US Netting Opinion - 2022

MEMORANDUM FOR THE INTERNATIONAL SWAPS AND DERIVATIVES ASSOCIATION, INC.
Enforceability of the Termination,

Close-Out and Multibranch Netting Provisions of the
1992 and 2002 Editions of ISDA Master Agreements
As of June 9, 2022
TABLE OF CONTENTS
Page
I. BACKGROUND AND ASSUMPTIONS ............................................................................................. 5

A. BACKGROUND ....................................................................................................................... 5
1. Calculation of the Lump-Sum Amount under the 2002 ISDA Master
Agreement ................................................................................................................... 7
2. Calculation of the Lump-Sum Amount under the 1992 ISDA Master
Agreements .................................................................................................................. 7
B. ASSUMPTIONS ........................................................................................................................ 8
II. QUESTIONS PRESENTED ................................................................................................................ 11
III. SUMMARY OF CONCLUSIONS ...................................................................................................... 12

A. “SWAP AGREEMENT” UNDER THE CODE, THE FDIA, THE NYBL AND THE
OLA ......................................................................................................................................... 13
B. FDICIA .................................................................................................................................... 13
C. NON-ENUMERATED TRANSACTIONS AND MASTER NETTING
AGREEMENTS UNDER THE CODE, THE FDIA, THE NYBL, THE OLA AND
FDICIA .................................................................................................................................... 13
D. TERMINATION CURRENCY ............................................................................................... 14
E. MULTIBRANCH ISDA MASTER AGREEMENTS ............................................................. 14
F. FOREIGN-LAW ISDA MASTER AGREEMENTS ............................................................... 15
G. NEW YORK-LAW ISDA MASTER AGREEMENTS ........................................................... 15
H. PENDING DEVELOPMENTS ............................................................................................... 15
IV. “SWAP AGREEMENT” UNDER THE CODE, THE FDIA, THE NYBL, THE OLA
AND FDICIA ........................................................................................................................................ 16
A. CODE....................................................................................................................................... 16
1. Background; Definitions ............................................................................................ 16
(a) Code Insolvency Proceedings ...................................................................... 16
(b) Definitions ................................................................................................... 16
2. Automatic Stay .......................................................................................................... 19
3. Right to Terminate and Exercise Netting Provisions ................................................. 19
4. Limitation on Avoiding Powers ................................................................................. 20
B. THE FDIA ............................................................................................................................... 21
(a) FDIA Insolvency Proceedings ..................................................................... 21
(b) Definitions ................................................................................................... 22
2. Right to Terminate ..................................................................................................... 23
3. Netting ....................................................................................................................... 23
4. No Selective Transfer or Repudiation........................................................................ 24
5. Pre-insolvency Payments ........................................................................................... 24
744581026.3 -i-
TABLE OF CONTENTS
(continued)
Page
6. No Walkaway Clause ................................................................................................ 25

C. THE NYBL .............................................................................................................................. 25
1. NYBL Insolvency Proceedings.................................................................................. 25
3. Netting ....................................................................................................................... 26
4. Selective Repudiation ................................................................................................ 27
6. No Forfeiture ............................................................................................................. 27
D. THE OLA................................................................................................................................. 27
(a) OLA Insolvency Proceedings ...................................................................... 27
(b) Qualified Financial Contract Overview ....................................................... 30
3. Netting ....................................................................................................................... 31
6. No Walkaway Clause ................................................................................................ 32
V. FDICIA.................................................................................................................................................. 32
A. BACKGROUND; DEFINITIONS........................................................................................... 32
1. Qualitative Test .......................................................................................................... 33
2. Quantitative Test ........................................................................................................ 33
B. TREATMENT OF TRANSACTIONS .................................................................................... 34
C. ENFORCEABILITY OF TERMINATION PROVISIONS OF AN ISDA MASTER
AGREEMENT UNDER FDICIA ............................................................................................ 34
D. PRE-INSOLVENCY PAYMENTS ......................................................................................... 34
VI. NON-ENUMERATED TRANSACTIONS AND MASTER NETTING AGREEMENTS

UNDER THE CODE, THE FDIA, THE NYBL, THE OLA AND FDICIA .................................... 35
A. CLASSIFICATION OF TRANSACTIONS ............................................................................ 35
1. Introduction ............................................................................................................... 35
2. Non-Enumerated Transactions that are “swap agreements” ...................................... 35
(a) Physically-settled commodity swaps and options on commodity
swaps ........................................................................................................... 35
(b) Economic Statistic Transactions .................................................................. 36
(c) Property Index Derivatives .......................................................................... 36
(d) Freight Transactions .................................................................................... 36
3. Non-Enumerated Transactions that are not “swap agreements” or master
netting agreements ..................................................................................................... 37
(a) Non-Enumerated Transactions as “securities contracts” ............................. 37
744581026.3 -ii-
TABLE OF CONTENTS
(continued)
Page
(b) Non-Enumerated Transactions as “forward contracts”................................ 39

(c) Non-Enumerated Transactions that are not “securities contracts” or
“forward contracts” ..................................................................................... 39
B. CODE....................................................................................................................................... 40
1. Treatment of Forward Contracts, Securities Contracts and Master Netting
Agreements ................................................................................................................ 40
(a) Automatic Stay ............................................................................................ 40
(b) Limitation on Avoiding Powers .................................................................. 43
(c) Liquidation .................................................................................................. 45
C. THE FDIA AND THE OLA .................................................................................................... 45
1. Treatment of Forward Contracts, Securities Contracts and Master
Agreements ................................................................................................................ 46
2. Right to terminate generally ...................................................................................... 46
3. Netting ....................................................................................................................... 46
D. THE NYBL .............................................................................................................................. 47
1. Treatment of Master Agreements .............................................................................. 47
2. Right to terminate ...................................................................................................... 47
3. Netting ....................................................................................................................... 47
4. Selective Repudiation ................................................................................................ 47
E. FDICIA .................................................................................................................................... 47
VII. TERMINATION CURRENCY ........................................................................................................... 47
VIII. MULTIBRANCH ISSUES .................................................................................................................. 48

1. Enforceability of multibranch close-out netting provisions in an ISDA
Master Agreement for U.S. Bank with foreign branches ........................................... 48
(a) FDIC-insured National Bank ....................................................................... 48
(b) FDIC-insured New York-chartered state bank ............................................ 49
(c) Exceptions ................................................................................................... 49
2. Commencement of a separate proceeding to administer the assets of (a) the
insolvent Federal Branch of Bank F or (b) the insolvent New York Branch
of Bank F ................................................................................................................... 50
(a) Federal Branch ............................................................................................ 50
(b) New York Branch ........................................................................................ 50
3. Treatment of multibranch close-out netting provisions in an insolvency
proceeding conducted for the New York Branch or the Federal Branch of
Bank F........................................................................................................................ 52
(a) New York Branch ........................................................................................ 52
(b) Federal Branch ............................................................................................ 53
4. Bad Branch Issues...................................................................................................... 54
744581026.3 -iii-
TABLE OF CONTENTS
(continued)
Page
(a) Insolvency Proceeding for a U.S. Bank ....................................................... 54

(b) Insolvency Proceeding for a New York Branch of Bank F ......................... 55
(c) Insolvency Proceeding for a Federal Branch of Bank F .............................. 55
IX. APPLICABILITY OF CONCLUSIONS REGARDING NEW YORK-LAW ISDA

MASTER AGREEMENT TO FOREIGN-LAW ISDA MASTER AGREEMENT ....................... 56
X. ENFORCEABILITY OF TERMINATION, CLOSE-OUT NETTING AND

MULTIBRANCH PROVISIONS OF NEW YORK-LAW ISDA MASTER
AGREEMENT UNDER NEW YORK STATE NONINSOLVENCY LAW .................................. 57
XI. PENDING DEVELOPMENTS ........................................................................................................... 57
XII. BRIDGES .............................................................................................................................................. 58
XIII. ADDENDUM– FEDERAL HOME LOAN BANKS ......................................................................... 59
744581026.3 -iv-
APPENDIX A: CERTAIN TRANSACTIONS UNDER THE ISDA MASTER AGREEMENTS..................... A-1
APPENDIX B: CERTAIN COUNTERPARTY TYPES..................................................................................... B-1
APPENDIX C. RECOMMENDED AMENDMENTS TO DOCUMENTS ........................................................ C-1
744581026.3 -v-
MEMORANDUM FOR THE INTERNATIONAL
SWAPS AND DERIVATIVES ASSOCIATION, INC.
PRIVATELY NEGOTIATED DERIVATIVES TRANSACTIONS:

NETTING UNDER THE CODE,
THE FDIA, THE NYBL, THE OLA AND FDICIA
As of June 9, 2022
This memorandum of law examines the treatment under the United States Bankruptcy Code (the “Code”),1
the Federal Deposit Insurance Act (the “FDIA”),2 the New York Banking Law (the “NYBL”)3, the Orderly
Liquidation Authority statute (the “OLA”)4 and the Federal Deposit Insurance Corporation Improvement Act of
1991 (“FDICIA”)5 of privately negotiated derivatives transactions that are documented under an ISDA Master
Agreement (as defined and discussed below). These privately negotiated derivatives transactions may include any
and all transactions described in the attached Appendix A (each, a “Transaction”). Some of these Transactions may
provide for payments of cash by both parties, such as interest rate swaps, currency swaps and options and foreign
exchange transactions, while others, such as equity, bond and commodity options, may require one party to deliver
cash and the other party to deliver shares, bonds or commodities.
Attached to this memorandum is Appendix B (Certain Counterparty Types), as provided by the
International Swaps and Derivatives Association, Inc. (“ISDA”). We discuss below with greater particularity and in
more jurisdictionally pertinent terms the entity-type coverage of this memorandum. Referring generally to
Appendix B, however, we note that this memorandum covers many kinds of banks (U.S. federally-insured
depositories, New York State chartered banks, federally-insured or not, and Federal Home Loan Banks),
corporations, hedge funds and proprietary traders, investment firms/broker-dealers, and partnerships, all to the extent
subject to U.S. Bankruptcy Code proceedings. This memorandum does not cover the Federal Reserve Banks,
insurance companies, international organizations, local authorities, pension funds, sovereigns or their “wealth
funds”, sovereign-owned entities, or U.S. states. “Investment Funds” may be covered if organized as corporations,
partnerships or business trusts. Also attached is Appendix C (Recommended Amendments to Documents), as
provided by ISDA, the purpose of which is to assist readers with the processing and consumption of information set
out in this memorandum of law.
With that as background, this memorandum of law is given in respect of the following derivative
counterparties organized under the laws of the United States or its constituent jurisdictions (each a “U.S. Party”):
(1) Certain U.S. entities subject to the Code
For purposes of this memorandum, U.S. entities subject to the Code (“Code Entities”) include:
1
11 U.S.C. § 101 et seq. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which was signed into law in April, 2005
(the “2005 Act”), amended the Code, the FDIA, FDICIA and related statutes as of October 17, 2005. The provisions of the 2005 Act that are
relied upon in this memorandum apply only to proceedings commenced under the Code, the FDIA, or related statutes on or after October 17,
2005. The Financial Netting Improvements Act of 2006, which was signed into law on December 12, 2006 (the “2006 Act”), builds on the 2005
Act to further improve and clarify the netting process for certain financial contracts through amendments to the Code, the FDIA, FDICIA and
related statutes. The provisions of the 2006 Act that are relied upon in this memorandum will apply only to proceedings commenced under the
Code, the FDIA, or related statutes on or after the date of its enactment. References in this memorandum to the Code, the FDIA and FDICIA will
be references to such laws as amended by the 2005 Act and/or the 2006 Act.
2
12 U.S.C. § 1811 et seq.
3
N.Y. Banking Law § 1 et seq.
4
12 U.S.C. § 5381 et seq.
5
Pub. L. No. 102-242, 105 Stat. 2236 (1991).
1
744581026.3
(i) corporations that are incorporated under the laws of any of the fifty states of the United
States, the District of Columbia or Puerto Rico6;
(ii) partnerships7 that are organized under the laws of any of the fifty states of the United
States, the District of Columbia or Puerto Rico; 8 and
(iii) business trusts (as referred to in Section 101(9)(A)(v) of the Code) that are organized
under the laws of any of the fifty states of the United States, the District of Columbia or Puerto Rico.
Business trusts are vehicles for the conduct of business and sharing of gains, and unlike ordinary trusts, are
not for holding and conserving particular property. Although the Code does not define the term “business
trust”, the courts have adopted several different interpretations of the term, all of which could include a
trust entering into derivatives transactions, depending on its structure.9
6
Investment firms/broker-dealers are typically organized as corporations or partnerships. Liquidation proceedings for broker-dealers with insured
accounts are typically conducted under the Securities Investor Protection Act (“SIPA”), 15 U.S.C. § 78aaa et seq.SIPA itself specifically provides
for the application of Chapters 1, 3 and 5 and Subchapters I and II of Chapter 7 of the Code to the extent such provisions are not inconsistent with
SIPA. § 78fff(b). As SIPA was amended by the 2005 Act, neither the stay applicable upon the filing with the court of an application for a
protective decree nor any order or decree obtained by the Securities Investor Protection Corporation shall operate as a stay of a creditor’s
“contractual right” (broadly defined) to liquidate, terminate, accelerate or net obligations arising under or in connection with, a securities contract,
commodity contract, forward contract, repurchase agreement, swap agreement, or master netting agreement, each as defined in the Code, or to
foreclose on cash collateral pledged by the debtor. 15 U.S.C. § 78eee(b)(2)(C)(i). Special stay and disposition rules apply in the SIPA context to
securities pledged as collateral, or sold or lent under a repurchase or securities lending agreement, by the failed broker-dealer. 15 U.S.C. §
78eee(b)(2)(C)(ii). Affiliates of registered broker-dealers that are not themselves so registered are also covered by this memorandum, to the
extent they are otherwise within its scope.
To the extent the Code Entity is a “stockbroker” with “customers” whose claims are not eligible to be satisfied by SIPC advances pursuant to 15
U.S.C. § 78fff–3, subchapter III of Chapter 7 of the Code (“Subchapter III”) will apply rather than SIPA (or in tandem with SIPA if the Code
Entity is a SIPC member and also has customers (within the meaning of SIPA) whose claims could be satisfied by SIPC advances). Code Section
101(53A) defines "stockbroker" to mean “person— (A) with respect to which there is a customer, as defined in section 741 of this title; and (B)
that is engaged in the business of effecting transactions in securities (i) for the account of others; or (ii) with members of the general public, from
or for such person's own account.” 11 U.S.C. § 101(53A). As a result of certain provisions of the Dodd-Frank Wall Street Reform and Customer
Protection Act, which specify how these definitions under the Code apply to security-based swaps, Subchapter III may apply in a Code
Proceeding with respect to certain security-based swap dealers, major security-based swap participants, and broker-dealers with security-based
swap activities. See 15 U.S.C. § 78c-5(g), which provides: “A security-based swap, as defined in section 78c(a)(68) of this title shall be
considered to be a security as such term is used in section 101(53A)(B) and subchapter III of title 11. An account that holds a security-based
swap, other than a portfolio margining account referred to in section 78o(c)(3)(C) of this title shall be considered to be a securities account, as
that term is defined in section 741 of title 11. The definitions of the terms ‘purchase’ and ‘sale’ in section 78c(a)(13) and (14) of this title shall be
applied to the terms ‘purchase’ and ‘sale’, as used in section 741 of title 11. The term ‘customer’, as defined in section 741 of title 11, excludes
any person, to the extent that such person has a claim based on any … non-cleared security-based swap except to the extent of any margin
delivered to or by the customer with respect to which there is a customer protection requirement under section 78o(c)(3) of this title or a
segregation requirement.”
7
Partnerships include general partnerships and limited partnerships. A limited liability company, or LLC, is an organizational form that has
attributes in common with both corporations and partnerships. Courts have found LLCs eligible to be debtors under the Code on the theory that
LLCs are similar enough to both corporations and partnerships to come within the definition of “person”, a term defined to “include”, in a non-
limiting sense, corporations and partnerships. See In re ICLNDS Notes Acquisition, LLC, 259 B.R. 289, 292 (Bankr. N.D. Ohio 2001).
Alternatively, a LLC might qualify as a “corporation” under various prongs of the Code definition of that term, e.g., “an association having a
power or privilege that a private corporation, but not an individual or a partnership, possesses.” 11 U.S.C. § 101(9)(A)(i). See In re KRSM
Props., LLC, 318 B.R. 712, 717 (B.A.P. 9th Cir, 2004).
8
Hedge funds and mutual funds domiciled in the U.S. are typically organized as corporations, partnerships or trusts (that are potentially “business
trusts”, see infra note 9 and accompanying text) and to that extent are covered by this memorandum.
9
See, e.g., In re Kenneth Allen Knight Trust, 303 F.3d 671, 679 (6th Cir. 2002) (concluding that “the definition of business trust properly belongs
to federal, rather than state, law,” and holding that the standard is whether the trust is created with the primary purpose of carrying on business or
commercial activity for the benefit of investors, and that the determination is highly fact-specific). But see In re Heritage N. Dunlap Trust, 120
B.R. 252, 254 (Bankr. D. Mass. 1990) (concluding that whether a trust is a “business trust” is determined by looking to applicable state law
(including filing and registration requirements)); In re Sung Soo Rim Irrevocable Intervivos Trust, 177 B.R. 673 (Bankr. C.D. Cal. 1995) (holding
that the state law classification of a trust created a “rebuttable presumption” as to the proper Code treatment, and then testing this presumption
under a framework derived from federal tax law cases, which looks for the presence of corporate attributes – (1) a trust created and maintained
for a business purpose; (2) title to property held by trustee; (3) centralized management; (4) continuity uninterrupted by death among beneficial
owners; (5) transferability of interests; and (6) limited liability – as hallmarks of business trust status). See also In re General Growth Properties,
Inc., 409 B.R. 43 (Bankr. S.D.N.Y. 2009) (reasoning that non-transferability of interests and lack of an internal management structure were
characteristics that the trust shared with some closely held corporations and concluding that these features did not prevent the the trust from being
a business trust); In re Universal Clearing House Co., 60 B.R. 985, 992 (D. Utah 1986) (finding a business trust because, although the trust never
engaged in a profit making business, its express purpose was principally making profit rather than protecting the trust assets); In re Mosby, 61
B.R. 636, 638 (E.D. Mo. 1985), aff’d, 791 F.2d 628 (8th Cir. 1986), (relying on cases with respect to business trusts in the Federal tax context).
2
744581026.3
Excluded from the scope of this memorandum are certain other entities, some of which are covered by the
Code, in particular:
(i) municipalities;10
(ii) pension funds that are subject to a special insolvency regime administered by the Pension
Benefit Guaranty Corporation;11
(iii) ordinary private trusts that are not eligible for insolvency under the Code; and
(iv) commodity brokers.12
(2) Certain U.S. banking institutions
For purposes of this memorandum, U.S. banking institutions (“U.S. Banking Institutions”) include
nationally chartered banking institutions that take federally-insured deposits, New York State chartered banking
institutions whether or not they take federally-insured deposits and Federal savings associations that take federally-
insured deposits. We refer to any of the foregoing U.S. Banking Institutions that take federally-insured deposits as
“Insured Institutions”, and to New York State chartered banking institutions that do not take federally-insured
deposits as “Uninsured N.Y. Institutions.”
(3) Certain U.S. systemically significant financial companies
For purposes of this memorandum, we refer to a Code Entity or Uninsured N.Y. Institution for which the
FDIC is appointed as receiver pursuant to the OLA, as described in Section IV.D, as a “Covered Financial
Company.”
(4) Certain U.S. branches of non-U.S. banking institutions
For purposes of this memorandum, U.S. branches of non-U.S. banking institutions (“Branches”) include
branches and agencies of banks incorporated or organized outside the United States that are (i) federally-licensed13
In addition, in defining the term “corporation” when the current Code was enacted by the Bankruptcy Reform Act of 1978, the drafters inserted
the term “business trust” in place of the following language used in the Bankruptcy Act of 1898: “any business conducted by a trustee or trustees
wherein beneficial interest or ownership is evidenced by a certificate or other written instrument.” 11 U.S.C. § 101(9)(A)(v). As at least some
courts have noted that this change was intended by Congress to broaden the variety of trusts eligible to obtain relief in the bankruptcy courts, it is
quite possible that a trust entering into derivatives transactions would be considered a “business trust.” See Knight at 679; In re Tru Block
Concrete Prods., Inc., 27 B.R 486, 490-91 (Bankr. S.D. Cal. 1983). See also Hecht v. Malley, 265 U.S. 144, 159-62 (1924); In re John Q.
Hammons Fall 2006, LLC, 573 B.R.881, 893-4 (Bankr. D. Kansas 2017) (observing that “newer approaches”, which “seem to favor a global,
totality of circumstances approach”, have “developed as the use of trusts has developed over the last 20 years”). But see In re The Estate of the
Assignment for the Benefit of Creditors of May, 405 B.R. 443 (Bankr. E.D. Mich. 2008), in which the court, in the context of a trust designed to
liquidate assets for the benefit of creditors, adopted a very narrow, and perhaps overly selective, reading of the Knight court’s analysis of the
1978 changes in the Code, discussed above, and concluded that Congress appeared to have intended to incorporate federal tax law concepts,
including “the concept that a liquidating trust is not a business trust”, id. at 455–56. In Catholic Sch. Employees Pension Trust, 599 B.R. 634,
662 (B.A.P. 1st Cir. 2019), the bankruptcy appellate panel endorsed (for use in future cases) a simplified test that was recently formulated in In re
Dille Family Tr., 598 B.R. 179, 194 (Bankr. W.D. Pa. 2019), which requires that (1) the trust itself was created for the purpose of transacting
business for a profit and (2) the trust has all the indicia of a corporate entity. In a significant new development, a Delaware bankruptcy court
rejected the majority view that federal law determines a trust’s status as a business trust, holding instead that the law of the jurisdiction in which
the trust is organized governs the issue. In re EHT US1, Inc., 630 B.R. 410 (Bkrtcy.D.Del. 2021). But see In re Quadruple D Tr., BR 21-16233
TBM, 2022 WL 819297, at *8 - 12 (Bankr. D. Colo. Mar. 18, 2022) (extensive analysis criticizing the EHT court’s reasoning).
10
Under 11 U.S.C. § 101(40) “municipality” means political subdivision or public agency or instrumentality of any of the fifty states of the
United States, but not of the District of Columbia or Puerto Rico. As a result of the 2005 Act, proceedings regarding municipalities under
Chapter 9 now have the benefit of Code Sections 555, 556, 559, 560, 561 and 562, some of which are discussed in this memorandum with respect
to other Code entities.
11
See Subchapter III on Plan Termination Insurance of the Employee Retirement Income Security Act (“ERISA”) of 1974 (29 U.S.C. § 1301
et seq.).
12
“Commodity broker” is defined in Section 101(6) of the Code to include a range of intermediaries in commodity contracts. Commodity
brokers in insolvency may be subject to special provisions of the Code and certain Commodity Futures Trading Commission rules. See 17 CFR
§ 190. Section 561(b)(2)–(3) of the Code limits, in certain respects, the application of netting to commodity brokers.
13
Under the International Banking Act of 1978, a Federal Branch must be licensed to take deposits and do banking business in the United States
(12 U.S.C. § 3102).
3
744581026.3
branches or agencies whether or not they take federally-insured deposits (“Federal Branches”) or (ii) New York
State licensed branches14 or agencies whether or not they take federally-insured deposits (“New York Branches”).
(5) Non-U.S. banks
For purposes of this memorandum, we refer to banks incorporated or organized outside the United States
(each with its branches or agencies as a single entity) or only the non-U.S. bank parent of a branch or agency, as
appropriate and relevant to the context.
(6) Entities not covered by this memorandum
Excluded from the scope of this memorandum (in addition to those described in (1) above) are certain other
categories of U.S. entities, in particular:
(i) insurance companies;15
(ii) credit unions; 16
(iii) governmental entities, such as the Federal Reserve Banks, government-sponsored
agencies (other than Federal Home Loan Banks, 17 which are discussed in Section XIII), such as the Federal
National Mortgage Association (“Fannie Mae”),18 the Federal Home Loan Mortgage Corporation (“Freddie
Mac”),19 the Financing Corporation,20 the Resolution Funding Corporation,21 the Banks for Cooperatives,22
the Farm Credit System Banks,23 and the Government National Mortgage Association (“Ginnie Mae”)24;25
(iv) international organizations; and
(v) sovereigns and states of federal sovereigns.
In addition, this memorandum of law covers FDICIA, which supplements the Code and the FDIA and
provides for the enforceability of netting provisions contained in a “netting contract” between two or more
“financial institutions” notwithstanding any other provision of law.26
14
A New York Branch of a non-U.S. banking institution must be licensed to take deposits or do business in New York (N.Y. Banking Law
§ 200).
15
U.S. insurance companies are subject to various insolvency laws at the state level. Parties should consider carefully entering into a 2002 ISDA
Master Agreement with U.S. insurance companies because the enforceability of the termination and close-out netting provisions of the 2002
ISDA Master Agreement may be uncertain under some state insurance company insolvency laws.
16
Credit unions are subject to a special insolvency regime governed by the Federal Credit Union Act (12 U.S.C. §§ 1751–1795k). This regime is
not treated in this memorandum.
17
See Federal Home Loan Bank Act of 1932 (12 U.S.C. §§ 1421–1449).
18
See National Housing Act of 1934 (12 U.S.C. § 1716 et seq.).
19
See the Federal Home Loan Mortgage Corporation Act (12 U.S.C. §§ 1451–1459).
20
See Federal Savings and Loan Insurance Corporation Recapitalization Act of 1987 (12 U.S.C. § 1441).
21
See The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (Pub. L. 101-73, 103 Stat. 183).
22
See The Farm Credit Act of 1971 (12 U.S.C. § 2121).
23
See The Farm Credit Act of 1971 (12 U.S.C. § 2011).
24
Ginnie Mae was created on September 1, 1968, as one of two corporations resulting from the partition of the former Federal National Mortgage
Association. Ginnie Mae is a tax-exempt corporate instrumentality of the United States, chartered under 12 U.S.C. §§ 1716b–1723i.
25
The Government-sponsored enterprises are subject to a variety of insolvency regimes. Some of these insolvency regimes are contained in the
acts establishing those government-sponsored entities; however, for some enterprises, such as Ginnie Mae, there are no specific statutory
provisions addressing liquidation, reorganization, conservatorship or receivership. The Federal Housing Finance Agency (“FHFA”) has certain
powers as conservator or receiver for Fannie Mae, Freddie Mac and the Federal Home Loan Banks under the Housing and Economic Recovery
Act of 2008 (“HERA”), Public Law 110-289, 122 Stat. 2654. The qualified financial contract provisions of HERA (described further in Section
XIII) share many features with the FDIA. Note that Freddie Mac and Fannie Mae were placed into conservatorship by the FHFA on
September 7, 2008. Note also that on December 29, 2004, the Student Loan Marketing Association, a former government-sponsored enterprise,
was dissolved in connection with its privatization as SLM Corporation.
26
See in particular the discussion under Section V.
4
744581026.3
This memorandum of law is confined to matters of the Federal laws of the United States and the laws of the
State of New York.
Parties entering into an ISDA Master Agreement that documents Transactions previously would have faced
an element of uncertainty in assessing the bankruptcy or insolvency risks involved in dealing with a counterparty
organized in the United States and subject to the Code, the FDIA or the NYBL. These risks would have varied
depending upon the type of counterparty (i.e., bank, savings institution or corporation). Generally, this uncertainty
has been removed and legal certainty provided as a result of amended provisions of the Code, the FDIA, the NYBL
and FDICIA, and the incorporation into the OLA of provisions patterned closely after the amended provisions of the
FDIA, each as discussed below.
This memorandum of law is structured as follows: Section I. sets forth some background information and
certain assumptions; Section II. sets forth the questions presented; Section III. sets forth a summary of conclusions;
Section IV. analyzes the treatment of a “swap agreement” under the Code, the FDIA, the NYBL and the OLA;
Section V. analyzes the provisions of FDICIA relevant to the ISDA Master Agreement; Section VI. analyzes the
treatment of Non-Enumerated Transactions (as defined below) under the Code, the FDIA, the NYBL, the OLA and
FDICIA; Section VII. briefly discusses the current status of obtaining judgments in non-U.S. currencies from U.S.
courts; Section VIII. discusses various issues arising with the multibranch provisions of the ISDA Master
Agreement in an insolvency of a U.S. Bank (as defined in assumption q. below) or a Federal or New York Branch of
a foreign bank; Section IX. discusses the applicability of the conclusions reached for a New York-law governed
ISDA Master Agreement to an ISDA Master Agreement that is governed by English, Irish or French law; Section X.
discusses the enforceability of the termination, close-out netting and multibranch provisions of the ISDA Master
Agreement under New York law; Section XI. discusses whether any developments are pending as a result of which
the current regulatory or legal environment under U.S. law or New York State law concerning the enforceability of
close-out netting may be expected to change in the foreseeable future; and Section XII. discusses the enforceability
of the termination and close-out netting provisions of (a) the 2001 ISDA Cross-Agreement Bridge and (b) the 2002
ISDA Energy Agreement Bridge (each, a “Bridge”). Section XIII. discusses the applicability of the conclusions of
this memorandum to Federal Home Loan Banks. Capitalized terms not otherwise defined herein have the meanings
assigned to them in the ISDA Master Agreement.
I.
BACKGROUND AND ASSUMPTIONS
A. Background
The International Swaps and Derivatives Association, Inc. (formerly known as the International Swap
Dealers Association, Inc., “ISDA”) published the ISDA Master Agreement (Multicurrency–Cross Border) (the
“Cross Border Agreement”) and the ISDA Master Agreement (Local Currency–Single Jurisdiction) (the “Single
Jurisdiction Agreement” and, together with the Cross Border Agreement, the “1992 ISDA Master Agreements” and
each a “1992 ISDA Master Agreement”), both in June 1992.27
ISDA published the 2002 ISDA Master Agreement in January 2003 (the “2002 ISDA Master Agreement
(Original)”) and, in June 2018, published the 2002 ISDA Master Agreement (Irish law) and the 2002 ISDA Master
Agreement (French law) (each a “2002 ISDA Master Agreement”, together the 2002 ISDA Master Agreements, and
together with the 1992 ISDA Master Agreements, the “ISDA Master Agreements” and each an “ISDA Master
Agreement”). The 2002 ISDA Master Agreement (Original) may be governed by either New York law or English
law as the parties elect. The 2002 ISDA Master Agreement (Irish law) and the 2002 ISDA Master Agreement
(French law) provide that they are governed, respectively, by Irish law and French law.
27
The Single Jurisdiction Agreement is designed for Transactions in a single currency between two parties organized or operating out of the same
jurisdiction. The Cross Border Agreement is designed for Transactions in any currency between two parties irrespective of their jurisdiction of
organization or operation. The Cross Border Agreement may be governed by either New York law or English law as the parties elect. Apart
from differences relating to the multicurrency and cross border aspects of the Cross Border Agreement, the two 1992 ISDA Master Agreements
are essentially the same in substance.
5
744581026.3
Set forth below is a general description of how the relevant provisions of the ISDA Master Agreements
operate. Any capitalized terms used but not defined herein are taken from the ISDA Master Agreements.
The ISDA Master Agreements state that the parties have entered or will enter into one or more Transactions
with each other from time to time and will execute and exchange a document or other confirming evidence (each, a
“Confirmation”) setting forth the particular terms of each Transaction.
The ISDA Master Agreements also state that the parties enter into Transactions in reliance on the fact that
each ISDA Master Agreement and Confirmations relating thereto form a single agreement between the parties and
the parties would not otherwise enter into any Transactions.28 The ISDA Master Agreements provide that each
Confirmation is a binding supplement to the relevant ISDA Master Agreement.
The ISDA Master Agreements provide that on each payment date all amounts otherwise owing in the same
currency under the same Transaction are netted so that only a single amount is owed in that currency. The ISDA
Master Agreements also provide, if the parties so elect, for such netting of amounts in the same currency among all
Transactions identified as being subject to such election that have common payment dates and booking offices. 29
The obligation of each party to make scheduled payments or deliveries with respect to the Transactions is subject to
the conditions that: (i) no Event of Default or Potential Event of Default with respect to the other party (including,
without limitation, a payment or delivery default) has occurred and continues and (ii) under the 1992 ISDA Master
Agreements and the 2002 ISDA Master Agreement, no Early Termination Date has occurred or been designated
with respect to any Affected Transaction.30 The failure by a party to make a payment or delivery with respect to any
Transaction or the insolvency of that party constitutes an Event of Default under the ISDA Master Agreements as it
relates to all Transactions.31 Finally, the default-based termination of any other specified derivatives transactions
between the parties (other than, under the 2002 ISDA Master Agreement, single transaction close-outs for delivery
failure under multiple transaction agreements) constitutes an Event of Default under the ISDA Master Agreements.32
The ISDA Master Agreements permit, in most cases, the designation of an Early Termination Date
following the occurrence of an Event of Default or Termination Event specified in the ISDA Master Agreements.
The ISDA Master Agreements provide that, in such case, no further scheduled payments and deliveries in respect of
the Transactions will be required to be made. In addition, the ISDA Master Agreements provide that, in the case of
a default-based termination, the designated Early Termination Date will be the Early Termination Date for all
Transactions.33 In addition, the 1992 and 2002 ISDA Master Agreements allow parties to elect, at the time they
enter into a 1992 or 2002 ISDA Master Agreement, for all the outstanding Transactions under the 1992 or 2002
ISDA Master Agreement to terminate automatically upon certain insolvency events, instead of requiring the Non-
defaulting Party to designate an Early Termination Date.
In the event of a default-based termination, the ISDA Master Agreements provide for a lump-sum amount
(reflecting the positive or negative values of all Transactions) to be calculated on the Early Termination Date
(commonly referred to as “close-out netting”).34 The 2002 and 1992 Master Agreements differ from one another in
terms of calculating payments owed upon a default-based termination. Nevertheless, the differences among them do
not affect the issues discussed in this memorandum of law.
28
See Section 1(c) of the 1992 ISDA Master Agreement and the 2002 ISDA Master Agreement.
29
See Section 2 of the ISDA Master Agreements.
30
Although not a Section 2(a)(iii) condition precedent, we note that under the 2002 ISDA Master Agreement, payment and delivery obligations
are deferred if an Illegality or Force Majeure Event has occurred and continues during the applicable Waiting Period, as defined in the 2002
ISDA Master Agreement. See Section 5(d). See Section 2(a)(iii) of the ISDA Master Agreements.
31
See Section 5(a)(i), (vii) of the ISDA Master Agreements.
32
See Section 5(a)(v) of the ISDA Master Agreements.
33
If an Early Termination Date is designated as the result of the occurrence of an Event of Default or a decline in the credit quality of a party
following the occurrence of certain merger-related events, all Transactions under the ISDA Master Agreements terminate. In the unlikely event,
however, that an Early Termination Date is designated as a result of the occurrence of certain events relating to the imposition of withholding
taxes or a change in law as a result of which a party’s performance becomes illegal (or, under the 2002 ISDA Master Agreement, a Force Majeure
Event), only the Transactions affected by such events (or, under the 2002 ISDA Master Agreement, in the case of an Illegality or a Force Majeure
Event and at the election in certain cases of either party, some of the Affected Transactions) terminate. See Section 6 of the ISDA Master
Agreements.
34
See Section 6 of the ISDA Master Agreements.
6
744581026.3
1. Calculation of the Lump-Sum Amount under the 2002 ISDA Master Agreement. The 2002 ISDA
Master Agreement contains a single method for calculating the lump-sum amount upon early termination, which is
based in part on the determination of a Close-out Amount. When determining a Close-out Amount, a Determining
Party calculates the amount of its losses that are or would be incurred or its gains that are or would be realized in
replacing, or in providing for the Determining Party the economic equivalent of (i) the material terms, including the
payments and deliveries by the parties under Section 2(a)(i), in respect of a Terminated Transaction or group of
Terminated Transactions, and (ii) the option rights of the parties in respect of a Terminated Transaction or group of
Terminated Transactions. A Close-out Amount is to be determined by the Determining Party in good faith, using
commercially reasonable procedures in order to produce a commercially reasonable result. The definition of Close-
out Amount is permissive with respect to the kind of information that a Determining Party may consider, though it
emphasizes consideration of certain information in certain contexts. Following the determination of any Close-out
Amount, Section 6(e) of the 2002 ISDA Master Agreement sets out how a lump sum termination payment is to be
calculated on early termination. The termination payment amount may be paid by the Non-defaulting or non-
Affected Party or by the Defaulting or Affected Party, as the case may be, depending on which the calculation
favors.
2. Calculation of the Lump-Sum Amount under the 1992 ISDA Master Agreements. The 1992 ISDA
Master Agreements contain alternatives for calculating the lump-sum amount upon early termination, which the
parties may elect at the time they enter into a 1992 ISDA Master Agreement.
First, the 1992 ISDA Master Agreements allow the parties to elect a payment measure based upon Market
Quotation (market values of the Transactions based upon the parties’ future scheduled payment or delivery
obligations) or Loss (a general indemnity). If the parties elect Market Quotation, the lump-sum amount includes
(i) all Unpaid Amounts (amounts which were or would have been due prior to termination) relating to the
Transactions and (ii) an amount that reflects the netting of positive (i.e., each amount that would be payable by the
Non-defaulting Party to replace Transactions under then current market conditions) and negative (i.e., each amount
that would be received by the Non-defaulting Party to replace Transactions under then current market conditions)
Market Quotations. As a result of such netting, the Defaulting Party is given credit for the negative market value of
any Transactions under which it then would (absent the existence of an Event of Default or Potential Event of
Default under the 1992 ISDA Master Agreements) have been entitled to receive payments from the Non-defaulting
Party, even though the Non-defaulting Party would not, by virtue of the conditional payment obligation provisions
set forth in the 1992 ISDA Master Agreements, otherwise have been obligated to make such payments. If the parties
elect Loss, then any payment upon termination will be equal to the Non-defaulting Party’s total net losses and costs
(or gain, in which case expressed as a negative number) under the 1992 ISDA Master Agreements as a result of the
termination of the Transactions.
Second, the 1992 ISDA Master Agreements also require the parties to elect between the “First Method” of
calculating termination payments and the “Second Method”. Under the First Method, in the case of an Event of
Default, if the lump-sum termination amount is positive, it is paid by the Defaulting Party to the Non-defaulting
Party, but, if it is negative, no payment is due: The Non-defaulting Party is not required to make a termination
payment to the defaulting party after an Event of Default. Under the Second Method, if the lump-sum termination
amount is a positive number, the Defaulting Party will pay it to the Non-Defaulting Party; if that amount is a
negative number, the Non-defaulting party will pay the absolute value of that number to the Defaulting Party.
On November 9, 1992, in the case of Drexel Burnham Lambert Products Corp. v. Midland Bank PLC, Case
No. 92-3098, 1992 WL 12633422 (S.D.N.Y. Nov. 10, 1992), Judge Pollack of the U.S. District Court for the
Southern District of New York held that “[t]he so-called ‘Limited Two-Way Payments Clause’ . . . is . . .
enforceable”.35 This memorandum of law, however, does not address the enforceability of the First Method (also
referred to as limited two-way payments) or the Second Method (also referred to as full two-way payments),
because, as a matter of the assumptions below, resolution of this issue would have no impact upon the conclusions
reached herein. The 2005 Act has amended the FDIA such that the limited two-way payment method, which would
likely fall within the definition of “walkaway clause”, would no longer be enforceable under the FDIA and FDICIA
35
1992 WL 12633422, at *2; see also Brookfield Asset Mgmt., Inc. v. AIG Fin. Prods. Corp., Case No. 09-8285, 2010 WL 3910590 (S.D.N.Y.
Sept. 29, 2010) (nonbankruptcy court holding on motion to dismiss that defendants failed to demonstrate that Section 6(e)(i) of the 1987 ISDA
Master Agreement is an unenforceable penalty clause).
7
744581026.3
against an institution in default that takes federally-insured deposits.36 The OLA contains a substantively identical
denial of enforceability of walkaway clauses against Covered Financial Companies.37 As noted in Section VIII.3(a)
below, limited two-way payments may be challenged under the NYBL as well.
B. Assumptions
For purposes of this memorandum, we have made the following assumptions:

(a) Two institutions, either (i) a corporation or another Code entity or (ii) a bank or other
similar financial institution, have entered into an ISDA Master Agreement. If the ISDA Master Agreement
is a 1992 ISDA Master Agreement or a 2002 ISDA Master Agreement (Original), the parties have selected
either the laws of the State of New York or the laws of England to govern the ISDA Master Agreement.
(The 2002 ISDA Master Agreement (Irish law) and the 2002 ISDA Master Agreement (French law)
provide that they are governed, respectively, by Irish law and French law.) At least one of the institutions
is a U.S. Party and neither institution has specified that it is a “Multibranch Party” or that the provisions of
Section 10(a) apply to it. (Please refer to Section VIII. for a discussion of the case where the Defaulting
Party is a Multibranch Party.)
(b) The provisions of the Preamble of the ISDA Master Agreements and Section 1(c) of the
1992 ISDA Master Agreements and 2002 ISDA Master Agreement, as well as Sections 1(a), 2(a), 5, 6 and
13(a) of the ISDA Master Agreements and the related definitions contained in the Preamble and Section 14
have not been altered in any material respect from the printed terms of the ISDA Master Agreements.38
(c) On the basis of the terms and conditions of the ISDA Master Agreement and other
relevant factors, and acting in a manner consistent with the intentions stated in the ISDA Master
Agreement, the Parties, each acting as principal, over time enter into a number of Transactions that are
intended to be governed by the ISDA Master Agreement. The Transactions entered into include any or all
of the Transactions described in Appendix A.
(d) Some of the Transactions provide for an exchange of cash by both parties and others
provide for the physical delivery of shares, bonds or commodities in exchange for cash.
(e) After entering into these Transactions and prior to the maturity thereof, the U.S. Party
becomes the subject of a voluntary or involuntary case in New York under the Code, the FDIA, the NYBL
or the OLA, as the case may be, and, subsequent to the commencement of the insolvency, the U.S. Party or
an insolvency official seeks to assume the Confirmations representing profitable Transactions for the
insolvent party and reject the Confirmations representing unprofitable Transactions for the insolvent party.
36
A “walkaway clause”, as most recently defined in the 2006 Act, is defined as follows: “any provision in a qualified financial contract that
suspends, conditions, or extinguishes a payment obligation of a party, in whole or in part, or does not create a payment obligation of a party that
would otherwise exist, solely because of such party’s status as a nondefaulting party in connection with the insolvency of an insured depository
institution that is a party to the contract or the appointment of or the exercise of rights or powers by a conservator or receiver of such depository
institution, and not as a result of a party’s exercise of any right to offset, setoff, or net obligations that exist under the contract, any other contract
between those parties, or applicable law.” 12 U.S.C. § 1821(e)(8)(G)(iii). The OLA contains a substantively identical definition of “walkaway
clause”. 12 U.S.C. § 5390(c)(8)(F)(iii).
37
12 U.S.C. § 5390(c)(8)(F).
38
We believe the following alterations to be consistent with this assumption: any selections contemplated by Sections 5 and 6 of the ISDA Master
Agreements and made pursuant to the Schedule (in the form published by ISDA) to an ISDA Master Agreement or in a Confirmation for a
Transaction; an amendment of a 1992 ISDA Master Agreement, in the form set out in the ISDA Close-out Amount Protocol, to replace Market
Quotation and (if elected) Loss with Close-out Amount; an amendment in the form published by ISDA in June 2014 for use in relation to Section
2(a)(iii) of the 1992 ISDA Master Agreement or the 2002 ISDA Master Agreement; or the alternative forms of Section 1(c) or Section 13(a), each
as set forth, respectively, in Part 4(h) and Part 4(s) of the Schedule (in the form published by ISDA) to the 2002 ISDA Master Agreement (French
law). This memorandum does not address use of the arbitration provisions set forth in Part 4(j) of the Schedule to the 2002 ISDA Master
Agreement (French law).
8
744581026.3
(f) The parties to the 1992 ISDA Master Agreement have adopted the Second Method for all
Events of Default and Termination Events.
(g) Upon the occurrence of an Event of Default or a Termination Event under Section 5 of
the ISDA Master Agreement in respect of the Defaulting Party, the Non-defaulting Party will act in good
faith and in a commercially reasonable manner in the exercise of its rights granted to it under Sections 5
and 6 of the ISDA Master Agreement.
(h) With respect to an Insured Institution subject to the FDIA, the written agreement
requirements of Sections 11(d)(9), 11(n)(4)(I) and 13(e) of the FDIA, as interpreted in the Policy Statement
Regarding Qualified Financial Contracts issued by the Board of Directors of the FDIC on December 12,
1989 (the “FDIC Policy Statement”), are met; 39 (ii) with respect to a U.S. Banking Institution or a New
York Branch subject to the NYBL, for purposes of the definition of Qualified Financial Contracts under the
NYBL,40 the Transactions entered into by such Party are reflected in the books, accounts or records of such
Party; and (iii) with respect to a Covered Financial Company subject to the OLA, the written agreement
requirements of 12 U.S.C. § 5390(a)(6) are met.41
(i) For purposes of Questions 1–8 and Question 10, it is assumed that the ISDA Master
Agreement is governed by the laws of the State of New York.
(j) Each Party has corporate power and authority to enter into the ISDA Master Agreement,
including all the Transactions thereunder, and is a sophisticated user of derivatives, and all Transactions are
enforceable in accordance with their terms.
(k) The execution and delivery of the ISDA Master Agreement, including the documents and
other confirming evidence exchanged between the Parties confirming the Transactions, have been duly
authorized by all necessary actions on the part of either Party.
(l) Any payments made by or any security interest granted to one Party in any of the assets
of the other Party were not taken by the Party in contemplation of the latter Party’s insolvency or with the
intent to hinder, delay, or defraud that Party or the creditors of that Party.
(m) Neither Party to the relevant ISDA Master Agreement will be an “insider” of the other
Party as defined in Section 101(31) of the Code, an “affiliate” of the other Party as defined in either
Section 101(2) of the Code or Section 23A of the Federal Reserve Act, or an “institution affiliated party” of
the other Party as defined in Section 3(u) of the FDIA.
(n) The United Nations Convention on Contracts for the International Sale of Goods will not
apply to the ISDA Master Agreement or Transactions entered into thereunder.
39
The FDIC Policy Statement provides a safe harbor under these sections of the FDIA where (i) the Transaction entered into under the ISDA
Master Agreement is evidenced by a written confirmation issued by one of the parties “reasonably contemporaneously” with the Transaction,
(ii) the Non-defaulting Party has relied on a representation or a resolution as to the corporate authority of the Insured Institution and (iii) the Non-
defaulting Party has maintained a copy of the confirmation and evidence of authority. We believe that the confirmations required under Section 9
of the ISDA Master Agreement and the representations given under Section 3 of the ISDA Master Agreement should meet the requirements set
forth in the FDIC Policy Statement. Subsections (d)(9) and (n)(4)(I) of Section 11, each of which relates to agreements generally, refer to
Section 13(e) to define aspects of the written agreement requirement. Section 13(e) has been amended by the 2005 Act to eliminate the
contemporaneous requirement, but, as written, only with respect to security arrangements for qualified financial contracts. We think subsections
(d)(9) and (n)(4)(I) of Section 11 should be interpreted to be equally subject to the amended language of Section 13(e). However, in the absence
of precedent, whether or not a court would decide that there remained any contemporaneous requirement in respect of an ISDA Master
Agreement remains unclear.
40
N.Y. Banking Law § 618-a2(e).
41
12 U.S.C. § 5390(a)(6) provides that “[n]o agreement that tends to diminish or defeat the interest of the Corporation as receiver in any asset
acquired by the receiver under this section shall be valid against the receiver, unless such agreement—(A) is in writing; (B) was executed by an
authorized officer or representative of the covered financial company, or confirmed in the ordinary course of business by the covered financial
company; and (C) has been, since the time of its execution, an official record of the company or the party claiming under the agreement provides
documentation, acceptable to the receiver, of such agreement and its authorized execution or confirmation by the covered financial company.”
9
744581026.3
(o) The ISDA Master Agreement and all Transactions carried out under the ISDA Master
Agreement are entered into prior to the formal commencement of insolvency proceedings against either
Party.
(p) At the time at which a Transaction is entered into under the ISDA Master Agreement,
neither Party has actual notice of the insolvency of the other Party.
(q) For the purposes of Questions 6 and 8 below, it is assumed that a federally chartered
national bank or a New York-chartered state bank that takes federally-insured deposits (the “U.S. Bank”)
has entered into an ISDA Master Agreement on a multibranch basis. In the 1992 and 2002 ISDA Master
Agreements, the U.S. Bank has specified that Section 10(a) applies to it and that it is a “Multibranch
Party”. The U.S. Bank then has entered into Transactions under the ISDA Master Agreement through its
head office and also through one or more branches of the U.S. Bank located in other countries that had been
specified in the Schedule to the U.S. Bank’s ISDA Master Agreement. After entering into these
Transactions and prior to the maturity thereof, the U.S. Bank becomes the subject of a voluntary or
involuntary proceeding under the banking insolvency laws of the United States.
(r) For the purposes of Questions 7 and 8 below, it is assumed that a bank (“Bank F”)
organized and with its headquarters in a country (“Country H”) other than the United States has entered
into an ISDA Master Agreement on a multibranch basis. In the 1992 and 2002 ISDA Master Agreements,
Bank F has specified that Section 10(a) applies to it and that it is a “Multibranch Party”. Bank F then has
entered into Transactions under the ISDA Master Agreement through Bank F and also through one or more
branches of Bank F located in other countries that had been specified in the Schedule to Bank F’s ISDA
Master Agreement, including in each case a branch of Bank F located in New York State and organized
under the laws of New York State that does not take federally-insured deposits (the “New York Branch”) or
a branch of Bank F located in and organized under Federal law (the “Federal Branch”). After entering into
these Transactions and prior to the maturity thereof, Bank F becomes the subject of a voluntary or
involuntary insolvency proceeding in Country H.
(s) For purposes of Question 9 below, the Parties enter into one of the following: (1) a 2002
ISDA Master Agreement (Irish law), or (2) a 2002 ISDA Master Agreement (French law), or (3) a 1992
ISDA Master Agreement, or 2002 ISDA Master Agreement (Original), in which Part 4(h) of the Schedule
reads as follows: “Governing Law. This Agreement will be governed by and construed in accordance with
English law” (each an “English-law ISDA Master Agreement” and each of the English-law ISDA Master
Agreement, the 2002 ISDA Master Agreement (Irish law) and the 2002 ISDA Master Agreement (French
law) a “Foreign-Law ISDA Master Agreement”). All the Transactions entered into under a Foreign-Law
ISDA Master Agreement will be governed by the same law as the ISDA Master Agreement. The Foreign-
Law ISDA Master Agreement, in particular the termination, the close-out netting and the multibranch
provisions thereof, the Schedule and all the Transactions entered into thereunder are valid, binding and
enforceable in accordance with the plain meaning of their terms under the law specified to govern the
Foreign-Law Master Agreement42 and, except as expressly discussed herein with respect to New York and
U.S. federal law, of any other jurisdiction whose law applies.
(t) All Bridged Agreements (as defined in Section XII) relate to transactions eligible for one
or more of the safe harbors for securities contracts, forward contracts or swap agreements under the Code
and, as qualified financial contracts, for purposes of the FDIA, the NYBL and the OLA; all Bridged
Agreements (including the transactions thereunder) are themselves enforceable under their governing laws
and the laws of the State of New York, if applied thereto, and satisfy assumptions (j) through (p) above (as
if references therein to the ISDA Master Agreement and Transactions were, respectively, to the relevant
Bridged Agreement and the transactions thereunder); the Bridge satisfies assumptions (i) through (p) above
(as if references to the ISDA Master Agreement and were to the Bridge, with references to Transactions
42
For purposes of this memorandum, we have reviewed only the English language version of the 2002 ISDA Master Agreement (French law),
and we assume that there is no difference in interpretation between the English and French version of the 2002 ISDA Master Agreement (French
law) and that any substantive or interpretive principles of non-U.S. law that may be incorporated into, or affect the interpretation of, the Foreign
Law Master Agreements do not materially affect the analysis set out herein.
10
744581026.3
being disregarded); all Bridged Agreements provide for simultaneous termination of all transactions
thereunder and calculation of a single net termination amount and the relevant Bridge, as written, would
successfully trigger those termination and netting provisions; the termination and netting provisions under
the Bridged Agreements are themselves enforceable under the Code, the FDIA, the NYBL and the OLA to
the same extent as are like provisions of the ISDA Master Agreements; and any notices deemed given shall
be given or adequately substituted for, to the extent necessary to support the enforceability of the Bridged
Agreements as described above.
II.
QUESTIONS PRESENTED
This memorandum of law addresses the following questions:

1. For purposes of the 1992 ISDA Master Agreements and 2002 ISDA Master Agreement, assuming
the parties have not selected Automatic Early Termination upon certain insolvency events to apply to the U.S. Party,
are the provisions of the relevant ISDA Master Agreement permitting the Non-defaulting Party to terminate all the
Transactions (i) upon the insolvency of a Code Entity, enforceable under the Code, the OLA or FDICIA, and
(ii) upon the insolvency of a U.S. Banking Institution, enforceable under the FDIA, the NYBL, the OLA (in the case
of an Uninsured N.Y. Institution) or FDICIA?
2. Assuming, in the case of the 1992 ISDA Master Agreements and 2002 ISDA Master Agreement,
that the parties have selected Automatic Early Termination upon certain insolvency events to apply to the U.S.
Party, are the provisions of the ISDA Master Agreement automatically terminating all the Transactions (i) upon the
insolvency of a Code Entity, enforceable under the Code, the OLA or FDICIA, and (ii) upon the insolvency of a
U.S. Banking Institution, enforceable under the FDIA, the NYBL, the OLA (in the case of an Uninsured N.Y.
Institution) or FDICIA?
3. Are the provisions of the ISDA Master Agreement providing for the netting of termination values
in determining a single lump-sum termination amount (i) upon the insolvency of a Code Entity, enforceable under
the Code, the OLA or FDICIA, and (ii) upon the insolvency of a U.S. Banking Institution, enforceable under the
FDIA, the NYBL, the OLA (in the case of an Uninsured N.Y. Institution) or FDICIA?
4. Assuming (i) the parties have entered into an ISDA Master Agreement, (ii) one of the parties is
insolvent and (iii) the parties have selected a Termination Currency other than U.S. dollars, is it possible to “prove”
(that is, file) a claim in a local insolvency proceeding in a foreign currency?
5. Is it possible to obtain or execute a judgment in a foreign currency under the laws of the U.S. or
the State of New York?
6. Would there be any change in the conclusions reached for Questions 1–5 above if a U.S. Bank
entered into an ISDA Master Agreement on a multibranch basis and then conducted business in that fashion prior to
its insolvency?
7. In relation to Bank F as a multibranch party with a New York Branch or a Federal Branch:
(a) Would there be a separate proceeding under New York law or Federal law with respect to
the assets and liabilities of a New York Branch or Federal Branch at the start of an insolvency proceeding
for Bank F in Country H? Or would the Superintendent or the OCC defer to the proceedings in Country H
so that the assets and liabilities of the New York Branch or Federal Branch would be handled as part of the
proceeding for Bank F in Country H? Could local creditors of a New York Branch or Federal Branch
initiate a separate proceeding even if the Superintendent or the OCC did not do so?
(b) If there would be a separate proceeding with respect to the assets and liabilities of a New
York Branch or Federal Branch, would the Superintendent or the OCC and the New York or Federal courts,
11
744581026.3
on the facts above, include Bank F’s position under an ISDA Master Agreement, in whole or in part, among
the assets of the New York Branch or Federal Branch and, if so, would the Superintendent or the OCC and
the New York or Federal courts recognize the close-out netting provisions of the ISDA Master Agreement
in accordance with their terms? We assume that close-out netting under the ISDA Master Agreement
would be enforced in accordance with its terms in the proceedings for Bank F in Country H.
8. Would the conclusions reached for Questions 6 and 7 above change as a result of the inclusion of a
non-netting branch in an ISDA Master Agreement, notwithstanding the possible actions that could be taken by an
insolvency official or court in another jurisdiction where close-out netting may be unenforceable (the “Non-Netting
Jurisdictions”)?
In particular, we will consider whether the conclusions reached for Questions 6 and 7 above would not be
materially altered based on the following scenarios:
(a) In the case of an insolvency proceeding for a U.S. Bank, the U.S. Bank, acting as a
multibranch party, has booked Transactions through its home office and one or more branches located in
Non-Netting Jurisdictions (the “Non-Netting Branches”).
(b) In the case of an insolvency proceeding for a Federal Branch or New York Branch of
Bank F, Bank F acting as a multibranch party, has booked Transactions through (i) its home office, (ii) its
Federal Branch or its New York Branch and (iii) one or more Non-Netting Branches in other jurisdictions.
9. Would the conclusions reached for Questions 1–8 above change as a result of the specification of
non-U.S. law to govern the Foreign-Law ISDA Master Agreements?
10. Are the termination, close-out netting and multibranch provisions contained in the ISDA Master
Agreement enforceable under the laws of the State of New York?
11. Are there any developments pending as a result of which the current regulatory or legal
environment under U.S. law or New York State law concerning the enforceability of close-out netting may be
expected to change in the foreseeable future?
III.
SUMMARY OF CONCLUSIONS43
The applicable provisions of the Code, the FDIA, the NYBL and the OLA clarify, to a significant extent,
the status of Transactions documented under an ISDA Master Agreement in both a Code Insolvency Proceeding,44
an FDIA Insolvency Proceeding,45 an NYBL Insolvency Proceeding46 and an OLA Insolvency Proceeding.47 These
laws expressly provide that, with respect to a master agreement that documents “swap agreement[s]” or a master
agreement that documents a combination of swap agreements, “securities contracts”, and/or “forward contracts”,
close-out netting provisions will be upheld to permit broad forms of netting arrangements, thereby providing a firm
legal foundation for calculating exposures on a net basis. In addition, where FDICIA applies (i.e., each counterparty
is a “financial institution” and the agreement is a type of “netting contract”), close-out netting provisions will be
upheld irrespective of the types of Transactions entered into under the “netting contract”.
43
The conclusions reached in A–C below apply regardless of whether or not the parties have selected Automatic Early Termination to apply.
44
See Section IV.A.1(a).
45
See Section IV.B.1(a).
46
See Section IV.C.1.
47
See Section IV.D.1(a).
12
744581026.3
A. “Swap Agreement” under the Code, the FDIA, the NYBL and the OLA
In a proceeding under the Code, the right to terminate by reason of and upon bankruptcy is expressly
recognized in the amendments to the Code, entitling Parties to an ISDA Master Agreement that is a “swap
agreement” to liquidate, terminate or accelerate the ISDA Master Agreement immediately upon the filing of a
bankruptcy petition by their counterparty and to calculate damages on a net basis (in addition to utilizing any
collateral they are holding to satisfy any secured claim under the ISDA Master Agreement). In an FDIC-
administered proceeding (whether under the FDIA or the OLA), a party’s right to terminate based solely on the
appointment of the FDIC as receiver (under the FDIA or the OLA) or conservator (under the FDIA), or the
insolvency or financial condition of the institution for which the FDIC has been appointed, (but not any right to
terminate based on other grounds) will be (i) in the case of a receivership, suspended until 5:00 p.m. (eastern time)
on the business day following appointment or (ii) in the case of a conservatorship, inaccessible. However, upon any
transfer or repudiation by the FDIC, and upon lapse of the one-business-day suspension period in the case of a
receivership, the close-out netting provisions of an ISDA Master Agreement that is a “swap agreement” will be
preserved and enforced (in the case of a transferred agreement, upon default of the transferee). A “walkaway”
clause, however, will not be enforced. A similar result will occur in an insolvency proceeding under the NYBL
which is administered by the Superintendent as would occur under the FDIA. Termination rights based solely on
insolvency or financial condition of an affiliate of the counterparty subject to the Code, FDIA, NYBL or OLA
proceeding could be limited by the OLA in certain circumstances if that affiliate is a Covered Financial Company.48
B. FDICIA
Where FDICIA is applicable49 (i.e., both parties are “financial institution[s]” and the agreement is a
“netting contract”), then, regardless of the types of Transactions documented under the ISDA Master Agreement and
“notwithstanding any other provision of law” (except as described below), the terms of such ISDA Master
Agreement should govern, enabling the parties to enforce the close-out netting provisions of the ISDA Master
Agreement. The enforceability of the termination provisions of an ISDA Master Agreement under FDICIA,
however, is limited by the rights of a receiver or conservator of an insolvent federally-insured depository under the
FDIA and the rights of a receiver of an insolvent Covered Financial Company under the OLA.50 These rights
include the prohibition against enforcement of a “walkaway clause” in a netting agreement against a federally-
insured depository or a Covered Financial Company in default.51
C. Non-Enumerated Transactions and Master Netting Agreements under the Code, the FDIA, the
NYBL, the OLA and FDICIA
Where FDICIA does not apply and with respect to an ISDA Master Agreement that documents
Transactions listed by name within the definition of “swap agreement” along with transactions that are not so
enumerated in the Code, the FDIA, the NYBL and the OLA (“Non-Enumerated Transactions”), a court should find,
under the circumstances described in this memorandum, that certain Non-Enumerated Transactions deserve the
same treatment as “swap agreement[s]” under the Code, the FDIA, the NYBL and the OLA, thereby enabling a
derivatives market participant to achieve one net amount owed by or to it.
Under the Code, if such Non-Enumerated Transactions are not treated as “swap agreement[s]” but rather as
any combination of one or more of “forward contract[s]” and/or “securities contract[s]”, and if the derivatives
market participant qualifies as a “master netting agreement participant”, then the ISDA Master Agreement will be
48
12 U.S.C. § 5390(c)(16). See Section IV.D.1(a).
49
See Section V.
50
The right to enforce close-out netting under FDICIA is subject to Section 11(e) of the FDIA (12 U.S.C. § 1821(e)), Section 210(c) of the OLA
(12 U.S.C. § 5390(c)), certain sections of the Federal Credit Union Act and any order authorized under Section 5(b)(2) of the Securities Investor
Protection Act of 1970. Termination rights based solely on insolvency or financial condition of an affiliate of a party to a netting contract could
be limited by the OLA in certain circumstances if that affiliate is a Covered Financial Company. 12 U.S.C. § 5390(c)(16). See Section
IV.D.1(a).
51
12 U.S.C. § 1821(e)(8)(G); 12 U.S.C. § 5390(c)(8)(F).
13
744581026.3
treated as a “master netting agreement” and the derivatives market participant may preserve and enforce close-out
netting with respect to such Non-Enumerated Transactions.52
Similarly, under the FDIA, the NYBL and the OLA, if such Non-Enumerated Transactions are not treated
as “swap agreement[s]” but rather as any combination of one or more of “forward contract[s]” and/or “securities
contract[s]”, then such ISDA Master Agreement would be treated as a single agreement and a single “qualified
financial contract”, and such party should be able to enforce the close-out netting provisions of the ISDA Master
Agreement to reach one net amount, to the extent the underlying transactions are themselves qualified financial
contracts.
FDICIA does not impose any restrictions based on type of Transaction.
D. Termination Currency
The selection of a Termination Currency other than U.S. dollars should not violate the public policy of the
United States or the State of New York. Nevertheless, for purposes of any insolvency proceeding under the Code,
the FDIA, the NYBL or the OLA, any claim of the Non-defaulting Party or any judgment in favor of the Non-
defaulting Party that is denominated in a currency other than U.S. dollars must be converted into U.S. dollars.
E. Multibranch ISDA Master Agreements
U.S. Bank with Foreign Branches. The conclusions reached under A–D above with regard to the
enforceability of the termination and close-out netting provisions in an ISDA Master Agreement would be
applicable to ISDA Master Agreements executed and conducted by a U.S. Bank on a multibranch basis.
Insolvency Proceedings Applicable to a New York Branch or a Federal Branch. There would be a separate
insolvency proceeding under New York or Federal law to administer the disposition of the assets and liabilities of a
New York Branch or Federal Branch; the New York proceedings would be administered by the Superintendent,
assuming the Superintendent did not defer to the FDIC or the FDIC did not otherwise take control of the assets of
the New York Branch. The Federal Branch proceeding would be administered by the FDIC after appointment by
the Office of the Comptroller of the Currency (“OCC”) or by the OCC. Individual creditors of the New York
Branch could not initiate a separate insolvency proceeding against the New York Branch if the Superintendent chose
not to initiate such a proceeding. Individual creditors of the Federal Branch may force the commencement of an
insolvency proceeding for the Federal Branch by obtaining a judgment against the Federal Branch in a U.S. court
and certifying to the OCC that such judgment has remained unpaid for 30 days.
Multibranch Netting with a New York Branch or a Federal Branch. Based on amendments to the NYBL, in
a separate insolvency proceeding for a New York Branch, the Superintendent would recognize and enforce the
multibranch close-out netting provisions of the ISDA Master Agreement entered into by the New York Branch, with
certain limitations. If the assets of the New York Branch were within the control of the FDIC, the insolvency
proceeding may be governed by the amended NYBL or the FDIA. In an insolvency proceeding for a Federal
Branch administered under either the FDIA or the National Bank Act (“NBA”) and the International Banking Act
(“IBA”), the multibranch close-out netting provisions might not be enforceable; however, a reasonable argument
exists that to the extent the FDIA would be applicable to the insolvency proceedings, the FDIC should enforce the
multibranch close-out netting provisions in accordance with the intention of the parties and the provisions of the
FDIA.
U.S. Bank with a Foreign Branch in a Non-Netting Jurisdiction. The conclusions reached above with
respect to the treatment of the multibranch netting provisions of the ISDA Master Agreement would remain the
same notwithstanding the fact that the U.S. Bank, acting on a multibranch basis, booked some Transactions through
Non-Netting Branches.
Foreign Bank with a U.S. Branch and Non-Netting Branches. The conclusions reached above with respect
to the treatment of the multibranch netting provisions of the ISDA Master Agreement would be applicable to
branches or agencies of Bank F if Bank F, acting on a multibranch basis, booked Transactions through its home
office, a Federal Branch or a New York Branch and one or more Non-Netting Branches in other jurisdictions.
52
Of course, an agreement solely for one of the protected categories of transactions other than swap agreements should also be protected under
the Code provisions relevant to that category of transaction.
14
744581026.3
F. Foreign-Law ISDA Master Agreements
The conclusions reached under A, B, C, D and E above with respect to the enforceability of the
termination, close-out netting and multibranch provisions of New York-law ISDA Master Agreements would be
applicable to Foreign-Law ISDA Master Agreements under the Code, the FDIA, the NYBL and FDICIA.
G. New York-Law ISDA Master Agreements
We believe that the termination,53 close-out netting and multibranch provisions contained in the ISDA
Master Agreement would be enforceable under the laws of the State of New York against the Defaulting Party in
accordance with their terms, subject to general principles of equity (including, without limitation, concepts of
materiality, reasonableness, good faith and fair dealing), regardless of whether considered in a proceeding in equity
or at law.
H. Pending Developments
Despite the effectiveness of many Dodd-Frank provisions regulating the OTC market, controversy
continues to attach to swaps and other aspects of financial reform. One manifestation of this is a movement, so far
ineffective, to reduce or eliminate the special insolvency protections available to swaps and certain other financial
contracts. This movement may be expected to continue in coming years. Whether or not it becomes an imminent
threat to the protections described in this memorandum remains to be seen. Bills have been introduced in Congress
to amend the U.S. Bankruptcy Code to provide new mechanisms for resolving financial institutions without resort to
the OLA, including a 48-hour stay on the termination of safe-harbored financial contracts (and related exercise of
rights against collateral), pending their potential transfer to a bridge company, and limitations on the exercise of
cross-defaults by counterparties to contracts with the debtor’s affiliates. See, e.g. Financial Institution Bankruptcy
Act of 2017, H.R. 1667, 115th Congress (2017). In a report on OLA and Bankruptcy Reform, the U.S. Department
of the Treasury has endorsed this approach and made specific recommendations of its own, including that domestic
regulators have standing in the bankruptcy proceeding to raise and be heard on issues, that courts have discretion to
grant standing to foreign regulators, and that a set of expert judges be designated in advance. The U.S. Treasury
report recommends that the OLA be retained but reformed, including by restricting the FDIC’s ability to treat
similarly situated creditors differently, providing for bankruptcy court adjudication of claims against the
receivership, clarifying the standard for commencing an OLA proceeding, enhancing the scope of judicial review,
and placing certain limitations on the use of the orderly liquidation fund.
As discussed further in Section XI, U.S. prudential regulators have adopted regulations that require
systemically important regulated financial firms and certain subsidiaries to employ contractual provisions in their
covered qualified financial contracts (“covered QFCs”) to (i) cause counterparties to opt in to the temporary stay-
and-transfer provisions of the FDIA and the OLA and (ii) prevent counterparties, subject to certain creditor
protection exceptions, from exercising default rights related, directly or indirectly, to the entry into resolution of an
affiliate of the regulated financial firm. The regulations provide a safe harbor for contracts amended pursuant to the
ISDA 2015 Universal Resolution Stay Protocol, including certain annexes, or a new protocol that must be the same
as the ISDA 2015 Universal Resolution Stay Protocol except for certain changes specified in the final regulations.54
To allow market participants to comply with the regulations, ISDA has developed the ISDA 2018 U.S. Resolution
Stay Protocol.55
Courts continue to address attempts by creditors and assignees to overcome the effects of certain anti-
avoidance protections available under the U.S. Bankruptcy Code by bringing state law causes of action with
substantially similar effect as avoidance actions that the bankruptcy trustee is expressly barred from asserting. A
recent appellate court decision appears to have resolved this issue in the Second Circuit in favor of broad preemption
53
Termination rights based solely on insolvency or financial condition of an affiliate of the Defaulting Party could be limited by the OLA in
certain circumstances if that affiliate is a Covered Financial Company. 12 U.S.C. § 5390(c)(16). See Section IV.D.1(a).
54
Certain differences in scope and creditor protections exist between these protocols and the requirements of the regulation that apply when the
protocol safe harbor is not utilized.
55
Grandfathering provisions may apply to qualified financial contracts entered into before January 1, 2019 provided that the covered entity and
its affiliates do not enter into or become party to a qualified financial contract with the counterparty or any of the counterparties' consolidated
affiliates after January 1, 2019.
15
744581026.3
of such state law causes of action, at least in circumstances where fraudulent intent is not a premise of the action. It
remains to be seen to what extent courts in other federal judicial circuits will follow the Second Circuit’s approach
or else adopt more restrictive approaches to preemption that would allow some such state law causes of action to
proceed. See footnote 229.
The Securities and Exchange Commission has adopted segregation requirements for security-based swap
dealers in respect of cleared and non-cleared security-based swaps, including possession and control requirements
for excess securities collateral, reserve account requirements, and a requirement to obtain subordination agreements
from customers that elect individual segregation or that waive segregation. See 84 Fed. Reg. 43872 (August 22,
2019). The compliance date for these requirements is scheduled to occur in October 2021. As provided in 15
U.S.C. § 78c-5(f), a person that has a claim based on a non-cleared security based swap is not excluded from the
term “customer”, as defined in the stockbroker liquidation provisions (subchapter III of Chapter 7) of the Code, to
the extent of any margin subject to a customer protection or segregation requirement. We expect the safe harbors
discussed in this memorandum would generally remain applicable in the context of a subchapter III proceeding.
However, counterparties of a security-based swap dealer that potentially could be subject to a subchapter III
proceeding will want to analyze carefully the ramifications of any subordination agreement and its interaction with
the provisions of subchapter III, including those regarding the computation of net equity and distribution of
customer property, as they relate to close-out netting and collateral setoff.
IV.
“SWAP AGREEMENT” UNDER THE CODE,

A. Code56
1. Background; Definitions
(a) Code Insolvency Proceedings. Under the Code, cases may be commenced either
voluntarily by the debtor, or involuntarily by the debtor’s creditors. A voluntary case commences when a
Code Entity files with the bankruptcy court a petition under the relevant chapter of the Code. An
involuntary case may be commenced under the Code by the filing with the bankruptcy court of a petition
by one of the persons or groups of persons indicated in the Code. As a general rule, the Code offers two
types of insolvency proceedings, one under Chapter 7 (liquidation) and one under Chapter 11
(reorganization).
(b) Definitions. The Code provides:
(i) an express exemption from the automatic stay contained in Section 362 to
exercise any contractual right “under any security agreement or arrangement or other credit
enhancement forming a part of or related to any swap agreement” or to “offset or net out any
termination value, payment amount, or other transfer obligation arising under or in connection
with 1 or more such [swap] agreements, including any master agreement for such agreements”;57
(ii) express recognition that parties will be entitled to exercise contractual rights to
liquidate, terminate or accelerate one or more “swap agreements” and net or offset termination
values and payment amounts under such “swap agreements”;58 and
56
Throughout this Section IV.A, we assume that the insolvent U.S. Party is a Code Entity.
57
11 U.S.C. § 362(b)(17) as amended by the 2006 Act.
58
11 U.S.C. § 560. See infra notes 66 to 69 and the accompanying text for a discussion of the very broad definition of “contractual right”, which
applies in several places in the Code, and limitations that have been read into the term by various courts..
16
744581026.3
(iii) express protection for pre-petition transfers in good faith under or in connection
with a “swap agreement” against a trustee’s power to avoid payments and other transfers as
preferences, fraudulent conveyances or by asserting the rights of a lien creditor under non-
bankruptcy law.59
Under Section 101(53C) of the Code, a “swap participant” is defined as “an entity that, at any time before
the filing of the petition, has an outstanding swap agreement with the debtor.” Under Section 101(22A) of the Code,
a “financial participant” is defined, in relevant part, as “an entity that, at the time it enters into a securities contract,
commodity contract, swap agreement, repurchase agreement, or forward contract, or at the time of the date of the
filing of the petition, has one or more agreements or transactions [of the foregoing type or one or more master
netting agreements] with the debtor or any other entity (other than an affiliate) of a total gross dollar value of not
less than $1,000,000,000 in notional or actual principal amount outstanding (aggregated across counterparties) at
such time or on any day during the 15-month period preceding the date of filing the petition, or has gross mark-to-
market positions of not less than $100,000,000 (aggregated across counterparties) in one or more such agreements or
transactions with the debtor or any other entity (other than an affiliate) at such time or on any day during the 15-
month period preceding the date of filing the petition”.
As amended by the 2006 Act, Section 101(53B) of the Code defines “swap agreement” as:
(i) any agreement, including the terms and conditions incorporated by reference in
such agreement, which is — (I) an interest rate swap, option, future, or forward agreement,
including a rate floor, rate cap, rate collar, cross-currency rate swap, and basis swap; (II) a spot,
same day-tomorrow, tomorrow-next, forward, or other foreign exchange, precious metals, or other
commodity agreement; (III) a currency swap, option, future, or forward agreement; (IV) an equity
index or equity swap, option, future, or forward agreement; (V) a debt index or debt swap, option,
future, or forward agreement; (VI) a total return, credit spread or credit swap, option, future, or
forward agreement; (VII) a commodity index or a commodity swap, option, future, or forward
agreement; (VIII) a weather swap, option, future, or forward agreement; (IX) an emissions swap,
option, future, or forward agreement; or (X) an inflation swap, option, future, or forward
agreement;
(ii) any agreement or transaction that is similar to any other agreement or

transaction referred to in this paragraph and that — (I) is of a type that has been, is presently, or in
the future becomes, the subject of recurrent dealings in the swap or other derivatives markets
(including terms and conditions incorporated by reference therein); and (II) is a forward, swap,
future, option, or spot transaction on one or more rates, currencies, commodities, equity securities,
or other equity instruments, debt securities or other debt instruments, quantitative measures
associated with an occurrence, extent of an occurrence, or contingency associated with a financial,
commercial, or economic consequence, or economic or financial indices or measures of economic
or financial risk or value;
(iii) any combination of agreements or transactions referred to in this subparagraph;
(iv) any option to enter into an agreement or transaction referred to in this

subparagraph;
(v) a master agreement that provides for an agreement or transaction referred to in

clause (i), (ii), (iii), or (iv), together with all supplements to any such master agreement, and
without regard to whether the master agreement contains an agreement or transaction that is not a
swap agreement under this paragraph, except that the master agreement shall be considered to be a
swap agreement under this paragraph only with respect to each agreement or transaction under the
master agreement that is referred to in clause (i), (ii), (iii), or (iv); or
59
11 U.S.C. §§ 546(g), 548(c), 548(d)(2).
17
744581026.3
(vi) any security agreement or arrangement or other credit enhancement related to
any agreements or transactions referred to in clause (i) through (v), including any guarantee or
reimbursement obligation by or to a swap participant or financial participant in connection with
any agreement or transaction referred to in any such clause, but not to exceed the damages in
connection with any such agreement or transaction, measured in accordance with section 562.60
As part of the Bankruptcy Reform Act of 1994, the definition of “swap agreement” was amended to
expressly include “spot foreign exchange agreements”. The 2005 and 2006 Acts, further amended the definition to
expressly include, among others, various types of equity, credit,61 commodity, weather, inflation and emissions
derivatives, as well as spot transactions on all of the foregoing underlyings.62
The reference in subparagraph (ii) above to “any agreement or transaction that is similar” was expanded
substantially in the 2005 and 2006 Acts to explicitly articulate types of transactions and underlyings intended to be
covered. The expanded reference appears open to spot transactions generally and to newer privately negotiated
derivatives transactions that have common fundamental characteristics with those Transactions specified, such as
economic statistic derivatives. When amending the Code in 1990, 2005 and 2006, Congress was aware that the
derivatives markets were rapidly growing and evolving, and it was sensible to include additional language designed
to accommodate this growth and evolution. The legislative history underscores in particular the expansive intent of
the new reference to “derivatives” markets (stating on page 6 of the House Report that “the proposed amendments
would change the reference to swap markets to ‘swap or other derivatives markets’ in order to avoid any suggestion
that new developments are limited to transactions that are technically swaps as opposed to other types of derivatives,
such as options”).63
The definition of “swap agreement” also contemplates that more than one “swap agreement” may be
effected under a master agreement such as an ISDA Master Agreement, and clarifies that in such a case, all such
agreements taken together will constitute a single “swap agreement” (regardless, but to the exclusion, of any
agreements under the master agreement that are not themselves swap agreements). 64 This provision, together with
60
11 U.S.C. § 101(53B)(B). Section 101(53B)(B) also states that the definition “is applicable for purposes of this title only, and shall not be
construed or applied so as to challenge or affect the characterization, definition, or treatment of any swap agreement under any other statute,
regulation, or rule, including the Gramm-Leach-Bliley Act, the Legal Certainty for Bank Products Act of 2000, the securities laws (as such term
is defined in section 3(a)(47) of the Securities Exchange Act of 1934) and the Commodity Exchange Act”.
61
Appendix A contains references to “Contingent Credit Default Swaps” and “Swap Deliverable Contingent Credit Default Swaps”. We regard
these transactions fundamentally as “Credit Default Swaps” for purposes of this memorandum, despite their idiosyncrasies of valuation and
settlement. See, e.g., Fed. R. Bankr. P. 3001(e). We note that variations exist in approaches to these transactions (especially the latter), but we
are not aware of variations that challenge our assessment.
62
The report of the House Committee on Financial Services stated that “the reference . . . to spot transactions in commodities is not intended to
encompass ordinary sales of goods contracts, but rather financial market transactions in commodities.” H.R. No. 109-648, at 6 (2006).
Presumably both the nature of the parties and the nature of the “goods” would figure in determining the scope of this aspect of the definition.
63
The bankruptcy court in In re National Gas Distributors, LLC took a more restrictive view of the definition of “swap agreement” (in its 2005
version) than that seemingly intended by Congress by holding that a “commodity forward agreement,” an enumerated “swap” under Section
101(53)(B), had to be traded in a financial market and could not have involved physical delivery of the commodity to an end user. 369 B.R. 884
(Bankr. E.D.N.C. 2007). The U.S. Court of Appeals for the Fourth Circuit, In re National Gas Distributors, LLC, 556 F.3d 247 (C.A.4 (N.C.)
2009) reversed this decision, noting Congress’s expansive intent and held that Congress did not preclude physical delivery in connection with a
“commodity forward agreement.”
National Gas did, however, elucidate four elements, arguably in dicta, which further restrict the definition of “commodity forward agreement”:
for example, that price, quantity and timing are fixed at the time of contracting. Hence, on remand, the lower bankruptcy court thereby held on
summary judgment that contracts without fixed quantity terms could not be “commodity forward agreements.” It is not clear whether this
limiting view will have ramifications beyond the case. See Lightfoot v. MXEnergy Electric, Inc. (In re MBS Mgmt. Servs., Inc.), 430 B.R. 750,
756 (Bankr. E.D. La. 2010), and 432 B.R. 570, 576 (Bankr. E.D. La. 2010), aff’d, 2011 WL 1899764 (E.D. La. May 19, 2011), aff’d, 690 F.3d
352 (5th Cir. 2012) (describing dicta of National Gas as “intentionally open-ended . . . and evocative rather than prescriptive” and stating that In
re Olympic Natural Gas Co., discussed infra at note 180, did not limit the definition of “forward contract” to require exact quantities and delivery
dates and that Olympic rejected several arguments designed to narrow the scope of the definition of “forward contract”). But see Conti v. Perdue
BioEnergy, LLC (In re Clean Burn Fuels, LLC), 2015 Bankr. LEXIS 3300 (Bankr. M.D.N.C.) which followed the controlling 4th Circuit National
Gas precedent and held that, by its logic, National Gas’s four elements not only apply to “commodity forward agreements” as “swap agreements”
under Section 546(g), but also extend to “forward contracts” under 546(e). See infra note 184.
64
11 U.S.C. § 101(53B)(A)(v). Under 11 U.S.C. § 101(53B)(A)(v), a master agreement comprising both transactions that are swap agreements
and transactions that are not swap agreements will be considered a swap agreement only with respect to the transactions that are themselves swap
agreements or other protected agreements.
18
744581026.3
Section 560 of the Code, discussed below, should bar any efforts by a trustee to “cherry-pick” among Transactions
advantageous to the trustee that fall within the definition of “swap agreement” and that are documented under an
ISDA Master Agreement.
2. Automatic Stay. Section 362(b)(17) of the Code creates an exception to the scope of the
automatic stay set forth in Section 362(a) of the Code. This exception permits a swap participant or a financial
participant to exercise any contractual rights under any security agreement or arrangement or other credit
enhancement forming a part of or related to any swap agreement or exercise any contractual right65 to offset or net
out any termination value, payment amount or other transfer obligation arising under or in connection with one or
more such agreements, including any master agreement for such agreements. This permits netting of payment (or
other property transfer) obligations at any time, including obligations arising after the filing of the bankruptcy
petition. This provision also allows parties holding collateral or margin, or entitled to the benefits of a guarantee, to
utilize such credit support, notwithstanding the bankruptcy filing.
In addition, Section 553(b)(1) of the Code protects the right of a swap participant to exercise rights of setoff
by exempting them from a trustee’s power to readjust any setoff that takes place during the 90-day period prior to
the filing of a petition.
3. Right to Terminate and Exercise Netting Provisions. Section 560 of the Code preserves the
contractual right of a swap participant or financial participant to liquidate, terminate or accelerate one or more “swap
agreement[s]” and offset or net out any termination or payment amounts owed under it in the event that the other
party to the agreement files a bankruptcy petition or becomes insolvent, or in the event that a trustee or custodian is
appointed for the party. A contractual right is defined to include a right set forth under a rule or bylaw of various
types of clearing facilities, exchanges or transaction execution facilities, or in a resolution of a governing board of
any thereof, or a right arising under common law, under law merchant, or by reason of normal business practice,
whether or not the right is evidenced in writing.66 A number of court decisions have considered limitations on the
scope of the protected contractual rights based on, inter alia, the timing and reason for exercise, the document in
which the right appears, and whether the ipso facto modification at issue was an essential component of terminating,
liquidating or accelerating a swap or merely incidental thereto.67
65
One bankruptcy court has construed Section 362(b)(17) in part by reference to the pre-2006 version of that section, which referred to setoff
against “property held by, pledged to, or under control of, or due from [the non-bankrupt swap participant] to margin, guarantee, secure or settle
any swap agreement.” Bank of America v. Lehman Bros. Holdings Inc., 439 B.R. 811, 835-36 (Bankr. S.D.N.Y. 2010) (holding that the
exception to the automatic stay under Section 362(b)(17) for the exercise of “contractual rights” did not extend to common-law setoff rights
against a “special purpose” deposit account pledged by the debtor exclusively to secure overdrafts arising in its bank accounts.) Please see the
discussion in the following paragraphs of the very broad definition of “contractual right”, which applies in several places in the Bankruptcy Code,
and limitations that have been read into the term by various courts.
66
See 11 U.S.C. § 560. This provision does not preempt the statute of frauds or any other provision of law, except for the provisions of the Code,
and does not validate any particular method of calculating termination values or damages. See H.R. Rep. No. 101-484, at 5–7 (1990). See also
Calpine Energy Servs., L.P. v. Reliant Energy Elec. Solutions, L.L.C. (In re Calpine Corp.), Case No. 05-60200, Adv. No. 08-1251, 2009 WL
1578282 (Bankr. S.D.N.Y. May 7, 2009) (holding that analogous language in Section 556 did not render enforceable a provision requiring the
debtor to give timely notice that it disputed the non-defaulting party’s calculation of a termination payment).
67
One bankruptcy court has read the scope of Section 560 protection as confined to contractual rights within the swap master agreement itself,
as opposed to related “flip clause” subordination rights within a related indenture. Lehman Bros. Special Fin. Inc. v. BNY Corporate Tr. Servs.
Ltd. (In re Lehman Bros. Holdings Inc.), 422 B.R. 407 (Bankr. S.D.N.Y. 2010). This decision, which did not consider the status of the indenture
as a related security arrangement and therefore a swap, justified its holding with the additional rationale that the flip clause fell outside of Section
560 because it did not deal expressly with liquidation, termination, or acceleration. Id. at 421. See also Lehman Bros. Special Fin. Inc. v.
Ballyrock (In re Lehman Bros. Holdings Inc.), 452 B.R. 31, 40 (Bankr. S.D.N.Y. 2011) (“elimination of a substantive right to receive funds that
existed prior to the bankruptcy” was not entitled to protection under Section 560, which is “limited exclusively to preserving the right to liquidate,
terminate and accelerate a qualifying financial contract”). In In re Lehman Bros. Holdings Inc., 2020 WL 4590247 (2nd Cir. August 11, 2020), the
Second Circuit Court of Appeals disagreed with the preceding statement and held that the subordination of a defaulting party’s payment priority
and distribution of collateral proceeds in accordance with a priority-of-payments waterfall was protected by the ‘liquidation’ prong of Section 560
where the priority-of-payments provision was a ‘swap agreement’, which the court found to be the case by virtue of the provision’s incorporation
by reference into the ISDA Master Agreement. Id. at *5, *8n.11. See also Michigan State Housing Development Authority v. Lehman Bros.
Derivatives Products, Inc. (In re Lehman Bros. Holdings Inc.), 502 B.R. 383, 394 (Bankr. S.D. N.Y. Dec. 19, 2013) (holding that a provision
within a swap agreement that shifted the methodology for calculating termination amounts upon the debtor counterparty’s bankruptcy was
protected by Section 560 because calculating a settlement amount was a “a necessary part of the exercise … of [the] ‘contractual right’ to ‘cause
the liquidation’” of the swap agreement). See also note 69 infra.
19
744581026.3
One principal effect of this provision is to override Section 365(e) of the Code, which otherwise generally
would prevent a nonbankrupt party from using the bankruptcy filing as a basis for exercising a typical bankruptcy
default provision in order to terminate an executory contract.68 Equally important, by permitting a party to “net out
any termination values”, Section 560 of the Code makes clear that the provisions contained in an ISDA Master
Agreement for closeout netting will be enforceable upon termination of a “swap agreement”.69
Section 562 of the Code, introduced as part of the 2005 Act, sets forth the timing of damage measurement
in connection with the termination of swap agreements, securities contracts, forward contracts, commodity contracts,
repurchase agreements and master netting agreements. In general, damages will be measured as of the earlier of the
date of rejection by the trustee of such agreement or the date or dates of the liquidation, termination, or acceleration
of the agreement by the other party in the transaction or agreement.70 If there are not any commercially reasonable
determinants of value as of the relevant date, damages shall be measured as of the earliest subsequent date or dates
on which there are such determinants.71 The proponent of a subsequent date has the burden of proving that there
were no commercially reasonable determinants of value as of the relevant earlier date.72
4. Limitation on Avoiding Powers. Section 546(g) of the Code limits certain powers of a bankruptcy
trustee to reclaim property previously transferred by the debtor. For example, a trustee can ordinarily reclaim
property transferred during the relevant “suspect period” prior to the bankruptcy filing if the transfer constituted a
“preference” (i.e., if it enabled a creditor to receive more than it would have been entitled to receive in a liquidation
proceeding), was actually or constructively fraudulent or, in certain cases, avoidable by a creditor under state law.73
Section 546(g) of the Code provides that a transfer before the commencement of the case “made by or to (or for the
benefit of) a swap participant or financial participant, under or in connection with any swap agreement”,74 cannot be
avoided by a bankruptcy trustee, unless such transfer is made with actual intent to hinder or defraud creditors.75
68
11 U.S.C. § 365(e) (providing that an executory contract, and any right or obligation thereunder, “may not be terminated or modified, at any
time after the commencement of a case solely because of a provision in such contract that is conditioned on – (A) the insolvency or financial
condition of the debtor at any time before the closing of the case; (B) the commencement of a case under this title; or (C) the appointment of or
taking possession by a trustee in a case under this title or a custodian before such commencement”). Code provisions that invalidate ipso facto
clauses in other contexts include 11 U.S.C. § 363(l) and 541(c).
69
Some courts have held that Section 560 protects termination rights only if triggered by an ipso facto condition of the kind specified in section
365(e)(1). See In re Enron Corp., 306 B.R. 465, 473 (Bankr. S.D.N.Y. 2004); In re Louisiana Pellets, Inc., Case No. 16–80162, 2016 WL
4011318, 62 BCD 247 (Bankr. W.D. La. 2016) (holding that a bankruptcy event-of-default provision that was modified such that the right to
terminate became exercisable only upon the debtor's failure to perform after commencement of the case did not constitute a right based on a
condition of the kind specified in Section 365(e)(1) and hence fell outside the protective scope of analogous language in Section 556). See also In
re Lehman Brothers Holdings, Inc., 2009 WL 6057286 (No. 08--13555 (JMP), Bankr. S.D.N.Y. Sept. 17, 2009) and Transcript of Proceedings
dated September 15, 2009 at 107-112(filed as Dkt. No. 5261) (bench opinion holding that failure to terminate for an extended period of time
following an insolvency filing constitutes a waiver of that right and that a contractual provision suspending the non-debtor’s performance was not
protected by the safe harbors). See also In re Southern California Edison Company, 2018 WL 949223 (S.D. Tex. February 2, 2018) (reversing
bankruptcy court’s finding of waiver based on the court’s “erroneous finding of an extra-statutory promptness requirement in [Section] 556”).
70
If the insolvent Code Entity is a stockbroker, SIPA or possibly Code provisions for determining a customer’s net equity claim may take
precedence over Section 562 in certain circumstances. See SIPC v. Lehman Bros. Inc., 433 B.R. 127 (Bankr. S.D.N.Y. 2010) (holding that the
SIPA definition of “net equity” under 15 U.S.C. § 78lll(11), rather than Section 562 of the Code, governed the applicable measurement date for a
claim relating to the close-out of short securities positions in a prime brokerage account). Similar limitations on Section 562 may apply in respect
of net equity claims in the liquidation of a stockbroker under Subchapter III.
71
In Crédit Agricole Corp. and Inv. Bank N.Y. Branch v. Am. Home Mortg. Holdings, Inc. (In re Am. Home Mortg. Holdings, Inc.), 637 F.3d
246 (3d Cir. 2011), the court held that the non-debtor party to a repurchase agreement had not met its burden of proving that application of a
discounted cash flow model was not a commercially reasonable determinant of value as of the acceleration date, a date on which markets for the
underlying instruments were “dysfunctional”.
72
11 U.S.C. § 562(c).
73
See generally 11 U.S.C. §§ 547, 548 and 544.
74
The 2006 Act added “or for the benefit of” throughout Section 546. In construing this phrase as used in Section 546(e), the Supreme Court
explained that a number of substantive avoidance provisions include that phrase, and by adding the same language to the safe harbor, “Congress
ensured that the scope of the safe harbor matched the scope of the avoiding powers.” Merit Management Group, LP v. FTI Consulting, Inc., 138
S. Ct. 883, 895 (2018). The 2005 reformulation of Section 546(g) to include “under or in connection” language overcomes the difficulty with
prior language documented in Interbulk, Ltd. v. Louis Dreyfus Corp. (In re Interbulk, Ltd.), 240 B.R. 195, 202–03 (Bankr. S.D.N.Y. 1999). This
amendment was discussed, and the legislative overrule of Interbulk noted, in Casa de Cambio Majapara S.A. de C.V. v. Wachovia Bank, N.A. (In
re Casa de Cambio Majapara S.A. de C.V.), 390 B.R. 595, 598 (Bankr. N.D. Ill. 2008) (rejecting argument that a prejudgment attachment did not
qualify for the safe harbor because it was not obtained according to a method prescribed in the swap agreement). See also Securities Inv.
20
744581026.3
Section 548(d)(2) of the Code additionally protects transfers of property made in connection with a “swap
agreement” (subject to the appropriateness of the underlying individual contracts in the case of a master agreement
that is a swap agreement) from avoidance by the bankruptcy trustee as fraudulent transfers. The Section provides
that such transfers are deemed to be taken “for value”. As long as such transfers also are taken “in good faith”, as
provided in Section 548(c) of the Code,76 they should be exempt from avoidance by the bankruptcy trustee as
fraudulent transfers.
B. The FDIA77
(a) FDIA Insolvency Proceedings. Insured Institutions are subject to insolvency proceedings under
the FDIA. The conservatorship and receivership provisions of the FDIA permit the FDIC to act as receiver or
conservator for any Insured Institution.
If an Insured Institution is a national banking association, it is also subject to certain provisions of the
NBA. The NBA78 provides a full-fledged legal regime for national banks, including provisions for voluntary
dissolution79 and receivership.80 Section 191 of the NBA empowers the OCC to appoint a receiver or conservator to
take over a national bank, in a number of circumstances, including whenever the OCC becomes satisfied that the
national bank is insolvent. Whenever the OCC is to appoint a receiver for any Federal depository institution, such as
a national bank, that takes federally-insured deposits, it must appoint the FDIC as receiver81 and the insolvency
proceedings would be carried out under the FDIA. In addition, it is within the OCC’s discretion to appoint the FDIC
as conservator for any Federal depository institution,82 such as a national bank, that takes federally-insured deposits.
We assume, for the purposes of this memorandum, that the OCC would appoint the FDIC as conservator for a
national bank, in which case the insolvency proceedings would be carried out under the FDIA as well.83
If the FDIC is appointed as a conservator or receiver of a national bank, the FDIC will have both the
powers granted to it by the FDIA and, to the extent not inconsistent with the FDIA, the powers granted to
conservators or receivers of national banks.84 For the reasons discussed in Section IV.B.5 below, we do not believe
that additional powers arising under the NBA will affect the treatment of qualified financial contracts under the
relevant provisions of the FDIA. Therefore, our discussion in this Section IV.B would also apply to an Insured
Institution that is subject to the NBA. FDICIA would also apply to the extent the contract at issue was a “netting
contract” between “financial institution[s]”.
Protection Corp. v. Bernard L. Madoff Inv. Securities, LLC (In re Madoff), 505 B.R. 135, 144 (S.D.N.Y.2013) (finding the language “in
connection with” in Section 546(g) should be given a broad interpretation of being “related to such an agreement”).
75
See note 229, infra, with respect to a potential exception to this statement and caveats based on certain decisions that upheld state law causes of
action that could have substantive results similar to Code avoidance actions.
76
Some courts have applied an “inquiry notice” standard to determine a transferee’s good faith, i.e., whether the transferee had knowledge of
facts that would lead a reasonable person, acting diligently, to inquire further and thereby discover that the debtor had an actual intent to hinder,
delay or defraud its creditors. See, e.g., In re Sentinel Management Group, Inc., 809 F.3d 958, 961 (7th Cir. 2016).
77
Throughout this Section IV.B, we assume that the insolvent U.S. Party will be an Insured Institution.
78
12 U.S.C. §§ 91, 191.
79
12 U.S.C. §§ 181–182.
80
12 U.S.C. §§ 191–194, 196–203.
81
Under 12 U.S.C. § 1821(c)(2)(A)(ii), “the [FDIC] shall be appointed receiver, and shall accept such appointment, whenever a receiver is
appointed for the purpose of liquidation or winding up the affairs of an insured Federal depository institution by the appropriate Federal banking
agency, notwithstanding any other provision of Federal law.”
82
Under 12 U.S.C. § 1813(c)(4), the term “Federal depository institution” means any national bank, any Federal savings association, and any
Federal branch.
83
Under 12 U.S.C. § 1821(c)(2)(A)(i), the FDIC may, at the discretion of the supervisory authority, be appointed conservator of any insured
Federal depository institution and the FDIC may accept such appointment. As a practical matter we believe that the OCC would appoint the
FDIC as conservator for a national bank.
84
12 U.S.C. § 203(d), 1821(c)(2)(B).
21
744581026.3
The FDIA would not apply in the case of a bank or savings institution that is neither federally-chartered nor
federally-insured. The FDIA also would not apply to a proceeding involving the insolvency of a non-U.S. bank’s
U.S. branch or agency that did not have federally-insured deposits.
(b) Definitions. The FDIA provides that, in the case of a receivership, subject to certain limitations, a
party to a qualified financial contract will be entitled to:
(i) exercise any contractual right to terminate, liquidate or accelerate a

qualified financial contract as a result of the appointment of the FDIC as receiver or the insolvency
or financial condition of the depository institution for which the receiver was appointed after
5:00 p.m. (eastern time) on the business day following the appointment of the receiver (which is
the deadline by which the FDIC must provide notice of any transfer of the qualified financial
contract to a bridge depository institution or other permitted transferee);
(ii) exercise any rights under any security agreement or arrangement or

other credit enhancement related to one or more qualified financial contracts; and
(iii) exercise any right to “offset or net out any termination value, payment
amount or other transfer obligation arising under or in connection with [one] or more [qualified
financial contracts]”.85
In the case of a conservatorship, the above applies except that a party to a qualified financial contract will
be able to exercise any contractual right to terminate other than one based solely on the appointment of or the
exercise of rights or powers by the conservator or the insolvency underlying the existence of such powers (i.e.,
a “bankruptcy” default provision).86
Another important feature of the FDIA with respect to qualified financial contracts, is that, in the case of
both receivership and conservatorship, it expressly provides that, notwithstanding the FDIC’s power to repudiate
qualified financial contracts or any federal or state law relating to the avoidance of preferential or fraudulent
transfers, neither payments made nor collateral transferred by an insured depository institution in connection with a
qualified financial contract may be avoided by the FDIC, except where the transferee intended to “hinder, delay, or
defraud” the creditors or the receiver or conservator of the institution.87
The FDIA distinguishes between the FDIC’s power as a receiver and as a conservator. As receiver, the
FDIC has the power to liquidate and wind up the affairs of an institution, while as a conservator, the FDIC has the
power to operate the insolvent institution as a going concern. When acting in either capacity, the FDIC generally
will have many of the powers of a bankruptcy trustee under the Code, including the right to repudiate burdensome
contracts, to enforce contracts and to assign contracts to another party. The FDIA, however, contains significant
limitations on the FDIC’s powers with respect to financial contracts meeting the definition of “qualified financial
contract”.
“Qualified financial contract” is defined to include securities contracts, commodity contracts, forward
contracts, repurchase agreements and swap agreements.88 In the 2005 and 2006 Acts, each of the definitions of
these types of protected transactions was amended to make it substantively identical to the revised Code definition
85
12 U.S.C. § 1821(e)(8)(A), (e)(10)(B)(i).
86
12 U.S.C. § 1821(e)(8)(E), (e)(10)(B)(ii). If there exists a contractual right to terminate based on the appointment of a conservator and some
other event of default that is not a “bankruptcy” default, then a party would be able to terminate a qualified financial contract upon the occurrence
of such other event notwithstanding the appointment of the conservator. See H.R. Rept. 109-31 at 124 (2005) (stating that “any payment,
delivery or other performance-based default, or breach of a representation or covenant putting in question the enforceability of the agreement,
will not be deemed to be based solely on financial condition”).
87
12 U.S.C. § 1821(e)(8)(C). See also 12 U.S.C. § 1821(e)(12) with regard to security interests generally.
88
12 U.S.C. § 1821(e)(8)(D)(i)–(vi). The term also extends to any “similar agreement” that the FDIC determines by regulation, resolution or
order to be a qualified financial contract.
22
744581026.3
for the same transaction (other than that the Code definitions specifically reference Code party and damages limits in
certain respects).89
In a manner identical to the definition of “swap agreement” under the Code, the definition of “swap
agreement” under the FDIA includes “any agreement or transaction that is similar”, indicating that it is intended to
cover both current and newly developed Transactions that, while not specifically enumerated, share fundamental
characteristics with those specified.
The FDIA also specifies that a master agreement such as an ISDA Master Agreement (i) that documents
Transactions falling within the definition of “swap agreement”, together with its supplements, will be treated as one
“swap agreement”, and (ii) that documents Transactions that are qualified financial contracts will be treated as one
qualified financial contract (but only with respect to those underlying agreements that are qualified financial
contracts).90
2. Right to Terminate. In the case of receivership, the FDIA provides that a party to a qualified
financial contract will be entitled to enforce any contractual right to terminate, liquidate or net such a contract as a
result of the appointment of the receiver or the insolvency or financial condition of the depository institution for
which the receiver has been appointed after 5:00 p.m. (eastern) on the business day after such appointment.91
In addition, in the case of a conservatorship, a party to a qualified financial contract may enforce any
contractual right to terminate, liquidate or accelerate, other than one based solely on the appointment of the
conservator or the insolvency or financial condition of the depository institution for which the conservator has been
appointed (i.e., a “bankruptcy” default provision).92
Where the FDIC is acting as the conservator for a bank or savings institution, the qualified financial
contract will continue in effect in accordance with its terms. The FDIC will succeed to the rights and obligations of
the bank or savings institution. A party to a qualified financial contract will not be able to terminate the contract as a
result of the appointment of the FDIC as conservator, but any default subsequent to this succession, such as failure
to make a payment, may result in termination of the contract.
The limitations described above on the ability of a party to utilize a bankruptcy or insolvency default
provision in the case of a conservatorship do not affect the rights of parties to enforce contractual rights to net out or
set off payment values or termination amounts upon any termination of an ISDA Master Agreement. Therefore,
these limitations on the right to terminate under the FDIA should not affect the basic evaluation of the credit
exposure that exists under a swap agreement or other qualified financial contract. When termination rights are
accessible (in a receivership or a conservatorship), the FDIA further provides that a person that is a party to a
qualified financial contract will be entitled to enforce any right under any security agreement or arrangement or
other credit enhancement related to one or more qualified financial contracts.93
3. Netting. A key provision of the FDIA protects the rights of parties to swap agreements and other
qualified financial contracts to “offset or net out any termination value, payment amount, or other transfer obligation
arising under or in connection with [one] or more [qualified financial contracts]”.94 This provision, together with the
anti-cherry-picking provisions described below, should ensure that credit exposures to an insolvent institution can be
calculated on a net basis pursuant to the terms of an ISDA Master Agreement.
89
12 U.S.C. § 1821(e)(8)(D). See id. § 1821(e)(3)(A), (C), described in Section IV.B1(b)3 below, which indicates how damages will be
calculated under the FDIA.
90
12 U.S.C. § 1821(e)(8)(D)(vi)–(vii).
91
12 U.S.C. § 1821(e)(10)(B)(i). This is the time by which the FDIC as receiver must notify parties to qualified financial contracts with the
failed depository institution of any transfer the FDIC makes of those contracts. 12 U.S.C. § 1821(e)(10(A). Thus, § 1821(e)(8)(A) and
§ 1821(e)(10)(B)(i) together reinstate a counterparty’s right to terminate, liquidate, accelerate and net if the FDIC has not given the requisite
notice by that time. In what is likely just a drafting artifact of the 2005 amendments, § 1821(e)(8)(A) refers to both termination and acceleration,
whereas the limitation on exercise of rights in § 1821(e)(10(B)(i) omits the reference to acceleration.
92
12 U.S.C. § 1821(e)(8)(A), (e)(12). 12 U.S.C. § 1821(e)(10)(B)(ii) refers to the right to “net” in lieu of the right to “accelerate”.
93
12 U.S.C. § 1821(e)(8)(A), (E). The 2006 Act included expanded Section 1821(e)(8)(D) in order to define those “person[s]” who may enforce
such rights. New Section 1821(e)(8)(D)(ix) defines a person as “any governmental entity in addition to any entity included in the definition of
such term in section 1 of Title 1” of the United States Code.
94
12 U.S.C. § 1821(e)(8)(A)(iii).
23
744581026.3
Under the FDIA, the liability of the FDIC in respect of a repudiated contract is generally limited to “actual
direct compensatory damages” of the parties to the contract as of the date on which the FDIC took possession of the
institution.95 With respect to qualified financial contracts, however, the “actual direct compensatory damages”
arising in respect of the FDIC’s repudiation of such a contract are deemed to include normal and reasonable costs of
cover or other reasonable measures of damages utilized in the industries for such contract and agreement claims,
calculated as of the date of the disaffirmance or repudiation of such contract or agreement.96
4. No Selective Transfer or Repudiation. The FDIA provides that, in any transfer of assets of an
insolvent institution, the receiver or conservator may not “cherry-pick” among qualified financial contracts between
the insolvent institution and any particular counterparty.97 Instead, if any qualified financial contract with a given
counterparty is transferred, all qualified financial contracts with that counterparty must be transferred to the same
party (together with all claims relating thereto).98 Likewise, as made clear by the 2005 Act, the receiver or
conservator may not “cherry-pick” among qualified financial contracts between the insolvent institution and any
particular counterparty for purposes of repudiating or disaffirming any qualified financial contracts.99
5. Pre-insolvency Payments. The FDIA, in the case of both receivership and conservatorship,
expressly provides that, notwithstanding the FDIC’s power to repudiate qualified financial contracts or any federal
or state law relating to the avoidance of preferential or fraudulent transfers, neither payments made nor collateral
transferred by an insured depository institution in connection with a qualified financial contract may be avoided by
the FDIC, except where the FDIC determines that the transferee intended to “hinder, delay, or defraud” the
institution or the creditors or the receiver or conservator of the institution.100 These provisions ensure that qualified
financial contracts receive parallel treatment under the FDIA and the Code with respect to any “preference”
payments.
If the FDIC is appointed as a conservator or receiver of a national bank, the FDIC will have both the
powers granted to it by the FDIA and, to the extent not inconsistent with the FDIA, the powers granted to
conservators or receivers of national banks. Therefore, pre-insolvency payments made by an insolvent national bank
may also be reviewed under Section 91 of the NBA.101 Pursuant to Section 91 of the NBA, all transfers by a
national bank, including “payments of money to either [shareholders or creditors], made after the commission of an
act of insolvency, or in contemplation thereof, made with a view to . . . preference of one creditor to another . . .
shall be utterly null and void . . . .” The FDIA provision described above was amended in the 2005 Act to clarify
that it supersedes Section 91 of the NBA. As amended, the FDIA provision applies “[n]otwithstanding . . .
[Section 91 of the NBA or] any other Federal or State law relating to the avoidance of preferential or fraudulent
transfers”.102 Accordingly, we believe that the FDIC (whether acting as conservator or receiver) should not be able
to invoke the preference provisions of the NBA to avoid a preinsolvency transfer made under a qualified financial
contract (if such transfer was made without the intent to hinder, defraud, or delay). Furthermore, if FDICIA applies,
a court should not void a transfer made pursuant to a security arrangement relating to a “netting contract”, if it is to
give effect to the broad preemptive language of the new Section 403(f) of FDICIA.103
95
Actual direct compensatory damages do not include punitive or exemplary damages, damages for lost profits or opportunity or damages for
pain and suffering.
96
12 U.S.C. § 1821(e)(3)(A), (C).
97
12 U.S.C. § 1821(e)(9). In addition, a receiver or conservator has express right to transfer to certain foreign institutions. 12 U.S.C.
§ 1821(e)(9)(B).
98
Qualified financial contracts, and related claims, security and credit enhancements, of the counterparty’s affiliates must also be included in such
transfer. Id.
99
12 U.S.C. § 1821(e)(11). Qualifed financial contracts of the counterparty’s affiliates must be disaffirmed or repudiated together with the
conterparty’s qualified financial contracts.
100
12 U.S.C. § 1821(e)(8)(C). See also 12 U.S.C. § 1821(e)(12) with regard to security interests generally.
101
12 U.S.C. § 91.
102
12 U.S.C. § 1821(e)(8)(C)(i).
103
12 U.S.C. § 4403(f) and Section V.D below.
24
744581026.3
6. No Walkaway Clause. The FDIA has been amended by the 2005 Act to deny enforcement against
a federally-insured depository institution in default of “walkaway” clauses in qualified financial contracts. Pursuant
to a 2006 Act amendment, a walkaway clause is defined as follows: “any provision in a qualified financial contract
that suspends, conditions or extinguishes a payment obligation of a party, in whole or in part, or does not create a
payment obligation of a party that would otherwise exist, solely because of such party’s status as a nondefaulting
party in connection with the insolvency of an insured depository institution that is a party to the contract or the
appointment of or the exercise of rights or powers by a conservator or receiver of such depository institution, and
not as a result of a party’s exercise of any right to offset, setoff, or net obligations that exist under the contract, any
other contract between those parties, or applicable law.”104
This FDIA restriction on enforcement of walkaway clauses applies also to FDICIA, discussed below.105
C. The NYBL106
1. NYBL Insolvency Proceedings. There are several different circumstances under which the FDIC
or another qualified Federal receiver may be appointed or appoint itself as conservator or receiver for an insolvent
New York State chartered banking institution. First of all, the New York Superintendent of Financial Services (the
“Superintendent”) is authorized to tender the receivership of an insolvent New York State chartered banking
institution that accepts federally-insured deposits to the FDIC or to another qualified Federal receiver.107
In addition, in certain cases, the appropriate federal banking agency may appoint the FDIC as sole receiver
or conservator for an insured state institution after consultation with the Superintendent.108 Such appointment may
occur where the appropriate federal banking agency (as defined in Section 3(q) of the FDIA) has determined that
(i) the institution is undercapitalized and has no reasonable prospect of becoming adequately capitalized or fails to
satisfy certain conditions specified in the FDIA, or the institution is critically undercapitalized or otherwise has
substantially insufficient capital, and (ii) the appointment is necessary to carry out the purposes of the “prompt
corrective action” provisions of Section 38 of the FDIA. However, a federal banking agency may not appoint a
conservator on these grounds without prior notice to the FDIC or the FDIC’s prior consent.109 The “appropriate
federal banking agency” with respect to an insured state member bank is the Board of Governors of the Federal
Reserve System (the “Board”).110
The FDIC may appoint itself as conservator or receiver for an insured New York state-chartered bank if it
determines that (i) a conservator, receiver or other legal custodian has been appointed for such institution, such
institution has been subject to the appointment of any such conservator, receiver or custodian for a period of at least
15 consecutive days, and one or more of the depositors in such institution is unable to withdraw any amount of any
insured deposit, or that such institution has been closed by or under the laws of any state; and (ii) one or more of the
grounds specified in Section 11(c)(5)111 of the FDIA existed with respect to such institution at the time the
conservator, receiver, or other legal custodian was appointed or such institution was closed, or any such grounds
exist at any time during the appointment of the conservator, receiver or other legal custodian or while such
institution is closed.112
104
12 U.S.C. § 1821(e)(8)(G).
105
12 U.S.C. § 1821(e)(8)(G)(i). The FDIC has been especially concerned to protect its insurance fund and its mandate to manage bank
insolvencies in the public interest.
106
Throughout this Section IV.C, we assume that the Superintendent has not tendered the receivership of an insolvent New York State chartered
banking institution that accepts federally-insured deposits to the FDIC. Please refer to Section IV.B, and the penultimate paragraph of this Section
IV.C.1, for discussion of the case where the FDIC has assumed the role of receiver.
107
N.Y. Banking Law § 634.
108
12 U.S.C. § 1821(c)(9)(A).
109
12 U.S.C. § 1821(c)(11).
110
12 U.S.C. § 1813(q)(2)(A).
111
12 U.S.C. § 1821(c)(5).
112
12 U.S.C. § 1821(c)(4).
25
744581026.3
Furthermore, the Board of Directors of the FDIC may appoint the FDIC as sole receiver or conservator for
an insured state-chartered depository institution, after consultation with the appropriate federal and state supervisory
authorities, where the Board of Directors has made a determination (a) that grounds for such appointment exist and
(b) that the appointment is necessary to reduce (i) the risk of loss to the FDIC’s deposit insurance fund with respect
to the institution or (ii) any loss that the deposit insurance fund is expected to incur with respect to the institution.113
If the FDIC appoints itself as conservator or receiver for an insured state bank, or is appointed as
conservator or receiver by the appropriate federal bank regulatory agency, the conservatorship and receivership
provisions of the FDIA apply to such appointment in the same manner as they would apply to a Federal depository
institution, except that the FDIC is required to give effect to state depositor preference statutes.114 If the FDIC is
appointed to such capacity by the applicable state banking supervisor, the FDIC may exercise both the powers given
to conservators and receivers by the applicable state law and the powers conferred upon it by Section 11 of the
FDIA.115
In all other cases an insolvency proceeding for that New York State chartered banking institution would be
conducted solely under the NYBL.116 As a rule, the insolvency proceedings under the NYBL, which are
administered by the Superintendent, are fairly similar to those applicable under the FDIA. A proceeding under the
NYBL is commenced when the Superintendent takes possession of the business and property of such banking
institution.117 If the Superintendent does so, he may conduct proceedings to liquidate the institution or may appoint
the FDIC as receiver or liquidator of such institution. The Superintendent has many of the powers of a bankruptcy
trustee under the Code, including the right to repudiate burdensome contracts. The commencement of an insolvency
proceeding is at the discretion of the Superintendent and may not be initiated by individual creditors.118
2. Right to Terminate. Section 619(1)(d)(2)(i) of the NYBL provides that the Superintendent’s
taking possession of a New York banking organization does not operate as a stay or as an injunction against the
termination of a “qualified financial contract” in accordance with its terms. That Section also provides that a party
to a qualified financial contract may exercise any of its rights under a security arrangement relating to any qualified
financial contract free from any stay. The definition of qualified financial contracts under the NYBL enumerates
certain categories of financial contracts.119 Those categories include, among others, swap agreements. The NYBL
does not describe in detail which financial contracts would be encompassed by this category. Nevertheless, we
believe that generally the Superintendent should interpret each category to include the same range of financial
contracts that are covered by the corresponding definitions under the FDIA.120
3. Netting. Section 619(d)(2) of the NYBL provides that the Superintendent’s taking possession of a
New York banking organization shall not act as an injunction against “any right to offset or net out any termination
value, payment amount, or other transfer obligation arising under . . . qualified financial contracts”. Under
113
12 U.S.C. § 1821(c)(10).
114
12 U.S.C. § 1821(c)(13).
115
12 U.S.C. § 1821(c)(3)(B).
116
The applicable laws are found in Article XIII of the NYBL.
117
There is no provision in the NYBL that permits a creditor of the bank or a person other than the Superintendent to commence such a
proceeding.
118
N.Y. Banking Law § 606(1).
119
N.Y. Banking Law § 618-a2(e). Under § 618-a2(e)(i) of the NYBL, “qualified financial contract” means any securities contract, commodity
contract, forward contract (including spot and forward foreign exchange), repurchase agreement, swap agreement, and any similar agreement, any
option to enter into any such agreement, including any combination of the foregoing, and any master agreement for such agreements, as well as
other agreements determined by the Superintendent to be qualified financial contracts, provided that such agreements satisfy certain documentary
requirements.
120
See supra Section IV.B. See, e.g., Cayuga Indian Nation v. Gould, 930 N.E.2d 233 (2010) (applying a federal statute to interpret an undefined
term used in a state statute where the state statutory provision was “patterned after” the federal statute and other indicators supported consistency
of this meaning with state legislative intent). See also Bank of Tokyo, State of New York Dept. of Banking, Staff Interpretive Letter (May 20,
2003), in which the staff of the State Banking Department referenced both the FDIA and the Code definitions and parallel purposes in
determining a securities lending transaction to be within the Section 618-a2(e) definition of qualified financial contract. Although precedent is
not clear on the point, we believe the Superintendent would look to the FDIA and Code as then in effect, rather than as those statutes were at the
time of the enactment of the relevant NYBL provisions. See id. (no reference to looking back to earlier versions of FDIA and Code).
26
744581026.3
Section 618-a of the NYBL, once the Superintendent has taken possession of an institution, the Superintendent may
“repudiate” any contract to which the institution is a party if the performance of that contract is burdensome and the
repudiation of that contract would promote the orderly administration of the institution’s affairs.
As under the FDIA, the liability of the Superintendent in respect of a repudiated contract is generally
limited to “actual direct compensatory damages” of the parties to the contract as of the date on which the
Superintendent took possession of the institution.121 With respect to qualified financial contracts, however, the
“actual direct compensatory damages” arising from the Superintendent’s repudiation of such a contract, or from the
termination or liquidation of such contract in accordance with its terms, is “deemed to include normal and
reasonable costs of cover or other reasonable measures of damages utilized among participants in the market for
qualified financial contract claims”.122 These damages are determined as of the date of repudiation or date of
termination of such qualified financial contract in accordance with its terms.123
4. Selective Repudiation. The NYBL also specifies that any master agreement for qualified financial
contracts, together with all supplements thereto, “shall be treated as one qualified financial contract”.124
Accordingly, if the Superintendent repudiates any of the Transactions under an ISDA Master Agreement, the
Superintendent would be required to repudiate all of them, and we believe that the amount payable by the parties to
the ISDA Master Agreement in respect of such repudiation would be calculated as provided under the ISDA Master
Agreement.
5. Pre-insolvency Payments. The NYBL does not grant the conservator or receiver of a New York
Bank special powers to avoid transactions entered into by such a bank before the commencement of an insolvency
proceeding under the NYBL. However, if a payment were made with the actual intent to hinder, delay or defraud
the present or future creditors of the New York Bank, such payment could be set aside as a fraudulent conveyance
under section 276 of the New York Debtor and Creditor Law or similar, applicable laws of another jurisdiction.125
6. No Forfeiture. Subsections (b) and (c) of Section 618-a2 of the NYBL direct the Superintendent
to disregard contractual provisions of qualified financial contracts that purport to “effect a forfeiture” of amounts
due to the Superintendent upon termination or liquidation of the contract.
D. The OLA126
(a) OLA Insolvency Proceedings. Title II of the Dodd-Frank Act establishes the Orderly Liquidation
Authority (the “OLA”),127 which authorizes the Secretary of the Treasury to appoint the FDIC as receiver of certain
systemically significant financial companies that are not federally-insured depositories128 following a
recommendation, determination and judicial review process set forth in the OLA.129 The purpose of the OLA is “to
121
12 U.S.C. § 1821(e)(3)(A)(i); see also N.Y. Banking Law § 618-a2(a).
122
N.Y. Banking Law § 618-a2(b).
123
Id.
124
N.Y. Banking Law § 618-a2(e). Based on the reasoning above with regard to parallelism between the NYBL and the comparable FDIA
definitions, we believe that a master agreement that contains transactions that are not qualified financial contracts would be treated as a qualified
financial contract only with respect to transactions that are themselves qualified financial contracts. See 12 U.S.C. § 1821(e)(8)(D)(vii). Parties
contemplating having such mixed masters should consider the ramifications with respect to termination, netting and access to collateral.
125
The local law of the jurisdiction in which the debtor is located governs claims for relief in the nature of those available under the New York
Uniform Voidable Transactions Act. New York Debtor and Creditor Law § 279.
126
Throughout this Section IV.D, we assume that the insolvent U.S. Party will be a Covered Financial Company.
127
12 U.S.C. §§ 5381–5394.
128
Note that insurance company procedures may be precipitated by the OLA, but applicable state law will apply. 12 U.S.C. § 5383(e).
129
The requisite determinations, which are to be made by the Secretary of the Treasury in consultation with the President, include findings that
the financial company is in default or danger of default, its failure and resolution under otherwise applicable law would have serious adverse
effects on the financial stability of the United States, and no viable private sector alternative is available to prevent the default of the financial
company. 12 U.S.C. § 5383(b). If the covered financial company’s board of directors (or equivalent body) does not acquiesce to the appointment
27
744581026.3
provide the necessary authority to liquidate failing financial companies that pose a significant risk to the financial
stability of the United States in a manner that mitigates such risk and minimizes moral hazard.”130 The OLA has not
yet been used. No attempt has been made to apply the OLA to a failing entity.
As receiver, the FDIC is directed to liquidate and wind up the affairs of a covered financial company in
such manner as the FDIC deems appropriate, subject to all legally enforceable and perfected security interests and
all legally enforceable security entitlements in respect of assets of the covered financial company.131 The FDIC’s
actions under the OLA are subject to certain mandatory terms and conditions, including that the FDIC shall
(i) determine that any such action is necessary for purposes of the financial stability of the United States, and not for
the purpose of preserving the covered financial company, and (ii) ensure that unsecured creditors bear losses in
accordance with the priority of claims provisions of the OLA.132
The powers of the FDIC as receiver under the OLA are closely patterned after those under the FDIA. In
addition, the OLA provides that the FDIC may avoid preferential and fraudulent transfers133 and preferential
setoffs,134 in each case under provisions patterned after (but not identical to) the corresponding provisions of the
Code,135 and may deviate from the equal treatment of similarly situated creditors in certain circumstances.136
Further, the FDIC has the power to enforce contracts of subsidiaries and affiliates of the covered financial company,
notwithstanding any ipso facto contractual rights based solely on the insolvency, financial condition or receivership
of the covered financial company, if the obligations of the affiliate or subsidiary under the contract are guaranteed or
otherwise supported by or linked to the covered financial company and either: (i) the guarantee or other support and
all related assets and liabilities are transferred to a bridge financial company or solvent third party during the time
period allowed for the transfer of QFCs or (ii) the FDIC provides “adequate protection” for the supported
obligations.137
In regulations implementing this provision of the OLA,138 the FDIC defines a contract of a subsidiary or
affiliate to be “linked” to a covered financial company if the contract contains a “specified financial condition
clause” that specifies the covered financial company. A “specified financial condition clause” is one that permits a
counterparty to terminate, accelerate, liquidate or exercise any other remedy under a contract with, or obtain
possession or exercise control over any property or affect any contractual rights of, the subsidiary or affiliate,
directly or indirectly by reason of specified types of actions or circumstances relating to the covered financial
company or one of its direct or indirect transferees, such as a bridge financial company or the bridge company’s
successor.
No action is required by the FDIC as receiver to exercise its power to enforce subsidiary or affiliate
contracts. The implementing regulation by its terms nullifies the counterparty’s entitlement to terminate, accelerate,
liquidate, or exercise any other remedy arising solely by reason of a specified financial condition clause.139 The
of the FDIC as receiver, the Secretary’s determinations will be subject to judicial review under an “arbitrary and capricious” standard. 12 U.S.C.
§ 5382(a)–(b).
130
12 U.S.C. § 5384.
131
12 U.S.C. § 5390(a)(1)(D).
132
12 U.S.C. § 5386.
133
12 U.S.C. § 5390(a)(11).
134
12 U.S.C. § 5390(a)(11).
135
See 11 U.S.C. §§ 547–548, 553. The FDIC has issued regulations to conform its avoidance powers under the OLA with respect to fraudulent
and preferential transfers to the corresponding Code provisions. 12 C.F.R. § 380.9.
136
See 12 U.S.C. § 5390(b)(4), (d)(4), (h)(5)(E). Upon appropriate determinations, the FDIC may make additional payments or credit additional
amounts to some but not other creditors of the Covered Financial Company with equally ranking claims. Of relevance to derivatives
counterparties, such additional amounts may take the form of payments or credits to third-party institutions in order to induce such institutions to
accept liability for the creditors’ claims. 12 U.S.C. § 5890(d)(4)(C). Such additional payments or credits may be clawed back by the FDIC if
necessary to repay obligations issued by the FDIC to the Secretary of the Treasury under the OLA. 12 U.S.C. § 5890(o)(1)(D)(i).
137
12 U.S.C. § 5390(c)(16).
138
12 C.F.R.§ 380.12.
139
12 C.F.R. § 380.12(a)(1)
28
744581026.3
preamble accompanying the regulation states that the regulation does not prohibit termination or exercise of
remedies based on breach or default by a subsidiary or affiliate of a covered financial company, such as failure to
make a payment; however, the subsidiary’s or affiliate’s failure to comply with a remedy for an “asserted violation
of an unenforceable specified financial condition clause” would not be permissible grounds for terminating a
contract or exercising remedies.140
The regulation interprets the statutory condition, noted above, requiring either the transfer of support or the
furnishing of adequate protection as being applicable only to obligations that are “supported” by, rather than merely
linked to, the covered financial company.141 The term “support” means an undertaking to guarantee, indemnify, or
make loans, advances or capital contributions or be contractually obligated to provide any other financial assistance
to the subsidiary or affiliate for the purpose of supporting the its contractual obligations for the benefit of a
counterparty to a linked contract.
Like the FDIA, the OLA contains significant limitations on the FDIC’s powers with respect to financial
contracts meeting the definition of “qualified financial contract”.
The OLA applies to “financial companies” for which the Secretary of the Treasury has made a systemic
risk determination under Section 203(b) of the OLA and that are not insured depository institutions (“covered
financial companies”). A “financial company” is defined as any “company” incorporated or organized under U.S.
Federal or State law that is one of the following:
(i) a bank holding company;
(ii) a nonbank financial company supervised by the Board of Governors of the

Federal Reserve (the “FRB”);
(iii) any company that is predominantly engaged in activities the FRB has
determined are financial in nature or incidental thereto for purposes of Section 4(k) of the Bank
Holding Company Act; and
(iv) any subsidiary (other than an insured depository institution or an insurance

company) of one of the aforementioned companies that is predominantly engaged in activities the
FRB has determined are financial in nature or incidental thereto for purposes of Section 4(k) of the
Bank Holding Company Act.142
In order to be considered to be “predominantly engaged” in the activities described in clauses (iii) or (iv), a
company’s consolidated revenues from such activities must constitute at least 85% of its total consolidated revenues,
as established in regulations to be promulgated by the FDIC in consultation with the Secretary of the Treasury.143
The OLA does not apply to federally chartered Farm Credit System Institutions, the Federal National Mortgage
Association, the Federal Home Loan Mortgage Corporation, any Federal Home Loan Bank or certain other
governmental or regulated entities.
In any case where the FDIC is appointed as receiver of a “covered financial company” under the OLA, it
may also appoint itself as receiver of any “covered subsidiary” of the covered financial company if the FDIC and the
140
77 Fed. Reg. 63205, 63207 (October 16, 2012).
141
12 C.F.R. § 380.12(a)(2). See also 77 Fed. Reg. 63205, 63208. We note the possibility of rights stemming from a specified financial
condition clause becoming accessible with respect to supported contracts (if the FDIC does not transfer the support and related assets and
liabilities, or provide adequate protection, within the allotted time period) while remaining inaccessible for contracts that are merely linked to the
covered financial company. Parties contemplating the exercise of rights in such circumstances should consider the ramifications, which are
beyond the scope of this memorandum, with respect to netting, setoff and access to collateral. The terms “support” and “related assets and
liabilities” are defined in 12 C.F.R. § 380.12(b)(3) and (4), respectively.
142
12 U.S.C. § 5381(a)(11). If the OLA proceeding is for a covered broker or dealer, the FDIC must appoint SIPC as trustee. 12 U.S.C.
§ 5385(a). SIPC must apply SIPA generally but not to assets and liabilities transferred by the FDIC to a bridge financial company. 12 U.S.C.
§ 5385(b)(1). The effect of SIPA on qualified financial contracts is highly limited. See 12 U.S.C. § 5385(b)(4). If the OLA proceeding is for a
“stockbroker” that is not a member of SIPC, the FDIC must generally apply the provisions of subchapter III of Chapter 7 of the Bankruptcy Code
in respect of the distribution to customers of customer name securities, customer property and member property. 12 U.S.C. § 5390(m)(1)(A).
143
12 U.S.C. § 5381(b). The FDIC’s regulations are codified at 12 C.F.R.§ 380.8. See also 78 Fed. Reg. 34712 (June 10, 2013).
29
744581026.3
Secretary of the Treasury jointly determine that the subsidiary is in default or danger of default, the appointment of
the FDIC as receiver would avoid or mitigate serious adverse effects on the financial stability or economic
conditions of the United States and such action would facilitate the orderly liquidation of the covered financial
company.144 A subsidiary of a covered financial company other than (i) an insured depository institution, (ii) an
insurance company or (iii) a covered broker or dealer is eligible to be treated as a covered subsidiary.145 If the FDIC
is appointed as receiver, the covered subsidiary is treated as a covered financial company under the OLA.146
(b) Qualified Financial Contract Overview. The OLA provides that, subject to certain limitations, a
party to a qualified financial contract will be entitled to:
(i) exercise any right to cause the termination, liquidation or acceleration of a

qualified financial contract as a result of the appointment of the FDIC as receiver or the insolvency
or financial condition of the covered financial company for which the receiver was appointed after
5:00 p.m. (eastern time) on the business day following the appointment of the receiver (which is
the deadline by which the FDIC must provide notice of any transfer of the qualified financial
contract to a bridge financial company or other permitted transferee);
(ii) exercise any rights under any security agreement or arrangement or

other credit enhancement related to one or more qualified financial contracts; and
(iii) exercise any right to “offset or net out any termination value, payment
amount or other transfer obligation arising under or in connection with [one] or more [qualified
financial contracts]”.147
Another important feature of the OLA is that it expressly provides that neither payments made nor
collateral transferred by a covered financial company in connection with a qualified financial contract may be
avoided by the FDIC, except where the transferee intended to “hinder, delay, or defraud” the creditors or the
receiver of the covered financial company.148
“Qualified financial contract” is defined to include securities contracts, commodity contracts, forward
contracts, repurchase agreements and swap agreements.149 The definition of each of these types of protected
transactions is substantially identical to the corresponding definition under the FDIA.150
In a manner identical to the definition of “swap agreement” under the Code and the FDIA, the definition of
“swap agreement” under the OLA includes “any agreement or transaction that is similar”, indicating that it is
intended to cover both current and newly developed Transactions that, while not specifically enumerated, share
fundamental characteristics with those specified.
The OLA also specifies that a master agreement such as an ISDA Master Agreement (i) that documents
Transactions falling within the definition of “swap agreement”, together with its supplements, will be treated as one
“swap agreement”, and (ii) that documents Transactions that are qualified financial contracts will be treated as one
qualified financial contract (but only with respect to those underlying agreements that are qualified financial
contracts).151
144
12 U.S.C. § 5390(a)(1)(E).
145
12 U.S.C. § 5381(a)(9).
146
12 U.S.C. § 5390(a)(1)(E)(ii).
147
12 U.S.C. § 5390(c)(8)(A), (c)(10)(B)(i).
148
12 U.S.C. § 5390(c)(8)(C).
149
12 U.S.C. § 5390(c)(8)(D)(i)–(vi). The term also extends to any “similar agreement” that the FDIC determines by regulation, resolution or
order to be a qualified financial contract.
150
See 12 U.S.C. § 1821(e)(8)(D)(i)–(vi).
151
12 U.S.C. § 5390(c)(8)(D)(viii).
30
744581026.3
2. Right to Terminate. The OLA provides that a person that is a party to a qualified financial
contract will be entitled to enforce any right to cause the termination, liquidation or acceleration of such a contract
which arises upon the date of the FDIC’s appointment as receiver of a covered financial company or at any time
after such appointment,152 except that any such right that arises solely as a result of or incidental to the appointment
of the receiver (or the insolvency or financial condition of the covered financial company for which the receiver has
been appointed) may not be exercised until 5:00 p.m. (eastern time) on the business day after such appointment.153
When termination rights are accessible, the OLA further provides that a person that is a party to a qualified financial
contract will be entitled to enforce any right under any security agreement or arrangement or other credit
enhancement related to one or more qualified financial contracts.154
3. Netting. A key provision of the OLA protects the rights of parties to swap agreements and other
qualified financial contracts to “offset or net out any termination value, payment amount, or other transfer obligation
arising under or in connection with [one] or more [qualified financial contracts]”.155 This provision, together with
the anti-cherry-picking provisions described below, should ensure that credit exposures to an insolvent covered
financial company can be calculated on a net basis pursuant to the terms of an ISDA Master Agreement.
Under the OLA, the liability of the FDIC in respect of a repudiated contract is generally limited to “actual
direct compensatory damages” of the parties to the contract as of the date on which the FDIC was appointed as
receiver.156 With respect to qualified financial contracts, however, the compensatory damages arising in respect of
the FDIC’s repudiation of such a contract are deemed to include normal and reasonable costs of cover or other
reasonable measures of damages utilized in the industries for such contract and agreement claims, calculated as of
the date of the disaffirmance or repudiation of such contract or agreement.157
4. No Selective Transfer or Repudiation. The OLA provides that, in any transfer of assets of a
covered financial company, the FDIC may not “cherry-pick” among qualified financial contracts between the
covered financial company and any particular counterparty. Instead, if any qualified financial contract with a given
counterparty is transferred, all qualified financial contracts with that counterparty or its affiliates must be transferred
to the same party (together with all claims, security and credit enhancements relating thereto). 158 Likewise, FDIC
may not “cherry-pick” among qualified financial contracts between the insolvent covered financial company and
any particular counterparty or that counterparty’s affiliates for purposes of repudiating or disaffirming any qualified
financial contracts.159
5. Pre-insolvency Payments. The OLA expressly provides that the FDIC, whether acting in its
corporate capacity or as receiver for a covered financial company, may not avoid any transfer of money or other
property in connection with any qualified financial contract with a covered financial company, except where “the
transferee had actual intent to hinder, delay, or defraud” such company, its creditors or the FDIC as receiver for such
152
12 U.S.C. § 5390(c)(8)(A), 10(B).
153
12 U.S.C. § 5390(c)(10)(B)(i). This is the time by which the FDIC as receiver must notify parties to qualified financial contracts with the
covered financial company of any transfer the FDIC makes of those contracts. 12 U.S.C. § 5390(c)(10)(A). Thus, § 5390(c)(8)(A) and
§ 5390(c)(10)(B)(i) together reinstate a counterparty’s right to terminate, liquidate, accelerate and net if the FDIC has not given the requisite
notice by that time. In what is likely just a drafting artifact carried over from the FDIA, § 5390(c)(8)(A) refers to both termination and
acceleration, whereas the limitation on exercise of rights in § 5390(c)(10(B)(i) omits the reference to acceleration.
154
12 U.S.C. § 5390(c)(8)(A). 12 U.S.C. § 5390(c)(8)(D)(x) defines a person to include “any governmental entity in addition to any entity
included in the definition of such term in section 1 of Title 1” of the United States Code.
155
12 U.S.C. § 5390(c)(8)(A)(iii).
156
Actual direct compensatory damages do not include punitive or exemplary damages, damages for lost profits or opportunity or damages for
pain and suffering. 12 U.S.C. § 5390(c)(3)(B).
157
12 U.S.C. § 5390(c)(3)(A), (C).
158
12 U.S.C. § 5390(c)(9)(A). Qualified financial contracts, and related claims, security and credit enhancements, of the counterparty’s affiliates
must also be included in such transfer. Id. Certain subordinated claims against the covered financial company need not be transferred. 12 U.S.C.
§ 5390(c)(9)(A)(i)(II). In addition, a receiver or conservator has the express right to transfer to certain foreign institutions. 12 U.S.C.
§ 5390(c)(9)(B).
159
12 U.S.C. § 5390(c)(11). Qualifed financial contracts of the counterparty’s affiliates must be disaffirmed or repudiated together with the
conterparty’s qualified financial contracts.
31
744581026.3
company.160 Similarly to the corresponding provision of the FDIA, this provision applies “[n]otwithstanding . . .
[Section 91 of the NBA or] any other Federal or State law relating to the avoidance of preferential or fraudulent
transfers”.161
6. No Walkaway Clause. Like the FDIA, the OLA denies enforcement against a covered financial
company in default of “walkaway” clauses in qualified financial contracts. A walkaway clause is defined in a
substantively identical manner to the corresponding definition under the FDIA.162 As under the FDIA, this
restriction on enforcement of walkaway clauses applies notwithstanding Section 403 and 404 of FDICIA, discussed
below.163
V.
FDICIA
A. Background; Definitions
In the event a court for some reason did not treat an ISDA Master Agreement as one agreement or did not
(or could not) apply the analysis concerning the Code, FDIA, the NYBL and the OLA set forth in Section IV above,
the close-out netting provisions in an ISDA Master Agreement with certain entities may still be enforced based on
FDICIA. As amended by the 2006 Act, FDICIA recognizes the enforceability of the termination, liquidation,
acceleration and netting of payment obligations between two “financial institution[s]” under a “netting contract”,
“notwithstanding any other provision of law” (other than certain provisions of the FDIA, the OLA and other Federal
statutes)164 and notwithstanding any “stay, injunction, avoidance, moratorium or similar proceeding or order,
whether issued or granted by a court, administrative agency, or otherwise”.165
Section 402(14) of FDICIA defines “netting contract” to mean, in pertinent part, a contract or agreement
between two or more financial institutions that: “provides for netting present or future payment obligations or
payment entitlements (including liquidation or close-out values relating to the obligations or entitlements) among
the parties to the agreement . . . .”166
In a striking change, the 2005 Act deleted the requirement that the netting contract be governed by the laws
of the United States or a constituent jurisdiction. As before, however, the contract must be valid under, and not
precluded by, Federal law to be a “netting contract” for purposes of FDICIA.167 We believe that the ISDA Master
Agreement qualifies as a “netting contract” under FDICIA.
In addition, in order for FDICIA to apply, both parties must be “financial institutions”. Section 402(9) of
FDICIA defines “financial institution” to mean a registered or licensed broker or dealer (and certain affiliates as
160
12 U.S.C. § 5390(c)(8)(C). Unlike the corresponding provision of the FDIA, the exception refers only to the transferee’s actual intent, not to
the FDIC’s determination of such actual intent. See 12 U.S.C. § 1821(e)(8)(C).
161
12 U.S.C. § 5390(c)(8)(C).
162
12 U.S.C. § 5390(c)(8)(F).
163
12 U.S.C. § 5390(c)(8)(F)(i).
164
Carved out from this sweeping statement and pertinent to this memorandum is FDIA Section 1821(e) (powers of conservators and receivers
with respect to contracts entered into before appointment of a conservator or receiver), 12 U.S.C. § 5390(c) (corresponding provision of the OLA)
or any order authorized under Section 5(b)(2) of the Securities Investor Protection Act of 1970. Please see note 179 below. Although not relevant
to the Code Entities we consider in this memorandum, also carved out is Section 561(b)(2) of the Code, which imposes certain limits on netting
rights when the debtor is a commodity broker.
165
See generally 12 U.S.C. §§ 4401–4407. A plain reading of this broad language in FDICIA appears to preempt all contrary Federal and state
laws and actions with respect to those laws. The Board of Governors of the Federal Reserve System has recognized that “[n]etting contracts
between financial institutions in the United States generally are valid under the netting provisions of . . . FDICIA”. 57 Fed. Reg. 31974 (July 20,
1992). That the 2005 and 2006 Acts specifically carved out particular statutes from this provision argues strongly that courts should give this pre-
emptive directive full effect as to all other statutes.
166
12 U.S.C. § 4402(14)(A)(i).
167
12 U.S.C. § 4402(14)(B).
32
744581026.3
determined by the Board), a depository institution (i.e., national and state banks, irrespective of their eligibility for
deposit insurance, credit unions, thrift institutions, U.S. branches or agencies of foreign banks, foreign banks (with
or without their U.S. branches or agencies (if any) as single entities), or Edge Act corporations), a registered or
licensed futures commission merchant or any other institution determined by the Board.168
The original terms of FDICIA delegated rule-making authority to the Board to expand the definition of
financial institutions beyond the original enumerated entities.169 Under Regulation EE adopted by the Board in
1994, the expanded definition of financial institution extended the protections of FDICIA to a significant number of
new entities that met both prongs of a two-prong test (qualitative and quantitative) included in the new definition of
“financial institution”.170 Regulation EE is available to both domestic and foreign “persons” that meet the two-
prong test.
1. Qualitative Test. The qualitative test requires that a “person” “represents, orally or in writing, that
it will engage in financial contracts as a counterparty on both sides in one or more financial markets”.171 In a letter
addressed to ISDA dated March 3, 1994, the Associate General Counsel of the Board explained that the word
“represents” does not require written contractual representations. The letter also states that there should be many
ways to meet this requirement. For example, representations can be made in noncontractual writings or orally.
Finally, the letter explains that representations do not have to be made to a particular counterparty.
2. Quantitative Test. An entity also must satisfy a quantitative test before it will be deemed a
financial institution under the new definition. This quantitative test requires that the entity meet either of two
minimum thresholds with respect to “financial contracts”. This test is not relevant to entities that qualify under the
statute, such as state-chartered branches; it is only relevant to entities that seek to qualify under the rule.
The definition of “financial contract” in the rule adopts the definition of “qualified financial contract” that
appears in Section 11(e)(8)(D)(i) of the FDIA, as amended.172
The first minimum threshold test requires an entity to have outstanding financial contracts of at least
$1 billion in notional principal amount with counterparties that are not affiliates. The alternative minimum threshold
test requires that an entity have financial contracts with a total gross mark-to-market position of at least
$100 million.173 Again, these two quantitative thresholds are alternatives, and satisfaction of either will satisfy the
quantitative prong of the two-prong test. Both of the alternative quantitative tests can be met by an entity that
exceeds either of the thresholds on any single day during the prior 15-month period. If a person qualifies as a
financial institution under the two-prong test, that person will be considered a financial institution for the purposes
of any contract entered into during the period it qualifies, even if the person subsequently fails to qualify.174
168
12 U.S.C. § 4402(9). Although we believe the reference to “foreign banks” is intended to address a foreign bank as a single institution
encompassing all its branches and agencies (including its U.S. branches and agencies), this is not clear on the face of the statute.
169
Id. This authority remains in the amended statute. The Board has exercised its authority in a variety of specific instances, frequently with
respect to GSEs. See, e.g., Letter of Jennifer J. Johnson, Secretary of the Board, to Paul Friend, Federal Home Loan Bank of New York, 1998
Fed. Res. Interp. Ltr. LEXIS 70, July 7, 1998, and Letter of William W. Wiles, Secretary of the Board to Maud Mater, Esq., Federal Home Loan
Mortgage Corporation, January 21, 1997.
170
Netting Eligibility for Financial Institutions, Regulation EE, 12 C.F.R. § 231.3. The Board recently adopted amendments to Regulation EE that
include swap dealers, security-based swap dealers and certain other entities in the definition of “financial institution” and clarify how the existing
activities-based test applies following a consolidation of legal entities. 86 Fed. Reg. 11618 (Feb. 26, 2021). The amendments also codify the
Board’s existing view that foreign banks, as defined in section 1(b) of the International Banking Act of 1978 (12 U.S.C. § 3101), are financial
institutions under the statutory definition, regardless of whether the foreign bank has a U.S. branch or agency. See 84 Fed. Reg. 18741, 18743
(May 2, 2019).
171
Netting Eligibility for Financial Institutions, Regulation EE, 12 C.F.R. § 231.3(a).
172
The sole difference from the FDIA definition is that Regulation EE defines a “forward contract” to include a contract with a maturity date two
days or less after the date the contract is entered into (i.e., a “spot” contract). 12 C.F.R. § 231.2(c). Under the FDIA, spot, same day-tomorrow,
tomorrow-next, forward, or other foreign exchange, precious metals and commodity agreements are “swap agreements”. 12 U.S.C.
§ 18212(e)(8)(D)(vi)(I).
173
The gross mark-to-market position is based on the sum of the absolute mark-to-market value of each financial contract (without regard to the
in-the-money or out-of-the-money status of the entity), calculated in accordance with the methods normally used by the parties to value each
contract. Netting Eligibility for Financial Institutions Regulation EE, 12 C.F.R. § 231.2(e).
174
Netting Eligibility for Financial Institutions, Regulation EE, 12 C.F.R. § 231.3(b).
33
744581026.3
B. Treatment of Transactions
Assuming that each of the parties to an ISDA Master Agreement is a “financial institution”, the netting
provisions in FDICIA would apply to that contract.175 After a review of the applicable statutory language and
legislative history, we have not found anything to suggest that different types of Transactions would fail to qualify
under the applicable provisions of FDICIA. In fact, because Congress intended to reduce systemic risk in enacting
Sections 401–407 of FDICIA,176 it appears that the correct view would be to construe broadly the application of
FDICIA so as to include Transactions that may not fall within the definition of “swap agreement”. In the event that
certain Non-Enumerated Transactions are not treated as “swap agreements” or as part of a “master agreement” (as
discussed below in Section VI.), a party may be able to rely on FDICIA to obtain close-out netting of an ISDA
Master Agreement upon the insolvency of a financial institution subject to FDICIA. The netting provisions of an
ISDA Master Agreement should be enforceable if both parties are “financial institutions”, regardless of whether all
of the Transactions entered under the ISDA Master Agreement are found to be “swap agreements” or “qualified
financial contracts”, or to fall within a “master agreement”.
C. Enforceability of termination provisions of an ISDA Master Agreement under FDICIA
FDICIA protects the enforceability of “netting contracts” between “financial institutions”, “notwithstanding
any other provision of law” or any “stay, injunction, avoidance, moratorium or similar proceeding or order, whether
issued or granted by a court, administrative agency, or otherwise”, other than certain provisions of the FDIA,
discussed below, the OLA or any order authorized under Section 5(b)(2) of the Securities Investor Protection Act of
1970.177
The 2006 Act amendments make it clear that FDICIA protects a financial institution’s ability to terminate,
liquidate, accelerate and net pursuant to the close-out netting provisions of an ISDA Master Agreement entered into
with an insolvent financial institution.178
D. Pre-insolvency payments.
FDICIA would apply to an ISDA Master Agreement between two “financial institution[s]” where the ISDA
Master Agreement is a “netting contract”, as discussed above. FDICIA neither provides for any insolvency
proceeding nor empowers any authority to void transfers. FDICIA as amended by the 2005 Act expressly provides
that the provisions of any security agreement or arrangement or other credit enhancement related to one or more
netting contract shall not be stayed, avoided or otherwise limited by any State or Federal law, other than certain
provisions not directly relevant to avoidance of transfers.179 Recovery under other statutes of a transfer made
pursuant to such a security arrangement would seem to constitute a limitation of a security arrangement that is
expressly prohibited by FDICIA.180
175
In the case of a physically settled transaction, such contract may, but need not allow for conversion of the value of the physically settled
transaction to a cash payment, because although Section 402(14) of FDICIA limits the definition of “netting contract” to a contract that “provides
for netting present or future payment obligations or payment entitlements” (emphasis added), “payment” is defined as “a payment of United
States dollars, another currency, or a composite currency, and a noncash delivery, including a payment or delivery to liquidate an unmatured
obligation.” 12 U.S.C. § 4402(15).
176
See 12 U.S.C. § 4401 (setting forth Congressional findings).
177
12 U.S.C. §§ 4403(a), 4405.
178
The 2006 Act specifically inserted the words “terminated, liquidated, accelerated and” before “netted” in Sections 403 and 404 of FDICIA,
making it expressly clear that the relevant terms of an ISDA Master Agreement with an insolvent financial institution are to be enforced without
delay, subject to note 164 above. 12 U.S.C. §§ 4403–4404.
179
See supra note 164 (referring to provisions of the FDIA, the OLA, SIPA and the Code). FDIC staff have informally expressed the view that
the intent of the cross-reference to the FDIA in FDICIA was to protect the stay and transfer provisions of the FDIA and not Section 1821(e) in
full, and that the cross-reference to the OLA added by the Dodd-Frank Act should be interpreted similarly.
180
Despite this sweeping language, in certain instances (e.g., actual fraud) a court might nonetheless have the incentive and the means to facilitate
recovery of a transfer. For example, under Section 402(14)(B) of FDICIA, a “netting contract” does not include a contract that is “invalid or
precluded by Federal law.” Under Section 548(a)(1)(A) of the Code, a trustee may avoid certain obligations incurred with actual intent to
defraud.
34
744581026.3
Under the 2006 Act, however, FDICIA was amended to expressly permit certain provisions of the FDIA to
override the netting provisions of a netting contract under FDICIA. The entirety of Section 1821(e) (powers of
conservators and receivers with respect to contracts entered into before appointment of a conservator or receiver)
overrides the FDICIA provision. Section 1821(e) importantly includes FDIA limits upon exercising termination and
netting rights against a receiver or conservator, see Section IV.B.2 above, and the unenforceability of walkaway
clauses under the FDIA against insured depository institutions in default.181
VI.
NON-ENUMERATED TRANSACTIONS AND MASTER NETTING AGREEMENTS UNDER THE CODE,

A. Classification of Transactions
1. Introduction. Derivatives market participants increasingly are documenting a wider variety of

Transactions under agreements such as the ISDA Master Agreement. Appendix A sets forth a current list of such
Transactions. Some of these Transactions are expressly enumerated under the definition of “swap agreement” in the
Code, the FDIA, the NYBL or the OLA, and some are Non-Enumerated Transactions, such as economic statistic
transactions and freight derivatives. Where FDICIA applies, a derivatives market participant should be able to
exercise its netting rights under FDICIA, irrespective of whether the Transactions documented under the ISDA
Master Agreement fall within the definition of “swap agreement” or not. Where the Code, the FDIA, the NYBL or
the OLA applies but FDICIA does not apply, the analysis is more complicated. In such a case, a court has to decide
whether Transactions should be treated as either “swap agreement[s]” and thus deserving of the treatment set forth
in Section IV. above, or as other kinds of transactions entitled to parallel treatment.182 If so, a derivatives market
participant would be able to exercise its netting rights by treating an ISDA Master Agreement governing multiple
kinds of protected transactions as a “master netting agreement” as defined in the Code, or a “master agreement” as
referenced in the FDIA, the NYBL and the OLA, with respect to such Non-Enumerated Transactions and
Transactions in the enumerated list.
The broadening of the definition of “swap agreement” accomplished in the 2005 Act and the 2006 Act has
added to the enumerated list many previously Non-Enumerated Transactions, such as bullion trades, commodity
forwards, equity derivatives, credit derivatives, weather derivatives, inflation derivatives and emissions
derivatives.183 As a result, it has become easier in many cases to rely on the “any agreement or transaction that is
similar” language in the Code and FDIA definitions of “swap agreement”. The OLA incorporates a substantively
identical definition.
2. Non-Enumerated Transactions that are “swap agreements”
(a) Physically-settled commodity swaps and options on commodity swaps. We believe that a
Transaction that is specifically enumerated in the definition of “swap agreement” in the Code, the FDIA, the NYBL
or the OLA deserves the treatment provided to a “swap agreement” therein, irrespective of whether the Transaction
is cash-settled or physically-settled.184 Thus, a physically-settled commodity swap, 185 including a bullion swap,186
181
12 U.S.C. § 1821(e)(8)(G). These specific limitations existed under the 2005 Act as well. The expansion of the Section 1821(e) carve-out in
the 2006 Act may be viewed more as the establishment of consistency in relevant cases, rather than the imposition of significant additional
constraints on the party seeking the close-out. We believe the cross-reference to OLA Section 5390(c) should be interpreted in a similar manner
but note that the OLA contains additional limitations on the exercise of termination rights not present in the FDIA. See 12 U.S.C. § 5390(c)(16).
182
Other safe-harbored transactions include securities contracts, forward agreements, commodity contracts (11 U.S.C. § 761(4)) and repurchase
agreements (11 U.S.C. § 101(47)).
183
For a description of these transactions, see Appendix A.
184
See Williams v. Morgan Stanley Grp., Inc. (In re Olympic Natural Gas Co.), 294 F.3d 737, 742 (5th Cir. 2002) (finding no distinction between
“financial” and physically settled forward contracts for purposes of the forward contract anti-avoidance provision of the Code). This view was
maintained with respect to commodity forward agreements, an enumerated type of swap agreement, in In re National Gas Distributors, 556 F.3d
247 (4th Cir. 2009). See supra note 63.
185
A physically settled commodity swap can be viewed as a series of contracts providing for the physical delivery of a variable amount of a
commodity at future dates in exchange for some fixed payment.
35
744581026.3
or an option on a physically-settled swap,187 including a bullion option,188 should be treated as a “swap agreement”
since “commodity swap[s]” and “option[s]” on “commodity swaps” are specifically enumerated under the definition
of “swap agreement” in the Code, the FDIA, the NYBL and the OLA.189 Aside from references to foreign exchange
and precious metals, in the Code, the FDIA and the OLA there is no specific definition of commodities in respect of
which swap agreements may be entered into. We believe that the term “commodity” should be interpreted broadly
in this context.190
(b) Economic Statistic Transactions. Economic statistic transactions are not specifically enumerated
within the definition of “swap agreement”. Economic statistic transactions are financial contracts, the value of
which is determined by reference to the value of a rate or index pertaining to particular economic statistics, e.g.,
inflation, unemployment or gross domestic product. Economic statistic transactions may include transactions in the
form of a swap, option, cap, collar or floor. While none of the Code, the FDIA, the NYBL or the OLA mentions
economic statistic transactions as such, the definition of “swap agreement” under the Code, the FDIA and the OLA
does include a common subtype of economic statistic transactions, “inflation swap[s], option[s], future[s] and
forward agreement[s]”.191 Accordingly, swaps, options, forwards and combinations thereof based on other
economic statistics should be viewed as within the definition of “swap agreement” under the Code, the FDIA, the
NYBL and the OLA based upon their similarity to inflation derivatives.192 In addition, economic statistic
transactions should qualify as swap agreements because they are based upon “quantitative measures associated with
an occurrence, extent of an occurrence, or contingency associated with . . . economic or financial indices”, as
described within clause (A)(ii)(II) of the Code definition and clause (II) of the FDIA and the OLA definitions of
“swap agreement”.
(c) Property Index Derivatives. Property index derivatives, although not specifically enumerated
within the definition of swap agreement in the relevant statutes, should be considered as such for the same reasons
that economic statistic transactions should be so considered.
(d) Freight Transactions. Freight derivatives are swaps, the value of which is determined by reference
to the value of a freight rate index, however they are not specifically enumerated within the definition of “swap
agreement”. Even so, they would appear to be of a type, commodity derivatives, that is specifically enumerated
within the definition of “swap agreement”. Cash-settled freight derivatives should be treated as commodity index
swaps, commodity swaps, and commodity options, futures and forwards which are enumerated in the definition of
“swap agreement”, provided that the freight rate index pertaining would be deemed a commodity. While none of
the Code, the FDIA, the NYBL or the OLA defines these types of transactions,193 a “commodity” is defined under
the Code just as it is under the Commodity Exchange Act (the “CEA”).194 The FDIA and the OLA use similar
wording to the Code for the definitions of “commodity contract” and “forward contract”.195 Accordingly, we think
186
For a description of this transaction, see Appendix A.
187
An option on a physically-settled swap is an option in consideration for a premium payment to purchase or sell a commodity at a future date in
exchange for an established price in which a party would take a physical delivery.
188
For a description of this transaction, see Appendix A.
189
The definitions of “swap agreement” set forth in the Code, the FDIA and the OLA specifically include a “commodity swap” and “any option
to enter into” any such agreement. 11 U.S.C. § 101(53B), 12 U.S.C. § 1821(e)(8)(D)(vi), 12 U.S.C. § 5390(c)(8)(D)(vi). Note also that the
references to spot transactions in the definition of swap agreement, first with respect to foreign exchange and precious metals and then generally
in the “similar agreements” provision are specific references to transactions that are physically settled.
190
This interpretation follows the broad scope of transactions described in the definition of “forward contract”. See infra notes 196–194 and
accompanying text.
191
11 U.S.C. § 101(53B)(A)(i)(X), 12 U.S.C. § 1821(e)(8)(D)(vi)(I) and 12 U.S.C. § 5390(c)(8)(D)(vi)(I).
192
We assume “recurrent dealing” to the extent required by the statutes.
193
Commodity option is defined in the Code as any agreement or transaction regulated by a certain CEA provision. 11 U.S.C. § 761(5).
According to that CEA provision, commodity option is defined as “any transaction involving any commodity regulated under [the CEA] which is
of the character of, or is commonly known to the trade as, an ‘option’, ‘privilege’, ‘indemnity’, ‘bid’, ‘offer’, ‘put’, ‘call’, ‘advance guaranty’, or
‘decline guaranty.’” 7 U.S.C. § 6c(b). This definition effectively refers directly back to the CEA for a definition of “commodity”.
194
11 U.S.C. § 761(8).
195
12 U.S.C. § 1821(e)(8)(D)(iii)–(iv); 12 U.S.C. § 5390(c)(8)(D)(iii)–(iv).
36
744581026.3
it appropriate to look to the CEA definition of commodity in determining what commodity swaps, options, caps,
collars and floors under the FDIA and the OLA are. We believe the same to be the case with respect to the NYBL.
The CEA defines a commodity in relevant part as “all services, rights, and interests in which contracts for
future delivery are presently or in the future dealt in.”196 The term “future delivery” is not defined other than as
“‘future delivery’ does not include any sale of any cash commodity for deferred shipment or delivery.”197 However,
the term “contract for future delivery” is used in the CEA interchangeably with “futures contract”.198 For example,
Section 15b(c)(1) of the CEA states, “The term ‘cotton futures contract’ means any contract of sale of cotton for
future delivery made at, on, or in any exchange, board of trade, or similar institution or place of business . . . .”
For example, we believe that futures contracts on indices of freight rates are offered on designated contract
markets such as the New York Mercantile Exchange, Inc. Accordingly, a freight derivative should be viewed as a
“commodity” for purposes of the CEA.199
In addition, the definition of “excluded commodity” includes “any economic or commercial index based on
prices, rates, values, or levels that are not within the control of any party to the relevant contract, agreement, or
transaction”.200 An index based on freight rates is facially within the definition and therefore should be seen as a
commodity for purposes of the CEA. Accordingly, freight transactions should be viewed as commodity swaps.201
3. Non-Enumerated Transactions that are not “swap agreements” or master netting agreements
Although the broadened definition of “swap agreement” may favorably resolve the situation with respect to
many previously Non-Enumerated Transactions, it is worth mentioning alternative transaction categories that are
bases for statutory relief that also have been broadened in some cases and are potentially available to transactions
that fall outside the definition of swap agreement (such transactions, “Eligible Transactions”). If transactions fall
within these other definitions, certain of which are discussed below, protections largely parallel to those available to
a “swap agreement” would apply to such transactions.
(a) Non-Enumerated Transactions as “securities contracts”. Under the Code (11 U.S.C. § 741(7))
“securities contract” means:
“(i) a contract for the purchase, sale, or loan of a security [as defined in 11 U.S.C. § 101(49)],
a certificate of deposit, a mortgage loan, any interest in a mortgage loan, a group or index of securities,
certificates of deposit, or mortgage loans or interests therein (including an interest therein or based on the
value thereof), or option on any of the foregoing, including an option to purchase or sell any such security,
certificate of deposit, mortgage loan, interest, group or index, or option, and including any repurchase or
reverse repurchase transaction on any such security, certificate of deposit, mortgage loan, interest, group or
index, or option (whether or not such repurchase or reverse repurchase transaction is a ‘repurchase
agreement’, as defined in section 101);
(ii) any option entered into on a national securities exchange relating to foreign currencies;
196
7 U.S.C. § 1a(9).
197
7 U.S.C. § 1a(27).
198
The term “contract for future delivery” is used interchangeably with “futures contract” in the 2005 ISDA Commodity Definitions (“2005
Definitions”) as well. The 2005 Definitions says “‘Futures Contract’ means, in respect of a Commodity Reference Price, the contract for future
delivery of a contract size in respect of the relevant Delivery Date relating to the Commodity referred to in that Commodity Reference Price.”
199
See, e.g., NYMEX Rule 945 (Panamax Timecharter Average (Baltic) Swap Futures). We have not conducted an exhaustive survey of freight
rate indexes that may be offered on other exchanges. Although it is arguable that the existence of these futures contracts is relevant only to OTC
transactions using the same indices, we think the better view is the existence of these futures contracts is supportive of a positive treatment of
freight indices and rates generally.
200
7 U.S.C. § 1a(19). An “excluded commodity” is one of a class of commodities deemed suitable for certain exclusions from aspects of the
CEA.
201
In Interbulk, Ltd., discussed in note 74 above, which was decided prior to both the enactment of the 2005 Act and the 2000 adoption of the
definition of “excluded commodity” referenced above, the court decided that the forward freight agreements at issue in that case conformed to the
definition of swap agreement within the meaning of the Code. The court was nonspecific in its treatment of the definition of “swap agreement”,
and the categorization of the agreements in question within the definition was apparently not an issue. See supra note 74.
37
744581026.3
(iii) the guarantee (including by novation) by or to any securities clearing agency of a
settlement of cash, securities, certificates of deposit, mortgage loans or interests therein, group or index of
securities, or mortgage loans or interests therein (including any interest therein or based on the value
thereof), or option on any of the foregoing, including an option to purchase or sell any such security,
certificate of deposit, mortgage loan, interest, group or index, or option (whether or not such settlement is
in connection with any agreement or transaction referred to in clauses (i) through (xi));
(iv) any margin loan;
(v) any extension of credit for the clearance or settlement of securities transactions;
(vi) any loan transaction coupled with a securities collar transaction, any prepaid forward
securities transaction, or any total return swap transaction coupled with a securities sale transaction;
(vii) any other agreement or transaction that is similar to an agreement or transaction referred
to in this subparagraph;
(viii) any combination of the agreements or transactions referred to in this subparagraph;
(ix) any option to enter into any agreement or transaction referred to in this subparagraph;
(x) a master agreement that provides for an agreement or transaction referred to in clause (i),
(ii), (iii), (iv), (v), (vi), (vii), (viii), or (ix), together with all supplements to any such master agreement,
without regard to whether the master agreement provides for an agreement or transaction that is not a
securities contract under this subparagraph, except that such master agreement shall be considered to be a
securities contract under this subparagraph only with respect to each agreement or transaction under such
master agreement that is referred to in clause (i), (ii), (iii), (iv), (v), (vi), (vii), (viii), or (ix); or
(xi) any security agreement or arrangement or other credit enhancement related to any
agreement or transaction referred to in this subparagraph, including any guarantee or reimbursement
obligation by or to a stockbroker, securities clearing agency, financial institution, or financial participant in
connection with any agreement or transaction referred to in this subparagraph, but not to exceed the
damages in connection with any such agreement or transaction, measured in accordance with section 562”
and explicitly excludes “any purchase, sale, or repurchase obligation under a participation in a commercial mortgage
loan”.
The 2006 Act amended the definition to include, most prominently, extensions of credit for the clearance or
settlement of securities transactions, loan transactions coupled with securities collars or prepaid forwards and total
return swaps coupled with securities sales. The definition of “securities contract” in the FDIA is similar to the
definition in the Code described above,202 and the definition in the OLA is substantively identical to the definition in
the FDIA. Although the NYBL does not describe in detail which financial contracts would be encompassed by the
category “securities contract”, we believe that the Superintendent should interpret this category to include the same
range of financial contracts that are covered by the definition in the Code described above. Securities contracts
under the Code, and like-kind transactions which are considered qualified financial contracts under the FDIA, the
NYBL and the OLA, are accorded statutory protections much like those described above with respect to swap
agreements. These protections are described below.
202
12 U.S.C. § 1821(e)(8)(D)(ii). The differences between the two definitions are the reference to Code parties and Section 562 damages limits
in the Code, and, under the FDIA, the right of the FDIC to include any purchase, sale or repurchase obligation under a participation in a
commercial mortgage loan through regulation, resolution or order.
38
744581026.3
(b) Non-Enumerated Transactions as “forward contracts”. The Code definition of “forward contract”,
as amended by the 2006 Act, is:
“(A) a contract (other than a commodity contract, as defined in section 761)203 for the purchase,
sale, or transfer of a commodity, as defined in section 761(8) of this title, or any similar good, article,
service, right, or interest which is presently or in the future becomes the subject of dealing in the forward
contract trade, or product or byproduct thereof, with a maturity date more than two days after the date the
contract is entered into, including, but not limited to, a repurchase or reverse repurchase transaction
(whether or not such repurchase or reverse repurchase transaction is a ‘repurchase agreement’, as defined in
this section) consignment, lease, swap, hedge transaction, deposit, loan, option, allocated transaction,
unallocated transaction, or any other similar agreement;
(B) any combination of agreements or transactions referred to in subparagraphs (A) and (C);
(C) any option to enter into an agreement or transaction referred to in subparagraph (A) or
(B);
(D) a master agreement that provides for an agreement or transaction referred to in

subparagraph (A), (B), or (C), together with all supplements to any such master agreement, without regard
to whether such master agreement provides for an agreement or transaction that is not a forward contract
under this paragraph, except that such master agreement shall be considered to be a forward contract under
this paragraph only with respect to each agreement or transaction under such master agreement that is
referred to in subparagraph (A), (B), or (C); or
(E) any security agreement or arrangement, or other credit enhancement related to any
agreement or transaction referred to in subparagraph (A), (B), (C), or (D), including any guarantee or
reimbursement obligation by or to a forward contract merchant or financial participant in connection with
any agreement or transaction referred to in any such subparagraph, but not to exceed the damages in
connection with any such agreement or transaction, measured in accordance with section 562.”204
It may be difficult to conceptualize a forward contract that is not also now a swap agreement for purposes
of the Code, the FDIA and the OLA. Nonetheless, forward contract status may prove useful and is noted here
accordingly. (Typical “spot trades”, of course, are settled within two days after the date the contract is entered into
and would not be forward contracts.) As in the case of security contracts, transactions that qualify as forward
contracts under the Code and as qualified financial contracts under the FDIA and the OLA may have access to
statutory protections much like those available to swap agreements, including, for example, the Section 362(b)(6)
exemption from the automatic stay, as described below.
(c) Non-Enumerated Transactions that are not “securities contracts” or “forward contracts”.
Transactions that may not qualify as “swap agreements” under the Code, the FDIA, the NYBL and the OLA and that
do not qualify as “securities contracts” or “forward contracts” under the Code, the FDIA, the NYBL and the OLA
(“Ineligible Transactions”) may not be eligible for special treatment under the Code (see sub B.), the FDIA (see sub
C.), the NYBL (see sub D.) and the OLA (discussed together with the FDIA in sub C.).205
203
A “commodity contract” is, in pertinent part, “(A) with respect to a futures commission merchant, contract for the purchase or sale of a
commodity for future delivery on, or subject to the rules of, a contract market or board of trade; (B) with respect to a foreign futures commission
merchant, foreign future; (C) with respect to a leverage transaction merchant, leverage transaction; (D) with respect to a clearing organization,
contract for the purchase or sale of a commodity for future delivery on, or subject to the rules of, a contract market or board of trade that is
cleared by such clearing organization, or commodity option traded on, or subject to the rules of, a contract market or board of trade that is cleared
by such clearing organization; (E) with respect to a commodity options dealer, commodity option”; or similar agreements, combinations of such
agreements, related master agreements and related security arrangements. 11 U.S.C. § 761(4).
204
11 U.S.C. § 101(25).
205
Protective provisions similar to those for swap agreements, securities contracts and forward contracts exist for “commodity contracts” and
“repurchase agreements”. These provisions are beyond the scope of this memorandum.
39
744581026.3
B. Code206
If the Non-Enumerated Transactions are not all afforded “swap agreement” treatment, then a derivatives
market participant may be faced with an ISDA Master Agreement under which “swap agreement[s]”, “forward
contract[s]” and/or “securities contract[s]” are documented. Such an ISDA Master Agreement, as a “master netting
agreement”, would still receive substantially the same protection as a “swap agreement” would.207
Section 101(38A) of the Code defines a “master netting agreement” as, in relevant part, “an agreement providing for
the exercise of rights, including rights of netting, setoff, liquidation, termination, acceleration, or close out, under or
in connection with one or more contracts that are described in any one or more of paragraphs (1) through (5) of
section 561(a) [the “Section 561(a) Transactions”], or any security agreement or arrangement or other credit
enhancement related to one or more of the foregoing, including any guarantee or reimbursement obligation related to
1 or more of the foregoing”. The definition clarifies that to the extent the agreement contains agreements or
transactions that are not Section 561(a) Transactions, the agreement shall be deemed to be a master netting
agreement only with respect to the Section 561(a) Transactions.208 Protective provisions relevant to master netting
agreements are described below.
1. Treatment of Forward Contracts, Securities Contracts and Master Netting Agreements
(a) Automatic Stay. The Code grants special treatment to forward contracts and securities contracts in
a manner analogous to swap agreements. Specifically, the Code provides an express exemption from the automatic
stay contained in Section 362 of the Code209 to permit, in pertinent part, the following: a “forward contract
merchant”,210 a “stockbroker”,211 a “financial institution”,212 a “financial participant”213 or a “securities clearing
206
Throughout this Section VI.B, we assume that the insolvent U.S. Party is a Code Entity. The situations under FDIA, the OLA and the NYBL
are described in Sections VI.C and VI.D below.
207
A swap master agreement that governs swap agreements and non-safe harbored transactions will still be respected as a master agreement with
respect to those swap agreements. See 11 U.S.C. § 101(53B)(A)(v).
208
11 U.S.C. § 101(38A)(B). Parties contemplating having such mixed masters should consider the ramifications with respect to termination,
netting and access to collateral.
209
11 U.S.C. § 362(b)(6).
210
Under 11 U.S.C. § 101(26), “forward contract merchant” means “a Federal reserve bank, or an entity the business of which consists in whole
or in part of entering into forward contracts as or with merchants in a commodity (as defined in section 761) or any similar good, article, service,
right, or interest which is presently or in the future becomes the subject of dealing in the forward contract trade.” There is split authority
regarding the breadth of the statutory definition. Compare BCP Liquidating LLC v. Bridgeline Gas Marketing, LLC (In re Borden Chemicals and
Plastics Operating L.P.), 336 B.R. 214, 225 (Bankr. D. Del. 2006) (“essentially any person that is in need of protection with respect to a forward
contract in a business setting should be covered, except in the unusual instance of a forward contract between two non-merchants who do not
enter into forward contracts with merchants”) (punctuation corrected from original) with In re FirstEnergy Solutions Corp., 596 B.R. 631 (Bankr.
N.D. Ohio 2019) (holding that a manufacturing company that entered into a forward contract in order to control the costs of inputs was not a
forward contract merchant because it was not in the business of entering into forward contracts for profit).
211
Under 11 U.S.C. § 101(53A), “stockbroker” means a person
(A) with respect to which there is a customer, as defined in Section 741 of this title; and
(B) that is engaged in the business of effecting transactions in securities (i) for the account of others; or (ii) with members of the general
public, from or for such person’s own account.
To qualify as a stockbroker, a person (a) must be engaged in the business of effecting transactions in securities, as agent and/or with members of
the general public and (b) must in the ordinary course of its business receive, acquire or hold securities and/or cash for customers in connection
with securities transactions. Thus, the term “stockbroker” applies only to persons that are generally understood to be securities brokers or dealers.
The critical aspect of the definition of stockbroker is the requirement that the securities dealer have customers; absent customers, the securities
dealers cannot qualify as a stockbroker. See Kaiser Steel Corp. v. Pearl Brewing Co. (In re Kaiser Steel Corp.), 952 F.2d 1230, 1240 n.11 (10th
Cir. 1991) (“Kaiser”), cert. denied, 112 S. Ct. 3015 (1992); Wider v. Wootton, 907 F.2d 570, 572 (5th Cir. 1990); In re ESM Gov’t Sec., Inc., 52
B.R. 372 (S.D. Fla. 1985). To our knowledge, there is no case law as to whether the term “stockbroker” would include non-U.S. stockbrokers.
As a rule, the Code does not distinguish between claimants on the basis of nationality or domicile. Therefore, we believe that the better view is
that non-U.S. stockbrokers would qualify under this provision.
Under 11 U.S.C. § 741(2), “customer” includes
(A) an entity with whom a person deals as principal or agent and that has a claim against such person on account of a security received,
acquired, or held by such person in the ordinary course of such person’s business as a stockbroker, from or for the securities account or
accounts of such entity (i) for safe keeping; (ii) with a view to sale; (iii) to cover a consummated sale; (iv) pursuant to a purchase; (v) as
collateral under a security agreement; or (vi) for the purpose of effecting registration of transfer; and
40
744581026.3
agency”214 to exercise any contractual right (as defined in Section 555 or 556) , under any security agreement or
arrangement or other credit enhancement forming a part of or related to any forward contract or securities contract,
or of any contractual right (as defined in Section 555 or 556215) to offset or net out any termination value, payment
amount or other transfer obligation arising under or in connection with one or more such contracts, including any
master agreement for such contracts. In addition, Section 553 of the Code, 11 U.S.C. § 553, which restricts setoff
under certain circumstances, expressly allows setoff of a kind referred to in Section 362(b)(6) of the Code.
In order to utilize the provisions of Section 362(b)(6), a derivatives market participant must be a “forward
contract merchant”, a “stockbroker”, a “financial institution”, a “financial participant” or a “securities clearing
agency”, as applicable, within the meaning of the Code. It is worth noting that the definition of “financial
participant”, which was added in the 2005 Act, significantly broadens the scope of eligible counterparties. The vast
majority of derivatives dealers in the marketplace should fall within one of these categories for purposes of the
Code. The 2006 Act has removed the requirement that eligible setoff involve a “settlement payment”216 or “margin
payment”217, as was previously required.218 This change clarifies the breadth of the protection intended.219 The
(B) an entity that has a claim against a person arising out of (i) a sale or conversion of a security received, acquired, or held as specified in
subparagraph (A) of this paragraph; or (ii) a deposit of cash, a security, or other property with such person for the purpose of purchasing or
selling a security.
To our knowledge, there is no case law as to whether the term “customer” would include non-U.S. customers. As a rule, the Code does not
distinguish between claimants on the basis of nationality or domicile. Therefore, we believe that the better view is that non-U.S. customers would
qualify under this provision.
212
Under 11 U.S.C. § 101(22) “financial institution” means “(A) a Federal reserve bank or entity that is a commercial or savings bank, industrial
savings bank, savings and loan association, trust company, federally-insured credit union, or receiver, liquidating agent, or conservator for such
entity and, when any Federal reserve bank, receiver, liquidating agent, conservator or entity is acting as agent or custodian for a customer
(whether or not a ‘customer’, as defined in section 741) in connection with a securities contract (as defined in section 741) such customer; or
(B) in connection with a securities contract (as defined in section 741) an investment company registered under the Investment Company Act of
1940.” To our knowledge, there is no case law as to whether the term “financial institution” would include non-U.S. banks. As a rule, the Code
does not distinguish between claimants on the basis of nationality or domicile. Additionally, the 2005 Act specifically removed the FDICIA
requirement that a “financial institution” be a domestic institution, see Section V.A., infra. Therefore, we believe that the better view by far is
that non-U.S. banks would qualify under this provision.
213
11 U.S.C. § 101(22A).
214
Under 11 U.S.C. § 101(48) “securities clearing agency” means a “person that is registered as a clearing agency under section 17A of the
Securities Exchange Act of 1934 or exempt from such registration under such section pursuant to an order of the Securities and Exchange
Commission, or whose business is confined to the performance of functions of a clearing agency with respect to exempted securities, as defined
in section 3(a)(12) of such Act for the purposes of such section 17A.”
The inclusion of securities clearing agencies within the ambit of protection is important to enable such agencies to realize against collateral
pledged by the debtor under their rules and bylaws and to assure timely settlement of the debtor’s securities contracts that clear through such
agencies.
215
Sections 555 and 556 define the contractual rights to liquidate, terminate or accelerate securities and forward contracts. They define such
rights as “a right set forth in a rule or bylaw of a derivatives clearing organization (as defined in the Commodity Exchange Act), a multilateral
clearing organization (as defined in the Federal Deposit Insurance Corporation Improvement Act of 1991), a national securities exchange, a
national securities association, a securities clearing agency, a contract market designated under the Commodity Exchange Act, a derivatives
transaction execution facility registered under the Commodity Exchange Act, or a board of trade (as defined in the Commodity Exchange Act), or
in a resolution of the governing board thereof, and a right, whether or not in writing, arising under common law, under law merchant, or by
reason of normal business practice.” 11 U.S.C. § 555. But see supra notes 65–69.
216
For purposes of the forward contract provisions of the Code, “settlement payment” is defined in section 101(51A), 11 U.S.C. § 101(51A).
For purposes of the securities contract provisions of the Code, “settlement payment” is defined in section 741(8), 11 U.S.C. § 741(8).
217
For purposes of the forward contract provisions of the Code, “margin payment” is defined in section 101(38), 11 U.S.C. § 101(38).
For purposes of the securities contract provisions of the Code, “margin payment” is defined in section 741(5), 11 U.S.C. § 741(5).
218
We emphasize that this memorandum is not intended to analyze repurchase agreements or commodity contracts, or to describe instances, such
as section 362(b)(6), where commodity broker status may be useful.
219
The changes to Section 362(b)(6), (7), (17) and (27) eliminated the requirement that the setoff be of “any mutual debt and claim”.
Section 553, however, dealing expressly with setoff, declares the protected (from other provisions of the Code) status of the setoff of a “mutual
debt” only. It is unclear what other provisions of the Code might have an impact upon a setoff not protected by Section 553, but able to be
implemented free of the stay under Section 362(b). Nonetheless, in the absence of legislative history indicating that Congress intended to delete
the mutuality requirement applicable to protected setoff, the revised provisions of Section 362 establish only a basis for arguing that a mutuality
requirement is not required, but arguments exist to the contrary. The legislative history observes that the relevant changes confirm the protection
of “all rights previously protected by Sections 362(b)(6), (7) and (17) . . . .” H.R. No. 109-648, at 7 (2006). A recent series of cases holds that
the mutuality requirement continues to apply to setoff under safe-harbored contracts. See Swedbank AB (PUBL) v. Lehman Bros. Holdings Inc.
41
744581026.3
definition of “contractual right[s] to liquidate, terminate or accelerate” under Sections 555 and 556 are also quite
broad (and parallel to that in Section 362(b)(17) discussed above).220 Accordingly, the exemption in
Section 362(b)(6) of the Code from the automatic stay should apply to forward contracts or securities contracts
documented under an ISDA Master Agreement.221 This would permit a derivatives market participant within one of
the above-enumerated categories of protected persons to net cash amounts or other property, if any, that it owes to
the debtor under forward contracts or securities contracts against payments or deliveries owed to that derivatives
market participant by the bankrupt with respect to other forward contracts or securities contracts under that ISDA
Master Agreement. Therefore, Section 362(b)(6) would allow a qualifying derivatives market participant to achieve
one net amount for all securities contracts and one net amount for all forward contracts documented under an ISDA
Master Agreement.
Furthermore, Section 362(b)(6) does not specifically link the setoff of amounts owed under a forward
contract against other amounts under that type of contract. Rather, the statute can be read to permit the setoff of
amounts owing under a forward contract (and its related credit and security arrangements and master netting
agreements) against amounts owing under a securities contract (and its related credit and security arrangements and
master netting agreements).222 We have not found any direct support for this analysis apart from the language of the
statute and certain legislative history which in each case does not preclude such a conclusion.223 More importantly,
Section 362(b)(27), as introduced in the 2005 Act and amended in the 2006 Act, clarifies that, when an agreement is
classified as a master netting agreement, all contractual rights under securities contracts, forward contracts and swap
agreements “under any security agreement or arrangement or other credit enhancement forming a part of or related
to any master netting agreement” or contractual rights arising from securities contracts, forward contracts and swap
agreements “to offset or net out any termination value, payment amount or other transfer obligation arising under or
in connection with 1 or more such master netting agreements” may be exercised “to the extent such participant is
eligible to exercise such rights under [Section 362(b)(6)] . . . or (17) for each individual contract covered by the
master netting agreement”.224
(In re Lehman Bros. Holdings Inc.), 445 B.R. 130, 137 (S.D.N.Y. 2011) (lack of mutuality between pre-petition claim and post-petition deposits
by debtor; “no evidence in the legislative history that the Safe Harbor Provisions were intended to eliminate the mutuality requirement”), aff’g
433 B.R. 101 (Bankr. S.D.N.Y. 2010); In re Lehman Bros. Inc., 458 B.R. 134 (Bankr. S.D.N.Y. 2011) (lack of mutuality under triangular setoff
provision); Sass v. Barclays Bank PLC (In re Am. Home Mortg., Holdings, Inc.), 501 B.R. 44 (Bankr. D. Del. Nov. 8, 2013) (following In re
Lehman Bros. Inc., 458 B.R. 134 (Bankr. S.D.N.Y. 2011), and stating that “nothing in section 561 of the Bankruptcy Code can preserve or
protect a right that that [sic] does not exist, inclusive of the mutuality requirement demanded in section 553”).
The SEC’s use of terminology, in its security-based swap margin and segregation regulations, that refers to “accounts” that “hold” non-cleared
security-based swaps, or in which non-cleared security-based swaps are “carried”, see, e.g., 17 CFR §§ 240.18a-3(b)(1), 240.18a-4a, 240.15c3-
3b, has prompted a commenter on the proposed regulations to raise the concern that the regulations appear to treat a nonbank security-based swap
dealer as an agent of the counterparty rather than a direct counterparty, with potentially deleterious effect on the mutuality of obligations for
close-out netting. 84 Fed. Reg. 43872, 43914 (August 22, 2019). In response to this concern, the SEC stated its belief that “in most cases a
counterparty entering into a non-cleared security-based swap transaction with a nonbank [security-based swap dealer (“SBSD”)] will be a direct
counterparty of the nonbank SBSD.” Id. This view is consistent with Section 3E(g) of the Securities Exchange Act, which states that the term
“customer”, as defined in Subchapter III, “excludes any person, to the extent that such person has a claim based on any … non-cleared security-
based swap except to the extent of any margin delivered to or by the customer with respect to which there is a customer protection requirement
under section 78o(c)(3) of this title or a segregation requirement” (emphasis added). Because the payments and deliveries under the
Transactions listed in Appendix A would not typically constitute such margin, the corresponding obligations (even for Transactions that are
security-based swaps) should not be viewed as incurred or owed as part of a stockbroker-customer relationship and thus should not lack mutuality
solely on this basis with respect to Transactions that are not security-based swaps, provided that there is no arrangement or understanding that
security-based swap positions are part of any additional supervening account structure, such as being carried as financial assets in a securities
account. However, in the absence of precedent or a clearer statement by the SEC, it remains to be seen whether a court would adopt this
view. Further analysis of this issue would be warranted in the atypical cases where a Transaction gives rise to credits in the reserve account
formulae of 17 CFR §§ 240.18a-4a or 240.15c3-3b, or calls for the delivery of “excess securities collateral” as defined in 17 CFR §§ 240.18a-4(a)
or 15c3-3(p). The effects of subordination agreements on this analysis are addressed in our companion memorandum regarding ISDA credit
support documentation.
220
See note 211 and discussion of Section 362(b)(17) above.
221
See 128 Cong. Rec. S8132 (daily ed. July 13, 1982) (statement of Sen. Dole) (“In the case of forward contracts, the net amount due to or
owing from the debtor would be the sum of the net amounts, if any, due or owing with respect to each such contract of the debtor [after operation
of the statute].”).
222
11 U.S.C. § 362(b)(6).
223
See 128 Cong. Rec. S8133 (daily ed. July 13, 1982) (statements of Sen. Dole and Sen. Mathias) (legislative history consistent with statute,
implying that setoff of amounts owed under securities contract against forward contract is consistent with statute).
224
11 U.S.C. § 362(b)(27).
42
744581026.3
(b) Limitation on Avoiding Powers. Sections 546(e) and 548(d)(2) of the Code also provide express
protection from the trustee’s avoidance power for, in pertinent part, transfers in good faith prior to the bankruptcy
filing that are “settlement payment[s]” or “margin payment[s]” made by or to (or for the benefit of) a “forward
contract merchant”, “stockbroker”, “securities clearing agency”, “financial institution” or “financial participant”.225
The 2006 amendments added “transfer[s]” to Section 546(e) as companions to payments to be protected from the
trustee’s avoidance powers with regard to securities contracts, commodities contracts and forward contracts.
Therefore any amounts payable during the term of an ISDA Master Agreement and at termination in connection
with Transactions that are found to be forward contracts or securities contracts should qualify as “settlement
payment[s]”, “margin payment[s]” and/or “transfer[s]”.226 Thus, if at least one of the direct parties227 to the ISDA
Master Agreement is a “forward contract merchant”, “stockbroker”, “securities clearing agency”, “financial
institution” or “financial participant”,228 then the protections of Section 546(e) should apply to payments under the
Transactions that are found to be forward contracts or securities contracts, provided that no such payment was made
with actual intent to hinder, delay or defraud (within the meaning of Section 548(a)(1)(A)) the transferor’s present or
future creditors.229
225
11 U.S.C. §§ 546(e), 548(d)(2). Importantly, these sections are limited by Section 548(a)(1)(A), which allows the trustee to avoid any transfer
or obligation made or incurred within two years before the date of the filing if such transfer or obligation was made with the intent to hinder,
delay or defraud. 11 U.S.C. § 548(a)(1)(A).
226
A consequence of the 2006 amendments is that the availability of the safe harbor under Section 546(e) should now be independent of the
intricacies surrounding the interpretation of the term “settlement payment.” The term “transfer,” defined in Section 101(54) as including “…
each mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property or an interest in
property”, occurs in both the Section 546(e) safe harbor and in the corresponding substantive avoidance provisions, thus substantially mitigating
the potential for mismatch based on the characterization of the transfer as a settlement payment or otherwise, at least insofar as the “transfer”
prong of the avoidance provision is at issue. Cf. Merit Management Group, LP v. FTI Consulting, Inc., 138 S. Ct. 883, 894 (2018) (“it is only
logical to view the pertinent transfer under [Section] 546(e) as the same transfer that the trustee seeks to avoid pursuant to one of its substantive
avoiding powers”). See also Lehman Bros. Holdings Inc. v. JPMorgan Chase Bank, N.A. (In re Lehman Bros. Holdings Inc.), 469 B.R. 415, 446
(Bankr. S.D.N.Y.2012) (holding that liens and collateral transfers were independently immune from avoidance regardless of whether the
incurrence of the related secured obligation, which the court held not to be a “transfer”, could be avoided). It should be noted, however, that
transfers were not added as companions to protected payments under the § 548 fraudulent transfer provisions relating to securities contracts and
forward contracts. The intent and effect of this omission is unclear. See H.R. Rep. 109-648, at 8 (2006) (stating that Congress’s intention is to
“conform[] the language of Sections 546(e) and 546(f) to the language of 546(g), regarding the protection of transfers in connection with swap
agreements”).
227
Two lower courts have disagreed on whether Section 546(e) can apply on the basis that the debtor-transferor is a financial participant. In In re
Samson Resources Corp., 625 B.R. 291, 301 (Bankr. D. Del. Dec. 23, 2020), the bankruptcy court held, in the context of examining the
availability of the Section 546(e) anti-avoidance safe harbor, that the definition of “financial participant” includes the debtor. The court disagreed
with the holding of the district court on this point in In re Tribune Co. Fraudulent Conveyance Litig., 2019 WL 1771786, *9 (S.D.N.Y. Apr. 23,
2019), which reasoned that the reference, in the quantitative threshold for financial participant status under Section 101(22A), to agreements
“with the debtor or any other entity …” would absurdly contemplate self-contracting if the term “financial participant” could include the
debtor. We believe the holding in Samson Resources is the better reading because the Tribune reasoning disregards the use of two prepositions,
“by or to”, in the anti-avoidance safe harbors under Sections 546(e) and (g), gives the term “entity”, as used in the definition of “financial
participant”, a different meaning than the statutory definition of “entity” in Section 101(15), and overlooks that the words “with the debtor” in
Section 101(22A), rather than being an empty reference to self-contracting, serve to remove ambiguity as to whether an agreement with the
debtor would have been excluded (by the words “any other entity”) from counting toward the quantitative threshold under Section 101(22A) if
the date of entry into the agreement is used as the testing date.
228
Unlike the termination and netting safe harbor for master netting agreements under Section 561, in which Section 561(b)(1) expressly requires
that protected party status be established separately with respect to each individual contract, neither Section 546(e) nor Section 548(d)(2)(B)
contains a similar express limitation, nor does the structure of either provision, in which the categories of protected parties are not listed in an
order corresponding to that in which the product categories appear, suggest an intent to impose any such limitation. We are not aware, however,
of definitive support for this reading in the case law (e.g., in a circumstance in which a party that qualified solely as a forward contract merchant
asserted protection from avoidance with respect to a securities contract).
229
11 U.S.C. §§ 546(e), 548(d)(2). A number of courts dealing with securities transactions have read Section 546(e) as limited by the courts’
view that Congress intended the safe harbor to protect only the public securities markets and clearing and settlement systems and therefore have
refused to apply the safe harbors in “private” transactions. Frequently at issue is whether the role played by a protected financial institution in a
multi-stage transaction suffices to shield other participants from avoidance. The Supreme Court recently granted certiorari to resolve a conflict
among circuits over the proper analytical approach to this question. In Merit Management Group, LP v. FTI Consulting, Inc., 138 S. Ct. 883
(2018), employing an analysis based primarily on statutory text and structure, the Supreme Court held that for purposes of analyzing whether the
conditions of Section 546(e) are met, the only relevant transfer is the one targeted for avoidance, not its component parts. Id. at 897. Thus, an
overarching transfer from the debtor to a selling shareholder did not qualify for the safe harbor, despite the involvement of one financial
institution as lender and another as escrow agent in the component steps. The parties did not assert that the debtor or selling shareholder qualified
as financial institutions under Section 101(22)(A) by virtue of being “customers”, and the Supreme Court did not address the impact such status
might have on the availability of the safe harbor. Id. at 890 n.2. Nor did it need to address whether the transaction qualified as a transfer that was
a settlement payment or in connection with a securities contract. Id. at 892 n.5.
43
744581026.3
As amended by the 2006 Act, Section 546(j) of the Code quite simply stipulates that the trustee may not
avoid transfers “by or to (or for the benefit of) a master netting agreement participant230 under or in connection with
any master netting agreement”, except to the extent that the trustee could otherwise avoid such a transfer under an
individual contract covered by the master netting agreement (e.g., a non-safe-harbored contract or a safe-harbored
contract with respect to which neither the transferor nor transferee qualifies as a protected party). In addition,
Section 548(d)(2) of the Code protects transfers of property made in connection with a “master netting agreement”
from avoidance as fraudulent transfers (subject to the meeting the criteria with respect to the underlying individual
contracts) by providing that such transfers are deemed to be taken “for value”.231 As long as such transfers also are
Courts also will not apply Section 546(e) to protect a transfer in a transaction void (as opposed to potentially voidable) under state law.
See Enron Corp. v. Bear, Stearns Int’l Ltd. (In re Enron Corp.), 323 B.R. 857, 870 (Bankr. S.D.N.Y. 2005), appeal denied, 2006 WL 1222035
(S.D.N.Y. May 3, 2006).
A number of courts have addressed whether Section 546(e) and Section 546(g) preempt state law causes of action, brought by parties other
than the bankruptcy trustee, that would provide essentially the same relief as avoidance actions barred by those sections. The Second Circuit
Court of Appeals, in In re Tribune Co. Fraudulent Conveyance Litig., 818 F.3d 98 (2d Cir. 2016) (“Tribune”), amended 946 F.3d 66 (2019),
considered the preemption question in relation to leveraged buyout-related payments to the debtor’s shareholders and held that Section 546(e)
preempts claims asserted by individual creditors to avoid transfers that fall within the terms of that section. 818 F.3d at 123. The court reasoned
that “[e]ven the narrowest purpose” of Section 546(e) would be at risk if claims barred in hands of the trustee could later be brought by creditors.
Id. at 119. In addition, the court found that it did not follow, as a matter of the plain meaning of Section 546(e) (which refers only to avoidance
by the trustee), that fraudulent conveyance claims revert to creditors after vesting in the trustee. Id. at 118. See also Whyte v. Barclays Bank
PLC, 494 B.R. 196 (S.D.N.Y. 2013), aff’d 644 Fed.Appx. 60 (2d Cir. 2016) (“Whyte”), in which the district court held that Section 546(g)
impliedly preempts state law fraudulent conveyance claims asserted by a litigation trust that was assignee of both creditor claims and avoidance
claims under Chapter 5 of the Code. The court reasoned that permitting the litigation trustee, which the court characterized as “the creature of a
Chapter 11 plan”, to invoke state law fraudulent conveyance actions would “stand as a major obstacle to the purposes and objectives of
Congress” in passing Section 546(g). Id. at 200.
It remains to be seen to what extent the Second Circuit’s approach, favoring broad preemption, will be adopted in other circuits. The
bankruptcy court in In re Physiotherapy Holdings, Inc., 2016 WL 3611831 (Bankr. D. Del. June 20, 2016) (“Physiotherapy”), leave to appeal
denied by 2017 WL 6524524 (D. Del. December 21, 2017), disagreed with the Tribune court’s preemption analysis (which is not binding on
courts outside the Second Circuit) and instead applied a presumption against preemption that could only be overcome by a “clear and manifest
purpose of Congress” to supersede state fraudulent transfer law. Based on its reading of the legislative history, the court held that Section 546(e)
did not bar a litigation trustee, in the capacity of creditor-assignee, from asserting state law fraudulent transfer claims if (1) the transaction sought
to be avoided poses no threat of “ripple effects” in the relevant securities markets; (2) only private stock is involved; and (3) the recipients are
corporate insiders alleged to have acted in bad faith. Physiotherapy at *10. The court distinguished Whyte as involving a “large portfolio of swap
transactions” and Tribune as involving public shares. Id. at *9. A difficulty with the Physiotherapy court’s preemption standard, perhaps
obscured by the specialized facts before it, is that its logic imputes to Congress an intent that courts engage in an analysis of the systemic risk
posed by particular transactional scenarios, a proposition whose plausibility and judicial administrability the court did not discuss. The Delaware
district court, in denying the defendants’ motion for leave to appeal from the bankruptcy court’s interlocutory order, found that the standard for an
interlocutory appeal  “substantial ground for a difference of opinion”  was not met, and further stated that the bankruptcy court’s “reading of
the safe harbor is supported by the plain language of the statute, and its careful preemption analysis followed controlling Third Circuit and
Supreme Court precedent.” 2017 WL 6524524 at *9-10.
Other courts have held that Section 546(e) does not preempt state law causes of action that are premised on facts distinct from those that
would be protected by Section 546(e)’s safe harbor. See In re Lehman Bros. Holdings Inc., 469 B.R. 415, 451 (Bankr. S.D.N.Y. 2012)
(constructive trust, unjust enrichment and conversion claims not preempted because they “have more in common with claims grounded in actual
fraudulent intent”).
Recent Chapter 15 cases have considered limitations on preemption-based arguments in the context of foreign law avoidance claims. In
Fairfield Sentry Limited v. Theodoor GGC Amsterdam, 2020 WL 7345988 (Bkrtcy.S.D.N.Y., 2020), the bankruptcy court applied Section 546(e)
to dismiss foreign law avoidance claims that the court had determined in a previous decision were analogous to preference claims, state law
fraudulent transfer claims or constructive fraudulent transfer claims under Section 548(a)(1)(B). Id. at *5. However, the court declined to extend
precedents based on implied preemption of state law claims to foreign law constructive trust claims, reasoning that implied preemption (as
distinct from express statutory preemption) relies on the Supremacy Clause of the U.S. Constitution, which does not refer to foreign law. Id. at *9
- *10. The Fairfield court approached the application of Section 546(e) to foreign law avoidance claims by examining their degree of similarity to
the Code avoidance provisions expressly cited in Section 546(e). Id. at *5. In In re Bankr. Est. of Norske Skogindustrier ASA, the bankruptcy
court disagreed with Fairfield’s approach (but not its preemption analysis) as it applied to the question of whether a foreign law avoidance claim
falls within the intentional fraud exception to the Section 546(e). 629 B.R. 717, 762–63 (Bankr. S.D.N.Y. 2021) (the “inquiry whether the
foreign statute is sufficiently analogous to section 548(a)(1)(A) must therefore be a flexible one, taking into account … the broader context of the
foreign legal regime, rather than a rigid comparison of the language in the foreign statute and our own”). To our knowledge, no court has
extensively examined the application of Section 546(e) or (g) to foreign law avoidance claims in a case under Chapter 7 or 11.
230
11 U.S.C. § 101(38B) (master netting agreement participant defined as “an entity that, at any time before the date of the filing of the petition,
is a party to an outstanding master netting agreement with the debtor”).
231
11 U.S.C. § 548(d)(2). In a SIPA proceeding, the “for value” defense does not apply to distributions from customer property in excess of the
recipient’s net equity claim. See In re Bernard L. Madoff Investment Securities LLC, 976 F.3d 184, 200 (2nd Cir. 2020) (“the ‘for value’ defense
[under Code Section 548(d)(2)(A)] applies to the extent that the resources available to satisfy creditors [i.e., customers to the extent of their with
net equity claims] remain the same”). The same logic would appear to apply with respect to the liquidation of a stockbroker under Subchapter III.
44
744581026.3
taken “in good faith”, as provided in Section 548(c) of the Code,232 they should be exempt from challenge as
fraudulent transfers.
(c) Liquidation. The Code further recognizes, in pertinent part, that a derivatives market participant
that is a “stockbroker”, “securities clearing agency”, “financial institution” or “financial participant” will be entitled
to exercise its contractual right (as broadly defined) to liquidate, terminate or accelerate a securities contract upon
the occurrence of an insolvency, subject to certain exceptions.233 The exercise of the close-out netting provisions
under an ISDA Master Agreement by a qualifying market participant with respect to Transactions that fall within the
definition of “securities contract” should be viewed as amounting to the liquidation, termination or acceleration of a
“securities contract” and thus within the scope of Section 555 of the Code.234
The Code also recognizes, in pertinent part, the right of a “financial participant” or a “forward contract
merchant” to exercise its contractual right to cause the liquidation, termination or acceleration of a forward contract
upon the occurrence of an insolvency.235 Accordingly, exercise of the close-out netting provisions under an ISDA
Master Agreement by a qualifying market participant with respect to Transactions that are “forward contracts”
should be viewed as amounting to the liquidation, termination or acceleration of a “forward contract” and thus
within the scope of Section 556 of the Code.236
Finally, the Code recognizes, in pertinent part, the right under a master netting agreement of any master
netting participant to exercise its contractual right to cause the “termination, liquidation or acceleration of or to
offset or net termination values, payment amounts, or other transfer obligations arising under or in connection with
one or more” securities contracts, forward contracts, swap agreements or master netting agreements, upon the
occurrence of an insolvency (to the same extent as would be the case with respect to a swap agreement, securities
contract or forward contract).237
C. The FDIA and the OLA238
Again, in a manner analogous to the Code analysis immediately above, if the relevant Transactions do not
fall within the definition of “swap agreement” under the FDIA or the OLA, as applicable, and these Transactions
were documented under an ISDA Master Agreement along with “swap agreement[s]”, a derivatives market
participant would be faced with an ISDA Master Agreement under which “swap agreement[s]” and other types of
Transactions are documented. Again, these Non-Enumerated Transactions are likely to fall within the definition of
232
11 U.S.C. § 548(c). See note 76 supra with regard to the “inquiry notice” standard applied by some courts to determine a transferee’s good
faith.
233
11 U.S.C. § 555. The exceptions to the protection from stay or avoidance referred to in Section 555 of the Code are court stays or orders
authorized under the provisions of SIPA or any statute administered by the SEC barring the liquidation of securities contracts of broker-dealers.
Although Section 555 defers to a SIPA stay, a new provision in SIPA added by the 2005 Act in turn defers to the Code, and states that any
“contractual rights of a creditor to liquidate, terminate, or accelerate” a safe-harbored transaction will not be stayed by an order under SIPA
(although it does not expressly refer to Section 555 of the Code, but does refer expressly to Section 362). 15 U.S.C. § 78eee(b)(2)(C). We believe
that the intent of this new provision was to give effect to the protection provided under Section 555 for contractual rights to liquidate, terminate or
accelerate a securities contract without regard to a SIPA stay. Special stay and disposition rules under SIPA apply, however, to securities pledged
as collateral, or sold or lent under a repurchase or securities lending agreement, by the failed broker-dealer. 15 U.S.C. § 78eee(b)(2)(C)(ii). With
respect to any injunctive relief or other stay gained by the SEC, the exception to Section 555 would continue to apply. The exception to the
operation of Section 555 for SEC stays, however, may be of little moment if FDICIA is applicable, given that FDICIA defers to certain
provisions of the FDIA and SIPA, but is silent (except for its broad pre-emptive provision) with respect to SEC stays.
The sections of the Code concerning the liquidation of a “forward contract”, 11 U.S.C. § 556, and a “swap agreement”, 11 U.S.C. § 560, are not
subject to the same exceptions.
234
11 U.S.C. § 555. Our research did not reveal anything to suggest that the termination provisions under an ISDA Master Agreement would not
be viewed as a liquidation within the meaning of Section 555 of the Code or within the meaning of Section 556 of the Code, 11 U.S.C. § 556,
discussed immediately below.
235
11 U.S.C. § 556.
236
Id.
237
11 U.S.C. § 561.
238
Throughout this Section VI.C, we have assumed in our discussion of the FDIA that the insolvent U.S. Party will be an Insured Institution and
in our discussion of the OLA that the insolvent U.S. Party will be a Covered Financial Company.
45
744581026.3
“forward contract”239 or “securities contract”240 under the FDIA and the OLA, each of which is a type of qualified
financial contract thereunder.241
1. Treatment of Forward Contracts, Securities Contracts and Master Agreements. A “forward
contract” and a “securities contract” are each included in the definition of “qualified financial contract”.242
Therefore, they are entitled to the treatment afforded to qualified financial contracts under the FDIA and the OLA
(as swap agreements are so entitled). The FDIA as amended by the 2005 Act states that a master agreement for one
or more forward contracts and securities contracts will be treated as a single qualified financial contract (but only to
the extent the underlying agreements are themselves qualified financial contracts).243 The legislative history of the
2005 amendments states that this provision ensures that cross-product netting will be effective. The OLA contains a
substantively identical provision.
2. Right to terminate generally. As discussed in Sections IV.B.2 and IV.D.2 above with respect to an
ISDA Master Agreement that documents only “swap agreement[s]”, the FDIA and the OLA provide that a party to a
qualified financial contract will be entitled to enforce any right to terminate or liquidate such a contract as a result of
the appointment of a receiver after 5:00 p.m. (eastern time) the business day after such appointment.244 Again,
however, in the case of a conservatorship under the FDIA, a party to a qualified financial contract may enforce any
contractual right to terminate or liquidate other than one based solely on the appointment of the conservator (or the
insolvency or financial condition of the depository institution for which the conservator has been appointed), i.e., a
“bankruptcy” default provision.245 Therefore, if another default under an ISDA Master Agreement is triggered in
addition to the “bankruptcy” default provision, a party could enforce its contractual right to terminate.
3. Netting. As discussed in Sections IV.B.3 and IV.D.3 above, netting provisions should be enforced
under the FDIA or the OLA with respect to forward contracts, securities contracts and master agreements
comprising any combination of the foregoing and/or swap agreements.
4. No Selective Transfer or Repudiation. In any transfer of assets of an insolvent institution, the

FDIA and the OLA provide that the receiver (or conservator in the case of the FDIA) may not “cherry-pick” among
qualified financial contracts between the insolvent institution and any particular counterparty.246 Instead, if any
qualified financial contract with a single counterparty is transferred, all qualified financial contracts with that
counterparty must be transferred to the same party (together with all claims, security and credit enhancements
relating thereto).247 Therefore, there is no risk of selective repudiation with a transfer. Furthermore, the FDIA and
the OLA provide that the receiver (or conservator in the case of the FDIA) may not “cherry-pick” among qualified
financial contracts between the insolvent institution and any particular counterparty in exercising its authority to
disaffirm or repudiate.248 Therefore, there is no risk of selective disaffirmance or repudiation.
239
As defined in 12 U.S.C. § 1821(e)(8)(D)(iv); 12 U.S.C. § 5390(c)(8)(D)(iv).
240
As defined in 12 U.S.C. § 1821(e)(8)(D)(ii); 12 U.S.C. § 5390(c)(8)(D)(ii).
241
See Section IV.B and IV.D above.
242
12 U.S.C. § 1821(e)(8)(D)(i); 12 U.S.C. § 5390(c)(8)(D)(i).
243
12 U.S.C. § 1821(e)(8)(D)(vii); 12 U.S.C. § 5390(c)(8)(D)(vii). Parties contemplating having such mixed masters should consider the
ramifications with respect to termination, netting and access to collateral.
244
12 U.S.C. § 1821(e)(8)(A), (e)(10); FDIC Statement of Policy 5113 (Dec. 12, 1989); 12 U.S.C. § 5390(c)(8(A), (e)(10).
245
12 U.S.C. § 1821(e)(8)(E), (e)(12).
246
12 U.S.C. § 1821(e)(9); 12 U.S.C. § 5390(c)(9).
247
Qualified financial contracts, and related claims, security and credit enhancements, of the counterparty’s affiliates must also be included in
such transfer. Id.
248
12 U.S.C. § 1821(e)(11); 12 U.S.C. § 5390(c)(11). Qualified financial contracts of the counterparty’s affiliates must be disaffirmed or
repudiated together with the counterparty’s qualified financial contracts.
46
744581026.3
D. The NYBL
1. Treatment of Master Agreements. Again, in a manner analogous to the Code and the FDIA
analysis immediately above, if the relevant Transactions do not fall within the definition of “swap agreement” under
the NYBL and these Transactions were documented under an ISDA Master Agreement along with “swap
agreement[s]”, a derivatives market participant would be faced with an ISDA Master Agreement under which “swap
agreement[s]” and other types of Transactions are documented. The definition of qualified financial contracts under
Section 618-a(2)(e)(1) of the NYBL enumerates certain categories of financial contracts.249 Those categories
include, among others, securities contracts, forward contracts, swap agreements and master agreements for such
agreements. The NYBL does not describe in detail which financial contracts would be encompassed by these
categories. However, we believe that generally the Superintendent should interpret these categories to include the
same range of financial contracts that are covered by the corresponding definitions under the FDIA.250 Nevertheless,
we understand that independent inquiries made with the Banking Division of the New York Department of Financial
Services for more unusual transactions may be helpful.
2. Right to terminate. As discussed under Section IV.C.2, Section 619(1)(d)(2)(i) of the NYBL
provides that the Superintendent’s taking possession of a New York banking organization does not operate as a stay
or as an injunction against the termination of a “qualified financial contract” in accordance with its terms.
3. Netting. As discussed under Section IV.C.3, netting among qualified financial contracts is
enforceable under the NYBL.
4. Selective Repudiation. As discussed under Section IV.C.4, the NYBL also specifies that any
master agreement for qualified financial contracts, together with all supplements thereto, “shall be treated as one
qualified financial contract.” Accordingly, if the Superintendent repudiates any of the Transactions under the ISDA
Master Agreement, the Superintendent would be required to repudiate all of them, and we believe that the amount
payable by the parties to the ISDA Master Agreement in respect of such repudiation would be calculated as provided
under the ISDA Master Agreement.
E. FDICIA
As discussed in Section V.B. above, the applicability of FDICIA is not restricted by the type of Transaction
involved.
VII.
TERMINATION CURRENCY
Under the ISDA Master Agreement, the parties may elect a Termination Currency for payment of the
termination amount other than U.S. dollars; accordingly, the single obligation to pay a net amount under the ISDA
Master Agreement would be converted into the Termination Currency.
249
Under § 618-a2(e)(i) of the NYBL, “qualified financial contract” means any securities contract, commodity contract, forward contract
(including spot and forward foreign exchange), repurchase agreement, swap agreement, and any similar agreement, any option to enter into any
such agreement, including any combination of the foregoing, and any master agreement for such agreements, as well as other agreements
determined by the Superintendent to be qualified financial contracts, provided that such agreements satisfy certain documentary requirements.
250
See above under Section VI.C. We assume in this discussion that the Superintendent would refer to the FDIA as in effect at the time of an
insolvency proceeding. Although there are good policy reasons why the Superintendent may interpret these definitions in accordance with the
FDIA as amended to date, there are countervailing reasons why the Superintendent might refer to the FDIA as it was at the time of enactment of
the relevant provisions of the NYBL.
47
744581026.3
This provision should not violate the public policy of the United States or the State of New York, given that
both Section 823 of the Restatement (Third) of The Foreign Relations Law of the United States and Section 27(b) of
the New York Judiciary Law permit the issuance of judgments denominated in foreign currencies.251
For purposes of any insolvency proceeding under the Code, the FDIA and the NYBL, any claim of the
Non-defaulting Party or any judgment in favor of the Non-defaulting Party that is denominated in a currency other
than U.S. dollars must be converted into U.S. dollars.252
VIII.
MULTIBRANCH ISSUES
1. Enforceability of multibranch close-out netting provisions in an ISDA Master Agreement for U.S.
Bank with foreign branches
(a) FDIC-insured National Bank. As discussed under Sections IV., V. and VI. above, specific
provisions of the FDIA and FDICIA ensure the enforceability of the bilateral close-out netting provisions of the
ISDA Master Agreement in cases of an FDIC-administered bank insolvency. These conclusions would not change
based on the assumption that the ISDA Master Agreement is executed and conducted on a multibranch basis.
Any national banking association may establish (with the permission of the Board of Governors of the
Federal Reserve) bank branches in foreign countries.253 These foreign branches are not considered to be
independent entities. The leading view on the relationship between a U.S. Bank and its foreign branches is
expressed in Sokoloff v. National City Bank of New York, 224 N.Y.S. 102 (N.Y. Sup. Ct. 1927): “when considered
with relation to the parent bank, [foreign branches] are not independent agencies; they are . . . merely branches, and
are subject to the supervision and control of the parent bank . . . , and their property and assets belong to the parent
bank, although nominally held in the names of the particular branches. Ultimate liability for a debt of a branch
would rest upon the parent bank.”254
Although foreign branches of national banks are required to keep independent financial records separate
from the records of the parent bank,255 this requirement is intended to simplify the oversight of foreign branches by
U.S. banking regulators, and should not be interpreted to grant the foreign branches “separate entity” status.256 The
“single entity” treatment of a U.S. Bank and its branches expressed in Sokoloff has been repeatedly reaffirmed by
federal and state courts.257
Furthermore, in an Interpretive Letter, the FDIC affirmed that the “single entity” theory would be applied
in the case of a receivership of an insolvent multinational bank chartered within the United States.258 Therefore, in
251
Under Section 27(b) of the New York Judiciary Law, in any case in which the cause of action is based upon an obligation denominated in a
currency other than currency of the United States, a court shall render or enter a judgment or decree in the foreign currency of the underlying
obligation. However, as a matter of New York law, such judgment or decree will be converted into currency of the United States at the rate of
exchange prevailing on the date of entry of the judgment or decree if it is to be enforced in the State of New York.
252
With respect to the Code, see In re Good Hope Chemical Corp., 31 B.R. 887, 891–92 (Bank. D. Mass. 1983). See also Official Form 10
(Proof of Claim) (indicating U.S. dollars in front of the space where the creditor must insert the total amount of its claim at the time the
bankruptcy case was filed); 11 U.S.C. § 502(b) (requiring the bankruptcy court to determine the amount of a claim “in lawful currency of the
United States as of the date of the filing of the petition” if an interested party objects to such claim).
253
12 U.S.C. § 601.
254
Sokoloff v. Nat’1 City Bank of N.Y., 224 N.Y.S. 102, 114 (N.Y. Sup. Ct. 1927) (citations omitted).
255
12 U.S.C. § 604.
256
First Nat’l City Bank of N.Y. v. IRS, 271 F.2d 616, 618–19 (2d Cir. 1959).
257
See, e.g., Vishipco Line v. Chase Manhattan Bank, N.A., 660 F.2d 854, 863–64 (2d Cir. 1981) (holding U.S. bank liable for the deposit
liabilities of its nationalized Vietnam branch); First Nat’l Bank of Boston (Int’1) v. Banco Nacional de Cuba, 658 F.2d 895, 900 (2d Cir. 1981)
(holding that Cuban branches of national bank were not a separate entity under 12 U.S.C. § 601); United States v. BCCI Holdings (Lux.), S.A.,
833 F. Supp. 32, 38 (D.D.C. 1993) (holding that all the foreign branches and the parent bank of the BCCI conglomerate were a single entity).
258
FDIC Interpretive Letter 941 (Feb. 28, 1994). Informal conversations with FDIC staff revealed no deviations from this policy. See the FDIC
press release PR-201-2009 11/6/2009 regarding United Commercial Bank.
48
744581026.3
such an insolvency proceeding, as a general matter, all creditors of the bank and its branches should be entitled to
obtain payment from the proceeds of all the international and domestic assets of the U.S. Bank and its branches,
regardless of the location of those assets.259
We believe, therefore, that the conclusions reached under Section III.A–D above would not change with
respect to an ISDA Master Agreement executed and conducted on a multibranch basis with a national bank because
the intent of the multibranch provisions (to net out payments across the entire bank, without regard to the place of
booking) is in harmony with the policies behind the FDIC’s “single entity” theory of receivership (to treat all bank
assets as a whole, without regard to the location of assets).
The enforcement of multibranch close-out netting also would be consistent with the language of the FDIA
and FDICIA discussed under Sections IV., V. and VI. above. Under the FDIA, a counterparty to a multibranch
ISDA Master Agreement that is a “qualified financial contract” is permitted to “offset or net out any termination
value, payment amount or other transfer obligation arising under or in connection with” one or more qualified
financial contracts.260 Nothing in this language would indicate a limitation on the ability to enforce multibranch
netting in an otherwise valid qualified financial contract. More explicitly, FDICIA would permit a counterparty that
is a “financial institution” to net out payment entitlements with the insolvent U.S. Bank “in accordance with” any
applicable netting contract.261
Based on the “single entity” approach to bank insolvency proceedings adopted by the U.S. courts and the
FDIC, and the language of the operative statutes that would apply in the case of a U.S. national bank insolvency, we
believe that the conclusions reached under Section III.A–D above would not change with respect to an ISDA Master
Agreement executed and conducted on a multibranch basis by a national bank.
(b) FDIC-insured New York-chartered state bank. If the Superintendent would tender the
receivership of an insolvent New York State-chartered banking institution that accepts federally-insured deposits to
the FDIC or to another qualified Federal receiver, the same result as set forth under (a) above would occur. In all
other cases, an insolvency proceeding for that New York State chartered banking institution would be conducted
under the NYBL.262 Under the NYBL, the New York bank and its branches would be treated as a single entity.
Specifically, Section 138 of the NYBL states that any New York bank with a branch office in a foreign country
“shall be liable for contracts to be performed at such branch office”.263
(c) Exceptions. Certain statutes provide that deposit obligations of a foreign branch of a federally or
New York-chartered state bank that cannot be paid by that foreign branch because of the imposition of exchange
controls or similar circumstances are not required to be paid by any other office of such bank unless the bank and the
depositor have otherwise explicitly agreed.264 However, we believe that the obligations of a Party under the
Transactions will not constitute deposits subject to these statutory provisions.
With respect to a foreign branch of a National Bank, however, it must be noted that the OCC has objected
to the decisions of the courts in the First National Bank of Boston (International), Vishipco and other cases and has
taken the position that, in appropriate circumstances, a foreign branch of a National Bank should be treated as a
separate entity from its U.S. parent following a sovereign risk event.265
With respect to a foreign branch of an FDIC-insured New York State-chartered state bank subject to the
provisions of the NYBL, Section 138 also provides that (i) a New York bank is liable on the contracts of its foreign
branch only to the extent that a bank organized under the laws of the foreign country would be liable under the same
contract, and (ii) if an unrecognized government of a foreign country seizes assets of a foreign bank, the obligations
259
Id.
260
12 U.S.C. § 1821(e)(8)(A)(iii).
261
12 U.S.C. § 4403(a).
262
The applicable laws are found in Article XIII of the NYBL.
263
264
See 12 U.S.C. § 633(a)(2) (applicable to all insured depository institutions); N.Y. Banking Law § 138(2-d) (applicable to New York State-
chartered banks).
265
See 1-3 O.C.C. Q.J. 36 (Aug. 1982) (letter from OCC to U.S. Department of Justice).
49
744581026.3
of that bank in respect of any contract made by it through any branch in that country are reduced pro tanto by the
proportion that the value of the assets seized bears to the aggregate of all the liabilities of the branch offices of the
bank in that country.266
2. Commencement of a separate proceeding to administer the assets of (a) the insolvent Federal
Branch of Bank F or (b) the insolvent New York Branch of Bank F.
Unlike the provisions of Federal and New York law discussed above, in which the courts and the FDIC
have promoted a “single entity” treatment of U.S. banks and their foreign branches, relevant provisions of the
NYBL and the IBA follow a “separate entity” theory for dealing with insolvent U.S.-based branches of foreign
banks.
(a) Federal Branch. Section 4 of the IBA governs the establishment and operation of Federal
Branches. Under the IBA, the rules and regulations applicable to Federal Branches generally are the same as those
governing a national bank and, as for a national bank, the OCC is in charge of applying them to Federal Branches.267
Under the IBA, the receiver for the Federal Branch exercises the same rights, privileges, powers, and authority as
are exercised by a receiver appointed by the OCC under the NBA. In an insolvency of a Federal Branch,
Section 4(j) of the IBA empowers the OCC to appoint a receiver to take possession of all the property and assets of
the Federal Branch, without regard to the proceedings in the bank’s home country and to apply assets to satisfy the
claims of creditors arising out of transactions conducted with the Federal Branch.268
Only after such claims are satisfied may the receiver turn over any remaining assets to the head office of
the foreign bank. Individual creditors of the Federal Branch may force the commencement of an insolvency
proceeding for the Federal Branch by obtaining a judgment against the Federal Branch in a U.S. court and certifying
to the OCC that such judgment has remained unpaid for 30 days.269
If the Federal Branch accepts federally-insured deposits, the liquidation of such insolvent Federal Branch is
also subject to the FDIA. Whenever the OCC is to appoint a receiver for any such Federal Branch, it must appoint
the FDIC as receiver. In addition, it is in the OCC’s discretion to appoint the FDIC as conservator for any Federal
depository institution, such as a Federal Branch,270 that takes federally-insured deposits. In these situations, the
insolvency proceedings for such Federal Branch would be carried out under the FDIA.271 If the Federal Branch does
not accept federally-insured deposits or if the OCC does not exercise its right to tender the conservatorship of a
Federal Branch that takes federally-insured deposits to the FDIC or to another qualified Federal receiver, the
administration of an uninsured Federal Branch would be governed by the NBA and the IBA, as applicable.272
(b) New York Branch. If the New York Branch accepts federally-insured deposits, the NYBL gives
the Superintendent the discretion to tender the receivership of that insolvent New York Branch to the FDIC or to
another qualified Federal receiver.273 In such an instance, it is not clear whether the multibranch close-out netting
provisions of the NYBL, as discussed under Section VIII.3 below, would apply or whether the insolvency
266
A New York bank is not required to repay any deposit made at a foreign branch if that branch cannot repay the deposit due to (i) an act of war,
insurrection, or civil strife; or (ii) an action by a foreign government or instrumentality, whether de jure or de facto, in the country in which the
branch is located preventing such repayment, unless such bank has expressly agreed in writing to repay the deposit under such circumstances.
See N.Y. Banking Law § 138(2-a).
267
12 U.S.C. § 3102(b).
268
12 U.S.C. § 3102(j).
269
Id.
270
Under 12 U.S.C. § 1813(c)(4), the term “Federal depository institution” means “any national bank, any Federal savings association, and any
Federal Branch.”
271
Under 12 U.S.C. § 1821(c)(2)(A)(ii), the FDIC shall be appointed receiver, and shall accept such appointment, whenever a receiver is
appointed for the purpose of liquidation or winding up the affairs of an insured Federal depository institution by the appropriate Federal banking
agency, notwithstanding any other provision of Federal law (other than, pertinently, Section 21A of the Federal Home Loan Bank Act,
see 12 U.S.C. § 1441(a)).
272
Please refer to Section VIII.3(b) below for further discussion of Federal Branch receiverships governed by the NBA and the IBA, as
applicable.
273
50
744581026.3
proceeding with respect to the insured New York Branch would be conducted under the FDIA or the NYBL, even if
there is no insolvent Federal Branch of Bank F.
If the New York Branch does not accept federally-insured deposits or if the Superintendent does not
exercise his right to tender the receivership of a New York Branch that takes federally-insured deposits to the FDIC
or to another qualified Federal receiver, then the NYBL would be applicable to that New York Branch. Under New
York law, the New York Branch of Bank F must be licensed to take deposits or do business in New York.274 The
Superintendent is authorized to take possession of the New York Branch if Bank F becomes the subject of
insolvency proceedings in Country H.275 After taking possession, the Superintendent is authorized to commence an
insolvency proceeding for the New York Branch, without regard to the proceedings in Country H.276 The
commencement of an insolvency proceeding is at the discretion of the Superintendent and may not be initiated by
individual creditors.277
If a foreign bank has both a New York Branch and a Federal Branch, the broad authority contained in the
IBA creates a jurisdictional overlap between a proceeding for a Federal Branch and a proceeding for a New York
Branch (insured or uninsured) of that bank. Because the OCC authority encompasses all assets of the foreign bank
in the United States, the assets of the New York Branch may be subject to an insolvency proceeding commenced
under the IBA with respect to the Federal Branch. This distinction is important, because as described below, New
York law will enforce multibranch close-out netting provisions while Federal law might not.
There have been decisions under the now repealed Section 304 of the Code that in combination suggested
that counterparties of the New York Branch of Bank F may experience some delay in enforcing early termination
and multibranch close-out netting provisions in insolvency proceedings brought by the Superintendent under the
NYBL. These cases suggested that the Superintendent’s proceedings might be interrupted by a Section 304
proceeding,278 and that the termination and netting provisions of the Code might not apply in a Section 304
proceeding.279 The 2005 Act, however, has amended the Code to make it clear both that the protective provisions of
the Code would apply in proceedings under the successor provision to Section 304, Chapter 15 of the Code, and that
branches and agencies of foreign banks with branches or agencies in the U.S. may not be the subject of Chapter 15
proceedings.280
274
275
N.Y. Banking Law § 606(4)(a).
276
See In re Liquidation of N.Y. Agency of B.C.C.I., 587 N.Y.S.2d 524, 526–27 (N.Y. Sup. Ct. 1992) (holding NYBL insolvency regime was a
“rational and balanced” system to protect the local interests of creditors of a New York branch of a foreign bank).
277
278
In re Agency for Deposit Ins., Rehab., Bankr. and Liquidations of Banks, 310 B.R. 793 (S.D.N.Y. 2004). In Agency, the Yugoslav receiver of
two failed Yugoslavian banks with New York agencies commenced U.S. bankruptcy proceedings under Section 304 of the Code to prevent the
Superintendent from giving preferences to certain creditors with respect to the New York assets of each bank’s New York agency, in accordance
with Section 606(4) of the NYBL. The Superintendent had already taken possession of each bank’s New York operations and initiated
liquidation proceedings pursuant to the NYBL by the time the Yugoslav receiver filed its Section 304 proceeding. This case did not seem to
involve any Transaction or close-out netting issues.
In response, the Superintendent brought a motion to dismiss the Section 304 petitions, which the Bankruptcy Court granted on the basis that
Section 109 of the Code expressly excludes foreign banks from the definition of who may be a “debtor” under the Code. The District Court
reversed the Bankruptcy Court’s decision and held that “[t]he fact that, under § 109, a foreign bank cannot avail itself of the full benefits of
Chapter 7 liquidation in the United States in no way implies that its estate may not obtain the benefits of a foreign bankruptcy by invoking the
remedies afforded by § 304.” Id. at 795. The District Court noted that the Yugoslav receiver’s entitlement to file a Section 304 petition in the
Bankruptcy Court is not dispositive of his entitlement to relief under Section 304 and remanded the case to the Bankruptcy Court to make a
determination as to whether the Yugoslav receiver has met the burden set out in Section 304. The District Court denied the Superintendent’s
motion for reconsideration of the order or, alternatively, for certification of the order immediate appeal. 313 B.R. 561 (S.D.N.Y. 2004). The
Second Circuit affirmed the decision. 482 F.3d 612 (2d Cir. 2007).
279
In re Petition of the Bd. of Directors of Compañía General de Combustibles S.A., 269 B.R.104, 111–12 (Bankr. S.D.N.Y. 2001).
280
11 U.S.C. §§ 561(d), 1501(c), 1519(f), 1521(f). Similarly, foreign banks with branches in the United States may not be Code debtors in
plenary cases (for example, under Chapter 7 or Chapter 11). 11 U.S.C. § 109(b)(3)(B). 11 U.S.C. § 561(d) states: “Any provisions of [the Code]
relating to securities contracts, commodity contracts, forward contracts, repurchase agreements, swap agreements, or master netting agreements
shall apply in a case under chapter 15, so that enforcement of contractual provisions of such contracts and agreements in accordance with their
terms will not be stayed or otherwise limited by operation of any provision of [the Code] or by order of a court in any case under [the Code], and
to limit avoidance powers to the same extent as in a proceeding under chapter 7 or 11 of [the Code] (such enforcement not to be limited based on
the presence or absence of assets of the debtor in the United States).” In Fairfield Sentry Limited v. Theodoor GGC Amsterdam, 596 B.R. 275,
51
744581026.3
3. Treatment of multibranch close-out netting provisions in an insolvency proceeding conducted for
the New York Branch or the Federal Branch of Bank F.
(a) New York Branch. If the Superintendent takes possession of the New York Branch and the
NYBL applies, the NYBL directs the Superintendent to segregate the assets of Bank F that are located in New York,
and use those assets to satisfy only the claims of creditors that arise out of transactions with the New York branch.281
The segregation, or “ring-fencing”, of the New York Branch’s assets and liabilities treats the New York Branch as a
separate entity, distinct from the assets and liabilities of Bank F.
In the absence of special provisions, this “separate entity” treatment dictated by the NYBL might be
interpreted to require the Superintendent to ignore the multibranch netting terms of an ISDA Master Agreement, and
to treat transactions booked through the New York Branch without regard to other transactions booked through
Bank F.
This outcome is avoided, however, by amendments to the NYBL adopted in 1993 that specifically address
the treatment of multibranch netting agreements in an insolvency proceeding for a New York Branch.282 These
amendments enumerate swap agreements and other derivatives as “qualified financial contracts”. The definition in
the NYBL is consistent with the definition of qualified financial contract in the FDIA. ISDA Master Agreements
executed on a multibranch basis would be within this definition to the extent that each transaction documented
thereunder is a qualified financial contract. As discussed under Sections IV. and VI. above, the definition of
qualified financial contract is expansive, and should encompass most derivatives transactions commonly
documented under ISDA Master Agreements, or transactions “similar to” such common transactions.283 However, it
may be useful to make independent inquiries with the Office of the Superintendent for more unusual transactions
that may not be within the definition of “qualified financial contract” contained in the NYBL.
The 1993 amendments limit the Superintendent’s power to terminate or repudiate qualified financial
contracts. Specifically, N.Y. Banking Law § 618-a1 provides that the Superintendent may not assume or repudiate
multibranch qualified financial contracts; these contracts must either be terminated by the non-insolvent
counterparty in accordance with their terms, or terminated by the banking regulators in Country H.284
Under the 1993 amendments, after the termination of the New York Branch’s multibranch ISDA Master
Agreement, netting of amounts due under the terminated ISDA Master Agreement are calculated on both a global
and New York only basis. The global net amount is the amount owed by or to Bank F as a whole if all transactions
across all branches subject to the multibranch netting agreement are considered (the “Global Net Payment
Obligation” or “Global Net Payment Entitlement”). The New York or local net amount is the amount owed by or to
the New York Branch after netting only the transactions entered into by the New York Branch (the “Branch/Agency
Net Payment Obligation” or “Branch/Agency Net Payment Entitlement”). The Superintendent shall only be liable
to pay a counterparty the lesser of the Global Net Payment Obligation and the Branch/Agency Net Payment
Obligation. Likewise, when a counterparty owes a net amount pursuant to a repudiated or terminated qualified
financial contract, the Superintendent of the insolvent New York Branch may demand from the counterparty a
payment of the lesser of the Global Net Payment Entitlement or the Branch/Agency Net Payment Entitlement. The
right of the Superintendent to receive this payment from a Non-defaulting Party exists regardless of the inclusion of
a limited two-way payments clause in the terminated qualified financial contract.285
310-315 (Bkrtcy. S.D.N.Y. 2018), the bankruptcy court held that — irrespective of whether the anti-avoidance safe harbor of Section 546(e)
applies extraterritorially (an issue the court did not decide) — Section 561(d) prevents a foreign representative in a Chapter 15 case from
invoking foreign insolvency law to avoid transfers of property outside the United States that result from the enforcement of “Close-out Rights”
(which the court defined as the non-debtor’s contractual right to cause the termination, liquidation, or acceleration of or to offset or net
termination values, payment amounts, or other transfer obligations as set forth in Section 561, id. at 308 n.47). The court did not reach the effect
of Section 561(d) on the potential avoidability of pre-close-out transfers, such as margin payments, that occur outside the United States.
281
N.Y. Banking Law § 606(4)(a).
282
N.Y. Banking Law §§ 618-a to 620.
283
N.Y. Banking Law § 618-a2(e)(i).
284
N.Y. Banking Law § 618-a1.
285
N.Y. Banking Law § 618-a2(c).
52
744581026.3
Based on these provisions, the Superintendent would enforce the close-out netting provisions of an ISDA
Master Agreement executed on a multibranch basis by the New York Branch, subject to the limitations described
above.286
If the New York Branch of Bank F accepts federally-insured deposits, the NYBL gives the Superintendent
the discretion to tender receivership of that insolvent New York Branch to the FDIC or to another qualified Federal
receiver.287 Where the Superintendent does tender receivership of the insolvent New York Branch to the FDIC, the
insolvency proceeding would be conducted under the FDIA or the NYBL. In this situation, we believe that the risk
of delay under the FDIA would be the same as under the NYBL.
(b) Federal Branch. A different result would occur if a separate proceeding was conducted
for a Federal Branch. In an FDIC-administered insolvency proceeding for a Federal Branch that takes
federally-insured deposits, the FDIC will “ring-fence” the U.S.-based assets and apply those assets to
satisfy the claims of creditors arising out of transactions conducted with the Federal Branch.288 Only after
such claims are satisfied may the FDIC turn over any remaining assets to the head office of the foreign
bank.289 This “ring-fencing” approach could be used to avoid enforcement of the multibranch close-out
netting provisions, because the FDIC could argue that payments due to the Federal Branch (i.e., U.S.-based
assets) should not be netted or set off against payment obligations of the head office of Bank F or its
branches in other jurisdictions.
These “ring-fencing” provisions may be in conflict with the provisions of the FDIA that protect a
counterparty’s right to “offset or net out any termination value…arising under or in connection with 1 or more
[qualified financial contracts]” (emphasis added).290 There is a strong argument that these provisions of the FDIA
are sufficiently broad to encompass multibranch netting, and that these provisions should apply in the case of an
FDIC-proceeding for a Federal Branch. It is worth noting that the FDIC’s authority in carrying out a receivership of
an insolvent Federal Branch under the IBA extends to the “same rights, privileges, powers and authority with respect
thereto as are now exercised by receivers of national banks”.291 Therefore, it may reasonably be argued that the
provisions of the FDIA should be applied in an FDIC insolvency proceeding for a Federal Branch in the same way
the FDIC would apply those provisions in an insolvency proceeding for a national bank.
Furthermore, there is some evidence indicating that the OCC would defer to a contractual agreement
between sophisticated parties in which one party “waives” the protection provided by the ring-fencing provisions of
the IBA. In an interpretive letter from 1988, the OCC stated that although the IBA grants a preference to creditors
whose claims arise out of transactions with a Federal Branch, there is no indication in the IBA that sophisticated
investors “may not agree to surrender or alter their priority rights”.292 The multibranch netting provisions of an
ISDA Master Agreement could be deemed to be a “surrender” of a counterparty’s priority rights because, depending
on the values of the transactions booked through the designated branches, a Non-defaulting Party might be better off
only netting transactions booked through the Federal Branch instead of netting transactions booked through all
branches and the head office. Therefore, it may be argued that if the OCC chose to enforce multibranch netting in
one situation (i.e., when it is deemed to be a waiver), it may choose consistently to enforce multibranch netting in all
situations, which would also be consistent with the FDIA.
However, without clarifying legislation or OCC regulations, it is unclear if the FDIC would enforce the
multibranch close-out netting provisions in accordance with the terms of the FDIA or, alternatively, permit close-out
netting only for transactions booked through the Federal Branch (or only for transactions booked through any
286
In the absence of precedent, it is not possible to determine if application of FDICIA might impel some more literal application of the ISDA
Master Agreement than that required by the terms of the NYBL.
287
288
12 U.S.C. § 3102(j)(2).
289
Id.
290
12 U.S.C. § 1821(e)(8)(A)(iii).
291
12 U.S.C. § 3102(j)(1).
292
OCC Interpretive Letter, 1988 WL 282300 (Sept. 2, 1988) (permitting investors of Notes issued by Federal Branch to agree to be subordinated
to all other creditors of the foreign bank, even those with claims against other branches of the foreign bank).
53
744581026.3
branches in the United States). We note that prior to the passage of the 2005 Act, ISDA had proposed that the OCC
exercise its rule-making authority under Section 3102(b) of the IBA and adopt clarifying regulations that would
ensure the enforceability of multibranch close-out netting provisions in an insolvency proceeding for a Federal
Branch. As of the date of this memorandum, however, the OCC had not taken any action in response to this
proposal.293
In an insolvency proceeding for a Federal Branch that does not take federally-insured deposits, the
receivership would be governed by the NBA and the IBA, as applicable. While the FDIA receivership provisions
provide special treatment for qualified financial contracts, the NBA does not contain comparably specific
provisions. We believe, however, that similar results should be obtained under the NBA and the IBA, as applicable,
as under the FDIA.294 Therefore, the analysis immediately above with respect to an FDIC-administered receivership
should apply equally and, without clarifying legislation or OCC regulations, it is unclear if the OCC would enforce
the multibranch close-out netting provisions under the NBA and the IBA or, alternatively, permit close-out netting
only for transactions booked through the uninsured Federal Branch (or only for transactions booked through any
branches in the United States).295
4. Bad Branch Issues
(a) Insolvency Proceeding for a U.S. Bank. As described under Section VIII.l above, in the case of an
insolvency proceeding for a U.S. Bank, the U.S. Bank and all of its branches will be deemed to be a “single entity”,
and all assets and liabilities of the insolvent U.S. Bank will be dealt with in a single insolvency proceeding in the
United States. Based on this “single entity” treatment, the fact that some Transactions under an ISDA Master
Agreement may be booked through one or more Non-Netting Branches of the U.S. Bank should not affect the
enforceability of the multibranch close-out netting provisions of an ISDA Master Agreement in the insolvency
proceeding for the U.S. Bank.
Notwithstanding the “single entity” treatment of a U.S. Bank, an insolvency official in a Non-Netting
Jurisdiction could attempt to sever or otherwise “ring-fence” the Transactions booked through the Non-Netting
Branch of the U.S. Bank. We do not believe that the FDIC, acting as either a conservator or a receiver for the
insolvent U.S. Bank, should or would recognize the validity of such actions.
There may be, however, narrow factual scenarios that might lead to an alternate conclusion. Although we
believe that the FDIC would enforce the multibranch close-out netting provisions of the ISDA Master Agreement in
almost all situations, we recognize the theoretical possibility that the FDIC could defer to an insolvency official in a
Non-Netting Jurisdiction in a way that might undermine the enforceability of the multibranch close-out netting
provisions. We believe that such a possibility would arise only in circumstances in which the insolvency official in
293
In connection with rulemaking to address the conduct of receiverships for uninsured national banks, the OCC stated that uninsured Federal
Branch resolution was “a more complicated topic” which implicated the overlay of other federal laws, including the IBA, as well as international
regulatory concerns about the resolution of global systemically important banks, and that it would continue to review and discuss the topic with
other regulators. Receiverships for Uninsured National Banks, 81 Fed. Reg. 62835, 62838 (September 13, 2016). We think that the provision of
the 2005 Act extending FDICIA to foreign banks as well as their U.S. branches should be applied to overcome any potential for an adverse result
under the IBA in those instances where FDICIA would be applicable. 12 U.S.C. § 4402. See supra note 168 and accompanying text. In the
absence of precedent, however, the extent of FDICIA’s influence is unclear.
294
See OCC Interpretive Letter No. 768 (Oct. 4, 1995). In addition, the 2005 Act added new Section 407 to FDICIA, 12 U.S.C. § 4406a, which
makes Section 11(e)(8) – (11) of the FDIA applicable, “[n]otwithstanding any other provision of law, … to an uninsured national bank or
uninsured Federal branch or Federal agency, a corporation chartered under section 25A of the Federal Reserve Act [12 U.S.C. 611 et seq.], or an
uninsured State member bank which operates, or operates as, a multilateral clearing organization ….” Any uncertainty engendered by the
statutory text that the ambit of the limiting relative clause – “which operates … a multilateral clearing organization” – might extend to uninsured
Federal branches would appear to be dispelled by the section heading of 12 U.S.C. § 4406a  “Treatment of contracts with uninsured national
banks, uninsured Federal branches and agencies, certain uninsured State member banks, and Edge Act corporations” (emphasis added)  and the
legislative history. See Statement of Michael L. Brosnan, Deputy Comptroller for Risk Evaluation, Office of the Comptroller of the Currency,
before the U.S. House Committee on Banking and Financial Services, Washington, D.C., July 24, 1998, reprinted at O.C.C. Quarterly Journal,
Vol. 17, No. 4, 155 (December 1998); H.R. Rep. No. 105-688, at 13; Brotherhood of R.R. Trainmen v. Baltimore & Ohio R.R. Co., 331 U.S. 519,
529 (1947) (statutory headings are “of use only when they shed light on some ambiguous word or phrase”). See also Barnhart v. Thomas, 540
U.S. 20, 26 (2003) (applying “rule of the last antecedent”). We are, however, unaware of any cases construing 12 U.S.C. § 4406a.
295
Again, in cases where FDICIA would be applicable, we think that its strong mandate to give effect to its provisions should pre-empt a narrow
application of close-out netting, although to what extent that will actually occur is unclear. See supra note 168.
54
744581026.3
a Non-Netting Jurisdiction manages to “cherry-pick” Transactions and realize substantial assets for the benefit of
local creditors.
Even in these circumstances, we believe that under U.S. law the FDIC should be required to act in a
manner consistent with the conclusions described above. Therefore, the assets and liabilities of the entire U.S. Bank
(including those arising under a multibranch ISDA Master Agreement) should be dealt with on a net basis in a
unified proceeding, in accordance with U.S. law, notwithstanding the actions taken outside the U.S. We believe that
the FDIC would not recognize, and a U.S. court would not declare enforceable, an order issued in an insolvency
proceeding in a Non-Netting Jurisdiction against a Non-Netting Branch of the U.S. bank as a result of which the
close-out netting provisions of the multibranch ISDA Master Agreement would be unraveled.
(b) Insolvency Proceeding for a New York Branch of Bank F. As described under Section VIII.2
above, in a New York Branch insolvency proceeding, under the provisions dealing with multibranch qualified
financial contracts, the New York Banking Superintendent will be obligated to pay the lesser of the Global Net
Payment Obligation and the Branch/Agency Net Payment Obligation under any terminated ISDA Master Agreement
documenting Transactions that are qualified financial contracts. The New York Banking Superintendent would
calculate the Global Net Payment Obligation for all Transactions under the multibranch ISDA Master Agreement,
notwithstanding actions taken by insolvency officials in Non-Netting Jurisdictions. Therefore, the conclusions
reached under Section VIII.2 above with respect to the treatment of multibranch ISDA Master Agreements should
not be altered if Bank F booked Transactions both through the New York Branch and through a Non-Netting
Branch.
There are certain scenarios where the provisions of the NYBL dealing with multibranch qualified financial
contracts would not apply. One such scenario would be that Bank F has operated in the U.S. both through a New
York Branch and a Federal Branch and the OCC would carry out the insolvency proceedings for both the Federal
Branch and the New York Branch and therefore encompass the assets of the New York Branch as well as the
Federal Branch. The New York Branch regime described above also would not apply in the unlikely scenario that
the Superintendent would tender the receivership of an insolvent New York Branch to the FDIC or to another
qualified Federal receiver.296
(c) Insolvency Proceeding for a Federal Branch of Bank F. As described under Section VIII.3 above,
the enforceability of multibranch close-out netting in an insolvency proceeding for a Federal Branch of Bank F is
uncertain. Therefore, we cannot rule out that the booking of Transactions through a Non-Netting Branch of Bank F
could affect the enforceability of multibranch close-out netting in an insolvency proceeding for a Federal Branch of
Bank F.
As described under Section VIII.3 above, in an insolvency proceeding for a Federal Branch of Bank F, the
receiver appointed by the OCC under the IBA would “ring-fence” the U.S.-based assets of such branch and apply
those assets to satisfy the claims of creditors arising out of Transactions conducted with the Federal Branch. Only
after such claims are satisfied may the receiver turn over any remaining assets to the head office of the foreign bank.
This “ring-fencing” approach could be used to avoid enforcement of the close-out netting provisions on a
multibranch basis, because the receiver could argue that payments due to the Federal Branch (i.e., U.S.-based assets)
should not be netted or setoff against payment obligations of the head office of a foreign bank or its branches in
other jurisdictions.297
296
See supra note 107 and accompanying text.
297
It should be noted, however, that these “ring-fencing” provisions may be in conflict with the provisions of the FDIA that protect a
counterparty’s right to “offset or net out any termination value . . . arising under or in connection with 1 or more (qualified financial contracts).”
See supra Section VIII.3(b). Similarly, if FDICIA is applicable, they may conflict with the broad, pre-emptive FDICIA mandate to net
“in accordance with . . . the terms of any applicable netting contract”. 12 U.S.C. § 4403(a).
55
744581026.3
IX.
APPLICABILITY OF CONCLUSIONS REGARDING NEW YORK-LAW ISDA MASTER AGREEMENT

TO FOREIGN-LAW ISDA MASTER AGREEMENT
The conclusions reached under Sections I.–VIII. above with respect to the enforceability of the termination,
close-out netting and multibranch provisions of the ISDA Master Agreement is subject to the assumption that the
ISDA Master Agreement is governed by the laws of the State of New York (each a “New York-law ISDA Master
Agreement”). The 1992 ISDA Master Agreement and the 2002 ISDA Master Agreement (Original) also permit the
parties thereto to choose English law as the law governing the ISDA Master Agreement, and the 2002 ISDA Master
Agreement (Irish law) and the 2002 ISDA Master Agreement (French law) specify, respectively, Irish law and
French law as the governing law.
If in connection with an insolvency of a U.S. Party a Federal district court or a Federal bankruptcy court
were to adjudicate a claim under a Foreign -Law ISDA Master Agreement, the court would first determine whether
the choice of the specified non-U.S. law to govern the Foreign-Law ISDA Master Agreement would comply with
the applicable U.S. choice of law rules with respect to the issue under consideration. If this choice of law is
recognized under the applicable U.S. choice of law rules, then U.S. insolvency officials would next determine
whether the termination and close-out netting provisions of such Foreign-Law ISDA Master Agreement are
enforceable under applicable U.S. insolvency laws.
Federal district courts sitting in diversity jurisdiction are bound to apply the choice of law rules of the state
in which the court sits.298 Federal courts in New York adjudicating in bankruptcy would also apply New York
choice of law rules in determining matters that do not raise important concerns implicating national bankruptcy
policy.299 Under the choice of law rules of the State of New York, choice of law clauses in respect of contractual
rights and duties300 are recognized unless there is no reasonable basis for the parties’ choice or the law chosen by the
parties would violate a “fundamental policy” of an otherwise applicable law of the State of New York.301 Therefore,
Federal district courts and Federal bankruptcy courts that sit in the State of New York would be bound to apply the
selected foreign law to the termination, close-out netting and multibranch provisions of a Foreign-Law ISDA Master
Agreement, insofar as a reasonable relationship to the chosen jurisdiction exists and the selected foreign law does
not violate a fundamental policy of New York or, under some precedents, of a non-forum jurisdiction with a
298
See Klaxon Co. v Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941). A diversity case transferred from one federal forum to another generally
retains the state choice-of-law rules of the original forum if proper venue existed there. See Atlantic Marine Const. Co., Inc. v. U.S. Dist. Court
for Western Dist. of Texas, 134 S. Ct. 568, 582-3 (2013).
299
See In re Gaston, 243 F.3d 599, 606-7 (2d Cir. 2001); see also In re Koreag, Controle et Revision S.A. v. Refco F/X Assocs., Inc. (In re
Koreag, Controle et Revision S.A.), 961 F.2d 341, 350 (2d Cir. 1992). See also In re Merritt Dredging Co., Inc., 839 F.2d 203, 206 (4th Cir.
1988) (holding that, absent a compelling federal interest which dictates otherwise, the Klaxon rule should prevail where a federal bankruptcy
court seeks to determine the extent of a debtor’s property interest). In those select instances where state substantive law raises “important
concerns implicating national bankruptcy policy”, bankruptcy courts in New York may follow federal choice of law rules, which in certain
contexts may be quite similar to New York law. See 961 F.2d at 350.
300
The extent to which parties may stipulate in advance by contract the law governing non-contractual claims is not entirely clear under New
York law. Some New York court decisions have given effect to parties’ contractual selection of the law to govern non-contractual claims arising
incident to a contract if the express language of the choice-of-law provision is “sufficiently broad as to encompass the entire relationship between
the contracting parties” and the choice is otherwise valid. See Bausch & Lomb Inc. v. Mimetogen Pharmaceuticals, Inc., 14 Civ. 6640 (FPG),
2016 WL 2622013 (W.D.N.Y. 2016) (internal citations and quotations omitted). However, the decisions we have reviewed do not reconcile their
holdings with (or claim to overturn) the traditional rule that contractual choice-of-law provisions do not bind the parties with respect to causes of
action sounding in tort. See, e.g., Fustok v. Conticommodity Servs., Inc., 618 F.Supp. 1082, 1089 (S.D.N.Y.1985). Furthermore, the authority
relied upon by many of these decisions traces back to Turtur v. Rothschild Registry International, Inc., 26 F.3d 304 (2d Cir.1994), a decision
which a later 2nd Circuit Court of Appeals decision described as “irrelevant” for purposes of New York law because the case is “better read” as
having applied Texas choice-of-law principles. Fin. One Pub. Co. Ltd. v. Lehman Bros. Special Fin., Inc., 414 F.3d 325, 334 (2d Cir. 2005).
301
. See, e.g., Welsbach, Elec. Corp. v. MasTec N. Am., Inc., 7 N.Y.3d 624, 629 (2006); Madden v. Midland Funding, LLC, 237 F.Supp.3d 130,
148 (S.D.N.Y. 2017) (collecting factors that courts have examined to determine whether the chosen law bears a reasonable relationship to the
parties or the transaction: “the parties’ negotiation of the agreement; performance under the agreement, including where loan payments were
received; the parties’ places of incorporation; the parties’ principal places of business; and the property that is the subject of the transaction”).
See also Radioactive, J.V. v. Manson, 153 F. Supp. 2d 462, 469 (S.D.N.Y. 2001) (citing the test articulated by Restatement (Second) of Conflicts
of Laws § 187(2), which, with respect to issues that are not capable of resolution by an explicit agreement of the parties, may defer to the
fundamental policies of a non-forum jurisdiction with a materially greater interest and whose laws would have governed in the absence of an
effective choice by the parties).
56
744581026.3
materially greater interest and whose laws would have governed in the absence of an effective choice by the
parties.302
Since the termination, close-out netting and multibranch provisions of a Foreign-Law ISDA Master
Agreement are the same as those contained in a New York-law ISDA Master Agreement, we believe that a court in
the State of New York would conclude that the termination and close-out netting provisions of a Foreign-Law ISDA
Master Agreement do not violate a fundamental policy of New York laws.
However, this analysis presumes that there is no applicable U.S. insolvency statute that deals with choice of
law issues and provides to the contrary. Under the FDIA, FDICIA, the Code and the NYBL, the governing law
selected under a Foreign-Law ISDA Master Agreement would not affect our conclusion set forth above.
X.
ENFORCEABILITY OF TERMINATION, CLOSE-OUT NETTING AND MULTIBRANCH PROVISIONS

OF NEW YORK-LAW ISDA MASTER AGREEMENT UNDER NEW YORK STATE NONINSOLVENCY
LAW
We believe that the termination, close-out netting and multibranch provisions contained in the ISDA
Master Agreement would be enforceable under the laws of the State of New York against the Defaulting Party in
accordance with their terms, subject to general principles of equity (including, without limitation, concepts of
materiality, reasonableness, good faith and fair dealing), regardless of whether considered in a proceeding in equity
or at law.303
XI.
PENDING DEVELOPMENTS
Despite the effectiveness of many Dodd-Frank provisions regulating the OTC market, controversy
continues to attach to swaps and other aspects of financial reform. One manifestation of this is a movement, so far
ineffective, to reduce or eliminate the special insolvency protections available to swaps and certain other financial
contracts. This movement may be expected to continue in coming years. Whether or not it becomes an imminent
threat to the protections described in this memorandum remains to be seen. Bills have been introduced in Congress
to amend the U.S. Bankruptcy Code to provide new mechanisms for resolving financial institutions without resort to
the OLA, including a 48-hour stay on the termination of safe-harbored financial contracts (and related exercise of
rights against collateral), pending their potential transfer to a bridge company, and limitations on the exercise of
cross-defaults by counterparties to contracts with the debtor’s affiliates. See, e.g. Financial Institution Bankruptcy
302
There are some precedents that do not follow the rule stated herein, but rather apply the law of a jurisdiction that has the most “significant
contacts” with the matter in dispute. However, the New York Uniform Commercial Code, the New York General Obligations Law and the vast
weight of the case law support the argument that the parties’ intentions and not “significant contacts” should be the dispositive factor in
determining choice of law. See McPhee v. Gen. Elec. Int’l, Inc., 736 F.Supp.2d 676, 680 (S.D.N.Y. 2010) (explaining that it would be
“inappropriate to judge which state has the most significant contacts with this dispute and perhaps as a result of that analysis to disregard the
choice-of-law provision” when the chosen law satisfies the reasonable relationship standard) (internal quotation and citation omitted), aff’d, 426
F. App’x 33 (2d Cir. 2011). See also Int’l Minerals & Res., S.A. v. Pappas, 96 F.3d 586, 592 (2nd Cir.1996) (finding “sufficient contacts” to
validate application of the selected (English) law to contract formation issues based on England’s “status as the forum of choice together with the
activities of the seller’s London brokers”); Finucane v. Interior Constr. Corp.,264 A.D.2d 618, 620 (1st Dept. 1999) (holding that the location of a
party’s principal place of business was a sufficient basis to support enforcement of the contractual choice of law). But see American Home
Assurance Company v. Hapag Lloyd Contained Linie GmbH, 2004 WL 1616379 at *4 (S.D.N.Y. July 19, 2004, as amended August 4, 2004)
(fact that defendant corporation was formed under the laws of the jurisdiction selected in the choice of law provision, standing alone, did not
constitute sufficient contacts to validate the parties’ choice), aff’d on other grounds, 446 F.3d 313 (2nd Cir. 2006). There is some (but not
extensive) support in New York precedents for an approach similar to that adopted by Restatement (Second) of Conflicts of Laws § 187(1), under
which the reasonable relationship inquiry is less exacting or unnecessary when the issue under consideration is one on which, under the laws of
the interested jurisdictions, the parties had freedom to contract. Granite Ridge Energy, LLC v. Allianz Glob. Risk U.S. Ins. Co., 979 F.Supp.2d
385, 391 (S.D.N.Y. 2013) (“It is as though the law of the selected jurisdiction were incorporated into the agreement by reference”) (quoting
dictum from Freedman v. Chem. Const. Corp., 43 N.Y.2d 260, 265 (1977)).
303
If the Defaulting Party is an affiliate of a Covered Financial Company, termination rights based solely on insolvency or financial condition of
the affiliated Covered Financial Company could be limited by the OLA in certain circumstances. See Section IV.D.1(a).
57
744581026.3
Act of 2017, H.R. 1667, 115th Congress (2017). In a report on OLA and Bankruptcy Reform,304 the U.S.
Department of the Treasury has endorsed this approach and made specific recommendations of its own, including
that domestic regulators have standing in the bankruptcy proceeding to raise and be heard on issues, that courts have
discretion to grant standing to foreign regulators, and that a set of expert judges be designated in advance. The U.S.
Treasury report recommends that the OLA be retained but reformed, including by restricting the FDIC’s ability to
treat similarly situated creditors differently, providing for bankruptcy court adjudication of claims against the
receivership, clarifying the standard for commencing an OLA proceeding, enhancing the scope of judicial review,
and placing certain limitations on the use of the orderly liquidation fund.
U.S. prudential regulators have adopted regulations305 that require systemically important regulated
financial firms and certain subsidiaries to employ contractual provisions in their covered qualified financial
contracts (“covered QFCs”) to (i) cause counterparties to opt in to the temporary stay-and-transfer provisions of the
FDIA and the OLA and (ii) prevent counterparties, subject to certain creditor protection exceptions, from exercising
default rights related, directly or indirectly, to the entry into resolution of an affiliate of the regulated financial firm.
The regulations provide a safe harbor for contracts amended pursuant to the ISDA 2015 Universal Resolution Stay
Protocol, including certain annexes, or a new protocol that must be the same as the ISDA 2015 Universal Resolution
Stay Protocol except for certain changes specified in the final regulations.306 To allow market participants to comply
with the regulations, ISDA has developed the ISDA 2018 U.S. Resolution Stay Protocol.307
Courts continue to address attempts by creditors and assignees to overcome the effects of certain anti-
avoidance protections available under the U.S. Bankruptcy Code by bringing state law causes of action with
substantially similar effect as avoidance actions that the bankruptcy trustee is expressly barred from asserting. A
recent appellate court decision appears to have resolved this issue in the Second Circuit in favor of broad preemption
of such state law causes of action, at least in circumstances where fraudulent intent is not a premise of the action. It
remains to be seen to what extent courts in other federal judicial circuits will follow the Second Circuit’s approach
or else adopt more restrictive approaches to preemption that would allow some such state law causes of action to
proceed, and similar issues have been raised with respect to foreign law causes of action under Chapter 15. See
footnote 229.
XII.
BRIDGES
Each Bridge allows parties to an ISDA Master Agreement to agree that certain other master agreements
between them (“Bridged Agreements”) will upon the happening of certain specified events (“Bridging Events”) be
defaulted, or cross-defaulted, to each other and the ISDA Master Agreement. Each Bridge further provides that a
separate net termination amount will be calculated under and in accordance with the terms of each Bridged
Agreement with respect to all transactions thereunder. All net termination amounts will then be combined within
the calculation of Loss or Unpaid Amounts, as the case may be, under the ISDA Master Agreement, so as to produce
ultimately a single net termination amount with respect to the ISDA Master Agreement and all Bridged Agreements.
Subject to the foregoing and all qualifications in this memorandum, we believe that the simultaneous
termination and close out netting provisions of each Bridge should be enforceable to the extent described in this
304
Department of the Treasury, Orderly Liquidation Authority and Bankruptcy Reform, Report to the President of the United States (February 21,
2018).
305
Federal Reserve, Restrictions on Qualified Financial Contracts of Systemically Important U.S. Banking Organizations and the U.S. Operations
of Systemically Important Foreign Banking Organizations, 82 Fed. Reg. 42882 (September 12, 2017); Federal Deposit Insurance Corporation,
Restrictions on Qualified Financial Contracts of Certain FDIC-Supervised Institutions, 82 Fed. Reg. 50228 (Oct. 30, 2017); Office of the
Comptroller of the Currency, Mandatory Contractual Stay Requirements for Qualified Financial Contracts, 82 Fed. Reg. 56630 (Nov. 29, 2017).
The overview of these regulations provided in this section is not intended to cover all aspects that will be material to entities affected by the
regulations.
306
Certain differences in scope and creditor protections exist between these protocols and the requirements of the regulation that apply when the
protocol safe harbor is not utilized.
307
Grandfathering provisions may apply to qualified financial contracts entered into before January 1, 2019 provided that the covered entity and
its affiliates do not enter into or become party to a qualified financial contract with the counterparty or any of the counterparties' consolidated
affiliates after January 1, 2019.
58
744581026.3
memorandum with respect to the ISDA Master Agreements, and that each Bridge should be viewed as a master
agreement or master netting agreement, as facts may dictate.
XIII.
ADDENDUM– FEDERAL HOME LOAN BANKS
This addendum, as more particularly set forth below, confirms that the material conclusions reached in
Parts IV.B, IX and X of this memorandum of law concerning the exercise of termination and netting rights under an
ISDA Master Agreement would apply equally when one of the Parties to the ISDA Master Agreement is a Federal
Home Loan Bank, as if the Federal Home Loan Bank were an Insured Institution and references in this
memorandum to the FDIA and FDIC were, respectively, references to the conservatorship and receivership
provisions308 of the Housing and Economic Recovery Act of 2008 (“HERA”) and to the Federal Housing Finance
Agency (the “Agency”).
The conclusions of this addendum are subject to the assumptions and qualifications set out in this
memorandum, as supplemented and modified by the following. We assume that: (i) all Transactions carried out
under the ISDA Master Agreement are “swap agreements” of a type enumerated in 12 U.S.C. §
4617(d)(8)(D)(vi)(I);309 (ii) the written agreement requirements of 12 U.S.C. § 4617(b)(9)(B) are met;310 and (iii)
neither Party to the relevant ISDA Master Agreement will be an “entity-affiliated party” of the other Party as
defined in 12 U.S.C. § 4502(11).
We do not comment on the process for the appointment of the Agency as conservator or receiver or the
procedures by which it may exercise its rights as such. Reform of Federal housing finance continues to be an active
topic of legislative proposals and Administration study. It is entirely possible that new legislation could
significantly amend or replace entirely the conservatorship and receivership provisions of HERA. We note that the
OLA does not apply to a Federal Home Loan Bank.311
We observe, with regard to Section IV.B.6 of this memorandum, that a “walkaway” clause is defined for
purposes of HERA as “a provision in a qualified financial contract that, after calculation of a value of a party’s
position or an amount due to or from 1 of the parties in accordance with its terms upon termination, liquidation, or
acceleration of the qualified financial contract, either does not create a payment obligation of a party or extinguishes
a payment obligation of a party in whole or in part solely because of the status of such party as a nondefaulting
party.”312
We note also that the class of transferees to which the Agency may transfer qualified financial contracts
under HERA is significantly broader than under the FDIA. Under the FDIA, the transferee must be a non-bankrupt
financial institution (including a foreign financial institution if under applicable law the contractual rights of the
parties are enforceable to substantially the same extent as permitted under the FDIA), whereas the corresponding
provision under HERA merely refers to a transfer of all contracts to one “person.”313,314
308
12 U.S.C. § 4617.
309
12 U.S.C. § 4617(d)(8)(D)(vi)(I) lists the following as types of swap agreements: “any agreement, including the terms and conditions
incorporated by reference in any such agreement, which is an interest rate swap, option, future, or forward agreement, including a rate floor, rate
cap, rate collar, cross-currency rate swap, and basis swap; a spot, same day-tomorrow, tomorrow-next, forward, or other foreign exchange or
precious metals agreement; a currency swap, option, future, or forward agreement; an equity index or equity swap, option, future, or forward
agreement; a debt index or debt swap, option, future, or forward agreement; a total return, credit spread or credit swap, option, future, or forward
agreement; a commodity index or commodity swap, option, future, or forward agreement; or a weather swap, weather derivative, or weather
option[.]”
310
12 U.S.C. § 4617(b)(9)(B) provides: “No agreement that tends to diminish or defeat the interest of the Agency in any asset acquired by the
Agency as receiver under this section shall be valid against the Agency unless such agreement is in writing and executed by an authorized officer
or representative of the regulated entity.” The written agreement requirement under HERA does not include a contemporaneous execution
requirement, such as that under Section 13(e) of the FDIA.
311
See 12 U.S.C. § 5381(a)(11)(C) (excluding Federal Home Loan Banks from the definition of “financial company”).
312
12 U.S.C. § 4617(d)(8)(G)(ii).
313
Compare 12 U.S.C. § 1821(e)(9)(A)-(B) with 12 U.S.C. § 4617(d)(9). Potential transferees under HERA may include a limited-life regulated
entity, which the Agency, as receiver, may choose to organize under a temporary charter with certain powers and attributes of the Federal Home
59
744581026.3
We do not address the applicability of FDICIA to Federal Home Loan Banks in this memorandum. The
provisions of HERA and FDICIA addressing the interaction of the two statutes are not drafted identically to the
corresponding provisions addressing the interaction between FDICIA and the FDIA, and the effect, if any, of these
differences is not entirely clear.
This memorandum of law is rendered solely to ISDA for the benefit and use of its members. This
memorandum of law may not be relied upon by any other person or used, circulated, quoted or otherwise referred to
or relied upon for any other purpose without our prior written consent; provided that this memorandum may be
shared with ISDA’s advisors, ISDA’s member’s advisors and ISDA’s members’ supervisors and regulators
provided that they may not rely on this memorandum.
MAYER BROWN LLP
As of June 9, 2022
Loan Bank in receivership. 12 U.S.C. § 4617(i)(1) and (7). In certain circumstances, the Director of the Agency may authorize a limited-life
regulated entity to obtain credit or issue debt that is secured by a senior or equal lien on property that is subject to a prior lien, provided that there
is “adequate protection” of the interest of the affected lienholder. 12 U.S.C. § 4617(i)(11); 12 C.F.R. § 1237.11.
314
Another drafting dissimilarity between HERA and the FDIA exists regarding transfers but appears to be without consequence. 12 U.S.C. §
4617(i)(7)—which authorizes the Agency, as receiver, to transfer the assets and liabilities of a regulated entity, such as a Federal Home Loan
Bank, to a newly established “limited-life regulated entity”— refers to transfers from a regulated entity “in default, or in danger of default”.
However, the prohibition against selective transfers in 12 U.S.C. § 4617(d)(9) refers only to a “regulated entity in default” and thus reads as being
potentially narrower than the authority to transfer under 12 U.S.C. § 4617(i)(7). This divergence in language appears to be without consequence,
however, because organization of a limited-life regulated entity, under 12 U.S.C. § 4617(i)(1), presupposes receivership, which results in
“default” under the definition of such term in 12 U.S.C. § 4502(8).
60
744581026.3
APPENDIX A
APPENDIX A
AUGUST 2015
CERTAIN TRANSACTIONS UNDER

THE ISDA MASTER AGREEMENTS
Basis Swap. A transaction in which one party pays periodic amounts of a given currency based on a
floating rate and the other party pays periodic amounts of the same currency based on another floating
rate, with both rates reset periodically; all calculations are based on a notional amount of the given
currency.
Bond Forward. A transaction in which one party agrees to pay an agreed price for a specified amount of a
bond of an issuer or a basket of bonds of several issuers at a future date and the other party agrees to pay a
price for the same amount of the same bond to be set on a specified date in the future. The payment
calculation is based on the amount of the bond and can be physically-settled (where delivery occurs in
exchange for payment) or cash-settled (where settlement occurs based on the difference between the
agreed forward price and the prevailing market price at the time of settlement).
Bond Option. A transaction in which one party grants to the other party (in consideration for a premium
payment) the right, but not the obligation, to purchase (in the case of a call) or sell (in the case of a put) a
specified amount of a bond of an issuer, such as Kingdom of Sweden or Unilever N.V., at a specified
strike price. The bond option can be settled by physical delivery of the bonds in exchange for the strike
price or may be cash settled based on the difference between the market price of the bonds on the exercise
date and the strike price.
Bullion Option. A transaction in which one party grants to the other party (in consideration for a
premium payment) the right, but not the obligation, to purchase (in the case of a call) or sell (in the case
of a put) a specified number of Ounces of Bullion at a specified strike price. The option may be settled by
physical delivery of Bullion in exchange for the strike price or may be cash settled based on the difference
between the market price of Bullion on the exercise date and the strike price.
Bullion Swap. A transaction in which one party pays periodic amounts of a given currency based on a
fixed price or a fixed rate and the other party pays periodic amounts of the same currency or a different
currency calculated by reference to a Bullion reference price (for example, Gold-COMEX on the
COMEX Division of the New York Mercantile Exchange) or another method specified by the parties.
Bullion swaps include cap, collar or floor transactions in respect of Bullion.
Bullion Trade. A transaction in which one party agrees to buy from or sell to the other party a specified
number of Ounces of Bullion at a specified price for settlement either on a “spot” or two-day basis or on a
specified future date. A Bullion Trade may be settled by physical delivery of Bullion in exchange for a
specified price or may be cash settled based on the difference between the market price of Bullion on the
settlement date and the specified price.
For purposes of Bullion Trades, Bullion Options and Bullion Swaps, “Bullion” means gold, silver,
platinum or palladium and “Ounce” means, in the case of gold, a fine troy ounce, and in the case of silver,
platinum and palladium, a troy ounce (or in the case of reference prices not expressed in Ounces, the relevant
Units of gold, silver, platinum or palladium).
A-1
744581026.3
Buy/Sell-Back Transaction. A transaction in which one party purchases a security (in consideration for a
cash payment) and agrees to sell back that security (or in some cases an equivalent security) to the other
party (in consideration for the original cash payment plus a premium).
Cap Transaction. A transaction in which one party pays a single or periodic fixed amount and the other
party pays periodic amounts of the same currency based on the excess, if any, of a specified floating rate
(in the case of an interest rate cap), rate or index (in the case of an economic statistic cap) or commodity
price (in the case of a commodity cap) in each case that is reset periodically over a specified per annum
rate (in the case of an interest rate cap), rate or index (in the case of an economic statistic cap) or
commodity price (in the case of a commodity cap).
Collar Transaction. A collar is a combination of a cap and a floor where one party is the floating rate,
floating index or floating commodity price payer on the cap and the other party is the floating rate,
floating index or floating commodity price payer on the floor.
Commodity Forward. A transaction in which one party agrees to purchase a specified quantity of a
commodity at a future date at an agreed price, and the other party agrees to pay a price315 for the same
quantity to be set on a specified date in the future. A Commodity Forward may be settled by the physical
delivery of the commodity in exchange for the specified price or may be cash settled based on the
difference between the agreed forward price and the prevailing market price at the time of settlement.
Commodity Index Transaction. A transaction, structured in the form of a swap, cap, collar, floor, option
or some combination thereof, between two parties in which the underlying value of the transaction is
based on a rate or index based on the price of one or more commodities.
Commodity Option. A transaction in which one party grants to the other party (in consideration for a
of a put) a specified quantity of a commodity at a specified strike price. The option can be settled either
by physically delivering the quantity of the commodity in exchange for the strike price or by cash settling
the option, in which case the seller of the option would pay to the buyer the difference between the market
price of that quantity of the commodity on the exercise date and the strike price.
Commodity Swap. A transaction in which one party pays periodic amounts of a given currency based on
a fixed price and the other party pays periodic amounts of the same currency based on the price of a
commodity, such as natural gas or gold, or a futures contract on a commodity (e.g., West Texas
Intermediate Light Sweet Crude Oil on the New York Mercantile Exchange); all calculations are based on
a notional quantity of the commodity.
Contingent Credit Default Swap. A Credit Default Swap Transaction under which the calculation
amounts applicable to one or both parties may vary over time by reference to the mark-to-market value of a
hypothetical swap transaction.
Credit Default Swap Option. A transaction in which one party grants to the other party (in consideration
for a premium payment) the right, but not the obligation, to enter into a Credit Default Swap.
Credit Default Swap. A transaction in which one party pays either a single fixed amount or periodic fixed
amounts or floating amounts determined by reference to a specified notional amount, and the other party
(the credit protection seller) pays either a fixed amount or an amount determined by reference to the value
315
We assume that this price (i.e., the amount that will be paid in lieu of delivery) is the prevailing market price of the commodity at the time of
settlement.
A-2
744581026.3
of one or more loans, debt securities or other financial instruments (each a “Reference Obligation”)
issued, guaranteed or otherwise entered into by a third party (the “Reference Entity”) upon the occurrence
of one or more specified credit events with respect to the Reference Entity (for example, bankruptcy or
payment default). The amount payable by the credit protection seller is typically determined based upon
the market value of one or more debt securities or other debt instruments issued, guaranteed or otherwise
entered into by the Reference Entity. A Credit Default Swap may also be physically settled by payment
of a specified fixed amount by one party against delivery of specified obligations (“Deliverable
Obligations”) by the other party. A Credit Default Swap may also refer to a “basket” (typically ten or
less) or a “portfolio” (eleven or more) of Reference Entities or may be an index transaction consisting of a
series of component Credit Default Swaps.
Credit Derivative Transaction on Asset-Backed Securities. A Credit Default Swap for which the
Reference Obligation is a cash or synthetic asset-backed security. Such a transaction may, but need not
necessarily, include “pay as you go” settlements, meaning that the credit protection seller makes
payments relating to interest shortfalls, principal shortfalls and write-downs arising on the Reference
Obligation and the credit protection buyer makes additional fixed payments of reimbursements of such
shortfalls or write-downs.
Credit Spread Transaction. A transaction involving either a forward or an option where the value of the
transaction is calculated based on the credit spread implicit in the price of the underlying instrument.
Cross Currency Rate Swap. A transaction in which one party pays periodic amounts in one currency
based on a specified fixed rate (or a floating rate that is reset periodically) and the other party pays
periodic amounts in another currency based on a floating rate that is reset periodically. All calculations
are determined on predetermined notional amounts of the two currencies; often such swaps will involve
initial and or final exchanges of amounts corresponding to the notional amounts.
Currency Option. A transaction in which one party grants to the other party (in consideration for a
of a put) a specified amount of a given currency at a specified strike price.
Currency Swap. A transaction in which one party pays fixed periodic amounts of one currency and the
other party pays fixed periodic amounts of another currency. Payments are calculated on a notional
amount. Such swaps may involve initial and or final payments that correspond to the notional amount.
Economic Statistic Transaction. A transaction in which one party pays an amount or periodic amounts of
a given currency by reference to interest rates or other factors and the other party pays or may pay an
amount or periodic amounts of a currency based on a specified rate or index pertaining to statistical data
on economic conditions, which may include economic growth, retail sales, inflation, consumer prices,
consumer sentiment, unemployment and housing.
Emissions Allowance Transaction. A transaction in which one party agrees to buy from or sell to the
other party a specified quantity of emissions allowances or reductions at a specified price for settlement
either on a "spot" basis or on a specified future date. An Emissions Allowance Transaction may also
constitute a swap of emissions allowances or reductions or an option whereby one party grants to the
other party (in consideration for a premium payment) the right, but not the obligation, to receive a
payment equal to the amount by which the specified quantity of emissions allowances or reductions
exceeds or is less than a specified strike. An Emissions Allowance Transaction may be physically settled
by delivery of emissions allowances or reductions in exchange for a specified price, differing vintage
years or differing emissions products or may be cash settled based on the difference between the market
price of emissions allowances or reductions on the settlement date and the specified price.
A-3
744581026.3
Equity Forward. A transaction in which one party agrees to pay an agreed price for a specified quantity
of shares of an issuer, a basket of shares of several issuers or an equity index at a future date and the other
party agrees to pay a price for the same quantity and shares to be set on a specified date in the future. The
payment calculation is based on the number of shares and can be physically-settled (where delivery
occurs in exchange for payment) or cash-settled (where settlement occurs based on the difference between
the agreed forward price and the prevailing market price at the time of settlement).
Equity Index Option. A transaction in which one party grants to the other party (in consideration for a
premium payment) the right, but not the obligation, to receive a payment equal to the amount by which an
equity index either exceeds (in the case of a call) or is less than (in the case of a put) a specified strike
price.
Equity Option. A transaction in which one party grants to the other party (in consideration for a premium
payment) the right, but not the obligation, to purchase (in the case of a call) or sell (in the case of a put) a
specified number of shares of an issuer or a basket of shares of several issuers at a specified strike price.
The share option may be settled by physical delivery of the shares in exchange for the strike price or may
be cash settled based on the difference between the market price of the shares on the exercise date and the
strike price.
Equity Swap. A transaction in which one party pays periodic amounts of a given currency based on a
fixed price or a fixed or floating rate and the other party pays periodic amounts of the same currency or a
different currency based on the performance of a share of an issuer, a basket of shares of several issuers or
an equity index, such as the Standard and Poor’s 500 Index.
Floor Transaction. A transaction in which one party pays a single or periodic amount and the other party
pays periodic amounts of the same currency based on the excess, if any, of a specified per annum rate (in
the case of an interest rate floor), rate or index level (in the case of an economic statistic floor) or
commodity price (in the case of a commodity floor) over a specified floating rate (in the case of an
interest rate floor), rate or index level (in the case of an economic statistic floor) or commodity price (in
the case of a commodity floor).
Foreign Exchange Transaction. A deliverable or non-deliverable transaction providing for the purchase
of one currency with another currency providing for settlement either on a "spot" or two-day basis or a
specified future date.
Forward Rate Transaction. A transaction in which one party agrees to pay a fixed rate for a defined
period and the other party agrees to pay a rate to be set on a specified date in the future. The payment
calculation is based on a notional amount and is settled based, among other things, on the difference
between the agreed forward rate and the prevailing market rate at the time of settlement.
Freight Transaction. A transaction in which one party pays an amount or periodic amounts of a given
currency based on a fixed price and the other party pays an amount or periodic amounts of the same
currency based on the price of chartering a ship to transport wet or dry freight from one port to another;
all calculations are based either on a notional quantity of freight or, in the case of time charter
transactions, on a notional number of days.
Fund Option Transaction: A transaction in which one party grants to the other party (for an agreed
payment or other consideration) the right, but not the obligation, to receive a payment based on the
redemption value of a specified amount of an interest issued to or held by an investor in a fund, pooled
investment vehicle or any other interest identified as such in the relevant Confirmation (a “Fund
Interest”), whether i) a single class of Fund Interest of a Single Reference Fund or ii) a basket of Fund
A-4
744581026.3
Interests in relation to a specified strike price. The Fund Option Transactions will generally be cash
settled (where settlement occurs based on the excess of such redemption value over such specified strike
price (in the case of a call) or the excess of such specified strike price over such redemption value (in the
case of a put) as measured on the valuation date or dates relating to the exercise date).
Fund Forward Transaction: A transaction in which one party agrees to pay an agreed price for the
redemption value of a specified amount of i) a single class of Fund Interest of a Single Reference Fund or
ii) a basket of Fund Interests at a future date and the other party agrees to pay a price for the redemption
value of the same amount of the same Fund Interests to be set on a specified date in the future. The
payment calculation is based on the amount of the redemption value relating to such Fund Interest and
generally cash-settled (where settlement occurs based on the difference between the agreed forward price
and the redemption value measured as of the applicable valuation date or dates).
Fund Swap Transaction: A transaction a transaction in which one party pays periodic amounts of a given
currency based on a fixed price or a fixed rate and the other party pays periodic amounts of the same
currency based on the redemption value of i) a single class of Fund Interest of a Single Reference Fund
or ii) a basket of Fund Interests.
Interest Rate Option. A transaction in which one party grants to the other party (in consideration for a
premium payment) the right, but not the obligation, to receive a payment equal to the amount by which an
interest rate either exceeds (in the case of a call option) or is less than (in the case of a put option) a
specified strike rate.
Interest Rate Swap. A transaction in which one party pays periodic amounts of a given currency based on
a specified fixed rate and the other party pays periodic amounts of the same currency based on a specified
floating rate that is reset periodically, such as the London inter-bank offered rate; all calculations are
based on a notional amount of the given currency.
Longevity/Mortality Transaction. (a) A transaction employing a derivative instrument, such as a forward,

a swap or an option, that is valued according to expected variation in a reference index of observed
demographic trends, as exhibited by a specified population, relating to aging, morbidity, and
mortality/longevity, or (b) A transaction that references the payment profile underlying a specific
portfolio of longevity- or mortality- contingent obligations, e.g. a pool of pension liabilities or life
insurance policies (either the actual claims payments or a synthetic basket referencing the profile of
claims payments).
Physical Commodity Transaction. A transaction which provides for the purchase of an amount of a
commodity, such as oil including oil products, coal, electricity or gas, at a fixed or floating price for
actual delivery on one or more dates.
Property Index Derivative Transaction. A transaction, often structured in the form of a forward, option or
total return swap, between two parties in which the underlying value of the transaction is based on a rate
or index based on residential or commercial property prices for a specified local, regional or national area.
Repurchase Transaction. A transaction in which one party agrees to sell securities to the other party and
such party has the right to repurchase those securities (or in some cases equivalent securities) from such
other party at a future date.
Securities Lending Transaction. A transaction in which one party transfers securities to a party acting as
the borrower in exchange for a payment or a series of payments from the borrower and the borrower’s
obligation to replace the securities at a defined date with identical securities.
A-5
744581026.3
Swap Deliverable Contingent Credit Default Swap. A Contingent Credit Default Swap under which one
of the Deliverable Obligations is a claim against the Reference Entity under an ISDA Master Agreement
with respect to which an Early Termination Date (as defined therein) has occurred.
Swap Option. A transaction in which one party grants to the other party the right (in consideration for a
premium payment), but not the obligation, to enter into a swap with certain specified terms. In some
cases the swap option may be settled with a cash payment equal to the market value of the underlying
swap at the time of the exercise.
Total Return Swap. A transaction in which one party pays either a single amount or periodic amounts
based on the total return on one or more loans, debt securities or other financial instruments (each a
“Reference Obligation”) issued, guaranteed or otherwise entered into by a third party (the “Reference
Entity”), calculated by reference to interest, dividend and fee payments and any appreciation in the
market value of each Reference Obligation, and the other party pays either a single amount or periodic
amounts determined by reference to a specified notional amount and any depreciation in the market value
of each Reference Obligation.
A total return swap may (but need not) provide for acceleration of its termination date upon the
occurrence of one or more specified events with respect to a Reference Entity or a Reference Obligation
with a termination payment made by one party to the other calculated by reference to the value of the
Reference Obligation.
Weather Index Transaction. A transaction, structured in the form of a swap, cap, collar, floor, option or
some combination thereof, between two parties in which the underlying value of the transaction is based
on a rate or index pertaining to weather conditions, which may include measurements of heating, cooling,
precipitation and wind.
A-6
744581026.3
APPENDIX B
APPENDIX B
SEPTEMBER 2009
CERTAIN COUNTERPARTY TYPES1
Bank/Credit Institution. A legal entity, which may be organized as a corporation, partnership or in some other form,
that conducts commercial banking activities, that is, whose core business typically involves (a) taking deposits from
private individuals and/or corporate entities and (b) making loans to private individual and/or corporate borrowers.
This type of entity is sometimes referred to as a “commercial bank” or, if its business also includes investment
banking and trading activities, a “universal bank”. (If the entity only conducts investment banking and trading
activities, then it falls within the “Investment Firm/Broker Dealer” category below.) This type of entity is referred
to as a “credit institution” in European Community (EC) legislation. This category may include specialised types of
bank, such as a mortgage savings bank (provided that the relevant entity accepts deposits and makes loans), or such
an entity may be considered in the local jurisdiction to constitute a separate category of legal entity (as in the case of
a building society in the United Kingdom (UK)).
Central Bank. A legal entity that performs the function of a central bank for a Sovereign or for an area of monetary
union (as in the case of the European Central Bank in respect of the euro zone).
Corporation. A legal entity that is organized as a corporation or company rather than a partnership, is engaged in
industrial and/or commercial activities and does not fall within one of the other categories in this Appendix B.
Hedge Fund/Proprietary Trader. A legal entity, which may be organized as a corporation, partnership or in some
other legal form, the principal business of which is to deal in and/or manage securities and/or other financial
instruments and/or otherwise to carry on an investment business predominantly or exclusively as principal for its
own account.
Insurance Company. A legal entity, which may be organised as a corporation, partnership or in some other legal
form (for example, a friendly society or industrial & provident society in the UK), that is licensed to carry on
insurance business, and is typically subject to a special regulatory regime and a special insolvency regime in order to
protect the interests of policyholders.
International Organization. An organization of Sovereigns established by treaty entered into between the
Sovereigns, including the International Bank for Reconstruction and Development (the World Bank), regional
development banks and similar organizations established by treaty.
Investment Firm/Broker Dealer. A legal entity, which may be organized as a corporation, partnership or in some
other form, that does not conduct commercial banking activities but deals in and/or manages securities and/or other
financial instruments as an agent for third parties. It may also conduct such activities as principal (but if it does so
exclusively as principal, then it most likely falls within the “Hedge Fund/Proprietary Trader” category above.) Its
business normally includes holding securities and/or other financial instruments for third parties and operating
related cash accounts. This type of entity is referred to as a “broker-dealer” in US legislation and as an “investment
firm” in EC legislation.
Investment Fund. A legal entity or an arrangement without legal personality (for example, a common law trust)
established to provide investors with a share in profits or income arising from property acquired, held, managed or
disposed of by the manager(s) of the legal entity or arrangement or a right to payment determined by reference to
such profits or income. This type of entity or arrangement is referred to as a “collective investment scheme” in EC
legislation. It may be regulated or unregulated. It is typically administered by one or more persons (who may be
private individuals and/or corporate entities) who have various rights and obligations governed by general law
and/or, typically in the case of regulated Investment Funds, financial services legislation. Where the arrangement
does not have separate legal personality, one or more representatives of the Investment Fund (for example, a trustee
1
In these definitions, the term “legal entity” means an entity with legal personality other than a private individual.
B-1
744581026.3
of a unit trust) contract on behalf of the Investment Fund, are owed the rights and owe the obligations provided for
in the contract and are entitled to be indemnified out of the assets comprised in the arrangement.
Local Authority. A legal entity established to administer the functions of local government in a particular region
within a Sovereign or State of a Federal Sovereign, for example, a city, county, borough or similar area.
Partnership. A legal entity or form of arrangement without legal personality that is (a) organised as a general,
limited or some other form of partnership and (b) does not fall within one of the other categories in this Appendix B.
If it does not have legal personality, it may nonetheless be treated as though it were a legal person for certain
purposes (for example, for insolvency purposes) and not for other purposes (for example, tax or personal liability).
Pension Fund. A legal entity or an arrangement without legal personality (for example, a common law trust)
established to provide pension benefits to a specific class of beneficiaries, normally sponsored by an employer or
group of employers. It is typically administered by one or more persons (who may be private individuals and/or
corporate entities) who have various rights and obligations governed by pensions legislation. Where the
arrangement does not have separate legal personality, one or more representatives of the Pension Fund (for example,
a trustee of a pension scheme in the form of a common law trust) contract on behalf of the Pension Fund and are
owed the rights and owe the obligations provided for in the contract and are entitled to be indemnified out of the
assets comprised in the arrangement.
Sovereign. A sovereign nation state recognized internationally as such, typically acting through a direct agency or
instrumentality of the central government without separate legal personality, for example, the ministry of finance,
treasury or national debt office. This category does not include a State of a Federal Sovereign or other political
sub-division of a sovereign nation state if the sub-division has separate legal personality (for example, a Local
Authority) and it does not include any legal entity owned by a sovereign nation state (see “Sovereign-owned
Entity”).
Sovereign Wealth Fund. A legal entity, often created by a special statute and normally wholly owned by a
Sovereign, established to manage assets of or on behalf of the Sovereign, which may or may not hold those assets in
its own name. Such an entity is often referred to as an “investment authority”. For certain Sovereigns, this function
is performed by the Central Bank, however for purposes of this Appendix B the term “Sovereign Wealth Fund”
excludes a Central Bank.
Sovereign-Owned Entity. A legal entity wholly or majority-owned by a Sovereign, other than a Central Bank, or by
a State of a Federal Sovereign, which may or may not benefit from any immunity enjoyed by the Sovereign or State
of a Federal Sovereign from legal proceedings or execution against its assets. This category may include entities
active entirely in the private sector without any specific public duties or public sector mission as well as statutory
bodies with public duties (for example, a statutory body charged with regulatory responsibility over a sector of the
domestic economy). This category does not include local governmental authorities (see “Local Authority”).
State of a Federal Sovereign. The principal political sub-division of a federal Sovereign, such as Australia (for
example, Queensland), Canada (for example, Ontario), Germany (for example, Nordrhein-Westfalen) or the United
States of America (for example, Pennsylvania). This category does not include a Local Authority.
B-2
744581026.3
APPENDIX C
APPENDIX C
AUGUST 2020
RECOMMENDED AMENDMENTS TO DOCUMENTS
This Appendix aims to assist firms in the consumption and processing of information. We recommend that readers
review all relevant sections of this memorandum and satisfy themselves as to the conclusions reached prior to
making any determinations and not rely solely upon the information contained in this Appendix.
Other than ensuring that the terms of the documents are consistent with the assumptions of this memorandum, there
are no amendments to the ISDA Master Agreements that we would recommend from the perspective of the matters of
United States federal and New York law that are addressed in this memorandum.
C-1
744581026.3
INDEX
1992 ISDA Master Agreement ........................................... 5 Foreign-Law ISDA Master Agreement ............................ 10
1992 ISDA Master Agreements .......................................... 5 Freddie Mac ....................................................................... 4
2002 ISDA Master Agreement ........................................... 6 Ginnie Mae ......................................................................... 4
2002 ISDA Master Agreement (French law) ......................6 Global Net Payment Entitlement ...................................... 52
2002 ISDA Master Agreement (Irish law) ..........................6 Global Net Payment Obligation ....................................... 52
2002 ISDA Master Agreement (Original)...........................5 IBA................................................................................... 14
Bank F .............................................................................. 10 Ineligible Transactions ..................................................... 40
Board ................................................................................ 25 Insured Institutions ............................................................. 3
Branch/Agency Net Payment Entitlement ........................ 52 ISDA .................................................................................. 5
Branch/Agency Net Payment Obligation .......................... 52 ISDA Master Agreement .................................................... 6
Branches ............................................................................. 3 ISDA Master Agreements .................................................. 6
Bridge ................................................................................. 5 NBA ................................................................................. 14
Bridged Agreements ......................................................... 58 New York Branch ............................................................ 10
CEA .................................................................................. 37 New York Branches ........................................................... 4
close-out netting.................................................................. 7 New York-law ISDA Master Agreement ......................... 56
Code.................................................................................... 1 Non-Enumerated Transactions ......................................... 13
Code Entities....................................................................... 2 Non-Netting Branches ...................................................... 12
Confirmation ....................................................................... 6 Non-Netting Jurisdictions................................................. 12
Country H ......................................................................... 10 NYBL ................................................................................. 1
Covered Financial Company...............................................3 OCC ................................................................................. 14
Cross Border Agreement .................................................... 5 Single Jurisdiction Agreement ........................................... 5
Eligible Transactions ........................................................ 37 Superintendent.................................................................. 25
English-law ISDA Master Agreement .............................. 10 Transaction ......................................................................... 1
FDIA ................................................................................... 1 U.S. Bank ......................................................................... 10
FDIC Policy Statement ....................................................... 9 U.S. Banking Institutions ................................................... 3
FDICIA ............................................................................... 1 U.S. Party ........................................................................... 1
Federal Branch .................................................................. 10 Uninsured N.Y. Institutions................................................ 3
Federal Branches ................................................................ 4
Index-1
744581026.3

US Netting Opinion - 2022

Uploaded by

Copyright:

Available Formats

US Netting Opinion - 2022

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

US Netting Opinion - 2022

Uploaded by

Copyright:

Available Formats

MEMORANDUM FOR THE INTERNATIONAL SWAPS AND DERIVATIVES ASSOCIATION, INC.

Enforceability of the Termination,

I. BACKGROUND AND ASSUMPTIONS ............................................................................................. 5

II. QUESTIONS PRESENTED ................................................................................................................ 11

III. SUMMARY OF CONCLUSIONS ...................................................................................................... 12

6. No Walkaway Clause ................................................................................................ 25

VI. NON-ENUMERATED TRANSACTIONS AND MASTER NETTING AGREEMENTS

(b) Non-Enumerated Transactions as “forward contracts”................................ 39

VII. TERMINATION CURRENCY ........................................................................................................... 47

VIII. MULTIBRANCH ISSUES .................................................................................................................. 48

(a) Insolvency Proceeding for a U.S. Bank ....................................................... 54

IX. APPLICABILITY OF CONCLUSIONS REGARDING NEW YORK-LAW ISDA

X. ENFORCEABILITY OF TERMINATION, CLOSE-OUT NETTING AND

XI. PENDING DEVELOPMENTS ........................................................................................................... 57

XII. BRIDGES .............................................................................................................................................. 58

XIII. ADDENDUM– FEDERAL HOME LOAN BANKS ......................................................................... 59

APPENDIX B: CERTAIN COUNTERPARTY TYPES..................................................................................... B-1

APPENDIX C. RECOMMENDED AMENDMENTS TO DOCUMENTS ........................................................ C-1

PRIVATELY NEGOTIATED DERIVATIVES TRANSACTIONS:

BACKGROUND AND ASSUMPTIONS

For purposes of this memorandum, we have made the following assumptions:

This memorandum of law addresses the following questions:

“SWAP AGREEMENT” UNDER THE CODE,

(b) Definitions. The Code provides:

(ii) any agreement or transaction that is similar to any other agreement or

(iii) any combination of agreements or transactions referred to in this subparagraph;

(iv) any option to enter into an agreement or transaction referred to in this

(v) a master agreement that provides for an agreement or transaction referred to in

(i) exercise any contractual right to terminate, liquidate or accelerate a

(ii) exercise any rights under any security agreement or arrangement or

(ii) a nonbank financial company supervised by the Board of Governors of the

(iv) any subsidiary (other than an insured depository institution or an insurance

(i) exercise any right to cause the termination, liquidation or acceleration of a

(ii) exercise any rights under any security agreement or arrangement or

NON-ENUMERATED TRANSACTIONS AND MASTER NETTING AGREEMENTS UNDER THE CODE,

1. Introduction. Derivatives market participants increasingly are documenting a wider variety of

(iv) any margin loan;

(viii) any combination of the agreements or transactions referred to in this subparagraph;

(D) a master agreement that provides for an agreement or transaction referred to in

4. No Selective Transfer or Repudiation. In any transfer of assets of an insolvent institution, the

APPLICABILITY OF CONCLUSIONS REGARDING NEW YORK-LAW ISDA MASTER AGREEMENT

ENFORCEABILITY OF TERMINATION, CLOSE-OUT NETTING AND MULTIBRANCH PROVISIONS

ADDENDUM– FEDERAL HOME LOAN BANKS

MAYER BROWN LLP

CERTAIN TRANSACTIONS UNDER

Longevity/Mortality Transaction. (a) A transaction employing a derivative instrument, such as a forward,

CERTAIN COUNTERPARTY TYPES1

RECOMMENDED AMENDMENTS TO DOCUMENTS

You might also like