National bank receiver is subject to the rights of secured creditors and creditors entitled to setoff. U.S. legal principles regarding enforcement of security interests are applicable to a receivership of a federal branch or agency conducted under National Bank Act. Therefore, receiver of an uninsured federal branch or agency does not have the right to interfere with the rights of secured creditors, including application of collateral held in U.S. to obligations of a non-U.S. office of the bank. (06/19/96).

Office of the Comptroller of the Currency

Interpretive Letter #733

Published in Interpretations and Actions July 1996

12 U.S.C. 3101A

12 U.S.C. 192

June 19, 1996

[ ]

Re: Enforceability of Netting and Collateral Agreements with Federal Branches and Agencies

Dear [ ]:

This is in response to your recent letter to the Office of the Comptroller of the Currency ("OCC") on

behalf of [ ]. [ ] is being organized <NOTE:The founding banks are Bank 1, Bank 2, Bank 3, Bank 4, Bank 5, Bank

6, Bank 7 and Bank 8.> as a [ ] limited purpose trust company to operate a multilateral foreign exchange

clearinghouse. [ ] will provide financial institutions dealing in foreign exchange with a means for netting

their transactions through the substitution of [ ] as the counterparty to each transaction.

You requested clarification of the enforceability of [ ] arrangements with participants that are uninsured

Federal branches or agencies of foreign banks in the event the OCC appoints a receiver for such a

Federal branch or agency. You represented that [ ]'s rules, which are incorporated into the participant

agreement, provide for netting payment obligations and entitlements among the participants, as well as

termination of transactions upon appointment of a receiver for a participant. Participants will also agree

to pledge collateral to secure their obligations under their netting contracts. To address the enforceability

of netting with each participant, [ ]'s structure requires a participant to be a "financial institution" as

defined in Title IV of the Federal Deposit Insurance Corporation Improvement Act of 1991 (Payment

System Risk Reduction Act), 12 U.S.C. 4401-07, or under the Federal Reserve's Regulation EE, 12

C.F.R. Part 231.

1

their obligations under their netting contracts. To address the enforceability

of netting with each participant, [ ]'s structure requires a participant to be a "financial institution" as

defined in Title IV of the Federal Deposit Insurance Corporation Improvement Act of 1991 (Payment

System Risk Reduction Act), 12 U.S.C. 4401-07, or under the Federal Reserve's Regulation EE, 12

C.F.R. Part 231.

1. Receivership Will Not Interfere With Rights of Secured Creditor Concerning Collateral

You asked us to confirm that a receiver appointed by the Comptroller under section 4(j) of the

International Banking Act ("IBA"), and acting under receivership authority of the National Bank Act,

would not have the right to stay, delay or hinder a secured party's remedies with respect to collateral

security under the following assumptions. The obligations of the branch or agency under a netting

contract, such as the rules of [ ] and the participant agreements, are secured pursuant to an agreement that

constitutes a valid and perfected security interest under applicable state law. In addition, the security

agreement was not entered into in contemplation of the foreign bank's insolvency, or that of the branch of

agency.

Interpretive Letter #733

(1 of 3)

We agree. The National Bank Act does not provide the receiver the right to stay, delay or hinder a

secured party's remedies with respect to collateral security in the described circumstances. There is no

automatic stay or other provision in the National Bank Act that authorizes such interference with the

rights of a secured creditor. In addition, there are no court cases or interpretations that would permit the

receiver to disregard the rights of a secured creditor in this situation. Rather, the cases and practice of

receivership under the National Bank Act instruct that a Comptroller-directed receivership is subject to

longstanding legal principles upholding the rights of secured creditors and creditors with setoff rights.

See Bell v. Hanover National Bank, 57 F

or interpretations that would permit the

receiver to disregard the rights of a secured creditor in this situation. Rather, the cases and practice of

receivership under the National Bank Act instruct that a Comptroller-directed receivership is subject to

longstanding legal principles upholding the rights of secured creditors and creditors with setoff rights.

See Bell v. Hanover National Bank, 57 F. 821, 822 (C.C.S.D.N.Y. 1893) ("It is only such balance of [the

collateral] as may be left after the lien upon it is satisfied that either the [bank] or the receiver is entitled

to ...."). See also Scott v. Armstrong, 146 U.S. 499, 510 (1892)(ratable payments by the receiver to

claimants are made only "from what belongs to the bank, and that which at the time of insolvency

belongs of right to [a creditor with setoff rights] does not belong to the bank.").

With regard to this question, you have also asked our opinion as to the effect of section 4(j)(2) of the

IBA, which provides that, with respect to the receivership of a branch or agency, the Comptroller shall

turn over the remainder of assets and proceeds to the head office of the foreign bank or its liquidator after

"there has been paid to each . . . creditor . . . the full amount of such claims arising out of transactions had

by them with any branch or agency ... and all expenses of the receivership." Section 4(j)(1) of the IBA

provides that a receiver appointed for a federal branch or agency shall take possession of all property and

assets of the foreign bank and "exercise the same rights, privileges, powers, and authorities with respect

thereto as are now exercised by receivers of national banks appointed by the Comptroller." However,

because nothing in section 4(j)(2) expressly limits or alters the law of secured transactions applicable to a

receivership conducted under the National Bank Act, as provided in section 4(j)(1), paragraph (1) and

paragraph (2) together yield a consistent result: the IBA does not provide authority for the receiver of a

federal branch to

ivers of national banks appointed by the Comptroller." However,

because nothing in section 4(j)(2) expressly limits or alters the law of secured transactions applicable to a

receivership conducted under the National Bank Act, as provided in section 4(j)(1), paragraph (1) and

paragraph (2) together yield a consistent result: the IBA does not provide authority for the receiver of a

federal branch to defeat the rights of a secured creditor. As noted above, under the National Bank Act

only the balance of collateral left over after satisfaction of the security interest would be an asset

available to the receiver for distribution to general creditors.

This conclusion is consistent with the legislative history of section 4(j) and the IBA, generally. On one

hand, the recognition of the rights of a secured creditor to the extent of its security interest in assets in the

U.S. would not give rise to the concerns that prompted section 4(j)(2). On the other hand, to interpret

section 4(j)(2) as prescribing different creditor priorities and elevating an unsecured creditor over a

secured creditor would be at odds with the principles of secured transactions widely recognized under

U.S. law. It would be virtually impossible for a foreign bank to operate branches and agencies in the U.S.

under such a standard because of the bank's inability to enter into the secured arrangements necessary for

market participation -- an absurd result that would violate the national treatment policy of the IBA.

The Comptroller's reasonable interpretation of section 4(j)(2), which he is responsible for administering,

is entitled to deference. See, e.g., Smiley v. Citibank (South Dakota), N.A., 64 U.S.L.W. 4399 (1996).

Moreover, it should be noted that the receiver of a Federal branch or agency acts as the agent of, and

subject to direction and control by, the Comptroller of the Currency

policy of the IBA.

The Comptroller's reasonable interpretation of section 4(j)(2), which he is responsible for administering,

is entitled to deference. See, e.g., Smiley v. Citibank (South Dakota), N.A., 64 U.S.L.W. 4399 (1996).

Moreover, it should be noted that the receiver of a Federal branch or agency acts as the agent of, and

subject to direction and control by, the Comptroller of the Currency. In our opinion, under the

circumstances outlined in your letter, the Comptroller should direct the receiver not to seek to stay,

hinder, delay or otherwise interfere with the exercise of rights of a secured party in collateral security and

not to interfere with the liquidation of such collateral by the secured party promptly following a default.

2. Receivership Will Not Prevent Secured Party from Applying Collateral Held in the U.S. to Obligations

of a Non-U.S. Office Or Otherwise Interfere With the Exercise of Rights

Interpretive Letter #733

(2 of 3)

You also asked us to confirm that the receiver would not have the right to prevent [ ] from applying the

collateral held in the United States to the obligations of a non-U.S. office or otherwise stay, delay or

hinder the exercise of remedies against the foreign bank and the collateral pledged to secure the foreign

bank's obligations, under the following assumptions. The netting contract, in the circumstances you

describe, is entered into by the head office or another non-U.S. office of the foreign bank. The non-U.S.

office secures its obligations under the contract by a pledge of collateral located in the United States

pursuant to a collateral security arrangement that would constitute a valid and perfected security interest

under applicable state law. The security agreement was not entered into in contemplation of the foreign

bank's insolvency, or that of the branch or agency.

We agree. As discussed above, the National Bank Act does not provide authority to a receiver appointed

by the Comptroller to interfere with the rights of a secured party. As noted, U.S

at would constitute a valid and perfected security interest

under applicable state law. The security agreement was not entered into in contemplation of the foreign

bank's insolvency, or that of the branch or agency.

We agree. As discussed above, the National Bank Act does not provide authority to a receiver appointed

by the Comptroller to interfere with the rights of a secured party. As noted, U.S. legal principles under

which a secured party may enforce its interests are fully applicable to a receivership of a Federal branch

or agency conducted under the National Bank Act. The direction to the receiver in section 4(j)(1) of the

IBA to "take possession" of all the property and assets of the foreign bank in the U.S., therefore, does not

supersede the applicable law of secured transactions. In our opinion, based upon the facts you described,

the Comptroller should direct the receiver not to interfere with the application of collateral held in the

U.S. to obligations of a non-U.S. office or otherwise interfere with the exercise of remedies pursuant to a

collateral security arrangement that would constitute a valid and perfected security interest under

applicable state law.

We trust this is responsive to your inquiry.

Very truly yours,

/s/

Julie L. Williams

Chief Counsel

Interpretive Letter #733

(3 of 3)