U.S. central bank reviews foreign banks derivatives deal

January 10, 2013 by · Leave a Comment
Filed under: Credit News 

This is interesting.  According to the article, with the Dodd-Frank regulation put through in 2010, it looks like the new rules now gives restrictions on U.S. banks that have access to the Federal Reserve discount window, in contrast, foreign banks that have U.S. branches do not get access to the discount window but “can” trade in derivatives.

This creates the issue on banking preference depending on your country of origin.  I do agree that banks that take part in derivatives trading, should not have access to u.s backstops reserved for deposit taking commercial banks.

CNBC (Financial Times) – The U.S. Federal Reserve is weighing a plan that would allow big foreign banks to avoid costly regulatory changes that were meant to prevent derivatives trading from being subsidized by U.S. taxpayers.

The changes arise from a measure known in the financial industry as the Lincoln amendment, named for Blanche Lincoln, former U.S. senator. It was included in the 2010 overhaul of U.S. regulation known as Dodd-Frank.

Her amendment in effect prohibits banks that have access to U.S. government-provided deposit insurance or Fed credit facilities from acting as derivatives dealers, on the basis that the taxpayer-provided safety net may subsidize such activities. There are some exceptions.

However, when the provision was drafted, lawmakers did not extend the exceptions to U.S. branches of foreign banks that do not have access to deposit insurance. Most foreign banks’ U.S. branches lack it.

Though U.S. financial groups will continue to be allowed to trade instruments such as interest rate swaps out of their banks, foreign banks’ U.S. branches will be forced to move all of their derivatives activities to affiliates outside the bank.

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