Big Banks Get More Time to Isolate Derivatives

JPMorgan Chase & Co., Goldman Sachs Group Inc. and Bank of America Corp. won a delay of Dodd-Frank Act requirements that they wall off some derivatives trades from bank units backed by federal deposit insurance.

Commercial banks including the Wall Street firms may get as long as an additional two years — until July 2015 — to comply with the rules, the Office of the Comptroller of the Currency said in a notice yesterday. The provision was included in Dodd-Frank, the 2010 financial-regulation law, as a way to limit taxpayer support for risky derivatives trades.

The Commodity Futures Trading Commission and other regulators need to complete swap rules to allow “federal depository institutions to make well-informed determinations concerning business restructurings that may be necessary,” the OCC said in the notice. The so-called push-out provision of Dodd-Frank requires that equity, some commodity and non-cleared credit derivatives be moved — or pushed out — into separate affiliates without federal assistance.

In February, the U.S. House Financial Services Committee approved with bipartisan support legislation that would let banks keep commodity and equity derivatives in federally insured units by removing part of the push-out rule. Regulators including Federal Reserve Chairman Ben S. Bernanke had opposed the provision when it was included in Dodd-Frank, saying it would drive derivatives to less-regulated entities.

The OCC is prepared to “consider favorably” requests for transition, the regulator said in the six-page notice. The agency said delays could be extended for a third year based on consultations with other regulators.

JPMorgan had 99 percent of its $72 trillion in notional swaps trades in its commercial bank in the third quarter of 2012, according to the OCC's quarterly derivatives report. Bank of America had 68 percent of its $64 trillion in its commercial bank, according to the report.

Banks including Citigroup Inc. will be given as long as two years beyond the July 16 deadline to move their swaps businesses, the OCC said. They must submit written requests describing how a transition period would reduce harmful effects on mortgage lending, job creation and capital formation. The requests, which must be submitted by Jan. 31, also must weigh how the transition period would affect insured depositors.

“The procrastination of both regulators and the banks on this portion of Dodd-Frank has been pretty amazing,” Marcus Stanley, policy director for Americans for Financial Reform, a coalition including the AFL-CIO labor federation, said in a telephone interview. “The swaps-pushout provision is a really important part and something that absolutely should be a central part of the regulatory framework.”

Scaled Back

Blanche Lincoln, an Arkansas Democrat who led the Senate Agriculture Committee during talks leading the regulatory overhaul, sponsored the original provision in 2010. It applied to more more types of derivatives before it was scaled back amid objections from Bernanke and Sheila Bair, former Federal Deposit Insurance Corp. chairman.

“I never myself thought it made a great deal of sense,” Barney Frank, the Massachusetts Democrat who helped draft the Dodd-Frank law and whose last day in Congress was yesterday, said on Feb. 16 when he supported changes to the pushout provision.

Ken Bentsen, executive vice president of public policy and advocacy at the Securities Industry and Financial Markets Association, said Congress should still seek to change the provision.

“We continue to believe that the underlying swaps push out provision is bad policy,” Bentsen said yesterday in an e-mail. The additional time is important because regulators haven't proposed how the provision would work. “Given this uncertainty, it is impractical to require compliance by July 2013,” he said.

Bloomberg News

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