Friday, May 11, 2012

Regulators Clarify that Swap Push Out Provision of Dodd-Frank Becomes Effective on July 16, 2013


In joint guidance, federal banking regulators clarified that the swap push out provisions of the Dodd-Frank Act take effect on July 16, 2013. The provisions, codified in Section 716 of Dodd-Frank, deny federal assistance to any entity defined under that section to be a swaps entity with respect to any swap, security-based swap, or other activity of the swaps entity. Effectively, Section 716 requires banks to divest the types of derivatives activities considered to carry the greatest risk, while allowing banks to retain the majority of their routine low-risk derivatives activities on behalf of customers. (OCC, FDIC, Federal Reserve Board, May 10, 2012, 77 F.R. 27456)

Section 716(h) provides that the prohibition becomes effective two years after the date on which this Act is effective. The banking regulators take the position that the word ``Act’’ in Section 716(h) refers to Title VII, which is called the Wall Street Transparency and Accountability Act, and not to the broader Dodd-Frank Act. Section 701 in Title VII provides that Title VII may be cited as the Wall Street Transparency and Accountability Act. Thus, reasoned the banking agencies, while enacted within the Dodd-Frank Act, Title VII is itself ‘‘an Act,’’ and references within Title VII to ‘‘this Act’’ should be interpreted as references to the Wall Street Transparency and Accountability Act, and not to the broader Dodd-Frank Act.

The guidance notes that this interpretation is supported by the fact that Section 716(m) refers specifically to the Dodd- Frank Act by name, a reference that would not be necessary if the reference to ‘‘this Act’’ in section 716(h) of the Wall Street Transparency and Accountability Act were intended to refer to the Dodd-Frank Act.

The Wall Street Transparency and Accountability Act (Title VII) became effective on July 16, 2011, which is later than the effective date of the Dodd-Frank Act generally. The Wall Street Transparency and Accountability Act has two subtitles. Both subtitles contain provisions that establish an effective date that is 360 days after the enactment of the subtitle. The date of enactment was July 21, 2010, said the guidance, making July 16, 2011 the effective date of the subtitles comprising the Wall Street Transparency and Accountability Act. Because Section 716 specifically adopts an effective date that is two years following the effective date of the Wall Street Transparency and Accountability Act, noted the agencies, it follows that Section 716 will become effective on July 16, 2013.

The agencies also said that they intend to invite comment on a separate proposal that would establish the appropriate transition period for insured depository institutions pursuant to section 716(f).

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