Federal Reserve Issues Interim Final Rule on Federal Assistance to Swap Entities

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Section 716(a) of the Dodd-Frank legislation forbids "Federal assistance" with respect to swaps, security-based swaps, or other activity of any "swaps entity." "Federal assistance" encompasses Federal Reserve credit facilities (including access to the discount window) other than as part of a program with broad-based eligibility under the Federal Reserve Act as well as FDIC insurance or guarantees. A "swaps entity" is defined to include swap dealers, security-based swap dealers, a major swap participant (MSP), or a major security-based swap participant (MSBP) registered under the Commodity Exchange Act of 1936 or the Securities Exchange Act of 1934, respectively.

Excluded from this definition, however, is any insured depository institution (IDI) that is an MSP or MSBP or that limits its swaps activities to:

  • Hedging directly related to the IDI's activities
  • Acting as a swaps entity for swaps or security-based swaps (other than non-cleared credit default swaps) involving rates or reference assets permissible for investment by a national bank.

There is also an exemption from the Section 716(a) prohibition for any IDI that is an MSP.

The prohibition becomes effective after a transition period of up to two years, with one possible extension for an additional year. This means IDIs that are neither excluded nor exempt are allowed a transition period within which to conform their swaps-related activities. The duration of the transition period is determined by the IDI's federal banking regulator in consultation with the SEC or the CFTC, as appropriate. The regulator must take into account and make written findings regarding the potential impact of divesting swaps activities on the IDI's mortgage lending, small business lending, job creation, capital formation (versus the potential negative impact on insured depositors and the FDIC's deposit insurance fund), and any other factor the agency deems appropriate (the "transition period factors").

The Federal Reserve Board (the "Board") is the regulator not only for state member banks but also for state-licensed branches and agencies of foreign banks. In that capacity, the Board has determined that uninsured branches and agencies of foreign banks should be treated as though they were IDIs. In its interim final rule, the Board will allow any such entity to request in writing up to a two-year transition period starting July 16, 2013, or the date on which the entity becomes a "swaps entity," whichever is later.

The submission must specify the length of the transition period requested, describe the quantitative and qualitative effects of immediate divestiture or cessation of swap-related activities on the transition period factors, and set forth the entity's plan for conforming its activities to the requirements of Dodd-Frank Section 716. The Board is prepared, in consultation with the SEC or the CFTC, as appropriate, to consider subsequent requests to extend the transition period for up to one additional year.

Although the interim final rule became effective immediately upon issuance, the Board has requested comment on all aspects of the rule, and in particular on three questions:

  • Is the inclusion of uninsured branches and agencies of foreign banks appropriate and consistent with Section 716?
  • How could the transition period process be improved to further the purposes of the statute, and what additional factors, if any, should the Board consider in reviewing transition period requests?
  • In connection with granting a transition period, should the Board impose any additional conditions or limitations, either at the time of the decision or to go into effect during such period?

Topics:  CFTC, FDIC, Federal Reserve, Major Swap Participants, SEC, Securities Exchange Act, Swap Dealers, Swaps

Published In: Finance & Banking Updates, Securities Updates

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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