FDIC Proposes Rules on Nullifying Subsidiary and Affiliate Cross-Defaults Under OLA

March 23, 2012

On March 20, 2012, the Federal Deposit Insurance Corporation (“FDIC”) issued a proposed rule (the “Proposed Rule”) to implement section 210(c)(16) of the Orderly Liquidation Authority provisions of the Dodd-Frank Act (“OLA”), relating to the ability of the FDIC as receiver under OLA to nullify certain affiliate and subsidiary cross-defaults. The Proposed Rule defines several key terms in the statute and clarifies the protections afforded to counterparties of subsidiaries and affiliates of entities placed into liquidation under OLA.

Section 210(c)(16) and the Proposed Rule are aimed at stabilizing a failing financial group during its resolution and preventing the cascading failures that can occur when one member of a financial group enters insolvency proceedings. While the power to nullify cross-defaults can help make a resolution more orderly and effective, it deprives creditors of bargained for protections and has the potential to leave counterparties worse off than if the financial company had been resolved under ordinary insolvency law. The statute and Proposed Rule attempt to strike a balance between these two competing goals by providing certain protections for counterparties to contracts enforced under section 210(c)(16).

The memorandum provides an overview of section 210(c)(16) and the Proposed Rule and analyzes the application of the Proposed Rule under various circumstances.