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Trading and Capital-Markets Activities Manual

Capital-Markets Activities: Investment Securities and End-User Activities (Continue)
Source: Federal Reserve System 
(The complete Activities Manual (pdf format) can be downloaded from the Federal Reserve's web site)

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1. Has the board of directors, consistent with its duties and responsibilities, adopted written investment-securities policies, including policies for when-issued securities, futures, and forward placement contracts? Do policies outline the following:
a. objectives 
b. permissible types of investments 
c. diversification guidelines, to prevent undue concentration 
d. maturity schedules 
e. limitations on quality ratings 
f. policies for exceptions to standard policy 
g. valuation procedures and their frequency 

2. Are investment policies reviewed at least annually by the board to determine if they are compatible with changing market conditions? 

3. At the time of purchase, are securities designated as to whether they are investments for the portfolio or trading account? 

4. Have policies been established governing the transfer of securities from the trading account to the investment-securities account? 

5. Have limitations been imposed on the investment authority of officers? 

*6. Do security transactions require dual authorization? 

7. Does the bank have any of the following: due from commercial banks or from other depository institutions, time, federal funds sold, commercial paper, securities purchased under agreements to resell, or any other money market type of investment? If so, determine the following. 
a. Is purchase or sale authority clearly defined? 
b. Are purchases or sales reported to the board of directors or its investment committee? 
c. Are maximums established for the amount of each type of asset? 
d. Are maximums established for the amount of each type of asset that may be purchased from or sold to any one bank? 
e. Do money market investment policies outline acceptable maturities? 
f. Have credit standards and review procedures been established? 


*8. Do procedures preclude the custodian of the bank securities from- 
a. having sole physical access to securities; 
b. preparing release documents without the approval of authorized persons; 
c. preparing release documents not subsequently examined or tested by a second custodian; and 
d. performing more than one of the following transactions: (1) execution of trades, (2) receipt or delivery of securities, (3) receipt and disbursement of proceeds? 

*9. Are securities physically safeguarded to prevent loss or their unauthorized removal or use? 

10. Are securities, other than bearer securities, held only in the name or nominee of the bank? 

11. When a negotiable certificate of deposit is acquired, is the certificate safeguarded in the same manner as any other negotiable investment instrument? 


12. Do subsidiary records of investment securities show all pertinent data describing the security; its location; pledged or un-pledged status; premium amortization; discount accretion; and interest earned, collected, and accrued? 

*13. Is the preparation and posting of subsidiary records performed or reviewed by persons who do not also have sole custody of securities? 

*14. Are subsidiary records reconciled, at least monthly, to the appropriate general-ledger accounts, and are reconciling items investigated by persons who do not also have sole custody of securities? 

15. For international-division investments, are entries for U.S. dollar carrying values of foreign currency-denominated securities rechecked at inception by a second person? 


*16. Is the preparation and posting of purchases, sale, and redemption records of securities and open contractual commitments performed or reviewed by persons who do not also have sole custody of securities or authorization to execute trades? 

*17. Are supporting documents, such as brokers' confirmations and account statements for recorded purchases and sales, checked or reviewed subsequently by persons who do not also have sole custody of securities or authorization to execute trades? 

*18. Are purchase confirmations compared to delivered securities or safekeeping receipts to determine if the securities delivered are the securities purchased? 


19. Do end-user policies- 
a. outline specific strategies and 
b. relate permissible strategies to other banking activities? 

20. Are the formalized procedures used by the trader- 
a. documented in a manual and 
b. approved by the board or an appropriate board committee? 

21. Are the bank's futures commission merchants and forward brokers- 
a. notified in writing to trade with only those persons authorized as traders and 
b. notified in writing of revocation of trading authority? 

22. Has the bank established end-user limits- 
a. for individual traders and total outstanding contracts?
b. which are endorsed by the board or an appropriate board committee? 
c. whose basis is fully explained? 

23. Does the bank obtain prior written approval detailing amount of, duration, and reason- 
a. for deviations from individual limits and 
b. for deviations from gross trading limits? 

24. Are these exceptions subsequently submitted to the board or an appropriate board committee for ratification? 

25. Does the trader prepare a pre-numbered trade ticket? 

26. Does the trade ticket contain all of the following information: 
a. trade date 
b. purchase or sale 
c. contract description 
d. quantity 
e. price 
f. reason for trade 
g. reference to the position being matched (immediate or future case settlement) h. signature of trader 

27. Are the accounting records maintained and controlled by persons who cannot initiate trades? 

28. Are accounting procedures documented in a procedures manual? 

29. Are all incoming trade confirmations- 
a. received by someone independent of the trading and recordkeeping functions and 
b. verified to the trade tickets by this independent party? 

30. Does the bank maintain general-ledger control accounts disclosing, at a minimum- 
a. futures or forwards contracts memoranda accounts, 
b. deferred gains or losses, and 
c. margin deposits? 

31. Are futures and forward contracts activities- 
a. supported by detailed subsidiary records and 
b. agreed daily to general-ledger controls by someone who is not authorized to prepare general-ledger entries? 

32. Do periodic statements received from futures commission merchants reflect- 
a. trading activity for the period, 
b. open positions at the end of the period, 
c. the market value of open positions, 
d. unrealized gains and losses, and 
e. cash balances in accounts? 

33. Are all of these periodic statements- 
a. received by someone independent of both the trading and recordkeeping functions and 
b. reconciled to all of the bank's accounting records? 

34. Are the market prices reflected on the statements- 
a. verified with listed prices from a published source and 
b. used to recompute gains and losses? 

35. Are daily reports of unusual increases in trading activity reviewed by senior management? 

36. Are weekly reports prepared for an appropriate board committee which reflect- 
a. all trading activity for the week, 
b. open positions at the end of the week, 
c. the market value of open positions, 
d. unrealized gains and losses, 
e. total trading limits outstanding for the bank, and 
f. total trading limits for each authorized trader? 

37. Is the futures and forward contracts portfolio revalued monthly to market value or the lower of cost or market? 

38. Are revaluation prices provided by persons or sources totally independent of the trading function? 


39. Does the board of directors receive regular reports on domestic and international division investment securities which include- 
a. valuations, 
b. maturity distributions, 
c. the average yield, and 
d. reasons for holding and benefits received (international-division and overseas holdings only)? 

40. Are purchases, exchanges, and sales of securities and open contractual commitments ratified by action of the board of directors or its investment committee and thereby made a matter of record in the minutes? 


41. Is the foregoing information an adequate basis for evaluating internal control? Are there significant deficiencies in areas not covered in this questionnaire that impair any controls? Explain any deficiencies briefly and indicate any additional examination procedures deemed necessary. 

42. Based on a composite evaluation, as evidenced by answers to the foregoing questions, is internal control adequate or inadequate?


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