Letter concludes that a national bank may hedge the risks arising from bank permissible, customer-driven derivative transactions using below-investment grade bonds, and that when the bank acquires such bonds for this purpose, it is subject to the standards applicable to derivative hedges and not the limitations of 12 C.F.R. Part 1 applicable to investment securities.

O

Comptroller of the Currency

Administrator of National Banks

Washington, DC 20219

Interpretive Letter #1064

July 13, 2006 August 2006

12 USC 24(7)

Subject:

Hedging Customer-Driven Derivative Transactions with Below-Investment Grade

Bonds

Dear [ ]:

[ ] (“Bank”) is seeking confirmation that it may hedge the risks arising

from bank permissible, customer-driven1 derivative transactions using, among other instruments,

below-investment grade bonds, and that when the Bank acquires such bonds for this purpose, it

is subject to the standards applicable to derivatives hedges and not the limitations in 12 C.F.R.

Part 1 applicable to investment securities. For the reasons discussed below, we conclude that the

Bank may engage in the hedging transactions in the manner proposed. However, before the

Bank commences the proposed activities, the Bank’s examiner-in-charge (“EIC”) must be

satisfied that the Bank has adequate risk management and measurement systems and controls to

conduct the activities on a safe and sound basis.

Background

The Bank proposes to act as a financial intermediary in customer-driven derivative transactions,

including credit default swaps in various currencies, swaps tied to the CDX.EM index,2 bond

options, credit default swaptions, credit linked notes, cross-currency swaps, baskets, interest rate

and cross-currency swaps in various investment and non-investment grade currencies, and

1 A customer-driven transaction is one entered into for another party’s valid and independent business purpose. See

OCC Interpretive Letter No. 892 (Sept. 13, 2000) (“IL No. 892”).

2 The CDX.EM index is the Dow Jones CDX Emerging Market Index, which is part of the Dow Jones CDX family

of credit derivative indexes

stment grade currencies, and

1 A customer-driven transaction is one entered into for another party’s valid and independent business purpose. See

OCC Interpretive Letter No. 892 (Sept. 13, 2000) (“IL No. 892”).

2 The CDX.EM index is the Dow Jones CDX Emerging Market Index, which is part of the Dow Jones CDX family

of credit derivative indexes. See Dow Jones Credit Derivative Indexes, Press Release, available at

http://indexes.dowjones.com/mdsidx/index.cfm?event=cdxPress.

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2

leveraged notes. The Bank’s products relate primarily to countries and currencies in Central and

South America, but also to countries in Europe, the Middle East, and Africa.

The Bank’s client base for these derivatives products consists of governments, supranational

bodies, corporations, and financial institutions both in and outside of the United States. The

financial institution segment is widely represented, ranging from insurance companies in North

and South America, to European and global hedge funds. Clients for these derivative products

may also come from the Bank’s private bank or other affiliates. All clients are subject to the

Bank’s suitability and compliance policies.

The Bank’s customers will use the derivatives for a variety of business purposes, including risk

management. For example, corporations may use derivatives to manage foreign-exchange risk,

or the risk that a change in currency exchange rates will affect business results. A corporation

that reports in one currency, e.g., United States Dollars, but receives payments in another

currency, e.g., Mexican Pesos, may hedge the foreign-exchange risk through the use of various

derivative instruments, including cross-currency swaps. A cross-currency swap involves the

exchange of payments denominated in one currency, e.g., United States Dollars, for payments

denominated in another, e.g., Mexican Pesos

ne currency, e.g., United States Dollars, but receives payments in another

currency, e.g., Mexican Pesos, may hedge the foreign-exchange risk through the use of various

derivative instruments, including cross-currency swaps. A cross-currency swap involves the

exchange of payments denominated in one currency, e.g., United States Dollars, for payments

denominated in another, e.g., Mexican Pesos. Payments are based on a notional principal

amount the value of which is fixed in exchange rate terms at the swap’s inception. If the Bank

enters into a cross-currency swap with a customer, the Bank assumes the currency exchange rate

risk until it offsets that risk by either entering into an offsetting cross-currency swap or hedging

the risk through the use of another financial instrument.

The Bank proposes to hedge certain financial derivative transactions the OCC has previously

found permissible by acquiring bonds issued by governmental or corporate entities in Central or

South America, Europe, the Middle East, or Africa that are not rated “investment grade.” For

example, the Bank may purchase below-investment debt in order to hedge a credit-derivative

based on the debt of a corporation.

In some cases, the securities purchased for hedging purposes will directly match a customer

transaction. In other cases, for risk management or liquidity purposes, the Bank will hedge a

transaction with an asset that is of a different type or maturity than the underlying customer

transaction. In all cases, the Bank commits to follow procedures to monitor and ensure that the

security purchased relates appropriately to the exposure presented by the customer transaction

tch a customer

transaction. In other cases, for risk management or liquidity purposes, the Bank will hedge a

transaction with an asset that is of a different type or maturity than the underlying customer

transaction. In all cases, the Bank commits to follow procedures to monitor and ensure that the

security purchased relates appropriately to the exposure presented by the customer transaction.

The Bank represents that the derivatives activities would be consistent with the Bank’s policies

and procedures related to the risk management of financial derivatives, along with regulatory

requirements applicable to such activities, including OCC Banking Bulletin 96-43: Credit

Derivatives, Guidelines for National Banks (August 12, 1996); OCC Banking Circular 277: Risk

Management of Financial Derivatives (October 27, 1993); and the Federal Financial Institutions

Examination Council’s Supervisory Policy Statement on Investment Securities and End-User

Derivatives Activities, 63 F.R. 20,191 (April 23, 1998). In addition to its overall risk

management of financial derivatives, the Bank has tested and implemented particular

management and accounting systems that reflect the proposed derivative transactions described

above and their associated hedge transactions. Moreover, the Bank will maintain market and

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3

credit positions that are essentially flat, with the exception of residual or anticipatory positions

arising from the need for the orderly establishment or unwinding of hedge transactions.

Discussion

For the reasons discussed below, and subject to satisfaction of the conditions set forth herein, we

conclude that the Bank’s acquisition of below-investment grade bonds in order to hedge risks

arising from permissible derivative transactions is subject to standards applicable to derivatives

activities, as discussed below, and that the limitations of 12 C.F.R. Part 1 applicable to

investment securities would not apply

d below, and subject to satisfaction of the conditions set forth herein, we

conclude that the Bank’s acquisition of below-investment grade bonds in order to hedge risks

arising from permissible derivative transactions is subject to standards applicable to derivatives

activities, as discussed below, and that the limitations of 12 C.F.R. Part 1 applicable to

investment securities would not apply. The Bank also may engage in cross-hedging in order to

hedge its risks from permissible derivative transactions, as described below.

In longstanding precedent, the OCC has found banks may engage in derivatives transactions3

with payments based on bank permissible holdings, such as foreign exchange or bank

permissible debt securities.4 Since national banks have legal authority to buy and sell particular

assets, the OCC has found that national banks also may enter into derivative transactions

involving exchanges of payments tied to changes in the market value of those bank permissible

assets.5 In addition, the OCC has found that national banks, acting as financial intermediaries,

may engage in customer-driven derivative transactions with payments tied to a broader range of

assets, including below-investment grade debt, and hedge risks arising from those transactions

through offsetting derivatives or physical positions in debt securities.6 For example, under 12

U.S.C. § 24 (Seventh) national banks may engage in perfectly matched, cash-settled, customer-

driven derivatives transactions with payments tied to a range of assets.7 In such transactions,

3 The OCC has previously recognized the ability of national banks to provide customers with a wide variety of

financial derivatives. See, e.g., OCC Interpretive Letter No. 652 (Sept. 13, 1994) (“IL No. 652”) (equity

index/derivative swaps) and OCC Letter from Jimmy F. Barton, Deputy Comptroller Multinational Banking, to Carl

Howard, Associate General Counsel, Citibank, N.A

uch transactions,

3 The OCC has previously recognized the ability of national banks to provide customers with a wide variety of

financial derivatives. See, e.g., OCC Interpretive Letter No. 652 (Sept. 13, 1994) (“IL No. 652”) (equity

index/derivative swaps) and OCC Letter from Jimmy F. Barton, Deputy Comptroller Multinational Banking, to Carl

Howard, Associate General Counsel, Citibank, N.A. (May 13, 1992) (interest rate, basis rate, currency, currency

coupon, and cash-settled commodity swaps; caps, collars, floors, swaptions, captions, and other option-like

products; forward rate agreements, long rate agreements, rate locks and spread locks, as well as similar products)

available at, LEXIS, Agency Decisions, OCC Decisions, Letters, Bulletins, Journals & Releases.

4 See, e.g., OCC Interpretive Letter No. 260 (June 27, 1983) (exchange-traded options on fixed income securities);

No Objection Letter No. 86-13 (Aug. 8, 1986) (transactions in futures contracts on United States Treasury securities,

mortgage-backed securities guaranteed by the United States government, and other “bank eligible securities”); OCC

Interpretive Letter No. 372 (Nov. 7, 1986) (exchange-traded foreign currency options); and OCC Interpretive Letter

No. 414 (Feb. 11, 1988) (foreign currency derivatives).

5 Id.

6 See, e.g., IL No. 892, supra (bank may hedge risks from bank permissible, customer-driven equity derivative

transactions with equity securities); OCC Interpretive Letter No. 935 (May 14, 2002) (“IL No. 935”) (bank may

hedge risks from bank permissible, customer-driven derivative activities with below-investment grade bonds); and

OCC Interpretive Letter No. 1051 (Feb. 15, 2006) (“IL No. 1051”) (bank may hedge and manage the counterparty

credit risks and liability exposures arising from contingent credit default swaps with below-investment grade debt).

7 See OCC Interpretive Letter No. 1039 (Sept

(bank may

hedge risks from bank permissible, customer-driven derivative activities with below-investment grade bonds); and

OCC Interpretive Letter No. 1051 (Feb. 15, 2006) (“IL No. 1051”) (bank may hedge and manage the counterparty

credit risks and liability exposures arising from contingent credit default swaps with below-investment grade debt).

7 See OCC Interpretive Letter No. 1039 (Sept. 13, 2005) (crude oil, natural gas, heating oil, natural gasoline,

gasoline, unleaded gas, gasoil, diesel, jet fuel, jet-kerosene, residual fuel oil, naphtha, ethane, propane, butane,

isobutene, crack spreads, lightends, liquefied petroleum gases, natural gas liquids, distillates, oil products, coal,

emissions allowances, benzene, dairy, cattle, wheat, corn, soybeans, soybean meal, soybean oil, cocoa, coffee,

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4

banks exchange payments with one customer and then exchange offsetting payments with

another counterparty, serving as financial intermediaries facilitating the flow of funds in our

economy.

The OCC also has found that national banks may portfolio-hedge their permissible securities

derivative transactions using either derivatives that settle in cash or by holding below-investment

grade debt securities.8 It is well established that national banks have authority to manage risks

arising from banking activities. Portfolio hedging can provide a more cost effective means of

managing risks arising from derivative activities than perfectly matching transactions because it

reduces transactional costs and operational risks. Rather than offset each individual derivative

transaction, the bank can determine its net positions and hedge only the residual risk in its book

of business

ng from banking activities. Portfolio hedging can provide a more cost effective means of

managing risks arising from derivative activities than perfectly matching transactions because it

reduces transactional costs and operational risks. Rather than offset each individual derivative

transaction, the bank can determine its net positions and hedge only the residual risk in its book

of business. In addition, the ability to hold debt securities increases a bank’s hedging options

and its ability to control risks in its derivatives business, and allows banks to compete more

effectively, meet customer demand, and operate more efficiently and profitably.9

In engaging in derivative activities and concomitant hedges, banks act as financial intermediaries

by exchanging payments with counterparties managing financial risks or otherwise meeting

financial needs. Banks have traditionally served as financial intermediaries in taking deposits

and making loans. Through permissible derivatives activities, national banks also serve as

financial intermediaries exchanging payments with customers to meet customers’ financial or

risk management needs.

A. Below-Investment Grade Bond Hedges

The OCC has previously determined that a national bank may purchase below-investment grade

debt securities in order to hedge customer-driven, bank permissible derivative transactions,

provided the bank’s EIC is satisfied that the bank has adequate risk management and

measurement systems and controls to conduct the activities on a safe and sound basis.10 In

limited circumstances the OCC also has permitted banks to cross-hedge securities derivatives

where consistent with a bank’s approved hedging risk management processes.11 Cross-hedging

is the use of one security, or a basket or securities, to hedge the risk arising from a transaction

involving another, different security.12 Cross-hedging is premised on the existence of a strong

cotton, orange juice, sugar, paper, rubber, steel, aluminum, zinc, lead, nickel, tin, c

ities derivatives

where consistent with a bank’s approved hedging risk management processes.11 Cross-hedging

is the use of one security, or a basket or securities, to hedge the risk arising from a transaction

involving another, different security.12 Cross-hedging is premised on the existence of a strong

cotton, orange juice, sugar, paper, rubber, steel, aluminum, zinc, lead, nickel, tin, cobalt, iridium, rhodium, freight,

high density polyethylene (plastic), ethanol, methanol, newsprint, paper (linerboard), pulp (kraft), and recovered

paper (old newsprint) derivatives and related indices) and OCC Interpretive Letter No. 1056 (Mar. 29, 2006) (frozen

concentrate orange juice, low density polyethylene and polypropylene).

8 See IL No. 892 and IL No. 935, both supra.

9 See generally IL No. 892, supra (the use of equity holdings, including equities held for hedging purposes, provides

substantial financial and operational advantages to banks).

10 See IL No. 935; IL No. 892; and IL No. 1051, all supra.

11 See IL No. 935 and IL No. 892, both supra.

12 See IL No. 935, supra.

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5

correlation between the price movement of different securities. In this case, the Bank may

purchase, for hedging purposes, debt securities issued by foreign corporate or governmental

entities subject to the standards described below.

Moreover, provided certain conditions are met, below-investment grade bonds purchased for the

purpose of hedging risks associated with bank-permissible derivative transactions would not be

subject to the provisions of 12 C.F.R. Part 1, which apply to “investment securities.” As

discussed below, national banks have several distinct sources of authority to hold debt securities.

Each of these authorities has specific limits and standards that apply to the securities held under

that authority. Debt securities properly held under one authority need not comply with the limits

or standards applicable to another authority

Part 1, which apply to “investment securities.” As

discussed below, national banks have several distinct sources of authority to hold debt securities.

Each of these authorities has specific limits and standards that apply to the securities held under

that authority. Debt securities properly held under one authority need not comply with the limits

or standards applicable to another authority.

Under 12 U.S.C. § 24 (Seventh), national banks are specifically authorized to purchase

investment securities for their own account subject to limits prescribed in OCC regulations.13

Purchases of investment securities pursuant to this authority are subject to limits set forth in 12

C.F.R. Part 1. However, the investment securities provisions of Section 24 (Seventh) and Part 1

do not constitute the exclusive source of authority for national banks to hold debt securities. For

example, national banks may purchase and hold debt securities pursuant to their lending

authority.14 Moreover, purchases of securities pursuant to these other banking powers, such as

lending authority, are not subject to the limits in Part 1. However, national banks purchasing

such interests under lending authority must comply with safe and sound lending practices.15

Such purchases should be based on a complete review of relevant credit information and an

informed credit judgment consistent with the acquiring bank’s credit policy, and be subject to

appropriate loan administration practices.16

Here, the Bank’s authority to hold the debt securities in question is based not on the investment

securities authority, but rather on the Bank’s incidental powers under Section 24 (Seventh) to

effectively hedge its risks arising under bank permissible derivatives activities.17 National banks

have the authority to engage in the business of banking and in incidental activities that are

13 Specifically, the statute provides: “[T]he association may purchase for its own account investment securities under

such limitations and res

ank’s incidental powers under Section 24 (Seventh) to

effectively hedge its risks arising under bank permissible derivatives activities.17 National banks

have the authority to engage in the business of banking and in incidental activities that are

13 Specifically, the statute provides: “[T]he association may purchase for its own account investment securities under

such limitations and restrictions as the Comptroller of the Currency may by regulation prescribe.”

14 See 12 U.S.C. § 24 (Seventh) and Banking Circular 181 (Rev.), “Purchases of Loans in Whole or in Part-

Participations;” see also OCC Interpretive Letter No. 600 (July 31, 1992).

15 Id.

16 Id.

17 Specifically, the statute provides that national banks shall have the authority: “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 this title.”

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6

“useful” or “convenient” to that business.18 As discussed above, the OCC has found that national

banks may engage in a wide variety of customer-driven derivatives transactions as part of the

business of banking.19 Managing the risks arising from permissible banking activities is itself

integral to the business of banking. The OCC has previously recognized that, as an activity that

is incidental to the business of banking, national banks may hold below-investment grade debt

securities in order to hedge risks arising from permissible derivatives activities.20 Such holdings

offer banks cost effective means to manage banking risks and thus are convenient and useful to

their banking activities

business of banking. The OCC has previously recognized that, as an activity that

is incidental to the business of banking, national banks may hold below-investment grade debt

securities in order to hedge risks arising from permissible derivatives activities.20 Such holdings

offer banks cost effective means to manage banking risks and thus are convenient and useful to

their banking activities.

The limitations in Part 1, which apply to securities purchased under the Bank’s authority to

“purchase for its own account investment securities” under Section 24 (Seventh), would not

apply to an acquisition of debt securities under the separate incidental authority to hold securities

to hedge resulting risks from permissible derivatives activities. When the Bank purchases

securities based on its incidental authority to hedge derivatives transactions with below-

investment grade debt, these activities are subject to standards specifically applicable to

derivatives activities discussed below.21 As discussed below, however, before the Bank

commences the proposed activities, the Bank’s EIC must be satisfied that the Bank has adequate

risk management and measurement systems and controls to conduct the activities on a safe and

sound basis.

B. Safety and Soundness Considerations

For the Bank to permissibly engage in the proposed activities on the basis of its incidental

authority to hedge risks arising from otherwise permissible derivatives activities, the Bank’s risk

measurement and management capabilities must be of appropriate sophistication to ensure that

the activity can be conducted in a safe and sound manner, for purposes of hedging and not as a

proprietary trading business, and otherwise in accordance with applicable law

on the basis of its incidental

authority to hedge risks arising from otherwise permissible derivatives activities, the Bank’s risk

measurement and management capabilities must be of appropriate sophistication to ensure that

the activity can be conducted in a safe and sound manner, for purposes of hedging and not as a

proprietary trading business, and otherwise in accordance with applicable law. Consequently,

the Bank must demonstrate to the satisfaction of its EIC that the Bank has established an

appropriate risk measurement and management process for the proposed activities.22

Documentation supplied to the EIC should establish to the satisfaction of the EIC that:

18 See NationsBank of North Carolina v. Variable Annuity Life Insurance Co., 513 U.S. 251 (1995); see also Arnold

Tours, Inc. v. Camp, 472 F.2d 427 (1st Cir. 1972).

19 See, e.g., IL No. 652, supra (equity derivative swaps); OCC Interpretive Letter No. 949 (Sept. 19, 2002) (equity

options and forwards); OCC Interpretive Letter No. 962 (Apr. 21, 2003) (electricity derivatives); and OCC

Interpretive Letter No. 1040 (Sept. 15, 2005) (emissions derivatives).

20 IL No. 892, supra; OCC Interpretive Letter No. 1033 (June 14, 2005) (hedging equity index derivatives with

baskets of securities); see also OCC Interpretive Letter No. 1018 (Feb. 10, 2005) (equity hedges on affiliate

transactions).

21 Similarly, Part 1 does not apply to investment grade bonds purchased to hedge permissible derivative transactions.

22 See IL No. 935, supra (“The standards set forth in OCC Interpretive Letter 892 that apply to hedging with equity

securities also apply to hedging with below-investment grade debt securities.”).

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7

(1) the Bank will hold the securities solely to hedge risks arising from customer-

driven bank permissible derivative transactions;

(2) the Bank will not hold the securities for speculative purposes;

terpretive Letter 892 that apply to hedging with equity

securities also apply to hedging with below-investment grade debt securities.”).

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7

(1) the Bank will hold the securities solely to hedge risks arising from customer-

driven bank permissible derivative transactions;

(2) the Bank will not hold the securities for speculative purposes;

(3) the securities will offer a cost-effective means to hedge risks arising from

permissible banking activities;

(4) the Bank will not take anticipatory, or maintain residual positions in the securities

except as necessary for the orderly establishment or unwinding of a hedging

position; and,

(5) the Bank has an appropriate risk management process place, satisfactory to the

EIC, for its hedging activities.

As detailed further in the Comptroller’s Handbook: Risk Management of Financial Derivatives

(January 1997) and OCC Banking Circular 277: Risk Management of Financial Derivatives

(October 27, 1993), an effective risk 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 effective risk

control functions that oversee and ensures the continuing appropriateness of the risk management

process. The Bank’s risk control processes should include systems to ensure the Bank’s

compliance with accounting and reporting as stipulated by the instructions for the Consolidated

Reports of Condition and Income and generally accepted accounting principles (“GAAP”).

Cross-hedging entails basis risk, including the risk that price fluctuations of the hedging

instrument will not exactly match the price fluctuations of the underlying transaction.23 In

addition, there can be risks resulting from maturity mismatch, liquidity and credit differences

s for the Consolidated

Reports of Condition and Income and generally accepted accounting principles (“GAAP”).

Cross-hedging entails basis risk, including the risk that price fluctuations of the hedging

instrument will not exactly match the price fluctuations of the underlying transaction.23 In

addition, there can be risks resulting from maturity mismatch, liquidity and credit differences.

Bank management thus must be able to justify its cross-hedge, i.e., demonstrate that the

instrument used for cross-hedging provides a reasonable substitute for the security exposure

arising from the derivative being hedged. Examiners evaluating the reasonableness of a cross-

hedge will consider the accuracy of the cross-hedge, its cost-effectiveness, and its liquidity in the

market in comparison to the security involved in the initial transaction.24 Accordingly, the Bank

may engage in cross-hedging, provided the Bank’s EIC is satisfied that the Bank has adequate

risk management and measurement systems and controls to conduct the activities on a safe and

sound basis.

The Bank’s processes must also 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 as a customer-driven, and non-

propriety trading business. The compliance monitoring program must include policies, training,

independent surveillance and well-defined exception approval and reporting procedures.

Further, the Bank must conduct these activities in a safe and sound manner, consistent with

prudential limits established by Bank management. Such prudential limits are subject to the

satisfaction of the Bank’s EIC that, at any given time, the prudential limits are adequate. The

23 See, e.g., OCC Interpretive Letter No. 878 (Dec. 22, 1999) and OCC Interpretive Letter No. 632 (June 30, 1993).

24 See IL No. 935, supra.

these activities in a safe and sound manner, consistent with

prudential limits established by Bank management. Such prudential limits are subject to the

satisfaction of the Bank’s EIC that, at any given time, the prudential limits are adequate. The

23 See, e.g., OCC Interpretive Letter No. 878 (Dec. 22, 1999) and OCC Interpretive Letter No. 632 (June 30, 1993).

24 See IL No. 935, supra.

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8

EIC may permit the Bank to net a short and long position in the same bond, as long as any

residual or basis risks are measured, in order to comply with any EIC imposed prudential limit

on such holdings.25

Conclusion

OCC precedents have previously recognized the authority of banks to engage in customer-driven

derivative transactions and to hedge the risks arising from those transactions through a broad

range of risk management tools including below-investment grade debt securities.26 We

conclude that the Bank may engage in the transactions it proposes, subject to standards and

requirements applicable to derivative activities set forth herein, rather than those set forth in 12

C.F.R. Part 1. However, before the Bank commences the proposed activities, the Bank’s EIC

must be satisfied that the Bank has adequate risk management and measurement systems and

controls to conduct the activities on a safe and sound basis. Our conclusions herein are

specifically based on the Bank’s representations and written submissions describing the facts and

circumstances of the subject transactions. Any change in the facts or circumstances could result

in different conclusions. If you have any additional questions, please do not hesitate to contact

Tahmineh Maloney, Attorney, Securities & Corporate Practices Division at (202) 874-5210.

Sincerely,

signed

Julie L

he Bank’s representations and written submissions describing the facts and

circumstances of the subject transactions. Any change in the facts or circumstances could result

in different conclusions. If you have any additional questions, please do not hesitate to contact

Tahmineh Maloney, Attorney, Securities & Corporate Practices Division at (202) 874-5210.

Sincerely,

signed

Julie L. Williams

First Senior Deputy Comptroller and Chief Counsel

25 In calculating compliance with Part 1, the Bank may not net positions acquired under its derivatives hedging

authority with investment securities holdings. Because securities purchased under different authorities are

purchased for different purposes, netting would not be appropriate.

26 See, e.g., IL No. 892, supra (national banks may take positions in equity securities solely to hedge customer-

driven, bank permissible equity derivatives transactions).