(a) Permitted risk-mitigating
hedging activities. The prohibition contained in section 248.3(a)
does not apply to the risk-mitigating hedging activities of a banking
entity in connection with and related to individual or aggregated
positions, contracts, or other holdings of the banking entity and
designed to reduce the specific risks to the banking entity in connection
with and related to such positions, contracts, or other holdings.
(b) Requirements.
(1) The risk-mitigating hedging activities
of a banking entity that has significant trading assets and liabilities
are permitted under paragraph (a) of this section only if:
(i) The banking entity has established
and implements, maintains and enforces an internal compliance program
required by subpart D of this part that is reasonably designed to
ensure the banking entity’s compliance with the requirements of this
section, including:
(A)
Reasonably designed written policies and procedures regarding the
positions, techniques and strategies that may be used for hedging,
including documentation indicating what positions, contracts or other
holdings a particular trading desk may use in its risk-mitigating
hedging activities, as well as position and aging limits with respect
to such positions, contracts or other holdings;
(B) Internal controls and ongoing monitoring,
management, and authorization procedures, including relevant escalation
procedures; and
(C) The conduct of
analysis and independent testing designed to ensure that the positions,
techniques and strategies that may be used for hedging may reasonably
be expected to reduce or otherwise significantly mitigate the specific,
identifiable risk(s) being hedged;
(ii) The risk-mitigating hedging activity:
(A) Is conducted in accordance
with the written policies, procedures, and internal controls required
under this section;
(B) At the inception
of the hedging activity, including, without limitation, any adjustments
to the hedging activity, is designed to reduce or otherwise significantly
mitigate one or more specific, identifiable risks, including market
risk, counterparty or other credit risk, currency or foreign exchange
risk, interest rate risk, commodity price risk, basis risk, or similar
risks, arising in connection with and related to identified positions,
contracts, or other holdings of the banking entity, based upon the
facts and circumstances of the identified underlying and hedging positions,
contracts or other holdings and the risks and liquidity thereof;
(C) Does not give rise, at the inception
of the hedge, to any significant new or additional risk that is not
itself hedged contemporaneously in accordance with this section;
(D) Is subject to continuing review,
monitoring and management by the banking entity that:
(1)
Is consistent with the written hedging policies and procedures required
under paragraph (b)(1)(i) of this section;
(2) Is designed to reduce or otherwise
significantly mitigate the specific, identifiable risks that develop
over time from the risk-mitigating hedging activities undertaken under
this section and the underlying positions, contracts, and other holdings
of the banking entity, based upon the facts and circumstances of the
underlying and hedging positions, contracts and other holdings of
the banking entity and the risks and liquidity thereof; and
(3) Requires ongoing recalibration
of the hedging activity by the banking entity to ensure that the hedging
activity satisfies the requirements set out in paragraph (b)(1)(ii)
of this section and is not prohibited proprietary trading; and
(iii)
The compensation arrangements of persons performing risk-mitigating
hedging activities are designed not to reward or incentivize prohibited
proprietary trading.
(2) The risk-mitigating hedging activities of a banking entity that
does not have significant trading assets and liabilities are permitted
under paragraph (a) of this section only if the risk-mitigating hedging
activity:
(i) At
the inception of the hedging activity, including, without limitation,
any adjustments to the hedging activity, is designed to reduce or
otherwise significantly mitigate one or more specific, identifiable
risks, including market risk, counterparty or other credit risk, currency
or foreign exchange risk, interest rate risk, commodity price risk,
basis risk, or similar risks, arising in connection with and related
to identified positions, contracts, or other holdings of the banking
entity, based upon the facts and circumstances of the identified underlying
and hedging positions, contracts or other holdings and the risks and
liquidity thereof; and
(ii) Is
subject, as appropriate, to ongoing recalibration by the banking entity
to ensure that the hedging activity satisfies the requirements set
out in paragraph (b)(2) of this section and is not prohibited proprietary
trading.
(c) Documentation requirement.
(1) A banking entity that has significant
trading assets and liabilities must comply with the requirements of
paragraphs (c)(2) and (3) of this section, unless the requirements
of paragraph (c)(4) of this section are met, with respect to any purchase
or sale of financial instruments made in reliance on this section
for risk-mitigating hedging purposes that is:
(2) In connection with any purchase or
sale identified in paragraph (c)(1) of this section, a banking entity
must, at a minimum, and contemporaneously with the purchase or sale,
document:
(i) The
specific, identifiable risk(s) of the identified positions, contracts,
or other holdings of the banking entity that the purchase or sale
is designed to reduce;
(ii) The
specific risk-mitigating strategy that the purchase or sale is designed
to fulfill; and
(iii) The trading
desk or other business unit that is establishing and responsible for
the hedge.
(3) A banking
entity must create and retain records sufficient to demonstrate compliance
with the requirements of this paragraph (c) for a period that is no
less than five years in a form that allows the banking entity to promptly
produce such records to the Board on request, or such longer period
as required under other law or this part.
(4) The requirements of paragraphs (c)(2)
and (3) of this section do not apply to the purchase or sale of a
financial instrument described in paragraph (c)(1) of this section
if:
(i) The financial
instrument purchased or sold is identified on a written list of pre-approved
financial instruments that are commonly used by the trading desk for
the specific type of hedging activity for which the financial instrument
is being purchased or sold; and
(ii) At the time the financial instrument is purchased or sold, the
hedging activity (including the purchase or sale of the financial
instrument) complies with written, pre-approved limits for the trading
desk purchasing or selling the financial instrument for hedging activities
undertaken for one or more other trading desks. The limits shall be
appropriate for the:
(A) Size, types, and risks of the hedging activities commonly undertaken
by the trading desk;
(B) Financial
instruments purchased and sold for hedging activities by the trading
desk; and
(C) Levels and duration of
the risk exposures being hedged.
