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Federal financial agencies release derivatives guidance
WASHINGTON (7/6/11)--The Federal Reserve and other financial regulatory agencies have urged financial institutions to practice effective management by using “appropriate reporting metrics and exposure limits systems” and other counterparty credit risk (CCR) mitigation measures. The Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, and the Office of Thrift Supervision joined the Fed in issuing the CCR management guidance. The regulators also advised institutions to have “well-developed and comprehensive stress testing,” and maintain systems that facilitate the measurement and aggregation of CCR.” The agencies said that the guidance “is intended primarily for use by banking organizations with large derivatives portfolios, as well as for supervisors as they assess and examine such institutions' CCR management.” The release defines CCR as “the risk that the counterparty to a transaction defaults or deteriorates in creditworthiness before the final settlement of the transaction.” The guidance is meant to supplement existing supervisory guidance and suggests that financial institutions strengthen their risk control activities by “validating models and systems, ensuring independent risk management and internal audit processes, and managing legal and operational risks.” National Credit Union Administration Chairman Debbie Matz has recently noted that credit risk "continues to constrain many credit unions' performance" and will remain a focus of examinations this year. The agency is also accepting public comment on whether to allow certain credit unions to hedge interest rates by investing in some forms of derivatives, including interest-rate swaps. For the full guidance, and more on the NCUA’s derivatives deliberations, use the resource links.
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