No. 376
(October 22, 1986) reprinted in [1985-1986 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 85,600
(indemnification from losses resulting from participation in the bank’s fiduciary securities lending program is a
permissible incidental activity provided the indemnification is consistent with OCC guidance and safety and
soundness); OCC Interpretive Letter No. 274 (December 2, 1983) reprinted in [1983-1984 Transfer Binder] Fed.
Banking L. Rep. (CCH) ¶ 85,438 (a national bank’s authority to lease its office space provides the authority for it to
establish appropriate lease terms if consistent with safe and sound banking practices).

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Source: Frix Law Library, https://www.frixlaw.com/law-library/statutes/OCC_INT0937. Check the current official text before relying on it. Not legal advice.