SIFMA Applauds Introduction of Swaps Push-out Reform Legislation (with Lofchie Comment)

SIFMA released a statement from Kenneth E. Bentsen, Jr., acting president and CEO, after legislation was introduced to amend Dodd-Frank Section 716 ("Prohibition against Federal Government bailouts of swaps entities"), which would force financial institutions to "push-out" their derivatives operations from banks into a separate entity. The Swaps Regulatory Improvement Act (numbered as HR 992 and S 474) was introduced in both houses of Congress by Senator Kay Hagan (D-NC) and Representative Randy Hultgren (R-IL). The bill also has a number of co-sponsors.

In the statement, Bentsen asserted that adoption of the legislation will "forestall a misguided action that would force swaps to migrate to other entities that are not subject to prudential regulation, and could likely increase systemic risk instead of reducing it."

Lofchie Comment: Section 716 of Dodd-Frank, otherwise known as the Lincoln Amendment, is, I think, ill-conceived. "Swaps dealing" activities are fundamentally credit transactions, and forcing credit transactions to be effected outside of banks is a policy decision that has all kinds of bad results, including preventing banks from being able to net all of their credit exposures to one party in the bank, thus increasing the likelihood that the bank will suffer credit losses on the failure of that counterparty. While Section 716 was amended to allow banks to continue to engage in swaps where the reference asset is bank-eligible or for hedging purposes, the Lincoln Amendment would still require push-out of dealing activities involving non-bank eligible swaps (e.g., involving commodities, equity, and non-investment grade debt), and would require U.S. branches of foreign banks to push out ALL swaps. Significantly, the effective date for push-out by U.S. branches of foreign banks is much earlier than for U.S. banks, and goes into effect this July. Leaving aside that Lincoln is wrong-headed as a policy matter, many foreign banks may be wholly unable to comply with its requirements should it come into effect on schedule. Foreign banks and their counterparties are simply too overwhelmed by all of the other requirements of Dodd-Frank to be able to move the hundreds of thousands of contracts that would be required to be moved if Lincoln were to go live on schedule. If Lincoln were to go into effect as scheduled, U.S. markets would not stop, but they would get awfully slow (and move even faster offshore).

Click hereto view statement in full (links externally to SIFMA website).For a general discussion (which we wrote shortly after the adoption of Dodd-Frank of the Lincoln Amendment), see: The Lincoln Amendment: Banks, Swap Dealers, National Treatment and the Future of the Amendment.