Industry group seeks confirmation that FDIC temporary debt guarantee program includes structured notes

By Kenneth Lim

Boston, Oct. 21 - The Structured Products Association is seeking confirmation from the Federal Deposit Insurance Corp. that structured notes are eligible for the new temporary liquidity guarantee program.

"As to eligible institutions that are participating, the FDIC guarantee would apply to all newly issued senior unsecured debt of those entities issued on or before June 30, 2009," the association wrote in a public letter. "The association seeks confirmation that structured products are indeed included within the scope of the 'senior, unsecured debt obligations' to which the FDIC guarantee would be applicable. Structured products predominantly are senior, unsecured debt obligations and clearly fit within this definition."

The association and law firm Morrison & Foerster will host a conference call Wednesday after the market closes to discuss the issue.

The FDIC announced Oct. 14 that it will guarantee banks' senior unsecured debt until June 30, 2012. The program includes promissory notes, commercial paper, inter-bank funding and any unsecured portion of secured debt.

Banks will be charged 75 basis points to protect their new debt issue. All FDIC-insured institutions will be covered for the first 30 days of the program without incurring any costs. After that initial period, institutions may opt out or be assessed for future participation. If an institution opts out, the guarantees will only be good for the first 30 days.

Structured notes are an important source of funding for many of the banks, the association said in its letter.

"For many financial institutions, the issuance of structured products represents a significant component of their funding operations," the letter stated.

"In return for responding to investors' demand for exposure to certain reference assets, structured products issuers often are able to obtain medium term financing at advantageous funding rates. Confirming the status of structured notes under the temporary guarantee program will help preserve this low cost funding source at a time when the lack of interbank liquidity and access to credit make such sources all the more important."

The structured products markets has generally assumed that the program covers structured notes, similar to the way FDIC deposit insurance also applies to structured certificates of deposit, the association said. But confirmation from FDIC would prevent "unnecessary confusion and instability" in the structured products market if there is uncertainty about what constitutes a senior, unsecured debt obligation, the association said.

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