Risk Management Manual of Examination Policies - FDIC

SECURITIES AND DERIVATIVES Section 3.3
program. Examiners will emphasize separation of duties
between the individuals who execute, settle, and account
for transactions.
The internal control program should be commensurate with
the volume and complexity of the investment activity
conducted, and should be as independent as practical from
related operations.
The board has responsibility for establishing general
internal control guidelines, which management should
translate into clear procedures that govern daily operations.
Management’s internal control program should include
procedures for the following:
• Portfolio valuation,
• Personnel,
• Settlement,
• Physical control and documentation,
• Conflict of interest,
• Accounting,
• Reporting, and
• Independent review.
Internal controls should promote efficiency, reliable
internal and regulatory reporting, and compliance with
regulations and bank policies.
Portfolio valuation procedures should require
independent portfolio pricing. The availability of
independent pricing provides an effective gauge of the
market depth for thinly traded instruments, allowing
management to assess the potential liquidity of specific
issues. For these and other illiquid or complex
instruments, completely independent pricing may be
difficult to obtain. In such cases, estimated or modeled
values may be used. However, management should
understand and agree with the methods and assumptions
used to estimate value.
Personnel guidelines should require sufficient staffing
resources and expertise for the bank’s approved investment
activities.
Settlement practices should be evaluated against the
guidelines provided in the Settlement Practices,
Confirmation and Delivery Requirements, and Delivery
Documentation Addenda.
.
Physical control and documentation requirements should
include:
• Possessing and controlling purchased instruments,
• Saving and safeguarding important documents, and
• Invoice review.
Invoice review requirements should address standards for
all securities and derivatives sold or purchased. Invoices
and confirmations display each instrument’s original
purchase price, which provides a basis to establish book
value and to identify reporting errors. Invoice reviews can
also be used when determining if the bank is involved in
any of the following inappropriate activities:
• Engaging one securities dealer or representative for
virtually all transactions.
• Purchasing from or selling to the bank’s trading
department.
• Unsuitable investment practices (refer to following
page.).
• Inaccurate reporting.
Conflict of interest guidelines should govern all
employees authorized to purchase and sell securities for the
bank. These guidelines should ensure that all directors,
officers, and employees act in the bank’s best interest. The
board should adopt polices that address authorized
employees’ personal relationships, including securities
transactions, with the bank’s approved securities
broker/dealers. The board may also adopt policies that
address the circumstances under which directors, officers,
and employees may accept gifts, gratuities, or travel
expenses from securities broker/dealers and associated
personnel.
Accounting practices should be evaluated against the
standards, opinions, and interpretations listed in this
section.
Reporting procedures should be evaluated against the
guidelines discussed in the Risk Reporting subsection Risk
Identification, Assessment and Reporting.
Independent review of the risk management program
should be conducted at regular intervals to ensure the
integrity, accuracy, and reasonableness of the program.
Independent review may encompass external audits or an
internal audit program. At many banks, however,
evaluation by personnel independent of the portfolio
management function will suffice. The independent review
program’s scope and formality should correspond to the
size and complexity of the bank’s investment activities.
Independent review of investment activity should be at
least commensurate with the independent review of other
primary bank activities. It should assess:
• Adherence to the board’s policies and risk limits,
Securities and Derivatives (12-04) 3.3-4 DSC Risk Management Manual of Examination Policies
Federal Deposit Insurance Corporation