The FDIC's Division of Supervision (DOS) has issued to its examiners the attached preliminary guidance for the supervisory review of credit derivatives. The guidance provides an overview of credit derivatives and includes a framework for analyzing the risks incurred by insured financial institutions that use these off-balance sheet instruments. 

Credit derivatives are financial instruments used to assume or lay off credit risk, sometimes to only a limited extent. Depository institutions are increasingly employing these off-balance sheet instruments to either purchase credit protection from or provide credit protection to counterparties. 

This guidance stresses the need for examiners to ensure that depository institutions that use credit derivatives for such purposes as risk management, yield enhancement, reduction of credit concentrations, or diversification of overall risk have established sound risk management policies and procedures. 

For more information, please contact your regional DOS office.

Nicholas J. Ketcha Jr.
Director

Attachment: PDF Format (125 kb, PDF help or hard copy ), HTML Format 

Distribution: FDIC-Supervised Banks (Commercial and Savings)