Letter to Senator Bennett, Representatives Oxley, Shelby, Sarbanes and Frank Regarding Netting Provisions in S. 2141
March 24, 2006
The Honorable Michael Oxley
House Committee on Financial Services
U.S. House of Representatives
2308 Rayburn House Office Building
Washington, DC 20515
Dear Chairman Oxley:
On behalf of the Credit Union National Association (CUNA) and the nation's 87 million credit union members, I would like to thank you for addressing the matter of amending extensive qualified financial contracts, or the netting provisions in S. 2141.
As you know, this measure would further amend the changes that Congress made to Federal Deposit Insurance Act (FDIA), the Federal Credit Union Act (FCUA), as well as the Bankruptcy Code in April of 2005.
The current version of the bill includes some parallel amendments to the FCUA, but omits some appropriate and necessary parallel amendments. Therefore, I ask that you amend S. 2141 with the attached suggested language.
The netting provisions provide for the orderly unwinding of certain financial contracts when one party to the transaction becomes insolvent. The credit union movement would be placed at a significant disadvantage if netting provisions are fully extended to banks and securities firms, and not to credit unions.
Should you have any further questions, or require additional information, please do not hesitate to contact me.
Once again, thank you for your consideration.
Daniel A. Mica
President & CEO
Suggested changes to S. 2141
SECTION 1. TREATMENT OF CERTAIN AGREEMENTS BY CONSERVATORS OR RECEIVERS OF DEPOSITORY INSTITUTIONS.
Paragraph (b) amends the FDIA's "Definition of Forward Contract." There is a parallel definition in the FCUA that should also be amended. Accordingly, paragraph (b) should be subdivided into subparagraphs (b)(1) and (b)(2). Subparagraph (b)(1) should contain all the current text of paragraph (b) and be titled as "FDIC-insured depository institutions." A new subparagraph (b)(2) should be added to read as follows:
(2) Insured credit unions. Section 207(c)(8)(D)(iv)(I) of the Federal Credit Union Act (12 U.S.C. 1787(c)(8)(D)(iv)(I)) is amended by striking "transaction, reverse repurchase transaction" and inserting "or reverse repurchase transaction (whether or not such repurchase or reverse repurchase transaction is a 'repurchase agreement', as defined in clause (v))".
SECTION 2. CLARIFYING AMENDMENTS RELATING TO DEFINITION OF PERSON.
This section of the bill adds a new definition of "Person" to both the FDIA and FCUA. The current bill text attempts to add this to the FCUA at Section 207(c)(8)(D)(vii). Subparagraph (vii) already exists in the FCUA, so the definition of Person should be added to the FCUA as a new subparagraph (ix).
SECTION 5. WALKAWAY CLAUSES.
This section amends the walkaway clauses in the FDIA. There are parallel clauses in the FCUA which should also be amended. Accordingly, Section 5 should be subdivided into paragraphs (a) and (b). Paragraph (a) should contain all the current text of Section 5 and be titled "FDIC-insured depository institutions." A new paragraph (b) should be added to read as follows:
(b) Insured credit unions. Section 207(c)(8)(G) of the Federal Credit Union Act (12 U.S.C. 1787(c)(8) (G)) is amended to read as follows:
"(G) Walkaway clauses not effective.
"(i) In general. Notwithstanding the provisions of subparagraphs (A) and (E), and sections 403 and 404 of the Federal Deposit Insurance Corporation Improvement Act of 1991, no walkaway clause shall be enforceable in a qualified financial contract of an insured credit union in default, provided that any payment or delivery obligations otherwise due from a party pursuant to the qualified financial contract shall be suspended from the time that the conservator or liquidating agent is appointed until the earlier of--
"(I) the time that such party receives notice that such contract has been transferred pursuant to subparagraph (A); or
"(II) 5:00 p.m. (eastern time) on the business day following the date of the appointment of the conservator or liquidating agent.
"(ii) Walkaway clause defined. For purposes of this subparagraph, the term 'walkaway clause' means 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 insured depository institution's insolvency or the appointment of or the exercise of rights or powers by a conservator or liquidating agent, 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.".