FDIC Gets New Powers Over Derivatives

The Federal Deposit Insurance Corp. can move a derivative contract from a failing bank to another financial institution under the new bankruptcy law that went into effect Oct. 17.Title IX of the bankruptcy law also allows financial netting of derivatives and other financial contracts when a bank, securities firm, or other company fails, according to a commentary by the FDIC. Federal regulators proposed these changes in the wake of the failure of a huge hedge fund in 1998. But congressional supporters of consumer bankruptcy reform kept the regulators' proposal tied to the bankruptcy bill that was signed into law by the president on April 20. "Title IX updates, clarifies, and strengthens the existing laws that determine what happens to financial contracts when a market participant fails," the FDIC says. The FDIC also comments that it will take time to gauge the impact of the new consumer bankruptcy regime. "What is safe to say is that many of these provisions make bankruptcy less attractive for consumers and that the interpretation of the new law will engage the courts for some time to come," the FDIC said.