US Government Debt Different - Finance Department - University of ...

80 A Market for End-of-the-World Insurance? Credit Default Swaps on US Government Debtfrom rules on frauduent and preferential transfers, which means thatCDS buyers generally cannot be forced to return collateral that aprotection seller posted before it filed for bankruptcy. 26 And third,the Code permits CDS buyers to exercise setoff rights immediatelyrather than having to follow the normal procedure of obtaining thebankruptcy court’s permission. 27If a failed protection seller is a “systemically important financial institution”—which,in today’s CDS market, would almost certainlybe the case—then the 2010 Dodd-Frank Act creates the possibilitythat its unwinding will be overseen not by a bankruptcy court butrather by the FDIC under its new “orderly liquidation authority.” 28Yet Congress was careful to specify that derivatives counterpartieswill enjoy the same general advantages in this receivership processthat they enjoy under the Bankruptcy Code. Thus, Dodd-Frank providesthat derivatives counterparties of a firm in receivership are exemptfrom rules requiring the return of fraudulent and preferentialtransfers, 29 and also that they can exercise contractual rights to terminateand liquidate their positions if a day has passed since the receivershipbegan and their contracts have not been transferred to anotherfinancial institution. 30 In addition, the FDIC has indicated that itintends to manage the receivership process in a way that will insulatederivatives counterparties from losses. Thus, the FDIC has statedthat one of its primary goals in exercising its liquidation authoritywill be to prevent a firm’s failure from putting “the financial systemitself at risk.” 31 This concern with systemic risk was among Congress’sostensible justifications for privileging derivatives counterparties inthe Bankruptcy Code, 32 a choice of stabilization mechanisms thatthe FDIC seems unlikely to second-guess. Moreover, the FDIC has26 11 U.S.C. § 546(g).27 11 U.S.C. § 561.28 Dodd Frank Wall Street Reform and Consumer Protection Act (2010) (“Dodd-Frank”), § 201 et seq., 12 U.S.C. § 5381 et seq.29 Id. at § 210(c)(8)(C), 12 U.S.C. § 5390(c)(8)(C).30 Id. at § 210(c)(8)(A), 12 U.S.C. § 5390(c)(8)(A); id. at § 210(c)(10)(B), 12U.S.C. § 5390(c)(10)(B).31 Remarks by Martin J. Gruenberg, Acting Chairman, FDIC, to the Federal ReserveBank of Chicago Bank Structure Conference, Chicago, IL (May 10, 2012),http://www.fdic.gov/news/news/speeches/chairman/.32 See Skeel & Jackson, note 24 above, at 162.