Commercial End User (CEU) Exception to Derivative Instruments – Regulatory Compliance Review

This whitepaper is written with an objective to diagonally review regulations from Banking industry regulators such as CFTC, Fed Reserve and OCC. The subject matter of this review is the designation of Commercial End User exception which Banks are required to flag on their derivative portfolio. While CEU designation allows Banks to optimize their RWAs, the documentation required to achieve compliance can be qualitative in nature and hence prone to operational risk as well as incorrect assessment of Credit Risk Regulatory capital. This paper attempts to shed light on the quantum of notionals involved and a requirement for enhancement in prudential banking capital adequacy regulations