In the banking industry, the specific regulatory configuration for a banking institution generally depends on the type of charter the institution chooses. Depository institution charter types include commercial bank and thrift charters: Commercial banks originally focused on the banking needs of businesses but over time have broadened their services. Thrifts include savings banks, savings associations, and savings and loans and were originally created to serve the needs—particularly the mortgage needs—of those not served by commercial banks. Charters may be obtained at the state or federal level. State regulators charter institutions and participate in the institutions’ oversight, but all institutions that have federal deposit insurance have a federal prudential regulator. The federal prudential regulators—which generally may issue regulations, conduct supervision, and take enforcement actions against industry participants within their jurisdiction—are OCC, Federal Reserve, and FDIC, and their basic functions are summarized in table 1. Additionally, FDIC insures deposits in banks and thrifts. Large banking organizations in the United States generally are organized as bank holding companies (BHC), which are companies that can control, among other entities, one or more banks. Typically, a large U.S. parent (or top tier) BHC owns a number of domestic depository institutions that also engage in lending and other activities. A BHC also may own nonbanking and foreign entities that engage in a broader range of business activities, which may include securities dealing and underwriting, insurance, real estate, leasing and trust services, or asset management. A BHC’s nonbank subsidiaries are affiliates of the BHC’s bank subsidiaries. Some large U.S. BHCs have thousands of subsidiaries. The Bank Holding Company Act of 1956, as amended, contains a comprehensive federal framework for the supervision and regulation of BHCs and their nonbank subsidiaries. Generally, any company that seeks to acquire control of an insured bank or BHC shall apply for approval as a BHC with the Federal Reserve. Under the Bank Holding Company Act, BHCs are subject to, among other things, consolidated supervision by the Federal Reserve. Further, the act restricts the activities of the BHC and its affiliates to those that are closely related to banking or, for qualified financial holding companies, activities that are financial in nature. In general, swaps and security-based swaps (collectively referred to as swaps in this report, unless otherwise noted) are types of derivative contracts that involve ongoing exchanges of payments for a specified period. Swaps and other derivatives have one or more “underlyings” (i.e., specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, or other variable) and one or more notional amounts (i.e., number of currency units, shares, bushels, pounds, or other units specified in the contract) that help determine the amount of the payments. For example, an end-user seeking to hedge its interest rate risk may enter into an interest rate swap with a dealer to exchange fixed-rate interest payments of 5 percent of $10 million for floating interest payments based on the 3-month London Interbank Offered Rate. Under the terms of the swap, the dealer agrees to make quarterly payments of 5 percent multiplied by $10 million to the end-user, and the end-user agrees to make quarterly payments of the 3-month London Interbank Offered Rate multiplied by $10 million. The notional value of this contract would be $10 million because that is the specified value on which exchanged interest payments are based. Swaps and other derivatives volumes generally are measured by their notional amounts. For example, the notional amount of derivative contracts held by insured U.S. commercial banks and savings associations increased from around $17 trillion in 1995 to around $165 trillion in 2016. However, notional amounts generally do not represent amounts at risk. Financial and nonfinancial firms use swaps and other derivatives to hedge risk, to speculate, or for other purposes, such as to reduce uncertainty. For example, an airline may enter into a commodity swap to lock in its fuel price over a certain time horizon, so that it can better manage its costs. Banks and other end-users that are exposed to maturity, currency, or interest rate mismatches between assets and liabilities may enter into swaps to hedge their exposure. Speculators may enter into equity derivatives to speculate on the direction of equity markets in order to make a profit, understanding that the profit or loss from the swap can be large in comparison to the cost of entering the swap. Unlike futures contracts, which are standardized financial contracts that are traded on exchanges, swaps traditionally have been privately negotiated between two counterparties in the OTC market. Types of swaps include the following: Interest rate swaps are contracts in which two parties agree to exchange interest cash flows or one or more notional principal amounts at certain times in the future according to an agreed-on formula. Banks, corporations, sovereigns, and other institutions use swaps to manage their interest-rate risks or speculate on interest-rate movements. Foreign exchange swaps are simultaneous purchases and sales of a certain amount of foreign currency for two different value dates. Corporations use such swaps to hedge their assets and liabilities incurred as a result of their overseas operations. Investors (e.g., international mutual funds) use such swaps to gain exposure to markets or to hedge currency risk. Commodity swaps are agreements between two counterparties to make periodic exchanges of cash based on notional quantity of a specified commodity or related index. The term “commodity” encompasses agricultural products, base metals, and energy products. Market participants include commodity producers and users, hedge funds, and mutual funds. Equity swaps are transactions in which payments referenced to the return on a certain equity index (e.g., S&P 500) or an equity and an interest rate are exchanged and are usually based on a fixed notional amount. End- users of equity swaps include money managers, hedge funds, insurance companies, corporations, and finance companies. A credit default swap is a contract between a seller and buyer of protection against the risk of default on a debt obligation issued by a reference entity and serves as an insurance policy that protects the buyer against the loss on the debt obligation in case of a default by the debt issuer (i.e., reference entity). The protection buyer makes periodic payments over the contract’s life, and the premium is a percentage of the contract’s notional value. If a credit event occurs (e.g., bankruptcy), the premium payment stops, and the protection seller pays the buyer the notional amount or agreed-to default payment. The debt obligation can include a loan, a bond, an asset-backed security, or a credit index. For example, an insurer that has invested in bonds issued by a company may go to a bank swap dealer to buy protection against the risk of the company defaulting on its bonds. In general, credit default swaps are between institutional investors and dealers. For most OTC derivative transactions, a dealer is one of the two counterparties to the contract. The 102 entities provisionally registered with CFTC as swap dealers (as of April 2017) include U.S. and foreign banks, securities broker-dealers, and futures commission merchants. Some BHCs own two or more swap dealers. Dealers often trade with other dealers, such as to hedge, or offset, risk from their OTC derivatives trades with their client firms or other risks. Section 716 prohibits the provision of federal assistance to banks that engage in certain swap activities but allows them to move, or “push out,” such activities to nonbank affiliates of the bank. As such, a BHC can continue to engage in those swaps through its nonbank subsidiaries. Section 716 of the Dodd-Frank Act does not directly prohibit a bank from engaging in swap activities. Rather, it provides that no federal assistance be provided to any “swaps entity” unless the entity restricts its swap activities to those permitted under the provision. The term “federal assistance” is defined as the use of any advances from any Federal Reserve credit facility or discount window that is not part of a program or facility with broad-based eligibility under section 13(3)(A) of the Federal Reserve Act, FDIC insurance or guarantees for the purpose of (A) making any loan to, or purchasing any stock , equity interest, or debt obligation of any swaps entity; (B) purchasing the assets of any swaps entity; (C) guaranteeing any loan or debt issuance of any swaps entity; or (D) entering into any assistance arrangement (including tax breaks), loss sharing, or profit sharing with any swaps entity. Covered depository institutions, including insured depository institutions, are included within the definition of a swaps entity only if they are registered swap dealers or security-based swap dealers. Because banks do not want to jeopardize their access to federal assistance, section 716 effectively prohibits bank swap dealers from engaging in swap activity unless they restrict that activity to swaps permitted under the provision. The original section 716 covered several types of swap activities: (1) swaps involving rates or reference assets permissible for investment by a national bank, (2) credit default swaps that are cleared by a derivatives clearing organization or a clearing agency, and (3) swaps transactions used for hedging or other similar risk-mitigating activities directly related to the bank’s activities. Consequently, the original section 716 generally prohibited the provision of federal assistance to bank swap dealers that engaged in swap activity involving most equity swaps, commodity swaps referencing physical commodities (except for precious metals), and noncleared credit default swaps, unless the swaps were used for hedging or mitigating bank risk.