On December 24, 2013, the Federal Reserve Board (FRB) issued a final rule that corrects a drafting oversight and clarifies that uninsured (non-IDI) US branches and agencies of non-US banks that are swap dealers (SDs) are to be treated as insured depository institutions (IDIs) and are therefore "swaps entities" for purposes of Section 716 of the Dodd-Frank Act, known as the swaps Pushout Rule. The Pushout Rule generally prohibits a swaps entity from receiving federal assistance, including access to the Fed discount window and deposit insurance (see Practice Note, US Derivatives Regulation: Swaps Pushout Rule). Swaps entities are essentially banks that are SDs and security-based SDs.

The final rule:

The final rule becomes effective on January 31, 2014. On that date, uninsured (non-IDI) US branches and agencies of non-US banks that are SDs are treated like and IDI and eligible to apply for the two-year transition period to comply with the Pushout Rule.

Many familiar with the Pushout Rule identified the treatment of US branches and affiliates of non-US banks as the main aspect of Section 716 that required further clarification. The omission of branches and affiliates of non-US banks from the Section 716(d) exemptions was thought to be a drafting oversight, which is confirmed by the release of this final rule.

Generally, for a number of bank regulatory purposes, US branches and affiliates of non-US banks are treated in the same way as US IDIs. They are permitted access to the Fed discount window and other Fed credit facilities constituting federal assistance under Section 716(b)(1) (15 U.S.C. § 8305(b)(1)). According to data released by the Fed in early December 2010, several European banks borrowed from Fed liquidity facilities during the financial crisis and would be expected to do so again in the event of a future liquidity crisis. Section 716(d), however, refers only to "insured depository institutions" which, taken literally, excludes uninsured US branches and affiliates of non-US banks from the exemptions (including extensions) contained in Section 716. Further, as discussed in the IFR, the structure, language and purpose of Section 716 create an ambiguity as to whether the term "insured depository institution" includes uninsured US branches and agencies of foreign banks for purposes of the various provisions of Section 716.

The term "insured depository institution" is not defined for purposes of Section 716. However, Section 2 of the Dodd-Frank Act provides that except as the context otherwise requires the definition of "insured depository institution" has the same meaning as in the Federal Deposit Insurance Act (FDIA). "Insured depository institution" is defined by section 3(c)(2) of the FDIA to mean a bank or savings association the deposits of which are insured by the FDIC, and, for some purposes under section 3(c)(3) of the FDIA, an uninsured US branch or agency of a foreign bank.

Regardless, under the IFR, uninsured US branches and affiliates of non-US swap-dealer banks had already been given access to the same initial (two year) Pushout Rule phase-in as US banks (to July 16, 2015) and were deemed eligible for the third-year extension.

Note that the Swaps Pushout Rule has been amended by federal legislation signed into law by President Obama in December 2014 and will now affect only a limited range of transactions (see Legal Update, Dodd-Frank Swaps Pushout Rule Substantially Repealed).