Alert March 24, 2009

OCC Issues Interpretive Letter Permitting National Banks to Engage in Derivative Transactions on Longevity Indices

The OCC issued an interpretive letter (“Letter #1110”) permitting national banks to engage in customer-driven derivative transactions on longevity indices.  The proposed longevity index derivatives could be used by customers to take or hedge exposure to the longevity and mortality of a certain population, and could assist customers such as pension plans in managing financial risks associated with longevity risk.  The OCC said that Letter #1110  follows long-standing OCC precedent permitting national banks to act as financial intermediaries in a variety of derivative transactions – including options, forwards and swaps involving equity indices, credit derivative indices and inflation indices, among others – where the transactions are perfectly matched and settle in cash.

Letter #1110 states that a national bank, by acting as a middleman in arranging the exchange of payments between counterparties (which may include an affiliate of the bank), is not providing insurance in a state, as generally prohibited by the Gramm-Leach-Bliley Act of 1999; however, national banks may not enter into longevity index derivative transactions with an insurance company referencing losses on the insurance company’s own policies.

A national bank wishing to engage in longevity index derivative transactions must notify its examiner-in-charge and receive written notification of the examiner’s supervisory no-objection, which will be based on an evaluation of the bank’s ability to conduct the activity in a safe and sound manner in light of the bank’s risk measurement and management systems and controls.  In addition, banks must maintain compliance with the requirements of Section 23A and 23B and the FRB’s Regulation W with respect to transactions between affiliates.