Repeal of Dodd-Frank's swaps push-out seen as unlikely to pass Congress

Despite positive vote by House subcommittee, lawyers say a bill repealing section 716 of Dodd-Frank will not pass

A move to repeal section 716 of the Dodd-Frank Act, which requires banks to push their equity, commodity and uncleared derivatives into separate affiliates, is unlikely to make its way through Congress, despite being approved in a November 15 vote by a subcommittee of the House Committee on Financial Services, lawyers say.

"I certainly don't hold out a lot of hope for the bill's passage because it has to go through the Senate, which is still controlled by the Democrats. However, it does a couple of things: it lays out a position, so the majority party in the House can express what it would do if they had control of the process, and it also requires the Democrats to reaffirm their policy on the swaps push-out," says Don Lamson, counsel at Shearman & Sterling LLP in Washington, DC.

The bill, HR 1838, which was introduced by congresswoman Nan Hayworth on May 11, passed through the subcommittee on Capital Markets and Government Sponsored Entities on November 15 by a vote of 21 to 12, with two Democrats - Carolyn Maloney and Jim Himes - voting with the Republicans.

However, in order for the bill to progress, the House Committee on Agriculture would have to produce a similar bill before it hits the floor of the House of Representatives. The Senate would also have to produce a comparable proposal. "There are many more steps to be taken, and there is not a lot of appetite in the Senate to start fixing Dodd-Frank. There is a fear that if any part of Dodd-Frank is reopened even to fix the noncontroversial problems, then other, more controversial, provisions will be reopened for debate and possible amendment, which neither side necessarily wants," says Scott Cammarn, special counsel at Cadwalader, Wickersham & Taft in Charlotte.

Section 716 prohibits any swaps entity from receiving federal support, including access to the Federal Reserve's discount window and guarantees from the Federal Deposit Insurance Corporation (FDIC) - forcing swap dealers to move parts of their derivatives business into separate entities.

There are many more steps to be taken, and there is not a lot of appetite in the Senate to start meddling with Dodd-Frank. There is a fear that if Dodd-Frank is reopened all manner of things could be changed and amended

There are broad exceptions to the push out. Banks are still allowed to use derivatives to hedge, and can act as market-makers on swaps referencing interest rates, foreign exchange, gold or silver, as well as credit default swaps that are cleared through a central counterparty. But they will need to push commodity derivatives, equity derivatives and uncleared credit derivatives into separate affiliates if they want to qualify for federal support.

Speaking to Risk in September, Daniel Pinto, JP Morgan's chief executive for Europe, the Middle East and Africa, said hybrid transactions that involve businesses on each side of the divide may also have to be pushed out. Meanwhile, most foreign banks will not qualify for the exemption at all, as they do not operate insured depository institutions in the US - an oversight Congress admitted soon after the bill had passed, but one that has yet to be fixed.

The attempt to repeal section 716 was marked up along with two other bills that aim to amend provisions in Dodd-Frank: the Swap Execution Facility (Sef) Clarification Act, and a bill to exempt inter-affiliate trades from Sef trading and central clearing requirements.

The Sef Clarification Act would prevent the Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC) from limiting the types of trading available on these new derivatives platforms, and would also stop the CFTC forcing Sef users to request a minimum of five quotes on each trade.

The inter-affiliate bill would exempt transactions between parties under common control from the swap definition, meaning inter-affiliate trades would not be subject to central clearing, Sef trading and bilateral margining - requirements dealers claim would make inter-affiliate trades expensive, if not impossible. The trades will, however, have to be reported to a trade repository.