The U.S. Department of the Treasury ("Treasury") published a report pursuant to President Donald J. Trump's memorandum directing Treasury to evaluate the Orderly Liquidation Authority ("OLA") and propose reforms. The OLA is a mechanism adopted by Congress (pursuant to Dodd-Frank Title II) for resolving large, complex financial institutions where resolution through bankruptcy would pose unacceptable systemic risks to the U.S. economy. Treasury made a number of recommendations for (i) adopting a new specialized chapter of the bankruptcy code to reduce the likelihood of needing to resort to OLA and (ii) reforming the OLA resolution process.

Treasury recommended the following reforms under the Bankruptcy Code:

  • Adopt a new "Chapter 14," specifically for resolving large financial institutions using powers to facilitate a "single point of entry" solution following a two-entity recapitalization model. On the filing of a holding company for bankruptcy under the new Chapter, assets transferred to a bridge company would include the ownership interests of operating subsidiaries. New Chapter 14 provides for a temporary stay on exercise of the termination rights of counterparties to derivatives and other qualified financial contracts ("QFCs");
  • Provide standing to relevant U.S. regulators to raise issues (and possibly to put an entity into an involuntary bankruptcy) and allow the Bankruptcy Court to grant standing to foreign regulators where relevant;
  • Grant deference to the Federal Reserve determination as to the financial stability implications of a transfer to a bridge company;
  • Cooperate with foreign authorities to improve confidence in the feasibility of the Chapter 14 process;
  • Allow the Chief Justice of the United States to designate in advance specialist bankruptcy judges to hear a Chapter 14 case;
  • Define "capital structure debt" as debt that will be left behind in a transfer of assets to a bridge bank, and include in the definition all unsecured debt for borrowed money (other than QFCs), including a secured lender's unsecured deficiency claim for an under-secured debt;
  • Do not include an asset threshold for determining a company's eligibility for Chapter 14; and
  • Make the definition of "covered financial corporation" under Chapter 14 consistent with the definition of "financial company" in Title II and relevant FDIC regulations.

Treasury recommended the following reforms for the OLA:

  • Restrict the FDIC's ability to treat similarly situated creditors differently;
  • Provide for the Bankruptcy Court to adjudicate claims against a receivership;
  • Clarify the standard for commencing a Title II proceeding;
  • Repeal the tax-exempt status of bridge companies;
  • Finalize the FDIC single-point-of-entry strategy for conducting Title II resolutions;
  • Limit the duration of any advances under the Orderly Liquidation Fund ("OLF") to a short, fixed term that is only as long as necessary to meet demonstrated liquidity needs;
  • If OLF funding is necessary, the FDIC should limit its use as much as possible to expedite a bridge company's return to reliance on private sources of liquidity;
  • Lend only on a secured basis to ensure protection of taxpayers;
  • If bridge companies do not fully repay OLF loans, charge an assessment as soon as reasonably possible; and
  • Strengthen the judicial review of findings required to put a company into OLA receivership.

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