FDIC Final Rule: Enforcement of Subsidiary and Affiliate Contracts by the FDIC as Receiver of a Covered Financial Company (Fed. Reg. Version)

The FDIC issued a final rule that implements a part of the Dodd-Frank 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.  As a condition to maintaining these subsidiary or affiliate contracts in full force and effect, the corporation as receiver must either:

  • 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
  • provide adequate protection to such contract counterparties.

The final rule sets forth the scope and effect of the authority granted under the Dodd-Frank Act, clarifies the conditions and requirements applicable to the receiver, addresses requirements for notice to certain affected counterparties, and defines key terms.

Effective Date: November 15, 2012.

Cross-Reference(s): Dodd-Frank Section 210 (Powers and duties of the Corporation).

Lofchie Comment:  Firms with financial exposure to covered financial companies and their affiliates should consider how such rulemaking affects their ability to close out contracts in the event of a counterparty default.  In this regard, firms may wish to review their current contracts; for example, a right to demand margin that is based upon the financial condition of a covered financial company may now be prohibited.

 

View rule release here: 77 FR 63205.