On March 20, the Federal Deposit Insurance Corporation (FDIC) proposed a rule (Proposed Rule), with request for comments, that implements section 210(c)(16) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act or the Act) , which permits the FDIC, as receiver for a financial company whose failure would pose a significant risk to the financial stability of the United States (a covered financial company), to enforce contracts of subsidiaries or affiliates of the covered financial company despite contract clauses that purport to terminate, accelerate, or provide for other remedies based on the insolvency, financial condition or receivership of the covered financial company.
The Proposed Rule makes clear that the effect of this enforcement authority is that no party may exercise any remedy under a contract simply as a result of the appointment of the receiver and the exercise of its orderly liquidation authorities as long as the receiver complies with the statutory requirements. "As a condition to maintaining these subsidiary contracts in full force and effect, the Corporation as receiver must either: (1) transfer any supporting obligations of the covered financial company that back the obligations of the subsidiary or affiliate under the contract (along with all assets and liabilities that relate to those supporting obligations) to a bridge financial company or qualified third-party transferee by the statutory one-business-day deadline; or (ii) provide adequate protection to such contract counterparties. The conditions contained in (i) and (ii) of the quoted statute were included to assure counterparties that any contractual right to guarantees or other support, including claims on collateral or other related assets, would be protected." The FDIC stated that "[a]lthough the statute speaks in terms of the power to enforce a contract to which the receiver is not a party, the Proposed Rule would recognize the practical effect of the intent of this authority, which is that the counterparty to such a contract may not exercise remedies in connection with a specified financial condition clause if the statutory conditions are met. No action is required of the receiver to enforce a linked contract; the Proposed Rule would make clear that the contract would remain in full force and effect unless the receiver failed to meet the requirements with respect to any supporting obligations of the covered financial company."
The Proposed Rule also would clarify the meaning of the statutory provision regarding a contractual obligation that is "guaranteed or otherwise supported by" the covered financial company. Support includes guarantees that may or may not be collateralized, netting arrangements and other examples of financial support of the obligations of the subsidiary or affiliate under the contract. "In circumstances where a contract of a subsidiary or affiliate is linked to the financial condition of the parent company via a ‘specified financial condition clause,’ but where the obligations of the subsidiary or affiliate are not ‘supported by’ the covered financial company through guarantees or similar supporting obligations, the requirement to transfer support and related assets or provide adequate protection does not apply. The mere existence of a ‘specified financial condition clause’ does not constitute a ‘support’ obligation by the covered financial company, and the Proposed Rule would make it clear that the subsidiary contract remains enforceable without any requirement to effectively create new support where none originally existed." The Proposed Rule similarly apples broadly to all contracts, and not solely to qualified financial contracts. "For example, a real estate lease or a credit agreement, neither of which would typically be classified as a qualified financial contract, would be subject to enforcement under section 210(c)(16) and the Proposed Rule notwithstanding a specified financial condition clause that might, for instance, give a lessor the right to terminate a lease based upon a change in financial condition of the parent of the lessee. A swap agreement of a subsidiary or affiliate would be subject to the section 21O(c)(16) and the Proposed Rule in the same manner if the agreement contains specified financial condition clause.”
The Proposed Rule would not affect other provisions of the Dodd-Frank Act governing qualified financial contracts, such as sections 21O(c)(8) ("Certain Qualified Financial Contracts") and 210(c)(9) ("Transfer of Qualified Financial Contracts"). "For example, where a covered financial company’s support of a subsidiary or affiliate obligation would itself be considered a qualified financial contract, such as a securities contract, the provisions of section 210(c)(9) that prohibit the selective transfer of qualified financial contracts with a common counterparty (or a group of affiliated counterparties) would continue to apply." Comments are due 60 days after publication in the Federal Register.
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