FDIC Law, Regulations, Related Acts
4000 - Advisory Opinions
Treatment of Securities Purchased by Trade Association Pursuant to Master Repurchase Agreement Between Association and Bank Upon Subsequent Failure of Bank
FDIC-91-71 August 12, 1991 Carroll R. Shifflett, Associate General Counsel
This responds to your May 3, 1991, letter concerning the treatment of securities purchased by your client, a trade association ("Association") pursuant to a repurchase agreement entered into between the Association and a bank ("Bank") should the Bank become insolvent.
As you are aware, the FDIC does not issue binding advisory opinions concerning hypothetical situations that may arise in future receiverships of insured institutions. The FDIC's actions as receiver are determined on a case by case basis, in accordance with applicable laws and in light of specific factual situations. I am willing, however, to provide my views as to what a court would hold in response to your inquiry, although I have not attempted to ascertain the rights or obligations of any other parties or to analyze these transactions under any provisions of law other than those specified.
According to your letter, the Bank has proposed that the Association, a depositor of the Bank with deposits exceeding $100,000, enter into a master repurchase agreement ("Agreement") with the Bank in order to protect that portion of the Association's deposits which exceeds $100,000. Under the Agreement, the Association would purchase securities from the Bank. After a period of time specified in the Agreement, which could range from several hours to several months, the Bank would repurchase the securities. The Bank would physically hold the securities the entire time, but would reflect the transfer of the securities on the books and account records of the Bank. In addition, you have indicated that the Agreement may be treated as a qualified financial contract ("QFC") under 12 U.S.C. Section 1821(e)(8).
If the Association and the Bank entered into an Agreement and subsequently the Bank failed, (1) would those securities that the Association had purchased but that the Bank had not repurchased prior to Bank failure be owned solely by the Association and (2) would these securities be deemed to be "deposits" as defined in Section 3(l) of the Federal Deposit Insurance Act (the "Act")?
If, as you have indicated, the Agreement is a QFC, it is my view that a court would hold that the FDIC as receiver has the right to either repudiate the Agreement, to transfer the Agreement to a third party or to hold the Agreement. If the receiver repudiates the Agreement, the Association would receive notice of the disaffirmance from the receiver. Because funds held by the Bank pursuant to the Agreement are not an insured deposit, the Association would have to file a claim with the receiver as provided in 12 U.S.C. section 1821(d)(3). In order to file such a claim, the Association would have to meet the requirements set out in the FDIC's Policy on Qualified Financial Contracts, dated December 12, 1989. A copy of that policy is attached to, and incorporated into, this opinion. Alternatively, if the receiver does not repudiate and instead transfers the QFC to a third party, the third party could enforce the terms of the Agreement and repurchase the securities. In the third scenario, if the receiver holds the Agreement, the counterparty is entitled to exercise its rights to terminate or liquidate the QFC, provided that the QFC contains such rights.
In addition to the receiver's treatment of the QFC, you also expressed a concern of whether the securities that the Association holds as of bank closing pursuant to the Agreement would be considered a "deposit" under the Act. The FDIC in its corporate capacity will make deposit insurance determinations based on transactions that have taken place up to the moment that the chartering authority closes the institution. As a result, any subsequent actions that the receiver makes with respect to the QFC will not affect the deposit insurance determination and, therefore, any funds transferred to the Association post closing that would result from a repurchase under the Agreement would not be a "deposit" but, rather would be considered property of the Association that is held by the receiver on the customer's behalf.
The foregoing opinion should not be considered as an endorsement or review of the appropriateness of the proposed transaction. I hope that we have addressed your questions adequately.