Enforcement of Subsidiary and Affiliate Contracts by the FDIC as Receiver of a Covered Financial Company, 63205-63215 [2012-25315]

Agencies

• FEDERAL DEPOSIT INSURANCE CORPORATION

[Federal Register Volume 77, Number 200 (Tuesday, October 16, 2012)]
[Rules and Regulations]
[Pages 63205-63215]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-25315]


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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 380

 RIN 3064-AD94


Enforcement of Subsidiary and Affiliate Contracts by the FDIC as 
Receiver of a Covered Financial Company

AGENCY: Federal Deposit Insurance Corporation.

ACTION: Final rule.

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SUMMARY: The Federal Deposit Insurance Corporation (the ``FDIC'' or the 
``Corporation'') is issuing a final rule (``Final Rule'') that 
implements part of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (the ``Dodd-Frank Act'' or the ``Act''), which permits 
the Corporation, 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.

DATES: Effective November 15, 2012.

FOR FURTHER INFORMATION CONTACT: R. Penfield Starke, Assistant General 
Counsel, Legal Division (703) 562-2422; Elizabeth Falloon, Counsel, 
Legal Division (703) 562-6148; Phillip E. Sloan, Counsel, Legal 
Division (703) 562-6137); Charlton R. Templeton, Resolution Planning 
and Implementation Specialist, Office of Complex Financial Institutions 
(202-898-6774).

SUPPLEMENTARY INFORMATION: Title II of the Dodd-Frank Act provides for 
the appointment of the FDIC as receiver of a covered financial company 
that poses a systemic risk to the nation's economic stability and 
outlines the process for the orderly resolution of a covered financial 
company following the FDIC's appointment as receiver. Section 209, 
codified at 12 U.S.C. 5389, authorizes the FDIC, in consultation with 
the Financial Stability Oversight Council (``FSOC''), to prescribe 
rules and

[[Page 63206]]

regulations as the FDIC considers necessary or appropriate with respect 
to the rights, interests and priorities of creditors, counterparties, 
security entitlement holders or other persons with respect to any 
covered financial company and other matters necessary or appropriate to 
the implementation of the orderly liquidation authority established 
under Title II of the Act. Pursuant to the authority granted by section 
209, the FDIC is issuing the Final Rule.

I. Background

    Fundamental to the orderly liquidation of a covered financial 
company is the ability to continue key operations, transactions and 
services that will maximize the value of the firm's assets and 
operations and avoid a disorderly collapse in the marketplace. To 
facilitate this continuity of operations, the Dodd-Frank Act provides 
several tools to preserve the value of the covered financial company's 
assets and business lines, including the powers granted in section 
210(c)(16), codified at 12 U.S.C. 5390(c)(16) (``section 210(c)(16)'' 
or the ``Statute''). Specifically, section 210(c)(16) provides that the 
Corporation, as receiver for a covered financial company, has the power 
``to enforce contracts of subsidiaries or affiliates of the covered 
financial company, the obligations under which are guaranteed or 
otherwise supported by or linked to the covered financial company, 
notwithstanding any contractual right to cause the termination, 
liquidation, or acceleration of such contracts based solely on the 
insolvency, financial condition, or receivership of the covered 
financial company, if (i) such guaranty or other support and all 
related assets and liabilities are transferred to and assumed by a 
bridge financial company or a third party * * * or (ii) the 
Corporation, as receiver, otherwise provides adequate protection with 
respect to such obligations.''
    The conditions contained in (i) and (ii) of the quoted statute 
assure counterparties that any contractual right to guaranties or other 
support, including claims on collateral or other related assets, would 
be protected. Thus, section 210(c)(16) requires, as a condition to the 
authority to enforce subsidiary or affiliate contracts that are 
``linked to'' the financial condition of the covered financial company 
through a default provision, that the Corporation as receiver transfer 
any guaranty or other support provided by the specified covered 
financial company for the contractual obligations together with all 
related collateral to a bridge financial company or other qualified 
transferee within one business day after its appointment as receiver. 
In the alternative, if the receiver does not transfer the support and 
the related assets and liabilities, the receiver must provide 
``adequate protection'' with respect to any support or collateral not 
transferred in order to preserve its right to enforce the contract of 
the subsidiary or affiliate.
    In providing the orderly liquidation authority of Title II, the 
Dodd-Frank Act provides certain particular authorities with respect to 
subsidiaries and affiliates of the covered financial company. For 
instance, section 210(a)(1)(E) of the Dodd-Frank Act provides an 
expedited procedure to allow the Corporation to appoint itself as the 
receiver of certain subsidiaries of a covered financial company if the 
Corporation and the Secretary of the Treasury jointly determine that 
such subsidiary is in default or in danger of default and that such 
action would mitigate serious adverse effects on the financial 
stability of the United States and would facilitate the orderly 
liquidation of the covered financial company. That section further 
provides that upon such an appointment, the subsidiary would be treated 
as a covered financial company and the Corporation would be able to 
exercise the full range of special powers available to the receiver.
    In certain cases, however, the receiver for the covered financial 
company may find that the best course of action to maximize the value 
of the covered financial company and to mitigate systemic risk would be 
to avoid actions that place subsidiaries in danger of default or that 
necessitate complex interlocking receiverships. The affiliated legal 
entities that collectively comprise a complex financial institution 
typically share and provide intra-group funding, guaranties, 
administrative support, human resources and other operational and 
business functions. Some of these operations and activities may be 
critical to the day-to-day functions and overall operations of the 
group. In addition, certain significant subsidiaries of a covered 
financial company may be essential to core business lines or may 
conduct critical operations that, if discontinued, may threaten the 
stability of the financial markets. In these circumstances, orderly 
liquidation of a covered financial company may best be accomplished by 
establishing a single receivership of the parent holding company and 
transferring valuable operations and assets to a solvent bridge 
financial company, including the stock or other equity interests of 
some or all of the company's various subsidiaries. Accordingly, the 
Dodd-Frank Act provides the FDIC with the tools and flexibility to act 
effectively as receiver for the covered financial company at the 
holding company or parent level without placing solvent subsidiaries 
into receivership. This approach may be the best means of preserving 
value, minimizing the shock to the financial system, providing 
additional flexibility to mitigate cross-border resolution issues for 
global systemically-important financial companies and allowing for a 
more expeditious resolution of a covered financial company.
    Where such an approach is adopted, the powers granted to the 
receiver under section 210(c)(16) are essential to preservation of 
going-concern value of the subsidiaries for the benefit of the parent 
in receivership. Absent this statutory provision, counterparties to 
contracts of subsidiaries and affiliates could exercise contractual 
rights to terminate their agreements based upon the insolvency of the 
specified covered financial company. As a result, otherwise viable 
affiliates of the covered financial company could become insolvent, 
thereby inciting the collapse of interrelated companies and potentially 
amplifying ripple effects throughout the economy.
    As described in more detail below, the Final Rule clarifies the 
scope of the authority granted in section 210(c)(16) as well as 
conditions and requirements applicable to the receiver. The Final 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. The Final Rule addresses requirements for 
notice to affected counterparties and defines key terms. It also 
clarifies the term ``adequate protection'' in a manner consistent with 
its interpretation under the Bankruptcy Code.
    On March 27, 2012, the FDIC published a notice of proposed 
rulemaking (``NPR'') relating to the enforcement of subsidiary and 
affiliate contracts by the Corporation as receiver of a covered 
financial company under section 210(c)(16) (77 FR 18127, March 27, 
2012). The NPR, which included proposed rules (the ``Proposed Rule''), 
requested comments on all aspects of the Proposed Rule and included 
specific questions as to several aspects of the Proposed Rule. The 
comment period ended on May 29, 2012. The FDIC

[[Page 63207]]

considered all of the comments received in response to the NPR.
    In accordance with section 209 of the Act, the FDIC reviewed 
otherwise applicable insolvency law, including the Bankruptcy Code, and 
has harmonized the Final Rule with such laws where possible. Such 
harmonization includes the formulation of the definition of adequate 
protection, which is generally consistent with Bankruptcy Code 
precedent. Also consistent with Section 209 of the Act, the FDIC 
consulted with the FSOC in preparing the Final Rule.

II. Summary of Comments on the Proposed Rule

    The FDIC received six comments in response to the Proposed Rule. 
Two letters were from individuals and fully supported the Proposed 
Rule. The other four letters, of which two were submitted by insurance 
industry trade groups, one by an insurance underwriter and one jointly 
on behalf of three financial industry associations, proposed that 
various changes should be made to the Proposed Rule. The FDIC also held 
a follow-up teleconference at the request of one of the authors of the 
financial industry association letter.
    One of the areas of concern to commenters related to how the rule 
would be applied. The letter from the financial industry associations 
expressed concern that by defining ``specified financial condition 
clause'' to include provisions permitting a counterparty to exercise 
remedies based directly or indirectly upon a change in the financial 
condition or the insolvency of the covered financial company, the 
Proposed Rule could be construed to prohibit the exercise of remedies 
by reason of an actual default by a subsidiary or affiliate of the 
covered financial company. One example cited in the letter was a 
payment default by a subsidiary which relied on its parent for funds 
with which to make contractual payments to its counterparties. The 
letter stated that if the subsidiary were to default on a payment 
obligation because the parent covered financial company was no longer 
capable of providing it with necessary funds, it could be argued that 
the default arose as a result of a change in the financial condition or 
the insolvency of the covered financial company.
    This outcome is not intended by the Proposed Rule, and language has 
been added to the preamble to further clarify this point. Although the 
Final Rule prohibits the exercise of remedies based upon specified 
types of actions or circumstances relating to a covered financial 
company or one of its direct or indirect transferees, the Final Rule 
does not prohibit a termination or exercise of other remedies based 
upon a default under a contractual provision that relates solely to a 
breach or default by the subsidiary or affiliate. Thus, the rule would 
not affect a counterparty's rights if the subsidiary or affiliate fails 
to make a payment due a counterparty. Of course, if the subsidiary or 
affiliate were to be in default under its contract because the 
subsidiary or affiliate did not comply with a proscribed remedy for an 
asserted violation of an unenforceable specified financial condition 
clause, the Final Rule does not permit the counterparty to take action 
on the basis of that default. Thus, for example, if a contract of a 
subsidiary required that the subsidiary deliver additional collateral 
on account of the changed financial condition of the covered financial 
company, the counterparty's right to exercise that remedy would be 
prohibited by the Final Rule and, accordingly, the counterparty would 
not be permitted to terminate or accelerate the contract based on the 
non-delivery by the subsidiary of the additional collateral.
    The letter from the financial industry associations also requested 
that the Proposed Rule be revised to clarify that the contractual 
rights of a counterparty to demand performance from a subsidiary or 
affiliate of the covered financial company at any time and for any 
reason cannot be interfered with under section 210(c)(16), without 
inquiry ``whether demand is made as a result of the CFC's default.'' 
The FDIC agrees that the rule is only intended to restrict the ability 
of a counterparty to take action based on the insolvency, financial 
condition or receivership of the covered financial company. Thus, if 
contractual terms provide a counterparty with a right to require margin 
or repayment in full or other performance on demand, without any 
linkage to the covered financial company, the enforceability of the 
provision is not limited by the Final Rule. On the other hand, if a 
right to demand margin is premised on the existence of a condition that 
is financial in nature, such as the counterparty deeming itself 
insecure, and if the counterparty's demand is based upon the financial 
condition of the covered financial company, such demand would not be 
permitted by the Final Rule.
    The financial industry association letter objected to the 
provisions of the Proposed Rule that would prevent a margin call 
against a subsidiary or affiliate of a covered financial company based 
on a change in the rating of the covered financial company following 
the appointment of the receiver. The letter argued that prohibiting 
such margin calls ``goes beyond the statutory scope of section 
210(c)(16), which only permits the FDIC to override contractual 
provisions to `terminate, liquidate or accelerate.' '' This argument 
seems to be a very narrow reading of the scope of section 210(c)(16). 
As discussed in more detail under III. The Final Rule--Section-by-
section analysis below, a broader reading of the section is necessary 
to implement the intended effect of the Statute to limit the impact of 
changes in the financial condition of the covered financial company on 
contractual relationships of counterparties. Allowing unlimited margin 
calls would impede the orderly resolution of the covered financial 
company and may well have the same practical effect as the termination 
of the applicable subsidiary or affiliate contract.
    This letter also objected that under the Proposed Rule it appeared 
that margin levels would be frozen based on the rating of the covered 
financial company immediately before the receiver was appointed. The 
letter suggested that rights to margin under contracts supported by the 
covered financial company be based on the rating of the bridge 
financial company or other qualified transferee to which the support is 
transferred and that rights to margin on a contract of a subsidiary 
that is linked but not supported be based on the rating of the entity 
to which the direct or indirect ownership interests in such subsidiary 
have been transferred. This would not be consistent with section 
210(c)(16), which refers to actions based on the financial condition of 
the covered financial company. This statutory framework is conducive to 
the creation of a period of stability following the appointment of a 
receiver to allow for the orderly resolution of a covered financial 
company. Moreover, it is not unlikely that ratings are uncertain in 
times of economic uncertainty; it is also likely that a bridge 
financial company would be unrated. The protection provided by section 
210(c)(16) is particularly important with respect to remedies, such as 
margin calls, that if permitted to be asserted against a subsidiary or 
affiliate could impede the ability of the receiver to accomplish an 
orderly liquidation in a manner that minimizes the impact on the U.S. 
economy.
    Although the counterparty's ability to call for additional margin 
would be suspended until the end of the orderly liquidation process to 
the extent that

[[Page 63208]]

margin levels were based on the financial condition of the covered 
financial company, it should be noted that the Final Rule would not 
interfere with the operation of other contractual provisions that would 
result in changes in the level of collateral during the orderly 
liquidation process.
    The financial industry association letter also asserted that 
section 210(c)(16) requires that adequate protection be provided for 
counterparties to contracts that are linked to, but not supported or 
guaranteed by, the covered financial company. The FDIC does not find 
this position supported in the express language of the statute. The 
portion of section 210(c)(16) in question states that the FDIC as 
receiver shall have the power to enforce subsidiary or affiliate 
contracts, the obligations under which are guaranteed or otherwise 
supported or linked to the covered financial company, if ``(i) such 
guaranty or other support and all related assets and liabilities are 
transferred to and assumed by a bridge financial company or a third 
party * * * or (ii) the Corporation, as receiver, otherwise provides 
adequate protection with respect to such obligations.'' Since the 
initial clause refers only to guaranty and support, the most 
straightforward reading is that each of the two clauses refers only to 
guaranties and other support and not to mere linkages that are not 
supported. The clause clearly intends to provide two alternatives for 
the circumstances that are intended to be covered--(i) the transfer of 
the guaranty or other support or (ii) the granting of adequate 
protection. Clause (i) is clearly directed only at guaranties and other 
support. If clause (ii) were construed to apply to other linked 
contracts, clause (ii) would be the only option for such contracts and 
would not work consistently with clause (i).
    Moreover, the interpretation suggested by the commenter might serve 
to create a windfall for counterparties of subsidiaries or affiliates 
by requiring the creation of support when none originally existed. If, 
prior to the failure of the covered financial company, a linked 
contract were not supported by a guaranty or collateral provided by the 
covered financial company, the concept of adequate protection would not 
suggest a requirement for the creation of such support after the 
failure.
    One of the letters from the insurance industry commenters also 
addressed linked-but-not supported contracts and objected to the 
Proposed Rule treating such contracts as covered by the Proposed Rule. 
The text of section 210(c)(16) specifically refers to a category of 
agreements that are ``linked'' to the covered financial company, in 
addition to agreements which are guaranteed or otherwise supported by 
the covered financial company. Accordingly, it is quite clear that 
contracts that are linked but not guaranteed or supported are included 
as protected contracts under section 210(c)(16).
    This commenter also objected that the Proposed Rule exceeded the 
intended effect of section 210(c)(16) by providing the power to enforce 
subsidiary and affiliate contracts not only to the FDIC as receiver but 
also to transferees of the covered financial company, such as bridge 
financial companies and third party acquirers. While the FDIC does not 
view the provision in the Proposed Rule that would have granted such 
authority to a transferee as providing any significant powers that were 
not suggested by the text of section 210(c)(16), the extension of such 
authority to transferees is not necessary to achieve the purposes of 
section 210(c)(16) and has not been included in the Final Rule. As 
noted in III. The Final Rule--Section-by-section analysis below, such 
contracts remain enforceable by the applicable subsidiary or affiliate 
as well as by the FDIC as receiver.
    The financial industry association letter also expressed concern 
that setoff or netting rights in respect of qualified financial 
contracts could be impaired unless the Proposed Rule was revised to 
limit the scope of section 210(c)(16) by providing that qualified 
financial contracts of subsidiaries or affiliates of a covered 
financial company would be enforceable only to the extent that such 
enforcement does not impair setoff or netting rights with respect to 
other qualified financial contracts. The limitation sought by the 
commenter generally was not consistent with the Statute. Moreover, in 
the examples provided in the letter, the asserted practical limitation 
on setoff or netting rights would result from the counterparty deciding 
to close out contracts, a situation wholly within the control of the 
counterparty.
    The financial industry association letter also requested 
clarification of the terms ``adequate protection'' and ``indubitable 
equivalent.'' As discussed below, it is intended that these terms be 
interpreted consistently with their treatment under the Bankruptcy 
Code. The letter correctly observes that under the Bankruptcy Code 
these terms are applied in the context of secured obligations and that 
they are subject to varying treatment among different jurisdictions and 
cases. Nonetheless, there is sufficient guidance in this precedent to 
provide at least a comparable degree of certainty in application as is 
provided by the Bankruptcy Code. The fact that under the Final Rule 
these terms are also to be applied to unsecured obligations should not 
detract from the guidance provided by such precedent.
    The financial industry associations also requested that the option 
to provide cash payments as a form of adequate protection be clarified 
and that the difference between this option and option of providing a 
guaranty of the receiver be clarified. The option to provide cash 
payments was included for cases where a full guaranty by the receiver 
would provide a disproportionate benefit to a counterparty or where 
there might be other reasons why the FDIC might prefer the use of cash 
to a guaranty. Such a situation might arise, for example, where there 
was a limited guaranty in favor of the counterparty that was not 
transferred to a bridge financial company. Another situation would be 
where a portion of collateral supporting a counterparty obligation was 
not transferred. In each of these cases, there might be an increased 
risk of loss to the counterparty arising from such failure to transfer, 
but the loss might be limited in nature.
    The letter also stated that ``[w]hile we believe that the FDIC 
means for `adequate protection' to protect counterparties from any 
incremental loss sustained due to actions taken by the FDIC as receiver 
for a covered financial company, clarifying this view could help 
provide much-needed certainty with respect to the application of this 
term.'' As suggested above, this is not a correct reading of the Final 
Rule. With respect to contracts of subsidiaries and affiliates that the 
receiver desires to remain enforceable notwithstanding an applicable 
specified financial condition clause, adequate protection would be 
provided only to compensate for the increased risk of loss due to the 
non-transfer of all or any portion of the covered financial company's 
support for such contract or related assets and liabilities.
    This letter also requested that the FDIC provide a procedure for 
counterparties to challenge the FDIC's adequate protection 
determinations. Such special procedures would be inconsistent with the 
urgency of the FDIC's responsibility to act expeditiously and 
efficiently in resolving a covered financial company. The Act makes 
clear that the FDIC as receiver should not be subject to delays of the 
type that are inherent in the

[[Page 63209]]

bankruptcy process. For example, section 210(e) of the Act provides 
that no court may take any action to restrain or affect the exercise of 
powers or functions of the receiver.
    The letters from the insurance industry included certain comments 
that relate only to the insurance industry. One letter proposed that 
the Final Rule state that section 210(c)(16) will not be applied to 
enforce a contract of an affiliate or subsidiary of a covered financial 
company if the affiliate or subsidiary is an insurance company. The 
commenter argued that because the Act provides that an insurance 
company should be liquidated in accordance with state law, Congress 
intended that insurance company subsidiaries and affiliates of a 
covered financial company should not be subject to the orderly 
liquidation provisions of Title II. In fact, to the contrary, insurance 
companies are expressly included among financial companies that may, in 
the circumstances set forth in the Act, become covered financial 
companies.
    Two insurance industry letters urged that the Final Rule include a 
provision that excludes director's or officer's liability insurance 
contracts and depository and financial institution bonds from the scope 
of the Final Rule. Both letters cited section 210(c)(13) of the Act, 
which specifically exempts liability insurance contracts and financial 
institution bonds entered into by a covered financial company from that 
section's general invalidation of ipso facto provisions, but both 
letters also noted that the Proposed Rule was not intended to override 
section 210(c)(13). One of these letters cited the ``common practice of 
a parent financial institution including its affiliates or subsidiaries 
as insureds under its financial institution bond.'' The other letter 
argued that the Proposed Rule would override a ``key historical 
element'' of a director's or officer's liability insurance contract 
that allows an ``automatic run-off'' upon a change in control of the 
insured company. The FDIC agrees that if the bond or insurance contract 
is entered into with the covered financial company and not with the 
subsidiary or affiliate in question, pursuant to section 210(c)(13) the 
contract with the covered financial company would be terminable by the 
insurance company. Unlike the ipso facto provisions of the Act, 
however, section 210(c)(16) does not exempt director and officer 
liability policies. Rather, it applies to all contracts. Thus, if the 
obligations to the subsidiary or affiliate under the bond or insurance 
contract constitute a contract between the insurance company and the 
subsidiary or affiliate, such obligations would not be covered by the 
exception to the ipso facto provisions of section 210(c)(13) and the 
contract with the subsidiary or affiliate would not be terminable by 
the insurance company upon the appointment of the receiver for the 
covered financial company. This is particularly important because the 
subsidiaries and affiliates are expected to include companies which 
will continue to operate and will need to have the protection afforded 
by this insurance.
    One of the insurance industry letters also proposed that the 
definition of ``support'' be expanded to include support that is not 
financial in nature, such as an agreement by a covered financial 
company to provide specific performance of the obligations of a 
subsidiary or affiliate. The phrase ``guaranteed or otherwise 
supported'' in section 210(c)(16) strongly suggests that the reference 
to support is support that is financial in nature.
    Finally, this letter also objected to the provision in the Proposed 
Rule that permits notice of the transfer of support and related assets 
and liabilities or the provision of adequate protection to be made on a 
Web site. As noted in the NPR, section 210(c)(16) does not require that 
any notice be given. However, the FDIC recognizes that counterparties 
will need to know the status of their contracts and the Web site 
posting option is included in the Final Rule in acknowledgement of the 
public's growing reliance on internet communication as well as the 
prevalence of online commerce. The Final Rule permits such posting in 
order to provide a means for the giving of notice that is practical 
from the perspective of the receiver, which might otherwise be burdened 
with having to send many thousands of notices, as well as from the 
perspective of the parties to the applicable contracts with the 
subsidiaries and affiliates, which would ordinarily be expected to 
monitor public information relating to covered financial companies and 
their subsidiaries and affiliates. The FDIC believes that the notice 
provisions of the Final Rule are reasonably calculated to provide 
actual notice.

III. The Final Rule

Overview

    The Final Rule clarifies that the power of the Corporation as 
receiver to enforce contracts of subsidiaries and affiliates under 
Dodd-Frank Act section 210(c)(16) effectively preserves contractual 
relationships of subsidiaries and affiliates of the covered financial 
company during the orderly liquidation process. The Final Rule 
identifies certain contracts that are ``linked to'' the covered 
financial company within the meaning of the Statute, as well as 
contracts that also are ``supported by'' the covered financial company. 
Under the Statute, a contract is ``linked to'' a covered financial 
company if it contains a provision that provides a contractual right to 
``cause the termination, liquidation or acceleration of such contract 
based solely on the insolvency, financial condition, or receivership of 
the covered financial company.'' That type of provision, called a 
``specified financial condition clause'' in the Final Rule, is more 
fully defined in the Final Rule. Although the Statute speaks in terms 
of the power to enforce a contract to which the receiver is not a 
party, the Final Rule recognizes the practical effect 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 Final Rule makes clear 
that the contract will remain in full force and effect unless the 
receiver fails to meet the requirements with respect to any supporting 
obligations of the covered financial company.
    The Final Rule establishes that if the subsidiary's obligations 
under the linked contract are supported by the covered financial 
company through, for example, guaranties or the granting of collateral 
that supports the obligations, the Corporation as receiver must either 
(a) transfer such support (along with all related assets and 
liabilities) to a qualified transferee not later than 5:00 p.m. 
(eastern time) on the business day following the appointment of the 
receiver, or (b) provide ``adequate protection'' to contract 
counterparties following notice given to the counterparties in 
accordance with the guidelines set forth in the Final Rule by the one-
business-day deadline.
    The Final Rule also clarifies the meaning of the statutory 
provision regarding a contractual obligation that is ``guaranteed or 
otherwise supported by'' the covered financial company. Support 
includes guaranties that may or may not be collateralized 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

[[Page 63210]]

covered financial company through guaranties 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 Final 
Rule makes it clear that the subsidiary or affiliate contract remains 
enforceable without any requirement to effectively create new support 
where none originally existed. This is consistent with the effect of 
section 210(c)(13), providing that ipso facto clauses in contracts of 
the covered financial company are unenforceable, and section 210(c)(8) 
of the Dodd-Frank Act, providing that ``walkaway clauses'' in qualified 
financial contracts of the covered financial company are unenforceable. 
In the case of those types of contractual provisions, there is no 
specified entity required to provide support, hence the concept of 
alternate support or adequate protection is inapplicable. In the same 
way, under the Final Rule, the concept of adequate protection does not 
arise in the absence of supporting obligations by the specified entity.
    The Final Rule applies 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, is subject to enforcement under section 
210(c)(16) and the Final 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 is 
subject to section 210(c)(16) and the Final Rule in the same manner if 
the agreement contains specified financial condition clause.
    The Final Rule does not affect other provisions of the Dodd-Frank 
Act governing qualified financial contracts, such as sections 210(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) continue to 
apply. Likewise, the provisions in section 210(c)(10) of the Dodd-Frank 
Act applicable to counterparties of qualified financial contracts also 
continue to apply. On the other hand, if the covered financial 
company's support of a subsidiary or affiliate consists of multiple 
contracts that are not qualified financial contracts, the Corporation 
as receiver may transfer all or a portion of such group of contracts as 
long as it provides adequate protection for the supporting obligations 
that were not transferred. Similarly, the Corporation may transfer all 
or a portion of ``related assets and liabilities'' that are not 
qualified financial contracts if it provides adequate protection for 
the portion of the assets and liabilities that was retained by the 
Corporation as receiver.

Section-by-Section Analysis

    Paragraph (a) of the Final Rule states the general rule with 
respect to the authority granted under section 210(c)(16) of the Dodd-
Frank Act, i.e., that the contracts of a subsidiary or affiliate of a 
covered financial company are enforceable notwithstanding the existence 
of a ``specified financial condition clause'' that provides a 
counterparty with the right to terminate or exercise remedies based 
upon the financial condition of the parent or affiliate covered 
financial company, provided that the FDIC as receiver for the covered 
financial company transfers all support and related assets and 
liabilities that back the obligations of such subsidiary or affiliate. 
To the extent that the receiver fails to transfer all support and 
related assets and liabilities, it must provide adequate protection to 
such counterparty to preserve its right to enforce the contracts of the 
subsidiary. The effect of this ability to enforce the contract is 
intended to be broad enough to preclude the counterparties from 
terminating or exercising other remedies such as requiring additional 
collateral but is intended to be limited in scope solely to remedies 
arising out of a specified financial condition clause, not other 
contractual defaults by the subsidiary or affiliate. The ability either 
to transfer support or to provide adequate protection can be exercised 
in the alternative, or in combination. For example, if some, but not 
all collateral is transferred, appropriate adequate protection may be 
provided in lieu of the collateral not transferred.
    The deadline for the transfer of support is the same as the time 
limit applicable to the transfer of qualified financial contracts under 
section 210(c)(10) of the Dodd-Frank Act, i.e., by 5:00 p.m. (eastern 
time) on the next business day. Although the decision to provide 
adequate protection in lieu of transferring support must also be made 
and steps must be taken that are reasonably calculated to provide 
notice within a business day, the language of the Final Rule does not 
require that the adequate protection be fully in place by that next-day 
deadline. Although the failure to complete within a business day the 
necessary documentation or transactions should not be deemed to be a 
waiver of the right to enforce the contract, once the receiver has 
provided notice of its intent to transfer support or provide adequate 
protection, the counterparty would be entitled to the benefit of the 
support or adequate protection even if the need for access to such 
support or protection arises before the applicable documentation or 
transfer of collateral is fully completed.
    The Final Rule provides, as set forth in the Statute, that the 
Corporation as receiver has the authority to enforce linked contracts 
under section 210(c)(16) of the Dodd-Frank Act. Also, the subsidiary or 
affiliate continues to have the ability to enforce the terms of such 
contracts as well. In essence, the effect of such authority to enforce 
is substantively the same as a prohibition of the counterparty to 
assert a specified financial condition clause against the subsidiary or 
affiliate. Effectively, the Final Rule makes clear that the practical 
effect of the operation of section 210(c)(16) is similar to that of 
section 210(c)(13) (prohibiting counterparties from the exercise of 
certain rights arising out of ipso facto clauses) and section 
210(c)(8)(F) (prohibiting counterparties to qualified financial 
contracts from the exercise of certain rights arising out of walkaway 
clauses); i.e., that the counterparties are prohibited from exercising 
remedies under a specified financial condition clause if the statutory 
conditions are met.
    Section 210(c)(16) expressly states that the power to enforce 
contracts of a subsidiary in the circumstances described in the Statute 
is vested in ``[t]he Corporation, as receiver for a covered financial 
company or as receiver for a subsidiary of a covered financial company 
(including an insured depository institution).'' This is captured in 
section 380.12(a)(3) of the Final Rule. This recognizes that the 
preservation of value through the enforcement of subsidiary and 
affiliate contracts is important to all of the interconnected entities 
that are related to the entity in receivership. The effect of the 
Statute is to prohibit the counterparty from terminating or exercising 
remedies based solely on the financial condition of the covered

[[Page 63211]]

financial company. Once the essential link to the covered financial 
company is established via the specified financial condition clause, 
the contract is enforceable by the receiver and by the subsidiary or 
affiliate that is the direct party-in-interest to the contract.

Definitions

    Section 380.1 is revised in the Final Rule because four terms have 
been added to it. These terms--``subsidiary,'' ``affiliate,'' 
``control'' and ``business day''--are used in the Final Rule but have 
been included as defined terms under section 380.1 because they are, or 
may be, used on more than one occasion in part 380. One of these 
terms--``business day''--was not included in the Proposed Rule but is 
defined in Title II of the Act. The other terms were included in the 
Definitions section of the Proposed Rule.
    The Final Rule includes six definitions in its Definitions section: 
``linked,'' ``specified financial condition clause,'' ``support,'' 
``related assets and liabilities,'' ``qualified transferee'' and 
``successor'' that relate specifically to the matters discussed in the 
Final Rule and therefore are not included in section 380.1 among 
definitions of general applicability to Part 380.
    A contract is ``linked'' to a covered financial company if it 
contains a specified financial condition clause naming the covered 
financial company as the specified company.
    The term ``specified financial condition clause'' is intended to 
broadly capture any provision that gives any counterparty a right to 
terminate, accelerate or exercise default rights or remedies as a 
result of any action or circumstance that results in or arises out of 
the exercise of the orderly liquidation authority. Each aspect of the 
definition of the term ``specified financial condition clause'' should 
be read expansively so that counterparties are effectively stayed from 
exercising rights under such a clause to terminate contracts or 
exercise other remedies during a Title II resolution process if the 
requirements of the Statute are met. Thus, a specified financial 
condition clause includes any clause that might be interpreted as 
giving rise to a termination right or other remedy due to the 
insolvency of the specified covered financial company that might have 
precipitated the appointment of the receiver, such as an act of 
insolvency or a downgrade in a rating from a rating agency. Likewise, 
as indicated in the NPR, the definition is broad enough to include a 
change in control provision that creates termination rights or other 
remedies upon the appointment of the FDIC as receiver or other change 
in control, such as the transfer of stock in the subsidiary to the 
bridge financial company or the sale, conversion or merger of the 
bridge financial company or its assets or the issuance of interests in 
the bridge financial company or its successor to creditors of the 
covered financial company in satisfaction of their claims. As stated in 
the NPR, the intent is to allow the subsidiary or affiliate contract to 
remain in effect despite the exercise of any or all of the authorities 
granted to the FDIC as receiver for a covered financial company 
throughout the orderly liquidation process.
    Although the language of the Statute refers to the counterparty's 
rights as ``termination, liquidation or acceleration,'' that list of 
remedies cannot be read to be exclusive, as the purpose of the 
provision is provide the FDIC with the power it needs to preserve 
going-concern value of the covered financial company as long as the 
rights of counterparties to receive bargained-for support is respected. 
Accordingly, the Final Rule uses the broader phrase ``terminate, 
liquidate, accelerate or declare a default under'' the contract. In 
effect, the specified financial condition clause is unenforceable if 
the statutory requirements are met. In addition, by clarifying that the 
link created by the specified financial condition clause may operate 
``directly or indirectly,'' the Final Rule clarifies that the scope of 
the defined term includes contracts where the specified company under 
the clause may be another company or an affiliate in the corporate 
structure so long as the ultimate triggering event relates to the 
financial condition of the covered financial company or the Title II 
actions taken with respect to that covered financial company. The term 
``specified company'' used in the definition is consistent with 
terminology commonly used in such provisions in derivatives contracts 
to refer to the company whose financial condition is the basis for the 
termination right or other remedy.
    Language in this definition is borrowed from sections of the Dodd-
Frank Act addressing related matters, such as the enforceability of 
contracts of the covered financial company notwithstanding ipso facto 
clauses (section 210(c)(13)) and walkaway clauses with respect to 
qualified financial contracts (section 210(c)(8)(F)). The fact that 
this language is adapted and expanded upon should not be deemed to 
reflect any interpretation of the meaning or possible limitations of 
those sections. The broad language of this definition reflects the 
authority granted in section 210(c)(16), which ensures that the 
receiver has the power to avoid precipitous terminations by 
counterparties of the subsidiary resulting in disorderly collapse and a 
loss of value to the covered financial company.
    In the event a counterparty (including its affiliates) has more 
than one contract with the subsidiary or affiliate of the covered 
financial company, any contract with a cross-default provision with 
respect to another contract containing a specified financial condition 
clause also would be ``linked.'' The same would be true of a single 
contract of a counterparty with a subsidiary or affiliate that cross-
defaulted to the contract of another subsidiary or affiliate that 
contained a specified financial condition clause.
    In order to make unmistakably clear that, as set forth in the 
Proposed Rule, section 210(c)(16) and the Final Rule protect covered 
contracts of subsidiaries and affiliates from the exercise of remedies 
until completion of the resolution process, a new subclause (G) has 
been added to specifically refer to a step that may be taken in the 
resolution process by the successor to a bridge financial company. The 
listed steps are intended to be illustrative but not exclusive. As 
stated in the NPR, section 210(c)(16) and the Final Rule give the 
receiver the necessary tools to keep subsidiary and affiliate contracts 
with specified financial condition clauses in place throughout the 
resolution process. This is further discussed below in the description 
of the definition of ``successor.''
    The term ``support'' means to guarantee, indemnify, undertake to 
make any loan, advance or capital contribution, maintain the net worth 
of the subsidiary or affiliate, or provide other financial assistance. 
This would include a pledge of collateral that directly secures an 
obligation of a subsidiary or affiliate. The definition does not 
include other assistance that is not financial in nature, such as an 
undertaking to conduct specific performance. Generally, if the 
obligation of the counterparty to perform is linked to the financial 
condition of the parent, the support also would likely be financial, 
and other types of arrangements are beyond the scope of the Statute. 
One comment was received in response to a question included in the NPR 
as to the sufficiency of this definition. As noted under II. Summary of 
Comments on the Proposed Rule above, this commenter argued that the 
definition should be expanded to include support that is not financial 
in nature. However, including such type of

[[Page 63212]]

support in the definition would be inconsistent with section 
210(c)(16).
    The term ``related assets and liabilities'' includes assets of the 
covered financial company serving as collateral securing the covered 
financial company's support obligation, and setoff rights or netting 
arrangements to which the covered financial company is subject if they 
are related to the covered financial company's support. It should be 
noted, however, that if the ``support'' were in the nature of a 
guaranty, the related assets and liabilities would not consist of all 
of the assets of the covered financial company unless the guaranty was 
secured by all assets of the covered financial company. The transfer of 
an unsecured guaranty or obligation to a qualified transferee would 
meet the requirements of the Final Rule in this regard, without the 
transfer of any particular assets. The definition also broadly includes 
any liabilities of the covered financial company that directly arise 
out of or relate to its support of the obligations or liabilities of 
the subsidiary or affiliate. In some instances, this definition may be 
redundant with the definition of support, as a guaranty could be both a 
related liability and a supporting obligation. The broader definition 
is intended to make clear that the full range of supporting obligations 
and related assets and liabilities must be transferred to ensure that 
the counterparties are in substantially the same position as they were 
prior to the transfer to the qualified transferee.
    It is important to note that in some situations ``support'' and 
``related assets and liabilities'' are themselves qualified financial 
contracts. Section 210(c)(8)(D)(ii)(XII) of the Act includes 
``securities contracts'' as qualified financial contracts, and defines 
securities contracts to include ``any security agreement or arrangement 
or other credit enhancement related to any agreement or transaction 
referred to in this clause, including any guaranty or reimbursement 
obligation in connection with any agreement or transaction referred to 
in this clause.'' Other types of qualified financial contracts, such as 
for example, swaps (in section 210(c)(8)(D)(vi)(VI) of the Act), are 
similarly defined to include related security agreements arrangements 
and other credit enhancements. To the extent such support and related 
assets and liabilities themselves constitute financial contracts, they 
are subject to the rules applicable to the treatment of qualified 
financial contracts, including the so-called all-or-none rule under 
section 210(c)(9).
    The term ``qualified transferee'' specifically includes a bridge 
financial company as well as any unrelated third party (other than a 
third party for which a conservator, receiver, trustee in bankruptcy, 
or other legal custodian has been appointed, or which is otherwise the 
subject of a bankruptcy or insolvency proceeding). A qualified 
transferee can include both the bridge financial company and a 
subsequent transferee; for instance, if assets and liabilities, 
including the support and related assets and liabilities are 
transferred first to a bridge financial company and then to another 
acquirer either prior to or upon the termination of the bridge 
financial company pursuant to the orderly liquidation authorities 
granted under Title II of the Dodd-Frank Act.
    The definition of the terms ``subsidiary'' and ``affiliate'' are 
consistent with the definitions given to such terms in the Dodd-Frank 
Act. Section 2(18) of the Act, codified at 12 U.S.C. 5301(18), provides 
that these terms will have the same meanings as in section 3 of the FDI 
Act (12 U.S.C. 1813). Under the Federal Deposit Insurance Act (``FDI 
Act''), the term ``subsidiary'' is broadly defined as ``any company 
which is owned or controlled directly or indirectly by another company 
* * *.'' ``Affiliate'' is defined by reference to the Bank Holding 
Company Act, 12 U.S.C. 1841(k) as ``any company that controls, is 
controlled by, or is under common control with another company.''
    The term ``control'' is used in the definitions of the terms 
``subsidiary'' and ``affiliate.'' The Statute refers to the definition 
of ``control'' provided in the FDI Act, which in turn, refers to the 
definition provided in the Bank Holding Company Act, 12 U.S.C. 1841(a). 
In defining the use of this term for purposes of the definitions of 
``subsidiary'' and ``affiliate,'' the Final Rule streamlines these 
cross-references, clarifies that certain provisions of the Bank Holding 
Company Act definition are inapplicable in this context, and adopts the 
flexible approach of conforming to the relevant provisions of the Bank 
Holding Company Act and regulations promulgated thereunder at the time 
of appointment of the receiver.
    In effect, the definition of ``control'' includes, as a company in 
``control'' of another company, a company that directly or indirectly 
or acting through one or more persons owns, controls, or has the power 
to vote 25 percent or more of any class of voting securities of the 
other company. Under the Final Rule, a company may also exercise 
``control'' if that company controls in any manner the election of a 
majority of the directors or trustees of the company. This definition 
is consistent with the Bank Holding Company Act definition as it has 
been reflected in regulations promulgated under that section, including 
Regulation W (12 CFR 223.3(g)) and Regulation Y (12 CFR 225.2(e)).
    Section 2 of the Dodd-Frank Act expressly adopts the FDI Act 
definitions that incorporate the Bank Holding Company Act definitions 
``except to the extent the context otherwise requires.'' Parts of the 
Bank Holding Company Act definition of ``control'' are inapposite to 
the context of section 210(c)(16). Provisions that provide for a 
determination of ``control'' made by the Federal Reserve Board of 
Governors pursuant to a notice and hearing are inconsistent with the 
expedited decision-making expressly required by section 210(c)(16).
    An entity is deemed to be a ``successor'' of a bridge financial 
company if it is the company into which the bridge financial company is 
converted by way of incorporation under the laws of a state or if it is 
the surviving company of a merger or consolidation of the bridge 
financial company with another company (whether before or after any 
such conversion). Although this definition was not included in the 
Proposed Rule, no substantive change is effected by its insertion in 
the Final Rule. Under the Act, it is possible that a bridge financial 
company's status as such could terminate before the resolution process 
is completed and a successor merely constitutes a continuation of a 
qualified transferee. By including this definition for ``successor,'' 
the Final Rule more specifically reflects a possible step and strategy 
in the resolution process that, while clearly within the general scope 
of the Proposed Rule and NPR, was not given specific mention.
    The term ``business day'' is defined in the same way such term is 
defined in section 210(c)(10)(D) of the Act, relating to notification 
of transfer of qualified financial contracts. This is consistent with 
the notice requirement in the Final Rule, which provides for steps to 
be taken to provide notice during the same time period that is 
applicable for the taking of steps to provide notice of the transfer of 
qualified financial contracts. This was also contemplated by a question 
included in the NPR (in respect of which no responses were received) as 
to whether ``business day'' should be defined consistently with the 
definition in section 210(c)(10)(D).

[[Page 63213]]

Adequate Protection

    Paragraph (c) of the Final Rule describes the different ways that 
the Corporation may provide adequate protection in the event that it 
does not transfer a covered financial company's support to a qualified 
transferee. The definition of adequate protection is consistent with 
the definition in section 361 of the Bankruptcy Code,\1\ which also 
formed the basis of the definition of adequate protection in the 
context of treatment of certain secured creditors under 12 CFR 380.52. 
Adequate protection may include any of the following: (1) Making a cash 
payment or periodic cash payments to the counterparties of the contract 
to the extent that the failure to cause the assignment and assumption 
of the covered financial company's support and related assets and 
liabilities causes a loss to the counterparties; (2) providing to the 
counterparties a guarantee, issued by the Corporation as receiver for 
the covered financial company, of the obligations of the subsidiary or 
affiliate of the covered financial company under the contract; or (3) 
providing relief that will result in the realization by the claimant of 
the indubitable equivalent of the covered financial company's support. 
The phrase ``indubitable equivalent,'' which appears in section 361 of 
the Bankruptcy Code, is intended to have a meaning consistent with its 
meaning in bankruptcy, in conformance with section 209 of the Dodd-
Frank Act that requires rules promulgated under Title II of the Act to 
be ``harmonized'' with the Bankruptcy Code where possible. One comment 
was received requesting further clarification of the definitions of 
adequate protection and indubitable equivalent. As discussed under II. 
Summary of Comments on the Proposed Rule above, no further 
clarification of these terms was deemed necessary.
---------------------------------------------------------------------------

    \1\ 11 U.S.C. 361.
---------------------------------------------------------------------------

    It is important to note that although a guaranty of the Corporation 
as receiver is expressly included among the enumerated examples of 
``adequate protection'' in paragraph (c) of the Final Rule, the 
omission of such specific reference in 12 CFR 380.52 is not intended to 
suggest that such a guaranty would not constitute adequate protection 
to secured creditors under to 12 CFR 380.52. The guaranty of the 
receiver is, in any event, the indubitable equivalent of any guaranty 
or support that it may replace, and the express mention of the guaranty 
is added only for the avoidance of any doubt. Any such guaranty issued 
in accordance with the Act would be backed by the assets of the covered 
financial company, and also would be supported by the orderly 
liquidation fund and the authority of the Corporation as manager of the 
orderly liquidation fund to assess the financial industry pursuant to 
section 210(o) of the Act. Such a guaranty would in all events qualify 
as the indubitable equivalent of any guaranty or support that it may 
replace. The express mention of the guaranty is added merely for the 
avoidance of any doubt.

Notice of Transfer or Provision of Adequate Protection

    Paragraph (d) of the Final Rule provides that if the Corporation as 
receiver transfers any support and related assets and liabilities of 
the covered financial company or decides to provide adequate protection 
in accordance with subparagraphs (a)(1) and (2), it will promptly take 
steps to notify contract counterparties of such transfer or provision 
of adequate protection. Although the Statute does not contain a notice 
requirement, the Final Rule requires that these reasonable steps be 
taken to provide notice in recognition of the practical reality that 
contract counterparties will need to know whether they may exercise 
remedies under a specified financial condition clause. In 
acknowledgement of the public's growing reliance on internet 
communication as well as the prevalence of online commerce, the Final 
Rule provides that the Corporation may post such notice on its public 
Web site, the Web site of the covered financial company or the 
subsidiary or affiliate, or provide notice via other electronic media. 
One comment was received in response to the question posed by the NPR 
as to whether these steps were reasonably calculated to provide notice. 
This commenter objected that navigation of Web sites is often difficult 
and that counterparties may not be aware that the parent financial 
company was placed into receivership and that, accordingly, this form 
of notice was inadequate. As discussed under II. Summary of Comments on 
the Proposed Rule above, no change has been made in the Final Rule. The 
use of electronic notification is effective and efficient in connection 
with the failure of a systemically important financial company. In such 
a case, individually directed notice would be unduly cumbersome and 
burdensome.
    While the Corporation will endeavor to provide notice in a manner 
reasonably calculated to provide notification to the parties in a 
timely manner, the provision of actual notice is not a condition 
precedent to enforcing such contracts. Any action by a counterparty in 
contravention of section 210(c)(16) will be ineffective, whether or not 
such counterparty had actual notice of the transfer of support or 
provision of adequate protection. Further, where the contract of the 
subsidiary or affiliate is linked to the covered financial company but 
not otherwise supported by the covered financial company, actual notice 
of by the Corporation of its appointment as receiver or its intent to 
exercise the authority under section 210(c)(16) is not required.

IV. Regulatory Analysis and Procedure

A. Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act (44 U.S.C. 3501, et 
seq.) (``PRA''), the FDIC may not conduct or sponsor, and a person is 
not required to respond to, a collection of information unless it 
displays a currently valid Office of Management and Budget (OMB) 
control number. The Final Rule would not involve any new collections of 
information pursuant to the Paperwork Reduction Act (44 U.S.C. 3501, et 
seq.). Consequently, no information will be submitted to the Office of 
Management and Budget for review.

B. Regulatory Flexibility Act

    The Regulatory Flexibility Act 5 U.S.C. 601, et seq. (RFA) requires 
each federal agency to prepare a final regulatory flexibility analysis 
in connection with the promulgation of a final rule, or certify that 
the final rule will not have a significant economic impact on a 
substantial number of small entities.\2\ Pursuant to section 605(b) of 
the Regulatory Flexibility Act, the FDIC certifies that the Final Rule 
will not have a significant economic impact on a substantial number of 
small entities.
---------------------------------------------------------------------------

    \2\ See 5 U.S.C. 603, 604 and 605.
---------------------------------------------------------------------------

C. Small Business Regulatory Enforcement Act

    The Office of Management and Budget has determined that the Final 
Rule is not a ``major rule'' within the meaning of the Small Business 
Regulatory Enforcement Fairness Act of 1996 (SBREFA), (5 U.S.C. 801 et 
seq.). As required by the SBREFA, the FDIC will file the appropriate 
reports with Congress and the General Accounting Office so that the 
Final Rule may be reviewed.

[[Page 63214]]

D. The Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families

    The FDIC has determined that the Final Rule will not affect family 
well-being within the meaning of section 654 of the Treasury and 
General Government Appropriations Act, enacted as part of the Omnibus 
Consolidated and Emergency Supplemental Appropriations Act of 1999 
(Pub. L. 105-277, 112 Stat. 2681).

E. Plain Language

    Section 722 of the Gramm-Leach-Bliley Act (Pub. L. 106-102, 113 
Stat.1338, 1471), requires the Federal banking agencies to use plain 
language in all proposed and final rules published after January 1, 
2000. The FDIC has sought to present the Final Rule in a simple and 
straightforward manner.

List of Subjects in 12 CFR Part 380

    Banks, banking, Financial companies, Holding companies, Insurance 
companies, Mutual insurance holding companies.

    For the reasons stated above, the Board of Directors of the Federal 
Deposit Insurance Corporation amends part 380 of title 12 of the Code 
of Federal Regulations as follows:

PART 380--ORDERLY LIQUIDATION AUTHORITY

0
1. The authority citation for part 380 is revised to read as follows:

    Authority:  12 U.S.C. 5383(e); 12 U.S.C. 5389; 12 U.S.C. 
5390(c)(16); 12 U.S.C. 5390(s)(3); 12 U.S.C. 5390(b)(1)(C); 12 
U.S.C. 5390(a)(7)(D).


0
2. Amend Sec.  380.1 by adding definitions of ``affiliate,'' ``business 
day,'' ``control,'' and ``subsidiary'' in alphabetical order to read as 
follows:


Sec.  380.1  Definitions.

* * * * *
    Affiliate. The term ``affiliate'' means any company that controls, 
is controlled by, or is under common control with another company at 
the time of, or immediately prior to, the appointment of receiver of 
the covered financial company.
* * * * *
    Business day. The term ``business day'' means any day other than 
any Saturday, Sunday or any day on which either the New York Stock 
Exchange or the Federal Reserve Bank of New York is closed.
* * * * *
    Control. The term ``control'', when used in the definitions of 
``affiliate'' and ``subsidiary'', has the meaning given to such term 
under 12 U.S.C. 1841(a)(2)(A) and (B) as such law, or any successor, 
may be in effect at the date of the appointment of the receiver, 
together with any regulations promulgated thereunder then in effect.
* * * * *
    Subsidiary. The term ``subsidiary'' means any company which is 
controlled by another company at the time of, or immediately prior to, 
the appointment of receiver of the covered financial company.

0
3. Add Sec.  380.12 to read as follows:


Sec.  380.12  Enforcement of subsidiary and affiliate contracts by the 
FDIC as receiver of a covered financial company.

    (a) General. (1) Contracts of subsidiaries or affiliates of a 
covered financial company that are linked to or supported by the 
covered financial company shall remain in full force and effect 
notwithstanding any specified financial condition clause contained in 
such contract and no counterparty shall be entitled to terminate, 
accelerate, liquidate or exercise any other remedy arising solely by 
reason of such specified financial condition clause. The Corporation as 
receiver for the covered financial company shall have the power to 
enforce such contracts according to their terms.
    (2) Notwithstanding paragraph (a)(1) of this section, if the 
obligations under such contract are supported by the covered financial 
company then such contract shall be enforceable only if--
    (i) Any such support together with all related assets and 
liabilities are transferred to and assumed by a qualified transferee 
not later than 5 p.m. (eastern time) on the business day following the 
date of appointment of the Corporation as receiver for the covered 
financial company; or
    (ii) If and to the extent paragraph (a)(2)(i) of this section is 
not satisfied, the Corporation as receiver otherwise provides adequate 
protection to the counterparties to such contracts with respect to the 
covered financial company's support of the obligations or liabilities 
of the subsidiary or affiliate and provides notice consistent with the 
requirements of paragraph (d) of this section not later than 5 p.m. 
(eastern time) on the business day following the date of appointment of 
the Corporation as receiver.
    (3) The Corporation as receiver of a subsidiary of a covered 
financial company (including a failed insured depository institution 
that is a subsidiary of a covered financial company) may enforce any 
contract that is enforceable by the Corporation as receiver for a 
covered financial company under paragraphs (a)(1) and (2) of this 
section.
    (b) Definitions. For purposes of this part, the following terms 
shall have the meanings set forth below:
    (1) A contract is ``linked'' to a covered financial company if it 
contains a specified financial condition clause that specifies the 
covered financial company.
    (2)(i) A ``specified financial condition clause'' means any 
provision of any contract (whether expressly stated in the contract or 
incorporated by reference to any other contract, agreement or document) 
that permits a contract counterparty to terminate, accelerate, 
liquidate or exercise any other remedy under any contract to which the 
subsidiary or affiliate is a party or to obtain possession or exercise 
control over any property of the subsidiary or affiliate or affect any 
contractual rights of the subsidiary or affiliate directly or 
indirectly based upon or by reason of
    (A) A change in the financial condition or the insolvency of a 
specified company that is a covered financial company;
    (B) The appointment of the FDIC as receiver for the specified 
company or any actions incidental thereto including, without 
limitation, the filing of a petition seeking judicial action with 
respect to the appointment of the Corporation as receiver for the 
specified company or the issuance of recommendations or determinations 
of systemic risk;
    (C) The exercise of rights or powers by the Corporation as receiver 
for the specified company, including, without limitation, the 
appointment of the Securities Investor Protection Corporation (SIPC) as 
trustee in the case of a specified company that is a covered broker-
dealer and the exercise by SIPC of all of its rights and powers as 
trustee;
    (D) The transfer of assets or liabilities to a bridge financial 
company or other qualified transferee;
    (E) Any actions taken by the FDIC as receiver for the specified 
company to effectuate the liquidation of the specified company;
    (F) Any actions taken by or on behalf of the bridge financial 
company to operate and terminate the bridge financial company including 
the dissolution, conversion, merger or termination of a bridge 
financial company or actions incidental or related thereto; or
    (G) The transfer of assets or interests in a transferee bridge 
financial company or its successor in full or partial

[[Page 63215]]

satisfaction of creditors' claims against the covered financial 
company.
    (ii) Without limiting the general language of paragraphs (b)(1) and 
(2) of this section, a specified financial condition clause includes a 
``walkaway clause'' as defined in 12 U.S.C. 5390(c)(8)(F)(iii) or any 
regulations promulgated thereunder.
    (3) The term ``support'' means undertaking any of the following for 
the purpose of supporting the contractual obligations of a subsidiary 
or affiliate of a covered financial company for the benefit of a 
counterparty to a linked contract--
    (i) To guarantee, indemnify, undertake to make any loan or advance 
to or on behalf of the subsidiary or affiliate;
    (ii) To undertake to make capital contributions to the subsidiary 
or affiliate; or
    (iii) To be contractually obligated to provide any other financial 
assistance to the subsidiary or affiliate.
    (4) The term ``related assets and liabilities'' means--
    (i) Any assets of the covered financial company that directly serve 
as collateral for the covered financial company's support (including a 
perfected security interest therein or equivalent under applicable 
law);
    (ii) Any rights of offset or setoff or netting arrangements that 
directly arise out of or directly relate to the covered financial 
company's support of the obligations or liabilities of its subsidiary 
or affiliate; and
    (iii) Any liabilities of the covered financial company that 
directly arise out of or directly relate to its support of the 
obligations or liabilities of the subsidiary or affiliate.
    (5) A ``qualified transferee'' means any bridge financial company 
or any third party (other than a third party for which a conservator, 
receiver, trustee in bankruptcy, or other legal custodian has been 
appointed, or which is otherwise the subject of a bankruptcy or 
insolvency proceeding).
    (6) A ``successor'' of a bridge financial company means
    (i) A company into which the bridge financial company is converted 
by way of incorporation under the laws of a State of the United States; 
or
    (ii) The surviving company of a merger or consolidation of the 
bridge financial company with another company (whether before or after 
the conversion (if any) of the bridge financial company).
    (c) Adequate protection. The Corporation as receiver for a covered 
financial company may provide adequate protection with respect to a 
covered financial company's support of the obligations and liabilities 
of a subsidiary or an affiliate pursuant to paragraph (a)(2)(ii) of 
this section by any of the following means:
    (1) Making a cash payment or periodic cash payments to the 
counterparties of the contract to the extent that the failure to cause 
the assignment and assumption of the covered financial company's 
support and related assets and liabilities causes a loss to the 
counterparties;
    (2) Providing to the counterparties a guaranty, issued by the 
Corporation as receiver for the covered financial company, of the 
obligations of the subsidiary or affiliate of the covered financial 
company under the contract; or
    (3) Providing relief that will result in the realization by the 
counterparty of the indubitable equivalent of the covered financial 
company's support of such obligations or liabilities.
    (d) Notice of transfer of support or provision of adequate 
protection. If the Corporation as receiver for a covered financial 
company transfers any support and related assets and liabilities of the 
covered financial company in accordance with paragraph (a)(2)(i) of 
this section or provides adequate protection in accordance with 
paragraph (a)(2)(ii) of this section, it shall promptly take steps to 
notify contract counterparties of such transfer or provision of 
adequate protection. Notice shall be given in a manner reasonably 
calculated to provide notification in a timely manner, including, but 
not limited to, notice posted on the Web site of the Corporation, the 
covered financial company or the subsidiary or affiliate, notice via 
electronic media, or notice by publication. Neither the failure to 
provide actual notice to any party nor the lack of actual knowledge on 
the part of any party shall affect the authority of the Corporation to 
enforce any contract or exercise any rights or powers under this 
section.

    Dated at Washington, DC, this 9th day of October, 2012.

    By order of the Board of Directors.

    Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 2012-25315 Filed 10-15-12; 8:45 am]
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