District Circular Letters
December 3, 1999
Capital Treatment for Synthetic
Collateralized Loan Obligations (CLOs)
To Bank Holding Companies,
State Member Banks,
U. S. Branches and Agencies
of Foreign Banks, and Others Concerned
in the Twelfth Federal Reserve District
Supervisory Guidance Released on Treatment of Synthetic Collateralized
Loan Obligations
The Federal Reserve Board, working in conjunction with the Office of
Comptroller of the Currency, has released a supervisory guidance on how
to treat synthetic securitizations for risk-based capital purposes.
The advent of credit derivatives several years ago has led to dramatic innovations
in the asset securitization market. As discussed in previous Federal Reserve
guidances, credit derivatives are on- and off-balance-sheet financial instruments
that permit banking organizations to assume or transfer credit risk on a
specified or "referenced" asset or pool of assets. Such instruments are
now being used to synthetically replicate collateralized loan obligations
(CLOs). Banking organizations utilize CLOs and their synthetic variants
to manage their balance sheets and, in some instances, transfer credit risk
to the capital markets. Such transactions allow economic capital to be more
efficiently allocated, resulting in improved shareholder returns.
Copies
Copies
of the Board's notice [SR 99-32 (SUP): Novmber 17, 1999] are available
from our Corporate Services Department. To request copies via mail, please
call (415) 974-2748. Board notices are also available
via the Federal Reserve Bank of San Francisco's Internet site.
Additional Information
For additional information regarding these matters, please contact our
Banking Supervision and Regulation Department, at (415) 974-2940
or (415) 974-2907.
FEDERAL RESERVE BANK OF SAN FRANCISCO
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