SIFMA Submits Comment Letter to House Congressional Leadership Regarding Swaps Push out Bill (with Lofchie Comment)

SIFMA submitted a comment letter to Speaker Boehner (R-OH) and Congresswoman Pelosi (D-CA) expressing strong support for H.R. 992. The House Bill relates to Dodd-Frank Section 716 ("Prohibition against Federal Government Bailouts of Swaps Entities") (also known as "Lincoln" or "push out"), which requires commercial banks to push out or remove certain swaps activities from the bank and establish and capitalize a separate affiliate. As a result of this section, SIFMA's position is that financial institutions could no longer be eligible for netting and other efficiencies, and SIFMA clients will migrate their swaps contracts to other entities that are not subject to prudential regulation by federal regulators. The comment letter supported the idea that H.R. 992 modifies Section 716 by subjecting only structured finance swaps based on asset-backed securities to be pushed out of banks and by not applying to equity or commodity swaps.

Lofchie Comment: Section 716 may be the most ill-advised provision in all of Dodd-Frank. Dealing in swaps is largely a credit intermediation business which logically belongs in banks, which are in the business of intermediating credit. If the provision were allowed to come into force, U.S. nonbanks would likely find it an uphill battle to compete in the credit intermediation business against non-U.S. banks.As a practical matter, it would take years to move the swaps business out of banks and into other financial institutions, given the necessary amount of redocumentation as well as the shifting of personnel and technology. The immense cost and time requirements of this effort are likely to prove a real drain on the financial system.

See: SIFMA Comment Letter.