Seal of the Board of Governors of the Federal Reserve System
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM

WASHINGTON, D. C.  20551

DIVISION OF BANKING
SUPERVISION AND REGULATION

SR 99-32 (SUP)
November 17, 1999

TO THE OFFICER IN CHARGE OF SUPERVISION AT EACH
          FEDERAL RESERVE BANK AND TO CERTAIN BANKING
          ORGANIZATIONS SUPERVISED BY THE FEDERAL RESERVE


SUBJECT: Capital Treatment for Synthetic Collateralized Loan Obligations

                     The advent of credit derivatives several years ago has led to dramatic innovations in the asset securitization market.  As discussed in previous Federal Reserve guidance, credit derivatives are on- and off-balance-sheet financial instruments that permit banking organizations to assume or transfer credit risk on a specified or "referenced" asset or pool of assets.1  Such instruments are now being used to synthetically replicate collateralized loan obligations (CLOs).2  Banking organizations utilize CLOs and their synthetic variants to manage their balance sheets and, in some instances, transfer credit risk to the capital markets.  Such transactions allow economic capital to be more efficiently allocated, resulting in, among other things, improved shareholder returns.3

                     Attached to this SR letter is supervisory guidance developed jointly with the Office of the Comptroller of the Currency on how to treat synthetic securitizations for risk-based capital purposes.  This SR letter should be disseminated to large complex banking organizations (both foreign and domestic) supervised by the Federal Reserve, as well as other institutions for which Reserve Bank staff believes it would be relevant. 

                     If you have any questions regarding the regulatory capital treatment of synthetic CLOs, please contact Tom Boemio, Senior Supervisory Financial Analyst, at (202) 452-2982.


Richard Spillenkothen
Director


Attachment (39 KB PDF)


Cross References:  SR letters 96-17, 97-18, 97-21, 98-25, and 99-18



Notes:

1.   See SR letters 96-17, “Supervisory Guidance for Credit Derivatives,” and 97-18, “Application of Market Risk Capital Requirements to Credit Derivatives,” for additional information.  Return to text

2.   See the section entitled “Collateralized Loan Obligations” in the Federal Reserve Trading Activities Manual.  Return to text

3.   For further guidance see SR letters 97-21, “Risk Management and Capital Adequacy of Exposures Arising from Secondary Market Credit Activities”; 98-25, “Sound Credit Risk Management and the Use of Internal Credit Risk Ratings at Large Banking Organizations”; and 99-18, “Assessing Capital Adequacy in Relation to Risk at Large Banking Organizations and Others with Complex Risk Profiles.”  Return to text


SR letters | 1999