• Repurchase Agreements and the "Failed Bank Rule"
  • August 19, 2009
  • Law Firm: Miller & Martin PLLC - Nashville Office
  • Banks that have not already amended their repurchase agreements/sweep agreements to comply with the FDIC’s “Failed Bank Rule” should do so immediately. 

    The FDIC has adopted a final regulation called “Processing of Deposit Accounts in the Event of an Insured Depository Institution Failure.”  Even if your bank is not in danger of failure, you must comply if you have any repurchase agreements/sweep accounts with customers.  In summary, the final rule provides:

    • Upon the failure of an FDIC-insured depository institution, the FDIC must determine the total insured amount for each depositor.  The final rule defines a deposit account balance on the day of failure as the end-of-day ledger balance.  With certain exceptions, the FDIC will use the cutoff times applied by the failed insured depository institution in establishing the end-of-day ledger balance for deposit insurance determination purposes.
    • All checks deposited into and posted to a deposit account by the applicable cutoff time and reflected as part of the end-of-day ledger balance will be treated as a deposit for insurance purposes, regardless of whether these funds have been collected.
    • Any automated sweep transaction transferring funds internal to the depository institution’s operations from one deposit account at the failed institution to a sweep investment vehicle at the failed institution will be completed on the day of failure.
    • Sweep account customers must be notified annually whether the swept funds are deposits and the status of the swept funds in the event of failure.

     
    The FDIC is concerned about the structure of certain sweep agreements involving repurchase agreements (“repos”).  In a properly executed repo arrangement, as of the depository institution’s normal end of day, the sweep customer either becomes the legal owner of identified assets (typically government securities) subject to a repurchase agreement or obtains a perfected security interest in those assets.  In such cases, the regulation says that the FDIC will recognize the customer’s ownership or security interest in the securities. 

    If your form sweep agreement has not been reviewed for compliance with this regulation, you should consult your counsel about this review and about the disclosures that must be made to sweep customers – both new and existing.  The deadline for providing certain disclosures required under the rule for new sweep accounts and for renewals of existing sweep accounts was July 1, 2009, but even if you missed the deadline, you should come into compliance as soon as possible.  By August 29, 2009, certain disclosures must be provided to your bank’s existing sweep customers.  We are advised by the FDIC’s compliance examiners that they are reviewing banks’ sweep agreements for compliance, and we must assume that the other federal banking regulators who perform compliance examinations will follow suit.