Letter concludes that it is permissible for the Bank and its London branch to engage in customer-driven, metal derivative transactions that settle in cash or by transitory title transfer and that are hedged on a portfolio basis with derivatives that settle in cash or by transitory title transfer. Before the Bank may engage in these transactions, the bank must notify its examiner-in-charge ("EIC"), in writing, of the proposed activities and must receive written notification of the EIC's supervisory non-objection.

O

Comptroller of the Currency

Administrator of National Banks

Washington, DC 20219

October 19, 2006

Interpretive Letter #1073

Patrick S. Antrim, Assistant General Counsel November 2006

Bank of America, N.A.

Legal Department

NC1-002-29-01

101 South Tryon Street

Charlotte, NC 28255

Subject: Portfolio-hedged Metal Derivative Transactions

Dear Mr. Antrim:

Bank of America, N.A. (“Bank”) is seeking confirmation from the Office of the Comptroller of

the Currency (“OCC”) that it is permissible for the Bank and its London branch to engage in

customer-driven,1 metal2 derivative transactions3 that settle in cash or by transitory title transfer

and that are hedged on a portfolio basis with derivatives that settle in cash or by transitory title

transfer. Presently, the Bank has authority to enter into customer-driven, cash-settled derivative

transactions on aluminum, nickel, lead, zinc and tin, and simultaneously enter into perfectly

matched offsetting derivative transactions on these same reference assets.4 Under this proposal,

rather than simultaneously entering into a perfectly matched offsetting transaction, the Bank will

hedge metal derivative transactions on a portfolio basis with exchange-traded and over-the-

counter (“OTC”) derivative transactions that settle in cash or by transitory title transfer as

1 A “customer-driven” transaction is one entered into for a customer’s valid and independent business purposes.

See OCC Interpretive Letter No. 892 (September 13, 2000).

2 The term “metal” includes all metals (e.g., aluminum, nickel, lead, zinc and tin) other than those that the Bank has

the express authority to buy and sell as “exchange, coin and bullion” under 12 U.S.C. § 24(Seventh). See, e.g., OCC

Interpretive Letter No. 693 (November 14, 1995); OCC Interpretive Letter No. 685 (August 5, 1995); and OCC

Interpretive Letter No. 553 (May 2, 1991)

3, 2000).

2 The term “metal” includes all metals (e.g., aluminum, nickel, lead, zinc and tin) other than those that the Bank has

the express authority to buy and sell as “exchange, coin and bullion” under 12 U.S.C. § 24(Seventh). See, e.g., OCC

Interpretive Letter No. 693 (November 14, 1995); OCC Interpretive Letter No. 685 (August 5, 1995); and OCC

Interpretive Letter No. 553 (May 2, 1991). The Bank already has the authority under Section 24(Seventh) to use

“exchange, coin and bullion” metals as reference assets for perfectly matched and portfolio-hedged derivative

transactions.

3 “Metal derivative transactions” include forwards, options, swaps, caps, floors and collars, and options on futures,

swaps, caps, floors and collars, in which a portion of the return (including interest or principal or payment streams)

is linked to metal or the price of metal.

4 See, e.g., OCC Interpretive Letter No. 1039 (July 25, 2005) (“IL No. 1039”).

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2

permitted for the Bank in OCC Interpretive Letter No. 962 in the context of electricity derivative

transactions.5 For the reasons discussed below, based on the facts and representations provided

by the Bank, we conclude that the proposed transactions are legally permissible for the Bank,

including its London branch. However, before the Bank may engage in such transactions, the

Bank must notify its examiner-in-charge (“EIC”), in writing, of the proposed activities and must

receive written notification of the EIC’s supervisory non-objection, based on the EIC’s

evaluation of the adequacy of the Bank’s risk measurement and management systems and

controls to enable the Bank to engage in the proposed activities on a safe and sound basis, and

the EIC’s evaluation of any other supervisory considerations relevant to the particular proposal.6

I. Background

The Bank is an active and significant participant in customer-driven financial intermediation

transactions involving a wide range of commodities

urement and management systems and

controls to enable the Bank to engage in the proposed activities on a safe and sound basis, and

the EIC’s evaluation of any other supervisory considerations relevant to the particular proposal.6

I. Background

The Bank is an active and significant participant in customer-driven financial intermediation

transactions involving a wide range of commodities. The Bank recently received authority to

engage in customer-driven, perfectly matched, cash-settled metal derivative transactions on

aluminum, nickel, lead, zinc, and tin.7 Thus, the Bank presently enters into a derivative

transaction on aluminum, nickel, lead, zinc, or tin and simultaneously enters into a perfectly

matched offsetting derivative transaction. Under the Bank’s proposal, it will enter into

customer-driven,8 metal derivative transactions and hedge the transactions, on a portfolio basis,

with cash-settled, exchange-traded and OTC metal derivative transactions and transitory title

transfers, based on the aggregate unmatched position in the portfolio. The Bank represents that

correlative data suggests that the relationship between different metals is not strong enough to

allow effective cross-hedging using derivative transactions based on different metal types (e.g.,

nickel vs. tin). However, the Bank represents that data shows that the business would recognize

risk-mitigation benefits by cross-hedging derivative contracts that have different contract

specifications, but that are based on like metals (e.g., contracts listed on the London Metals

Exchange (“LME”) for primary aluminum and North American Special Aluminum Alloy

(“NASAAC”) and the US Commodity Exchange (“COMEX”) aluminum contract). Accordingly,

the Bank proposes to use such related derivative contracts and take transitory title to the

underlying metal in its overall portfolio management

ations, but that are based on like metals (e.g., contracts listed on the London Metals

Exchange (“LME”) for primary aluminum and North American Special Aluminum Alloy

(“NASAAC”) and the US Commodity Exchange (“COMEX”) aluminum contract). Accordingly,

the Bank proposes to use such related derivative contracts and take transitory title to the

underlying metal in its overall portfolio management. As new derivative transactions are added

to the Bank’s metal derivative portfolios resulting in changes to the unmatched position, the

Bank will adjust its hedging position to manage its aggregate exposure to market risk (i.e., the

risk to earnings or capital arising from changes in the value of portfolios of metal derivative

transactions). The purpose of the proposed hedges, similar to the transactions addressed in IL

No. 1039, is to offset market risk from its metal derivative transactions.

5 OCC Interpretive Letter No. 962 (April 21, 2003) (“IL No. 962”).

6 The Bank may also engage in customer-driven, perfectly matched, cash-settled derivative transactions on the

metals captured by this letter not previously approved for such transactions by the OCC, on the basis of the analysis

and subject to the conditions set forth in detail in IL No. 1039.

7 See, IL No. 1039, supra.

8 The Bank’s customers for this purpose include producers and consumers of metals, utilities, hedge funds, and

merchant/trading companies.

settled derivative transactions on the

metals captured by this letter not previously approved for such transactions by the OCC, on the basis of the analysis

and subject to the conditions set forth in detail in IL No. 1039.

7 See, IL No. 1039, supra.

8 The Bank’s customers for this purpose include producers and consumers of metals, utilities, hedge funds, and

merchant/trading companies.

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3

The Bank believes that the expansion of the Bank’s derivatives business to include the proposed

transactions is a natural extension of the Bank’s existing customer-driven financial

intermediation products and encompasses products regularly requested by the Bank’s customers.

The Bank represents that the purpose of expanding its metal derivative business is to provide risk

management and other tools to the Bank’s customers in substantively the same manner as is

currently done with respect to its existing derivatives business. The major difference between

the financial intermediation activities the OCC recently approved for the Bank involving metal

derivatives and the proposed activity, is that here the Bank will manage risks arising from

derivative transactions on a portfolio basis rather than on a perfectly matched basis. When

transactions are perfectly matched, the primary risk to the Bank is counterparty credit risk (i.e.,

the risk that a counterparty will not make payments according to the terms of the transaction).

With portfolio-hedging, the Bank may also be exposed to market risk, basis risk9 and calendar

spread risk,10 however, these risks will be subject to risk management limits. The Bank has

demonstrated the ability to successfully manage and control such risks in its portfolio-hedged

electricity derivative transactions

unterparty will not make payments according to the terms of the transaction).

With portfolio-hedging, the Bank may also be exposed to market risk, basis risk9 and calendar

spread risk,10 however, these risks will be subject to risk management limits. The Bank has

demonstrated the ability to successfully manage and control such risks in its portfolio-hedged

electricity derivative transactions.

The Bank represents that portfolio-hedging is a more cost effective means of managing risks

arising from permissible derivative activities than perfectly matching transactions because it

reduces transactional costs and operational risks (i.e., the risk of incurring financial loss due to

human or technical errors). Metals portfolios resulting from customer-driven portfolios will

naturally contain offsetting transactions. Thus, the Bank need only hedge the net residual risk

position in each portfolio when it engages in portfolio-hedging and manage this risk similarly to

how it manages the residual risk in its existing commodities business. With perfectly matched

transactions, the Bank must offset each metal transaction that it enters into and pay the costs

associated with executing each of these trades. Because the Bank must execute a greater number

of transactions to perfectly match transactions than it would if it were portfolio-hedging, there is

also greater opportunity for back office error and reconcilement issues in perfectly matched

trades.

Periodically the Bank may hedge metal derivative portfolios by using hedging instruments that

result in basis risk. Such mismatches, and thus the resulting basis risk, tend to become more

pronounced progressively during the life of the transactions, thus making accurate hedging

essential. In some instances, cash-settled transactions may provide less than completely accurate

hedges

es.

Periodically the Bank may hedge metal derivative portfolios by using hedging instruments that

result in basis risk. Such mismatches, and thus the resulting basis risk, tend to become more

pronounced progressively during the life of the transactions, thus making accurate hedging

essential. In some instances, cash-settled transactions may provide less than completely accurate

hedges. The Bank believes that the ability to engage in metals transitory title transfers will

enable the Bank to more accurately and precisely hedge its proposed metal derivative

transactions and substantially reduce its basis risk in portfolio-hedged metal derivatives. The

Bank represents that it will engage in the proposed title transfer transactions solely for the

accommodation of customers or for its own risk management purposes.

9 Basis risk is the risk that the price fluctuations of the hedging instruments will not exactly match price fluctuations

of the underlying transactions. See OCC Interpretive Letter No. 1060 (April 26, 2006) (“IL No. 1060”).

10 Calendar spread risk occurs when the Bank acquires short and long futures or options positions to hedge metal

derivatives on the opposite position(s) on the same metal in the portfolio, which have expiration dates different from

the contracts in the portfolio and can potentially result in a gain or loss as the difference between the portfolio and

the hedge contracts widens or narrows.

0”).

10 Calendar spread risk occurs when the Bank acquires short and long futures or options positions to hedge metal

derivatives on the opposite position(s) on the same metal in the portfolio, which have expiration dates different from

the contracts in the portfolio and can potentially result in a gain or loss as the difference between the portfolio and

the hedge contracts widens or narrows.

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4

The Bank states that its ability to engage in the proposed activities will enable the Bank to meet

the growing demand for these products to manage metal prices by customers such as metal

producers and consumers. In addition, the Bank believes that by offering customers a broader

range of risk management products that more effectively address their individual risk

management needs, the Bank will have the ability to attract a broader customer base. Finally, the

Bank represents that by participating in a broader range of markets and expanding its customer

base, it may diversify and reduce credit and other risks arising from its financial intermediation

business. Accordingly, the Bank believes the proposed transactions will enable it to meet

customer demand and operate its metal derivatives business more effectively and efficiently.

In sum, the Bank contends that the proposed transactions pose risks similar in nature to those

inherent in its portfolio-hedged electricity derivative transactions (e.g., market risk, basis risk,

and calendar spread risk), which it has demonstrated the ability to successfully manage and

control

meet

customer demand and operate its metal derivatives business more effectively and efficiently.

In sum, the Bank contends that the proposed transactions pose risks similar in nature to those

inherent in its portfolio-hedged electricity derivative transactions (e.g., market risk, basis risk,

and calendar spread risk), which it has demonstrated the ability to successfully manage and

control. The Bank maintains that the proposed transitory title transfers do not pose risks

different from the transitory title activities the OCC addressed in prior OCC precedent in the

context of coal and electricity derivative transactions.11 Notably, because the title transfer

transactions involving metals will not entail the physical possession of commodities, these

transactions will not involve the customary activities relating to, or risks attendant to, commodity

ownership (e.g., storage costs, insurance, and environmental protection).

The Bank expects to clear at least some of the exchange-traded future contracts it enters into,

through Banc of Americas Securities Limited (“BASL”), a foreign bank subsidiary of the

Bank,12 and Bank of America Securities LLC (“BAS”), an affiliate of the Bank. The Bank

11 See IL No. 1060, supra; OCC Interpretive Letter No. 1025 (April 6, 2005); and IL No. 962, supra.

12 BASL is a foreign bank incorporated in the United Kingdom and, as such, is supervised by the United Kingdom’s

Financial Services Authority. BASL is a wholly owned subsidiary of the Bank. Under the Federal Reserve Act at

12 U.S.C. § 601 and the Federal Reserve Board’s (“Board”) implementing Regulation K at 12 C.F.R. § 211.8(b)(1),

a member bank has the authority to directly invest in a foreign bank subject to the requirements in U.S. statutes and

regulations. The Bank states that it expects BASL to become a clearing member of the LME and to provide clearing

services on contracts listed on that exchange on aluminum, NASAAC, aluminum alloy, nickel, lead, zinc, and tin

implementing Regulation K at 12 C.F.R. § 211.8(b)(1),

a member bank has the authority to directly invest in a foreign bank subject to the requirements in U.S. statutes and

regulations. The Bank states that it expects BASL to become a clearing member of the LME and to provide clearing

services on contracts listed on that exchange on aluminum, NASAAC, aluminum alloy, nickel, lead, zinc, and tin.

LME rules provide that LME clearing members must become exchange clearing members of LCH.Clearnet Ltd.

(“LCH”), which is the contracted central counterparty (“CCP”) clearinghouse that clears LME contracts. LME

Rules, Part 1, Section 1.1.3.1; http://www.lme.co.uk/what_clearing.asp. As the CCP, LCH acts as an intermediary

between two parties to a contract, taking on any monetary risk involved (e.g., if one party fails to meet its obliga-

tions due to bankruptcy) as guarantor for the trade. See ,e.g.,http://www.lme.co.uk/membership_associatebroker.asp.

The LME does not act as a counterparty or guarantor to LME contracts. BASL is not exposed to unlimited liability to

either the LCH or the LME for the defaults of other members. A defaulting LME clearing member’s unsettled registered

LCH contracts are handled under LCH Rules, which provide that an exchange member’s liability for the default of other

members is limited up to the amount of the member’s default fund contribution. LCH Rulebook, Default Fund

Rules 32 - 35. The rights and liabilities under unsettled LME contracts not registered with LCH are deemed discharged

under LME Rules and replaced with an obligation of the defaulter to pay the counterparty or vice versa, a default

settlement amount, and does not impose liability on uninvolved counterparties. LME Rules, Part 9, Section 3.3.4. The

determination of the default settlement amount by the LME is final, conclusive, and binding upon the defaulter and each

counterparty. LME Rules, Part 9, Section 3.6. The Board’s Regulation K at 12 C.F.R

igation of the defaulter to pay the counterparty or vice versa, a default

settlement amount, and does not impose liability on uninvolved counterparties. LME Rules, Part 9, Section 3.3.4. The

determination of the default settlement amount by the LME is final, conclusive, and binding upon the defaulter and each

counterparty. LME Rules, Part 9, Section 3.6. The Board’s Regulation K at 12 C.F.R. § 211.10(a)(18), requires a

member bank to give the Board prior notice before any subsidiary joins a mutual exchange or clearinghouse, unless the

potential for liability of the subsidiary to the exchange, clearinghouse, or other members of the exchange, as the case may

be, is legally limited by the rules of the exchange or clearinghouse to an amount that does not exceed the applicable $ 25

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5

anticipates that either BAS or BASL will act as a clearing member of one or more metal

exchanges, or will enter into an introducing broker arrangement to clear through another clearing

member of such exchange(s). The Bank represents that if the Bank engages in any transactions

subject to sections 23A and 23B of the Federal Reserve Act and the Federal Reserve Board's

Regulation W with or through its affiliates in connection with its proposed metal derivative

activities, including transactions with third parties that might benefit an affiliate such that the

transaction would be attributable to that affiliate under Regulation W, the Bank will do so in

compliance with those authorities

ons 23A and 23B of the Federal Reserve Act and the Federal Reserve Board's

Regulation W with or through its affiliates in connection with its proposed metal derivative

activities, including transactions with third parties that might benefit an affiliate such that the

transaction would be attributable to that affiliate under Regulation W, the Bank will do so in

compliance with those authorities.

The Bank commits that it will: (1) not engage in metal derivative transactions other than cash-

settled transactions and those that settle by transitory title transfer, (ii) not run a proprietary book

in metal derivatives (except insofar as that book is created to accommodate customer-driven

transactions or as part of the Bank’s portfolio hedging strategy), (iii) limit trading in the proposed

metal derivatives exclusively to hedge residual open positions arising from customer

transactions, (iv) not take physical positions in metals, and (v) conduct its metal derivative

business in a safe and sound manner and consistent with prudent risk management practices

prescribed the OCC Handbook: Risk Management of Financial Derivatives13 and Banking

Circular 277.14

The Bank commits that the metal derivative portfolio-hedging and transitory title transfer

transactions will be conducted in a manner consistent with the policies, procedures, and controls

that it applies to its existing commodities derivatives business.

II. Discussion

For the reasons discussed below, based on the facts and representations provided by the Bank,

we conclude that the proposed transactions are legally permissible for the Bank, including its

London branch

sfer

transactions will be conducted in a manner consistent with the policies, procedures, and controls

that it applies to its existing commodities derivatives business.

II. Discussion

For the reasons discussed below, based on the facts and representations provided by the Bank,

we conclude that the proposed transactions are legally permissible for the Bank, including its

London branch. However, before the Bank may engage in such transactions, the Bank must

notify its EIC, in writing, of the proposed activities and must receive written notification of the

EIC’s supervisory non-objection, based on the EIC’s evaluation of the adequacy of the Bank’s

risk measurement and management systems and controls to enable the Bank to engage in the

proposed activities on a safe and sound basis, and the EIC’s evaluation of any other supervisory

considerations relevant to the particular proposal.

A. National Bank may engage in Customer-driven, Portfolio-hedged Metal

Derivative Transactions

million general-consent limit under Regulation K at 12 C.F.R. § 211.9(b)(4). The Bank represents that BASL’s

liability would be less than the applicable $ 25 million general consent limit of 12 C.F.R. § 211.9(b)(4) that would

trigger notice to the Federal Reserve Board.

13 OCC Handbook: Risk Management of Financial Derivatives (January 1997) (“OCC Handbook”).

14 OCC Banking Circular No. 277 (October 27, 1993) (“BC-277”).

n K at 12 C.F.R. § 211.9(b)(4). The Bank represents that BASL’s

liability would be less than the applicable $ 25 million general consent limit of 12 C.F.R. § 211.9(b)(4) that would

trigger notice to the Federal Reserve Board.

13 OCC Handbook: Risk Management of Financial Derivatives (January 1997) (“OCC Handbook”).

14 OCC Banking Circular No. 277 (October 27, 1993) (“BC-277”).

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6

The OCC has previously determined that the Bank may engage in perfectly matched cash-settled

derivatives on aluminum, nickel, lead, zinc, and tin as a financial intermediary under 12 U.S.C. §

24(Seventh).15 The Bank now proposes to use any metal not already authorized for the Bank

under its 12 U.S.C. § 24(Seventh) “exchange, coin and bullion” authority as a reference asset in

portfolio-hedged derivative and transitory title transfer transactions that settle in cash or by

transitory title transfer. The ability to engage in these transactions will increase the Bank’s

hedging options and its ability to control risks in its metal derivatives business. A difference

between the activities previously approved for the Bank and those for which approval is sought

here is that rather than simultaneously entering into metal derivative transactions with perfectly

matched offsetting transactions, the Bank will manage the transactions on a portfolio basis with

exchange-traded and OTC cash-settled derivative transactions, in the same manner as the Bank

currently manages its electricity derivatives.16 The Bank will also settle metal derivative

transactions by transitory title transfer and hedge these transactions with derivative transactions

that settle by transitory title transfer, in a manner previously addressed for the Bank in IL No.

962 in the context of electricity derivative transactions

ve transactions, in the same manner as the Bank

currently manages its electricity derivatives.16 The Bank will also settle metal derivative

transactions by transitory title transfer and hedge these transactions with derivative transactions

that settle by transitory title transfer, in a manner previously addressed for the Bank in IL No.

962 in the context of electricity derivative transactions.

The expansion of the Bank’s derivatives business to include the proposed transactions is a

natural extension of the Bank’s existing financial intermediation activities. The OCC has

previously addressed the permissibility under Section 24(Seventh) of portfolio-hedging and

transactions that settle in cash or by transitory title where the bank takes title to the commodity in

a “chain of title” and relinquishes title instantaneously.17 Portfolio-hedging can be a more cost

effective means of managing risks arising from permissible derivative activities than perfectly

matching transactions because it reduces transactional costs and operational risks. Portfolio-

hedging and transitory title transfer activities allow banks to meet customer demand, and operate

more efficiently and effectively. Transitory title transfers also enable banks to participate in

markets using this form of settlement and provide customers a broader range of sophisticated risk

management tools to address their financial, risk management, and liquidity needs. In

conducting transitory title transfers in connection with a permissible derivatives business, banks

act as financial intermediaries, ultimately exchanging payments between counterparties

managing financial risks or otherwise meeting financial needs.18 Executing transactions and

hedging in this manner is consistent with a portfolio-hedged financial intermediation business

d liquidity needs. In

conducting transitory title transfers in connection with a permissible derivatives business, banks

act as financial intermediaries, ultimately exchanging payments between counterparties

managing financial risks or otherwise meeting financial needs.18 Executing transactions and

hedging in this manner is consistent with a portfolio-hedged financial intermediation business.

The risks to which the Bank is exposed under this proposal are similar in nature to those arising

in other commodity derivative transactions where the Bank has a demonstrated ability to manage

and control such risks. Accordingly, the Bank may act as a financial intermediary in customer-

driven, metal derivative transactions that settle in cash or by transitory title transfer, and

portfolio-hedge those transactions with metal derivative transactions that settle in cash or by

15 See IL No. 1039, supra.

16 Another difference is that the Bank will enter into derivative transactions with customers on a broader range of

metals.

17 See, e.g., IL Nos. 1060, 1025, and 962, all supra.

18 See, e.g., IL No. 1025, supra.

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7

transitory title transfer. Before the Bank engages in the transactions, however, the Bank’s EIC

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

systems and controls to engage in the activities on a safe and sound basis, as discussed below.

B. The Portfolio-hedged Metal Derivative Transactions must be Conducted in a

Safe and Sound Manner

For the Bank to permissibly engage in the proposed 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 and in accordance with applicable law

, as discussed below.

B. The Portfolio-hedged Metal Derivative Transactions must be Conducted in a

Safe and Sound Manner

For the Bank to permissibly engage in the proposed 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 and in accordance with applicable law. Before the Bank

engages in the transactions, the Bank’s EIC must be satisfied that the Bank has established

adequate risk measurement and management systems and controls to engage in the activities on a

safe and sound basis. As detailed further in the OCC 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. The Bank’s risk control

processes should include 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.

In implementing these policies, procedures, and controls, the Bank shall commit 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; (iv) the

establishment, implementation and monitoring of appropriate risk management limits with

respect to various types of risks —such as credit, market and basis risk —associated with metal

derivatives and transitory title transfers of metal; and (v) Compliance Department training of

perso

contingency

planning) to accommodate the activity; (iii) the implementation of appropriate controls; (iv) the

establishment, implementation and monitoring of appropriate risk management limits with

respect to various types of risks —such as credit, market and basis risk —associated with metal

derivatives and transitory title transfers of metal; and (v) Compliance Department training of

personnel and development of a supervisory framework designed to ensure compliance with

policies and procedures, including trading practices. 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 commodity derivative products and business.

In addition to a satisfactory 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 in its proposal, including the commitment to continue to

conduct its financial intermediation activities in metal derivatives as a customer-driven and non-

proprietary trading business. The compliance-monitoring program should also ensure that the

Bank has a supervisory framework that protects against manipulative practices of any kind. An

adequate and effective compliance-monitoring program will include policies, training,

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

tives as a customer-driven and non-

proprietary trading business. The compliance-monitoring program should also ensure that the

Bank has a supervisory framework that protects against manipulative practices of any kind. An

adequate and effective compliance-monitoring program will include policies, training,

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

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8

C. London Branch Activities

National bank foreign branches19 may engage in general banking activities, which are

determined under national banking law.20 A national bank, via its foreign branch, may engage in

such general banking activities, permissible for a national bank in the United States, in a foreign

country.21 Accordingly, the proposed activities may be permissible for the London branch as

“general banking activities” permissible for a national bank in the United States on the basis of

the analysis set forth in detail above.

III. Conclusion

We conclude that the proposed transactions are legally permissible for the Bank, including its

London branch. Before the Bank may engage in such transactions, however, the Bank must

notify its EIC, in writing, of the proposed activities and must receive written notification of the

EIC’s supervisory non-objection, based on the EIC’s evaluation of the adequacy of the Bank’s

risk measurement and management systems and controls to enable the Bank to engage in the

proposed activities on a safe and sound basis, and the EIC’s evaluation of any other supervisory

considerations relevant to the particular proposal. 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 questions please contact Tena M

the EIC’s evaluation of any other supervisory

considerations relevant to the particular proposal. 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 questions please contact Tena M. Alexander, Special Counsel,

Securities and Corporate Practices Division, at (202) 874-5210.

Sincerely,

/s/

Julie L. Williams

First Senior Deputy Comptroller

and Chief Counsel

19 OCC regulations define the term “foreign branch” to mean an office of a national bank (other than a

representative office) that is located outside the United States at which banking or financing business is conducted.

12 C.F.R. § 28.2(d). Similarly, Regulation K defines a “foreign branch” as an office of an organization that is

located outside the country in which the organization is legally established and at which a banking or financing

business is conducted. 12 C.F.R. § 211.2( k).

20 See 12 U.S.C. § 604a; 12 C.F.R. § 211.4(a).

21 12 C.F.R. § 28.4(a).