The Dodd-Frank Act makes several changes to §§ 23A and 23B, the provisions of the Federal Reserve Act that restrict transactions between depository institutions and their affiliates. Most significantly, the changes to §§ 23A and 23B (collectively, the amendment) for the first time restrict depository institutions’ ability to enter into derivative transactions with their affiliates, to the extent that the transactions cause depository institutions to have credit exposure to their affiliates.
Depository institutions and their affiliates regularly use derivatives to manage risk, and some adjustments to these practices will no doubt be required. However, the full impact of the restriction on interaffiliate derivatives will not be known until we have more guidance in two areas: How will a depository institution’s credit exposure to an affiliate be measured in the context of a derivative transaction? And will the banking regulators be willing to use their exemptive powers to permit those interaffiliate derivatives that are effective risk-management tools?
