Home -> Law Blog Directory -> Legal Commentary Blogs -> Economics of Contempt

Legal Commentary

: Economics of Contempt

Surprising provision in Dodd's proposed resolution authority

By Anonymous

I hope to get time to write a full post on Sen. Dodd's financial reform bill in the next couple of days, but I do want to highlight one significant provision in the proposed resolution authority (which very much surprised me). In normal commercial bank resolutions, the derivatives safe harbor doesn't apply for the first 24 hours ? that is, counterparties to a failed bank's derivatives contracts (and repos, etc.) can't terminate, liquidate, or net the derivatives until 5:00 p.m. on the business day following the FDIC's seizure of the bank. The purpose of this 1-day breather is to give the FDIC time to transfer a failed bank's derivatives positions, usually en masse, to healthy institutions.

Section 210(c)(10)(B) of Sen. Dodd's bill, however, provides that the derivatives safe harbor doesn't apply for five (5) full business days after a covered nonbank financial institution is seized (pp. 231?232). This essentially gives the FDIC five days instead of one to figure out what to do with a failed financial institution's derivatives positions. That's a major difference, especially considering that the House bill stuck with the traditional 1-day breather. Frankly, I think the House bill was wrong, and that the FDIC would almost certainly need more than one day to sort out where to transfer a failed financial institution's derivatives positions. But at first blush, five days strikes me as way too long. (The five days immediately following Lehman's failure felt like an eternity.) I think three days strikes the right balance, but even that's probably optimistic.

In any event, that provision immediately caught my eye.

Full post as published by Economics of Contempt on March 16, 2010 (boomark / email).