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4000 - Advisory Opinions

FDIC's Policy Regarding the Treatment of "SWAP" Transactions in Its Receiverships


January 30, 1989

John L. Douglas, General Counsel

This is in reference to your recent inquiry concerning the policy of the Federal Deposit Insurance Corporation ("FDIC") with respect to the treatment of interest rate and currency swaps and related transactions ("swaps") entered into by an insured national or state-chartered bank 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 treatment of swap transactions 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 selectively discriminate among a series of swap transactions entered into under the terms of master swap agreement between an insured national or state-chartered bank (the "bank") of which the FDIC is subsequently appointed receiver and a single counterparty (the "counterparty").

We assume: (1) the accuracy of the representations made in your inquiry; (2) the genuineness, validity and enforceability of the obligations of the bank under all the swaps transacted pursuant to a single master agreement; (3) strict identity of the parties to the master agreement (including the swaps transacted thereunder); (4) no intent by the counterparty to delay or defraud creditors of the bank; (5) if not theretofore closed-out, close-out of the future payment obligations of both parties promptly upon the appointment of the FDIC as receiver of the bank; and (6) the netting of all future obligations outstanding between the counterparty and the bank based upon the termination values prevailing at the time the master swap agreement is deemed terminated, including giving credit to the bank for the value of those swaps which have a negative market value from the counterparty's perspective.

Based on the preceding assumptions, I believe that a court would recognize the provability of a claim presented by a counterparty for damages resulting from the breach of a master swap agreement by a bank of which the FDIC is appointed receiver. This assumes that the claim is limited to the net termination value (which includes amounts due but unpaid prior to termination) of all swaps of the bank as of the termination of the master swap agreement.

I further believe that a court would defer to industry practice and to the express terms of the master swap agreement and uphold such agreement's treatment of all underlying transactions as a single, integral agreement, thereby preventing the FDIC from selectively transferring less than the entirety of such transactions to an assuming bank or bridge bank or from selectively enforcing or performing less than the entirety of such agreement.

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