Credit Risk and Derivatives: Understanding Interconnected Risks in Financial Markets, Study Guides, Projects, Research of Business Demography and Environmental Studies

Download Credit Risk and Derivatives: Understanding Interconnected Risks in Financial Markets and more Study Guides, Projects, Research Business Demography and Environmental Studies in PDF only on Docsity! May 10, 1994 1 Questions and Answers for BC-277: Risk Management of Financial Derivatives Background 1. What exactly are the risks posed to banks by financial derivative instruments? Credit Risk The risk of loss if a counterparty defaults on a contract and at the time of default the contract has a positive mark-to-market value for the nondefaulting party. Prior to maturity, credit risk also includes an amount in excess of the then current mark-to-market value, reflecting the likelihood that a derivative instrument will attain even higher mark-to-market values prior to its maturity (also referred to as "pre-settlement risk"). Some derivative instruments also pose "settlement risk," which is the short-term risk (less than 24 hours) a bank faces when it has performed its obligations under a contract, but has not yet received value from its counterparty. Market Risk The risk of loss associated with a decline in the value of a derivative instrument, and/or the decline in the value of a portfolio if the portfolio is unhedged or imperfectly hedged. Such declines result when the value of the underlying assets, securities, or rates moves in a direction that reduces the value of a derivative instrument. Liquidity Risk The risk that a bank will be unable to meet its net funding requirements. For derivative instruments, a high degree of mathematical sophistication and frequent updates is necessary in order to assess future cash flow patterns. Consequently, it can be difficult for a bank to control the amount and timing of future payment obligations or receipts associated with derivative instruments. Liquidity risk also includes situations in which a market participant cannot execute a transaction at a fair price because of wide bid-ask spreads, meaning that a bank would have less certainty about the true value of the instrument. This risk is particularly important in highly structured or customized transactions, because it may be difficult to locate a counterparty to enter into a transaction in a timely manner. Operational Risk The risk associated with human error, system failures, or inadequate procedures and controls. This risk is exacerbated in the case of certain financial derivative instruments because of the complex nature of their payment structures and the calculation of their values. May 10, 1994 2 Systemic Risk The risk that financial difficulties in one institution or a major market disruption will cause uncontrollable financial harm to other institutions or prevent the effective operation of the financial system generally. Legal Risk The risk that a transaction is not valid and enforceable under applicable law. Over-the-counter derivative instruments, rather than exchange-traded instruments, have generally been the focus of this risk; however, the risk with respect to these transactions has been reduced due to the exemption from the Commodity Exchange Act granted by the CFTC after the passage of the Futures Trading Practices Act of 1992. In addition, legal risk arises from concern about whether netting arrangements contained in standard derivative products master agreements would be honored in the event of a counterparty's default, receivership or bankruptcy, or that a party is unable to pursue other rights provided for in the agreement. Legal risk also refers to situations when a bank's customer does not have the power and authority to engage in derivative transactions. Reputation Risk The risk that a bank might lose a client, or its ability to compete effectively for new clients, due to perceptions that the bank does not deal fairly with clients or that it does not know how to properly manage its derivatives business. The above risks, although defined individually, are often realized simultaneously (i.e., risks may be interconnected). This is particularly true when there is a structural realignment of market prices in a given marketplace (e.g., the September 1992 currency crisis in the European Exchange Rate Management (ERM) system). During such periods, there can often be a concurrent increase in market risk, a reduction in market liquidity, and an increase in credit risk, all of which increase systemic risk. 2. Have derivatives activities increased systemic risk? Systemic risk can arise from many sources, including derivatives activities. Derivatives are not the sole, or even the principal, source of systemic risk in financial markets. However, the possibility of systemic disruptions has perhaps increased in recent years as a result of the combination of two factors: (1) rapid growth in volume and complexity of derivatives, and (2) rapid improvements in technology and telecommunications which have increased the sensitivity of the financial system to shocks. May 10, 1994 5 states that a bank should reasonably satisfy itself that the terms of any contract governing its derivatives activities with a counterparty are legally sound. 8. When will BC-277 be effective? BC-277 became effective when it was issued on October 27, 1993. 9. What will be the practical result for a bank of not following BC-277? BC-277 sets forth safe and sound standards for a bank's derivatives activities. As a practical matter, failure to comply with the provisions of the Circular could expose a bank to unacceptable losses to derivative-related income and reductions to capital, which could ultimately lead to the failure of the bank. Banks should perform a self-assessment of their current practices relative to BC-277's requirements. Each bank should develop an action plan to correct areas of non- compliance. The OCC will work with banks to address deficiencies in compliance with the Circular. To the extent that banks engage in unsafe and unsound activities by failing to comply with BC-277, the OCC may enforce the standards via available administrative remedies, such as cease and desist orders, civil money penalties, etc. 10. If a bank is not in compliance with several standards in BC-277, which standards should take priority? All of the standards are important, and depending upon the condition of markets, the condition of the bank and the bank's counterparties, any of them might be considered "most important" at a particular time. Consequently, OCC expects banks to comply with each standard contained in BC-277 to the extent that a standard could be viewed as being relevant to a bank's business activities. 11. Are exchange-traded futures and futures options covered by BC-277? Yes. Although much of BC-277 was written with OTC derivatives in mind, the safety and soundness standards contained throughout the document apply to all derivatives activities and to all banking activities, to the extent possible. May 10, 1994 6 12. The circular refers to financial contracts, including "swaps, forwards, futures, options, caps, floors, collars, and various combinations thereof." Is this intended to include forward foreign exchange transactions? The definition of derivatives in BC-277 specifically includes forwards. As a consequence, BC- 277 does explicitly cover forward foreign exchange transactions. Since forwards are covered, BC-277 also applies to forward CMO and pass-thru MBS purchases. For example, banks should incorporate pre-settlement risk into their overall credit limits for appropriate counterparties. The definition of derivatives does not include spot foreign exchange transactions, regular-way settlement of mortgage and other securities, money market instruments and other asset/liability accounts. However, the guidelines in BC-277 represent sound procedures for risk management generally. Therefore, to the extent possible, they should be applied to all of a bank's risk management activities. 13. Is the OCC concerned about any particular bank(s), either dealer or end-user? The OCC has general concerns that not all derivatives users both understand the associated risks and have adequate risk measurement, monitoring and control systems and policies in place. The OCC has particular concerns about the extent of senior management and board of director knowledge and oversight of derivative activities, for both dealers and end-users, and this is especially so with respect to the trading and use of "exotic" or highly complex derivative instruments. The OCC has responded to this concern by issuing BC-277, which will be supplemented with Examiner Guidance and Examination Procedures in the next few months. 14. BC-277 indicates that the OCC "encourages" national banks to use derivatives for various purposes. Why then does BC-277 go on to state that the OCC is "concerned about how the use of derivatives can influence the risk of failure of any institution and negatively affect the liquidity of the financial system"? The OCC believes that derivatives, when properly managed, offer many potential benefits, such as allowing banks to access the lowest cost funding alternative, and providing greater flexibility in managing risk by transferring unwanted risks to parties who are more willing, or better suited, to take them. However, even though derivatives present the same risks that banks have always managed, the associated risks are often interconnected and, hence, generally more difficult to manage. As a result, the OCC wants banks to establish appropriate risk management systems and controls in order to safely engage in derivatives activities. May 10, 1994 7 15. Do floating rate loans, securities and loans with caps/floors, indexed deposits, and mortgage loans and securities constitute "derivatives" for purposes of BC-277? BC-277 focuses principally on over-the-counter, customized, derivative financial transactions. While loans and securities with caps and floors have derivative features, they are not explicitly included in BC-277's definition of "derivatives." While the OCC has other guidance for specific assets, such as the tests for mortgage derivative products contained in BC-228, the guidance in BC-277 represents sound procedures for risk management generally. Therefore, to the extent possible, BC-277 should be applied to all of a bank's risk management activities. Because loans and securities with explicit and embedded options, including mortgage-backed securities, complicate the risk management process, they are included within the broad scope of BC-277's guidance. Banks are expected to measure, monitor and control risks from these products in their overall balance sheet management. 16. BC-277 states that "structured debt obligations" are covered. What are structured debt obligations, and what is the extent of BC-277's applicability to them? Structured debt obligations are debt issues whose coupon, redemption amount, and/or stated maturity adjusts depending upon movements in interest rates, foreign exchange rates, commodity prices, equity indices, etc. BC-277 indicates that bank end-users should have risk management systems that evaluate the possible impact on the bank's earnings and/or capital which might result from adverse changes in market conditions. For structured notes, the OCC expects banks to have evaluated the risk of these instruments, and placed meaningful limits on the volume of such assets. Additionally, the OCC expects banks that purchase structured notes to understand, by performing "stress tests," how the economic value and cash flows of the notes will change as a result of changes in interest rates, yield curve shape, volatility, commodity prices, equity indices, foreign currency exchange rates, or other relevant market factors. Banks should use such analyses to identify those market environments that would cause unacceptable deterioration in value or cash flows. Banks should also carefully assess the liquidity risk of structured notes. Because of the complexity of many of the structures, market risks can be extremely high. Secondary markets are often quite limited and market prices can be difficult to obtain. For banks holding structured notes in an available for sale account, management must pay particular attention that the market values, and consequently the bank's capital, are correctly stated. 17. Does BC-277 apply to fiduciary activities? Because BC-277 outlines sound risk management principles generally, it applies to all risk activities within a bank, to the extent practicable. It is not expected that fiduciary departments would be derivatives dealers; however, they should be guided by the Circular as an end-user or May 10, 1994 10 24. When are approvals and decisions appropriate for the board versus a committee of the board? The Circular indicates those cases where the board can designate a committee, or senior management, to approve policies and procedures. Otherwise, the full board is responsible for oversight. 25. How much expertise should bank senior management and the board have regarding derivatives? And should their level of knowledge and expertise be verified by testing? The OCC does not expect senior managers and directors to demonstrate operating expertise in the derivatives markets, and does not expect them to take any tests. The OCC does expect management and the board to have sufficient understanding of the products and risks to approve the bank's derivatives business strategy (as articulated in policies); to have general familiarity with the nature of the business, including an understanding of the nature of the risks taken; to limit the amount of earnings and capital at risk; and to review periodically the results of derivatives activity, including compliance with appropriate limits. 26. For limited end-users, what does the OCC expect when it says that "risk measurement systems should be capable of demonstrating the effectiveness of derivatives transactions in achieving such objectives?" Can a bank have limited end-user activities without having to establish a group to measure risks which are not much different than the risks associated with on-balance sheet investment securities? Banks need to have risk measurement systems, regardless of whether they are engaged in derivatives activities. Systems used by the bank should capture the bank's derivatives transactions and be capable of evaluating the effect of the derivatives on the bank's overall risk profile. If the bank's policy stipulates that derivatives are to be used to reduce risk exposures, the bank's risk measurement and monitoring processes should be capable of documenting that the derivatives transactions in fact do reduce risk. Banks are not required to hire new personnel to measure derivatives risks. For limited end-users, the individual or unit that measures and monitors risk can be part of a more general operations, compliance or risk management unit; it cannot be made a part of a trading or sales unit. A trading/sales unit and the risk management unit may both report to a Chief Financial Officer, as long as they are independent from each other. May 10, 1994 11 27. What is interconnection risk? Interconnection risk refers to risk combinations in a bank's portfolio that may or may not be immediately obvious. For example, a market event that affects cash flows or the value of a specific type of financial instrument may also affect financial instruments in other markets because of cross-market price or rate correlations. Ultimately, such an event can have a wide- spread impact on a bank's financial holdings as well as the holdings of the bank's counterparties, and on market conditions generally. For example, if interest rates on short-term U.S. government securities were to increase, it is likely that other domestic interest rates, both short- and long-term, would also increase. In addition, it is also likely that increasing domestic rates would influence exchange rates to the extent that international investors shifted their holdings out of foreign financial instruments and into domestic financial instruments to exploit the higher domestic interest rates. Rising interest rates may also result in higher credit risks for a bank as interest-sensitive borrowers become less able to service their bank debt. Moreover, while the various markets adjust to, or come in line with, the increase in domestic interest rates (and as market participants reassess their own financial strategies in view of the rising rates) bid-ask spreads may widen and volatility may increase, reflecting a general rise in uncertainty about the true value of certain financial instruments. Such changes to bid-ask spreads and market volatility would pose greater liquidity risk to a bank by increasing the uncertainty associated with both the bank's net funding requirements and the bank's ability to meet those funding requirements by selling assets or settling liabilities at anticipated values. Interconnection risk is typically more important to those institutions heavily involved in derivatives activities, such as dealers and active end-users, because financial derivatives can link markets more closely and in less intuitive ways, and hence, pose less-intuitive risk combinations. However, it is important to recognize that interconnection risk is a relatively new concept, and few, if any, banks currently have developed the methodologies necessary to successfully measure and monitor interconnected risk positions, but several of the more sophisticated banks are working on addressing these issues. Developing interconnection risk position limits involves intensive analyses of relevant rates and prices in order to determine the nature and extent of any trends and patterns within those rates and prices (and their associated volatilities and bid-ask spreads). Knowledge of these trends and patterns may serve as guides to measure aggregate market and credit risk exposures more accurately. For example, the potential future credit exposure of a fixed/floating interest rate swap is generally calculated using scenarios of probable interest rate paths. However, the potential future exposure of a portfolio of interest rate swaps is unlikely to be represented by the sum of the individual exposures associated with each swap within the portfolio. Interrelationships among rates affect the potential future exposure of the portfolio. Another important aspect of interconnection risk is gaining a better understanding of low probability/high risk events. For example, there is likely to be a positive relationship between May 10, 1994 12 credit exposure to a counterparty and the default probability of that counterparty, especially for counterparties with sizeable exposures relative to their capital. Determining the extent of this type of risk would require integrating an on-going analysis of counterparty credit quality with market movements. Managing this risk would be especially important during times of market stress. 28. Would recognizing interconnected risk positions enable a bank to assume more risk due to "portfolio diversification effects"? Generally not, because BC-277 extends the concept of risk correlations to include possible correlations between different types of risk. For example, when markets rates or prices become volatile, market participants might become more hesitant to engage in transactions, thereby reducing market liquidity. In such circumstances, market risk would be correlated to liquidity risk. Hence, a particular market could become illiquid at the same time a bank proposes to sell or close out a position in that market. The simultaneous occurrence of increased market risk and increased liquidity risk could pose as great a risk as the occurrence of a single catastrophic event. As a consequence of this kind of interconnectedness, a bank might determine that its aggregate risk tolerance (based on the combination of market, credit, liquidity, and operational risks) could be reached as a result of interactions between different types of risk, even though the bank's market risk profile might seem "manageable" when viewed independently. 29. The risk management systems sections refer to the necessity for limits on concentration risk. What is intended by "concentration" in this context? The third bullet point on page 8 under Section A3, "Risk Management Systems," indicates that a comprehensive system should include limits and controls on the level(s) of risk regarding counterparty credit, concentrations, and other relevant market factors. The term "concentrations" refers to identifiable groups of a bank's assets and/or liabilities that are especially sensitive to changes in specific market factors. These concentrations are similar to interconnected risk exposures, but the focus here is a "product-oriented" approach as opposed to the "risk-oriented" approach discussed in question 27. The product-oriented approach is a less precise means of controlling risks, but it is more easily designed and applied. Consequently, it is more common among less active market participants. For example, it may be appropriate for a bank to establish limits and sublimits on the volume of option contracts having the same strike price or exercise date, as well as limits on the maximum percentage of open interest of a futures contract. Other limits should be applied to legal risks regarding contract enforceability. Limits on the amount of business in new products, subject to the development of market knowledge and product experience, are other market factors for which banks should implement policies to avoid concentrations (see also question 30 for a related discussion on this point). May 10, 1994 15 The OCC's guidance also recognizes that buyers of OTC financial derivatives instruments need to possess some degree of sophistication, or have access to such sophistication, in order to understand those transactions. Many end-users of financial derivatives instruments are sufficiently sophisticated to understand the appropriateness of a particular transaction to their risk management purposes. Section C1 provides an added measure of assurance in this regard by recognizing the obligation of bank dealers, who have credit and reputational interests at risk, to assess their clients' sophistication and their understanding of the derivatives transactions that they propose to enter into. 34. What kind of documentation would a dealer have to complete if it did not believe a transaction was "appropriate" for a counterparty? Each bank must determine whether it will execute transactions it considers inappropriate. A bank which executes such transactions should maintain documentation in the file that indicates why it believed the transaction was not appropriate and details the individuals involved in the discussions (both bank and counterparty). The bank does not need to obtain any formal acknowledgement from the counterparty confirming that the bank felt the transaction was not appropriate. There is no legal prohibition against a bank executing a transaction that it feels is inappropriate for a customer; however, the bank must consider safety and soundness standards, particularly as they relate to the counterparty's ability to perform the contract. If the bank believes a transaction is inappropriate, it should only execute the transaction after advising the customer of this determination, and documenting the files accordingly. The OCC would expect that transactions the dealer determines are inappropriate would generally be initiated by the customer, rather than the bank dealer. 35. Does the "appropriateness standard" apply to transactions between dealers? If not, at what level of counterparty sophistication does this standard become effective? The standard does not apply to transactions between dealers or, in most cases, to other "market professionals" such as trading advisors and fund managers. The counterparty's level of sophistication, as well as the dealer's general understanding of its business, are key factors in this determination. The OCC expects banks transacting derivatives business with non-dealers to evaluate the credit risk of a derivatives transaction using standards similar to those used for non-derivative transactions. As in any credit transaction, the bank would evaluate the purpose of the transaction and make an assessment as to whether its terms are appropriate given the counterparty's business objectives, plans and strategies. In many cases, credit file information will outline the customer's risk profile, business characteristics, and the types of transactions for which the counterparty would require a credit line. In such cases, no additional customer information would ordinarily be necessary. The "appropriateness standard" serves to ensure that banks make credit decisions for derivatives activities based upon the same principles as for non-derivative transactions. May 10, 1994 16 The OCC does want the bank dealer that sells or intermediates a transaction to/for a "customer" to exercise caution, however, and to consider documenting the files appropriately, when the bank has reason to believe that the counterparty does not fully understand the risks of a transaction (particularly unusual risk elements), or a proposed transaction is of a type that has not been specifically approved (by the bank dealer) for a particular counterparty. In these situations, prudent management practices call for the bank to document the bank's determination that the transaction is appropriate for the counterparty. 36. Does the "appropriateness standard" apply to a bank acting as agent? Yes. Sound risk management principles demand that banks acting as agent assess, based upon currently available information, whether a cash or derivative instrument, including a structured note, to be sold is appropriate for a customer. Banks acting as agents face the same reputation risks as bank dealers acting as principals, particularly if they are recommending the transaction. 37. What specifically does a bank have to know about a counterparty's policies and procedures in order to determine that a transaction is "appropriate?" Because derivative transactions often involve customizing a product to address a specific need, a bank that is designing a derivative transaction needs to understand the risk its counterparty is trying to manage or assume. Unless it does so, the bank cannot make an appropriate evaluation of the credit risk of the transaction. The bank should make sure that its counterparty understands the general market risk profile of the derivative transaction, and should explain how (particularly if the counterparty lacks sophistication in derivatives) the transaction will achieve the counterparty's objectives. The bank does not have to obtain and review its counterparty's policies, or verify the data used by the counterparty to assess its risk position. 38. Does a credit officer have to approve each derivatives transaction? If the transaction does not present a credit line problem, can it occur without credit officer approval? If so, who would have responsibility for determining "appropriateness" as indicated in Section C1 of BC-277? No, a credit officer does not need to approve each derivatives transaction. OCC expects, however, that credit officers review, and derivatives sales personnel understand, the types of transactions appropriate for a credit line. Many banks establish aggregate credit limits for their customers, with sublimits for various types of direct lending. Likewise, they also establish sublimits for derivatives product exposures by type (e.g., interest rate, currency, commodity, etc.). May 10, 1994 17 Management in the derivatives area should recognize that unusual types of transactions may require specific approval, given prudent concerns about the counterparty's business operations, even if the exposure does not threaten to exceed an approved line. Bank management should determine the appropriate approving personnel (e.g., sales unit, sales management, credit officer, etc.) in such instances. 39. On page 12, BC-277 states that "derivative credit lines should be approved using the same credit discipline as credit exposures arising from traditional lending products." Does this mean that end-users cannot rely on a Moody's or S&P rating in setting a credit limit? End-users, particularly limited end-users, may use the ratings supplied by nationally recognized ratings services as a factor in determining credit limits. They generally do not have the expertise to analyze the complex financial statements of derivatives dealers, particularly non-bank dealers, or it is not cost effective for them to do so. Banks generally should not, however, rely exclusively on such ratings. Management remains responsible for using the best information available; the lag time between financial events and ratings changes can sometimes be significant. It would be imprudent for management to maintain a credit limit in the face of material adverse news about a counterparty, simply because the ratings services had yet to change a rating. Active end-users may have the resources and talent necessary to make a more informed judgment, and generally should do so, particularly if credit exposures are large. 40. Must a bank measure the potential increase in credit exposure for short term derivative transactions if the risk-based capital rules do not require an "add-on"? It depends upon the level of derivatives activity. The OCC generally expects risk measurement systems to be more sophisticated than risk-based capital (RBC) guidelines. The existing RBC standards are minimums and banks should not use such standards as accurate measures of derivatives-related credit risk. BC-277 requires risk management systems that are appropriate for the risk being managed. For some banks, rough approximations of risk (such as those contained in the Basle proposals) may be acceptable. 41. What is the meaning of the term "settlement limits"? The discussion of settlement limits refers to the risk incurred when a bank performs its obligation under a contract before the counterparty performs its obligation. Settlement limits are particularly important for transactions, such as foreign exchange transactions, that do not involve delivery vs. payment (DVP, i.e, when payment and delivery are simultaneous). When a transaction is not DVP, the party who first performs under the contract (for example, by delivering currency) is exposed until the other party performs. As indicated in the Circular, the May 10, 1994 20 Legal Issues 46. Will the OCC require an opinion of counsel to support bilateral netting agreements for purpose of calculating credit exposure? Yes, for transactions with many foreign counterparties or U.S. branches or offices of some foreign counterparties. Because the legal status of netting for these counterparties is uncertain, it is prudent to obtain legal assurance that netting agreements will be valid in the event of default or bankruptcy. 47. Will an industry legal opinion (e.g., a competent legal opinion addressed to a trade group such as ISDA) satisfy the opinion of counsel requirement? Yes, provided that the particular agreement does not contain terms that vary from those addressed in the industry opinion. 48. Do futures exchanges meet the requirements of your multilateral netting guideline? All futures exchanges that meet the conditions set forth in the Report of the Committee on Interbank Netting Schemes of the Central Banks of the Group of 10 Countries, Bank for International Settlements, Nov. 1990 ("Lamfalussy Report") would meet the OCC's requirements. All major U.S. futures exchanges meet these standards. Capital Adequacy 49. How do your examiners ascertain that a national bank engaged in derivatives transactions maintains adequate capital to support those activities? All national banks are expected to meet the OCC's minimum capital requirements as contained in 12 CFR 3. Monitoring a bank's compliance with these minimum requirements is part of the OCC's ongoing supervision process. In addition, OCC examiners evaluate the need for capital in excess of regulatory minimums. Factors that are considered in determining a bank's overall capital adequacy include the quality of the bank's risk management systems, exposure to credit concentrations, as well as liquidity, interest rate, market, legal and operational risks. Banks with deficient risk management practices or significant individual or aggregate risk exposures will be expected to hold capital above the regulatory minimums. The banking agencies have issued a notice of proposed rulemaking to amend the risk-based capital guidelines (12 CFR 3) to incorporate interest rate risk. The proposal includes measurement of interest rate risk resulting from derivatives and other off-balance sheet accounts. May 10, 1994 21 Accounting 50. How should derivatives be accounted for considering the supersession of BC-79? Although BC-277 supersedes BC-79, the accounting guidelines previously contained in BC-79 remain effective, as they are codified in the instructions to the Call Report. Financial derivatives not specifically addressed in the instructions to the Call Report should be accounted for in accordance with generally accepted accounting principles. The banking agencies are currently reviewing regulatory accounting policies for off-balance sheet financial derivatives. 51. What disclosures for derivatives does the OCC recommend? Currently, depending on their size and other factors, banks are required to report certain information about their off-balance sheet derivative activities in Schedules RC-D, RC-L, and RC-N. The banking agencies have published for comment a number of proposed Call Report disclosures with respect to derivatives. They include changes to: • Schedule RC-L that provide separate reporting for futures, forwards and options, distinguishing between exchange-traded and OTC transactions, and providing for replacement cost data and reporting of fair values for contracts accounted for both at market and on a hedge or accrual basis. Additionally, banks would be required to report a single net current credit exposure with respect to legally enforceable bilateral netting arrangements across all derivative contracts. • Schedule RI to capture data regarding the amount of off-balance sheet derivative income (or loss) included in net interest income and net income. Revisions to risk-based capital standards for the measurement of interest rate risk mandated by section 305 of the Federal Deposit Insurance Corporation Improvement Act of 1991 have also been proposed and would result in significant changes to the Call Report. In addition, the Basle Supervisors' Committee has undertaken a project that may result in an explicit capital charge for market risk in bank trading activities and expanded reporting of derivative maturities.