BC - 216
BANKING ISSUANCE
Comptroller of the Currency
Administrator of National Banks
Type:  Banking Circular
Subject:  Securities Denominated in Foreign Currencies

TO:  Chief Executive Officers of All National Banks, Deputy Comptrollers
     (District) and All Examining Personnel

PURPOSE

The purpose of this circular is to advise national banks of the
Comptroller of the Currency's policies concerning ownership of securities
which are not denominated in U.S. dollars.

SCOPE

This circular applies to all securities not denominated in U.S. dollars
held by national banks.

BACKGROUND

The supply of investment securities which are denominated in foreign
currencies is expanding. Banks that traditionally have not conducted
international operations or acquired assets denominated in a foreign
currency are now acquiring foreign currency denominated securities for
investment purposes.

The limitations applicable to a national bank's acquisition of securities
for investment purposes are listed in 12 USC 24 and 12 CFR 1. Eligible
investment securities are not required to be denominated in U.S. dollars.
However, national bank portfolio investment in a security which is
denominated in a foreign currency introduces a risk in the form of foreign
(currency) exchange risk. Foreign exchange risk can be substantially
different from the risks ordinarily managed by investor banks, because the
value of the foreign currency may fluctuate in relation to the dollar
value at which the bank carries the security on its books.

POLICY

National banks are authorized to acquire foreign currency denominated
investment securities subject to the limits of 12 USC 24 and 12 CFR 1.
Foreign currency denominated investment securities must be revalued,
reported and recorded in accordance with FASB Statement No. 52, "Foreign
Currency Translation" (FAS 52). Except as otherwise provided by FAS 52,
gains or losses resulting from the currency revaluation should be included
in the determination of net income for the reporting period.

National banks which choose to hold foreign currency denominated
investment securities should demonstrate the ability to manage the
resulting foreign exchange risk. Bank management should establish and
maintain prudent management controls and procedures, taking into
consideration all other foreign currency exposure of the institution. The
Board of Directors or a board committee should approve and enforce
policies to control foreign currency risks. These policies, at a minimum,
should address:

- Currency limits

- Gross and net open position limits

- Asset and liability mismatch (gap) limits

- Stop loss limits

- Individual purchase and sale authority limits

- Evaluation and periodic reevaluation of currency risk exposure, and
  country risk exposure

- Procedures for periodic revaluation

- Financial reporting considerations

- Appropriate management information systems and Board or board committee
  information systems

- Internal audit procedures

A discussion of the standards for controlling foreign exchange risk is
contained in Section 813 of the Comptroller's Handbook for National Bank
Examiners. National banks which choose to function as dealers in foreign
currency denominated investment securities, subject to 12 USC 24 and 12
CFR 1, should refer to the FFIEC Uniform Guideline on Internal Control for
Foreign Exchange Activities in Commercial Banks (BB 80-15, dated June 11,
1980).

ORIGINATING OFFICE

Investment Securities Division (202) 874-5216


Robert Herrmann
Senior Deputy Comptroller
  for Bank Supervision

Date:  September 11, 1986