This morning, the FDIC adopted the attached final rule regarding the “Enforcement of Subsidiary and Affiliate Contracts by the FDIC as Receiver of a Covered Financial Company” (the “Final Rule”). The Final Rule is substantially similar to the rule that the FDIC proposed in March of this year (see the attached alert memorandum describing the proposed rule).
Under the Final Rule:
·
All cross-defaults in
contracts of subsidiaries or affiliates of the entity in resolution (the
“covered financial company” or “CFC”) that are triggered by the
insolvency or resolution of the CFC are made unenforceable.
o For example, if an ISDA
Master Agreement with a subsidiary of the CFC identifies the CFC as a
“Specified Entity”, the counterparty would not be able to close out based
on a “Bankruptcy” Event of Default under Section 5(a)(vii) with respect to
the CFC.
·
If such contracts are
guaranteed or otherwise supported by the CFC, the FDIC must do either of
the following within one business day after the FDIC’s appointment as
receiver of the CFC in order to enforce the contracts:
o Transfer the guarantee
or other support to a bridge financial company or other “qualified
transferee”; or
o Otherwise provide
“adequate protection”.
·
Counterparties to
enforced contracts would not be able to call for additional margin based
on any of the actions described above or other actions taken by the FDIC
to resolve the CFC.
Later this week, we will publish a full alert memorandum summarizing the Final Rule and the issues that it raises for creditors. In the meantime, if you have any questions about the Final Rule, feel free to contact any of your regular contacts at the firm or any of our partners or counsels listed under “Banking and Financial Institutions” or “Bankruptcy and Restructuring” in the “Practices” section of our website (http://www.cgsh.com).