Swaps Pushout Rule: Federal Reserve Banks Revise Discount Window Documentation

Effective July 16, 2013, the Federal Reserve Banks’ Operating Circular No. 10 (“OC-10”) has been amended to include a new appendix entitledProhibition Against Federal Assistance to Any Swaps Entity (“Appendix 6”).  Appendix 6 is intended to ensure that the Federal Reserve Banks comply with the requirements of Section 716 of the Dodd-Frank Act (“Swaps Pushout Rule”) when making discount window advances under OC-10.  OC-10 sets forth the terms and conditions under which an entity may obtain advances from, incur obligations to, or pledge collateral to a Federal Reserve Bank.

The Swaps Pushout Rule prohibits any “federal assistance” from being provided to “swaps entities,” which include registered swap dealers, security-based swap dealers, major swap participants and major security-based swap participants.  Any registered major swap participant or major security-based swap participant that is an insured depository institution is excluded from the definition of swaps entity.  Consequently, a bank that registers as a swap dealer will not be eligible for access to a Federal Reserve Bank’s discount window unless the bank “pushes out” its swaps activities to non-bank affiliates that are not eligible for deposit insurance or access to the discount window, or ceases to engage in such swaps activities altogether, subject to any applicable exemption, transition period or grandfathering provision.

Under Appendix 6, each time a borrower wishes to access a Federal Reserve Bank’s discount window under OC-10, the borrower must be, and is deemed to represent that it is, either (1) not a swaps entity or (2) a swaps entity that is eligible to receive the advance pursuant to one or more exemption, transition period, grandfathering or other provisions of the Swaps Pushout Rule.  Appendix 6 also requires borrowers to promptly notify the appropriate Federal Reserve Bank if any representation contained in Appendix 6 becomes untrue or inaccurate while an advance remains outstanding.  In addition, an event of default occurs under OC-10 if a borrower fails to comply with a requirement of Appendix 6 or if any representation or warranty contained in it is inaccurate on the date it is deemed to be made or on any date on which an advance remains outstanding.  Appendix 6 also provides that any pledge of collateral, request for an advance or incurrence of any other obligation under OC-10 constitutes an entity’s agreement to the new terms in it.

Consistent with the Federal Reserve Board’s interim final rule clarifying that uninsured U.S. branches and agencies of foreign banks are treated as insured depository institutions for purposes of the Swaps Pushout Rule, a branch or agency of a foreign bank, rather than the foreign bank itself, will be treated as the borrower for purposes of the representations in Appendix 6.  This clarification in Appendix 6 reflects the separate entity doctrine in the Swaps Pushout Rule context.  Applying the separate entity doctrine, U.S. federal and state courts and banking agencies have treated branches of foreign banks as legally separate entities that are separate from the foreign bank as a whole and separate from each other branch for purposes of many U.S. banking and non-banking laws and regulations. Read Davis Polk’s memorandum on the Federal Reserve Board’s interim final rule under the Swaps Pushout Rule.

Appendix 6 acts as an amendment to all existing OC-10 agreements and takes effect automatically.  Borrowers are not required to execute and return any documents to evidence their acceptance of Appendix 6, which will also form a part of all OC-10 agreements entered into by borrowers in the future.

The full memo, published by Davis Polk & Wardwell LLP on July 15, 2013, can be found here.