Skip to main content
U.S. flag
An official website of the United States government
Dot gov
The .gov means it’s official. 
Federal government websites often end in .gov or .mil. Before sharing sensitive information, make sure you’re on a federal government site.
Https
The site is secure. 
The https:// ensures that you are connecting to the official website and that any information you provide is encrypted and transmitted securely.
Financial Institution Letter

Examiner Guidance On Structured Note Holdings

TO: CHIEF EXECUTIVE OFFICER 
SUBJECT: FDIC Issues Examiner Guidance on Agency-Issued Step-Up Bonds and Other Structured Note Holdings 
Summary: The FDIC has issued guidance to examiners on the review of structured note holdings at FDIC-supervised institutions. The guidance advises examiners that agency-issued step-up bonds, when managed and controlled in compliance with supervisory policy, present risks similar to callable bonds and that aggregate levels of structured notes should not, in and of themselves, raise supervisory concern. 

The Federal Deposit Insurance Corporation (FDIC) has issued the attached guidance to examiners on the review of structured note holdings and related risk-management processes. Recent Call Report data have indicated a significant increase in certain banks' holdings of structured notes.

The guidance reminds examiners that the Call Report "memoranda" item aggregates data regarding bank holdings of all forms of structured notes, and includes instruments such as agency-issued step-up bonds, index-amortizing notes, dual-index notes, de-leveraged bonds, range bonds and inverse floaters. Relatively low risk agency-issued single step-up bonds are included in the definition of structured notes. The guidance advises that the single aggregated Call Report measure does not, in and of itself, create a requirement for additional examiner scrutiny, but may - when combined with other aspects of the bank's interest rate risk exposure - justify increasing the scope of review. Agency-issued step-up bonds generally do not, when managed and controlled in compliance with supervisory policy, present significantly more risk than a simple callable fixed rate bond. Current supervisory standards for the acquisition and analysis and management of risk associated with investment securities, including all forms of structured notes, are set forth in the "Supervisory Policy Statement on Investment Securities and End-User Derivatives Activities" (FIL-45-98, dated April 28, 1998).

For more information about the guidance, please contact Keith Ligon, Section Chief in the Division of Supervision and Consumer Protection, on 202-898-3618.

For your reference, FDIC Financial Institution Letters (FILs) may be accessed from FDIC's Web site at http://www.fdic.gov/news/financial-institution-letters/2004/index.html.

Michael J. Zamorski

Director

Division of Supervision and Consumer Protection 

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, NW, Room 100, Washington, DC 20434 (1-877-275-3342 or (703) 562-2200).

FIL-59-2004
Attachment(s)

Last Updated: May 27, 2004