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5000 - Statements of Policy


FDIC STATEMENT OF POLICY ON QUALIFIED FINANCIAL CONTRACTS

This statement of policy of the Board of the Directors of the Federal Deposit Insurance Corporation ("FDIC") addresses two issues regarding the treatment by the FDIC of qualified financial contracts ("QFCs"), as such term is defined in section 11(e)(8)(D)(i) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. 1821 et seq. as amended by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"). In making this statement of policy, the Board of Directors recognizes the uniqueness of QFCs in the financial markets. Such contracts and transactions allow for appropriate liquidity and hedging operations in financial institutions. Generally transactions are conducted in a highly regulated industry providing further safeguards. In providing this policy statement it is the intent of the Board to provide guidance to the financial markets with regard to the treatment of these contracts in the event the FDIC is appointed receiver or conservator of a financial institution. With the exception of federal fund ("fed funds") transactions which likewise occupy a unique position in the depository institution industry, the Board does not intend to provide in this policy statement any indication or guidance of the treatment by a receiver or conservator of any other type of contract other than those specifically so defined as qualified financial contracts in the FDI Act or as may be subsequently defined by the Board pursuant to the FDI Act. For purposes of the requirements set out in sections 11(d)(9), 11(n)(4)(I) and 13(e) it is intended that this policy statement apply not only to QFCs but to fed funds transactions as well. It is specifically understood and intended by the Board that this policy statement may be relied upon by counterparties to these types of transactions. It is the Board's intention that this policy statement be effective unless revoked or otherwise withdrawn upon 45 days notice provided in the Federal Register and such notice or withdrawal shall operate prospectively only. Nothing in this policy statement is intended to apply to transactions between a bank or thrift and a counterparty which is an affiliate of the bank or thrift. This policy statement is intended to provide a "safe harbor" for bona fide transactions conducted by depository institutions and nonaffiliated counterparties.

I.  Written Agreement Requirements

Any QFC (including any ancillary agreements, such as a master agreement or security arrangements) that complies with the following criteria will be deemed to satisfy the requirements set forth in sections 11(d)(9), 11(n)(4)(I) and 13(e) of the FDI Act:

1.  The QFC is evidenced by a writing (including a confirmation) that either is sent by the depository institution to the counterparty or by the counterparty to the depository institution. In either case, the writing must be sent reasonably contemporaneously with the parties' agreement to enter into the specific QFC transaction. The writing need not be signed unless otherwise required by applicable non-insolvency law;

2.  The depository institution, by corporate action, was authorized under applicable non-insolvency law to enter into the QFC. A depository institution will be deemed to have taken such corporate action if the counterparty has relied in good faith either on a resolution (or extract thereof) provided by the institution's corporate secretary or assistant secretary or on a written representation (whether in a master agreement or otherwise) from an officer of the level of vice president or higher, as to the depository institution's authority; and

3.  The writing (or a copy thereof) evidencing the QFC and the evidence of authority must be maintained by the depository institution in its official books and records. However, the counterparty may, by appropriate evidence (including the production of copies maintained by the counterparty) establish the existence of the writing and the evidence of authority.

The Board of Directors intends that the FDIC apply the above criteria and the FDI Act requirements in a manner generally consistent with reasonable business trading practices in the QFC markets, in view of Congress's recognition in FIRREA of the important role QFCs play in providing liquidity and portfolio and risk management to depository institutions. Without limiting the criteria set forth above, it is anticipated that the FDIC will look to the totality of the circumstances surrounding such transactions including the counterparty's good faith attempt to comply with all reasonable trading practices and requirements, any non-insolvency law requirements and the requirements stated herein. Further, the Board does not consider the amendments made by FIRREA to the FDI Act requirements to be applicable to QFCs entered into prior to August 9, 1989, although compliance with the foregoing criteria with respect to such pre-FIRREA QFCs would be considered compliance with any pre-FIRREA requirements.

II.  Section 11(e)(10) of the FDI Act

The FDIC as receiver for a depository institution will act in accordance with the following procedures in applying sections 11(e)(8)(A) and 11(e)(10) of the FDI Act. These procedures are consistent with certain provisions of section 212 of FIRREA that had been contained in the bills passed by the House and Senate but were inadvertently omitted in the final statute. Moreover, the final statute as written contains inconsistencies which may not be harmonized except by the inclusion of these inadvertently omitted provisions:

1.  In applying section 11(e)(10) of the FDI Act, the receiver shall use its best efforts to notify a party to a QFC whether it has effected a transfer of asset or liabilities in accordance with section 11(e)(9)(A) of the FDI Act prior to 12 noon local time on the business day following appointment of the receiver.

2.  The provisions of section 11(e)(8)(A) of the FDI Act shall not apply if a party to a QFC is notified by the receiver of the failed depository institution by the close of business (New York time) on the business day following its appointment that the receiver has transferred to a single insured depository institution (other than one in default): (a) all QFCs between the failed depository institution and such party and its affiliates; (b) all claims of the party and its affiliates under such QFCs against the failed depository institution (other than claims subordinated by any such QFC to the claims of general unsecured creditors); (c) all claims of the failed depository institution against the party and its affiliates under such QFCs; and (d) all property securing claims under such QFCs.

3.  Neither a bridge bank nor an institution organized by the FDIC and immediately placed into conservatorship or placed into conservatorship at the time of a purchase and assumption transaction with the receiver of a failed institution for which FDIC has been appointed receiver shall be considered a depository institution in default for purposes of paragraph 2.

4.  For purposes of section 11(e)(10) of the FDI Act, the receiver shall be deemed to have notified a party if it has taken steps reasonably calculated to provide notice to such party. In providing guidance in both of these areas relating to qualified financial contracts and with regard to sections 11(d)(9), 11(n)(4)(I) and (13)(e) requirements which apply to fed funds transactions, it is the intention of the Board of Directors to provide appropriate guidance to the financial markets. It is intended by the Board of Directors that this policy statement ultimately becomes the basis for regulations which should be adopted in due course. However, given the importance of these unique types of transactions and contracts it is the desire of the Board of Directors to provide this guidance in the most expeditious form possible. Further, the Board notes that on this day the Resolution Trust Corporation adopted these same policies with regard to the same transactions.

By order of the Board of Directors this 12th day of December 1989.


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Last updated September 16, 2013 regs@fdic.gov