Fed Grants Foreign Banks Leeway in Dodd-Frank Swap Rule

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Foreign-based banks won leeway in Dodd-Frank Act requirements to separate swaps trading from their U.S. branches under a Federal Reserve policy released yesterday.

The central bank said in an interim final rule that the banks will be eligible to apply for a transition period of 24 months in rules taking effect July 16. The Institute of International Bankers, a lobbying group representing Credit Suisse Group AG and Deutsche Bank AG among others, urged the Fed to grant foreign banks the same phase-in process U.S. banks like JPMorgan Chase & Co. received earlier this year

“Absent clarity regarding the availability of the transition period, uninsured U.S. branches and agencies of foreign banks arguably would have to terminate their swaps activities by July 16, 2013 in order to continue to be eligible for access to the discount window,” the Federal Reserve said in the rule. Ending the swaps might have resulted in disorder and risks to their operations, the central bank said.

Dodd-Frank, the 2010 financial regulatory overhaul, requires banks to separate some swaps trading from units that are backed by federal deposit insurance or have access to the central bank’s discount window. The provision was included in the law by former Senator Blanche Lincoln, an Arkansas Democrat, to limit risky trading at taxpayer-backed banks.

Provision Opposed

Dodd-Frank requires that equity, some commodity and non-cleared credit derivatives be pushed out into affiliates. Interest-rate and some credit swaps can still be traded in bank units. Regulators including Fed Chairman Ben S. Bernanke had opposed the provision, saying it would drive derivatives to less-regulated entities.

“I never myself thought it made a great deal of sense,” Barney Frank, the former House Democrat from Massachusetts and drafter of the law, said in February 2012. The measure was included in the law to help secure Senate passage, he said.

In January, JPMorgan, Citigroup Inc., Bank of America Corp. and other U.S. banks won the opportunity for at least a two-year delay in the pushout provision from the Office of the Comptroller of the Currency. The action left unresolved if branches of foreign-based banks would be awarded the same opportunity for a delay. Senators said the law intended to treat the branches in the same way as insured depository banks even if the language of the law didn’t make that clear.

“We applaud the Federal Reserve’s clarification that for the purposes of the swaps push-out provision of Dodd-Frank, uninsured U.S. branches and agencies of foreign banks have parity of treatment vis-à-vis U.S. insured depository institutions,” Sally Miller, chief executive of the international bankers’ lobby group, said in a statement. “This clarification addresses a widely-acknowledged drafting error in the original legislation.”

The interim final rule was effective yesterday, while the central bank will accept comments until Aug. 4. The rule will be revised if necessary, the Fed said in a statement.