Risk Management Manual of Examination Policies - FDIC

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SECURITIES AND DERIVATIVES Section 3.3 balance sheet positions. If management uses a market risk modification strategy without assessing its effects on overall bank market risk, then management may actually worsen the bank’s market risk profile. Failure to understand and adequately manage those risks is an unsafe and unsound practice. Next, management must determine the strategy’s intended time horizon (the length of time the strategy must remain in place) and number of periods needed. Horizon length is an important factor, since many long-term derivatives and some securities have limited liquidity. The number of periods can be an equally important factor. For example, a strategy that involves the value of a single cash position to be liquidated or acquired on a single future date may be described as a single-period strategy. However, a multiperiod strategy involves liquidation or acquisition of a cash position over successive periods. Offsetting such positions can involve a sequence of instruments that mature in corresponding periods. Prior to implementing any market risk modification strategy, management should evaluate all related costs, including transaction costs, analysis and monitoring expense, and foregone interest income on funds paid to mark positions to market (for example, margin maintenance). Once a strategy has been implemented, management must regularly monitor the strategy’s effectiveness. However, careful development and monitoring can not guarantee a strategy will achieve the intended market risk objectives. Management should periodically evaluate instrument performance to determine if the strategy remains appropriate and effective. When warranted, management should adjust the strategy. The examination of this area should focus on evaluating management's understanding and reporting of the instruments used in any risk modification strategies. This understanding will be reflected in a program for reviewing and documenting financial contracts and counterparty information. Determining the effectiveness of risk modification strategies should be conducted as part of the rate sensitivity module. The interest rate risk review should be able to rely on the individual investment findings of the securities and derivatives review. Board and Management Oversight The board and management must understand and regularly evaluate the risks and benefits from all market risk modification strategies used. Market risk modification strategies can involve complex transactions and instruments, which may include significant risk. In addition, market risk modification strategies may require enhanced management expertise and internal controls. The board maintains oversight responsibility for all market risk modification strategies. In that role, the board should adopt policies that establish management’s responsibility for developing, implementing, and monitoring the process. Those policies should specify: • Risk limits, • Specific exposures needing modification, • Accounting treatment, • Reporting, • Monitoring, • Permissible strategies and instruments, • Counterparty credit risk guidelines, • Activity limits, and • Analysis and documentation standards. DSC Risk Management Manual of Examination Policies 3.3-22 Securities and Derivatives (12-04) Federal Deposit Insurance Corporation
SECURITIES AND DERIVATIVES Section 3.3 ACCOUNTING GUIDANCE AICPA Audit and Accounting Guide: Banks and Savings Institutions Chapter 5 – Investments in Debt and Equity Securities Chapter 8 – Mortgage Banking Activities and Loan Sales Chapter 15 – Futures, Forwards, Options, Swaps, and Similar Financial Instruments APB - Accounting Principles Board Opinions EITF - Consensus Positions of the Emerging Issues Task Force FAS - FASB Statements FIN - FASB Interpretations FTB - FASB Technical Bulletins PB - AICPA Practices Bulletins SOP - AICPA Statements of Position APB 18 The Equity Method of Accounting for Investments in Common Stock EITF 00-9 Classification of a Gain or Loss from a Hedge of Debt That is Extinguished EITF 98-15 Structured Notes Acquired for a Specified Investment Strategy EITF 96-12 Recognition of Interest Income and Balance Sheet Classification of Structured Notes EITF 96-11 Accounting for Forward Contracts and Purchased Options to Acquire Securities Covered by FAS No. 115 EITF 95-11 Accounting for Derivative Instruments Containing Both a Written Option-Based Component and a Forward-Based Component EITF 93-18 Recognition of Impairment for an Investment in a Collateralized Mortgage Obligation Instrument or in a Mortgage-Backed Interest-Only Certificate EITF 90-19 Convertible Bonds with Issuer Option to Settle for Cash Upon Conversion EITF 90-17 Hedging Foreign Currency Risks with Purchased Options EITF 89-4 Accounting for Purchased Investment in a Collateralized Mortgage Obligation Instrument or in a Mortgage-Backed Interest-Only Certificate EITF 89-18 Divestitures of Certain Investment Securities to an Unregulated Common Controlled Entity Under FIRREA EITF 88-9 Put Warrants EITF 88-8 Mortgage Swaps EITF 87-20 Offsetting Certificates of Deposit Against High-Coupon Debt EITF 87-1 Deferral Accounting for Cash Securities That Are Used to Hedge Rate or Price Risk EITF 86-40 Investments in Open-End Mutual Funds That Invest in U.S. Government Securities EITF 86-28 Accounting Implications of Indexed Debt Instruments EITF 86-25 Offsetting Foreign Currency Swaps EITF 86-15 Increasing-Rate Debt EITF 85-29 Convertible Bonds with a “Premium Put” EITF 85-20 Recognition of Fees for Guaranteeing a Loan EITF 85-17 Accrued Interest Upon Conversion of Convertible Debt EITF 84-7 Termination of Interest Rate Swaps FAS 149 Amendment of Statement 133 on Derivative Instruments and Hedging Activities DSC Risk Management Manual of Examination Policies 3.3-23 Securities and Derivatives (12-04) Federal Deposit Insurance Corporation
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DSC Risk Management Manual of Exami
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INDEX Section 0.1 Policies, Procedu
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INDEX Section 0.1 Liquidity Managem
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INDEX Section 0.1 Introduction 14.1
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BASIC EXAMINATION CONCEPTS AND GUID
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CAPITAL Section 2.1 INTRODUCTION Pu
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CAPITAL Section 2.1 Interests in As
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CAPITAL Section 2.1 the holder prio
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CAPITAL Section 2.1 • Qualifying
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CAPITAL Section 2.1 application sub
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CAPITAL Section 2.1 may leave the b
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CAPITAL Section 2.1 procedures empl
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CAPITAL Section 2.1 growth and rema
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ASSET QUALITY Section 3.1 INTRODUCT
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LOANS Section 3.2 INTRODUCTION The
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LOANS Section 3.2 Qualifications of
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LOANS Section 3.2 to the ALLL), an
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LOANS Section 3.2 PORTFOLIO COMPOSI
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LOANS Section 3.2 • Require reaso
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LOANS Section 3.2 Internal Controls
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LOANS Section 3.2 continue to suppo
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LOANS Section 3.2 board of director
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LOANS Section 3.2 the institution's
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LOANS Section 3.2 such as for lives
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LOANS Section 3.2 Classification Gu
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LOANS Section 3.2 checks; terms in
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LOANS Section 3.2 • Sublicensee B
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LOANS Section 3.2 similar propertie
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LOANS Section 3.2 policies and proc
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LOANS Section 3.2 Moreover, since t
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LOANS Section 3.2 generally should
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LOANS Section 3.2 exercise control
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LOANS Section 3.2 Problems in this
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LOANS Section 3.2 that reveal other
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LOANS Section 3.2 Other loans of qu
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LOANS Section 3.2 be determined whe
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INTERNAL ROUTINE AND CONTROLS Secti
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RELATED ORGANIZATIONS Section 4.3
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RELATED ORGANIZATIONS Section 4.3 c
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RELATED ORGANIZATIONS Section 4.3 U
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RELATED ORGANIZATIONS Section 4.3 i
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RELATED ORGANIZATIONS Section 4.3 A
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RELATED ORGANIZATIONS Section 4.3 c
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RELATED ORGANIZATIONS Section 4.3 S
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RELATED ORGANIZATIONS Section 4.3 w
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RELATED ORGANIZATIONS Section 4.3 r
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RELATED ORGANIZATIONS Section 4.3 A
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FIDELITY AND OTHER INDEMNITY PROTEC
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VIOLATIONS OF LAWS AND REGULATIONS
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VIOLATIONS OF LAWS AND REGULATIONS
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MISCELLANEOUS BANKING ACTIVITIES Se
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EARNINGS Section 5.1 structure will
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EARNINGS Section 5.1 demand is low)
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EARNINGS Section 5.1 2. Certain dir
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EARNINGS Section 5.1 capital and al
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LIQUIDITY AND FUNDS MANAGEMENT Sect
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SENSITIVITY TO MARKET RISK Section
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BANK SECRECY ACT, ANTI-MONEY LAUNDE
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BANK FRAUD AND INSIDER ABUSE Sectio
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SUSPICIOUS ACTIVITY AND CRIMINAL VI
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INTERNATIONAL BANKING Section 11.1
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APPLICATIONS Section 12.1 Effective
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APPLICATIONS Section 12.1 for compa
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APPLICATIONS Section 12.1 be tantam
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APPLICATIONS Section 12.1 accept sh
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APPLICATIONS Section 12.1 consideri
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APPLICATIONS Section 12.1 accepted
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APPLICATIONS Section 12.1 The FDIC
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APPLICATIONS Section 12.1 employee
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APPLICATIONS Section 12.1 including
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APPLICATIONS Section 12.1 Branch cl
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APPLICATIONS Section 12.1 its accep
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APPLICATIONS Section 12.1 examinati
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MEMORANDUMS OF UNDERSTANDING Sectio
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CIVIL MONEY PENALTIES Section 14.1
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CMP MATRIX (Continued) Points Sugge
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FORMAL ADMINISTRATIVE ACTIONS Secti
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REPORT OF EXAMINATION INSTRUCTIONS
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BANK OF ANYTOWN ANYTOWN ANY COUNTY
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Examination Conclusions and Comment
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Risk Management Assessment 99999 1.
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Violations of Laws and Regulations
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Information Technology Assessment (
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Fiduciary Activities Assessment (Co
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Comparative Statements of Financial
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Recapitulation of Securities 99999
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Items Subject to Adverse Classifica
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Analysis of Loans Subject to Advers
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Assets with Credit Data or Collater
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Capital Calculations 99999 Tier 1 C
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Comparative Statements of Income an
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Extensions of Credit to Directors/T
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Confidential - Supervisory Section
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In-House Information Technology 999
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Directors/Trustees and Officers 999
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INTERNATIONAL REPORT PAGES AND WORK
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Analysis of the Country Exposure Ma
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International Loans, Acceptances, a
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International Loans, Acceptances, a
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Foreign Exchange Activities 99999 N
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Position Analysis - Other Currencie
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Revaluation and Income/Loss Analysi
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Policy and Procedures 99999 1. (a)
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Policy and Procedures (Continued) 9
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Audit and Internal Controls - Inter
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Parallel-Owned Banking Organization
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REPORT OF INVESTIGATION INSTRUCTION
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Description of the Transaction INVE
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FINANCIAL HISTORY AND CONDITION Ass
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FINANCIAL HISTORY AND CONDITION (Co
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ADEQUACY OF THE CAPITAL STRUCTURE G
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ADEQUACY OF THE CAPITAL STRUCTURE (
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FUTURE EARNINGS PROSPECTS Assess th
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FUTURE EARNINGS PROSPECTS (Continue
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GENERAL CHARACTER OF THE MANAGEMENT
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IV. GENERAL CHARACTER OF THE MANAGE
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Interview Comments IV. GENERAL CHAR
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RISK TO THE FUNDS As a general matt
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VI. CONVENIENCE AND NEEDS OF THE CO
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OTHER PERTINENT INFORMATION If appl
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Source: Application for Federal Dep
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Service Continuity & Monitoring OTH
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