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From Banking and Finance Law Daily, June 5, 2013

Fed Establishes Procedures for Swaps Push-Out Transition

By John M. Pachkowski, J.D.

The Federal Reserve Board has issued an interim final rule that establishes the process that banking organizations supervised by the Fed must use to apply to take advantage of the transition period found in section 716 of the Dodd-Frank Act, known as the “swaps push-out provision” which becomes effective on July 16, 2013.

Section 716 of the Dodd-Frank Act generally prohibits the provision of certain types of federal assistance, such as discount window lending and deposit insurance, to swaps entities. Insured depository institutions that are swaps entities are eligible for a transition period of up to 24 months to comply and for certain statutory exceptions.

Uninsured branches and agencies. The interim rule, which became effective June 5, 2013, also addresses treatment of the swaps push-out provision as it relates to uninsured U.S. branches and agencies of foreign banks.

In clarifying the scope of the push-out provision to uninsured U.S. branches and agencies of foreign banks, the Fed noted that the structure, language, and purpose of section 716 creates an ambiguity regarding the definition of “insured depository institution.” It concluded, however, that treating uninsured U.S. branches and agencies of foreign banks as insured depository institutions is consistent with the purpose and legislative history of section 716 to reduce systemic risks from derivatives activities.

Transition period. Under the interim rule, a state member bank and an uninsured state branch and agency of a foreign bank may seek a transition period of up to 24 months from July 16, 2013, for an entity that is a swaps entity as of July 16, 2013, or from the date on which the entity becomes a swaps entity, if that date occurs after July 16, 2013.

To apply for the transition period, a state member bank and an uninsured state branch and agency of a foreign bank must submit a written request to the Fed. The request must include:

  1. the length of the transition period requested;
  2. a description of the quantitative and qualitative impacts of immediate divestiture or cessation of swap or security-based swaps activities on the institution; and
  3. a description of the insured institution’s plan for conforming its activities to the requirements of section 716.

In describing the impacts, a bank, or state branch or agency, must illustrate the potential impact of divestiture or cessation of swap or security-based swaps activities on the institution’s mortgage lending, small business lending, job creation, capital formation versus the potential negative impact on insured depositors, and the Deposit Insurance Fund.

Comments. Finally, the Fed is “interested in receiving comments on all aspects of the interim final rule” with particular attention to the following:

  1. Is it appropriate and consistent with section 716 to define insured depository institution to include an uninsured U.S. branch or agency?
  2. How could the transition period process be modified to better achieve the purposes of section 716? Are there any additional factors that the Board should consider in reviewing a request for a transition period?
  3. Are there specific additional conditions or limitations that the Board should, by rule, impose in connection with granting a transition period? If so, what conditions or limitations would be appropriate? Alternatively, should the Board consider what conditions or limitations might be appropriate to apply during a transition period (including any extension thereof) on a tailored or case-by-case basis?

All comments are due by Aug. 4, 2013.

MainStory: TopStory BankingOperations DoddFrankAct FederalReserveSystem FinancialStability SecuritiesDerivatives

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