First take: Swaps Push-Out

December 2014

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Overview

Over the weekend, the US Senate passed an appropriations bill for the President's signature that included a provision to roll-back much of Dodd Frank's section 716 (i.e., the Swaps Push-Out). The Swaps Push-Out had prohibited bank swap dealers (with access to FDIC insurance or the Fed's discount window) from dealing in certain swaps, including credit default swaps, equity swaps, and many commodity swaps. Swaps related to rates, currencies, or underlying assets that national banks may hold (e.g., loans) were allowed to remain in the bank, as were any swaps used for hedging or similar risk mitigation activities.

Congress's roll-back narrows the scope of swaps that must be pushed out of the bank to now include only "structured finance swaps," which are defined as swaps (or security-based swaps) referencing asset backed securities (ABS) (or a group or index primarily comprised of ABS). Furthermore, even these swaps need not be pushed out if they are used for hedging or risk mitigation, or if their underlying ABS is of a sufficient credit quality (or type or category) deemed permissible by prudential regulators.

  1. Rolling back the Push-Out reduces industry costs and risk management complexity, but does not greatly impact the swaps market.
  2. Congress's change to the Push-Out is not surprising.
  3. Other Dodd Frank provisions limiting swaps risk-taking remain intact.
  4. The Push-Out deadline will likely remain July 16, 2015.
  5. Firms still have work to do.

This First take elaborates on the key points above and discusses what's next.

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