Interpretive Letter #1185 - OCC Interpretive Letter

Interpretive Letter #1185

June 2025

June 12, 2025

Subject: National Bank Use of Certain Debt Securities Acquired for Investment and Equity

Securities Acquired as Hedges as Collateral for Repurchase Agreement Transactions (Repo)

Dear [ ]:

This responds to your request dated December 19, 2024, concerning whether [ ]

and [ ] (individually, [ ] and [ ] and collectively, the Banks) may use

securities acquired under 12 C.F.R. part 1 and equity securities acquired to hedge customer-

driven equity derivatives as collateral in repo transactions. Specifically, you requested

confirmation that the proposed activity would not constitute impermissible dealing under 12

U.S.C. §§ 24(7) and 378. Your request also raised the question of whether the proposed activity

is not inconsistent with the requirements of the OCC’s derivatives regulation at 12 C.F.R.

§ 7.1030. We confirm, based on the Banks’ representations and subject to the limitations

described below, that the activity (1) would not be impermissible dealing and (2) would not be

inconsistent with the OCC’s derivatives regulation at 12 C.F.R. § 7.1030.1

I.

Background

The Banks propose to use (a) securities in the Banks’ investment portfolio and (b) equity

securities acquired to hedge [ ]’s customer-driven equity derivative transactions as

collateral for tri-party repos.2 Under the proposal, the Banks would act as borrowers in the repo.

They would sell the collateral securities to a repo counterparty with an agreement to repurchase

the securities at a predetermined time and price. The difference between the sale price and the

purchase price would reflect the interest that the Banks would pay on the repo. The purpose of

the proposed activity is to help meet the Banks’ liquidity needs by allowing the Banks to access

funds more quickly in times of stress

eral securities to a repo counterparty with an agreement to repurchase

the securities at a predetermined time and price. The difference between the sale price and the

purchase price would reflect the interest that the Banks would pay on the repo. The purpose of

the proposed activity is to help meet the Banks’ liquidity needs by allowing the Banks to access

funds more quickly in times of stress.

1 This letter does not express any opinion on the applicability of the federal securities laws to any part of the

proposed activity. The Banks have represented that the proposed activities will be structured to comply with all

applicable securities laws.

2 In a tri-party repo, an independent custodian bank, clearing house, or securities depository is responsible for

ensuring that the collateral’s value remains adequate during the life of the transaction. See OCC, Comptroller’s

Handbook: Custody Services (Jan. 2002), p. 89. In this case, an unaffiliated bank would serve as the collateral agent

and custodian for the collateral.

2

Transaction Overview

The Banks represent the following:

• The Banks would use Type I, II, III, IV, and V securities acquired under 12 C.F.R. part 1

and, in the case of [ ], equity securities acquired to hedge customer-driven equity

derivative transactions as collateral. The securities would be liquid and readily

marketable for the purposes of applicable capital rules.3

• With respect to the securities that the Banks cannot deal in, the Banks would not purchase

the securities for the purpose of serving as repo collateral. Rather, the Banks would

purchase the securities either as investments pursuant to 12 C.F.R. part 1 or, in the case

of [ ], as a hedge pursuant to the physical hedging provisions of 12 C.F.R. §

7.1030

of applicable capital rules.3

• With respect to the securities that the Banks cannot deal in, the Banks would not purchase

the securities for the purpose of serving as repo collateral. Rather, the Banks would

purchase the securities either as investments pursuant to 12 C.F.R. part 1 or, in the case

of [ ], as a hedge pursuant to the physical hedging provisions of 12 C.F.R. §

7.1030. The Banks would not run a matched book between the initial purchase of the

securities and their use as collateral (i.e., the purchase of the securities would be wholly

unconnected to the later use of the securities for the repo transactions). The Banks would

not hold themselves out as making a market in the purchase and sale (via repo) of the

securities, would not make a market in securities, would not hold an inventory of

securities for the purpose of making a market or dealing in the securities, and would not

solicit transactions for the purpose of being able to purchase and then sell (via repo) the

securities.

• The securities are currently held on the Banks’ balance sheets. The securities would

continue to be reflected on the Banks’ balance sheets once they are used as collateral for

repos.

• The Banks would retain credit and market risk with respect to the securities.4 The Banks

would take on additional credit risk with respect to the repo counterparty but would not

be subject to any additional market risk because the repo would entail selling and

repurchasing the collateral at a predetermined price.

• The Banks’ repo counterparties could not rehypothecate or otherwise re-use the

collateral.

• If a repo counterparty defaulted and failed to return the collateral, the Banks would have

the right to net and set off their obligation to return cash to the counterparty against the

value of the unreturned collateral

o would entail selling and

repurchasing the collateral at a predetermined price.

• The Banks’ repo counterparties could not rehypothecate or otherwise re-use the

collateral.

• If a repo counterparty defaulted and failed to return the collateral, the Banks would have

the right to net and set off their obligation to return cash to the counterparty against the

value of the unreturned collateral. If the Banks needed to replace the unreturned collateral

(e.g., to maintain a hedge), the Banks would generally be able to purchase or borrow the

securities at the same price as the most recent daily mark-to-market valuation of the

unreturned securities.

• The Banks would have the right to substitute government securities as collateral in all the

repo transactions.

• If a customer-driven equity derivative terminated early, [ ] would substitute

collateral to reacquire the equity security and then promptly sell the equity security.

• The Banks state that, because of the protections afforded by tri-party repo, there is

minimal risk of delays or failure to deliver.

3 To qualify as a repo-style transaction under 12 C.F.R. part 3, a transaction must meet certain requirements

including that the transaction must be based solely on liquid and readily marketable securities, cash, or gold. See 12

C.F.R. § 3.2.

4 In the case of the equity securities, the market risk should be offset by the derivative transactions that the securities

hedge.

lure to deliver.

3 To qualify as a repo-style transaction under 12 C.F.R. part 3, a transaction must meet certain requirements

including that the transaction must be based solely on liquid and readily marketable securities, cash, or gold. See 12

C.F.R. § 3.2.

4 In the case of the equity securities, the market risk should be offset by the derivative transactions that the securities

hedge.

3

II.

Analysis

National banks have broad authority to engage in repos, including as borrowers.5 However,

using certain debt securities and equities as collateral raises two issues:

a. Whether the activity amounts to impermissible dealing under 12 U.S.C. §§ 24(7) and

378; and

b. Whether re-using equities as collateral complies with the limitations on physical hedging

provided under 12 C.F.R. § 7.1030(e).

a. Dealing Prohibition

Under 12 U.S.C. § 378(a)(1), a national bank generally may not accept deposits and also

engage in securities dealing.6 However, this general prohibition does not apply to “dealing in . . .

investment securities . . . to the extent permitted” by 12 U.S.C. § 24.7

Twelve U.S.C. § 24(Seventh) likewise provides that a national bank generally may not

deal in securities.8 Notwithstanding this general prohibition, the statute goes on to provide that a

national bank may purchase for its own account “investment securities,” subject to such

limitations and restrictions as the OCC may prescribe by regulation, and that limitations and

restrictions on dealing in investment securities under the statute do not apply to a national bank

dealing in certain government securities.9

Twelve C.F.R. part 1 implements 12 U.S.C. § 24(Seventh)’s provisions concerning

dealing in securities. Under 12 C.F.R

“investment securities,” subject to such

limitations and restrictions as the OCC may prescribe by regulation, and that limitations and

restrictions on dealing in investment securities under the statute do not apply to a national bank

dealing in certain government securities.9

Twelve C.F.R. part 1 implements 12 U.S.C. § 24(Seventh)’s provisions concerning

dealing in securities. Under 12 C.F.R. part 1, a national bank may deal in Type I and II securities

(generally comprising certain United States and Canadian government securities and similar

investment securities) but may only purchase and sell (but not deal in) Type III, IV, or V

securities (comprising other types of debt obligations that meet certain requirements).

In this case, the Banks propose to use a variety of securities acquired under 12 C.F.R. part

1 and equity securities acquired under 12 C.F.R. § 7.1030 as collateral for repo transactions.10

Since the Banks may deal in Type I and II securities, the key question is whether using the other

types of securities acquired under part 1 or equities acquired under 12 C.F.R. § 7.1030 violates

the dealing prohibition.

5 See, e.g., OCC, Comptroller’s Handbook: Bank Dealer Activities (Mar. 1990), p. 7 (“Banks employ repos of

government securities as borrowing substitutes . . .”); OCC, Comptroller’s Handbook: Investment Securities (Mar.

1990), p. 29; FFIEC, Policy Statement: Repurchase Agreements of Depository Institutions with Securities Dealers

and Others, 63 Fed. Reg. 6935 (Feb. 11, 1998).

6 More specifically, “in the business of issuing, underwriting, selling, or distributing, at wholesale or retail, or

through syndicate participation, stocks, bonds, debentures, notes, or other securities.” 12 U.S.C. § 378(a)(1).

7 Id

r.

1990), p. 29; FFIEC, Policy Statement: Repurchase Agreements of Depository Institutions with Securities Dealers

and Others, 63 Fed. Reg. 6935 (Feb. 11, 1998).

6 More specifically, “in the business of issuing, underwriting, selling, or distributing, at wholesale or retail, or

through syndicate participation, stocks, bonds, debentures, notes, or other securities.” 12 U.S.C. § 378(a)(1).

7 Id.

8 “The business of dealing in securities and stock by the association shall be limited to purchasing and selling such

securities and stock without recourse, solely upon the order, and for the account of, customers, and in no case for its

own account, and the association shall not underwrite any issue of securities or stock.” 12 U.S.C. § 24(Seventh).

9 See id. The relevant provisions of 12 U.S.C. §§ 24(Seventh) and 378 were enacted by the Glass-Steagall Act.

10 The OCC has determined that a national bank may purchase equity securities to hedge customer-driven derivative

transactions without violating the prohibition against underwriting or dealing in securities. See, e.g., 12 C.F.R.

§ 7.1030(e); OCC Interpretive Letter 892 (Sept. 13, 2000).

4

The OCC stated that “dealing” in securities under 12 U.S.C. §§ 24(Seventh) and 378 “is

generally understood to encompass the purchase of securities as principal for resale to others.”11

The OCC further noted that “[d]ealing is buying and selling as part of a regular business

rwriting or dealing in securities. See, e.g., 12 C.F.R.

§ 7.1030(e); OCC Interpretive Letter 892 (Sept. 13, 2000).

4

The OCC stated that “dealing” in securities under 12 U.S.C. §§ 24(Seventh) and 378 “is

generally understood to encompass the purchase of securities as principal for resale to others.”11

The OCC further noted that “[d]ealing is buying and selling as part of a regular business. A

dealer typically maintains an inventory of securities and holds itself out to the public as willing

to purchase and sell and continuously quote prices.”12 In addition, although the definitions of

dealer and underwriter in federal securities laws do not control “for purposes of the Glass-

Steagall Act, these statutes were enacted during the same time period, and the Supreme Court

has previously sought guidance from the securities laws in understanding the ordinary meaning

of terms that also appear in Glass-Steagall.”13 Although the definitions in the federal securities

laws are not determinative, activities outside the scope of the federal securities laws are unlikely

to be subject to the Glass-Steagall Act.14

In sum, the Banks would not purchase securities principally for resale to others, would

not maintain an inventory of securities for resale, and would not hold themselves out as being in

the business of dealing or making a market in the securities at issue. Based on the foregoing, the

proposed activities would not constitute impermissible dealing.

b. Limitations on Physical Hedging

The OCC’s derivatives regulation provides that “[a] national bank engaging in physical

hedging activities . . . must hold the underlying solely to hedge risks arising from derivatives

transactions originated by customers for the customers’ valid and independent business

purposes.”15 Similar language appears in 12 C.F.R

not constitute impermissible dealing.

b. Limitations on Physical Hedging

The OCC’s derivatives regulation provides that “[a] national bank engaging in physical

hedging activities . . . must hold the underlying solely to hedge risks arising from derivatives

transactions originated by customers for the customers’ valid and independent business

purposes.”15 Similar language appears in 12 C.F.R. § 7.1030(b)(4), which defines physical

hedging to mean “holding title to or acquiring ownership of an asset (for example, by warehouse

receipt or book-entry) solely to manage the risks arising out of permissible customer-driven

derivatives transactions.” The question is whether the Banks’ proposed use of the securities as

collateral complies with the requirement to hold an asset solely to hedge risks. As discussed

below, the proposed activities, as described by the Banks, comply with this requirement.

The language cited above addresses a national bank holding or acquiring an underlying

asset solely “to hedge” or “to manage” the risks of the derivative activity. The key consideration

is the bank’s purpose in acquiring or holding an asset. Moreover, the primary purpose of the

11OCC Interpretive Letter 892. See also OCC Interpretive Letter 804 (Sept. 30, 1997) (“[D]ealing in securities

generally encompasses purchase and sale activities as principal with respect to the securities of other issuers.”).

12 OCC Interpretive Letter 892.

13 OCC Interpretive Letter 388 (Jun. 16, 1987) (citing Sec. Indus. Ass’n v. Bd. of Governors of Fed. Rsrv. Sys., 468

U.S. 137, 150-52 (1984) and Sec. Indus. Ass’n v. Bd. of Governors of Fed. Rsrv. Sys., 807 F.2d 1052, 1062-64 (D.C.

Cir. 1986)).

14 OCC Interpretive Letter 388 (“We do not believe, however, that activities not subject to the federal securities laws

could ever be subject to Glass-Steagall.”)

pretive Letter 388 (Jun. 16, 1987) (citing Sec. Indus. Ass’n v. Bd. of Governors of Fed. Rsrv. Sys., 468

U.S. 137, 150-52 (1984) and Sec. Indus. Ass’n v. Bd. of Governors of Fed. Rsrv. Sys., 807 F.2d 1052, 1062-64 (D.C.

Cir. 1986)).

14 OCC Interpretive Letter 388 (“We do not believe, however, that activities not subject to the federal securities laws

could ever be subject to Glass-Steagall.”). In addition, in Interpretive Letter 804, the OCC determined that a bank

was not engaged in dealing because it would not (1) purchase securities in the transaction, (2) have principal risk, (3)

have the potential for market gain with respect to the securities at issue, nor (4) have indicia of ownership of record

or beneficial ownership. In this case, the Banks would purchase the securities, would have principal risk, would have

the potential for market gains and losses, and would have indicia of ownership. Nevertheless, the Banks would not

exhibit any of these factors as a result of the proposed repo activities. Rather, they would exhibit these factors either

as a result of initially purchasing (1) debt obligations as permissible investments under 12 C.F.R. part 1 or (2) equity

securities as hedges to customer-driven derivative transactions—an activity which does not violate the prohibition

against banks dealing in securities. See supra note 10. Nor would the Banks exhibit any of these factors as a result of

any effort to purchase securities principally for resale to others, maintain an inventory, or make a market.

15 12 C.F.R. § 7.1030(e)(1) (emphasis added).

quity

securities as hedges to customer-driven derivative transactions—an activity which does not violate the prohibition

against banks dealing in securities. See supra note 10. Nor would the Banks exhibit any of these factors as a result of

any effort to purchase securities principally for resale to others, maintain an inventory, or make a market.

15 12 C.F.R. § 7.1030(e)(1) (emphasis added).

5

limiting language in 12 C.F.R. § 7.1030(e)(1) and (b)(4) is to ensure that national banks do not

misuse their physical hedging authority to acquire securities that national banks could not

otherwise hold as principal.16

In this case, [ ] would acquire or hold equity securities as a hedge to customer-

driven derivative activities and would not purchase equities for the purpose of serving as

collateral. The use as collateral is secondary and subordinate to bona fide hedging of customer-

driven derivatives activities. If a derivative terminated early, [ ] represents that it would

promptly substitute collateral and sell the equity securities.17 Throughout the repo transaction, [

] would retain the market risk associated with the equity securities and reflect the securities on its

balance sheet. The securities would thereby continue to serve as an effective hedge while serving

as collateral. In light of the foregoing, the proposed use of the equity securities as collateral is not

inconsistent with the requirements of 12 C.F.R. § 7.1030(e).

III.

Conclusion

Based on the Banks’ representations as described above, the proposed activity would not

amount to impermissible dealing under 12 U.S.C. §§ 24(7) and 378 and would not be

inconsistent with the requirements of 12 C.F.R. § 7.1030. It is incumbent on each Bank to ensure

that it appropriately monitors the activity and prevents it from evolving into impermissible

dealing or activity that would violate the requirements of 12 C.F.R

ions as described above, the proposed activity would not

amount to impermissible dealing under 12 U.S.C. §§ 24(7) and 378 and would not be

inconsistent with the requirements of 12 C.F.R. § 7.1030. It is incumbent on each Bank to ensure

that it appropriately monitors the activity and prevents it from evolving into impermissible

dealing or activity that would violate the requirements of 12 C.F.R. § 7.1030.18 This conclusion

is based on the facts and circumstances as represented in your request. Different facts and

circumstances or different applicable laws and regulations could result in a different conclusion.

We trust that this is responsive to your inquiry.

Sincerely,

/s/

Stuart Feldstein

Acting Principal Deputy Chief Counsel

16 The regulation’s definition of “customer-driven” emphasizes this purpose: “Customer-driven means a transaction

is entered into for a customer's valid and independent business purpose (and a customer-driven transaction does not

include a transaction the principal purpose of which is to deliver to a national bank assets that the national bank

could not invest in directly).” 12 C.F.R. § 7.1030(b)(1). See also Activities and Operations of National Banks and

Federal Savings Associations, 85 Fed. Reg. 40794, 40808 n.100 (Jul.7, 2020) (“In addition, several interpretive

letters have also specified that a bank may not engage in physical hedging activities for the purpose of speculating in

security or commodity prices. As described above, customer-driven financial intermediation as defined in the

proposal would not include activities entered into for the purpose of speculation.”).

17 Under 12 C.F.R. § 7.1030(e)(3), a national bank may not take anticipatory or maintain residual positions in an

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

18 See, e.g., 12 C.F.R. §§ 1.5 (safe and sound banking practices under part 1); 7.1030(f) (safe and sound banking

practices under derivatives regulation).