The Swaps Pushout Rule: Much Ado about the Wrong Thing?

Abstract

A notably bitter battle over financial reform in the wake of the crisis of 2008 has centered on a mandate that banks refrain from entering into certain “swaps,” or contracts in which parties promise to pay each other based on defined events such as a bond default. The prohibition, enacted as part of the Dodd-Frank Act, was popularly known as the Swaps Pushout Rule (the “Rule”). Bank holding companies could continue to transact in these instruments, but had to do so out of different legal entities, such as broker-dealers. Several of the largest financial institutions in the United States recently led a successful lobbying effort to roll back the Rule so that banks can continue to enter into the vast majority of these swaps. The Rule’s rollback has inspired intense criticism, but the critiques have not accurately reflected what is really at stake for the banks or the public. The rollback matters, but not for the reasons put forward by Senators or reported in the press. This Essay explains the practical impact of the Rule and its rollback, and argues that the appropriate focus should be on capital requirements rather than the legal entity in which the swaps are booked.

Keywords: swap, swaps, swaps pushout rule, financial regulation, banking law, Dodd-Frank, bank capital, net capital, derivatives, credit derivatives, single point of entry, bank resolution