Deutsche Bank AG, the European continent’s biggest bank, is among lenders given an extra two years by the Federal Reserve to separate derivatives trading from U.S. units that get government backing.
The Fed, in letters posted to its website this week, said Frankfurt-based Deutsche Bank, Standard Chartered PLC, Societe Generale SA, Canadian Imperial Bank of Commerce, Bank of Montreal, Toronto-Dominion Bank, Credit Agricole SA, Natixis SA and Bank of Nova Scotia must determine whether to halt swaps activity or move it to properly capitalized affiliates. Under the Dodd-Frank Act swaps push-out rule, interest-rate and some credit swaps can still be traded inside the banks.
“The potential impact of granting a 24-month transition period is less adverse than the potential impact of denying the transition period,” Robert Frierson, secretary of the Fed board of governors, wrote in the letters, delaying a deadline that otherwise required the push-out by today. Forcing the banks to cut off trades sooner could risk “operational problems and market disruption,” he wrote.
Dodd-Frank, enacted in 2010, expanded swaps oversight as U.S. lawmakers sought to make markets less vulnerable after the 2008 credit crisis. The push-out rule, included in the law by former Senator Blanche Lincoln, requires that equity, some commodity and non-cleared credit derivatives be walled off from bank units with access to deposit insurance and the Fed’s discount window.
The Fed’s letters are almost identical to those the central bank sent to U.S. companies such as Goldman Sachs Group Inc. and Bank of New York Mellon Corp.
The Office of the Comptroller of the Currency granted the two-year phase-out period last month to national banks it oversees, including JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Wells Fargo & Co. and Morgan Stanley.
Derivatives, including swaps, are financial instruments used to hedge risks or for speculation. They’re based on stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in the weather or interest rates. Options and futures are the most common types of derivatives.