Banks, including some of the nation's largest, can have an extra two years—and possibly even a third—to prepare for new restrictions that kick in this summer if they are designated as swap dealers.

Section 716 of the Dodd-Frank Act requires federal depository institutions deemed to be "swap entities," to “push out” nonconforming activities into a separate entity that is prohibited from receiving taxpayer-funded assistance. The Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, and Federal Deposit Insurance Corporation jointly issued guidance that section 716's effective date is July 16, 2013.

A notice issued Thursday afternoon by the OCC informed institutions that are, or may become, swap dealers that it will consider requests for a transition period. The guidance has been submitted to the Federal Register for publication and is effective immediately. Written requests must be submitted by January 31.

Section 716(f) allows federal banking agencies to allow such a transition period to divest or cease nonconforming swap activities; the ban on federal assistance does not apply during this time. The transition period, which begins on the effective date, can initially be up to 24 months, if agreed upon after a consultation between the bank's supervisory authority, the Commodity Futures Trading Commission, and the Securities and Exchange Commission. The conformance timeline can also be extended by an additional year if these agencies later decide it is necessary.

The OCC notice explains that factors that will influence the approved length of a transition period include the potential impact of divesting or ceasing nonconforming swap activities on an institution's mortgage lending, small business lending, job creation, and capital formation when compared to the potential negative impact on insured depositors and the FDIC's Deposit Insurance Fund.

Among the reasons cited for granting transition periods is that section 716 assumes a regulatory framework that is not yet complete, and further development of the Title VII regulatory framework is necessary “to make well-informed determinations concerning business restructurings.” An approved delay  will also, ideally, mitigate operational and credit risks.

“The OCC believes that implementation of section 716 without transition periods would cause unwanted adverse consequences,” the notice says.

Requests for a transition period must be in writing and specify the duration being sought, up to two-years starting from July 16, 2013. Requests must discuss:

The institution's plan for conforming its swap activities

How the requested transition period would mitigate adverse effects on mortgage lending, small business lending, job creation, and capital formation

The extent to which the requested transition period could have a negative impact on the institution's insured depositors and the Deposit Insurance Fund

Operational risks and other safety and soundness concerns that a transition period would mitigate.

The OCC may also require banks to provide additional information before establishing a transition period.

An institution that is unsure if, or when, it will be or become a swaps entity may request a transition period. These requests must additionally explain why it believes it might be considered a swaps entity under the CFTC's definition of swap dealer or the SEC's definition of a security-based swap dealer.