New Termination and Liquidation Regime for Certain Swap Counterparties Under Dodd-Frank
On January 20, 2011, the CFTC proposed rules requiring swap dealers and major swap participants to include certain consents and confirmations with respect to the new orderly liquidation authority under Title II of the Dodd-Frank Act (the "Act") and the existing resolution process of insured depository institutions under the Federal Deposit Insurance Act ("FDIA"). The new resolution process under Title II provides for an orderly liquidation under a Federal Deposit Insurance Corporation ("FDIC") administered receivership of certain non-bank financial companies whose failure could adversely affect the financial stability of the United States. As further discussed below, under the new Title II liquidation authority, counterparties' swap agreements will be subject to a temporary stay in order to permit the FDIC to transfer the swaps and other assets of an insolvent financial company to a third party. The CFTC's proposed rules require parties to make certain acknowledgements and consents with respect to such an FDIC-administered receivership and puts parties on notice of the potential effect that the new liquidation authority may have on counterparties' uncleared, bilateral trades. The proposed regulation does not apply to swaps cleared by a derivatives clearing organization.
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