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U.S. Swaps “push-out” pushed out

The Consolidated and Further Continuing Appropriations Act of 2015 (the “Cromnibus” Bill) was signed by President Obama yesterday, narrowly avoiding another Government shutdown. The 1,600 page final text did not include a wide range of mooted financial reforms and exemptions. However, it does amend Section 716 of Dodd-Frank, variously known as the “push-out” or “Lincoln” rule. Section 716 required FDIC-insured banks to remove commodity (excluding gold), equity and non-cleared CDS derivatives to a non-federally insured legally separate subsidiary. The amendment confines the rule’s application to asset-backed securities that are not eligible for hedging exemptions.

There has been widespread comment that the amendment is yet another example of financial sector omnipotence, displaying its ability to rewrite or dispense with inconvenient regulation. This view is, at best, misplaced. The Lincoln Rule was itself a last-minute addition to Dodd-Frank, the price for Senator Blanche Lincoln’s vote, in her mistaken belief that the provision’s popularity may allow her to retain her job. In its original wider form, the Rule was of such limited application as to have negligible systemic impact- commodity derivatives represent a small fraction of the overall market. Even against the background of potential fallout arising from the ongoing oil-price plunge, the exclusion of commodity and equity derivatives from FDIC cover was certainly anomalous and arguably pointless.

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