District Circular Letters
January 2, 1998
BANKING SUPERVISION AND REGULATION:
FUTURES COMMISSION MERCHANT ACTIVITIES
To State Member Banks, U.S. Branches
and Agencies of Foreign Banks,
Bank Holding Companies, and Others Concerned
in the Twelfth Federal Reserve District
Guidance on Futures Brokerage Activities and Futures Commission Merchant
Operations
The Federal Reserve has issued an examiner guidance for evaluating the
futures brokerage activities of banking organizations [SR 97-33 (SUP)].
The guidance incorporates recent amendments to Regulation Y, addresses
the expanding scope of futures activities conducted by different types
of banking organizations worldwide, and implements supervisory initiatives
to effect more risk-focused and burden-sensitive approaches to the supervision
of futures commission merchants (FCMs). The publication is designed to
assist examiners in assessing how well a consolidated financial organization
manages one or more discrete futures brokerage operations, as well as
in making a broader assessment of the organization's overall risk management.
The guidance substantially revises and updates existing examiner guidance
applicable to FCM subsidiaries of bank holding companies and makes them
applicable to FCM subsidiaries of State member banks, Edge Act corporations
and foreign banking organizations. It addresses the broader scope of permissible
futures brokerage activities articulated in Regulation Y, and by extension
in Regulation K, and focuses on the adequacy of management and the management
processes used to control the credit, market, liquidity, reputation, and
operations risks entailed in these activities, including brokerage, clearing,
funds management, and advisory services.
The guidance takes a global line-of-business supervisory approach to
the inspection of FCM activities, rather than traditional full scope examinations
of individual FCM subsidiaries, many of which are primarily supervised
by functional regulators. Reviews and reports of functional regulators
should be utilized to the fullest extent in the planning and conduct of
inspections of FCM activities of a banking organization in order to avoid
duplication and to minimize supervisory burdens. However, in conducting
an inspection of various aspects of a banking organization's FCM activities,
a review of various functions in a sample of the organization's FCM subsidiaries
may be necessary and appropriate in order to determine the extent of the
risks posed by these operations to the banking organization and to determine
whether management of those risks is satisfactory.
Copies
Copies of the Board's guidance [SR
97-33 (SUP)] are available from our Corporate Services Department.
To request copies to be sent via mail, please call (415) 974-2748.
Additional Information
For additional information regarding these matters, please contact our
Banking Supervision and Regulation Department, at (415) 974-20233
FEDERAL RESERVE BANK OF SAN FRANCISCO
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