The Federal Reserve on Wednesday, June 5, issued an interpretation of the so-called “swaps push-out” section of the Dodd-Frank Act that corrects a drafting error that virtually everyone agrees needed to be fixed. The Federal Reserve’s solution was simple: it rewrote the statute.

Section 716 of Dodd-Frank provides, in simplified form, that any US bank that engages in a significant amount of swaps activity may not be insured by the Federal Deposit Insurance Corporation (“FDIC”) or use advances from the Federal Reserve’s discount window in order to support its swaps business. This provision is subject to numerous exceptions, the most important of which is that an FDIC-insured depository institution is exempt from most of the prohibitions.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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