Glitch in Swaps Regs May Penalize Foreign Banks

By Joe Adler

Industry representatives are praising a recent move by regulators to provide more time to comply with pending swap restrictions, but many said the fix highlights a lingering problem with the rules that will effectively penalize foreign banks operating in the U.S. Under the Dodd-Frank Act, banks must move swaps activities — excluding certain hedging deals — into affiliates without U.S. government support. Regulators had initially set a mid-July effective date, but the Office of the Comptroller of the Currency — as allowed by the financial reform law — said recently it will grant extensions of up to two years. Other regulators are expected to follow suit. But due to an apparent congressional error, branches of foreign banks that lack deposit insurance are disqualified from the extended phase-in, and must soon move hedging activities that their U.S. counterparts can keep. That has prompted calls either for an accommodation from the Federal Reserve Board, which oversees foreign banks’ U.S. activities, or a legislative fix. “Unless somebody can come up with Plan B or Congress can be persuaded to clean this mess up, it’s a real problem,” said Karen Shaw Petrou, a managing partner for Federal Financial Analytics Inc. Even Lincoln herself recognized the error, saying in July 2010 after the provision passed that in lawmakers’ “rush to complete” the final reform law, “there was a significant oversight made in finalizing” the amendment “as it relates to the treatment of uninsured U.S. branches and agencies of foreign banks.” “This oversight on our part is unfortunate and clearly unintended,” she said.