FDIC to discuss eligibility of structured notes in guarantee program, SPA says; market remains uncertain

By Kenneth Lim

Boston, Oct. 22 - The Federal Deposit Insurance Corp. will meet Thursday to discuss whether a temporary debt guarantee program includes structured notes, according to the Structured Products Association.

The FDIC will discuss the issue on Thursday afternoon, after which an interim final rule is expected, said a member of the association's law and compliance committee at a conference call Wednesday hosted by the association and law firm Morrison and Foerster.

An interim final rule is a temporary rule that will be effective immediately but will be open for comment and further changes.

The question for the industry is whether structured notes are eligible for the FDIC's recently announced temporary liquidity guarantee program to guarantee senior unsecured debt obligations by U.S. financial institutions until 2012. The association on Tuesday sent a public letter to FDIC seeking confirmation about whether structured notes are included in the program.

"It's our reading of the current draft that structured products should be included and we've spent some time putting together a letter so that we can move forward as a business, as an industry," said Morrison & Foerster's Anna Pinedo, co-chair of the association's law and compliance committee.

Participants in the conference call expressed uncertainty about whether and how structured notes will be guaranteed.

A major issue, raised by a participant from distributor Incapital LLC, was whether an FDIC guarantee would cover the principal amount of a structured note or its marked-to-market value. The participants noted that guaranteeing a marked-to-market value of the notes could create uncertainties for the FDIC in terms of how much it was actually insuring, and could also provide a put for holders of out-of-the-money non-principal protected products issued by a bank in default.

Along those lines, a question was also raised about whether the FDIC guarantees would apply to non-principal protected notes.

"I think what we're seeing is how complicated it's going to be," a participant remarked.

Pinedo also urged industry members to provide feedback to FDIC regarding the program, noting that the new rules are still being tweaked as industry comments are received by the insurer.

If the FDIC decides that its guarantee program will apply to structured notes, the association will suggest language that can be added to product literature for issuers that use the program, association chairman Keith Styrcula said.

"We will distribute some model language," he said.

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