[Federal Register Volume 60, Number 226 (Friday, November 24, 1995)]
[Rules and Regulations]
[Pages 57916-57919]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-28584]



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FARM CREDIT ADMINISTRATION
12 CFR Part 615

RIN 3052-AB66


Funding and Fiscal Affairs, Loan Policies and Operations, and 
Funding Operations; Global Debt

AGENCY: Farm Credit Administration.

ACTION: Interim rule; request for comment.

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SUMMARY: The Farm Credit Administration (FCA) is issuing an interim 
regulation to clarify the Federal Farm Credit Banks Funding 
Corporation's (Funding Corporation) statutory authority to use more 
than one fiscal agent to facilitate the sale of Systemwide debt 
securities. The regulation permits the Funding Corporation to employ 
fiscal agents other than Federal Reserve Banks (FRBs) for issuance of 
dollar denominated Systemwide debt securities in foreign capital 
markets. Thus, the rule recognizes the authority of the Funding 
Corporation to issue, sell, and distribute Systemwide debt securities 
on behalf of the Farm Credit banks (banks) on a global basis. Updating 
existing FCA regulations allows the banks to engage in debt marketing 
practices used by other Government-Sponsored Enterprises (GSEs). In 
addition, 

[[Page 57917]]
expanding debt marketing internationally may broaden the investor base 
for Systemwide debt securities and lead to lower funding costs.

DATES: The regulations shall become effective upon the expiration of 30 
days after publication during which either or both Houses of Congress 
are in session. Written comments must be received on or before December 
26, 1995. Notice of effective date will be published in the Federal 
Register.

ADDRESSES: Comments may be mailed or delivered to Patricia W. DiMuzio, 
Associate Director, Regulation Development, Office of Examination, 1501 
Farm Credit Drive, McLean, VA 22102-5090. Copies of all communications 
received will be available for examination by interested parties in the 
Office of Examination, Farm Credit Administration.

FOR FURTHER INFORMATION CONTACT:

Laurie A. Rea, Policy Analyst, Office of Examination, Farm Credit 
Administration, McLean, VA 22102-5090, (703) 883-4498;
      or

William L. Larsen, Senior Attorney, Office of General Counsel, Farm 
Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TDD (703) 
883-4444.

SUPPLEMENTARY INFORMATION:

I. Background

    The Farm Credit System (System) funds its lending operations 
through the sale of debt securities in the domestic capital markets. 
The banks currently offer Systemwide debt securities, primarily 
consisting of Consolidated Systemwide bonds, medium-term notes and 
discount notes.1 The Funding Corporation, acting on behalf of the 
banks, issues, markets, and handles the debt obligations of the System. 
The Funding Corporation also has the responsibility for establishing, 
subject to FCA approval, the amount, maturities, rates of interest, and 
terms and conditions of participation by the several banks in each 
issue of Systemwide debt securities.2

    \1\ Systemwide debt securities are the joint and several 
obligations of the banks. See 12 U.S.C. 2155(a)(2) and 12 U.S.C 
2153(d).
    \2\ See 12 U.S.C. 2160.
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    The Funding Corporation uses a selling group of investment dealers 
and dealer banks to market Systemwide debt securities. Systemwide debt 
securities are generally issued in book-entry form.3 The FRBs 
maintain the book-entry securities as agents of the banks.4 
Pursuant to FCA regulations, Systemwide debt securities clear and 
settle through the Federal Reserve Banks' Book-entry System (Fed book-
entry system).5 Foreign investors can purchase Systemwide debt 
securities through institutions and depositories that have appropriate 
accounts with an FRB. Currently, the banks do not issue securities 
through agents other than the FRBs either domestically or in foreign 
capital markets.

    \3\ Securities issued in book-entry form are assigned to an 
investor's account upon purchase. The investor receives a custody 
receipt from his or her bank or non-bank dealer instead of receiving 
a certificate. Payment of principal and interest on book-entry 
securities is credited to the investor's account and does not 
require presentation of a coupon or certificate. Investors may 
choose, as a custodian, any bank or other financial institution that 
maintains book-entry accounts with a member of the Federal Reserve 
System.
    \4\ See 12 CFR part 615, subpart O.
    \5\ The FRBs operate a book-entry system, which provides book-
entry holding and settlement for all U.S. dollar denominated 
securities issued by the U.S. Government, certain agencies, 
instrumentalities (including GSEs), and international organizations 
of which the United States is a member. The Fed book-entry system 
enables specified depositories and other institutions, with an 
appropriate account with an FRB or Branch, to hold, make payments, 
and transfer securities and funds through the FRBs' Fedwire 
electronic funds transfer system.
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    In contrast, other GSEs 6 have launched global debt issuance 
programs to expand the sale of their debt securities into foreign 
capital markets. While most GSEs have issued or sold debt securities 
denominated in United States dollars (U.S. dollars) outside the United 
States, three 7 also have issued debt securities denominated in 
foreign currencies. The global debt programs aim at increasing the 
depth and breadth of the market for the issuer's debt securities. The 
GSEs are seeking to diversify and control the cost of borrowing at a 
time when their overall funding needs are rising sharply. The foreign 
capital markets could provide the GSEs funding opportunities at rates 
that are attractive compared to domestic sources. Additionally, 
international debt sales may enhance the efficiency of GSE debt sales 
by expanding their sources of funding and reducing the burgeoning 
supply of GSE debt in the domestic market.

    \6\ The Federal National Mortgage Association (Fannie Mae), the 
Federal Home Loan Mortgage Corporation (Freddie Mac), the Student 
Loan Marketing Association (Sallie Mae) and the Federal Home Loan 
Banks (FHLBs) have introduced global debt programs.
    \7\ Fannie Mae, Sallie Mae, and the FHLBs have issued non-dollar 
denominated debt securities.
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II. System Global Debt Program Proposal

    The Funding Corporation proposes to establish a global debt 
marketing program for issuance of Systemwide debt securities similar to 
the other GSEs. The Funding Corporation has requested FCA's 
confirmation that the Farm Credit Act of 1971, as amended 8 (Act), 
allows the banks to issue Systemwide debt securities in foreign capital 
markets using fiscal agents other than the FRBs. The proposed System 
Global Debt Program (Program) contemplates three approaches to enter 
into foreign capital markets that vary in scope and complexity.

    \8\ 12 U.S.C. 2001-227966-6.
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    The first approach is designed to increase secondary market sales 
of Systemwide debt securities outside the United States. To accomplish 
this, the Funding Corporation would use international depositories and 
clearing systems for maintaining and servicing book-entry Systemwide 
debt securities. By expanding secondary market trading and safekeeping 
to accountholders in clearing systems beyond the Fed book-entry system, 
the Funding Corporation could increase and support demand by foreign 
investors. Primary issuances of dollar denominated Systemwide debt 
securities would continue to be issued through the FRBs in book-entry 
form.
    The Program's second method to heighten the System's presence in 
foreign capital markets involves both primary issuance and secondary 
market sales of Systemwide debt securities outside the United States. 
Dollar denominated Systemwide debt securities would be issued through 
fiscal agents other than the FRBs, either exclusively outside the 
United States or simultaneously inside and outside the United States. 
Secondary market trading and safekeeping of the debt securities would 
be accomplished through international depositories and clearing 
systems.
    Under the third approach, Systemwide debt securities would be 
denominated in foreign currencies and issued exclusively outside the 
United States through fiscal agents other than the FRBs. Secondary 
market trading and safekeeping would be handled through international 
clearing systems. Such non-dollar denominated Systemwide debt 
securities issued in foreign capital markets are the subject of an 
Advance Notice of Proposed Rulemaking also adopted by the FCA Board on 
November 16, 1995, and published elsewhere in today's issue of the 
Federal Register. 

[[Page 57918]]


III. Statutory and Regulatory Considerations

A. General

    The Act grants broad authority to: (1) The banks to issue debt 
obligations to fund their operations; and (2) the FCA to approve the 
issuance of System debt in the capital markets. Under section 4.2, 
Systemwide debt obligations must be issued solely through the Funding 
Corporation, while section 4.9(b)(1) of the Act authorizes the Funding 
Corporation to ``issue, market, and handle the obligations'' of the 
banks. Under section 4.9(b)(2) of the Act, the Funding Corporation, 
acting for the banks and subject to FCA approval, ``shall determine the 
amount, maturities, rates of interest, terms, and conditions of 
participation by the several banks in each issue of joint, 
consolidated, or System-wide obligations.'' Sections 4.2 and 5.17(a)(4) 
of the Act require FCA approval of the issuance of all System debt 
obligations.

B. Secondary Market Sales Outside the United States

    In general, secondary market trading and sales of Systemwide debt 
securities have been limited to the United States market. However, 
secondary market sales of dollar denominated Systemwide debt securities 
outside the United States are compatible with current statutory and 
regulatory requirements. The initial issuance of such debt securities 
would be subject to the standard FCA approval process.9

    \9\ See 12 U.S.C. 2153, 2252(a)(4).
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C. Issuance of Systemwide Debt Outside the United States

    The Act is silent concerning issuance of Systemwide debt outside 
the United States. No provision of the Act explicitly or implicitly 
prohibits the banks, acting through the Funding Corporation, from 
issuing debt obligations outside the United States. Furthermore, there 
appears to be no other Federal statute or judicial ruling that would 
prohibit the banks from issuing Systemwide debt securities outside the 
United States. Nevertheless, the laws of the various host countries may 
restrict some aspects of System debt issuances within their borders.

D. Use of Issuing and Servicing Agents Other Than the FRBs

    Section 4.8(a) of the Act, which governs the issuance and sale of 
System obligations through fiscal agents, clearly contemplates that the 
banks can issue their debt obligations through one or more fiscal 
agents. Section 4.8(a) states:

    Each bank of the System * * * may provide for the sale of 
obligations issued by it, consolidated obligations, or System-wide 
obligations, through a fiscal agent or agents, by negotiation, 
offer, bid, syndicate sale, and to deliver such obligations by book 
entry, wire transfer, or such other means as may be appropriate. 
(Emphasis added.)

Section 4.8(a) does not, however, identify a fiscal agent or agents 
that the banks are authorized to use for debt issuances.
    The FCA regulations governing the issuance, maintenance, and 
servicing of Farm Credit securities refer only to the authority of FRBs 
to act as agents for the banks.10 The absence of any reference in 
the regulations to fiscal agents other than the FRBs may appear to 
restrict the authority of the Funding Corporation to select a fiscal 
agent other than an FRB. In light of the apparent latitude permitted 
under section 4.8(a), the FCA believes the authority of the Funding 
Corporation to employ fiscal agents other than FRBs should be 
clarified.

    \10\ See 12 CFR part 615, subpart O which authorizes each FRB to 
issue and maintain book-entry Farm Credit securities, service book-
entry Farm Credit securities by making payment of interest and 
payment at maturity or upon call, transfer or pledge Farm Credit 
securities to any transferee or pledgee eligible to maintain an 
appropriate book-entry account in its name with an FRB and provide 
other services as fiscal agent.
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IV. Need for Amended Regulations

    The FCA regulations governing issuance of Systemwide debt 
securities were promulgated nearly 20 years ago. The existing 
regulations reflect a period when the FRBs served as the exclusive 
fiscal agents for GSE debt issuances in a predominantly domestic 
market. Since then, global debt markets and international clearing 
systems have evolved and become more closely integrated with the United 
States domestic securities market. Due to substantial increases in GSE 
debt issuances, the domestic GSE debt market has become highly 
competitive. As a result, the GSEs are seeking to expand their market 
horizon and lower their cost of funds by using international delivery 
systems to reach foreign investors.
    The FRBs may not act as fiscal agents for GSE debt obligations that 
are issued outside of the United States. Therefore, GSEs that embark 
upon global debt programs must employ fiscal agents that have the 
capability of issuing, maintaining, and servicing international debt 
offerings. As noted, the Act does not restrict the issuance of 
Systemwide debt securities to domestic markets or the use of fiscal 
agents to the FRBs. To clarify this authority, the FCA is adopting a 
new subpart P in 12 CFR part 615 dealing with issuance of Global 
Systemwide debt securities. The FCA regulations governing the authority 
of the FRBs to issue book-entry Farm Credit securities are not affected 
by the new rules and remain in effect.11

    \11\ See 12 CFR part 615, subpart O.
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    The FCA believes the new regulations will preserve the flexibility 
provided to the banks under the Act by allowing them to pursue the most 
cost-effective and efficient method of raising funds in the capital 
markets. The FCA also recognizes the increasingly global nature of 
capital markets and supports the objectives of the proposed Program. By 
developing the capability to issue debt internationally, the System may 
increase its name recognition, broaden its investor base, diversify its 
sources of funding, and obtain more cost-effective financing.
    The new subpart differentiates Systemwide debt securities 
distributed outside the United States from those issued through the 
FRBs under existing Funding Corporation programs. The regulation 
defines a Global agent as any fiscal agent, other than the FRBs, used 
by the Funding Corporation to facilitate the sale of global debt 
securities. Global debt securities are defined as obligations issued by 
the Funding Corporation on behalf of the Farm Credit banks under 
section 4.2(d) of the Act through a fiscal agent or agent and 
distributed either exclusively outside the United States or 
simultaneously inside and outside the United States. Issuances of 
global debt securities will be subject to the standard FCA approval 
process.
    The FCA believes that it is unlikely that any substantial 
operational or business risks to the System will be posed by clearance 
and settlement of transactions in the systems outside the Fed book-
entry system. Systemwide debt securities issued internationally would 
likely be handled through established and interconnected international 
clearinghouses, all of which have book-entry systems available to 
distribute and settle primary sales and to transfer beneficial 
interests in secondary market sales among their respective holding 
institutions, participants, and accountholders. In general, book-entry 
systems are considered superior to other means for evidencing ownership 
and are universally accepted by investors in the global marketplace. 
All issuers of debt or equity securities must employ an entity to 
issue, hold, trade, and clear book-entry securities in the name of 
accountholders, unless the securities are issued in definitive (i.e., 
tangible) form to facilitate sales. To date, the 

[[Page 57919]]
experience of the other GSEs engaged in global debt marketing programs 
also suggests that using international clearing systems is an 
acceptable business practice.
    Nevertheless, the FCA believes that the operational risk inherent 
in the development of a global debt program is significant enough to 
warrant the requirement that the Funding Corporation Board of Directors 
approve each prospective global agent and clearing system. 
Additionally, the Funding Corporation must establish appropriate 
selection criteria for global agents. The FCA expects that selection 
criteria will be based on factors such as credit ratings, capital, 
reputation, experience, and management capabilities to ensure that the 
entity is suitable to assume and carry out the functions of a fiscal 
agent, including the appointment of subordinate agents if 
necessary.12

    \12\ Depending upon the agreement between the Funding 
Corporation and the entity acting as global agent, a global agent 
may only retain primary responsibility over certain fiscal functions 
and thus may need to appoint other agents, such as paying agent, 
transfer agent, calculation agent, exchange agent, or register agent 
to perform other functions necessary for clearance and settlement of 
transactions.
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    Promulgation of new subpart P of 12 CFR part 615 effectively 
approves the first two aspects of the proposed Program as previously 
outlined. Thus, the Funding Corporation may engage global agent(s) to 
issue and service dollar denominated global debt securities and 
facilitate their secondary market trading in foreign capital markets by 
using international clearing systems.
    The FCA has decided that the third aspect of the proposed Program--
issuance of non-dollar denominated Systemwide debt securities--presents 
issues that need to be addressed through conventional notice-and-
comment rulemaking rather than in the present expedited rulemaking. The 
Act does not restrict the issuance of Systemwide debt securities to 
dollar denominated securities. However, issuance of non-dollar debt 
obligations could raise safety and soundness concerns for the banks, 
including currency and counterparty risks. The FCA, therefore, intends 
to explore these potential safety and soundness issues through an 
Advance Notice of Proposed Rulemaking prior to developing regulations.

V. Expedited Rulemaking Procedure

    The Act permits the Funding Corporation to market debt securities 
on a global basis and use global agents to issue and service such 
securities. Moreover, marketing and issuance of dollar denominated debt 
by GSEs is an established practice that appears to present minimal 
safety and soundness risk. Accordingly, the FCA finds that pre-
promulgation notice and comment on a new subpart P that merely 
clarifies existing authority is unnecessary and is not in the public 
interest.13 Thus, this regulation shall take effect as a final 
regulation in accordance with section 5.17(c)(1) of the Act, upon the 
expiration of 30 days after publication in the Federal Register, during 
which either or both Houses of Congress are in session. The FCA 
solicits and will consider comments on whether the requirements of new 
subpart P need further clarification.

    \13\ See 5 U.S.C. 553(b)(B).
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List of Subjects in 12 CFR Part 615

    Accounting, Agriculture, Banks, Banking, Government securities, 
Investments, Rural areas.

    For the reasons stated in the preamble, part 615 of chapter VI, 
title 12 of the Code of Federal Regulations is amended as follows:

PART 615--FUNDING AND FISCAL AFFAIRS, LOAN POLICIES AND OPERATIONS, 
AND FUNDING OPERATIONS

    1. The authority citation for part 615 continues to read as 
follows:

    Authority: Secs. 1.5, 1.7, 1.10, 1.11, 1.12, 2.2, 2.3, 2.4, 2.5, 
2.12, 3.1, 3.7, 3.11, 3.25, 4.3, 4.3A, 4.9, 4.14B, 4.25, 5.9, 5.17, 
6.20, 6.26, 8.0, 8.4, 8.6, 8.7, 8.8, 8.10, 8.12 of the Farm Credit 
Act (12 U.S.C. 2013, 2015, 2018, 2019, 2020, 2073, 2074, 2075, 2076, 
2093, 2122, 2128, 2132, 2146, 2154, 2154a, 2160, 2202b, 2211, 2243, 
2252, 2278b, 2278b-6, 2279aa, 2279aa-4, 2279aa-6, 2279aa-7, 2279aa-
8, 2279aa-10, 2279aa-12); sec. 301(a) of Pub. L. 100-233, 101 Stat. 
1568, 1608.

    2. Subpart P is added to read as follows:

Subpart P--Global Debt Securities


Sec. 615.5500  Definitions.

    In this subpart, unless the context otherwise requires or 
indicates:
    (a) Global debt securities means consolidated Systemwide debt 
securities issued by the Funding Corporation on behalf of the Farm 
Credit banks under section 4.2(d) of the Act through a fiscal agent or 
agents and distributed either exclusively outside the United States or 
simultaneously inside and outside the United States.
    (b) Global agent means any fiscal agent, other than the Federal 
Reserve Banks, used by the Funding Corporation to facilitate the sale 
of global debt securities.


Sec. 615.5502  Issuance of global debt securities.

    (a) The Funding Corporation may provide for the sale of global debt 
securities on behalf of the Farm Credit banks through a global agent or 
agents by negotiation, offer, bid, or syndicate sale, and deliver such 
obligations by book-entry, wire transfer, or such other means as may be 
appropriate.
    (b) The Funding Corporation Board of Directors shall establish 
appropriate criteria for the selection of global agents and shall 
approve each global agent.

    Dated: November 17, 1995.
Floyd Fithian,
Secretary, Farm Credit Administration Board.
[FR Doc. 95-28584 Filed 11-22-95; 8:45 am]
BILLING CODE 6705-01-P