Federal Reserve Final Rule: Prohibition Against Federal Assistance to Swaps Entities (Regulation KK)

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On December 24, 2013 the Federal Reserve Board issued a final rule on Regulation KK, which prohibits the offering of Federal assistance to swap entities. Under the rule, an uninsured U.S. branch or agency of a foreign bank would be treated as an insured depository institution for purposes of section 716 of the Dodd-Frank Act. The rule also establishes a process by which a state member bank or uninsured state branch or agency of a foreign bank may request a transition period to conform its swaps activities to the requirements of section 716.

The rule's effective date is January 31, 2014.

Background

Section 716 of the Dodd-Frank Act, the "swaps pushout provision," (aka the Lincoln Amendment) specifically prohibits insured depositary institutions - banks, savings associations and insured federal branches - from using any Federal assistance, such as FDIC loans or emergency aid from the Federal Reserve discount window, for swap-related activity (except for certain "conforming swap activities," as defined under section 716(d) of Dodd-Frank. However, Section 716(f) allowed for the possibility of a transition period to allow such institutions time to wind down non-conforming swap activities.

In April 2012, the Office of the Comptroller of the Currency (OCC) and other Prudential Regulators had previously issued joint guidance that set an effective date for the rule of July 16, 2013. To view the April 2012 guidance, click HERE.

On January 4, 2013, the Office of the Comptroller of the Currency (OCC) issued guidance that allows for up to a two year transition period for entities requesting it. (VIEW OCC GUIDANCE).

On June 5, 2013, the Federal Reserve Board issued an interim final rule and request for comment on Regulation KK. The final rule issued December 24, 2013 adopts without change the June 5 interim rule.

Summary of the Rule

The interim final rule provides that, for purposes of section 716 of the Dodd-Frank Act and the interim final rule, the term “insured depository institution” includes any insured depository institution as defined in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813) and any uninsured U.S. branch or agency of a foreign bank.

A state member bank and an uninsured state branch and agency of foreign bank may seek a transition period of up to 24 months from July 16, 2013 (for an entity that is a swaps entity as of July 16, 2013), or from the date on which the entity becomes a swaps entity (if that date occurs after July 16, 2013), by submitting a written request to the Board. The request must include:

  • the length of the transition period requested;
  • a description of the quantitative and qualitative impacts of immediate divestiture or cessation of swap or security-based swaps activities on the institution; and
  • a description of the insured institution’s plan for conforming its activities to the requirements of section 716.

Under the interim final rule, the Board may also request additional information that it believes is necessary in order to act on a request for a transition period.

Related Document: Federal Register Entries: Interim Final; Final Rule

References

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