On August 4, 2015, the US Treasury Department Office of Comptroller of the Currency (“OCC”) issued a supervisory bulletin regarding when a national bank’s taking or making delivery of physical commodities as part of hedging commodity derivative transactions would be considered to be a “nominal” percentage of its risk management activities. The OCC’s position is that such activity is permissible when the bank’s commodity position is no more than five percent of the notional value of the bank’s derivatives that are in that same particular commodity and that allow for physical settlement within 30 days. This position is not applicable to transactions in commodities in which a national bank can deal directly, that is gold, silver, platinum, palladium and copper.

In 1993, the OCC issued a lengthy supervisory circular providing guidance on the risk management of financial derivatives. In the issuance, the OCC stated that national banks may engage in physical commodity transactions in managing the risks arising out of commodity derivative transactions subject to the following conditions:

  • Any physical transactions supplement the bank’s existing risk management activities, constitute a nominal percentage of a bank’s risk management activities, are used only to manage risk arising from otherwise permissible (customer-driven) banking activities, and are not entered into for speculative purposes; and
  •  Before entering into any such physical transactions, the bank has submitted a detailed plan for the activity to the OCC and the plan has been approved

That bulletin, BC-277, did not quantify what level of physical trading was considered to be “nominal,” nor did a subsequent 1994 supervisory issuance which contained a series of questions and answers regarding BC-277.

In the August 4 issuance, the OCC stated that a bank’s physical hedges are a “nominal” percentage of its risk management activities only if, for each commodity, the value of the position in that commodity (long or short) is no more than five percent of the notional value of derivatives contracts in that commodity that allow for settlement through physical delivery within 30 days. The limit is calculated separately for each commodity that underlies any of the bank’s commodity derivatives. The OCC noted that this limit ensures that the bank keeps physical inventory of a particular commodity to levels commensurate with its need to make or take physical delivery of that commodity.

All other requirements regarding engaging in physical commodity hedging activities remain in place as set forth in BC-277, including having the OCC approve the bank’s detailed plan for engaging in such activity.

The bulletin is applicable only to banks chartered by the OCC under the National Bank Act and US offices of non-US banks licensed by the OCC under the International Banking Act. The OCC also charters federal thrift institutions under the Home Owners Loan Act but has not issued any interpretations allowing federal thrifts to take or make delivery of a physical commodity as part of hedging a commodity derivative transaction.