Foreign Banks May Continue Swaps Activities...and Still Access Discount Window

The Board of Governors of the Federal Reserve System (“Board”) on June 5, 2013 took a bold step in issuing interim final rules (“Interim Rules”) that allow a foreign bank’s uninsured US branches and agencies to continue to access the Reserve Banks’ discount windows notwithstanding that the foreign bank is a registered swaps dealer engaged in swaps activities. The Interim Rules limit the effect on foreign banks of the ban on access by swaps entities to the discount window and other Federal Reserve credit facilities that was established by Section 716 of the Dodd-Frank Act. That ban is effective as of July 16, 2013.

This eleventh hour reprieve is undoubtedly welcome news for foreign banks with US branches and agencies. A now well-known inadvertent drafting omission limited the availability of the so-called swaps push-out exemptions from the Section 716 Federal funding ban to “insured depository institutions.” The Interim Rules correct this oversight by defining an uninsured US branch or agency of a foreign bank as an “insured depository institution” for the purposes of Section 716. That definitional change puts a foreign bank on equal footing with a US bank for Section 716 purposes and allows uninsured US branches and agencies of a foreign bank that is a swaps dealer to continue to access the discount window provided the foreign bank “pushes out” certain otherwise prohibited swaps activities to affiliates other than its US branches or agencies. It also permits the foreign bank’s US branches and agencies to continue to conduct directly swaps activities involving hedging and risk-mitigating activities or swaps based on rates or reference assets that are permissible investments for a US national bank other than non-cleared credit default swaps.

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