HR 992 modifies Section 716 of the Dodd-Frank Act to add numerous additional exemptions to the section’s ban on Federal government bailouts of large derivatives dealers.
What Does Section 716 Do?
The key effect of Section 716 as currently written is that it would force many types of swaps dealing activities to be removed from insured depository institutions and placed into a separately capitalized subsidiary. This is because Section 716 prohibits public (taxpayer) support for derivatives dealing, and insured depository institutions are automatically eligible for substantial public support. This support includes access to the Federal Reserve discount window as well as FDIC deposit insurance.
Section 716 already contains exemptions to the broad ban on public support that permit dealing in interest rate swaps and foreign exchange swaps to remain within the depository institution. Any derivatives needed to hedge actual banking activities may also remain within the depository institution. However, dealing in more exotic swaps – including equity swaps, many commodity swaps, and all customized credit default swaps -- would have to be conducted in a separate subsidiary completely supported by private capital and not eligible for the public support given to depository institutions.
How Exactly Does HR 992 Modify Section 716?
The exemptions added by HR 992 would allow almost all of the forms of swaps dealing ‘pushed out’ of the depository institution by Section 716 to instead remain in the depository institution. These swaps dealing activities would once again be supported by the public safety net, including Federal Reserve and deposit insurance support. This reverses most of the effect of Section 716.
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