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Mon 1 to Wed 31 Jul 2013

US swaps push-out rule takes effect

The "swaps push-out" rule mandated by Title VII of the Dodd–Frank Wall Street Reform and Consumer Protection Act 2010 is scheduled to take effect this month.

Swaps are a type of derivatives contract, in which at least two counterparties exchange the cashflows associated with a financial asset they own. Originally, the aim of the contracts was to lower financial risks, but nowadays the swaps trade has become very large, because it not only allows traders to reduce interest costs or lower financial risks for capital assets they hold, but also to obtain speculative capital gains and to avoid tax liability.

Lawmakers now believe that dodgy swap agreements contributed to the financial crisis of 2008/2009. They therefore require greater supervision and oversight of the swaps trade. Thus, the new regulations require many types of swaps to be settled via clearing-house intermediaries using collateral deposits, the separate institutional treatment of high-risk speculative swaps, and a "push out" of the riskiest contracts which will not eligible for government backstop insurance.

US financial institutions have strongly opposed the new regulatory framework, arguing that it increases the cost of capital, merely displaces financial risks from A to B, and restricts the ability of investors to hedge risks. Banks and finance companies can apply for further postponement of compliance with the new rules.

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