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Financial Institution Letters

Examiner Guidance On Structured Note Holdings

FIL-59-2004
May 27, 2004


TO: CHIEF EXECUTIVE OFFICER
SUBJECT: FDIC Issues Examiner Guidance on Agency-Issued Step-Up Bonds and Other Structured Note Holdings
Summary: The FDIC has issued guidance to examiners on the review of structured note holdings at FDIC-supervised institutions. The guidance advises examiners that agency-issued step-up bonds, when managed and controlled in compliance with supervisory policy, present risks similar to callable bonds and that aggregate levels of structured notes should not, in and of themselves, raise supervisory concern.

The Federal Deposit Insurance Corporation (FDIC) has issued the attached guidance to examiners on the review of structured note holdings and related risk-management processes. Recent Call Report data have indicated a significant increase in certain banks' holdings of structured notes.

The guidance reminds examiners that the Call Report "memoranda" item aggregates data regarding bank holdings of all forms of structured notes, and includes instruments such as agency-issued step-up bonds, index-amortizing notes, dual-index notes, de-leveraged bonds, range bonds and inverse floaters. Relatively low risk agency-issued single step-up bonds are included in the definition of structured notes. The guidance advises that the single aggregated Call Report measure does not, in and of itself, create a requirement for additional examiner scrutiny, but may - when combined with other aspects of the bank's interest rate risk exposure - justify increasing the scope of review. Agency-issued step-up bonds generally do not, when managed and controlled in compliance with supervisory policy, present significantly more risk than a simple callable fixed rate bond. Current supervisory standards for the acquisition and analysis and management of risk associated with investment securities, including all forms of structured notes, are set forth in the "Supervisory Policy Statement on Investment Securities and End-User Derivatives Activities" (FIL-45-98, dated April 28, 1998).

For more information about the guidance, please contact Keith Ligon, Section Chief in the Division of Supervision and Consumer Protection, on 202-898-3618.

For your reference, FDIC Financial Institution Letters (FILs) may be accessed from FDIC's Web site at http://www.fdic.gov/news/news/financial/2004/index.html.

Michael J. Zamorski
Director
Division of Supervision and Consumer Protection

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Attachment

Distribution: FDIC-Supervised Banks (Commercial and Savings)

NOTE: Paper copies of FDIC financial institution letters may be obtained through the FDIC's Public Information Center, 801 17th Street, NW, Room 100, Washington, DC 20434 (1-877-275-3342 or (703) 562-2200).




Last Updated 05/25/2004 communications@fdic.gov