[Federal Register Volume 60, Number 102 (Friday, May 26, 1995)]
[Notices]
[Pages 27976-27977]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-12992]



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FEDERAL DEPOSIT INSURANCE CORPORATION


Statement of Policy Regarding Treatment of Collateralized Letters 
of Credit After Appointment of the Federal Deposit Insurance 
Corporation as Conservator or Receiver

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Statement of policy.

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SUMMARY: The FDIC has adopted a statement of policy that sets forth how 
the FDIC, as conservator or receiver for an insured depository 
institution, proposes to treat letters of credit backed by a pledge of 
collateral by the insured depository institution. Only those 
collateralized letters of credit (CLOCs) that were initially issued 
prior to the enactment of the Financial Institutions Reform, Recovery, 
and Enforcement Act of 1989 (FIRREA) are covered by this policy.

EFFECTIVE DATE: May 19, 1995.

FOR FURTHER INFORMATION CONTACT:
Sharon Powers Sivertsen, Assistant General Counsel (202-736-0112), or 
Michael H. Krimminger, Senior Counsel (202-736-0336), Legal Division, 
Federal Deposit Insurance Corporation, 550 17th Street, NW., 
Washington, DC 20429.

Statement of Policy Regarding Treatment of Collateralized Letters of 
Credit After Appointment of the Federal Deposit Insurance Corporation 
as Conservator or Receiver

    This Statement of Policy sets forth the treatment that the Federal 
Deposit Insurance Corporation (FDIC) as the conservator or receiver of 
an insured depository institution will give certain collateralized 
letters of credit issued by insured depository institutions prior to 
August 9, 1989.

Background

    On August 9, 1989, the Financial Institutions Reform, Recovery, and 
Enforcement Act of 1989 (FIRREA) was signed into law. This statute 
amended the Federal Deposit Insurance Act (FDI Act) to clarify the 
FDIC's rights as conservator or receiver to repudiate contracts and to 
limit claims for damages upon repudiation to those actual, direct 
compensatory damages determined as of the date of the appointment of 
the conservator or receiver. 12 U.S.C. 1821(e)(3)(A). With regard to 
secured contracts, the FDI Act provides that the repudiation provisions 
contained in 12 U.S.C. 1821(e) are not to be construed as permitting 
the avoidance of any legally enforceable or perfected security interest 
in any assets of the institution, except where such interest is taken 
in contemplation of the institution's insolvency or with the intent to 
hinder, delay, or defraud the institution or the institution's 
creditors. 12 U.S.C. 1821(e)(11).
    Generally, contingent obligations do not give rise to provable 
claims against a receivership or conservatorship, and any claims based 
upon such obligations have no provable damages because the damages are 
not fixed and certain as of the date of the appointment of the receiver 
or conservator. Accordingly, no provable claims in a receivership or 
conservatorship can be based on contingent obligations unless the 
default by the account party conferring a right to draw under the 
obligations occurred prior to the appointment of the receiver or 
conservator.
    Reading section 11(e) of the FDI Act, 12 U.S.C. 1821(e), as a 
whole, it is clear that even secured contracts may be repudiated; that 
damages are limited to the extent set forth in the statute; and that 
legally enforceable or perfected security agreements will be honored to 
the extent of such damages but no further or otherwise. In other words, 
if there is a repudiation, the collateral securing the contract may be 
liquidated and the proceeds paid to or retained by the creditor up to 
the damages allowed by the statute. The remaining collateral or 
proceeds will be remitted or returned to the conservator or receiver as 
property of the institution or its estate, or to a bona fide junior 
lienholder to the extent applicable.
Statement of Policy

    The FDIC has considered a number of relevant policy factors with 
respect to the treatment of certain collateralized letters of credit 
after its appointment as conservator or receiver of insured depository 
institutions. Specifically, it has considered its legal rights and 
powers under FIRREA; the assurances provided by the Federal Home Loan 
Bank Board prior to the enactment of FIRREA; the assurances provided by 
the Resolution Trust Corporation in its September 15, 1990 statement of 
policy on the treatment of collateralized letters of credit; market 
reliance on these assurances; the need for market certainty and 
stability; and the potential long-term cost to the FDIC of the 
repudiation of certain collateralized letters of credit. Based on its 
consideration and balancing of such factors, the FDIC has determined to 
adopt and implement the following Policy on the treatment of certain 
collateralized letters of credit after its appointment as conservator 
or receiver of insured depository institutions. This Policy is 
substantively the same as the RTC's September 25, 1990 policy statement 
on collateralized letters of credit and conforms to the RTC and FDIC 
policy statements on collateralized put obligations. As a consequence, 
adoption of the proposed policy statement will promote market certainty 
and stability upon the transition of receivership responsibilities from 
the RTC to the FDIC on July 1, 1995. 12 U.S.C. 1441a(b)(3)(A)(ii).
    This Policy will apply only to collateralized letters of credit 
utilized in capital markets financing transactions originally issued by 
insured depository institutions prior to August 9, 1989, and any 
subsequent renewal, replacement or extension of such letters of credit. 
In addition, this Policy will apply only in such transactions where the 
underlying security interest is in collateral owned and pledged by the 
insured depository institution to secure its obligations and the 
security interest is both perfected and legally enforceable under 
applicable law. These financing transactions include transactions 
involving publicly-offered obligations rated by one or more nationally-
recognized credit rating agencies and transactions involving non-rated 
privately placed obligations structured in a manner substantially 
similar to such rated obligations. The [[Page 27977]] policy does not 
apply to trade letters of credit or letters of credit issued for any 
other purpose.
    After its appointment as conservator or receiver of any insured 
depository institution, the FDIC may either (1) continue any 
collateralized letters of credit as enforceable under the terms of the 
contract during the pendency of the conservatorship or receivership or 
(2) call, redeem or prepay any collateralized letters of credit by 
repudiation or disaffirmance.
    If the FDIC as conservator or receiver exercises its right to call, 
redeem or prepay any collateralized letters of credit by repudiation or 
disaffirmance, it may do so either directly by cash payment in exchange 
for the release of the collateral or by repudiation of the contract 
followed by liquidation of the collateral by a trustee or other secured 
party. If the FDIC in its capacity as conservator or receiver 
accelerates the collateralized letters of credit by repudiation or 
disaffirmance, payment will be made to the extent of available 
collateral up to an amount equal to the outstanding principal amount or 
accreted value of the secured obligations, together with interest at 
the contract rate up to and including the date of payment and expenses 
of liquidation, if provided in the contract. If any collateral or 
proceeds remain after payment of such amounts, such collateral or 
proceeds then must be remitted or returned to the conservator or 
receiver as property of the institution or its estate, or to a bona 
fide junior lienholder to the extent applicable. If, however, the 
collateral securing the contract is insufficient to pay in full the 
amounts owing under the contract, the holder will receive a 
receivership certificate for any balance remaining due under the 
contract.
    The FDIC shall have a reasonable time, generally no more than 180 
days from the date of the appointment of the FDIC as conservator or 
receiver, to elect whether to disaffirm, repudiate, or accelerate a 
collateralized letter of credit. In the case of institutions for which 
the FDIC already has been so appointed, the period in which to make 
such an election shall begin to run as of the date of the adoption of 
this Policy and continue for 180 days.
    This Policy Statement does not change or amend the FDIC's 
longstanding position that standby letters of credit are contingent 
obligations. Based on its consideration and balancing of the policy 
issues presented, however, the FDIC has adopted this statement of 
policy for collateralized letters of credit initially issued prior to 
August 9, 1989, and any subsequent renewal, replacement or extension of 
such letters of credit. It is understood that the persons involved in 
such secured transactions with insured depository institutions may 
reasonably rely upon this Policy Statement.

    Dated at Washington, D.C., this 18th day of May, 1995.

    By order of the Board of Directors.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Acting Executive Secretary.
[FR Doc. 95-12992 Filed 5-25-95; 8:45 am]
BILLING CODE 6714-01-M