# OCC Interpretive Letter No. 1113: Letter concludes that the National Bank Act permits a national bank to become a clearing member of ICE Trust, a clearinghouse for over-the-counter credit default swaps. The Bank's exposure to the ICE Trust for the defaults of other members is subject to the lending limit in 12 U.S.C. § 84 or any lower limit set by the examiner-in-charge ("EIC"). Before the Bank may become an ICE Trust clearing member, the Bank must establish a comprehensive risk management framework to govern the risks associated with its membership, and receive a written supervisory no-objection from its EIC. Other national banks may rely on the letter to become clearing members of ICE Trust, but must obtain prior written EIC approval

> Federal · Agency guidance · In force

URL: https://www.frixlaw.com/law-library/statutes/OCC_INT1113

## Section

- **Citation:** OCC Interpretive Letter No. 1113
- **Heading:** Letter concludes that the National Bank Act permits a national bank to become a clearing member of ICE Trust, a clearinghouse for over-the-counter credit default swaps. The Bank's exposure to the ICE Trust for the defaults of other members is subject to the lending limit in 12 U.S.C. § 84 or any lower limit set by the examiner-in-charge ("EIC"). Before the Bank may become an ICE Trust clearing member, the Bank must establish a comprehensive risk management framework to govern the risks associated with its membership, and receive a written supervisory no-objection from its EIC. Other national banks may rely on the letter to become clearing members of ICE Trust, but must obtain prior written EIC approval
- **Jurisdiction:** Federal
- **Kind:** Agency guidance
- **Status:** In force
- **Text as of:** August 14, 2026
- **Source:** Compiled text
- **Location:** OCC Interpretive Letters / Letter concludes that the National Bank Act permits a national bank to become a clearing member of ICE Trust, a clearinghouse for over-the-counter credit default swaps. The Bank's exposure to the ICE Trust for the defaults of other members is subject to the lending limit in 12 U.S.C. § 84 or any lower limit set by the examiner-in-charge ("EIC"). Before the Bank may become an ICE Trust clearing member, the Bank must establish a comprehensive risk management framework to govern the risks associated with its membership, and receive a written supervisory no-objection from its EIC. Other national banks may rely on the letter to become clearing members of ICE Trust, but must obtain prior written EIC approval.

## Text

O

Comptroller of the Currency
Administrator of National Banks

Washington, DC 20219

Interpretive Letter #1113
March 4, 2009 March 2009
12 USC 84
12 CFR 7.1017(a)

Subject: [ ] (“Bank”) Membership in The IntercontinentalExchange
US Trust (“ICE Trust”) Credit Default Swap Clearinghouse

Dear [ ]:

This responds to your request that the Office of the Comptroller of the Currency (“OCC”)
confirm that it is permissible for the Bank to participate as a clearing member of ICE
Trust, a clearinghouse for over-the-counter (“OTC”) credit default swaps (“CDS”).1 ICE
Trust is a New York trust company, which will be a member of the Federal Reserve
System and subject to the regulatory and supervisory requirements of the Federal Reserve
Board (“FRB”) and the New York State Banking Department. ICE Trust will meet the
statutory requirements for a multilateral clearing organization (“MCO”),2 as a State
member bank. As an MCO, ICE Trust will be permitted to clear CDS, as OTC
derivatives.3

1 A CDS is a bilateral OTC contract designed to transfer the credit exposure of specified products between
parties. The buyer of a CDS receives credit protection, whereas the seller of the swap guarantees the credit
worthiness of the obligor on the product in exchange for a fixed payment or a series of fixed payments.
Effectively, the risk of default is transferred from the buyer of the CDS to the seller.

2 An MCO is a system utilized by more than two participants in which the bilateral credit exposures of
participants arising from the transactions cleared are effectively eliminated and replaced by a system of
guarantees, insurance, or mutualized risk of loss. 12 U.S.C. § 4421(1).

3 See 12 U.S.C. § 4401 et seq., and ICE Trust Rule (“Rule”) 611
rred from the buyer of the CDS to the seller.

2 An MCO is a system utilized by more than two participants in which the bilateral credit exposures of
participants arising from the transactions cleared are effectively eliminated and replaced by a system of
guarantees, insurance, or mutualized risk of loss. 12 U.S.C. § 4421(1).

3 See 12 U.S.C. § 4401 et seq., and ICE Trust Rule (“Rule”) 611. OTC derivative transactions are defined
in 12 U.S.C. § 4421 to include any agreement, contract, or transaction that is a credit spread or credit swap
or that is a swap on one or more occurrences of any event, equity security, or other equity instrument, debt
security or other debt instrument. CDS fit within this definition of OTC derivatives.

For the reasons discussed below, we conclude that the Bank may participate as a clearing
member of ICE Trust, provided the Bank, prior to becoming a member, establishes a
comprehensive risk management framework4 to govern the risks associated with its
membership, and receives a written supervisory no-objection from its examiner-in-charge
(“EIC”).

Background

ICE Trust will provide CDS clearing services to its clearing participants (“members”).
Membership is open to market participants that meet the clearinghouse’s membership
criteria.5 The Bank proposes to become an ICE Trust clearing member.

ICE Trust will novate and clear the trades executed by its members.6 Bilateral contracts
entered into by its members will be replaced by two superseding CDS contracts between
ICE Trust and each party to the bilateral transactions. Under the new contracts, ICE
Trust will assume the counterparties’ obligations under the original contracts and
effectively become the central counterparty (i.e., the buyer to every seller and the seller to
every buyer) to CDS trades
ilateral contracts
entered into by its members will be replaced by two superseding CDS contracts between
ICE Trust and each party to the bilateral transactions. Under the new contracts, ICE
Trust will assume the counterparties’ obligations under the original contracts and
effectively become the central counterparty (i.e., the buyer to every seller and the seller to
every buyer) to CDS trades.

For admission to ICE Trust, member applicants must have a minimum tangible net worth
(Tier 1 capital) of $5 billion.7 Potential members or their parents must have a minimum
long term rating of at least “A” or its equivalent from designated or equivalent rating
agencies or otherwise demonstrate to the satisfaction of the FRB that it satisfies stringent
credit criteria.8 A member (or its affiliate) must be licensed and regulated for capital
adequacy by a “competent authority.”9 Members must provide initial and mark-to-
market margin, and contribute collateral (“Required Contributions”) to ICE Trust’s
guaranty fund (“Fund”),10 which is available to cover a member’s default.11 The

4 The risk management framework should focus on the qualitative controls necessary to address the risks of
the Bank’s activities and, in addition, provide for the Bank’s compliance with quantitative restrictions
discussed below.

5 Membership criteria are designed to insure that each member has sufficient operational capabilities,
financial resources, risk management experience and regulatory oversight to be permitted to become an
ICE Trust member. ICE Trust Risk Management Framework (“RMF”) § IV.

6 Rule 301.

7 Rule 201(b)(ii) and RMF § IV.

8 Rule 201(b)(iii) and RMF § IV. This criterion is not met if an applicant is rated below “A” and the
applicant will not be admitted as an ICE Trust clearing member. Id.

9 RMF § IV, A
urces, risk management experience and regulatory oversight to be permitted to become an
ICE Trust member. ICE Trust Risk Management Framework (“RMF”) § IV.

6 Rule 301.

7 Rule 201(b)(ii) and RMF § IV.

8 Rule 201(b)(iii) and RMF § IV. This criterion is not met if an applicant is rated below “A” and the
applicant will not be admitted as an ICE Trust clearing member. Id.

9 RMF § IV, A. “Competent authorities” include the OCC, the FRB, the U.K Financial Services Authority
or any other regulatory body ICE Trust designates from time to time for this purpose. Rule 201(b)(i).

10 The Fund is designed to provide adequate funds to cover simultaneous losses associated with the default
of the two clearing members with the greatest potential up-side (widening spread) losses (i.e.,
uncollateralized losses). RMF § IV.

2

Required Contribution is based on the risk profile of the member’s portfolio, subject to a
$20 million minimum.12 The Required Contribution is determined based on the nature
and scope of, and risk associated with, each member’s activities. If a clearing member’s
portfolio presents greater risk, ICE Trust may require the member to increase the amount
of its Required Contribution.13 ICE Trust calculates each member’s Required
Contribution on a daily basis.14 If a member’s calculated Required Contribution for a
particular day exceeds the prior day’s calculated contribution by 5% or exceeds the total
Fund by 5%, ICE Trust will make a demand for the member to provide cash or collateral
to the Fund, sufficient to cover the deficit, which must be met within one hour.15

The Rules define acts that constitute member defaults and describe the actions the
clearinghouse may take once it declares a member in default.16 In the event of a member
default, the Fund may be used to pay the costs of closing out a defaulting member’s
liabilities that exceed the defaulting member’s cash/collateral (margin accounts) or
guarantee
it, which must be met within one hour.15

The Rules define acts that constitute member defaults and describe the actions the
clearinghouse may take once it declares a member in default.16 In the event of a member
default, the Fund may be used to pay the costs of closing out a defaulting member’s
liabilities that exceed the defaulting member’s cash/collateral (margin accounts) or
guarantee. ICE Trust will notify members whenever it makes a charge to the Fund.17
ICE Trust may liquidate the losses resulting from a member’s default using this priority
schedule: (1) the ICE Trust Priority Contribution;18 (2) the non-defaulting members’
Required Contributions (not to exceed an average of $50 million per non-defaulting
member) and ICE Trust’s Pro Rata Contribution19 applied pro rata to the loss based on
the relative size of such contributions, and (3) the remainder of each non-defaulting
member’s Required Contribution applied pro rata to the remaining loss based on the
relative size of such contributions.20

11 Rules 401- 404 and 801 and RMF § IV. ICE Trust is also required to make capital contributions to the
Fund of up to $100 million, which includes up to $50 million representing a first loss contribution (“ICE
Trust Priority Contribution”) and the lesser of $50 million or the average Required Contribution (“ICE
Trust Pro Rata Contribution”). Rule 801.

12 RMF, Appendix 3 and ICE Trust Clearing Participant Application Documents (“PAD”).

13 PAD.

14 RMF § IV.

15 Rule 801 and RMF § IV.

16 A member is in default if, for example, the member: (1) fails to meet or is likely to fail to meet the
member’s contract obligations with the clearinghouse, (2) fails to pay margin by prescribed deadlines,
rust Pro Rata Contribution”). Rule 801.

12 RMF, Appendix 3 and ICE Trust Clearing Participant Application Documents (“PAD”).

13 PAD.

14 RMF § IV.

15 Rule 801 and RMF § IV.

16 A member is in default if, for example, the member: (1) fails to meet or is likely to fail to meet the
member’s contract obligations with the clearinghouse, (2) fails to pay margin by prescribed deadlines,
(3) is suspended or expelled or has privileges revoked by ICE Trust, or (4) has a guarantor who fails or is
likely to fail to meet any of its obligations or is in default under a guarantee to ICE Trust. Rule 20-605(a).

17 Rule 802(d).

18 The “ICE Trust Priority Contribution” is a contribution provided by ICE Trust to the Fund of up to $50
million representing a first loss contribution. Rule 801.

19 The “ICE Trust Pro Rata Contribution” is a contribution provided by ICE Trust to the Fund that is the
lesser of $50 million or the average Required Contribution.

20 Rules 801 and 802.

3

If ICE Trust draws on the Fund to cover a member default, resulting in a member having
an amount of collateral in the Fund less than the member’s Required Contribution, the
member must pay to the Fund an amount sufficient to restore the member’s Required
Contribution (“Additional Assessment”) prior to the opening of business on the next
business day.21 This amount is dynamic and can change from one day to the next based
on changes in the member’s transaction volume
ber having
an amount of collateral in the Fund less than the member’s Required Contribution, the
member must pay to the Fund an amount sufficient to restore the member’s Required
Contribution (“Additional Assessment”) prior to the opening of business on the next
business day.21 This amount is dynamic and can change from one day to the next based
on changes in the member’s transaction volume. Before the Additional Assessment is
due, a non-defaulting member may provide ICE Trust with a notice of intent to withdraw
from membership, thus becoming a “Retiring Participant.”22 As a Retiring Participant,
the amount of the Additional Assessment going forward may meet, but will not exceed,
in total, a member’s Required Contribution prior to the default.23 Thus, a Retiring
Participant has the ability to limit its contingent liability for the default of other members
to twice the member’s Required Contribution as of the day of default, subject to Monthly
Adjustments.24 25 Following the first day on which the Retiring Participant no longer has
any open positions, ICE Trust is not entitled to increase a Retiring Participant’s Required
Contribution.26
If the Fund is insufficient to discharge the obligations of the defaulting member, taking
into account the Additional Assessments, or ICE Trust determines that a winding up of
outstanding CDS is prudent or ICE Trust defaults, ICE Trust will determine close-out
values for all open positions (Wound-up Contracts) and determine a single net amount

21 Rule 802(b)(iv). If the entirety of the ICE Trust Pro Rata Contribution was not paid out under Rules
801(c)(i) and 802(b)(ii), the excess of the contribution will be available up to the ICE Trust Default
Maximum, along with any Additional Assessments, to cover a default
ll open positions (Wound-up Contracts) and determine a single net amount

21 Rule 802(b)(iv). If the entirety of the ICE Trust Pro Rata Contribution was not paid out under Rules
801(c)(i) and 802(b)(ii), the excess of the contribution will be available up to the ICE Trust Default
Maximum, along with any Additional Assessments, to cover a default.

22 A “Retiring Participant” is a clearing member who has notified ICE Trust of its intention to terminate its
status as a clearing member or who has been notified by ICE Trust of its intention to terminate the
member’s status as a member. Rule 102.
23 RMF § I.

24 While ICE Trust calculates each member’s Required Contribution daily, ICE Trust does not adjust a
member’s Required Contribution until month’s end, to reflect the average daily Required Contribution for
the month (the “Monthly Adjustment”), which may result in a positive or negative change in a Retiring
Participant’s Additional Assessment. Rules 101 and 801, and RMF § IV. Moreover, a Retiring Participant
continues to be responsible for any deficit where the member’s Required Contribution for a particular day
exceeds the prior day’s calculated contribution by 5% or exceeds the total Fund by 5%. Rule 801 and RMF
§ IV. A Retiring Participant is responsible for the Monthly Adjustment and deficit amounts if the member
has open positions at any time during the month with respect to which ICE Trust calculates and demands
these amounts. Rule 801. A Retiring Participant’s obligations remain outstanding until ICE Trust’s return
of a Retiring Participant’s Fund contribution, which is subject to the timing and formula provisions of Rule
803
responsible for the Monthly Adjustment and deficit amounts if the member
has open positions at any time during the month with respect to which ICE Trust calculates and demands
these amounts. Rule 801. A Retiring Participant’s obligations remain outstanding until ICE Trust’s return
of a Retiring Participant’s Fund contribution, which is subject to the timing and formula provisions of Rule
803.

25 The Bank, as a Retiring Participant, would continue to monitor its activities pursuant to its risk
management framework (see text below under Safety and Soundness) in order, among other things, to
ensure that the Required Contribution and Additional Assessment did not exceed the Bank’s lending limit
at the time advances of funds are made to ICE Trust. 12 U.S.C. § 84 and 12 C.F.R. Part 32.

26 Rule 801.

4

owed by or to each member.27 ICE Trust will apply all amounts collected from members
who owe ICE Trust a net amount under the Wound-up Contracts, plus all available
amounts in the Fund, to pay all net amounts owed by ICE Trust to members under the
Wound-up Contracts, subject to ICE Trust’s limits on liability.28 29

ICE Trust will return a Retiring Participant’s Fund contribution minus any portion used
to cover the obligations of a defaulting member or in connection with Wound-up
Contracts.30

A defaulting member’s obligations remain a liability of the member and related
guarantor, which ICE Trust may collect from the member’s margin, collateral or other
assets of such member or guarantor or by legal process.31 If ICE Trust recovers funds
from a defaulting member, it is obligated to repay contributions paid by the clearing
members, as reflected in steps (4) through (6) below, subject to the following payment
priority: (1) to costs and expenses (including legal fees and expenses related to
collection); (2) to certain related unreimbursed costs and expenses (e.g., costs and
expenses of sale, opens positions, closing out) (Rule 802(a)); (3) to any deficiencies
owed to members under
ibutions paid by the clearing
members, as reflected in steps (4) through (6) below, subject to the following payment
priority: (1) to costs and expenses (including legal fees and expenses related to
collection); (2) to certain related unreimbursed costs and expenses (e.g., costs and
expenses of sale, opens positions, closing out) (Rule 802(a)); (3) to any deficiencies
owed to members under Wound-up Contracts (Rule 804); (4) to members and ICE Trust
for contributions to the Fund that were charged for the defaulting member’s deficiency
under Rule 802(b)(iv) (whether or not the member remains a member at the time of
collection), first to members to the extent they were charged after the ICE Trust Default
Maximum was reached and thereafter to the members and ICE Trust, in proportion and
up to the amount each was charged; (5) to the members whose contributions were
charged for the deficiency under Rule 802(b)(iii) in proportion and up to the amount of
the charge, and (6) to ICE Trust and any member whose contribution was charged for the
deficiency under Rule 802(b)(ii) (whether or not such members remain members at the
time of collection) in proportion and up to the amount each was charged, (7) to ICE Trust
for and up to the amount of the charge against the ICE Trust Priority Contribution,
provided that ICE Trust contributes any amount recovered to the Fund for credit to the

27 Rule 804(a).

28 Id. Under Rule 312, ICE Trust’s liability for member contract obligations is limited to amounts on
deposit with the Fund (subject to Additional Assessment limits), the ICE Trust Priority Contribution, the
ICE Trust Pro Rata Contribution (including such unpaid amounts up to the ICE Trust Default Maximum,
which is no more than $50 million per the calculation under Rule 802(b)(v)), and any amount ICE Trust
collects from a member or the member’s guarantor for its obligations or Wound-up contracts
eposit with the Fund (subject to Additional Assessment limits), the ICE Trust Priority Contribution, the
ICE Trust Pro Rata Contribution (including such unpaid amounts up to the ICE Trust Default Maximum,
which is no more than $50 million per the calculation under Rule 802(b)(v)), and any amount ICE Trust
collects from a member or the member’s guarantor for its obligations or Wound-up contracts. ICE Trust’s
liability to a member for contract obligations may not exceed the aggregate amount paid to ICE Trust by a
member within the twelve-month period preceding any claim therefore.

29 ICE Trust and any Retiring Participant may agree to establish a new general guarantee fund and have
ICE Trust accept for clearing, replacements for some or all of the Wound-up Contracts. Rule 804(b).

30 The timing of ICE Trust’s return of a Retiring Participant’s Fund contribution is determined under the
formula set forth in Rule 803.

31 Rule 802(c).

5

ICE Trust Priority Contribution, and (8) the payment of any of the defaulting member’s
other obligations.32

Discussion

For the reasons discussed below, we believe a national bank has authority to become an
ICE Trust clearing member under the NBA, provided the bank, prior to becoming a
member, establishes a comprehensive risk management framework to govern the risks
associated with membership as described below, and receives a written supervisory no-
objection letter from its EIC. Banks must limit their exposures to ICE Trust to amounts
equal to or below their Section 84 limits, as discussed below
CE Trust clearing member under the NBA, provided the bank, prior to becoming a
member, establishes a comprehensive risk management framework to govern the risks
associated with membership as described below, and receives a written supervisory no-
objection letter from its EIC. Banks must limit their exposures to ICE Trust to amounts
equal to or below their Section 84 limits, as discussed below.

National Bank Act

The NBA permits national banks to engage in foreign and domestic clearing activities,
subject to safety and soundness limitations, as activities that are part of the business of
banking because the activities are functionally equivalent to bank permissible credit and
financial intermediation activities.33 The NBA also permits national banks to provide
default fund contributions to clearinghouses as bank permissible guaranties and as
activities incidental to bank permissible activities.

Clearing is a form of extending credit, one of the main functions of banking
institutions.34 A clearing agent substitutes its credit for that of its customers. A clearing
agent is liable to a clearinghouse for performance on all submitted contracts, and
assumes, with respect to the clearinghouse, the risk of other member defaults. The
clearing function also is akin to two other traditional bank credit functions: providing
bankers’ acceptances and letters of credit.35 The credit function provided by the Bank in
its clearing capacity is part of the business of banking because a principal busine
36
ss of a
ank is to extend credit.
ole of
,

b

National bank clearing activities also are functionally consistent with the primary r
banks as financial intermediaries. The role of a bank is to act as an intermediary,
facilitating the flow of money and credit among different parts of the economy.37 The
role of a bank intermediary takes many forms: providing payments transmission services

32 Id.

33 See, e.g. OCC Interpretive Letter No
National bank clearing activities also are functionally consistent with the primary r
banks as financial intermediaries. The role of a bank is to act as an intermediary,
facilitating the flow of money and credit among different parts of the economy.37 The
role of a bank intermediary takes many forms: providing payments transmission services

32 Id.

33 See, e.g. OCC Interpretive Letter No. 1014 (Jan. 10, 2005) (“IL No. 1014”); IL No. 929 (Feb. 11, 2002)
(“IL No. 929”); and OCC Interpretive Letter No. 494 (Dec. 29, 1989) (“IL No. 494”).

34 Id.

35 Id.

36 Id.

37 See, e.g., OCC No-Objection Letter No. 90-1 (Feb. 16, 1990) and OCC No-Objection Letter No. 87-5
(July 20, 1977).

6

borrowing from savers and lending to users, and participating in the capital markets,
here. As the recognized intermediaries between other, non-bank participants in th
financial markets and the payment systems, banks possess the expertise to make
exchanges of payments and securities betwee
as
e
n, and settle transactions for, parties and to
anage their own intermediation position.38
ng
and
e

or
ank has a substantial interest in the
erformance of the transaction involved.”41
of
de
antee as a condition to ICE Trust membership, subject to the limits described
elow.

m

A long line of OCC precedents support the conclusion that the Bank’s proposed cleari
services are within the legally authorized powers of national banks.39 Moreover, the
OCC has permitted national banks and their foreign branches to join clearinghouses
other entities that require members to cover a portion of the losses arising from th
default of other members, as bank permissible guaranties, where the bank had a
substantial interest in being a member and its liability was de minimis or limited, and did
not exceed Section 84 or lower EIC-established limits.40 Under 12 C.F.R
tted national banks and their foreign branches to join clearinghouses
other entities that require members to cover a portion of the losses arising from th
default of other members, as bank permissible guaranties, where the bank had a
substantial interest in being a member and its liability was de minimis or limited, and did
not exceed Section 84 or lower EIC-established limits.40 Under 12 C.F.R. § 7.1017(a), a
national bank is permitted to guarantee the obligations of another party if the bank has a
substantial interest of its own in the transaction. This regulation provides, in part, that
“[a] national bank may lend its credit, bind itself as a surety to indemnify another,
otherwise become a guarantor . . . if: (a) The b
p

Here, the Bank has a substantial interest in agreeing to cover a portion of the losses
defaulting ICE Trust clearing members where this obligation is an integral part of
permissible clearing activities. The Bank seeks to become an ICE Trust clearing member
as an effective and efficient means of clearing CDS trades. The Bank must agree to
cover a portion of the losses of defaulting clearing members as a condition of ICE Trust
clearing membership. Thus, the Bank has a substantial interest in committing to provi
the guar
b

38 See OCC Interpretive Letter 892 (Sept. 8, 2000).

39 See, e.g., Unpublished Letter (Dec. 13, 1995) (national bank membership in Exchange Clearing House
Limited (ECHO)); OCC Operating Subsidiary Notice Application Control No. 94-ML-08-00002 (Sept. 21,
1994) (national bank clearing membership in SIMEX); IL No. 494, supra (national bank and operating
subsidiary as exchange clearing member); OCC Interpretive Letter No. 422 (Apr. 11, 1988 (national bank
and operating subsidiary clearing and exchange memberships); OCC Interpretive Letter No. 384 (May 18,
1987) (same); OCC Interpretive Letter No. 380 (Dec. 29, 1986); (execution, clearance, and exchange
membership); and OCC Interpretive Letter No. 372 (Nov. 7, 1986) (same).

40 See, e.g
ating
subsidiary as exchange clearing member); OCC Interpretive Letter No. 422 (Apr. 11, 1988 (national bank
and operating subsidiary clearing and exchange memberships); OCC Interpretive Letter No. 384 (May 18,
1987) (same); OCC Interpretive Letter No. 380 (Dec. 29, 1986); (execution, clearance, and exchange
membership); and OCC Interpretive Letter No. 372 (Nov. 7, 1986) (same).

40 See, e.g. OCC Interpretive Letter No. 1071 (Sept. 6, 2006) (“IL No. 1071”) and IL Nos. 1014 and 929,
supra.

41 12 C.F.R. § 7.1017(a). A nexus between a bank permissible transaction and a guaranty may provide the
“substantial interest” for the bank. See, e.g., IL No. 929, supra (bank’s provision of a default fund
contribution/guaranty was incidental to the business of bank’s clearing and execution activities and
satisfied substantial interest needed for issuance of a guarantee) and OCC Interpretive Letter No. 376 (Oct.
25, 1986) (national bank’s guarantee of third party securities borrowers’ conduct was incidental to the
bank’s securities lending program and constituted a sufficient substantial interest).

7

OCC precedent also clearly establishes that national banks may contribute to funds to
guarantee the potential losses of others, in order to engage in bank permissible activities
where the bank’s potential liability for the defaults of others is limited. For example, in
IL No. 929, the OCC found it permissible for a national bank, via its foreign bran
contribute to a foreign clearinghouse’s default fund in order to clear bank permissible
derivative contracts where the liability for other member defaults was limited.
,

ch, to
e
se
ause the bank could limit its liability and the bank had a substantial
terest in contributing to the default fund so that it could engage in bank permissible

se
ng
g
er
e losses of defaulting members was limited and that the bank had a substantial interest
s
order to clear bank permissible
derivative contracts where the liability for other member defaults was limited.
,

ch, to
e
se
ause the bank could limit its liability and the bank had a substantial
terest in contributing to the default fund so that it could engage in bank permissible

se
ng
g
er
e losses of defaulting members was limited and that the bank had a substantial interest
s.
ntial
an
integral part of ISO membership and the liability exposure was sufficiently limited where

42
Clearinghouse members were required to contribute to the default fund to cover losses
caused by any defaulting member. In the event of a member default, the clearinghouse
could seek additional contributions to the default fund by non-defaulting members. Th
non-defaulting members had the option of contributing the additional funds or resigning
their membership. Thus, the resignation option provided members the ability to limit
their liability for the default of other members to the member’s original default fund
contribution. The OCC found that the branch’s participation in the foreign clearinghou
was permissible bec
in
clearing activities.

The OCC also concluded that it was permissible for national banks to contribute to the
loss allocation system of a domestic clearinghouse as a condition to membership, where
liability for the losses of other members was limited.43 Clearinghouse members were
required to maintain clearing fund deposits in an account to be used by the clearinghou
to cover losses in the event of a member default. Any losses remaining after applying the
deposit could be allocated to non-defaulting members. In that event, a non-defaulting
member could either pay the amount of the loss or terminate its membership. If a netti
member terminated its membership, its loss allocation liability was limited to its clearin
fund deposit. As a result, a member national bank could limit its liability to its initial
required fund deposit
fter applying the
deposit could be allocated to non-defaulting members. In that event, a non-defaulting
member could either pay the amount of the loss or terminate its membership. If a netti
member terminated its membership, its loss allocation liability was limited to its clearin
fund deposit. As a result, a member national bank could limit its liability to its initial
required fund deposit. Thus, the OCC determined that a member’s obligation to cov
th
in providing the guaranty in order to engage in bank authorized clearing activitie

Similarly, the OCC permitted a national bank to become a member of domestic
independent systems operators (“ISOs”), which operate much like clearinghouses, to
execute bank permissible electricity derivative transactions.44 As a condition to
membership, the bank was to participate in a program that subjected members to pote
unlimited liability for any losses allocated to members arising from member defaults.
The ISOs had systems in place to mitigate the risk of additional assessments and the
bank’s exposure was subject to the limits of Section 84 as a legal matter.45 The OCC
determined that the bank had a substantial interest in covering such potential losses as

42 IL No. 929, supra.

43 IL No. 1014, supra.

44 IL No. 1071, supra.

45 The arrangement was also subject to any additional limits imposed by the bank’s EIC.

8

the ISO had risk of loss mitigants in place and the bank established risk management
systems and controls to estimate and maintain its potential liabilities within Section 84
mits or lower limits imposed by the EIC.

s
tion to
e
sessments, and could limit its exposure to the clearinghouse to its
ection 84 limits.
e
e size of
ce
ever,
rehensive risk
anagement framework addressing risks arising from these exposures
in place and the bank established risk management
systems and controls to estimate and maintain its potential liabilities within Section 84
mits or lower limits imposed by the EIC.

s
tion to
e
sessments, and could limit its exposure to the clearinghouse to its
ection 84 limits.
e
e size of
ce
ever,
rehensive risk
anagement framework addressing risks arising from these exposures.
afety and Soundness
nt
amework to measure and manage the risks arising from these exposures, including:
• Effective oversight by senior management;
nterparty
credit risk, at both inception of membership and an on-going basis;

li

Recently, in OCC Interpretive Letter No. 1102 (Oct. 14, 2008), the OCC determined that
a national bank had a substantial interest in joining a foreign clearinghouse as a custodian
clearing member, where clearing members were subject to potentially unlimited liability
for the defaults of other clearinghouse members. In the event that the clearing fund wa
not sufficient to cover a member default, the clearinghouse had the right to assess the
remaining balance against all members in proportion to each member’s contribu
the fund. While the by-laws, rules and regulations of the clearinghouse did not
specifically limit the Bank’s exposure to the clearinghouse, the OCC determined that a
national bank could join the clearinghouse where it had systems in place to mitigate th
risk of additional as
S

Based on all the foregoing, we conclude that it is permissible under the NBA for th
Bank to become a clearing member of ICE Trust, provided the Bank establishes a
comprehensive risk management framework and limits its exposures to ICE Trust to its
Section 84 limits or a lower exposure limit established by the EIC, in light of th
the Bank, the nature and volume of its activities, and the characteristics of the
clearinghouse.46 The Bank’s membership in ICE Trust should enable the Bank to redu
its counterparty credit risk and operational ri
k establishes a
comprehensive risk management framework and limits its exposures to ICE Trust to its
Section 84 limits or a lower exposure limit established by the EIC, in light of th
the Bank, the nature and volume of its activities, and the characteristics of the
clearinghouse.46 The Bank’s membership in ICE Trust should enable the Bank to redu
its counterparty credit risk and operational risk from derivatives transactions since the
clearinghouse will act as a central counterparty and net members’ positions. How
because each member assumes obligations to cover losses from other defaulting
members, membership also can create a complex, contingent forward credit exposure.
Accordingly, prior to joining ICE Trust, the Bank should establish a comp
m

S

When national banks join clearinghouses or exchanges that impose liability on members
for other members’ defaults, banks should implement a comprehensive risk manageme
fr

• Policies and procedures that identify and quantify the level(s) of cou

46 Under the lending limit, 12 U.S.C. § 84 and 12 C.F.R. Part 32, a national bank’s loans and extensions of
credit to one borrower are limited to 15 percent of the bank’s capital and surplus, subject to certain
exceptions and with the application of certain loan combination rules. Additionally, a bank’s credit
exposures must be consistent with safe and sound banking practices. Accordingly, the Bank must limit its
exposure to ICE Trust so that amounts of funds advanced as margin or Fund contributions do not exceed an
amount equal to, if not below, the Section 84 limits, in light of the size of the Bank, the nature and volume
of its activities, and the characteristics of the clearinghouse.

9
dit
exposures must be consistent with safe and sound banking practices. Accordingly, the Bank must limit its
exposure to ICE Trust so that amounts of funds advanced as margin or Fund contributions do not exceed an
amount equal to, if not below, the Section 84 limits, in light of the size of the Bank, the nature and volume
of its activities, and the characteristics of the clearinghouse.

9

• Limits and other controls on the level(s) of risk with respect to counterparty
credit, concentrations, and other relevant market factors;
• A systematic approach to capture exposure in the entire clearinghouse;
risk taken, and
demonstrate compliance with approved policies and limits; and
s to ensure the integrity of measurement, control, and
reporting systems.
olicies and Procedures
licies
.
ding
redit risk management, audit, legal, and compliance. Policies should include:
d roles and responsibilities for management of risks associated with
nge and clearinghouse risks so that the bank
ior to joining an exchange or clearinghouse;
plies with all membership requirements and other applicable
ntial risk exposure and ensuring compliance with board-
Annual reviews by internal audit to assess compliance with bank policies.
ue Diligence
r to
due
nd the quality of its risk management systems. At a minimum, this should include an:

• Regular reports that accurately present the nature and level(s) of

• Auditing procedure

P

Exchange and clearinghouse memberships should be governed by appropriate po
and procedures
mpliance with board-
Annual reviews by internal audit to assess compliance with bank policies.
ue Diligence
r to
due
nd the quality of its risk management systems. At a minimum, this should include an:

• Regular reports that accurately present the nature and level(s) of

• Auditing procedure

P

Exchange and clearinghouse memberships should be governed by appropriate po
and procedures. Bank policies should establish a formal process for approving
membership in a central counterparty, as well as ongoing monitoring of risk exposure
This process should include the necessary control and oversight functions, inclu
c

•
Clearly define
membership;
•
Guidelines on the types of exchanges and clearinghouses the bank may join;
•
A well-defined risk tolerance for excha
can establish meaningful risk limits;
•
A formal process for approval of membership in exchanges or clearinghouses;
•
A comprehensive due diligence review pr
•
An initial legal review by bank counsel;
•
Ongoing reviews by bank counsel to assess any changes in membership requirements
and ensure the bank com
limits and restrictions;
•
Periodic credit reviews of current memberships on exchanges and clearinghouses,
including monitoring of pote
approved credit limits; and
•

D

Banks should conduct a thorough due diligence of exchanges or clearinghouses prio
becoming a member. Banks should evaluate the credit assessment that the central
counterparty uses for its members, both at inception and on an ongoing basis. The
diligence should be of appropriate depth to enable bank management to develop a
thorough understanding of the operational framework of the exchange or clearinghouse,
a

10
horough due diligence of exchanges or clearinghouses prio
becoming a member. Banks should evaluate the credit assessment that the central
counterparty uses for its members, both at inception and on an ongoing basis. The
diligence should be of appropriate depth to enable bank management to develop a
thorough understanding of the operational framework of the exchange or clearinghouse,
a

10

•
in-depth knowledge of the central counterparty’s role, membership criteria and
it quality of the central counterparty;
ault-
gement practices, including
understanding of the regulatory requirements of the exchange or clearinghouse; and
ls, and management's expertise. The bank’s risk
lerance for concentrations and credit exposures to central counterparties should be

ich the
y

ngent risk exposure is changing as a
art of the process. Potential exposure should be monitored individually and in aggregate
n
y
s
to the exchange or
learinghouse arising from defaults of other members if at any time the cumulative
e a membership compliance review is conducted for
ach exchange or clearinghouse. This review should be conducted at inception and
presents that it has established a comprehensive risk management framework
addressing the risks associated with its membership in ICE Trust that satisfies the above
standards.
structure, corporate governance, and management team;
•
analysis of the cred
•
understanding of membership agreement and requirements, including the def
sharing protocol;
•
analysis of central counterparty credit risk mana
collateral, margin, and netting requirements;
•
analysis of settlement and default procedures;
•
analysis by legal counsel of any default-sharing precedents and any other applicable
limits or restrictions;
•
•
assessment of key risks associated with joining the exchange or clearinghouse
uirements, including the def
sharing protocol;
•
analysis of central counterparty credit risk mana
collateral, margin, and netting requirements;
•
analysis of settlement and default procedures;
•
analysis by legal counsel of any default-sharing precedents and any other applicable
limits or restrictions;
•
•
assessment of key risks associated with joining the exchange or clearinghouse.

Bank management should establish internal risk limits that are prudent in light of the
bank's financial condition, capital leve
to
reflected in policies and procedures.

Ongoing Monitoring and Reporting

Bank policies should require a periodic review of all central counterparties for wh
bank is a member. The policies should clearly define the scope and responsibilities for
conducting these reviews. Bank management should obtain accurate and timely
information from the exchange or clearinghouse to assess and monitor potential liabilit
based upon the bank’s level of activity and applicable laws, rules, and regulations. Bank
management should also keep abreast of changes in membership rules and in member
activity, on a periodic basis, to assess how its conti
p
for all exchange and clearinghouse memberships.

Bank management should develop contingency strategies to mitigate risks associated
with exchange or clearinghouse membership, including establishing risk triggers and a
approval process for executing contingency risk mitigation strategies. The contingenc
risk mitigation strategies should include internal limits when the bank must adjust it
activities to avoid exceeding limits on potential advances of funds
c
payments under its contingent obligations approach these limits.

Senior management should ensur
e
appropriate intervals thereafter.

The Bank re

11
approval process for executing contingency risk mitigation strategies. The contingenc
risk mitigation strategies should include internal limits when the bank must adjust it
activities to avoid exceeding limits on potential advances of funds
c
payments under its contingent obligations approach these limits.

Senior management should ensur
e
appropriate intervals thereafter.

The Bank re

11

Conclusion

We conclude that the Bank may participate as a clearing member of ICE Trust, provided
the Bank, prior to becoming a member, establishes a comprehensive risk management
framework to govern the risks associated with its membership as described above, and
receives a written supervisory no-objection letter from its EIC. Our conclusions are
specifically based on the Bank’s representations, and any change in facts or
circumstances could result in a different conclusion. If you have any questions
concerning this letter, please contact Tena M. Alexander, Senior Counsel, Securities and
Corporate Practices Division, at (202) 874-4625.

Sincerely,

signed

Julie L. Williams
First Senior Deputy Comptroller
And Chief Counsel

12

## Nearby sections

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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/statutes/OCC_INT1113. Check the current official text before relying on it. Not legal advice.