June 27, 1997

BANKING SUPERVISION AND REGULATION:
MARKET RISK CAPITAL REQUIREMENTS

To State Member Banks and
Bank Holding Companies
in the Twelfth Federal Reserve District

Supervisory Letter Regarding Application of Market Risk Capital Requirements to Credit Derivatives

Attached is a supervisory letter from the Federal Reserve Board regarding the application of the market risk capital requirements to credit derivatives held in the trading account. The guidance in this letter describes the three risk elements of credit derivatives against which banking organizations should maintain capital. The capital requirements are based upon three defined types of positions: open positions, matched positions, and offsetting positions.

For Additional Information

If you have any questions about the information in this supervisory letter, please contact our Banking Supervision and Regulation Department, at (415) 974-2023.

FEDERAL RESERVE BANK OF SAN FRANCISCO

Attachment