# O

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| ## Comptroller of the Currency                                        |
|                                                                       |
| > Administrator of National Banks                                     |
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Washington, DC 20219

##### Interpretive Letter #937

June 27, 2002 **June 2002**

**12 USC 24(7)**

Re: Authority of a National Bank to Engage in

[Financial Intermediation Transactions]{.underline}

Dear **\[ \]**:

This responds to your request that the Office of the Comptroller of the
Currency ("OCC") confirm the opinion of **\[ \]** (the "Bank") that it
is permissible for the Bank to engage in financial intermediation
transactions, where the payments between parties are based on the price
of electricity.[^1] For the reasons discussed below and subject to the
limitations described herein, we believe that the proposed transactions
are permissible for the Bank.

**I. Background**

The Bank currently engages in a variety of financial intermediation
transactions involving exchanges of payments based on interest rates,
and the value of equities and commodities. The Bank's financial
intermediation derivative transactions involve a wide range of
energy-related commodities, including petroleum, natural gas, and other
hydrocarbon products. These transactions provide risk management tools
to meet customers' financial needs. For example, oil and gas derivatives
offer users and producers protection against increases and decreases in
the price of oil or gas.

The Bank proposes to add transactions based on the price of electricity
to its existing financial intermediation derivatives business. Similar
to its existing financial intermediation derivatives business involving
energy commodities, the electricity derivative business will be a
customer-driven rather than a proprietary trading business. The Bank's
electricity financial intermediation activities will involve exchanges
of payments, similar to other financial intermediary transactions
presently engaged in by the Bank. The transactions will be cash-settled
and the Bank will not physically receive or deliver electricity.

The transactions in which the Bank proposes to engage will enable
customers to meet legitimate financial and risk management needs**.**
Representative examples of these transactions described below, include
swaps, options, and forwards contracts. The Bank represents that each of
these cash-settled transactions is used by market participants
(including generators, industrial consumers and marketers) in their
management of price risks in a competitive and deregulated
environment.[^2]

Example 1: An electricity producer has contracts to provide electricity
to manufacturers at market prices over the next two years. The
electricity producer wants to receive fixed payments for electricity it
produces over that period and obtain protection against price declines.

To eliminate electricity price risk, the producer enters into a
cash-settled, electricity derivative swap with the Bank. Under the swap,
the producer pays the Bank the floating market price for a notional
amount of electricity over the next two years, and receives a fixed
price for the same notional amount of electricity. Alternatively, the
producer may achieve the same result through a series of cash-settled
forward transactions with the Bank. Under the cash-settled, forward
transactions, the producer pays the Bank the market value of a specified
notional amount of electricity at a future date, and receives a fixed
price for the same notional amount of electricity.

Example 2: An industrial consumer of electricity wants to fix its cost
of electricity over the next two years and protect itself against price
increases. The consumer enters into a cash-settled, electricity swap
with the Bank. Under the swap, the consumer pays the Bank a fixed price
for a notional amount of electricity over the next two years, and
receives the floating market price for the same notional amount of
electricity. Alternatively, the consumer may achieve the same result
through a series of cash-settled forward transactions with the Bank.
Under the forward transactions, the customer pays a fixed price for a
notional amount of electricity, and the customer receives the market
value of the same notional amount of electricity at a future date.

Example 3: An electricity consumer determines it will meet earnings
projections only if the cost of a notional amount of electricity is \$30
or lower. The consumer wants protection against prices rising over \$30
and wants to retain the benefits of prices declining below \$30. To
achieve this protection, the consumer enters into a cash-settled cap
option with the Bank that entitles the consumer, for a fee, to receive
the difference between \$30 and a higher market price for electricity.

As the Bank's book of electricity derivative transactions increases,
much of the market risk exposures from transactions with customers may
offset each other. Consequently, the Bank will not need to hedge each
transaction individually. It will manage market risks on a "portfolio
basis," and hedge the resulting net risk exposures. There will normally
be some residual market risk that is left unhedged, which will be
subject to risk management limits as discussed below. However, this risk
will be *de minimis* relative to the Bank\'s earnings and capital and
will be consistent with a customer-driven business strategy. The Bank's
hedges will include cash-settled electricity swaps, forwards, and
options.

The Bank represents that deregulation dramatically changed the operation
of the power markets. For wholesale market participants, the price of
power is a market rate variable that presents a risk profile analogous
to that of interest rates, natural gas prices or equity prices. If left
unmanaged, power prices can introduce volatility into a customer's
earnings. Moreover, as deregulation proceeds, the variety of customers
exposed to power prices will broaden. At present, power generators and
distributors face substantial electricity price risks. Institutional and
corporate consumers (such as chemical companies, refineries, and heavy
manufacturers) are also exposed. The Bank has well-established
relationships with these types of customers.

The Bank's proposed financial intermediary initiative relates
exclusively to wholesale energy and power markets, and does not in any
way relate to a business with retail clients or to actual power
procurement. Furthermore, because the Bank proposes to solely engage in
cash-settled electricity derivative transactions, the Bank represents it
will not be required to register as a power marketer with, or otherwise
become subject to the supervision or jurisdiction of, the Federal Energy
Regulatory Commission or any regional transmission or other organization
which operates as a power exchange or power pool. And, as previously
stated, the Bank will [not]{.underline} receive or deliver actual power
as a result of any cash-settled electricity derivative transaction that
it enters.

The Bank believes that financial intermediation activities based on the
price of electricity are a natural extension of the Bank's existing
financial intermediation activities involving energy commodities. The
Bank states that energy derivative customers have requested that the
Bank offer electricity derivative transactions for many years. The
Bank's electricity derivatives business will provide the Bank's
customers risk management tools in substantively the same manner as the
Bank provides such tools in connection with its existing petroleum,
natural gas, and related derivatives business. Essentially, the Bank
will offer electricity derivative transactions to customers as an
additional means for them to meet their legitimate financial and risk
management needs.

The Bank has expertise in conducting cash-settled energy commodity
derivative transactions. Consistent with this expertise, the Bank has
well-established policies, procedures and controls that it applies to
its commodity derivatives businesses. For example, the Bank: (i) hedges
the price risk arising from cash-settled commodity derivatives on a
portfolio basis and values transactions using data sets and models
implemented in accordance with Bank standards;

\(ii\) records credit exposure against customer credit limits; (iii)
documents cash-settled customer transactions using the ISDA Master
Agreement, with appropriate confirmations; and (iv) uses operations
systems that permit booking and settlement of cash-settled commodity
derivative transactions. The Bank represents that it will conduct the
proposed activities in customer-driven, cash-settled electricity
derivatives consistent with the same policies, procedures, and controls
it applies to its existing energy commodity derivatives business
("[Electricity Derivative Product Controls]{.underline}").

The Bank commits that it will not commence its new cash-settled
electricity derivatives business without first putting in place and
implementing all necessary policies, procedures and controls (including
the [Electricity Derivative Product Controls]{.underline}) to assure
that (i) its electricity derivative business is customer-driven,
cash-settled, and meets all required regulatory standards for conducting
a customer-driven derivative business, and (ii) the Bank has in place
all appropriate mechanisms to identify, monitor, limit and control the
risks inherent in conducting this business so that it complies with all
applicable OCC guidance and requirements.[^3]

The Bank specifically acknowledges that, as contemplated by the *OCC
Derivatives Handbook* and BC-277, an effective risk management process
includes appropriate oversight and supervision, managerial and staff
expertise, comprehensive policies and operating procedures, risk
identification, measurement and management information systems, and
effective risk control functions that oversee and ensure the continuing
appropriateness of the risk management process. To manage the risks in
its proposed cash-settled electricity derivatives business, the Bank
represents it will implement those policies, procedures and controls set
forth in OCC guidance, *e.g.,* *OCC Derivatives Handbook* and BC-277, to
assure the ongoing function and maintenance of an effective risk
management process. In implementing those policies, procedures, and
controls, the Bank commits to conducting a full evaluation of (i)
pricing, hedging (including portfolio hedging), processing,
recordkeeping, documentation, accounting, "back office" and risk
management; (ii) the development of adequate knowledge, staff, oversight
management and technology (including contingency planning) to
accommodate the activity; (iii) the implementation of appropriate
controls (including the [Electricity Derivative Product
Controls]{.underline} discussed above); (iv) the establishment,
implementation and monitoring of appropriate risk management limits with
respect to various types of risks \-- such as market risk, credit risk,
and liquidity risk \-- associated with a customer-driven, cash-settled
derivatives activity;[^4] and (v) Compliance Department training of
personnel and development of a supervisory framework designed to ensure
compliance with policies and procedures, including trading practices.
Such a framework will strictly prohibit manipulative practices of any
kind, including patterns of trading related to so-called "round
tripping" of electricity derivatives transactions.[^5] Risk Control,
Operations, Accounting, Legal, Compliance, Audit and Senior and Line
Management will all be involved in assuring that the risks undertaken by
the Bank are comparable to, and are addressed in ways comparable to
those applicable to, the Bank's existing energy-based derivative
products and business.

The Bank further commits that: \[1\] it will [not]{.underline} engage in
any electricity derivatives transactions that might physically settle
without the OCC's permission, \[2\] any trading in derivatives will be
limited to cash-settled derivatives and done primarily to hedge residual
open positions arising from customer transactions, and \[3\] its
electricity derivative business will be customer driven; it will
[not]{.underline} be operated as a proprietary trading business.
Transactions in electricity markets will permit the Bank to manage and
hedge, within well-controlled limits, the risks arising from valid,
customer-driven, derivative transactions.

#### 

#### II. Discussion

In our opinion, the Bank may establish a customer-driven, cash-settled
electricity derivative business and hedge risks arising from these
permissible banking activities, provided the Bank has established an
appropriate risk measurement and management process for its electricity
derivative and hedging activities. This process is necessary for the
Bank to achieve its customer risk management objectives in a safe and
sound manner and, thus, must be established before the OCC can determine
that the proposed activities are permissible as part of the business of
banking.

**A. Financial Intermediation Transactions Involving Commodities**

**are Authorized as Part of the Business of Banking**

The OCC has previously concluded in a variety of contexts that national
banks may engage in customer-driven, cash-settled financial
intermediation transactions they are authorized to conduct as part of
the business of banking under 12 U.S.C. § 24(Seventh). The OCC has
recognized, for example, that commodity and commodity index derivatives
are a modern form of traditional financial intermediation functions
performed by banks and, based in part on that lineage, has concluded
that national banks may make payments to, or receive payments from,
customers under commodity derivative contracts in the event of a gain or
loss in a metal or energy product or index thereon. These derivative
transactions thus have been recognized as permissible for national banks
as a financial intermediation activity.[^6]

In these arrangements, national banks act as financial intermediaries
between customers that want to manage risks resulting from the
variations in the price of a particular commodity or commodity index.
Customers do not deal directly with one another, but instead make
payments to the intermediary bank.[^7] Under these authorities, the OCC
has determined that national banks may engage in matched and unmatched
commodity price index swaps and manage and warehouse them on a portfolio
basis and originate, trade and make markets in certain swap products and
in other derivative instruments such as futures and options.[^8]

Based on similar reasoning, the OCC has permitted national banks to
engage in various commodity-linked transactions involving oil, gas,
other hydrocarbons, and metals.[^9] "Commodity-linked transactions"
include making loans, taking deposits, and issuing debt instruments
having terms related to commodity prices, sales, or indices, or measured
in relation to the future; and entering into swaps, forwards, and other
transactions relating to commodity prices and indices, or any
combination thereof, in order to assist customers of the Bank in
managing their financial exposures.[^10] National banks may also
originate, trade, and make markets in swap contracts and related
derivative products, including cash-settled commodity swaps, caps,
collars, floors, swaptions, captions and other option-like products,
based on their deposit taking, lending, and financial intermediation
authority.[^11]

Moreover, Congress has recognized the authority of national banks to
engage in commodity derivative transactions. Under the
Gramm-Leach-Bliley Act,[^12] banks may offer "identified banking
products" without registration under the Securities Exchange Act of
1934,[^13] subject to banking law requirements and supervision.
"Identified banking products" include certain swap agreements, defined
as "any individually negotiated contract, agreement, warrant, note or
option that is based, in whole or in part, on the value of, any interest
in, or any quantitative measure or the occurrence of any event relating
to, one or more **commodities**,[^14] securities, currencies, interest
or other rates, indices, or other assets.\"[^15] The GLBA conference
report further observes that these products are among the \"activities
in which banks have traditionally engaged.\"[^16] Congress' recognition
that banks engage in commodity derivative transactions and exemption of
these activities from certain securities regulations is consistent with
the OCC's longstanding position that national banks have the authority
to engage in customer-driven, cash-settled commodity derivative
transactions, subject to safety and soundness considerations.

**B. The Bank's Proposed Cash-Settled Electricity Derivative Business
is**

**Functionally Equivalent to other Bank Permissible Commodity Derivative
Transactions**

Electricity derivative transactions are a natural extension of the
Bank's existing energy derivative products, *e.g.,* petroleum, natural
gas, and other hydrocarbon derivative products. Electricity swaps,
forwards and options are the operational, structural, and functional
equivalents of commodity derivative transactions the OCC has previously
determined are permissible for national banks. Customer-driven,
cash-settled commodity swaps, forwards, and options, whether based on
metals or energy, including electricity, are privately negotiated
contracts between the parties to the transactions. As such, the terms of
the swaps, forwards, and options may be individually tailored to the
specific risk sensitivities of customers, *e.g.,* limiting exposure to
price fluctuations and market uncertainties. And, by entering into a
swap, forward, or option contract, the parties agree to make payments
based on the performance of a particular commodity or commodity index,
whether the commodity at issue is an energy product, such as petroleum,
natural gas, a hydrocarbon or electricity, or metal, such as aluminum,
lead, nickel, tin, zinc cobalt, iridium and rhodium.

All of these contracts involve exchanges of payments akin to those that
a bank makes and receives in connection with its role as a financial
intermediary. Cash-settled electricity swaps are agreements between two
counterparties that allow them to exchange fixed or floating payments
based on a notional amount of electricity. Banks' authority to enter
into cash-settled swaps is well established.[^17] Similar exchanges of
payments may be achieved using forwards or options. For example,
cash-settled electricity and other swaps are basically portfolios of
cash-settled forwards. Each forward embedded in a swap transaction is an
agreement to exchange payments based on a fixed or floating price at a
certain future date. To illustrate, an electricity swap might consist of
an exchange of payments based on a notional amount of electricity every
month for the next five years. The instrument is a swap because the
parties exchange the net of two offsetting payment streams, once a
month. The swap is nothing more than a series of 60 separate forward
contracts (12 months x 5 years). Although forward contracts may provide
for physical delivery, cash-settled forwards are functionally equivalent
to cash-settled swaps and permissible under banks' deposit, lending and
financial intermediary authorities.

Cash-settled options are similar to those cash-settled contracts, and
thus permissible for national banks, in that options permit the holder
to decide to execute a transaction in the future with the seller at a
price determined today. Cash-settled options also are similar to
cash-settled swaps and forwards in that two options - a cap and a
floor - can replicate the cashflow of swap transactions. The same legal
reasoning that allows national banks to engage in cash-settled
electricity swaps applies to cash-settled forwards and options.
Expansion of the Bank's existing commodity derivatives business to
include cash-settled electricity-linked transactions will not effect any
substantive change in the [type]{.underline} or [nature]{.underline} of
the activity conducted, but only in their underlying [basis]{.underline}
(*i.e.,* the particular commodity in question).

Finally, GLBA supports the permissibility of national banks entering
into cash-settled electricity transactions, by not limiting the types of
commodity derivative transactions exempt from registration under the '34
Act. Of course, for any commodity derivative transaction to be
permissible for national banks, it must be permissible under national
banking law, which requires, as discussed below, the bank to have
appropriate risk measurement and management processes in place to
conduct the activity.

As described in Section I, the Bank's proposal to engage in
customer-driven, cash-settled electricity derivative business is
intended to build on the Bank's existing client product offerings in
petroleum, natural gas and other energy-related financial instruments,
and to provide to customers sophisticated risk management tools directly
related to the accommodation of customer needs. Bank customers seek a
creditworthy, sophisticated and focused counterparty to assist them in
meeting their electricity price management needs and to act as an
intermediary in derivative transactions on their behalf. The Bank's
entry into the electricity derivatives business will provide customers a
new high credit quality counterparty for these transactions that is a
trusted and known quantity to them and has significant experience,
knowledge and expertise. The Bank's ability to engage in a
customer-driven, cash-settled, electricity derivative business will also
benefit the Bank's customers by reducing customers' financial risks
associated with fluctuations in the prices of commodities.[^18]

In addition, the Bank will benefit from an electricity derivative
business that enables it to diversify, expand its customer base, and
increase revenues. The Bank's proposed cash-settled electricity
derivative business will pose risks similar to those inherent in other
types of cash-settled electricity derivatives transactions with which it
is already familiar and for which it has demonstrated the ability to
successfully manage, *e.g.,* counterparty, price, basis, liquidity,
credit, and compliance risks.

**C. Hedging Risks Arising from Bank Permissible Commodity Derivative
Activities**

**is Integral to Those Permissible Activities**

The OCC has long recognized that using derivatives to hedge against the
risks associated with bank permissible activities is an integral part of
those permissible banking activities.[^19] Indeed, the OCC has
determined that national banks may hedge bank permissible commodity
derivative transactions with other commodity derivatives, such as
futures, and swaps and options and other over-the counter (OTC)
instruments, when conducted in a safe and sound manner as provided in
OCC guidance.[^20] Hence, as with other commodity derivatives, national
banks may hedge bank permissible electricity derivative transactions
with electricity futures, and swaps and options and OTC derivative
instruments. Further, the OCC has specifically endorsed the hedging of
commodity transactions on a transaction-by-transaction or portfolio
basis.[^21] The principles that the OCC has articulated in hedging
commodity derivatives and related contexts are equally applicable to
hedging customer-driven, cash-settled electricity derivative
transactions.[^22]

**D. The Customer-Driven, Cash-Settled Electricity Derivative
Transactions and**

**Hedges must be Conducted in a Safe and Sound Manner**

Engaging in customer-driven, cash-settled derivative transactions and
hedges does not automatically qualify the activity as part of the
business of banking. The nature of the electricity derivative activity
proposed requires sophisticated risk measurement and management
capacities on the part of a bank, and qualified personnel, in order for
the activity to actually function as described and to operate in a safe
and sound manner. Thus, in order for the OCC to conclude that this
proposed activity is permissible for the Bank as "part of the business
of banking" the Bank must demonstrate to the satisfaction of the OCC
that the Bank has established an appropriate risk measurement and
management process for its electricity derivative activity. As detailed
further in the *OCC Derivatives Handbook* and BC-277, an effective risk
measurement and management process includes board supervision,
managerial and staff expertise, comprehensive policies and operating
procedures, risk identification and measurement, and management
information systems, as well as an effective risk control function that
oversees and ensures the appropriateness of the risk management process.

In addition to a risk management program, the Bank's process must
include an independent compliance monitoring program to ensure ongoing
compliance with the specific commitments made by the Bank, including its
commitment to conduct its financial intermediation activities in
electricity as a customer-driven, and non-proprietary trading
business.[^23] The Bank must have an adequate and effective compliance
monitoring program that includes policies, training, independent
surveillance and well-defined exception approval and reporting
procedures.

The OCC will make these determinations though the Bank's
examiner-in-charge ("EIC") and the Bank may not commence the proposed
activities unless and until its EIC has concluded that the foregoing
standards are met.

**III. Conclusion**

The Bank may conduct the proposed customer-driven, cash-settled
electricity derivative business and hedge risks arising from these
permissible banking activities as an extension of its existing
energy-related commodities derivatives business, provided the Bank has
established, to the satisfaction of its EIC, an appropriate risk
measurement and management process for its electricity derivative and
hedging activities.

Sincerely,

**-signed-**

Julie L. Williams

First Senior Deputy Comptroller and Chief Counsel

[^1]: For the purposes of this letter, the term "electricity derivative
    transactions" includes cash-settled electricity-linked transactions
    of every type \-- including derivative products such as futures,
    forwards, options, swaps, caps, floors, and collars, and options
    thereon  ‑‑ in which a portion of the return (including interest
    and/or principal and/or payment streams) is linked to the price of
    electricity.

[^2]: In support of the Bank's representation, it references the
    discussion in the *Primer on Electricity Futures and Other
    Derivatives* (U.S. Department of Energy-funded study by the
    Environmental Energy Technologies Division of the University of
    California Ernest Orlando Lawrence Berkeley National Laboratory,
    January 1998) (the "*Electricity Derivatives Primer*") of all three
    of these instruments and their use in electricity markets, as
    follows. [Swaps]{.underline} enable a customer (either a generator
    or an end-user) to lock in a specific price for the electricity in
    question, and can be tailored to meet the needs of the buyer and the
    seller (*e.g.,* delivery points, time periods, etc.). Generators and
    end-users use both [put-options]{.underline}
    ("[floors]{.underline}") and [call-options]{.underline}
    ("[caps]{.underline}") -- or a combination of puts and calls
    ("[collars]{.underline}") -- to ensure a particular price range for
    the electricity in question. Under a [forward contract]{.underline},
    one party is obligated to buy, and the other to sell, a specified
    quantity of electricity at a fixed price on a given date in the
    future. At the maturity of a forward contract, the seller will
    deliver the electricity and the buyer will pay the purchase price.
    If, at that time, the market price of the electricity is higher than
    the price specified in the contract, then the buyer will have
    protected itself from price volatility. Conversely, if the market
    price is lower than the contract price, then the seller will have
    benefited from the terms of the contract. The *Electricity
    Derivatives Primer* emphasizes (at 43) that "\[t\]hese types of
    instruments work well because they can be tailored to the unique
    circumstances of generators, end users, and marketers."

[^3]: *See, e.g*., OCC Handbook: *Risk Management of Financial
    Derivatives* (January 1997) ("*OCC Derivatives Handbook*"); OCC
    Banking Circular No. 277 (October 27, 1993), *reprinted in* CCH Fed.
    Banking L. Rep. ¶ 62-152 ("BC-277"); OCC Bulletin 94-31 (May 10,
    1994), *reprinted in* CCH Fed. Banking L. Rep. ¶ 62-152.

[^4]: For example, in the context of market and related risks of
    electricity derivatives, the Bank will specifically address such
    matters as price volatility and concentration of market participants
    on a geographic and power exchange/power pool/individual customer
    basis. In the context of options, it will specifically address all
    of those characteristics identified in the *OCC Derivatives
    Handbook* (*e.g*., at 20-21 and Appendix B) as primary component
    measures of option sensitivity.

[^5]: For example, the head of the electricity derivatives desk will be
    provided with a "supervisory checklist" that describes the
    responsibilities of the position in monitoring transactions for
    market manipulation, including round-tripping. This individual will
    receive daily position and activity reports to review and monitor
    consistent with the best practices policy. The Bank's Compliance
    Division will also receive and review on a daily basis, position and
    activity reports and, on a quarterly basis, will test the
    appropriateness of derivative transactions and hedges and review
    documentary support. Bank employees involved in this business will
    be subject to applicable "Standards of Professional Conduct" and be
    required to attend annual compliance training.

[^6]: *See* OCC No-Objection Letter No. 90-1 (February 16, 1990),
    *reprinted in* \[1989-1990 Transfer Binder\] Fed. Banking L. Rep. ¶
    83,095 ("*Unmatched Commodity Swap Letter*"); OCC No-Objection
    Letter No. 87-5 (July 20, 1987), *reprinted in* \[1988-1989 Transfer
    Binder\] Fed. Banking L. Rep. (CCH) ¶ 84,034 ("*Matched Commodity
    Swap Letter*"). The *Unmatched Commodity Swap Letter* and the
    Ma*tched Commodity Swap Letter* predate *NationsBank of North
    Carolina v. Variable Annuity Life Insurance Co.*, 513 U.S. 251
    (1995) and characterized the commodity price index swaps as a
    financial intermediary activity incidental to a bank's express power
    to engage in deposit and lending activities under 12 U.S.C.
    § 24(Seventh). The OCC has since concluded that swap and funds
    intermediation activities are part of the business of banking. *See*
    OCC Interpretive Letter No. 892 (September 13, 2000), *reprinted in*
    \[2000-2001 Transfer Binder\] Fed. Banking L. Rep. (CCH) ¶ 81-411;
    OCC Letter from Ellen Broadman, Director, Securities and Corporate
    Practices Division, OCC, to Barbara Moheit, Regional Counsel, FDIC
    (October 20, 1998) (unpublished) ("*Broadman Letter*").

[^7]: In the event of a customer default on a commodity swap, the bank
    makes payments in place of a defaulting customer's obligation. The
    bank's payment is an advance of funds for which the defaulting
    customer is obligated to reimburse the bank or is an exercise of a
    national bank's authority to make loans.

[^8]: OCC Letter from Jimmy F. Barton, Deputy Comptroller Multinational
    Banking, to Carl Howard, Associate General Counsel, Citibank, N.A.
    (May 13, 1992) (unpublished); *Unmatched Commodity Swap Letter,
    supra; Matched Commodity Swap Letter, supra.*

[^9]: *See, e.g.,* OCC Interpretive Letter No. 684 (August 4, 1995),
    *reprinted in* \[1993-1994 Transfer Binder\] Fed. Banking L. Rep.
    (CCH) ¶ 83,632; OCC Letter from Robert Herman, Deputy Comptroller
    (October 4, 1994) (unpublished); OCC Interpretive Letter No. 632
    (June 30, 1993), *reprinted in* \[1993-1994 Transfer Binder\] Fed.
    Banking L. Rep. (CCH) ¶ 83,516.

[^10]: OCC Interpretive Letter No. 632, *supra*.

[^11]: OCC Letter from Horace Sneed, Senior Attorney, LASD, (March 2,
    1992) (unpublished) ("*Commodity Swap Portfolio Letter*").

[^12]: Pub. L. No. 106-102 (1990)(effective May 12, 2001) ("GLBA").

[^13]: 15 U.S.C. § 78a *et seq*.

[^14]: The Commodity Futures Trading Commission has recognized that
    entities engage in derivative instruments on various commodities,
    including crude oil, refined oil products, natural gas, metals, and
    **electricity.** *See, e.g.,* 2000 CFTC Ltr. LEXIS 248 (December 4,
    2000).

[^15]: (emphasis added). See P.L. 106-102, 113 Stat. 1338 (1999), §§
    201, 202, 206.

[^16]: H.R. Rep. No. 106-434 at 163 (1999) (Summary of Title II in
    Managers\' Statement).

[^17]: In the 1980's the OCC opined on the permissibility of national
    banks engaging in interest rate, currency, and commodity price index
    swaps and caps. *See* Matched Commodity Swap Letter; OCC
    Interpretive Letter No. 462 (December 19, 1988), *reprinted in*
    \[1988-1989 Transfer Binder\] Fed. Banking L. Rep. (CCH) ¶ 85,686;
    OCC Letter from J. Michael Shepherd, Senior Deputy Comptroller,
    Corporate and Economic Programs (July 7, 1988) (unpublished). Then,
    in the 1990's, the OCC recognized that national banks may advise,
    structure, arrange, and execute transactions, as agent or principal,
    in connection with interest rate, basis rate, currency, currency
    coupon, and cash-settled commodity and equity swaps; swaptions,
    captions, and other option-like products; forward rate agreements,
    rate locks and spread locks, as well as similar products that
    national banks are permitted to originate and trade in and in which
    they may make markets. *See* OCC Interpretive Letter No. 725 (May
    10, 1996), *reprinted in* \[1995-1996 Transfer Binder\] Fed. Banking
    L. Rep. (CCH) ¶ 81,040; OCC Interpretive Letter No. 652 (September
    13, 1994), *reprinted in* \[1994 Transfer Binder\] Fed. Banking L.
    Rep. (CCH) ¶ 83,600; OCC Letter from Jimmy F. Barton, Deputy
    Comptroller Multinational Banking, to Carl Howard, Associate General
    Counsel, Citibank, N.A. (May 13, 1992) (unpublished); *Commodity
    Swap Portfolio Letter*; *Unmatched Commodity Swap Letter, supra.*

[^18]: *See, e.g., Unmatched Commodity Swap Letter.*

[^19]: Through hedging activities, national banks serve in a financial
    intermediation capacity. Longstanding OCC precedent recognizes the
    authority of national banks to act as financial intermediaries,
    engaging in permissible derivative transactions and assuming
    offsetting positions or hedges. In so doing, the bank protects
    itself against risks arising from established, permissible banking
    activities. As a result of hedging, a bank becomes an intermediary,
    by interposing itself between customers initiating bank permissible
    derivative transactions and those providing offsetting returns.
    Thus, because hedging is an integral part of financial
    intermediation services, the activity is permissible for national
    banks. OCC Interpretive Letter No. 896 (August 21, 2000), *reprinted
    in* \[2000 - 2001 Transfer Binder\] Fed. Banking L. Rep. (CCH) ¶
    81-415; *Broadman Letter, supra.*

[^20]: OCC Interpretive Letter No. 684, *supra*; OCC Interpretive Letter
    No. 683 (July 28, 1995), *reprinted in* \[1994-1995 Transfer
    Binder\] Fed. Banking L. Rep. (CCH) ¶ 83,631; OCC Interpretive
    Letter No. 632, *supra*; *Commodity Swap Portfolio Letter, supra*.

[^21]: *See, e.g.,* *Swap Portfolio Letter*, *supra*; *Unmatched
    Commodity Swap Letter*, supra; *Matched Commodity Swap Letter*,
    supra.

[^22]: Indeed, the Federal Reserve Board, in recognizing that
    "\[b\]anking organizations have developed a number of commodity...
    linked transactions. . . including commodity-indexed deposits,
    loans, debt issues, and derivative products, such as
    [forwards]{.underline}, [options]{.underline}, and
    [swaps]{.underline}," has noted that banks enter "into
    exchange-traded commodity or stock index futures and options in
    order to hedge the exposure inherent in these transactions."
    (emphasis added). 12 C.F.R. §208.128 (repealed so as to broaden the
    authority of state member banks to engage in derivative transactions
    without prior Federal Reserve Board approval; *See* 62 Fed. Reg.
    15272, 15276 (Mar. 31, 1997) (discussing proposed repeal of §
    208.128); *see also* 63 Fed. Reg. 37630 (July 13, 1998)). The OCC
    recognizes the similarity of different financial instruments,
    stating, for example, that "\[d\]espite their difference in form,
    options, futures and options on futures serve a similar function:
    enabling banks and investors to hedge against risk of. . .price
    changes relating to the underlying instruments." OCC Interpretive
    Letter No. 896, *supra.* In the equity context, the *OCC Derivatives
    Handbook* makes clear (at 71) that banks that enter into swap
    transactions may hedge these transactions with "futures contracts,
    options, and similar over-the-counter instruments." *See also* note
    3 above.

[^23]: The OCC has long considered safety and soundness issues when
    determining whether an activity is part of, or incidental to the
    business of banking. *See e.g.*, OCC Interpretive Letter 892,
    *supra* (national bank may engage in equity hedging activities only
    if it has an appropriate risk management process in place); OCC
    Banking Bulletin 96-5 (September 20, 1996) (replaced by OCC Bulletin
    2000-23 (July 20, 2000)) (national bank's purchase of life insurance
    is incidental to banking if it is convenient or useful in connection
    with the conduct of the bank's business and consistent with safe and
    sound banking practices); OCC Interpretive Letter No. 684, *supra*
    (commodity hedging is a permissible banking activity provided the
    activity is conducted in accordance with safe and sound banking
    practices); *Decision of the Office of the Comptroller of the
    Currency on the Request by Chase Manhattan Bank, N.A. to Offer the
    Chase Market Index Investment Deposit Account* (August 8, 1988)
    (national banks have the authority to establish the amount of the
    payments to be made and received under their deposit and loan
    contracts and may determine the amount of those payments by
    reference to any index or standard as long as the bank complies with
    safe and sound banking principles and, in the case of loans, with
    state usury laws); OCC Interpretive Letter No. 376 (October 22,
    1986) *reprinted in* \[1985-1986 Transfer Binder\] Fed. Banking L.
    Rep. (CCH) ¶ 85,600 (indemnification from losses resulting from
    participation in the bank's fiduciary securities lending program is
    a permissible incidental activity provided the indemnification is
    consistent with OCC guidance and safety and soundness); OCC
    Interpretive Letter No. 274 (December 2, 1983) *reprinted in*
    \[1983-1984 Transfer Binder\] Fed. Banking L. Rep. (CCH) ¶ 85,438 (a
    national bank's authority to lease its office space provides the
    authority for it to establish appropriate lease terms if consistent
    with safe and sound banking practices).