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Financial Institution Letters

Investment Activities

April 28, 1998


SUBJECT: FDIC Adopts New Standards for Investment Securities and End-User Derivatives Activities

The Federal Deposit Insurance Corporation (FDIC), in conjunction with other members of the Federal Financial Institutions Examination Council (FFIEC), has adopted a new "Supervisory Policy Statement on Investment Securities and End-User Derivatives Activities" (1998 Statement). The 1998 Statement provides guidance on sound practices for managing the risks of investment activities, with a particular emphasis on market risk (primarily interest rate risk).

In adopting the 1998 Statement, the FDIC is rescinding the "Supervisory Policy Statement on Securities Activities," published on February 3, 1992 (see FIL-7-92). This action eliminates the constraints on investing in mortgage derivative products (MDPs) that are deemed "high risk" under existing supervisory guidance. The decision to eliminate such constraints does not indicate that the FDIC believes that MDPs currently identified as "high risk" are appropriate or inappropriate investments. Rather, the decision reflects the view that the appropriateness of any investment product must be evaluated using a variety of factors, especially management's ability to measure and manage the risks of investment activities.

As a matter of sound practice, financial institutions should understand the risks inherent in their securities activities, both prior to purchase and on an ongoing basis. The FDIC continues to believe that the stress testing of MDP investments, as well as other investments, has significant value for financial institutions' management of risk. The 1998 Statement, which is attached, will become effective on May 26, 1998. For further information, please contact your Division of Supervision Regional Office.

Nicholas J. Ketcha Jr.

Attachment: April 23 Federal Register, pages 20191-20197

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, N.W., Room 100, Washington, D.C. 20434 (800-276-6003 or (703) 562-2200).

Last Updated 07/17/1999

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