The Dodd-Frank Act created a new orderly liquidation authority ("OLA"), modeled largely on the bank resolution provisions in the U.S. Federal Deposit Insurance Act, to be used to resolve troubled systemically important non-bank financial institutions. At the U.S. government's discretion, under certain circumstances, OLA may supersede the Bankruptcy Code and the Securities Investor Protection Act with respect to any such institutions.
Many have been thinking about what OLA might mean to them if applied to their institution. But far fewer have focused on the material impact OLA would have on their rights and recoveries as a creditor of a covered institution. However, as is highlighted by recent downgrades in the credit ratings of certain large financial institutions, ratings agencies are taking note of OLA's likely impact on creditors.
In light of recent FDIC rulemaking, now is a good time for institutions active in the financial markets to begin understanding and considering the potential impact that OLA might have on their credit exposures, risk profiles and potential recoveries in the event of counterparty insolvency.