Tuesday, August 10, 2010

Dodd-Lincoln Colloquy Reveals Equal Treatment for Branches of Foreign Banks under Bank Swap Push Out Provisions

In the rush to complete the House-Senate conference on the Dodd-Frank Act, there was a significant oversight made in finalizing section 716 as it relates to the treatment of uninsured U.S. branches of foreign banks. Under section 716, insured depository institutions must push out all swaps and security-based swaps activities except for specifically enumerated activities, such as hedging and other similar risk mitigating activities directly related to the insured depository institution’s activities.

Under the U.S. policy of national treatment, which has been part of U.S. law since the International Banking Act of 1978, uninsured U.S. branches of foreign banks are authorized to engage in the same activities as insured depository institutions. While these U.S. branches of foreign banks do not have deposits insured by the FDIC, they are registered and regulated by a federal banking regulator, they have access to the Federal Reserve discount window, and other Federal Reserve credit facilities. A number of these U.S. branches of foreign banks will be swap entities under section 716 and title VII of Dodd-Frank. Due to the fact that the section 716 safe harbor only applies to insured depository institutions it means that U.S. branches of foreign banks will be forced to push out all their swaps activities. According to a colloquy between Senator Dodd and Senator Lincoln, this result was not intended. U.S. branches of foreign banks should be subject to the same swap desk push out requirements as insured depository institutions under section 716.

U.S. branches of foreign banks should, and are willing to, meet the push out requirements of section 716 as if they were insured depository institutions. Senator Dodd agreed that uninsured U.S. branches of foreign banks are included in the safe harbor of section 716 and should be treated the same as insured depository institutions under the provisions of section 716, including the safe harbor language. Cong. Record, July 15, 2010, pp. S5903-5904.

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