According to Bloomberg, the Federal Reserve has completed a new rule based on a Dodd-Frank Act requirement known as the push out rule, which will force banks to fence off foreign derivatives trades from US branches.
The push out rule, which hasn’t been changed since its initial drafting in back in June, will go into effect on January 31st. For the time being, uninsured foreign branches of US banks will be treated as though they have government backing—including deposit insurance.
Though the rule is supposed to go into effect on the 31st, many banks have already asked for and received grace periods of up to two years to comply.
In an attempt to make the market safer after derivative trading was linked to the financial crises of 2008, the push out rule has been designed to alleviate pressure from the US government in the event of another crisis by forcing foreign bank branches to separate certain equity, some commodity, and non-cleared credit derivatives from US branches.
With the push out rule coming into effect at the end of next month, banks will now have to either stop the affected swaps trading or move it to properly capitalized affiliates.