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Banking Interpretations

NYSBL 96(1) and 201

February 22, 2006

[ ]

Dear [ ]:

This is in response to your letter dated February 22, 2005 and your follow up letter dated March 22, 2005.

Your first letter contained a proposal whereby the Treasury Department ("Treasury NY") in [ ] New York Branch ("NY Branch") would make certain investments in four different types of derivatives contracts: gold futures, crude oil futures, and the Goldman Sachs commodity index futures and equity index futures. These investments would be booked to the NY Branch. You indicated that all of the investments would be settled for cash and would be made solely on established, highly liquid exchanges. In an earlier communication, we advised you that the Banking Department had no objection to the NY Branch's proposed investment in gold futures. This letter will address only the proposed investments by the NY Branch in the other three commodities (the "Financial Products").

In your proposal, you indicated that Treasury NY's plan was to develop a customer base that holds assets linked with the commodity and equity-based indices and to be able to provide various financial intermediation-related services, including the hedging of exposures on your customers' behalf. We understand that prior to developing the customer base, the NY Branch would like to develop expertise in investing in the Financial Products by trading minimal positions with strict limits and controls.

We have reviewed all of our relevant prior opinions and have been unable to find any that would support your contention that trading minimal positions in the Financial Products that are not customer-driven in that they are related to a customer's transaction—one already requested or reasonably expected to be requested in the immediate future--are "incidental" to the banking activities of the NY Branch. That is to say, the Department is unable to reach the conclusion that proprietary trading in the proposed Financial Products constitutes part of the "business of banking" or permissible"incidental activities" under existing legal standards. Trading in such products, we believe, is authorized only if the transactions are customer-driven.

We note that, in the past, the Banking Department has approved certain types of transactions that are similar to those you describe in your letter when they are customer-driven. We do not, however, understand that you have asked us for an opinion on that issue. If the NY Branch wishes to pursue such a request, the Banking Department would need a fully developed factual basis (in writing) for the proposed activities before opining on whether they are indeed "incidental" to the NY Branch's banking activities, and thus permissible.

If you have any questions concerning any of the foregoing, please feel free to contact me, or Rosanne Notaro of our Legal Division.

Sincerely,

David S. Fredsall,
Deputy Superintendent of Banks

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