A hard look at a recent OCC interpretive letter points to a very interesting, if technical, contribution to the debate on CDS in particular and OTC derivatives more generally. In an interpretive letter released late last month, the OCC gave national banks – which of course largely control OTC clearing – a big break on risk-based capital associated with exposures to ICE.  ICE has become the bank regulator’s CCP of choice since the Fed gave it a bank charter last March.  The OCC’s capital decision means that big dealers will want to use ICE or, should any other CCP get the Fed’s blessing, similar entities within the bank regulator’s purview.  Even if the CFTC gets its exchange-trading platforms off the ground, they simply won’t be able to compete against the bank-blessed CCPs unless – unlikely – the regulators give these exposures similar capital treatment.

An in-depth assessment of the ICE decision is available by return e-mail.  The OCC letter can be found at: http://www.occ.treas.gov/interp/may09/int1116.pdf