Under the gun because of a congressional deadline, the Federal Reserve by May 12 will introduce an interim rule that imposes new regulatory restraints on derivative transactions between banks and their non-bank affiliates, industry sources predicted last week. Normal procedure would be a proposed rule offered for a period of public comment. The concern in industry circles last week was whether the new interim rule would designate derivatives transactions with affiliates as "covered transactions." In that case, billions of dollars worth of derivative flows could be subject to transaction size limits and collateral requirements under Section 23A of the Federal Reserve Act.
"The Board is aware of its statutory deadline and anticipates meeting it," a Fed spokeswoman said. As to whether the central bank's action would take the form of an interim rule, the spokeswoman said that was not clear. The requirement to act by May 12 is imposed by the Gramm-Leach-Bliley Act.
The same deadline also applies to intraday overdrafts to affiliates. But there is skepticism in industry ranks that the Reserve Board will move as far in this area as it might with derivatives. To impose 23A limits on daylight overdrafts would entail banks monitoring affiliate transfers all of the time and it would prove impossible, sources said, to keep track of the money movements. By contrast, said a banking lawyer, "the staff for many years have looked at derivatives as something that should be subject to 23A."
There was hope, however, last week that the anticipated interim rule would take a different tack. Rather than making derivatives covered transactions, it could settle for specifying safety and soundness conditions that banks must observe in doing derivatives transactions with affiliates. GLBA says by May 12 the Fed must adopt a "final rule" to "address" such transactions. It therefore does not expressly mandate that derivatives or intradays must be covered transactions. Also, GLBA allows delay in implementation of the rule "for such period as the Board deems necessary."