OCC Clarifies Guidance on Commodity Hedging

The OCC issued a bulletin today clarifying its limits on physical commodity transactions by banks. Preexisting OCC guidance allows the use of physical commodity transactions to manage risks involved with commodity derivatives provided those activities constitute a “nominal” percentage of overall risk management activities.

Today’s guidance defined “nominal” as when the value of the bank’s positions in the actual commodity does not exceed 5 percent of the notional value of its derivatives contracts in that commodity allowing for settlement through delivery within 30 days. The OCC also reminded banks that engage in commodity derivatives that they are required to submit a plan to the OCC for how they will do so and obtain a written statement that the OCC does not object to the plan.