Internal Control Questionnaires and Verification Procedures

Interest Rate Risk

1. Do the policy and controls for derivatives used as investment substitutes or risk management tools:

   1. Authorize the use of derivatives?

   2. Address overall net income and capital objectives?

   3. Require analysis that reflects the expected impact of derivatives on the overall interest rate risk profile in terms of earnings-at-risk or economic value?

   4. Require the periodic testing of interest rate risk positions and the derivatives cash flows under adverse changes in interest rates and other market conditions?

   5. Describe which derivative instruments are authorized? Does the approval process consider:

      • The liquidity of the instrument?

      • Leverage?

      • The capacity and creditworthiness of approved counterparties?

      • The ability of interest rate risk models to evaluate the derivative instruments?

   6. Require that derivatives be independently revalued for risk control purposes? Require outside price sources be used where appropriate?

   7. Establish, in the absence of authoritative accounting guidance, hedge accounting criteria, including ongoing testing of hedging effectiveness?

   8. Detail appropriate accounting procedures?

   9. Require annual board approval?

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