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Reversal of Dodd-Frank swaps rule ignores lessons from financial crisis, ‘London whale’ 

December 19, 2014
Henry Engler, Reuters

The decision by U.S. Congress last week reverse the so-called swaps ”pushout” rule for certain derivatives contacts will put a greater responsibility on regulators to demonstrate they have effective oversight over bank activities of the sort that played a role in the 2008 financial crisis and ‘London whale’ trading debacle.

Specifically, certain un-cleared credit default swaps comprised most of the contracts that were included in the push-out rule, or Section 716 of the Dodd-Frank Act. The rule requires banks that wished engaged in this activity to place them in separate affiliates with higher capital requirements. As such, they would not be funded through the deposit gathering activities of banks, seen as an important lesson from the financial crisis. 

“It is illogical to repeal the 716 push out requirement,” Federal Deposit Insurance Corporation vice chairman Thomas Hoenig, a former Federal Reserve Bank regional president, said last week. ”The main items that must be pushed out under 716 are uncleared credit default swaps (CDS), equity derivatives and commodities derivatives. These are, in relative terms, much smaller and where the greater risks and capital subsidy is most useful to these banking firms,” he said.

Read more: Reuters

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