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January 4, 2013

DODD-FRANK ACT-OCC Issues Guidance on Transition Period for Bank Swaps Push-Out

By Mark S. Nelson, J.D.

The Office of the Comptroller of the Currency (OCC) has announced new guidance for banks to request transition periods under the Dodd-Frank Act's Section 716 swap push-out requirement. This provision bars federal assistance to swaps entities, including insured federal depository institutions (DIs) that may become swap dealers due to their nonconforming swap activities. The OCC's transition guidance is effective immediately. Transition periods begin on Section 716's effective date (July 16, 2013, per prior joint guidance) and can last for up to two years, subject to a one year extension. Written transition requests are due to the OCC by January 31, 2013.

Section 716(f) provides that the appropriate federal banking agency must, upon consultation with the CFTC and the SEC, permit an insured DI swap entity up to two years to divest or cease nonconforming swaps activities. The banking agency must make written findings regarding an insured DI's mortgage lending, small business lending, job creation and capital formation in relation to the potential negative impact on insured depositors and the Federal Deposit Insurance Corporation's deposit insurance fund (DIF). The banking agency can consider other appropriate factors and may impose necessary and appropriate conditions on a DI's plans. The banking agency may extend an insured DI's transition period for one year upon further consultation with the CFTC and the SEC.

The OCC determined that transition-period guidance is required to implement Section 716(f) because the swaps regulatory infrastructure required by the Dodd-Frank Act is still being created. Transition guidance will provide "regulatory certainty" and reduce the potential for service disruptions to insured DI clients. The guidance also will minimize insured DIs' related operational and credit risks. In a footnote, the OCC cited the CFTC's December 2012 Dodd-Frank Title VII exemptive order as further justification for granting transitional relief to insured DIs while regulators continue to develop the swaps regulatory framework. The OCC concluded that swap push-out transition periods will alleviate many negative effects that may otherwise result from Section 716's premature implementation.

The OCC is thus prepared to favorably consider transition period requests. An insured DI must submit a written request to the OCC for an appropriate transition period for up to two years. The request must discuss:

  • The DI's plan to conform its swap activities;
  • How the transition can reduce negative effects on mortgage lending, small business lending, job creation, and capital formation;
  • The extent to which the transition may negatively impact the DI's insured depositors and the DIF;
  • Operational risks and safety and soundness concerns the transition can mitigate; and
  • Other facts the DI wants the OCC to consider.

An insured DI that is unsure of its swaps-entity status may still request a transition period. The request must reply to all of the items specified in the OCC's guidance and further explain why the insured DI believes it may be or become a swap dealer or security-based swap dealer under the CFTC's or the SEC's rules. However, an insured DI that engages in only conforming swap activities may not request a transition period because it is not subject to the federal assistance ban.

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