Bank One Corporation - Page 239

                                        -79-                                          
               portfolio.  The unearned credit spread adjustment                      
               represents amounts set aside to cover expected credit                  
               losses and to provide compensation for credit exposure.                
               Expected credit losses should be based upon expected                   
               exposure to counterparties (taking into account netting                
               arrangements), expected default experience, and overall                
               portfolio diversification.  The unearned credit spread                 
               should preferably be adjusted dynamically as these                     
               factors change.  It can be calculated on a transaction                 
               basis, on a portfolio basis, or across all activities                  
               with a given client.                                                   
               Two additional adjustments are necessary for portfolios                
               that are not perfectly matched: the “close-out costs                   
               adjustment” which factors in the cost of eliminating                   
               their market risk; and the “investing and funding costs                
               adjustment” relating to the cost of funding and                        
               investing cash flow mismatches at rates different than                 
               the LIBOR rate which models typically assume.                          
               The Survey reveals a wide range of practice concerning                 
               the mark-to-market method and the use of adjustments to                
               mid-market value.  The most commonly used adjustments                  
               are for credit and administrative costs.                               
               The G-30 report does not provide an objective standard as to           
          the calculation, measurement, or testing of either the unearned             
          credit spread (i.e., the credit adjustment) or the administrative           
          costs adjustment.                                                           
                    4.  BC-277                                                        
               Later in 1993, shortly after the G-30 report was issued, the           
          OCC released Banking Circular 277 (BC-277), entitled “Risk                  
          Management of Financial Derivatives”.  This document addressed              
          the valuation of financial derivatives and was sent to the chief            
          executive officer of every national bank.  In relevant part, it             
          stated on the cover page:                                                   







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