4000 - Advisory Opinions
Close-Out of Forward Currency Obligations Owned by Banks in FDIC Receivership
April 29, 1988
Carroll R. Shifflett, Assistant General Counsel
This is in reference to your recent inquiry concerning the policy of the Federal Deposit Insurance Corporation ("FDIC") with respect to the enforceability of procedures adopted by the Foreign Currency Clearing House ("FCH") to effect the close-out of forward currency obligations owed to FCH by participating banks of which the FDIC becomes receiver.
The actions of the FDIC in its capacity as receiver of a failed FDIC-insured institution are determined on a case-by-case basis, in accordance with applicable law and in light of specific factual situations. For this reason, the FDIC has not adopted any formal policy regarding the liquidation of forward currency contracts in its receiverships and does not believe it appropriate or in keeping with the multiple legal authorities under which it acts as a receiver to adopt such a policy. I am willing, however, to provide my views as to what a court would hold in response to an attempt by the FDIC to obtain a stay of efforts by FCH to effect the close-out of a forward currency obligation owed by a participating bank of which the FDIC is appointed receiver.
In your letter you advise, among other things, that FCH will be the exclusive counterparty to each participant on the trades it accepts. To protect its interest, FCH will collect and retain collateral from its participants, and will secure its interest in that collateral effectively.
We assume: (1) the accuracy of the representations made in your letter; (2) the genuineness, validity and enforceability of the underlying obligation of the failed bank to FCH arising out of the foreign currency contracts and the absence of fraud or other similar extraordinary circumstances; (3) the existence of a valid and perfected security interest in the collateral; (4) no intent on the part of FCH to delay or defraud creditors of the failed FDIC-insured institution; (5) the collateral is to be liquidated promptly and in a commercially reasonable manner; and (6) the excess value (if any) of the collateral securing the obligation is to be promptly remitted to the FDIC in its capacity as receiver for the failed institution. Based on such assumptions, we advise you that it is not likely that a court would uphold an attempt by the FDIC to stay the liquidation of the collateral. We have no reason to believe that the liquidation of the collateral in the manner described in your letter is not commercially reasonable.